Which Cost of Goods Sold (COGS) Formula Should You Use? A Guide for Product Resellers and Manufacturers

Some brands purchase and resell inventory items to customers, while others manufacture the goods they sell. Both types of businesses spend money on inventory, but there are more differences than similarities, especially in how they calculate their cost of goods sold (COGS).

COGS is a key factor in your profit margins, and it shapes your income statement too. So it's vital to use the right cost of goods sold formula for your business model. Consulting firm Kearney expects global supply chain costs to rise up to 7% above inflation by late 2025, so product sellers can't afford to ignore cost tracking.

Key Takeaways

• Resellers calculate COGS as Beginning Inventory + Purchases − Ending Inventory.
• Manufacturers use Raw Materials + Direct Labor + Utilities + Overhead.
• COGS counts only direct production or purchasing costs. It excludes admin, marketing, and office rent.
• COGS percentage = (COGS ÷ Revenue) × 100. It shows how much of each sales dollar goes to making or buying your products.
• A lower, well-managed COGS means stronger gross margins, so tracking it closely protects your profit.

What Is Cost of Goods Sold (COGS)?

Cost of goods sold, abbreviated COGS, is the direct cost of producing or purchasing the goods a company sells to generate revenue.

In other words, it's the expense tied directly to making or buying your products during a specific period. Indirect costs like administrative expenses and office supplies are excluded from the calculation.

It's a straightforward concept, but it looks different depending on whether you purchase or produce your inventory. Let's walk through both scenarios.

COGS vs. Cost of Sales vs. Operating Expenses

These terms get mixed up constantly, so let's clear them up. Getting them right keeps your margins accurate and your accountant happy.

• Cost of sales is often used interchangeably with COGS. You'll see it more often at retailers, wholesalers, and service businesses that don't manufacture.
• Operating expenses (rent, marketing, and admin salaries) are not part of COGS. They keep the business running but aren't tied to a specific unit.

Salaries are where people trip up. Only wages for direct production labor count toward COGS. The salaries of your office, sales, and admin teams sit in operating expenses instead.

What's Included in COGS (and What's Excluded)

A quick reference so you know what belongs in the calculation and what doesn't.

Included in COGS:

• Raw materials and components used to make your products.
• The purchase cost of finished goods you resell.
• Direct labor wages for the people who build the product.
• Freight-in, duties, and other landed costs to get inventory in the door.

Excluded from COGS:

• Marketing, advertising, and sales commissions.
• Office rent, utilities not tied to production, and admin salaries.
• Distribution and shipping to the customer after the sale.

Cost of Goods Sold Formula

There isn't one universal cost of goods sold formula, because resellers and manufacturers track different costs. Here are both, side by side.

Reseller COGS = Beginning Inventory + Purchases During the Period − Ending Inventory

Resellers use this formula because they buy finished inventory rather than build it.

Manufacturer COGS = Raw Materials + Direct Labor Costs + Utilities + Direct Overhead Expenses

Manufacturers use this one because they're producing goods, so they carry extra variables like factory overhead, raw materials, and labor.

Whichever formula you use, you can calculate COGS by hand, in spreadsheets, or automatically with inventory management software like Cin7. Automating it is faster and more accurate, but understanding what goes into the calculation helps you spot ways to optimize COGS.

How to Calculate Cost of Goods Sold (Step-by-Step)

To calculate COGS, first pick the formula that applies to you: reseller or manufacturer. Then plug in your inventory values or production costs for the period. Your numbers may shift depending on your inventory valuation method, like LIFO or FIFO.

Here's a closer look and a worked example for each.

Calculating COGS for Resellers (With Example)

Resellers use the basic formula: COGS = Beginning Inventory + Purchases During the Period − Ending Inventory, where:

• Beginning Inventory is the value of the inventory at the start of the accounting period.
• Purchases During the Period is the total cost of additional inventory bought for resale during the period.
• Ending Inventory is the value of the inventory at the end of the accounting period.

