Definition
Cost of goods sold, or COGS, is the total purchase cost of the products you sold during a period. It leaves out stock still on the shelf and costs unrelated to the goods themselves.
The formula
Opening stock is what you held at the start of the period, valued at cost. Purchases are what you bought during it. Closing stock is what is left at the end. Whatever is not left must have been sold, lost or damaged.
A worked example
A farm supply shop starts March with stock worth $5,000 at cost. During March it buys $3,000 of feed and tools. A stock count on March 31 values what remains at $4,200. COGS = 5,000 + 3,000 - 4,200 = $3,800. If sales for March were $5,600, gross profit is 5,600 - 3,800 = $1,800.
Notice that buying $3,000 of stock did not mean $3,000 of cost. Only the part that left the shop counts.
Common mistakes
- Using purchases as cost. A big delivery late in the month inflates the cost and understates profit.
- Skipping the count. Without a closing figure the formula cannot work. A regular stock count feeds it.
- Leaving out loss. Damaged, expired and stolen stock leaves the shelf, so it ends up in COGS. That is useful: a rising COGS with flat sales hints at shrinkage.
- Including rent and wages. These are running costs, not part of COGS.
In Shopkeepa
Shopkeepa keeps stock as a ledger of movements and shows gross profit where a cost is known, so you do not have to run the sum by hand. Shopkeepa is pre-launch; early-access sign-ups hear when it opens.
Related terms
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