Cost of Goods Sold (COGS)
Also known as: cost of sales · direct costs · product costs
Definition
Cost of Goods Sold (COGS) is the direct cost of producing or purchasing the products you sell — raw materials, manufacturing, supplier costs, and shipping. For ecommerce sellers and makers, COGS is the most important expense to track for accurate profit calculation.
Detailed Explanation
COGS is different from operating expenses. COGS includes costs directly tied to creating each product: raw materials, components, packaging, direct labor, and inbound shipping. Operating expenses include marketing, software subscriptions, office costs, and platform fees. For a handmade jewelry seller: COGS = silver wire + beads + packaging + Etsy listing fees. Operating expense = photography equipment, Adobe CC, craft fair booth rental. The formula for gross profit: Revenue - COGS = Gross Profit. Gross Profit - Operating Expenses = Net Profit. AI bookkeeping tools can track COGS per product or SKU and calculate per-product profitability — critical for knowing which items are worth selling more of.
Freelancer Example
An Etsy seller makes handmade candles. For one $28 candle: wax ($3), fragrance oil ($4), jar ($5), wick ($0.50), label ($1), and packaging ($2) = $15.50 COGS. Etsy fees average $3. Revenue ($28) - COGS ($15.50) = $12.50 gross profit. Minus Etsy fees ($3) = $9.50 net profit per candle. Without COGS tracking, the seller might think the full $28 is profit — a dangerously inaccurate view.