Is shipping to customers part of COGS?

It depends on your accounting approach. Inbound shipping to your warehouse is usually part of COGS. Outbound shipping to customers is often treated as a separate fulfillment cost. For ad decisions, include it in per-order costs either way.

Is advertising included in COGS?

No. Advertising is an operating expense, not part of COGS. COGS only includes costs directly tied to making or buying the products you sold, such as supplier price, materials and inbound freight.

COGS (cost of goods sold)

COGS (cost of goods sold) is the direct cost of producing or buying the products you sold in a period, including materials, manufacturing and inbound freight.

What is COGS?

COGS, short for cost of goods sold, is what it directly costs you to get the products you sold. For an online store, that usually includes the price paid to the supplier or manufacturer, packaging that is part of the product, and inbound shipping and import duties to get stock to your warehouse. It does not include marketing, staff salaries or software. COGS matters because it sets your gross margin, which decides how much money is left to pay for ads and overheads. Without an accurate COGS, you cannot know your real profit or your break-even ROAS.

How to calculate COGS

The standard formula is starting inventory plus purchases during the period, minus ending inventory. For example, a store starts the month with 5,000 dollars of stock, buys 3,000 dollars more, and ends the month with 4,000 dollars of stock. COGS is 5,000 plus 3,000 minus 4,000, which equals 4,000 dollars. Per product, many stores simply track a unit cost. If a product costs 12 dollars to buy plus 2 dollars of inbound freight, the unit COGS is 14 dollars. Selling 100 units then gives a COGS of 1,400 dollars for that product.

What is a good COGS?

A lower COGS relative to price is better, because it leaves a bigger gross margin. Many direct-to-consumer brands that rely on paid ads typically aim for a product cost that is a small fraction of the selling price, since ads, shipping and fees also need covering. The right level varies by niche: beauty and supplements often have lower COGS as a share of price than electronics or furniture. Rather than chase a fixed number, compare COGS with your price and your ad costs per order. If little is left after both, the price, cost or product needs rethinking.

How to improve COGS

Negotiate better unit prices as your order volume grows, and ask suppliers for price breaks at higher quantities. Compare several suppliers for each key product, but weigh quality and reliability, not just price. Reduce inbound freight by consolidating shipments or using slower, cheaper modes for stock that is not urgent. Simplify packaging where it does not affect the customer experience. Review product design to remove costly parts customers do not value. Finally, keep inventory records accurate, since lost or damaged stock quietly inflates COGS and makes margins look better on paper than they really are.

COGS vs operating expenses

COGS covers costs tied directly to the products you sold, such as manufacturing, supplier prices and inbound freight. Operating expenses cover the costs of running the business, such as advertising, salaries, rent, software and apps. COGS rises and falls with sales volume, while many operating expenses stay roughly the same each month. Revenue minus COGS gives gross profit. Gross profit minus operating expenses gives operating profit. Keeping the two separate helps you see whether a problem comes from product costs or from how much you spend running the business. Both belong in any honest view of profit.

Free tool: Profit Margin Calculator

Questions

Is shipping to customers part of COGS?: It depends on your accounting approach. Inbound shipping to your warehouse is usually part of COGS. Outbound shipping to customers is often treated as a separate fulfillment cost. For ad decisions, include it in per-order costs either way.
Is advertising included in COGS?: No. Advertising is an operating expense, not part of COGS. COGS only includes costs directly tied to making or buying the products you sold, such as supplier price, materials and inbound freight.