COGS
Cost of goods sold (COGS)
Revenue
Cost of goods sold: the direct cost of making or buying the products you sell.
What is COGS?
COGS includes the costs directly tied to the products you sold: raw materials or wholesale cost, manufacturing and often inbound freight and packaging. It usually leaves out marketing, salaries for staff not involved in production, software and rent, which are operating expenses. How shipping to customers and payment fees are treated varies, so be consistent.
Revenue minus COGS is gross profit, and gross profit divided by revenue is gross margin. It is the first number to check when deciding how much you can spend on ads, discounts and free shipping.
Formula
Gross margin = (Revenue - COGS) ÷ Revenue × 100
Example
For example, a store has $100,000 in revenue for the month and $38,000 in COGS. Its gross profit is $62,000 and its gross margin is 62%.
Why COGS Matters
Knowing your COGS tells you how much room you have for discounts, shipping and marketing before an order stops being profitable.
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