Cost of Goods Sold (COGS) represents the direct costs associated with producing or purchasing products that are sold, including materials, manufacturing, and shipping to the warehouse. In a WMS context, understanding COGS helps evaluate profitability, set pricing, and manage inventory efficiently.

It's the foundation of knowing whether you're actually making money.

Why COGS Matters in Warehousing

COGS directly determines your gross profit. Sell a product for £50 with COGS of £30? You've got £20 gross profit. Sell it for £50 with COGS of £45? Only £5 gross profit remains for operational expenses, marketing, and actual profit.

Without accurate COGS tracking, you can't price products correctly, assess which items are profitable, or make informed inventory decisions. You might be selling products at a loss without realising it.

Components of COGS

In a warehouse and fulfilment context, COGS typically includes:

Direct product costs:

• Purchase price from suppliers

• Manufacturing costs (for own production)

• Raw materials and components

Inbound logistics:

• Shipping from the supplier to the warehouse

• Import duties and tariffs

• Freight and handling fees

Landed costs:

• Customs clearance

• Insurance during transit

• Currency conversion fees

What COGS doesn't include: warehouse operating costs (rent, labour, utilities), marketing, sales commissions, or distribution to customers. Those are operating expenses, not COGS.

Calculating COGS

The basic formula is straightforward:

COGS = Beginning Inventory + Purchases - Ending Inventory

Example:

• Beginning inventory (1 Jan): £100,000

• Purchases during the year: £500,000

• Ending inventory (31 Dec): £80,000

• COGS: £100,000 + £500,000 - £80,000 = £520,000

This tells you the cost of products actually sold during the period, not just purchased.

COGS and Profitability

Understanding COGS is essential for calculating gross profit margin, one of the most important profitability metrics.

Gross Profit Margin = (Revenue - COGS) ÷ Revenue × 100

Example:

• Revenue: £1,000,000

• COGS: £650,000

• Gross Profit: £350,000

• Gross Profit Margin: 35%

A healthy gross margin varies by industry. Fashion might target 50-60%, whilst electronics might run at 20-30%. Know your industry benchmarks and track your performance against them.

COGS and Inventory Management

Accurate COGS tracking improves inventory management decisions in several ways.

Product profitability analysis: Identify which products generate the best margins. A high-selling product with a 10% margin might be less valuable than a moderate seller with a 40% margin.

Pricing decisions: Set prices that cover COGS plus desired margin. Factor in COGS increases from suppliers before they erode your profitability.

Inventory turnover assessment: Calculate how efficiently you're converting inventory investment into sales. High-COGS items sitting unsold tie up significant capital.

Dead stock identification: Products with high COGS that aren't selling represent substantial losses. Clearing them quickly, even at reduced margins, recovers capital for better-performing products.

WMS and COGS Tracking

Modern warehouse management systems maintain accurate COGS data for each product and track how that cost changes over time.

Automated tracking: WMS records COGS for each inventory batch received, tracking different costs for different purchase dates.

FIFO/LIFO management: The system applies First-In-First-Out or Last-In-First-Out methods consistently, affecting COGS calculations and tax implications.

Reporting and analytics: Generate reports showing COGS by product, category, supplier, or time period. Identify trends and cost increases requiring action.

Profitability analysis: Combine COGS data with sales data to understand which products, customers, or channels generate the best margins.

Common COGS Mistakes

Including operational costs: Warehouse rent, staff wages, and utilities aren't COGS. They're operating expenses. Mixing them distorts gross profit calculations.

Forgetting landed costs: Only tracking purchase price whilst ignoring shipping, duties, and fees understates true COGS and overstates profitability.

Inconsistent methods: Switching between FIFO and LIFO methods makes year-on-year comparisons meaningless. Pick one method and stick with it.

Ignoring shrinkage: Damaged, stolen, or obsolete inventory still represents COGS even though it wasn't sold. Factor shrinkage into your calculations.

Getting Started

Understanding and tracking COGS doesn't require complex systems initially:

1. Record all product purchase costs, including shipping and duties.

2. Track inventory values at period start and end.

3. Calculate basic COGS using the standard formula.

4. Compare COGS to revenue for gross profit analysis.

5. Review product-level profitability regularly.

6. UseWMS to automate tracking as you scale.

COGS is fundamental to understanding whether your business is profitable. You might have impressive revenue figures, but if COGS consumes 85% of revenue and operating expenses take another 20%, you're running at a loss.

Track it properly, and you'll make smarter purchasing decisions, set better prices, and focus on genuinely profitable products rather than just high-volume ones.