Cost of Goods Sold (COGS) is the total direct cost of producing or purchasing the goods a business actually sold during a period. For a retailer it is mainly what you paid suppliers for the items that left the shelf, plus directly attributable costs such as inbound freight. COGS does not include indirect overheads like rent, marketing, or salaries.
COGS formula
COGS = Opening Inventory + Purchases − Closing Inventory
Worked example
A Karachi hardware shop starts the month with Rs. 800,000 of stock, buys Rs. 500,000 more during the month, and ends with Rs. 600,000 of stock. COGS = 800,000 + 500,000 − 600,000 = Rs. 700,000. That Rs. 700,000 is the cost of the goods that were sold, and it is subtracted from sales revenue to find gross profit.
Why COGS matters
COGS sits at the heart of profitability. Subtract it from revenue and you get gross profit; divide gross profit by revenue and you get the gross margin. An inaccurate COGS — usually caused by a wrong closing-inventory count — distorts profit, tax, and pricing decisions. It also appears directly on the income statement and affects the tax a business owes.
Because COGS depends on an accurate inventory valuation, it is only as reliable as your stock records. EloERP’s integrated ERP and accounting updates inventory value with every sale and purchase, so COGS and gross profit are always current rather than calculated once a year.
Related glossary terms
Frequently asked questions
What costs are included in COGS?
COGS includes the direct costs of the goods sold — purchase or production cost, inbound freight, and directly attributable handling. It excludes indirect costs such as rent, utilities, marketing, and administrative salaries, which are operating expenses.
What is the difference between COGS and operating expenses?
COGS is tied to the specific goods that were sold and scales with sales volume. Operating expenses (rent, salaries, advertising) keep the business running regardless of how many units sell. Both reduce profit but appear on different lines of the income statement.
How does inventory valuation affect COGS?
COGS depends on the value assigned to opening and closing inventory, which is set by the costing method (FIFO, weighted average, etc.). Different methods produce different COGS figures in times of changing prices, so a consistent method is essential for comparable results.