What Is Cost of Goods Sold (COGS)? Formula + Example

Quick Definition

Cost of Goods Sold (COGS) is the direct cost of the products you sold in a period. For most Shopify stores, that's what you paid suppliers plus freight and duties to bring stock in. If you make your own products, it's materials and production labor. It's also called cost of sales. Ad spend and app fees don't count.

How to Calculate COGS for a Month or Quarter

Accountants get COGS for a period from three numbers in your stock records.

COGS = Beginning inventory + Purchases − Ending inventory

Beginning inventory is your stock's value at cost on day one. Add purchases, the new stock you bought that period. Then subtract ending inventory, what's left on the last day at cost. You get the cost of stock that left your shelves, mostly through orders. Lost or broken stock is in there too.

Example: a mug shop's first quarter

Stock on January 1, at cost: $8,000
New stock bought during the quarter: $5,000
Stock counted on March 31, at cost: $7,200
COGS: $8,000 + $5,000 − $7,200 = $5,800

It sold $15,000 of mugs that quarter. Minus $5,800 of COGS, that's $9,200 of gross profit.

For one order, COGS is just each item's cost times the quantity. Adding up every order gets you close but misses lost or broken stock.

What Counts as COGS on a Shopify Store

COGS is what it took to get a product ready to sell. Running the store is separate.

Usually in: the supplier's price or your raw materials, freight to bring stock to you, import duties, and wages for whoever makes the product.
Usually out: ads, your Shopify plan, apps, office rent, and staff who don't make products.
Depends on the store: shipping to customers, shipping boxes and card fees. Some stores put them in COGS and some don't. Just be consistent, and ask your accountant.

Cost per Item: Where COGS Lives in Shopify

Every product in your Shopify admin has a Cost per item field under Pricing. Customers never see it, and each variant can have its own. Shopify uses it for the item's profit and margin, and in its profit reports.

Ideally, enter your landed cost: supplier price plus freight and duties, spread across every unit.

Example: 500 imported mugs

Supplier price: $2,500 ($5 a mug)
Freight: $600
Import duties: $200
Landed cost: $3,300 ÷ 500 = $6.60 a mug

The mug sells for $22. Enter just the $5 supplier price and Shopify shows a 77% margin. With $6.60 it's 70%. That $1.60 gap on every mug is profit you never had.

When supplier prices change, update the field, or Shopify's profit numbers will rest on an old cost.

Why Discount Math Starts With COGS

A discount cuts your price, but COGS doesn't move. Take $5 off that $22 mug and gross profit drops from $15.40 to $10.40.

So checking whether a sale made money has to start here. Our guide to measuring discount ROI and profit with COGS covers the full method.

The Big Mix-Up: Stock Bought Isn't Stock Sold

Lots of owners think COGS is what they spent on stock this month. It isn't. It only counts stock that sold.

Say you spend $12,000 on stock in October to prep for Black Friday, and by month's end $3,000 of it (at cost) has sold. October's COGS is $3,000, not $12,000. The other $9,000 is still inventory on your shelves. Your bank balance feels all $12,000. Your COGS doesn't.

COGS alone can mislead you in two more ways. It goes up whenever sales go up, so a bigger number can be good news. Compare it with revenue instead, which is what gross margin does. It also skips ads and other running costs, so a store with healthy gross profit can still lose money.