Cost of Goods Sold Calculator
Calculate COGS and gross profit margin
COGS Formulas
Understanding Cost of Goods Sold
Cost of Goods Sold (COGS) represents the direct costs of producing goods sold by a company. It includes raw materials, direct labor, and manufacturing overhead directly tied to production. COGS is subtracted from revenue to calculate gross profit.
The basic COGS formula uses inventory accounting: Beginning Inventory + Purchases - Ending Inventory = COGS. If you start with $50,000 inventory, purchase $200,000, and end with $40,000, your COGS is $210,000.
COGS is crucial for determining profitability and pricing. A high COGS relative to revenue indicates tight margins. Different industries have vastly different COGS profiles—software has near-zero COGS while manufacturing has substantial material and labor costs.
What's Included in COGS
Raw Materials
Materials and parts directly used in products sold.
Direct Labor
Wages for workers directly producing goods.
Manufacturing Overhead
Factory utilities, equipment depreciation, production supplies.
Freight In
Shipping costs to get inventory to your location.
Gross Margin by Industry
| Industry | Typical COGS % | Gross Margin | Notes |
|---|---|---|---|
| Software/SaaS | 10-25% | 75-90% | Low marginal cost |
| Retail | 60-75% | 25-40% | Product resale |
| Manufacturing | 50-70% | 30-50% | Material + labor |
| Restaurants | 28-35% | 65-72% | Food cost target |
| Grocery | 75-80% | 20-25% | Low margin, high volume |
Managing COGS
Negotiate with Suppliers
Volume discounts, payment terms, and competitive bidding reduce material costs.
Improve Efficiency
Reduce waste, optimize processes, and minimize rework to lower production costs.
Track by Product
Calculate COGS per product/SKU. Identify and address low-margin items.
Inventory Method Matters
FIFO, LIFO, and weighted average give different COGS. Choose appropriately and be consistent.
Frequently Asked Questions
What's NOT included in COGS?
Exclude: selling expenses, marketing, administrative salaries, rent for non-production space, R&D, and distribution costs (freight out). These are operating expenses, not COGS.
FIFO vs LIFO: which should I use?
FIFO (First In First Out) assumes oldest inventory sold first—better matches physical flow. LIFO (Last In First Out) can reduce taxes during inflation. FIFO is more common and required under IFRS.
How does COGS affect taxes?
COGS is deductible. Higher COGS = lower taxable income. However, artificially inflating COGS is fraud. Use proper accounting methods and be consistent year to year.
What's the difference between COGS and Cost of Sales?
For product companies, they're interchangeable. Service companies use Cost of Sales (or Cost of Revenue) since there's no inventory—it includes direct labor and service delivery costs.
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