{"id":13937,"date":"2022-12-07T04:19:19","date_gmt":"2022-12-07T09:19:19","guid":{"rendered":"https:\/\/onecommerce.io\/blog\/?p=13937"},"modified":"2023-04-14T04:36:10","modified_gmt":"2023-04-14T08:36:10","slug":"cost-of-goods-sold","status":"publish","type":"post","link":"https:\/\/onecommerce.io\/blog\/2022\/12\/07\/cost-of-goods-sold\/","title":{"rendered":"What Is Cost Of Goods Sold &#038; How To Calculate It?"},"content":{"rendered":"<p><i><span style=\"font-weight: 400;\">No matter if you\u2019re selling online or offline, you must keep close track of your <\/span><\/i><b><i><a href=\"https:\/\/onecommerce.io\/blog\/cost-of-goods-sold\/#cost_of_goods_sold\" target=\"_blank\" rel=\"noopener\" data-schema-attribute=\"\">Cost Of Goods<\/a> (COGS) <\/i><\/b><i><span style=\"font-weight: 400;\">&#8211; one of the most crucial metrics that best reflect your business\u2019 health. But what is COGS and why tracking this metric is a must?\u00a0<\/span><\/i><\/p>\n<p><i><span style=\"font-weight: 400;\">In this article, we\u2019ll walk you through:<\/span><\/i><\/p>\n<ul class=\"penci_list_shortcode penci_list-checklist\">\n<li><i><span style=\"font-weight: 400;\">What is Cost of Goods Sold?<\/span><\/i><\/li>\n<li><i><span style=\"font-weight: 400;\">Why should you track COGS?<\/span><\/i><\/li>\n<li><i><span style=\"font-weight: 400;\">Formula to calculate Cost of Goods Sold?<\/span><\/i><\/li>\n<li><i><span style=\"font-weight: 400;\">4 accounting methods for COGS<\/span><\/i><\/li>\n<\/ul>\n<p><i><span style=\"font-weight: 400;\">Let\u2019s dive right in!<\/span><\/i><\/p>\n<h2><b>What is Cost of Goods Sold?<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">Cost of Goods Sold (COGS) is the direct cost of producing your business\u2019 products, which means <\/span><b>it includes all the costs for labor and materials needed to produce your business\u2019 finished goods<\/b><span style=\"font-weight: 400;\">.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">And because COGS is all about production expenses, <\/span><b>it does not include indirect costs such as marketing or distribution<\/b><span style=\"font-weight: 400;\">.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Besides labor and materials costs, COGS can also include:<\/span><\/p>\n<ul class=\"penci_list_shortcode penci_list-checklist\">\n<li><span style=\"font-weight: 400;\">Purchased items for resale<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Purchase returns and allowances<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Trade or cash discounts<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Factory overhead costs such as energy and maintenance<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Parts for production<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Shipping and assembling the said parts into finished goods\u00a0<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Storage costs<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Freight-in costs<\/span><\/li>\n<\/ul>\n<h2><b>Why do you need to track COGS for your business?<\/b><\/h2>\n<p><b>Your gross profit equals your revenue minus Cost of Goods Sold<\/b><span style=\"font-weight: 400;\">. That\u2019s why it can be regarded as a profitability metric to assess how efficiently you are running your business.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Because COGS directly affects your bottom line, <\/span><b>you need to reduce your COGS to increase your net profit<\/b><span style=\"font-weight: 400;\">. And in order to do that, you must track it frequently.<\/span><\/p>\n<h2><b>How to calculate Cost of Goods Sold?<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">Now that you have a better understanding of COGS, let us show you how to calculate it:<\/span><\/p>\n<blockquote><p><span style=\"color: #36ca98; font-size: 14pt;\"><strong>Cost of Goods Sold = Beginning Inventory + Purchases &#8211; Ending Inventory<\/strong><\/span><\/p><\/blockquote>\n<p><span style=\"font-weight: 400;\">In the formula above:<\/span><\/p>\n<ul class=\"penci_list_shortcode penci_list-checklist\">\n<li><b>Beginning inventory <\/b><span style=\"font-weight: 400;\">is the total value of in-stock products and raw materials at the beginning of your reporting period<\/span><\/li>\n<li><b>Ending inventory<\/b><span style=\"font-weight: 400;\"> is the total value of products and materials at the end of your reporting period<\/span><\/li>\n<li><b>Purchases<\/b><span style=\"font-weight: 400;\"> include all of the components, raw materials, and products sold to other parties during this period<\/span><\/li>\n<\/ul>\n<p><b><span class=\"penci-highlighted-one\">NOTE:<\/span> <\/b><span style=\"font-weight: 400;\">As mentioned, Cost of Goods Sold directly impacts your gross and net profit, so it\u2019s necessary to track your COGS frequently. This will help you <strong>spot abnormal ups and downs with your COGS and make timely improvements<\/strong>.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">To keep track of your COGS, you can design your own Excel\/Google Sheets files or download a template on the Internet.