Question 1

What is cost of goods sold (COGS)?

Accepted Answer

Cost of goods sold (COGS) is the total direct cost of producing or purchasing the products you sell. It includes raw materials, direct labour, shipping to your warehouse, and packaging — but not rent, marketing, or administrative costs.

Question 2

How do you calculate COGS?

Accepted Answer

COGS = Materials + Direct Labour + Shipping/Freight + Packaging + any other direct costs. For retailers: COGS = Purchase Price + Inbound Shipping. For manufacturers: COGS = Raw Materials + Direct Labour + Manufacturing Overhead allocated to production.

Question 3

What is the difference between COGS and expenses?

Accepted Answer

COGS are costs directly tied to producing or purchasing products you sell — they scale with units. Expenses (operating costs) are indirect: rent, salaries, marketing, software. COGS is subtracted from revenue to get gross profit. Operating expenses are subtracted from gross profit to get net profit.

Question 4

What is a good COGS ratio?

Accepted Answer

It varies by industry. Retail: 50–75% COGS ratio. Ecommerce: 40–60%. Manufacturing: 55–70%. SaaS: 10–30%. Food & beverage: 25–40%. A lower COGS ratio means more gross profit per unit sold.

COGS Calculator

How to calculate COGS