What is COGS?

Understanding Cost of Goods Sold for ecommerce

Last updated: 17th January 2025

What is COGS?

COGS stands for Cost of Goods Sold. It represents the direct costs attributable to the production or purchase of the goods sold by a company.

COGS for Ecommerce

For Shopify merchants, COGS typically includes:

  • Product purchase price - What you pay your supplier
  • Shipping to warehouse - Inbound shipping costs
  • Import duties - Customs fees and tariffs
  • Handling costs - Packaging and preparation

Why COGS Matters

Understanding your COGS is essential because:

  1. Accurate Profit Margins - Without knowing costs, you can't know your true profit
  2. Pricing Decisions - Set prices that ensure profitability
  3. Tax Implications - COGS is a deductible business expense
  4. Business Valuation - Investors look at gross margins

COGS vs Operating Expenses

COGSOperating Expenses
Direct costs of productsIndirect business costs
Varies with sales volumeMore fixed in nature
Product cost, shipping to warehouseRent, salaries, marketing
Affects gross profitAffects net profit

Calculating COGS

The basic formula is:

COGS = Beginning Inventory + Purchases - Ending Inventory

CostSync simplifies this by tracking costs at the order level, giving you accurate COGS for each sale.