Once you move beyond buying and reselling finished goods, your cost of goods sold (COGS) depends on correctly tracking raw materials, assemblies, and production activity. Spreadsheets and basic QuickBooks Online workflows don’t capture material, assembly, and production costs or apply them correctly. If your COGS aren’t correct, you can’t make sound pricing decisions. Your margins will begin to shrink, and you’ll have trouble planning for growth and scaling with confidence.
This article explains how to calculate COGS correctly by extending QuickBooks Online with inventory management software like SOS Inventory.
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What Is the COGS Formula and What Belongs in It?
COGS represents the direct costs tied to producing the products you sell. In a small manufacturing operation, it’s the full cost of turning raw materials into sellable items, including the materials you consume and the production-related expenses required to make them ready for sale.
The COGS formula is simple. Anything that was in inventory at the start, plus what you added, minus what’s still on the shelf, represents what you actually sold.
COGS = Beginning Inventory Value + Value of Purchases Added During the Period – Ending Inventory Value
As a manufacturer, you need to include direct materials used in production and the costs directly tied to making your products, including component parts, subassemblies, and any other production-related expenses that increase the value of inventory as it moves through your workflow.
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Typically included in COGS:
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Typically excluded from COGS:
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Why Do Small Manufacturers Miscalculate Cost of Goods Sold?
As production grows more complex, the tools and workflows that small manufacturers use to track costs can’t keep up. Spreadsheets have version control issues. Multiple files, manual updates, and delayed cost changes don’t reflect current material prices or production activity. Costs are already outdated by the time they’re entered, and those inaccuracies carry forward into COGS calculations.
Some manufacturers use QuickBooks Desktop or Enterprise to calculate COGS because the platform handles accounting well. However, it wasn’t designed for detailed assemblies or tracking production costs across multiple steps. It misses costs tied to subassemblies or partial builds, forcing you to rely on manual adjustments based on guesswork.
Common COGS calculation errors include:
- Using outdated spreadsheet data that doesn’t reflect current material costs
- Manually adjusting inventory values to correct missing or incorrect costs
- Failing to roll assembly and subassembly costs into finished goods
- Applying the COGS formula inconsistently across reporting periods
- Missing production-related costs during builds or process manufacturing
When costs aren’t applied consistently, COGS fluctuates for reasons unrelated to actual production changes, making it harder to trust your reports or price products with confidence.
How Can an Inventory Management System for QuickBooks Online Improve COGS Accuracy?
When you extend QuickBooks Online with an inventory management system for QuickBooks like SOS Inventory, you don’t have to rely on manual adjustments or after-the-fact corrections. Instead, you apply structure to how materials, assemblies, and production activity flow into cost of goods sold.
This kind of structure matters because manufacturing costs aren’t static. When your inventory system has features that account for those realities, COGS reflects what actually went into producing each item. Instead of padding margins to compensate for uncertainty, you’ll be able to price products based on real costs. You’ll spot margin erosion earlier, understand which products are performing well, and adjust before small issues become expensive ones.
Improve COGS Accuracy with SOS Inventory
COGS sits at the center of pricing, margins, and long-term profitability. Spreadsheets and basic QuickBooks Online workflows don’t reflect how your products are actually built, so using them to calculate COGS will result in skewed numbers.
Extending QuickBooks Online with SOS Inventory gives you a more practical way to apply the COGS formula. By structuring how materials, assemblies, and production workflows are tracked, you can calculate COGS based on real inventory movement instead of corrections made after the fact.
Download our white paper to learn how you can use SOS Inventory within QuickBooks Online to calculate COGS accurately and protect your margins as your operation scales.
Frequently Asked Questions
Why is calculating cost of goods sold difficult for small manufacturers?
As production grows, tracking materials, assemblies, and labor becomes complex. Spreadsheets and basic QuickBooks Online workflows often miss or misapply costs, leading to inaccurate margins and pricing.
How does an inventory management system for QuickBooks Online help with COGS?
An inventory management system for QuickBooks Online, like SOS Inventory, tracks costs consistently across materials and production workflows. Using this type of software can make your COGS calculations more reliable, improve pricing, and increase margin visibility.
How often should manufacturers review their COGS calculations?
Ideally every month or reporting period, to identify cost fluctuations and detect inconsistencies before they affect pricing decisions.