Questions · Business calculations
What is cost of goods sold (COGS), and how is it calculated?
The answer
Cost of goods sold (COGS) is what the goods you sold in a period cost you to buy and bring into the shop. Calculate it as opening stock + purchases − closing stock, all at cost and without GST you can claim back. It does not include rent, salaries or other running costs.
Cost of goods sold answers a simple question: of everything I sold this month, what did it cost me? It is the number you subtract from sales to find gross profit, and the number you divide by average stock to find inventory turnover.
The formula
Everything you started with plus everything you bought, minus what is still on the shelf, is what left the shop. Purchases should include freight and other costs of getting goods to you, minus anything returned to suppliers.
A worked example
A kirana store’s figures for one month, at cost and before claimable GST:
| Figure | Amount |
|---|---|
| Opening stock | ₹1,20,000 |
| Add: purchases | ₹3,40,000 |
| Add: freight inwards | ₹6,000 |
| Less: closing stock | ₹1,30,000 |
| Cost of goods sold | ₹3,36,000 |
If sales for the month were ₹4,20,000 (before GST), gross profit is ₹4,20,000 − ₹3,36,000 = ₹84,000, a 20% gross margin. Rent, salaries and electricity come out of that ₹84,000 next; the difference is explained in gross profit vs net profit.
What belongs in COGS
| Include | Leave out |
|---|---|
| Supplier price after trade discounts | GST you can claim as input tax credit |
| Freight, transport and handling to your shop | Rent, salaries, electricity, marketing |
| Stock written off as damaged, expired or missing | Shop fittings, computers and other equipment |
| Goods bought for the office rather than for sale |
Stock lost to damage or theft ends up in COGS automatically with this formula, because it is no longer in closing stock. Many owners track it separately as well, so that losses are visible rather than hidden in the cost of sales.
A second way: add up the cost of each sale
Billing software that records the cost of every item can add up the cost of each item sold instead. This gives COGS for any day, item or category without waiting for a stock count. It will not include losses until a count is approved as an adjustment, so the two methods should agree once counts are up to date. How the cost of each unit is chosen when prices change (FIFO or weighted average) is covered in how to calculate stock value.
Common mistakes
- Using sales instead of cost. COGS is what the goods cost you, never what customers paid.
- Counting purchases as COGS. Goods bought but still on the shelf are stock, not cost of sales.
- Leaving out freight, which makes gross margin look better than it is.
- Including claimable GST, which overstates COGS.
- Valuing closing stock at selling price, which understates COGS and flatters profit.
How your accounts present COGS can depend on your business and the rules that apply to it, so treat this as general information and check the details with your accountant.
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General information, not legal, tax or financial advice. Published by Chameron Digital.