Cost of goods sold (COGS)
Cost of goods sold is the direct cost of the products you actually sold in a period. It is what you subtract from revenue to get gross profit.
Updated
- Formula
- COGS = opening inventory + purchases − closing inventory
- Also called
- COGS, cost of sales
What goes into it
COGS covers the costs of getting a product into a sellable state in your warehouse:
- the price paid to the supplier, or materials and direct labour if you make it;
- inbound freight and insurance;
- import duties and taxes you cannot reclaim;
- packaging that is part of the product as sold.
It leaves out the costs of running the business and of making the sale: marketing, salaries, software, payment fees and, in most accounting policies, shipping to the customer.
Two ways to arrive at it
From stock counts. Opening inventory plus purchases, less closing inventory. A store that started the quarter with $12,000 of stock, bought $30,000 and ended with $9,000 has a COGS of $33,000.
From sales. Units sold times the cost of each unit. Sell 500 linen throws at a cost of $22.60 each and the COGS for those sales is $11,300. This is the method a per-variant cost supports, and it is only as good as the cost on each variant.
Why the per-unit figure matters
The second method fails quietly. A variant with no cost contributes nothing to COGS, so gross profit is overstated by its whole revenue. A cost that was right last year and never updated does the same thing more slowly.
In Cogsy
Cogsy does not produce a COGS report. It maintains the input: a current, dated cost for every variant, with the costs you choose rolled into the figure written to Shopify, and a list of the variants that have none.
Questions
- Is shipping to the customer part of COGS?
- Usually not. Outbound shipping is most often treated as a selling or fulfilment expense. Freight you pay to bring stock in is part of the product's cost. Accounting treatment varies, so follow your accountant's policy and apply it the same way every period.
- Are payment processing fees part of COGS?
- They are normally recorded as a selling expense, not as cost of goods. They still reduce what you keep from each sale, which is why it helps to track them per product beside the cost of goods.
- Is COGS the same as cost per item in Shopify?
- No. Cost per item is a figure stored on one variant. COGS is a total for a period, the cost of every unit sold in it.
Related
Glossary
Gross profitGross profit is revenue minus the cost of the goods sold. The formula, a per-unit and a per-period example, and how it differs from gross margin and net profit.
Glossary
Landed costLanded cost is what a product costs by the time it reaches your warehouse: purchase price, freight, insurance, duties and handling. Formula and worked example.
Glossary
Unit costUnit cost is what one unit of a product costs you to buy or make. How to calculate it for bought and made goods, and what belongs in it.
Guide
Cost per item in Shopify: what it is and what depends on itWhat Shopify's cost per item field holds, how to set it, which reports use it, who can see it, and the four things one static field cannot do.