<\/span><\/p>\n<div id=\"attachment_13938\" style=\"width: 1930px\" class=\"wp-caption aligncenter\"><img aria-describedby=\"caption-attachment-13938\" class=\"wp-image-13938 size-full\" src=\"https:\/\/onecommerce.io\/blog\/wp-content\/uploads\/2022\/12\/COGS-template.jpg\" alt=\"Cost of Goods Sold\" width=\"1920\" height=\"969\" title=\"\"><p id=\"caption-attachment-13938\" class=\"wp-caption-text\">For example, here\u2019s a simple template to calculate Cost of Goods Sold on the <a href=\"https:\/\/corporatefinanceinstitute.com\/resources\/templates\/excel-modeling\/cost-of-goods-sold-template\/\" target=\"_blank\" rel=\"noopener\" data-schema-attribute=\"\">CFI\u2019s website<\/a><\/p><\/div>\n<p>? How to track COGS accurately for your Shopify store?<\/p>\n<p>When you\u2019re on Shopify plan ($79\/month) or Advanced Shopify ($299\/month), you can access the COGS report.\u00a0 Shopify Cost of Goods Sold calculation includes taxes and shipping costs. However, these 2 metrics vary from country to country, which can hurt your data accuracy.<\/p>\n<p>So to closely monitor your COGS, you probably may want to try <a href=\"https:\/\/onecommerce.io\/r\/rs639056660d9e335c11eccac1\" target=\"_blank\" rel=\"noopener\" data-schema-attribute=\"\"><strong>TrueProfit<\/strong><\/a>. This profit-tracking app automatically tracks your COGS (Weight-based or Quantity-based) by multiple regions so you could know your exact COGS and most importantly, your profits &amp; losses in real-time.<\/p>\n<p><strong><div class=\"wrap-block\" style=\"background-image: url('https:\/\/onecommerce.io\/blog\/wp-content\/uploads\/2022\/11\/color.png');background-repeat: no-repeat;background-size: cover;background-position: center;padding: 20px;\"><table style=\"width: 100%; border-collapse: collapse;\" cellpadding=\"30\">\r\n<tbody>\r\n<tr>\r\n<td style=\"width: 50%;\">\r\n<p class=\"h2\"><span style=\"color: #36ca98;\"><strong>Track all your Profits &amp; Losses in real-time<\/strong><\/span><\/p>\r\n<span style=\"color: #ffffff;\">With <span style=\"color: #36ca98;\">TrueProfit<\/span>, you can automatically monitor all your store's important metrics in one place.<\/span>\r\n\r\n<a href=\"https:\/\/onecommerce.io\/r\/rs638734e84449866de2ae04e9\" class=\"pencisc-button pencisc-button__20551388\" target=\"_blank\" style=\"background-color:#36CA98;border-color:#36CA98;border-radius:5;color:#ffffff;\"><strong>Start Tracking<\/strong><\/a><style>a.pencisc-button.pencisc-button__20551388:hover{ background-color:#ffffff !important;border-color:#ffffff !important;color:#36CA98 !important;}<\/style><\/td>\r\n<td style=\"width: 50%;\"><img class=\"alignnone size-full wp-image-13654\" src=\"https:\/\/onecommerce.io\/blog\/wp-content\/uploads\/2022\/11\/TP.png\" alt=\"\" width=\"600\" height=\"370\" title=\"\"><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table><\/div><style data-type=\"vc_shortcodes-custom-css\"><\/style><\/strong><\/p>\n<h2><b>4 accounting methods for COGS<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">Because \u201cCOGS = Beginning inventory + Purchase &#8211; Ending inventory\u201d, <\/span><b>different accounting methods will give different inventory &amp; COGS values<\/b><span style=\"font-weight: 400;\">.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Here are 4 widely-used accounting methods\u00a0<\/span><\/p>\n<h3><b>1. FIFO &#8211; First In, First Out method<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">With FIFO method,<\/span><b> the first (earliest) products <\/b><span style=\"font-weight: 400;\">you produce or purchase<\/span><b> are the ones you sell first<\/b><span style=\"font-weight: 400;\">. S<\/span><span style=\"font-weight: 400;\">ince prices tend to increase over time, with FIFO method, you sell your lowest-cost products first, resulting in <\/span><b>a lower COGS &amp; higher net income.\u00a0<\/b><\/p>\n<p>For instance, you make 3 shirts A, B, and C that cost you $5, $6, and $7 respectively. Now during the whole reporting period, if you sell 2 shirts, your COGS would be $5+$6=$11.<\/p>\n<h3><b>2. LIFO &#8211; Last In, First Out method<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">On the contrary, with LIFO method,<\/span><b> the last (latest) products<\/b><span style=\"font-weight: 400;\"> you produce or purchase <\/span><b>are the ones you sell first<\/b><span style=\"font-weight: 400;\">. <\/span><span style=\"font-weight: 400;\">As mentioned, prices tend to increase over time, with LIFO method, you sell your highest-cost products first, resulting in <\/span><b>a higher COGS &amp; lower net income<\/b><span style=\"font-weight: 400;\">.<\/span><\/p>\n<p>Taking the same example of the FIFO method, if you sell 2 shirts, your COGS using LIFO method would be $6+$7=$13.<\/p>\n<h3><b>3. Average Cost method<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">As its name might suggest, with the average cost method,<\/span><b> your COGS will be calculated using an average cost<\/b><span style=\"font-weight: 400;\"> for the reporting period. This method helps blend all your costs throughout the period and smooth out price fluctuations.