About

Cost of Goods Sold (COGS) refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the good. It excludes indirect expenses, such as distribution costs and sales force costs. Calculating COGS accurately is critical because it is deducted from your gross revenue to determine your gross profit.

Different industries manage COGS differently. A retailer focuses on inventory levels, a manufacturer looks at raw materials and direct labor, while a SaaS business looks at server costs and support fees (often termed 'Cost of Revenue'). This tool provides standardized templates to help you ensure no direct cost is overlooked.

Formulas

The fundamental accounting equation for COGS in inventory-heavy businesses is:

COGS = Inventory_start + Purchases − Inventory_end

For service or manufacturing contexts, it expands to sum all direct costs:

COGS = ∑ ( Materials + Labor + Overhead )

Reference Data

Industry	Typical COGS Range (%)	Primary Cost Drivers	Key Efficiency Metric
SaaS / Software	15% - 25%	Hosting, 3rd Party APIs, Support Staff	Gross Margin > 80%
Apparel Retail	40% - 50%	Wholesale Purchase Price, Freight	Inventory Turnover
F&B / Restaurants	28% - 35%	Ingredients, Packaging, Waste	Food Cost Percentage
Manufacturing	55% - 70%	Raw Materials, Direct Labor, Factory Overhead	Production Yield
Construction	70% - 85%	Materials, Subcontractors, Labor	Job Costing Accuracy
Professional Services	30% - 40%	Billable Salaries, Software Licenses	Billable Utilization
Electronics	60% - 75%	Components, Assembly, R&D Amortization	Component Sourcing
E-commerce (Dropshipping)	60% - 80%	Product Cost, Shipping, Transaction Fees	Average Order Value

Frequently Asked Questions

No. COGS is a direct cost relative to revenue and appears above the Gross Profit line on the income statement. Operating expenses (OPEX) like rent, marketing, and administration appear below Gross Profit.

COGS is a legitimate business expense that reduces your taxable income. The higher your valid COGS, the lower your net profit, and consequently, the lower your tax liability. However, inflating COGS illegally is tax fraud.

Service businesses (like consultancies) calculate 'Cost of Revenue'. This includes the direct labor cost of the employees providing the service and any direct tools used (e.g., software licenses specifically for that client project).

Beginning Inventory is the value of all unsold goods you had on hand at the start of the accounting period. It must exactly match the 'Ending Inventory' of the previous period.

Generally, no. Marketing and advertising are Customer Acquisition Costs (CAC) and are classified as operating expenses, not Cost of Goods Sold.