What is cost of goods sold (COGS)?

Your accountant, your bank and every margin you calculate start from the same figure: what the things you sold cost you. Not what you bought this month — what you used up making the sales. That is cost of goods sold, or COGS.

The formula

COGS = opening stock + purchases − closing stock

For one item, COGS is simply what it cost you: the ingredients in a dish, or the price you paid your supplier for a T-shirt.

A worked example

A clothing shop starts the month with £8,000 of stock at cost, buys £5,000 more, and counts £7,500 left at the end.

£8,000 + £5,000 − £7,500 = £5,500 of goods sold.

If sales for the month were £13,750 before VAT, gross profit was £8,250 — a 60% margin.

Purchases are not COGS

A big delivery on the last day of the month is not this month's cost: most of it is still on the shelf. Using purchases instead of usage makes good months look bad and bad months look good. The closing stocktake is what makes COGS honest.

What goes in it

• The ingredients or products themselves, at the price you paid.
• Packaging that leaves with the customer — takeaway cups, boxes, bags.
• Delivery charges from suppliers, if you pay them per order.

Wages, rent and energy do not go in COGS; they are operating costs. In restaurants, COGS plus labour is prime cost.

Common mistakes

1. Using purchases instead of usage. Always adjust for opening and closing stock.
2. Counting stock at selling price. Stock is valued at what you paid.
3. Forgetting waste and staff food. They are used up too — record them so the gap is explained, see wastage.

Tracking it in DUMA

Every menu item with a recipe has its ingredient cost worked out, so each sale carries its own cost. The Stock usage report shows what was used, received and adjusted item by item, and stocktakes correct the counts that COGS depends on.