The business owner will add a percentage on top of the COGS baseline to create a profit margin, as well as to cover indirect costs. Some pricing strategies start with COGS as the baseline, or minimum, price charged to the customer. Small businesses with an average gross revenue (before costs or expenses) of less than $25 million in the past three tax years report cost of goods this way.”ĬOGS will also play a role in how you price your products. “This decreases the total amount of taxes they need to pay. “Companies that make and sell products or buy and resell its purchases need to calculate COGS in order to write off the expense, according to the IRS,” said the experts at Freshbooks. This includes things like materials and labor used to create the product, but not indirect expenses such as distribution costs or overhead.ĬOGS is an important metric that is included in a business’s income statement. What is cost of goods sold?Ĭost of goods sold (COGS) is a sum of all direct costs associated with selling a product or service. Here’s what you need to know about the cost of goods sold metric, including how to calculate it for your venture. A high COGS can eat into your profit and slow growth, but it is a tax-deductible expense for most businesses. This KPI impacts everything from your tax rate to your pricing model and even your personal income. Getty Images/ake1150sbĬost of goods sold (COGS) is an important metric that contributes to a business’s overall gross profit and long-term growth prospects. It's important to know your business's cost of goods sold, for both your own benefit as the owner and the benefit of prospective investors.

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