Cost of Goods Sold

Every product a business sells usually has a cost behind it. When you, an aspiring entrepreneur, calculate profit, you should not only look at sales. Cost of Goods Sold, or COGS, is the direct cost of making or buying the products a business sells. Understanding COGS helps you price products correctly and know how much profit you are actually making.

COGS matters because it helps an entrepreneur understand how much it costs to create the product they sell. Without it, a business may think it is making money when it is actually earning very little. Furthermore, COGS helps with profit calculation, pricing, and even reducing waste. A smart entrepreneur knows both the selling price and the cost behind the product.

Cost of Goods Sold means the direct costs connected to producing or buying the goods sold by a business.

It includes materials, ingredients, and packaging. It can also include the cost of buying products for resale.

For example, if you sell brownies, your COGS may include flour, sugar, chocolate, eggs, and packaging.

COGS usually includes raw materials, products bought for resale, packaging, direct labor, and production supplies.

Raw materials are ingredients, fabric, wood, paper, wax, or any material used to make the product.

Products bought for resale are items bought from a supplier and sold to customers.

Packaging includes boxes, bags, labels, jars, or wrapping used for the sold product.

Direct labor is money paid to someone directly involved in making the product.

Production supplies are small items used directly in production, such as glue, thread, or baking cups.

Not every business cost is part of COGS. Marketing, rent, utilities, delivery to customers, administrative costs, and website fees are usually separate expenses.

These are still important expenses, but they are not direct costs of making or buying the product.

The simple formula is: Cost per product = Total direct costs / Number of products made.

Total direct costs are all the costs directly used to make the products.

The number of products made is how many items were produced.

Cost per product tells you how much one item costs to make.

For example, if you spend 500 Egyptian pounds on ingredients and packaging and make 50 cupcakes, the cost per cupcake is 10 Egyptian pounds.

COGS is directly connected to profit because the formula is: Selling Price - Cost of Goods Sold = Gross profit per item.

If one cupcake sells for 25 Egyptian pounds and costs 10 Egyptian pounds to make, the gross profit per cupcake is 15 Egyptian pounds.

This is not final net profit because other expenses, such as marketing or rent, may still need to be subtracted.

Pricing without knowing COGS is dangerous because some entrepreneurs choose prices by copying competitors or simply guessing.

This can be risky because their costs may be different.

A product may look profitable, but after adding materials and packaging, the profit may be very small.

If the selling price is too close to COGS, the business may not have enough money left for other things like marketing, rent, or growth.

Pricing should be based on cost, value, and then the market.

Entrepreneurs can reduce COGS by buying materials in bulk when safe and affordable, comparing suppliers, reducing waste, improving production, using affordable packaging, tracking materials, avoiding overbuying, and negotiating better prices with suppliers.

1. 1List all the materials needed to make the product.
2. 2Add the cost of ingredients, supplies, packaging, and direct labor.
3. 3Divide the total direct costs by the number of products made.
4. 4Calculate the cost per product.
5. 5Subtract COGS from the selling price to find gross profit per item.
6. 6Review whether the selling price is high enough to cover other expenses.
7. 7Look for ways to reduce COGS without lowering quality.

• Forgetting to include packaging.
• Forgetting small materials like labels, glue, thread, or bags.
• Pricing products without knowing the cost per item.
• Confusing COGS with all business expenses.
• Assuming a product is profitable just because people are buying it.
• Mixing personal purchases with business materials.
• Not updating COGS when material prices increase.

• COGS is the direct cost of making or buying the products a business sells.
• COGS can include materials, ingredients, packaging, direct labor, and products bought for resale.
• Not every business expense is part of COGS.
• Knowing COGS helps entrepreneurs price better and protect profit.
• A smart business owner asks, 'How much did each sale cost me?' not only, 'How much did I sell?'