What is COGS and Why It Matters
Cost of Goods Sold (COGS) is the direct cost of products you sell during an accounting period. It includes product costs, inbound shipping, packaging, and tariffs—but NOT advertising, rent, or salaries. Understanding your COGS is essential for calculating profit margins, setting competitive prices, and accurately reporting income for taxes.
The COGS Formula
COGS = Beginning Inventory + Purchases − Ending Inventory
Formula Breakdown
- Beginning Inventory: Value of unsold inventory at period start
- Purchases: Total cost of inventory acquired during period (including shipping, tariffs, packaging)
- Ending Inventory: Value of unsold inventory at period end
What to Include in COGS
- Product unit cost from supplier
- Inbound shipping (freight to warehouse)
- Import tariffs and duties
- Packaging materials (boxes, tissue, fillers)
- Product labeling and prep services
- Direct labor (if manufacturing products)
What NOT to Include
- Advertising and marketing costs
- Rent and utilities
- Salaries (unless direct production)
- Office supplies and software
- Customer shipping and fulfillment
- Platform fees (Amazon, Shopify, etc.)
Real Example: Calculating COGS
| Component | Amount |
|---|---|
| Beginning Inventory (Jan 1) | $50,000 |
| Product Purchases | $120,000 |
| Inbound Shipping | $15,000 |
| Import Tariffs | $8,000 |
| Packaging Materials | $12,000 |
| Labeling Services | $3,000 |
| Total Purchases | $158,000 |
| Ending Inventory (Jan 31) | $45,000 |
| COGS for January | $163,000 |
Calculation: $50,000 + $158,000 − $45,000 = $163,000
Inventory Valuation Methods
- FIFO (First-In, First-Out): Oldest inventory sells first. Lower COGS in rising-price environments
- LIFO (Last-In, First-Out): Newest inventory sells first. Higher COGS in rising-price environments
- Weighted Average: Calculate average cost of all inventory. Simplest and most common for online sellers
- Specific Identification: Track actual cost of specific units. Best for high-value items
Per-Unit COGS Calculation
For profitability analysis, calculate COGS per individual unit:
COGS Per Unit = Landed Cost Per Unit
= (Product Cost + Inbound Shipping + Tariffs + Packaging + Labeling) ÷ Units Received
Example: 1,000 units purchased: $8/unit ($8,000) + $1,000 shipping + $500 tariffs + $1,000 packaging = $10,500 total. Cost per unit = $10.50.
Common COGS Mistakes
- Using FOB price instead of landed cost (missing 15-35% of true cost)
- Forgetting inbound freight and tariffs (can add 20-30% to COGS)
- Including operating expenses like advertising in COGS
- Not tracking inventory accurately at period end
- Changing inventory valuation methods mid-year
Calculate Your COGS
Use our free COGS calculator to instantly calculate your cost of goods sold or download our complete COGS guide for more detailed information.