<\/span><\/p>\n<p>Keep using the same example above, your total inventory is then $5+$6+$7=$18 and your average cost per unit would be $18\/3=$6. If you sell 2 shirts, your COGS using average cost method would be $6&#215;2=$12.<\/p>\n<h3><b>4. The Specific Identification method<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">With Specific Identification method, you use the specific cost of each unit to calculate COGS each period. Therefore, you know precisely which product was sold and at what cost using this method.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This method is widely used by businesses that sell unique items such as cars, real estate, and jewelry.<\/span><\/p>\n<p>If it costs you $1,000 to craft a custom necklace, then the COGS of this necklace is simply $1,000.<\/p>\n<h2><b>Compare the Cost of Goods Sold to other metrics<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">Some of you might say that <\/span><b>Cost of Revenue<\/b><span style=\"font-weight: 400;\"> and<\/span><b> Operating Expenses <\/b><span style=\"font-weight: 400;\">are the same thing as COGS. However, they are not.<\/span><\/p>\n<h3><b>1. COGS vs Cost of Revenue<\/b><\/h3>\n<p><b>Cost of Revenue<\/b><span style=\"font-weight: 400;\"> is different from COGS because <\/span><b>it takes into account the COGS plus all the costs outside your production like marketing and distribution<\/b><span style=\"font-weight: 400;\">.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Be noted that if you\u2019re a pure service-based business (e.g: painters, doctors, lawyers, and carpenters), you have to list your costs as Cost of Revenue, instead of COGS<\/span><\/p>\n<p><span style=\"font-weight: 400;\">However, if you\u2019re providing services and selling products at the same time, you can list COGS in your income statements. Take <\/span><b>hotels<\/b><span style=\"font-weight: 400;\"> and <\/span><b>airlines<\/b><span style=\"font-weight: 400;\">, for instance, besides providing services such as lodging and transportation, they also sell food, beverage, souvenirs, and many other items. These are definitely regarded as goods.<\/span><\/p>\n<h3><b>2. COGS vs Operating Expenses<\/b><\/h3>\n<p><span style=\"font-weight: 400;\">To be concise, <\/span><b>Operating Expenses<\/b><span style=\"font-weight: 400;\"> include costs that COGS do not cover.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Operating expenses may include Selling, General, and Administrative expenses ( SG&amp;A). To be more specific, operating expenses refer to:<\/span><\/p>\n<ul class=\"penci_list_shortcode penci_list-checklist\">\n<li><span style=\"font-weight: 400;\">Legal costs<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Office supplies<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Rent<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Utilities<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Payroll<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Sales and marketing<\/span><\/li>\n<li><span style=\"font-weight: 400;\">Insurance costs<\/span><\/li>\n<\/ul>\n<h2><b>Final thoughts<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">All in all, <\/span><b>Cost of Goods Sold<\/b><span style=\"font-weight: 400;\"> is one of the most crucial metrics that you must track and monitor closely because it directly impacts your gross profit and tells you whether you can make a profit and scale up your business or not.<\/span><\/p>\n<p><i>For the latest news, information, and updates about eCommerce, don\u2019t forget to follow us on\u00a0<\/i><strong><a href=\"https:\/\/onecommerce.io\/\" target=\"_blank\" rel=\"noopener\" data-schema-attribute=\"\"><i>OneCommerce<\/i><\/a><\/strong><i>.<\/i><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Cost of Goods Sold includes all the direct costs of producing the goods sold by your brand. If you can reduce COGS, your Gross Profit will increase.<\/p>\n","protected":false},"author":6,"featured_media":13952,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[3],"tags":[],"amp_enabled":true,"_links":{"self":[{"href":"https:\/\/onecommerce.io\/blog\/wp-json\/wp\/v2\/posts\/13937"}],"collection":[{"href":"https:\/\/onecommerce.io\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/onecommerce.io\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/onecommerce.io\/blog\/wp-json\/wp\/v2\/users\/6"}],"replies":[{"embeddable":true,"href":"https:\/\/onecommerce.io\/blog\/wp-json\/wp\/v2\/comments?post=13937"}],"version-history":[{"count":19,"href":"https:\/\/onecommerce.io\/blog\/wp-json\/wp\/v2\/posts\/13937\/revisions"}],"predecessor-version":[{"id":14486,"href":"https:\/\/onecommerce.io\/blog\/wp-json\/wp\/v2\/posts\/13937\/revisions\/14486"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/onecommerce.io\/blog\/wp-json\/wp\/v2\/media\/13952"}],"wp:attachment":[{"href":"https:\/\/onecommerce.io\/blog\/wp-json\/wp\/v2\/media?parent=13937"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/onecommerce.io\/blog\/wp-json\/wp\/v2\/categories?post=13937"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/onecommerce.io\/blog\/wp-json\/wp\/v2\/tags?post=13937"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}