April 1, 2026 | Finance Strategy

Understanding "Cost of Goods Sold" (COGS)

Key Takeaways

COGS represents the **direct costs** of producing the goods or services you sell.
It does NOT include overheads like rent, marketing, or general office salaries.
In 2026, tracking COGS is the only way to accurately find your **Gross Profit Margin.**

In 2026, many Australian business owners reach the end of the month wondering where all their cash went. Often, the "leak" is in their **Cost of Goods Sold (COGS).** COGS is the most critical metric for any business that sells products or physical services. If yours is too high, you’re basically working for your suppliers instead of yourself. Here is how to track and optimize your COGS this year.

What is Included in COGS?

To follow the accounting rules, you should only include costs that move **directly** when a sale is made. If you sell a wooden table, your COGS includes:

**Direct Materials:** (Wood, screws, varnish).
**Direct Labor:** (Wages for the person who made the table).
**Freight-In:** (Shipping costs to get the materials to your workshop).
**Contract Manufacturing Hooks:** (Subcontractors who did the sanding).

What is NOT Included? (The "Operating Expenses")

This is where data gets messy. Do not put the following in COGS:

**Rent:** You pay rent whether you sell one table or one hundred.
**Insurance:** A fixed annual cost.
**Software:** (Xero, marketing tools).
**Admin Salaries:** (The person who does the bookkeeping).

The COGS Formula

For businesses with physical stock (inventory), the standard 2026 formula for COGS is:

formula: (Opening Inventory + Purchases) - Closing Inventory

💡 Note: If your COGS is over 50% of your revenue and you’re a service business, or over 30% for a retailer, you likely have a pricing problem or a waste problem in your production.

Summary: Better Data, Bigger Profit

Understanding your COGS allows you to see the real efficiency of your business. It identifies exactly how much it costs you to "make a dollar," which is the foundation of any growth strategy. At PrepMyBook, we help our clients audit their COGS every month to pinpoint exactly where their margins are leaking. Let’s make 2026 your most profitable year yet.

Audit Your Profit Margins

Our financial strategy experts can build a custom Profit & Loss report that clearly separates your COGS from your overheads. Let’s find the "hidden profit" in your business.

Talk to a Financial Strategist