COGS Calculator — Cost of Goods Sold (2025)

Cost of Goods Sold (COGS): What It Is and Why It Matters

Cost of Goods Sold (COGS) reflects the direct costs required to purchase or produce the products you sell. It is the backbone of pricing and profitability: revenue minus COGS equals gross profit, and your gross margin percentage is one of the fastest ways to assess whether the business model scales.

How to Use the COGS Calculator on This Page

1. Enter your Beginning Inventory for the period using the value from your prior period's balance sheet or inventory count.
2. Fill in Purchases, Freight‑in, Purchase Returns/Allowances, and Purchase Discounts so the calculator can compute Net Purchases automatically.
3. Type your Ending Inventory based on a physical count or reliable perpetual inventory report.
4. Optionally add Revenue for the same period so the tool can calculate gross profit and gross margin percentage.
5. Review the summary cards and chart: if COGS is zero or ending inventory looks too high, adjust your inputs until the numbers match your accounting records.

What's Included in COGS?

• Direct materials you resell or use in production
• Freight‑in and inbound shipping to acquire inventory
• Purchase returns/allowances and discounts (as reductions to net purchases)
• For manufacturers: the cost of goods manufactured (COGM) that flows into finished goods

How to Calculate COGS (Step‑by‑Step)

1. Start with Beginning Inventory (the dollar value on day one of the period).
2. Add Purchases made during the period, plus Freight‑in.
3. Subtract Purchase Returns/Allowances and Purchase Discounts.
4. Subtract Ending Inventory (the dollar value left on hand).

Worked Example (Retail Store)

Manufacturing Note (COGM → COGS)

Manufacturers first compute Cost of Goods Manufactured (COGM): Direct Materials Used + Direct Labor + Manufacturing Overhead ± WIP changes. Then: COGS = Beginning Finished Goods + COGM − Ending Finished Goods. Our on‑page calculator focuses on retail/wholesale inputs, which is what most small businesses need.

How to Improve Gross Margin

• Negotiate vendor pricing and seek early‑pay purchase discounts.
• Reduce freight‑in through consolidated shipments or better lanes.
• Lower returns/allowances with quality control and clear product pages.
• Optimize assortment using ABC analysis to prioritize high‑margin items.

Common COGS Mistakes to Avoid

• Booking outbound shipping and marketing into COGS (inflates COGS and hides opex).
• Counting obsolete or damaged inventory at full value in ending inventory.
• Ignoring purchase discounts and returns when computing net purchases.
• Using the wrong inventory valuation method (FIFO/LIFO/Weighted Average) for your goals.

Quick Answers

• Service businesses: Often report Cost of Sales instead; labor may be included if it is directly tied to delivery.
• GAAP vs IFRS: Both allow FIFO and Weighted Average; LIFO is permitted under GAAP but not IFRS.
• Taxes: In the U.S., COGS reduces taxable income. Keep purchase, freight‑in, and inventory records organized.