Cost of Goods Sold (COGS) Calculator

What Is COGS?

Cost of Goods Sold (COGS), also called Cost of Sales, is the direct cost of the goods a company actually sold during a period.
It is the first line subtracted from revenue, and what survives it has to pay for everything else in the business.

The COGS Formula

COGS = Beginning Inventory + Purchases During Period − Ending Inventory

This is the periodic inventory method, which calculates COGS at the end of an accounting period (month, quarter, or year).

Gross Profit and Gross Margin

Gross Profit = Revenue − COGS

Gross Margin % = (Gross Profit / Revenue) × 100

Gross margin is the number to watch on a product business.
It says how much of each sales dollar is left once the goods themselves are paid for, and rent, wages, marketing and profit all come out of that remainder.

A worked example

Type the placeholder figures into the boxes above and this is what comes back.

Beginning inventory $50,000, purchases $200,000, ending inventory $60,000, revenue $400,000.

• COGS = $50,000 + $200,000 − $60,000 = $190,000
• Gross profit = $400,000 − $190,000 = $210,000
• Gross margin = $210,000 ÷ $400,000 = 52.50%
• COGS as a share of revenue = 47.50%

The ending inventory is the part people get wrong. It is a subtraction, not an addition: stock still sitting on your shelf at the close of the period was never sold, so its cost has not been incurred yet.

Inventory Valuation Methods

The method used to value inventory affects COGS, especially when costs change over time:

• FIFO (First In, First Out): Oldest inventory is sold first. In rising cost environments, FIFO produces lower COGS and higher gross profit.
• LIFO (Last In, First Out): Newest inventory is sold first. Produces higher COGS in rising cost environments (allowed in the US, but not IFRS).
• Weighted Average Cost: Smooths out price fluctuations by averaging all unit costs. Simpler to administer.

What Is Included in COGS?

• Raw materials and components
• Direct labor (workers who make or handle the product)
• Manufacturing overhead (factory rent, utilities, equipment depreciation)
• Freight and import duties
• Packaging costs

Not included in COGS:

• Selling, General & Administrative (SG&A) expenses
• Marketing and advertising
• Executive salaries
• R&D costs

Industry Gross Margin Benchmarks

How to Reduce COGS

• Negotiate better pricing with suppliers
• Buy in larger quantities for volume discounts
• Reduce waste and scrap in production
• Outsource manufacturing to lower-cost regions
• Substitute materials without sacrificing quality

On a business with $3M in COGS, a 2% reduction cuts $60,000 of cost and drops it straight to gross profit.