What are my cost of goods sold?
Cost of goods sold is what it costs you to deliver what you sell. It is the first number subtracted from revenue, and it determines whether your pricing actually works.
The short answer
Cost of goods sold (COGS)includes every direct cost of delivering your product or service: materials, direct labor, manufacturing, shipping. Your P&L report shows COGS as a section right below revenue. Below, we'll show you exactly where to find it and what should (and shouldn't) be in there.
Why COGS is the cost most business owners miscategorize
You run a custom furniture shop. Last month you spent $14,000 on hardwood, $8,000 on hardware and finishing supplies, and $18,000 paying your two craftspeople. That is $40,000 in COGS. But your bookkeeper also put your shop rent ($3,200) and your accounting software ($200) into COGS. Those are operating expenses, not direct costs.
With the wrong categorization, your COGS shows $43,400 instead of $40,000. That makes your gross margin look 4 points worse than it actually is. You might think your pricing is broken when really your bookkeeping is.
Getting COGS right matters because it is the foundation of gross margin, the single most important indicator of whether your core business model is sound. If the wrong costs are in the wrong buckets, every ratio you calculate downstream is misleading.
What belongs in COGS and what does not
The rule is straightforward: if the cost only exists because you made a sale or delivered a service, it is COGS. If you would still pay it even with zero sales, it is an operating expense.
- Belongs in COGS: Raw materials, components, direct labor (hourly workers on production), subcontractor costs, manufacturing supplies, freight and shipping on products sold, packaging.
- Does not belong in COGS: Office rent, utilities, marketing, administrative salaries, software subscriptions, insurance, vehicle maintenance (unless vehicles are used exclusively for delivery).
- The gray area: Some costs straddle the line. A warehouse used only for inventory storage could be COGS. A manager who splits time between production and admin is harder to classify. When in doubt, talk to your accountant and be consistent.
How to find your COGS in QuickBooks Online (5 steps)
- 1Open the Profit and Loss report
From the left sidebar, click Reports. Search for “Profit and Loss” and open it. Set the date range to the current month.
- 2Find the Cost of Goods Sold section
Below Total Income, you will see the Cost of Goods Sold section. It lists every account categorized as COGS. The total at the bottom of this section is your COGS for the period.
- 3Review the individual line items
Click into each COGS account to see the transactions. Look for anything that seems misclassified (software, rent, general supplies). These should be moved to operating expenses.
- 4Check your Chart of Accounts for COGS mapping
Go to Settings (gear icon) → Chart of Accounts. Filter by “Cost of Goods Sold” account type. Make sure only true direct costs are categorized here.
- 5Compare to last month
Run the P&L for last month. Did COGS go up? Did it go up proportionally to revenue, or faster? If COGS grew 15% but revenue only grew 5%, your direct costs are outpacing your sales.
Total time: about 8 minutes if you review individual line items. About 3 minutes if you just want the total. The Chart of Accounts review is a one-time check worth doing.
How to find your COGS in Xero (4 steps)
- 1Go to Accounting → Reports → Profit and Loss
Select the current month. Click Update.
- 2Find the Direct Costs section
Xero labels COGS as “Less Direct Costs” or “Less Cost of Sales.” This section appears right below revenue. The Total Direct Costs line is your COGS.
- 3Click into line items to verify categorization
Click any line item to see the underlying transactions. To review or adjust account types, go to Accounting → Chart of Accountsand filter by “Direct Costs” type.
- 4Add a comparison period
Select “Compare with: Previous Period” to see how direct costs changed month over month. Look at whether the change is proportional to revenue changes.
Total time: about 5 minutes. Xero's Direct Costs section maps directly to COGS. The comparison feature saves you from running a second report.
What it takes to monitor COGS every month
- 3-5 minutes per month to pull the P&L and check the COGS total.
- Periodic categorization review. Every quarter, it is worth checking that new transactions are landing in the right accounts. Bookkeepers make mistakes, and auto-rules can drift.
- COGS as a percentage of revenue is the number to track over time. The absolute dollar amount changes with volume. The percentage tells you if your direct cost efficiency is improving or worsening.
Or track your cost of goods sold automatically, every month
Bottomline pulls your COGS directly from QuickBooks or Xero and calculates it as a percentage of revenue each month. It flags when the ratio changes significantly:
Bottomline also compares your COGS ratio to prior months and highlights which specific cost categories drove any changes. If materials costs spiked 12% from a supplier price increase, you will see that in the report without having to dig through individual transactions.