What is COGS (Cost of Goods Sold)?

Cost of Goods Sold (COGS) represents the total direct costs attributable to the production or acquisition of the goods that a company sells during a given accounting period. For manufacturers, COGS includes raw materials, direct labor, and manufacturing overhead tied to production. For retailers and e-commerce brands, COGS encompasses the wholesale purchase price of merchandise, inbound freight, duties, and any direct costs required to make the product available for sale. COGS is one of the most critical line items on an income statement because it is subtracted directly from revenue to determine gross profit—the foundational measure of a business’s ability to generate earnings from its core operations.

Why It Matters

COGS is the single largest expense for most product-based businesses, often consuming 40 to 70 percent of total revenue. Even small fluctuations in COGS can have an outsized impact on profitability. A brand generating $5 million in annual revenue with a 55 percent COGS ratio spends $2.75 million on the goods it sells; reducing COGS by just two percentage points frees $100,000 in gross profit that drops straight to the bottom line. This is why operations leaders, finance teams, and supply chain managers obsess over COGS—it is the lever with the greatest potential to improve margins without requiring a single additional sale.

Accurate COGS tracking is also essential for financial reporting and tax compliance. Under both GAAP and IFRS, inventory must be valued at its acquisition cost, and COGS must be recognized when the associated revenue is recorded. Misstating COGS leads to incorrect gross margin figures, distorted profitability assessments, and potential audit exposure. For businesses operating across multiple sales channels, accurately allocating COGS to the correct orders, channels, and time periods requires robust systems that connect purchasing, inventory, and order data in real time.

Beyond compliance, COGS analysis drives strategic decisions. Comparing COGS by product line reveals which offerings are truly profitable and which merely generate revenue. Trending COGS over time exposes the impact of supplier price increases, currency fluctuations, and logistics cost changes. Benchmarking COGS against industry peers highlights operational efficiency opportunities. Without granular, accurate COGS data, businesses are making pricing, sourcing, and assortment decisions in the dark.

How It Works

Calculating COGS depends on your business model and inventory accounting method, but the fundamental formula is: COGS = Beginning Inventory + Purchases During the Period – Ending Inventory. Here is how each component contributes:

• Beginning inventory: The total value of all goods available for sale at the start of the accounting period. This figure carries forward from the ending inventory of the prior period and includes the cost of products on hand in warehouses, in transit, and consigned to third-party logistics providers.
• Purchases: All costs incurred to acquire or produce additional inventory during the period. For a retailer, this includes wholesale costs, inbound shipping, customs duties, and landed cost adjustments. For a manufacturer, it includes raw material purchases, direct labor, and production overhead allocated to finished goods.
• Ending inventory: The total value of unsold goods remaining at the close of the period. The inventory valuation method used—FIFO (First In, First Out), LIFO (Last In, First Out), or weighted average cost—directly affects the ending inventory value and therefore the COGS figure. FIFO assumes older, potentially lower-cost inventory is sold first, while LIFO assumes newer inventory is sold first, which can produce significantly different COGS outcomes in periods of rising or falling prices.
• Per-order COGS: At the individual order level, COGS is the sum of the unit costs of all items in the order, plus any directly attributable fulfillment costs such as picking labor and packaging materials. Tracking COGS at the order level enables precise profitability analysis by channel, customer, and promotion.
• Excluded costs: COGS does not include indirect expenses such as marketing, sales salaries, rent for corporate offices, or general administrative overhead. These expenses are accounted for separately as operating expenses below the gross profit line.

How Nventory Helps

Nventory gives you granular, real-time COGS visibility across every product, order, and sales channel. By integrating purchase order data, landed cost components, and inventory valuation methods into a single platform, Nventory automatically calculates accurate COGS as orders are fulfilled—eliminating the spreadsheet gymnastics and month-end reconciliation headaches that plague growing brands. With unified order data flowing from Shopify, Amazon, WooCommerce, and all your connected marketplaces, Nventory enables you to analyze COGS by channel, product category, supplier, and time period, surfacing the insights you need to negotiate better supplier terms, optimize your product mix, and protect your margins as you scale.