Cost of Goods Sold (COGS) is one of those accounting terms that sounds scarier than it is. It's simply what the products you sold cost you to make. It matters because it's how your profit gets calculated for taxes: revenue minus COGS (and other expenses) is what you're taxed on. Understanding it keeps you from over- or under-stating what you actually earned.
What COGS includes
For a maker, COGS is the direct cost of the goods you actually sold in a period: mainly the materials in them, and often the direct labor to make them. It's closely related to the true cost you use for pricing, just viewed through an accounting lens and totaled across what sold.
- Materials consumed in the products you sold.
- Direct labor to produce them (rules vary; your accountant will guide this).
- Often inventory changes: what you had at the start vs. the end of the period.
Why it matters beyond taxes
COGS isn't just a tax chore. Tracked over time, it tells you your gross margin: how much of each sales dollar is left after the cost of making what you sold. A creeping COGS is an early warning that material costs are eating your profit before it shows up anywhere else.
COGS is just your costs, counted at the finish line: what the things you actually sold cost you to make.
Keep the records you'll need
- Track what each product costs to make (its recipe and materials).
- Track what you sold over the period.
- Keep your purchase and inventory records so the numbers reconcile.
- Hand clean totals to your accountant. Don't reconstruct it from memory in April.
This isn't tax advice: rules differ by where you are and how you file, so check with a tax professional for your situation. But the bookkeeping shrinks when the underlying numbers are already tracked. Keepsel keeps a true cost per product, and from the Maker plan it records your sales and gives you profit and tax reports, so the raw material for your COGS is there when you (or your accountant) need it, not a year-end scramble.