COGM vs. COGS — What's the Difference?
We discuss the difference between COGM and COGS, and show you how to calculate both important manufacturing metrics.
Confused about the difference between Cost of Goods Sold (COGS) and Cost of Goods Manufactured (COGM)? You’re not alone — the two terms look almost identical on the surface, and plenty of accounting guides use them interchangeably. They aren’t the same thing, though. And if you’re running a handmade or small-batch manufacturing business, understanding the distinction is genuinely useful for pricing, profitability, and tax reporting.
This guide breaks both terms down clearly, walks through a real example with a candle maker, and shows you how each figure fits into your business picture.
Last updated: March 2026
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What is COGS?
COGS stands for Cost of Goods Sold. It’s the total direct cost of the goods you’ve actually sold to customers during a given period.
COGS typically includes:
- Direct materials used in the products you sold
- Direct labor tied to producing those specific products
- Shipping costs directly attributed to sold orders (in some accounting treatments)
What it does not include: overhead expenses like advertising, warehouse rent, or general admin costs. Those go elsewhere on your income statement.
Your COGS figure is what hits your income statement. It sits directly below revenue, and the gap between the two is your gross profit. Get this number wrong and your profit margins will be off — which means your pricing will be off too.
Learn more: How to Calculate your Cost of Goods Sold (COGS) →
What is COGM?
COGM stands for Cost of Goods Manufactured. It’s the total cost of everything you produced during a period — whether or not it sold.
COGM includes:
- Direct materials consumed in production
- Direct labor (wages, contractor fees tied to making things)
- Manufacturing overhead (equipment depreciation, workshop rent, utilities for your workspace)
- Work-in-progress adjustments (what was half-finished at the start of the period, minus what’s still half-finished at the end)
That last point is important. COGM accounts for the flow of production, not just the final output. If you started the month with partially finished stock and ended with some too, COGM factors that in.
The COGM formula
Opening work in progress (WIP)
+ Direct materials used
+ Direct labor costs
+ Manufacturing overhead
− Closing work in progress (WIP)
= Cost of Goods Manufactured (COGM)
COGM feeds into your inventory calculations. Once goods are manufactured, they move to your finished goods inventory — and when they sell, that’s when COGS kicks in.
COGM vs. COGS — the key difference
Here’s the clearest way to think about it:
- COGM = what it cost you to make everything during a period
- COGS = what it cost you to produce the portion that sold during a period
They can look identical if you sell everything you make (zero leftover finished inventory). But most makers carry some finished stock from one period to the next, which is exactly where the two figures diverge.
Quick comparison table
| COGM | COGS | |
|---|---|---|
| What it measures | Total production cost | Cost of goods actually sold |
| Includes overhead? | Yes | No (usually) |
| Includes unsold stock? | Yes | No |
| Where it appears | Internal manufacturing reports | Income statement |
| Used for | Production efficiency analysis | Pricing, tax reporting, gross profit |
| When the figures match | When all manufactured goods are sold in the same period | Same |
A worked example — 48 candles
Let’s say you’re a candle maker. In January you produce a batch of 48 candles. Here’s what that costs you:
Materials:
- Soy wax: $28
- Fragrance oils: $18
- Wicks, jars, lids: $22
- Labels and packaging: $12
- Total materials: $80
Labor: You spend 4 hours on the batch at $20/hr = $80
Overhead: You allocate $40/month of your workshop costs to this batch = $40
COGM for the batch: $200 (or about $4.17 per candle)
Now, you start January with 6 unsold candles from December in your finished goods inventory. You sell 38 candles during January, leaving you with 16 in stock at month end.
COGS for January:
Opening finished goods inventory (6 candles × $4.00*)
+ COGM for January ($200)
− Closing finished goods inventory (16 candles × $4.17)
= COGS
(Using $4.00/candle as December’s unit cost for simplicity)
$24 + $200 − $66.72 = $157.28
So your COGM was $200 (everything you made) but your COGS was $157.28 (the cost of what you actually sold). The difference lives in your finished goods inventory — it’s the cost of the 16 candles still sitting on your shelf.
This matters for your income statement. You only deduct $157.28 against your January revenue, not the full $200.
