How to Determine Cost of Goods Sold for Consumer Brands: A Bottoms-Up Guide
Learn how to calculate COGS with a bottoms-up method tailored for CPG brands. Boost margins, pricing accuracy and financial clarity.
Understanding how to calculate cost of goods sold (COGS) is critical for any consumer product business. Whether you are running an ecommerce business or selling wholesale to retailers, determining cost of goods sold is the foundation for setting pricing strategies, maintaining healthy margins and making informed financial decisions.
This article breaks down how to calculate COGS using a practical, bottoms-up method specifically tailored for consumer goods brands. We will walk through what should be included in COGS, common mistakes to avoid and how inventory valuation methods affect your financial statements. If you are a founder or operator trying to calculate cost on a per unit basis, this guide is for you.
Building a Bottoms-Up COGS Table
To accurately determine the cost of goods sold, you have to first derive how much each component costs at a unit level, then add up the total cost of each of these items per unit and multiply by the number of units sold during the same period.
Creating a detailed COGS calculator starts with mapping each SKU or product type. Here is a sample table for a single-serve coffee pouch at a per unit basis:
Cost Item | Cost Per Unit |
|---|---|
Green coffee beans | $0.08 |
Roasting fee | $0.08 |
Drip pouch filter | $0.02 |
Outer packaging | $0.08 |
Freight-in | $0.05 |
Co-manufacturing fee | $0.30 |
QC testing per unit | $0.02 |
3PL Pick and Pack | $0.20 |
Total COGS per unit | $0.83 |
Once you have your cost per unit, you can use your sales volume for the accounting period to calculate COGS:
COGS = Cost per Unit x Units Sold
This approach is especially useful for brands selling direct-to-consumer or through wholesale channels with varying cost structures.
DTC vs Wholesale: What Changes in COGS?
The channel you sell through significantly affects which costs you include. For direct-to-consumer (DTC) sales, you may want to include 3PL pick-and-pack fees, inserts and postage. These costs typically apply only to ecommerce business operations.
Wholesale includes distribution costs such as freight to retail DCs or brokerage fees.
Consider building two versions of your COGS calculator - one for wholesale and one for DTC - to more accurately reflect gross margin and pricing strategies.
How to create a COGS calculator (free template)
To build your own COGS calculator, use a spreadsheet that lists every direct cost associated with your product. Here is a step-by-step approach:
Create a tab to track all direct costs: raw materials, packaging, labor, freight-in, manufacturing
Enter unit costs or batch costs and divide by yield to get per-unit values
Create another tab(s) for the COGS calculator
Calculate total COGS, ideal price, gross margin per SKU and LOT number
It provides inputs for your accounting statements and helps with inventory management.
You can download a free COGS Calculator template here.
Top-down COGS calculation for Accounting
The standard cost of goods sold formula is:
COGS = Beginning Inventory + Purchases During the Period − Ending Inventory
This formula calculates how much it cost your company to produce or purchase the inventory that was actually sold during the accounting period. It appears on the company’s income statement and directly impacts gross profit and net income.
This method works well for general accounting and tax reporting, but if you are running a consumer brand with multiple SKUs and variable costs, you need to go deeper.
Inventory Valuation Method and COGS Impact
Your inventory valuation method affects the way COGS appears in financial statements. There are three main accounting methods:
FIFO (First-In, First-Out): Assumes older inventory is sold first. In periods of rising prices, it leads to lower COGS and higher net income.
LIFO (Last-In, First-Out): Assumes newer inventory is sold first. This results in higher COGS and lower taxable income during inflation.
Average Cost Method: Spreads inventory cost evenly across units sold. Good for consistent reporting but may blur cost fluctuations.
Many service companies and accounting firms prefer FIFO because it aligns with actual inventory movement. However, your choice should depend on how inventory affect COGS and your reporting goals.
When to Use Average cost of goods sold
Another inventory valuation method is the average cost method. This accounting method is useful when inventory costs fluctuate frequently. It calculates the cost of inventory sold by averaging the total cost of goods available for sale over the total units available.
Average Cost = (Beginning Inventory + Purchases) / Total Units Available
COGS = Average Cost per Unit x Units Sold
This method smooths out price volatility and ensures consistent reporting. However, it may not reflect the true cost structure of fast-scaling CPG businesses where material costs or freight rates vary sharply.
COGS vs Operating Expenses
COGS includes direct costs involved in producing inventory sold. Operating expenses include indirect costs and indirect expenses not tied to production. These may include administrative expenses, salaries, rent, software subscriptions and trade spend.
Incorrectly classifying these costs can distort your gross margin and operating income. Your balance sheet and income statement rely on accurate categorization to assess financial health.
When to Recalculate COGS
You should revisit your COGS model when:
Supplier prices change
Freight or storage costs changes
Your SKU mix changes
You scale production volume increases
Adjusting your COGS model in real time improves your ability to calculate gross profit and maintain operational efficiency.
Common COGS Mistakes to Avoid
Including overhead costs or marketing in COGS
Not accounting for freight-in or packaging
Using estimates instead of actual costs
Ignoring obsolete inventory or shrinkage
Poor inventory management can lead to misreported COGS and distorted financial statements. Business consultants and accounting firms recommend quarterly or monthly reviews.
Using COGS for Better Decision-Making
Accurate COGS data helps you:
Set smart prices that reflect production costs and variable costs
Understand your gross profit margin by SKU or channel
Improve inventory turnover and reduce waste
Identify margin opportunities and cost-saving initiatives
COGS is also essential for tax reporting. Be sure to consult accounting firms if you plan to change your accounting method.
Master Your COGS to Grow
Knowing how to calculate COGS using a bottoms-up approach empowers you to build a stronger, more profitable business.
Whether you are a founder, ops lead or finance manager, a detailed understanding of your direct costs incurred will help you manage cash flow, improve margins and present cleaner financial statements.
The better you know your numbers, the better you know your business.
FAQ
1. What should be included in COGS for a consumer goods brand?
COGS for CPG brands should include direct costs like raw materials, packaging, labor, co-manufacturing, freight-in, quality control and storage. It excludes overhead, marketing, and admin expenses.
2. How do you calculate COGS per unit?
To calculate COGS per unit, list all direct costs for a product, convert batch costs to per-unit, then sum them. Multiply the total by units sold to get total COGS.
3. What’s the difference between COGS for DTC vs wholesale?
DTC COGS may include 3PL pick-and-pack fees, inserts, and postage. Wholesale COGS often includes freight to DCs and brokerage fees. Cost structure changes by channel.
4. What is the average cost method for calculating COGS?
The average cost method divides total cost of goods available by total units available. It smooths out price fluctuations and is useful for consistent COGS reporting.
5. Why does accurate COGS calculation matter for CPG businesses?
Accurate COGS helps set prices, track gross margin, manage inventory and improve profitability. It also ensures cleaner financial reporting and better tax compliance.
