The direct costs attributable to producing or purchasing the goods a business sells, including materials, labor, and shipping. Subtracted from revenue to calculate gross profit.
Understanding Cost of Goods Sold (COGS)
Cost of Goods Sold (COGS) represents the direct costs of producing or purchasing the products a business sells during a specific period. For ecommerce sellers, this primarily includes the wholesale cost of inventory, inbound shipping to your warehouse or FBA, and direct manufacturing costs if you produce your own products.
COGS is subtracted from revenue on the income statement to calculate gross profit, making it one of the most important figures for understanding product-level profitability. It does not include indirect costs like marketing, rent, or administrative salaries — those are operating expenses.
Accurately tracking COGS requires a consistent inventory valuation method — FIFO (first in, first out), LIFO (last in, first out), or weighted average cost. Most ecommerce sellers use FIFO, which assumes the oldest inventory is sold first.
Why It Matters for Ecommerce
COGS directly determines your gross margin, which is the single most important profitability metric for product-based businesses. If your COGS is too high relative to your selling price, no amount of sales volume will make the business profitable. Tracking COGS by SKU helps you identify which products are truly profitable after all direct costs.
Practical Example
You sell phone cases for $25 each. Your COGS per unit includes: $8 wholesale cost + $1.50 inbound shipping + $0.50 packaging = $10 per unit. Your gross profit is $15 per unit ($25 - $10). If Amazon charges a $3.75 referral fee and $3.50 FBA fee, those are additional expenses that reduce your net profit but are not part of COGS.
Related Terms
Gross Profit
Revenue minus the cost of goods sold (COGS). Measures how efficiently a business produces or sources its products before accounting for overhead, taxes, and other operating expenses.
AccountingIncome Statement
A financial statement showing revenue, expenses, and profit or loss over a specific period. Also called a profit and loss statement (P&L), it measures a company's financial performance.
AccountingProfit and Loss Statement (P&L)
Another name for the income statement. Summarizes revenues, costs, and expenses over a reporting period to show whether a business made or lost money.
Put This Knowledge Into Practice
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