Why the difference matters for your business
Pricing
COGS is your floor. If you sell a candle for less than what it cost to make and sell it, you’re losing money on every transaction. Knowing your per-unit COGS — including a sensible overhead allocation — keeps you from making that mistake.
Plenty of makers price based on what competitors charge without ever checking whether that price covers their actual costs. COGS is what grounds you in reality.
See also: Pricing Psychology for Success →
Tax reporting
COGS directly reduces your taxable income. It’s one of the most significant deductions available to product-based businesses, and it shows up on Schedule C (for sole proprietors) under “Cost of goods sold.” Get this wrong and you either overpay tax or create problems with your accounting records.
For a deeper look at COGM vs COGS in a bookkeeping context, see: Etsy Bookkeeping — Your Guide for Maker Success →
Production efficiency
COGM tells a different story. It’s more useful for looking inward at your manufacturing process. If your COGM keeps rising even though your material costs haven’t changed, that points to a labor or overhead problem — maybe you’re taking longer to make things, or your utilities costs have crept up.
Tracking COGM over time gives you early warning signals that pure sales figures won’t catch.
Inventory health
Running out of stock is expensive. Knowing your COGM helps you understand exactly how much capital is tied up in each production run — and whether your stocking levels make sense for your sales velocity. For a practical guide on avoiding stockouts, see: The Complete Guide to Stockout Prevention →
How to track your COGS (and stop doing it in spreadsheets)
Makers have a few options. A spreadsheet works well enough in the early days — you know your material costs, you track your sales, and you do the maths manually at the end of the quarter. But it breaks down fast once you’re running multiple products, sourcing from different suppliers, or selling across more than one channel.
The problems with spreadsheets: they’re time-consuming, error-prone, and they don’t update in real time. Change your supplier for one ingredient and you’re manually recalculating costs across every product that uses it.
Dedicated software like Craftybase handles this automatically. You add your materials, set up your recipes (what goes into each product), and Craftybase calculates your COGS per unit in real time — including any cost changes that flow through from your supply chain. No manual recalculation required.
You can also use the free COGS calculator to run quick estimates without entering all your data upfront.
Frequently Asked Questions
What's the simplest way to remember the difference between COGM and COGS?
COGM is what it cost you to make everything during a period. COGS is what it cost you to produce the portion that actually sold. They're equal only if you sell every single thing you manufacture — which most makers don't. The gap between them is the cost sitting in your finished goods inventory.
Does COGS include overhead costs for a small handmade business?
Traditional COGS excludes overhead — it covers direct materials and direct labor only. But for small handmade businesses, many makers choose to factor in overheads when calculating their per-unit cost and setting prices. That's actually COGM thinking applied to pricing — it gives you a truer picture of what each product costs to produce. Just be consistent: use the same method across all your products.
How do I calculate COGS if I make products in batches?
Divide your total batch cost by the number of units produced to get a per-unit cost, then multiply by the number of units sold. For example: a batch of 48 candles costing $200 to produce works out to $4.17 per candle. If you sell 38 of them, your COGS is 38 × $4.17 = $158.46. Craftybase automates this calculation — you enter the batch, it tracks what sold and what remains in inventory.
Does COGM matter for Etsy sellers and other DTC makers?
COGM is most useful if you're carrying meaningful finished goods inventory between accounting periods. If you make-to-order and sell everything you produce, COGM and COGS will be nearly identical. But if you batch-produce and hold stock — which most Etsy sellers do — tracking COGM helps you understand how much capital is tied up in unsold inventory and whether your production runs are profitable before a single item ships.
Where does COGS appear on my tax return?
For US sole proprietors, COGS is reported on Schedule C (Part III) of your federal tax return. It reduces your gross receipts to give you gross profit, which then feeds your net profit calculation. Accurate COGS tracking is one of the most impactful deductions available to product-based businesses — undercounting it means overpaying tax.
Craftybase — COGS and manufacturing cost tracking for makers
Craftybase is built specifically for small-batch manufacturers. You add your materials and recipes, connect your sales channels, and Craftybase handles the rest: real-time COGS per product, inventory deductions as orders come in, and the reports you need at tax time.
No spreadsheet gymnastics. No recalculating when supplier prices change. Just accurate numbers, whenever you need them.