Let's put it in action with a shoe seller:

• At the start of the year, they have $10,000 worth of shoes in inventory.
• Throughout the year, they purchase $30,000 worth of additional shoes.
• At the end of the year, they have $5,000 worth of shoes left.

Plug those numbers into the reseller formula:

COGS = $10,000 (Beginning Inventory) + $30,000 (Purchases) − $5,000 (Ending Inventory)

COGS = $35,000

For this example year, the brand's COGS is $35,000. Cin7's accounting and inventory software can automate this for resellers by tracking COGS per unit at the time of sale. That means you track it on a perpetual basis, without waiting for the period to close.

Calculating COGS for Manufacturers (With Example)

Manufacturers use: Total COGS = Raw Materials Cost + Direct Labor Costs + Utilities + Overhead Expenses. Imagine a company that builds and sells wooden tables, where:

• Raw Materials: The wood, screws, and varnish used in production count toward COGS.
• Direct Labor Costs: Wages and benefits for the workers who build the tables are included.
• Utilities: Electricity to power tools and water used to process wood fall under utilities.
• Direct Overhead Expenses: Facility rent, insurance, and machinery depreciation tied to production are included.

Now say this company sold 100 wooden tables over the quarter. The costs for those 100 tables were:

• Raw Materials Cost: $5,000
• Direct Labor Costs: $3,000
• Utilities: $500
• Direct Overhead Expenses: $2,000

Enter those values into the manufacturer formula:

Total COGS = $5,000 (Raw Materials) + $3,000 (Direct Labor) + $500 (Utilities) + $2,000 (Overhead)

Total COGS = $10,500

So the total production cost for those 100 tables is $10,500. With Cin7, manufacturers can automate job costing to track COGS for each order, and our manufacturing inventory software keeps materials, labor, and overhead in one place.

Cost of Goods Sold Percentage (COGS to Sales Ratio)

Your COGS percentage, also called the COGS to sales ratio, shows how much of your revenue goes toward making or buying what you sell. The formula is simple:

COGS Percentage = (COGS ÷ Revenue) × 100

Say your COGS is $35,000 and your revenue is $70,000. Your COGS percentage is 50%, so half of every sales dollar covers the cost of goods, and the other half is gross profit before other expenses.

What's healthy? It varies by industry, but AgencyAnalytics notes that 30% to 40% of sales is a common benchmark, while a COGS above 50% can signal rising production costs or pricing that needs a look. Track it over time in real-time reporting to protect your gross margin.

Inventory Valuation Methods That Affect COGS (FIFO, LIFO, Weighted Average)

The value you assign to inventory changes your COGS, especially when prices move. Here are the three most common methods:

• FIFO (First In, First Out): Assumes your oldest stock sells first. During inflation, this reports a lower COGS and a higher profit.
• LIFO (Last In, First Out): Assumes your newest stock sells first. During inflation, this reports a higher COGS and a lower taxable profit.
• Weighted Average: Blends all units into one average cost, smoothing out price swings between purchases.

There's no single right choice. Your method depends on your goals, your accounting rules, and how prices are trending. For a deeper look, see our guide to inventory valuation methods.

Benefits of Understanding and Leveraging COGS

Understanding COGS matters for every business owner, whichever cost of goods sold formula you use. Here's what it unlocks.

Informed Decision-Making

COGS analysis helps you make smarter calls on product lines, suppliers, and production. You can spot your most profitable products and put resources behind them. Tracking COGS over time also guides pricing decisions, like trimming bloated costs or streamlining production.

Profitability Analysis

Understanding COGS lets you analyze profitability accurately. With your direct costs in hand, you can calculate gross profit margin, a core measure of company health. Leaner production and better resource use can lower COGS, improve cash flow, and boost your bottom line.

Pricing Strategy and Cost Optimization

Tracking COGS protects profitability by informing your pricing and surfacing ways to cut spending. That's especially relevant now, as 55% of businesses flag inflation as a growing supply chain risk, up from 31% in 2023.

An accurate view of COGS helps you set competitive prices while optimizing your spending. When you understand your cost structure, you can cover your expenses and still stay competitive.

