How to calculate cost of goods sold (COGS)

The COGS formula

COGS = Beginning inventory + Purchases − Ending inventory

Beginning inventory

value of stock at the start of the period, at cost

Purchases

landed cost of stock bought during the period

Ending inventory

value of stock left at the end of the period, at cost

The logic: everything you had available to sell, minus what's still on the shelf, must be what you sold.

How to calculate cost of goods sold: a worked example

Worked example: one monthExample numbers

Input	Value at cost
Inventory at the start of the month	$80,000
Stock purchased during the month (landed cost)	$30,000
Inventory at the end of the month	$91,000

COGS = $80,000 + $30,000 − $91,000 = $19,000

With net revenue of $47,000:

• Gross profit = $47,000 − $19,000 = $28,000
• Gross margin = $28,000 ÷ $47,000 = 59.6%

You can also calculate COGS bottom-up: units sold × landed cost per unit, summed across products. Both methods should roughly agree.

A big gap points to shrinkage, miscounts or costs that aren't up to date. A stocktake usually finds the cause.

What to include in COGS for a Shopify store

Shopify's profit reports use the cost per item you enter on each product. Enter landed cost there, not just the supplier price, and update it when a new batch costs more or less.

Contribution Margin per SKU CalculatorWhat a single SKU actually contributes after COGS, shipping, and fees.Open calculator

How COGS feeds your other numbers

Gross margin. Gross margin = (revenue − COGS) ÷ revenue. Understating COGS overstates your margin, and with it your break-even ROAS and pricing decisions. See the guide to gross profit margin.

Inventory turnover. Turnover = COGS ÷ average inventory, so COGS is the top half of the formula.

Inventory Turnover Rate CalculatorHow many times a year your inventory turns over, and how many days that takes.Open calculator

Valuation method. When purchase costs change over time, which cost goes into COGS depends on your valuation method. FIFO assigns the oldest costs first; weighted average uses a blended cost. The guide to FIFO shows how much difference it makes.

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Common COGS mistakes

• Counting purchases as COGS. Buying stock isn't an expense until it sells. A big order in one month doesn't make that month's COGS high.
• Leaving out freight and duties. Supplier price alone understates COGS.
• Valuing inventory at retail price. Beginning and ending inventory must be at cost.
• Skipping the ending count. Without an accurate count or system figure, the formula can't work. Regular cycle counts keep it reliable.
• Ignoring write-offs. Damaged or lost stock that's written off should be recorded, not left in ending inventory.

For the full cost build-up per unit, see the guide to product costing.