Cost of goods sold (COGS)
What the things you actually sold cost you to make or buy.
Cost of goods sold is the direct cost of the stock you sold during the year — the ingredients, materials or wholesale goods themselves, plus freight to get them in. Rent, phone and insurance are not COGS; they are overheads. The formula is opening stock + purchases − closing stock, and the result is subtracted from your sales to give gross profit.
The distinction that matters is direct versus indirect. If a cost rises when you sell one more unit, it is almost always COGS. If it stays flat whether you sell ten units or a thousand, it is an overhead. Getting the split right is what makes gross profit a number you can act on — it tells you whether your pricing works, separately from whether your fixed costs are under control.
Worked example
You run a market stall. You start the year with $2,000 of stock, buy $34,000 more, and finish with $3,500 on the shelf. COGS is $2,000 + $34,000 − $3,500 = $32,500. On $60,000 of sales that is a gross profit of $27,500, or about 46%.
Common mistake
Counting everything you bought as COGS, including the stock still sitting unsold at year end. Stock you have not sold is an asset, not an expense — leaving it in overstates your costs and understates your profit.
Grounded in ATO guidance. Figures last checked . General information, not tax advice.
Related terms
Trading stock (and the $5,000 stocktake shortcut)
The goods you hold to sell — and when you can skip the stocktake.
Taxable income
Assessable income minus deductions — what tax is actually on.
GST turnover ($75,000 threshold)
The gross income figure that triggers GST registration.
ABN (Australian Business Number)
The 11-digit number that identifies your business.
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