Inventory Management

COGS also gives you insight into your inventory. By tracking it over time, you can spot trends and optimize stock levels to minimize holding costs and avoid overstocking or stockouts.

How to Reduce COGS Without Sacrificing Quality

Once you're tracking COGS accurately, the next question is how to bring it down without cutting corners. A few practical levers:

• Negotiate with suppliers or buy in bulk to lower your per-unit material cost.
• Trim waste and rework in production, since scrapped materials still count toward COGS.
• Right-size inventory to reduce holding costs and avoid markdowns on deadstock.
• Review your valuation method, since FIFO, LIFO, and weighted average report COGS differently.

The goal isn't the cheapest inputs. It's the smartest ones, so you protect margins and keep customers happy.

Best Practices for Tracking COGS

Calculating COGS helps you improve profitability, pricing, and inventory strategy. Follow these best practices to get the most from your COGS data.

Track COGS Regularly

Calculating COGS once a year instead of continuously means missed chances to adjust your margins. Costs can eat into your profit long before you notice and can act.

For the sharpest insight, keep accurate inventory and expense records and calculate COGS consistently. Cin7 makes this easy by calculating COGS for each item sold and integrating with your accounting software so you can monitor margins over time.

Use Technology

Inventory management software streamlines valuation and COGS tracking, saving time and cutting the errors that come with manual entry. It's also how you keep pace with finance leaders. In Deloitte's Q1 2026 North American CFO Signals survey, 53% of CFOs named automation and technology upgrades as the most proven way to control costs.

Take GoNano, a manufacturer of roof-life extension products that ran on spreadsheets, email, and forms. After moving to Cin7, they doubled their contractor network to over 400 accounts in about 18 months without proportionally growing back-office staff.

You can go further, too. Pair automated COGS with AI demand forecasting to plan purchases before costs spike, and turn insights into lower expenses and healthier margins.

Review and Adjust

Automating COGS reduces manual work and frees up your team's time. Even so, remember to review the data and act on it.

Assess COGS regularly to find areas to improve. A manufacturer seeing higher COGS from rising material costs might negotiate with suppliers or explore more cost-effective materials.

Cost of Goods Sold Formula FAQs

Still have questions? Here are quick answers to the ones we hear most.

Is COGS an Expense or an Asset?

COGS is an expense, and it lands on your income statement where it's subtracted from revenue to give gross profit. Until inventory actually sells, its cost sits on your balance sheet as an asset. The moment a sale happens, that cost moves from inventory to COGS.

What's the Difference Between COGS and Cost of Goods Manufactured (COGM)?

Cost of goods manufactured (COGM) is the total cost of everything you finished producing in a period, whether it sold or not. COGS is narrower: it's the cost of the goods you actually sold. Manufacturers often calculate COGM first, then use it to help work out COGS.

How Do I Calculate COGS in Excel?

You can calculate COGS in Excel with one simple formula. Put your beginning inventory, purchases, and ending inventory in three cells, then use =beginning+purchases−ending (for example, =B1+B2−B3). It works, but a spreadsheet won't update on its own, so tools like Cin7 track COGS automatically as each item sells.

Does COGS Reduce Your Taxes?

Yes. COGS is a deductible business expense, so a higher COGS lowers your taxable income for the period. That's also why your valuation method matters, since FIFO, LIFO, and weighted average can each report a different COGS and change what you owe.

Where Does COGS Appear on Your Financial Statements?

COGS appears on your income statement, right below revenue and above gross profit. Subtract COGS from revenue and you get gross profit, one of the clearest signals of how efficiently you make or buy what you sell. It doesn't show up on your balance sheet, but unsold inventory does, until it sells.

Simplifying COGS Calculations With Cin7

Whether you purchase or manufacture your inventory, automating your COGS calculation reduces manual work, improves accuracy, and saves time. Best of all, it lets you monitor and adjust profit margins on the fly.

Cin7 automates COGS for resellers and manufacturers at the time of sale, so you can understand this key expense in real time and find opportunities to grow profit. See it for yourself with a free trial, or request a demo to see Cin7 in action.