Cost of goods sold for food businesses, explained

Cost of goods sold (COGS) is what it cost you to make the things you sold in a period, usually a month. For a small food business it is mostly the ingredients and packaging that left with each sale. The formula is: stock at the start of the month + purchases during the month − stock at the end of the month. Subtract it from your sales and you get gross profit, the money left to pay rent, delivery, yourself and, if anything remains, profit.

What goes in and what stays out

COGS covers what gets used up in production and goes up when you make more:

• Ingredients: flour, butter, sugar, chocolate, eggs, fruit, oil.
• Packaging that leaves with the product: boxes, bags, jars, labels, liners.
• Wages for whoever makes the product, if you pay them to produce.

What usually stays out and is subtracted later:

• Rent, utilities, phone, internet.
• Delivery app commissions and card fees.
• Advertising, travel, accountant.

Some costs sit on the line, like the energy your oven uses. For your own tracking there is no single right answer. Decide where each cost goes, write it down and keep the rule the same every month, or the months stop being comparable. For tax purposes, how each cost is reported is a question for your accountant.

Do not confuse COGS with cost per unit. Cost per unit comes from your recipe: it is what each product should cost, and the full method is in how to calculate the cost of a food product. COGS comes from your purchases and your stock count: it is what you actually spent. The gap between the two tells you a lot.

The monthly formula

COGS = opening stock + purchases − closing stock

• Opening stock: the ingredients and packaging you had on the first day of the month, valued at what you paid.
• Purchases: everything you bought for production during the month, from receipts, invoices, card statements and cash.
• Closing stock: what is left on the last day of the month, valued the same way.

The logic is simple. You start with something, you buy more, and whatever is no longer on your shelves was used, sold, spoiled or given away. All of that is the month's cost.

Why not just add up purchases? If you buy a 25 kg sack of flour on the 28th that you will use next month, that spend does not belong to this month. And if this month you used chocolate you bought last month, that cost does belong here. The stock count corrects for that timing.

Counting stock without losing a day

The count is the step people skip, and it is the step that makes the formula work. A few practical rules:

• Count on the same day each month, at close, before you shop for the next month.
• Weigh or count, then multiply by the price you last paid.
• Focus on what is expensive or bulky. Salt and spices can be estimated.
• Use the same format every time: item, quantity, unit, price, total.

For a simple way to organise your shelves (what to count, how often, how to use the oldest stock first), see simple inventory for small kitchens.

Worked example: a month of brownies

You bake and sell brownies. Here is your October.

COGS = 310 + 1,780 − 280 = $1,810

You sold 1,150 brownies at $4.00 each, so sales were 1,150 × 4.00 = $4,600. If your prices include sales tax, use sales without the tax.

• Gross profit = 4,600 − 1,810 = $2,790
• Gross margin = 2,790 ÷ 4,600 = 60.7%
• COGS as a share of sales = 1,810 ÷ 4,600 = 39.3%

Out of every $100 of brownies sold, $39.30 went on what went into and around them. $60.70 is left for everything else.

The check almost nobody runs

Now compare with your recipe. According to your costing, each brownie costs $1.42 in ingredients and packaging.

• Expected cost: 1,150 × 1.42 = $1,633
• Actual cost, from the formula: $1,810
• Gap: 1,810 − 1,633 = $177

That is $177 of stock that left your shelves without turning into a sale, or 177 ÷ 1,810 = 9.8% of your COGS. The usual suspects:

• Waste: trimmed edges, a tray that burned, brownies that went stale before they sold.
• Brownies you gave away as samples or ate yourself.
• Pieces cut bigger than the recipe says.
• Prices that went up and never made it into your costing.
• A mistake in the stock count.

A small, steady gap is normal. A gap that grows month after month is telling you that something changed in the kitchen or at the shops. Without both numbers you would never see it.

From COGS to profit

COGS is the first step down. Taken from sales it gives you gross profit, and from there you still subtract rent, commissions, travel and your own pay to reach net profit. The difference is explained in gross profit vs net profit.

The same idea, looked at per product instead of per month, is your food cost percentage: how much of each product's price goes on ingredients. Two views of the same problem. One tells you how the month closed; the other tells you which product is driving that result.

Where to keep the numbers

A sheet with four lines per month is enough: opening stock, purchases, closing stock, sales. The hard part is not the formula. It is having every purchase recorded and your prices up to date. If you are torn between a notebook, a spreadsheet and an app, compare what each one handles in costing in a notebook, a spreadsheet or an app.

Keep every receipt, or a photo of it, on the day you buy. Purchases that never get recorded make COGS look smaller than it is and gross profit look bigger. It is the most common mistake, and the most comforting one.

Do it with the calculator

For the recipe check you need your cost per unit. Put your ingredients, what you paid and the batch yield into the food cost calculator, and it gives you the cost of each brownie, with ingredients and packaging shown separately, ready to multiply by what you sold.