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Tracking your COGS against your revenue can help you see opportunities to lower your costs, and increase your profitability. Your cost of goods sold tells you how efficient you are at creating your product, which in turn affects your business’s gross profitability. Regardless of your business type, COGS is one of the most important financial metrics for your company to track.

Fees paid to the third-party integrators for their services during customer implementation.

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License fees for the third-party toolset.

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Salaries for any employees directly involved with building the product and ensuring customers are able to access and use it, such as: software engineers, product designers, devOps engineers, customer support team.

Sample Data’s COGS would include things like:

In addition to the annual subscription, new customers also pay Sample Data a 10% setup fee to cover technical implementation and training for the end users, which is then usually handled by a third-party integration partner. The software leverages a toolset created by a different tech company, and Sample Data pays a license fee to include it in their own product. Sample Data develops business analytics software to help large companies better understand their marketing and sales funnels, which it sells on an annual subscription plan.

Shipping costs to deliver the product to end buyers, including both consumers and channel-partner retailers.

Fulfillment expenses, like the cost of warehouse storage and picking/packing products to ship.

Tariffs and customs for bringing the products into the United States from the overseas factories.

Freight costs for shipping finished products from the factories to Sample Fitness’s warehouses.

Purchasing costs for acquiring the lifestyle products that Sample Fitness sells but does not produce itself.

Costs paid to its contract manufacturers to produce the finished clothing items.

Raw materials used in creating the clothes.

Sample Fitness’s COGS would include things like: The website also offers a small range of related lifestyle products like aromatherapy candles and reusable water bottles, which Sample Fitness purchases wholesale from partner brands. Sample Fitness designs and produces athleisure clothing, which it sells directly to consumers through its website, and through select brick-and-mortar channel partners. Example: COGS for a Physical-Goods Business It’s important to keep in mind that COGS only includes costs directly involved with creating or purchasing your product and getting it to your customers – overhead costs like marketing are considered operating expenses instead (more on that later). If your company sells finished goods purchased from manufacturers, those purchasing costs are also included in your COGS.

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How to Calculate COGS for Physical GoodsĬOGS are the costs that your business incurs to create and deliver your product or service.

We’re here to clear it up.ĬOGS are the costs that your business incurs to create and deliver your product or service. And like many aspects of bookkeeping and finance, it can be confusing if you don’t have a background in the field. It’s one of the first sections on your income statement, and it can affect how you report your business taxes. Cost of Goods Sold (COGS) is one of the most fundamental concepts in your business’s finances.