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Cost of goods sold (COGS)
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What is
Cost of goods sold (COGS) is the total direct cost of the goods a business sells during a specific period. It includes the cost of raw materials and labor directly tied to producing or purchasing inventory, but excludes indirect costs like marketing, rent, or administrative salaries.
What you need to know about cost of goods sold:
COGS only counts sold inventory — unsold goods sitting in your warehouse aren't included in the calculation.
A lower COGS relative to revenue means a higher gross profit margin — the first sign of business efficiency.
COGS appears on the income statement and directly reduces taxable income, making it a key figure at tax time.
How to calculate cost of goods sold
To apply the cost of goods sold formula, add the value of your inventory at the start of the period to any purchases made during that period, then subtract the value of inventory remaining at the end.
Why is calculating cost of goods sold important?
Know your true profitability
COGS is what turns revenue into gross profit. Without it, you can't tell whether selling more is actually making you better off — or just keeping you busy.
Set prices with confidence
Once you know your COGS, you have a floor for pricing. You can set margins deliberately rather than guessing, and adjust quickly when supplier costs shift.
Keep your books accurate and tax-ready
COGS is a deductible business expense that reduces taxable income. Recording it consistently keeps your financial statements clean and simplifies year-end reporting.
Frequently asked questions
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