Cost of Goods Sold (COGS) is the direct cost of producing or purchasing the products a company sells. It includes materials, labor, and manufacturing costs directly tied to the goods sold during a specific period. COGS is subtracted from revenue to calculate gross profit.
COGS = Beginning Inventory + Purchases - Ending Inventory
Value of inventory on hand at the start of the accounting period.
Total cost of inventory purchased or manufactured during the period.
Value of inventory remaining at the end of the accounting period.
Let's calculate COGS for a retail business:
| Component | Value |
|---|---|
| Beginning Inventory (Jan 1) | $50,000 |
| Purchases During Year | $200,000 |
| Goods Available for Sale | $250,000 |
| Less: Ending Inventory (Dec 31) | ($60,000) |
| Cost of Goods Sold | $190,000 |
In this example, the business had $250,000 worth of goods available to sell. After subtracting the $60,000 still in inventory at year end, COGS is $190,000 — the cost of the goods actually sold.
Enter your inventory and purchase values to calculate your Cost of Goods Sold.
Value at start of period
Total inventory bought
Value at end of period
Goods Available for Sale
$250,000
Beginning + Purchases
Ending Inventory
$60,000
Still on hand
Cost of Goods Sold
$190,000
COGS
COGS = Beginning Inventory + Purchases - Ending Inventory
COGS = $50,000 + $200,000 - $60,000
COGS = $190,000
Interpretation: Your Cost of Goods Sold is $190,000 for this period. This represents the direct cost of the inventory you sold. Subtract this from your revenue to calculate gross profit.
COGS includes: Cost of merchandise purchased for resale, freight-in costs, import duties.
Typical range: 60-80% of revenue
COGS includes: Raw materials, direct labor, manufacturing overhead (factory rent, equipment, utilities).
Typical range: 40-70% of revenue
COGS includes: Direct labor costs, materials used to deliver services. Many service businesses have minimal or no COGS.
Typical range: 0-40% of revenue
Understanding the difference is critical for accurate financial reporting:
| Cost Type | Included in COGS | Operating Expense |
|---|---|---|
| Raw materials / Merchandise | ✓ | - |
| Direct labor (factory workers) | ✓ | - |
| Factory rent / utilities | ✓ | - |
| Freight-in (shipping to you) | ✓ | - |
| Office rent / utilities | - | ✓ |
| Marketing / Advertising | - | ✓ |
| Sales commissions | - | ✓ |
| Shipping to customers | - | ✓ |
| Administrative salaries | - | ✓ |
Revenue - COGS = Gross Profit
Lower COGS means higher gross profit margin. This is the first indicator of business efficiency.
COGS is a deductible expense. Accurate COGS tracking ensures you are not overpaying on taxes. Choosing FIFO vs LIFO affects your tax liability.
COGS and ending inventory are linked. Overstate COGS and you understate inventory (and profit). Accurate inventory counts are essential.
Understanding your COGS per unit helps you set profitable prices. If COGS is 60% of price, you have a 40% gross margin to cover expenses and profit.
StockZip inventory management gives you real-time visibility into stock levels, purchase costs, and valuation — the data you need to calculate accurate COGS. Track every item from receipt to sale.
Common questions about scanning, offline mode, pricing, and migration.
Cost of Goods Sold (COGS) represents the direct costs of producing or purchasing the goods that a company sells during a specific period. It includes the cost of materials, direct labor, and manufacturing overhead directly tied to production.