What is Cost of Goods Sold (COGS)
Cost of Goods Sold (COGS) refers to the direct costs your business incurs to produce or acquire products. For ecommerce stores, this typically includes raw materials, packaging, shipping, and other costs tied to each sale.
How do You Calculate COGS?
This is the basic formula for calculating your Cost of Goods Sold:
COGS = Starting inventory + Purchases – Ending inventory
This formula measures how much it costs your business to produce the goods sold in a specific period.
• **Starting inventory** is the total value of products or materials you have at the beginning of that period.
• **Purchases** include any additional costs to manufacture or purchase goods, such as materials, packaging, and shipping, during the period.
• **Ending inventory** is the value of what’s left in stock at the end of the same period.
Many businesses use inventory management software to calculate COGS. These tools record all sales and purchases and track stock movement. If you request COGS for a specific product or timeframe, the software can automatically calculate the total.
In ecommerce, this calculation becomes much easier when your systems are connected. MyWorks helps keep these figures accurate by syncing real-time inventory, purchase, and order data between your Shopify or WooCommerce store and your QuickBooks or Xero account.
Which Costs Should You Consider When Calculating COGS?
The costs included in your COGS depend on what it takes to produce or acquire your products. For ecommerce stores, that means considering every expense directly tied to getting an item ready for sale.
Here are the most common cost categories:
• **Raw materials:** the components or ingredients used to create your products, such as wax and wicks for candles or fabric for apparel.
• **Merchant and platform fees:** transaction fees from Shopify Payments, PayPal, or Stripe.
• **Packaging materials:** boxes, inserts, labels, and any branding materials used to ship orders.
• **Storage and fulfillment fees:** costs from warehouses or third-party logistics (3PL) providers that handle inventory and shipping.
• **Shipping and supplier costs:** freight and delivery expenses for materials and finished goods.
• **Labor costs:** wages paid to employees directly involved in production or fulfillment.
• **Maintenance and repairs:** equipment servicing or replacement related to manufacturing or packaging.
What’s an Example of COGS in Action?
Imagine a Shopify store selling handmade candles. At the start of October, inventory is valued at $5,000. During the month, the store spends another $3,000 on materials and labor, and ends the month with $1,500 worth of unsold stock.
COGS = $5,000 + $3,000 – $1,500 = $6,500
That $6,500 represents the direct cost of producing goods sold during October.
MyWorks keeps this data consistent by syncing order, product, and purchase information from your ecommerce platform to QuickBooks or Xero, so your COGS reports match your inventory and sales activity.
Why is COGS Important?
COGS directly affects your gross profit, which is the key metric showing how efficiently your business turns production costs into revenue.
Monitoring COGS helps you identify which products are most profitable and where expenses may be eroding your margins. Accurate COGS tracking also supports tax compliance, ensuring you claim all eligible deductions and maintain reliable financial records.
What’s the Difference Between COGS and Operating Expenses?
While both COGS and operating expenses reflect business costs, they apply to different activities.
COGS represents the direct costs of producing or acquiring the products you sell, like materials, packaging, shipping, and fulfillment.
Operating expenses, on the other hand, cover the day-to-day costs of running your business, such as rent, software subscriptions, or marketing.
For example, the cost of producing custom t-shirts counts toward COGS, while the cost of advertising them on Instagram is an operating expense.
| Category | Example | Affects | |———-|———|——–| | COGS | Product materials, packaging, and fulfillment costs | Direct cost of goods sold | | Operating Expenses | Marketing, software subscriptions, and rent | Cost of running the business |
Tracking these separately provides a clearer view of true product profitability and can assist in making changes to lower operating costs, ultimately improving profit margins.
What Are Some Common Mistakes When Calculating COGS?
Avoiding common COGS errors can save you from inaccurate reporting and distorted margins. Here are a few to watch for:
• **Forgetting inventory adjustments:** not subtracting lost, damaged, or unsellable stock can inflate your COGS.
• **Including indirect costs:** marketing, admin, or other overhead expenses don’t belong in COGS.
• **Manual data entry errors:** missed or outdated updates between Shopify/WooCommerce and QuickBooks can misstate your figures.
Automating data sync with MyWorks helps prevent these mistakes by keeping product, order, and inventory records aligned across platforms.