Inventory glossary

What is Cost of goods sold?

Cost of goods sold is the direct cost of the products you have sold, counting only the cost of the items themselves, not your rent, marketing or other overhead.

Cost of goods sold, often called COGS, tells you what you actually spent to produce the sales you made. You subtract it from revenue to get gross profit, so if your COGS is wrong, your profit numbers are wrong too, even if sales look strong.

Use COGS to check your margins per product and to decide which items are worth reordering. A SKU with high sales but thin margin after COGS may matter less to your cash flow than a slower seller with a fat margin. Track it per product, not just as one store-wide number, so you can compare which variants actually make you money.

Formula

COGS = Beginning inventory + Purchases - Ending inventory

Example

A candle store starts the month with 200 candles in stock worth $4 each, so $800. During the month they buy 300 more candles at $4 each, costing $1,200. At month end they count 150 candles left, worth $600. COGS = 800 + 1200 - 600 = $1,400 for the month.

Common mistakes

  • Including shipping to customers or packaging as COGS when it should be a separate expense.
  • Using the current purchase price instead of the actual cost paid for the units sold.
  • Forgetting to update ending inventory counts, which throws off the whole calculation.

Cost of goods sold and SteadyShelf

SteadyShelf does not calculate COGS, but it uses your per-SKU sales pace to time and size reorders so you are not tying up cash in stock before you need it.

SteadyShelf is launching on the Shopify App Store. Join early access to get the install link first.

Related terms

Gross margin · Inventory valuation · Weighted average cost · FIFO · Inventory turnover

Full inventory glossary

FAQ

Does cost of goods sold include shipping costs?

Inbound freight to get the product to you can be included in COGS. Outbound shipping to customers should not be, that is a separate selling expense.

How is COGS different from inventory value?

Inventory value is what your unsold stock is worth right now. COGS is the cost of what you already sold during a period. They are linked but measure different things.

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