Cost of Goods Sold for Etsy Sellers: What Counts and What Does Not

Cost of goods sold — COGS for short — is a plain idea with a fancy name. It means: what did the materials that ended up inside the things you sold actually cost you?

Not what you spent in total, and not what is sitting on your shelves. Only the cost of what went into pieces that left your shop in a buyer's parcel. Getting this number right matters for pricing all year, and again in January for your taxes.

What counts as COGS for a maker

Count the materials that become part of the product:

The wax, wick, and fragrance oil in a candle
The yarn in a knitted hat
The wood in a carved sign
The beads and wire in a bracelet
Anything else that leaves with the buyer as part of the finished piece

The test is simple: is it in the parcel, part of the thing itself? If yes, it belongs in COGS when that item sells.

What does not count

Just as important is what stays out:

Your own labor. Your time is real and it matters for pricing, but it is not a material, and it does not go in COGS.
Tools. A mould, a saw, knitting needles — you buy them once and use them on many pieces. They are equipment, not a material inside one item.
Postage. What you pay to send a parcel is a selling cost, not a material in the piece.
Packaging sits on the edge. It goes in the parcel but is not part of the product itself. Track it as its own cost — you need it for pricing — but keep it separate from COGS so your numbers stay clean.
Materials still on your shelf. Unused wax is not COGS yet. It becomes COGS only when it goes into an item that sells.

That last point is where most makers' numbers go wrong. They add up everything they bought and call it the cost of what they sold. But materials still sitting in a box have not been sold, and counting them now overstates your costs and understates what you kept.

Weighted-average costing, in plain words

Here is the problem hiding inside COGS. You do not buy your materials once, at one price. You buy them again and again, and the price moves.

Weighted-average costing is the fair way through it: instead of pretending every batch cost the same as the first, or tracking which exact spoonful came from which bag, you average the cost across what you have, weighted by how much of each you bought.

A small example. Say you buy 10 lb of wax for $50. That batch costs $5 per pound. Later you buy another 10 lb of wax, but the price has gone up: $70 this time, $7 per pound.

You now have 20 lb of wax that cost you $120 in total. The weighted average is $120 ÷ 20 lb = $6 per pound.

From now on, every candle you make costs its wax at $6 per pound — not $5, not $7 — until you buy more wax, at which point you fold the new purchase into the average and work it out again. Say a candle uses half a pound of wax. Its wax cost is $3. That $3, plus the wick and fragrance at their averages, is the materials cost that goes into COGS when the candle sells.

This is not fancy accounting for its own sake. If you keep costing candles at the old $5 a pound after your real cost became $7, your prices and your profit figures are both built on a cost you can no longer buy at.

Why a spreadsheet breaks

A spreadsheet can do this for one material. It starts to break when life gets real:

You have twenty materials, each bought several times at different prices.
One product uses six materials; another uses two of the same ones in different amounts.
A price rise lands mid-year and every average has to be redone without breaking the old sales.
A sale in December used materials costed before a November price rise — the sheet has to remember which average was true on which date.

Each is fixable by hand, once. Together, month after month, they are where errors creep in — silently. The sheet still adds up; it is just adding up costs from the wrong batch.

Makers who stay sane either keep few materials and a tidy sheet, updated the day every purchase arrives, or let a tool hold the purchases and work the averages for them.

The habit that makes January easy

Record every materials purchase when it arrives: what it is, how much of it, what it cost. Record what each product uses. Then COGS is no longer a January scramble through receipts — it is just the sum of the materials inside the things you actually sold, at the average cost that was true when they sold.

If you want to check what a product really costs you before you price it, the free pricing calculator on mykeptmoney.com lets you enter your materials cost and see what you would keep after every Etsy fee.

Cost tracking is not tax advice. This tool organizes your own numbers; it does not prepare or file your taxes. Show the worksheet to your tax preparer.