Cost of Goods Sold for Small Businesses

February 11, 2021 12:12 pm Published by Leave your thoughts

average cost of goods sold for small business
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It assumes the goods you purchased or produced last are the first items you sold. When prices are rising, goods with higher costs are sold first and closing inventory is lower. To help you track your profitability without an MBA or accounting degree, check out Square’s profit and loss template for any business. Cost of goods sold is a major input in profit and loss statements, which are typically called income statements by large corporations.

Check out what your competitors are offering, then experiment with your threshold to see what makes sense for your industry and your market. If speed is the most important component of shipping to you, and you either 1) don’t mind what it costs or 2) can pass those costs on to customers, FedEx will be a good choice for your shipping needs. By allowing a week for delivery, instead of going with overnight, you can cut shipping costs by nearly two-thirds. It’s impossible to list in one article all the different shipping rates you could possibly be charged. But we can provide a small view into the different rates you can expect to pay with a few of the major carriers.

How do you calculate cost of goods sold in retail?

The direct costs of producing the goods that a company sells are referred to as COGS. Directly involved in the production of this good are the materials and labor that were used. It does not include indirect expenses like distribution and sales force costs. COGS is sometimes referred to as the cost of sales; it refers to the costs a company has for making products from parts or raw materials or buying products and reselling them.

cost of materials

These are also known as direct expenses since they relate directly to your product’s creation. If the cost goes up during the year, you have to figure this increase into your COGS equation. The IRS has several approved ways to account for changes in costs during the year without having to track each product price individually. The agency allows small businesses (with annual gross receipts of $25 million or less) to not keep an inventory if they use a way of accounting for inventory that “clearly reflects income.”

To get the value of your inventory at the beginning and end of the year, you may need to do some kind of physical inventory. Check with your tax professional for help on the best way to get an accurate count. Also, don’t forget product containers and goods on display at a store or booth.

Cost of Goods Sold (COGS) Explained and How to Calculate it (

Some service-based businesses will find it beneficial to keep track of cost of goods sold, but whether it is helpful depends on how a specific business uses inventory. Instead, they would include the cost of those items as tax deductions for operational costs. Keeping track of costs of goods sold for a service business isn’t always necessary—especially if the business is a “pure” service business that doesn’t have any inventory or sell products.

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Let us know how well the content on this page solved your problem today. All feedback, positive or negative, helps us to improve the way we help small businesses. Ramp offers a free corporate card and finance management system for small businesses. Almost without exception, envelopes are less expensive to ship than boxes. So if you’re able to ship your items safely in an envelope or padded mailer, be sure to do so.

These double entry definitions are an expense of the business because you sell these products to make money. Using the example above, you’d add all three unit prices up and apply the average cost against all units sold during that time period. You may want to start out using the average cost method to manage cash flow, especially if you don’t manufacture your own products. Depending on your business, that may include products purchased for resale, raw materials, packaging, and direct labor related to producing or selling the good. Cost of goods sold is the direct cost of producing a good, which includes the cost of the materials and labor used to create the good. COGS directly impacts a company’s profits as COGS is subtracted from revenue.

What items are included in the cost of goods sold?

Always consult an accountant or tax professional for specific COGS reporting or tax requirements for your small business. Let’s do the COGS calculation, starting with the cost per unit sold each month. As your business grows, and as you start to measure your cost of goods sold over longer periods, you might use more sophisticated ways to calculate these numbers. Beginning inventory is the cost value of the merchandise or goods that a business had on hand at the beginning of a period.

If you have any manufacturing labor costs or direct sales costs, you can include those as well, but that may not apply to all businesses. Cost of goods sold is an important number for business owners and managers to track. That is the absolute lowest price you can sell a product to break even. Any additional margin goes back to covering overhead and eventually profit. If you don’t know your COGS and break-even point, you don’t know if you’re making or losing money.


Depending on the carrier you use, you may pay extra for those things. To retain as much money as possible from each sale in the form of profits, your goal is to spend as little as possible on shipping. That goal is complicated by your customers’ demand for fast, reliable delivery. Fortunately, you can balance those competing needs by checking out a variety of shipping carriers and choosing the one that best delivers on both your customers’ expectations and your own.

How Do You Calculate Cost of Goods Sold (COGS)?

This is a good question for your tax professional because the tax rules are complicated. For partnerships and multiple-member LLCs, the cost of goods sold is part of the partnership tax return . COGS is calculated each year by showing changes in the company’s balance of “goods” or inventory, from the beginning to the end of the company’s fiscal year. The same people who had been willing for years to stash their companies’ money, and their personal fortunes, at SVB, suddenly balked.


To calculate the opening inventory, simply add up the cost of any goods that were in stock at the start of your chosen period. As a result, these are all expenses that contribute to the end cost of the product. First in, first out, also known as FIFO, is an assessment management method where assets produced or purchased first are sold first. This method is best for perishables and products with a short shelf life.

Income statements are one of the three most important financial documents in your repertoire—and learning how to draw one up is a crucial step in understanding your business’s financial trajectory. To get more info on how to build your own report, check out our page on how to prepare an income statement. Variable costs are costs that change from one time period to another, often changing in tandem with sales. The cost of goods sold is a variable cost because it changes.

The Best Payroll Companies for Small Businesses in 2023 We looked at 15 of the top payroll processing companies and evaluated their user friendliness,… In turn, the net profit shows you, your investors, and other financial stakeholders exactly how financially healthy your business is—which influences who invests in your business and how much. Costs such as sales and marketing, salaries, and transportation are not included in COGS. The above example shows how the cost of goods sold might appear in a physical accounting journal.

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All the major shipping carriers take package size into consideration when determining the price you’ll pay to ship something. Whatever carrier you choose to work with, make sure that you’re using the right kind of packaging to net you the best rates. If you use the packaging your carrier provides, you’ll probably be able to access the best rates. FedEx does offer an easy to use shipping calculator, but be aware that you are likely to qualify for a rate that’s lower than the advertised cost. CarrierDelivery TimeCostUSPS1-Day$26.353-Day$7.75FedEx1-Day$66.092-Day$30.047-Day$23.29UPS1-Day$62.972-Day$28.61Let’s try another type of package. We’ll keep the same to and from destinations, but change the type of package.

Profit and loss statements, which are also called income statements, list your revenue and expenses to calculate your net profit. Calculating and tracking COGS throughout the year can help you determine your net income, expenses, and inventory. And when tax season rolls around, having accurate records of COGS can help you and your accountant file your taxes properly. Determining the cost of goods sold is only one portion of your business’s operations. But understanding COGS can help you better understand your business’s financial health.

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This post was written by Ciara Darmody

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