How COGS Works

You buy a carton of 24 body lotions for NGN48,000. By evening, you’ve sold ten bottles at NGN3,000 each. That’s NGN30,000 in sales. How much did you make on them?

To answer that, you need cost of goods sold (COGS): the cost of the products your business sold during a period. For a shop that buys finished goods and resells them, it starts with what those goods cost you to buy.

The ten bottles cost NGN20,000. Your gross profit is NGN10,000. The rest of the carton is still on your shelf, waiting for its own sale.

Here’s how that calculation works across a whole month, including when your supplier changes prices halfway through.

What is COGS, and when does it count?

COGS follows the goods you sell. When you receive stock, you record inventory. When you sell it, the cost assigned to those units moves into COGS. This matches the stock cost to the revenue it earned, as described in the IFRS Foundation’s IAS 2 inventory guidance.

Using our lotion example, with no extra purchase costs or stock losses:

That NGN10,000 still has to help pay the shop’s rent, salaries, and other running costs. Gross profit is the amount left after COGS; it isn’t your final profit after every bill. Our bookkeeping guide for Nigerian retail shops explains how to keep those records alongside your sales and stock.

If you use the sale money to restock tomorrow, the old sale keeps its NGN20,000 COGS. The new goods get a new inventory record. We walk through that part in how to record a sale and the restock you paid for with it.

How to calculate COGS for the month

The standard retail COGS formula is:

COGS = Opening inventory + Purchases − Closing inventory

Opening inventory is the cost of stock you own at the start of the period. Purchases are the inventory costs you add during it. Closing inventory is the cost of stock still there at the end. You may also see these called beginning and ending inventory in Xero’s COGS guide.

All three figures use cost, not the prices on your shelves. Purchases should reflect supplier returns and discounts, plus any acquisition costs included in your inventory valuation.

Say your shop has these figures for August:

You had NGN800,000 of goods available at cost. NGN250,000 remained, so NGN550,000 went into COGS. This example assumes no write-offs, missing stock, or other adjustments. Keep those movements separate when reconciling a real stock count; missing goods didn’t earn a sale.

Your NGN600,000 of purchases is different from the NGN550,000 COGS. A busy restocking month can leave plenty of what you bought unsold.

How COGS changes your profit

If August’s sales were NGN800,000, excluding any VAT collected:

• Gross profit: NGN800,000 − NGN550,000 = NGN250,000.
• Gross margin: NGN250,000 ÷ NGN800,000 × 100 = 31.25%.

With NGN150,000 of shop running costs, that leaves NGN100,000 operating profit, before interest and tax. Our guide to revenue and profit explains why the sales total alone can’t tell you how the business is doing.

What costs belong in COGS?

For a retailer, inventory cost can include more than the supplier’s price. Costs directly needed to bring goods to their location and condition for sale form part of inventory cost. ICAEW’s summary of IAS 2 explains that principle.

Suppose 100 identical bottles cost NGN200,000 and getting that batch to your shop costs NGN10,000. Including that inbound delivery gives a batch cost of NGN210,000, or NGN2,100 per bottle. Selling ten uses NGN21,000 of inventory cost.

The distinction matters when recording transport. A delivery that brings in new stock and a dispatch rider taking an order to a customer do different jobs. Agree on the treatment with your bookkeeper, and count each cost once.

This article focuses on goods bought for resale. If you manufacture products, inventory costs can also include production labour and factory overheads.

What happens when your supplier changes prices?

Your supplier charges NGN2,000 a bottle on Monday and NGN2,400 on Friday. You still sell at NGN3,000. Which cost belongs to Saturday’s sales?

That’s where your inventory costing method comes in. FIFO means first in, first out: you assign the oldest available stock costs to sales first.

Take a separate example. You start with no bottles, receive two batches, and then sell 25:

Under FIFO, assign Monday’s NGN2,000 cost to the first 20 bottles sold and Friday’s NGN2,400 cost to the other five:

COGS = (20 × NGN2,000) + (5 × NGN2,400) = NGN52,000

Revenue is 25 × NGN3,000 = NGN75,000. Gross profit is NGN23,000. The 15 bottles left have a total cost of NGN36,000.

