Cost of goods sold (COGS) is the direct cost of the items a business actually sold in a period — the purchase price of stock it resold, or the ingredients, materials and direct labour that went into what it made — excluding overheads such as rent, utilities and marketing.
Cost of goods sold (COGS)
Also called COGS, cost of sales, cost of revenue ·
Cost of goods sold (COGS) is what the things you sold cost you. For a shop it is the price you paid suppliers for the stock that left the shelves; for a café it is the beans, milk, cups and pastries that went out with each order; for a salon it is the retail products sold plus the colour and supplies used up in services. It does not include rent, utilities, marketing or general wages. Subtract COGS from revenue and you get gross profit — the money left to pay for everything else.
The COGS formula
There are two common ways to work it out. The periodic method uses stock counts and is how most accountants calculate COGS for a period. The per-item method multiplies what sold by what each unit cost, and is what a POS with cost prices can show you day to day.
| Method | Formula | Best for |
|---|---|---|
| Periodic (from stock counts) | COGS = opening inventory + purchases − closing inventory | Month-end or year-end figures; captures waste and losses automatically |
| Per item (from sales) | COGS = Σ (units sold × cost per unit) | Day-to-day profit by item, when every item has a cost price |
A worked example
A small café counts its stock at cost on the first of the month: beans, milk, syrups, cups and packaged snacks come to $2,400. During the month it buys $5,100 of supplies. On the last day it counts again and has $1,900 of stock left.
- Opening inventory + purchases: $2,400 + $5,100 = $7,500 of stock available to sell.
- Subtract closing inventory: $7,500 − $1,900 = $5,600 COGS.
- If revenue for the month was $16,000, gross profit is $16,000 − $5,600 = $10,400.
- Gross margin is $10,400 ÷ $16,000 = 65%.
The arithmetic is the same in any currency — swap the dollar sign for yours. Note that the café spent $5,100 that month but its COGS was $5,600, because it also used up $500 of stock it already held. Purchases and COGS are only equal when stock levels do not change.
Why COGS matters for a small business
COGS is the biggest cost most product businesses have, and it moves with every sale, so small changes in it have large effects on profit. A supplier raising the price of milk by a few cents, a barista pouring heavier shots, or a shop that keeps selling an item at last year’s price after its cost went up all show up first as rising COGS. If you only watch revenue, a busy month can feel successful while the margin quietly shrinks.
Knowing COGS per item is what lets you price with confidence. Once you know a latte costs you $1.10 to make, you can decide whether $4.50 leaves enough after rent and wages, and you can see which items earn their place on the menu and which only look popular.
Common mistakes
- Treating purchases as COGS. What you bought this month is not what you sold; stock on the shelf at month-end is still an asset, not a cost.
- Loading overheads into COGS. Rent and general wages are real costs, but mixing them in makes gross margin meaningless and hard to compare month to month.
- Leaving out delivery charges. The landed cost of an item includes what you paid to get it to your door.
- Stale cost prices. If suppliers raised prices and your records still show the old cost, per-item COGS will be too low and every margin will look better than it is.
- Ignoring the gap between the two methods. Per-item COGS only counts what was rung up; the periodic method also counts waste, breakage and theft. The difference between them is your inventory shrinkage.
How COGS relates to other terms
COGS is the cost half of gross profit margin: margin is (revenue − COGS) ÷ revenue. Markup works from the other direction, starting with the cost of one unit and adding to it to set a price. Stock that never sells never becomes COGS — it sits on the balance sheet as dead stock until you sell it, discount it or write it off.
Questions
- What is the formula for cost of goods sold?
- Cost of goods sold is opening inventory plus purchases during the period minus closing inventory. Per item, it is the number of units sold multiplied by the cost of each unit.
- Are wages part of cost of goods sold?
- Wages for people who directly make the product can be part of cost of goods sold; wages for general staff, managers and front-of-house usually are not. Small businesses should apply one rule consistently and confirm the tax treatment with an accountant.
- Is cost of goods sold the same as expenses?
- No. Cost of goods sold covers only the direct cost of the items sold, while operating expenses cover running the business, such as rent, utilities and marketing. Revenue minus cost of goods sold is gross profit; gross profit minus operating expenses is net profit.
- Do service businesses have cost of goods sold?
- Service businesses usually have a small cost of goods sold made up of the supplies used in each service and any products sold. A salon’s colour and developer, or a car wash’s soap and wax, are examples.
- Why is my cost of goods sold higher than what I bought this month?
- Cost of goods sold is higher than purchases when you used up stock you already had at the start of the month. It is lower than purchases when you bought more than you sold and your closing stock went up.
Keep reading
- GlossaryGross profit marginGross profit margin is the share of each sale left after the cost of the goods. See the formula, a worked example, margin vs markup, and common mistakes.
- GlossaryMarkupMarkup is the percentage you add to cost to set a price. The formula, how to price from a target margin, a worked example and the mistakes that cost money.
- GlossaryInventory shrinkageInventory shrinkage is stock your records say you have but you don’t. How to calculate it and the shrinkage rate, what causes it and how small shops reduce it.
- GuideHow to calculate profit margin (and price for it)Profit margin is profit divided by revenue. Learn the margin and markup formulas, how to price for a target margin, and the mistakes that quietly cost money.
- Free toolProfit margin calculatorFree profit margin calculator: enter cost and price to get profit, margin and markup — or enter a target margin to get the price to charge. Formula shown.
- FeatureInventoryFree, browser-based inventory software: stock that drops with every sale, adjustments with a reason, low-stock alerts and suggested reorder quantities.
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