COGS (Cost of Goods Sold)
COGS is the direct cost of the products a business sold in a period, including purchase or production cost and inbound freight.
COGS includes costs that are directly tied to the goods: the supplier price or materials, inbound shipping, import duty and sometimes packaging. It does not include operating costs such as rent, marketing or salaries.
COGS is the starting point for gross profit and gross margin, and it is used for inventory turnover and tax reporting.
Formula
COGS = Opening inventory + Purchases − Closing inventory
Gross profit = Revenue − COGS
Example
A shop starts the month with 10,000 of stock, buys 6,000 more and ends with 7,000. COGS for the month is 10,000 + 6,000 − 7,000 = 9,000.
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Common questions
Is shipping to customers part of COGS?
Many businesses treat outbound shipping as an operating expense, but practices vary. Be consistent.
Does COGS include ad spend?
No. Advertising is an operating expense.