Now look at the next sale. Each remaining bottle costs NGN2,400, so a NGN3,000 selling price leaves NGN600 gross profit. The older bottles left NGN1,000 each. You can sell exactly the same number tomorrow and make less money.

That’s a reason to review your retail and wholesale prices when a new delivery arrives.

How weighted average compares with FIFO

FIFO and weighted average are both accepted methods for interchangeable inventory under IAS 2. Weighted average spreads the total cost across the available units. In this example, NGN88,000 divided by 40 bottles gives NGN2,200 each, and COGS for 25 bottles would be NGN55,000.

Use a consistent method appropriate to your accounts. Guessing a cost from memory is what makes the figures unreliable.

Buying in cartons and selling in pieces

COGS needs the cost of the quantity sold, even when your supplier and customer use different units.

Suppose a 25kg bag of shea butter has a total inventory cost of NGN100,000. That is NGN4,000 per kg. A 250g sale uses one quarter of a kilogram, so the shea butter in that sale costs NGN1,000. Any extra costs of preparing the retail pack need accounting for too.

Check your unit conversion before entering stock. If a carton holds 24 bottles but your records say 12, the calculated cost per bottle will be twice what it should be. Every margin based on it will be wrong.

Mistakes that make COGS unreliable

Recording a restock as a running expense

In an inventory system that records COGS when goods sell, also entering the same purchase under Expenses counts it twice. Receive the goods into inventory and let their cost flow through to COGS as they sell.

Replacing old batch costs with today’s supplier price

A new delivery has its own cost. Keep the earlier purchase records so you can explain what each batch cost and how you calculated past margins. Today’s replacement price helps you plan the next order; it doesn’t rewrite Monday’s purchase.

Leaving returns and stock losses unrecorded

A saleable customer return brings stock back and reverses the associated COGS. Expired, damaged, or missing goods need a loss or adjustment record. Otherwise, a stock count can make those losses look like goods sold, or leave you reporting stock you can no longer sell. IAS 2 requires inventory losses to be recognised when they occur. See the IFRS inventory guidance.

Check discrepancies while you can still trace the delivery or sale. For goods with a shelf life, tracking expiry dates helps you catch stock at risk before it becomes a write-off.

Common questions about COGS

What is the difference between COGS and inventory?

Inventory is the stock your business still owns. COGS is the cost assigned to goods you have sold. If you buy 24 bottles at NGN2,000 each and sell ten, COGS is NGN20,000 and the remaining inventory costs NGN28,000, assuming no other stock movements or losses.

Is cost of sales the same as cost of goods sold?

For a shop reselling physical goods, cost of sales usually means the same thing as COGS. Cost of sales is a broader label that can also include the costs of delivering services. Check what your report includes before comparing it with another business.

Does a credit sale have COGS before the customer pays?

Yes. Under accrual accounting, once the sale is recognised, the cost of the goods belongs in the same period as the revenue. The customer’s unpaid balance is recorded as money owed to you. Receiving payment later does not create another sale or another COGS charge.

This is why a profit report and a bank balance can show different pictures. See cash flow vs profit for a fuller example.

What is a good COGS percentage for a small shop?

There is no single percentage that suits every shop. Divide COGS by revenue and multiply by 100 to find yours. A shop with NGN550,000 COGS and NGN800,000 revenue has a COGS percentage of 68.75%, leaving a 31.25% gross margin to cover running costs and profit. Whether that is enough depends on those costs and the products you sell.

See what each sale cost you in Mayloo

In Mayloo, receiving stock records a batch at the cost you enter. You can use Receive Stock for a restock or receive goods against a purchase order when you need the supplier record too. Sales use FIFO batch costs to calculate COGS, with unit conversions for products you buy in bulk and sell in smaller quantities.

Those recorded costs feed into your profit and loss reports. If you have more than one shop, branch P&L shows the figures for each location.

Accurate inputs still matter. Start with a product you sell every day. Check its purchase cost and pack size against the supplier’s receipt, record the stock, and look at the gross profit after your next sale. You’ll have a number you can check bottle by bottle.

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