How to calculate COGS
There are two formulas for COGS (cost of goods sold) calculations. One is more commonly used by retailers, the other by manufacturers.
Retailer COGS formula
Cost of goods sold formula used by retailers for inventory accounting.
Why retailers use this COGS formula
You will notice that the cost-of-goods-sold formula makes no reference to the number of sales. Instead, it focuses on the value of inventory at the beginning and end of the sales period. Doing it this way helps to account for inventory that is discarded due to damage, and changes in wholesale prices.
An ecommerce business may choose to add shipping and transaction fees to their COGS seeing as they’re a characteristic of every sale.
Manufacturer COGS formula
Manufacturers have more complex supply chains. It makes sense for them to add up all the costs on their product’s journey to the customer. Be aware that some choose not to count warehousing or freight.
See related terms
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This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.