{"id":297140,"date":"2026-01-20T16:10:21","date_gmt":"2026-01-20T03:10:21","guid":{"rendered":"https:\/\/www.reckon.com\/nz\/?post_type=sbh&p=297140"},"modified":"2026-03-05T17:48:39","modified_gmt":"2026-03-05T04:48:39","slug":"what-is-and-how-calculate-cost-of-goods-sold","status":"publish","type":"sbh","link":"https:\/\/www.reckon.com\/nz\/small-business-resources\/starting-a-small-business\/what-is-and-how-calculate-cost-of-goods-sold\/","title":{"rendered":"What is & how to calculate cost of goods sold (COGS)"},"content":{"rendered":"

[et_pb_section fb_built=”1″ custom_padding_last_edited=”on|phone” _builder_version=”4.23″ custom_padding_tablet=”” custom_padding_phone=”0px||||false|false” da_disable_devices=”off|off|off” locked=”off” global_colors_info=”{}” da_is_popup=”off” da_exit_intent=”off” da_has_close=”on” da_alt_close=”off” da_dark_close=”off” da_not_modal=”on” da_is_singular=”off” da_with_loader=”off” da_has_shadow=”on”][et_pb_row column_structure=”1_3,2_3″ _builder_version=”4.23″ background_size=”initial” background_position=”top_left” background_repeat=”repeat” width=”100%” custom_padding=”||0px||false|false” locked=”off” global_colors_info=”{}”][et_pb_column type=”1_3″ module_class=”table-contents” _builder_version=”4.23″ background_color=”#f3f2f6″ custom_padding=”25px||25px||true|false” sticky_position=”top” sticky_limit_bottom=”section” sticky_position_tablet=”top” sticky_position_phone=”none” sticky_position_last_edited=”on|desktop” border_radii=”on|24px|24px|24px|24px” global_colors_info=”{}” custom_padding__hover=”|||”][et_pb_text _builder_version=”4.23″ text_font=”||||||||” global_colors_info=”{}” background__hover_enabled=”on|desktop”][\/et_pb_text][\/et_pb_column][et_pb_column type=”2_3″ _builder_version=”4.16″ custom_padding=”|||” global_colors_info=”{}” custom_padding__hover=”|||”][et_pb_text admin_label=”Copy paste body text here” _builder_version=”4.27.5″ header_2_font_size=”32px” header_2_font_size_tablet=”30px” header_2_font_size_phone=”26px” header_2_font_size_last_edited=”on|tablet” global_colors_info=”{}”]<\/p>\n

What is the cost of goods sold? How do you calculate cost of goods sold? Simply, the cost of goods sold (COGS) is a core calculation in the buying and selling of goods by a small business, distributer, wholesaler, or manufacturer and we\u2019ll show you how to calculate COGS.<\/span><\/p>\n

Understanding how to calculate COGS sits at the heart of basic accounting and sales practices.\u00a0<\/span><\/p>\n

As a case in point, cost of goods sold is often featured in the second line of a business\u2019s income statement or profit and loss statement. So yes, it\u2019s important.<\/span><\/p>\n

What is cost of goods sold (COGS)<\/span><\/h2>\n

COGS is essentially how much it costs you to produce your products or services.<\/span><\/p>\n

The cost of goods sold is the wholesale price of a product or material to a distributer, retailer, or manufacturer before they add their margin and create sales revenue.\u00a0<\/span><\/p>\n

Put another way: <\/span>sales revenue – cost of goods sold = gross profit.<\/b><\/p>\n

For example, If your business creates a product for nine dollars, incurring one dollar in direct overhead costs along the way and you then sell that product for fifteen dollars, your COGS is ten dollars and your gross profit is five dollars.<\/span><\/p>\n

This also holds true for the manufacturing industry. If a manufacturer buys materials to manufacture a product and then sells that product to a distributer, the price of materials, production labour and overheads are also known as cost of goods sold.\u00a0<\/span><\/p>\n

As you can see, it\u2019s not only a direct material expense or products that constitute COGS, but also direct labour and cost incursions.<\/span><\/p>\n

\"cost<\/p>\n

What are not COGS?<\/span><\/h3>\n

This leads to an interesting question: what are not considered COGS?\u00a0<\/span><\/p>\n

Any cost incurred that relate to advertising, distribution, management, marketing, indirect overheads etc are <\/span>not <\/span><\/i>COGS.<\/span><\/p>\n

Only direct materials and direct labour and overheads can be considered COGS.<\/span><\/p>\n

How to calculate COGS<\/span><\/h2>\n

How do you calculate COGS exactly? To build on the simple equation above, we\u2019re going to look at a way to calculate the cost of goods sold and what it represents when referred to in an income statement and basic accounting<\/a>.<\/span><\/p>\n

Firstly, for accounting purposes, your COGS isn\u2019t as simple as it seems. You also need to include inventory<\/a>:<\/span><\/p>\n

COGS = beginning inventory + purchases during the period – ending inventory.<\/b><\/p>\n

What does this mean exactly?<\/span><\/p>\n

Let\u2019s say you have defined a period of 12 months. Your beginning inventory will be stock on hand from the previous period. Purchases during the period are stock you bought in those 12 months. Ending inventory is what you have left for the next period.<\/span><\/p>\n

As an example, let\u2019s say you have:<\/span><\/p>\n