Guide
How to Calculate Cost of Goods Sold for a Small Product Business
Cost of goods sold is what the products you actually sold cost you. It is the number that turns revenue into gross profit, and it is easier to work out than it sounds.
What it is
Cost of goods sold, often shortened to COGS, is the cost of the units that left your shelves in a period. It is not what you spent on stock in that period. Stock you bought but have not sold yet is still an asset sitting on the shelf, not a cost of the sales you made.
Revenue minus cost of goods sold is your gross profit. Everything else you pay for, such as rent, software and marketing, comes out of gross profit to leave your net profit.
The simple way: cost per unit times units sold
If you know the landed cost of each product, multiply it by the number you sold. Sell 120 candles that cost you $4.20 each and your cost of goods sold for candles is $504.00.
Do that for every product and add the results together. This is the method that works best when you record each order line with its product, because the spreadsheet can do the multiplying.
The other way: opening stock plus purchases minus closing stock
If you do not track units sold, count your stock instead. Value your stock at cost at the start of the month, add what you bought during the month, and subtract the value at the end.
Start the month with $3,000 of stock at cost, buy $1,200 more, and finish with $2,700. Cost of goods sold is $3,000 plus $1,200 minus $2,700, which is $1,500.
The two methods should give the same answer. When they do not, stock has been lost, broken or miscounted, and the gap tells you how much.
What to include in the cost of a unit
Everything it took to get the unit ready to sell: the supplier price, freight, duty and packaging. That is the landed cost. If you make the product, it is the materials for one unit and any labour you pay for, which is why costing a batch matters.
What to leave out
Rent, utilities, software, advertising, selling fees and your own salary. These do not attach to a particular unit, so they are overheads, counted below gross profit.
Keeping them separate is what lets you see two different things: whether your products are priced well, and whether the business around them costs too much to run.
Why it is worth doing every month
Gross margin, which is gross profit divided by revenue, should be fairly steady from month to month. If it drops, a supplier has raised prices, you have been discounting, or stock is going missing. Cost of goods sold is how you notice in time to do something about it.
