Foundation 7 of 20 · Report
How to Calculate Cost of Goods Sold (COGS) and Unit Cost
If You Have Never Costed One Unit, You Are Guessing.
"Hypothetically. What does it cost to make one jar?" If you set your price by feel and leave your own time out of the cost, your best seller might be your worst earner. Here is how to calculate cost of goods sold, one unit at a time.
Last Updated: 10/25/2026 · Written by Dr. Paul Borosky, DBA, MBA
The Short Answer
What Is Cost of Goods Sold?
Textbook Definition
Cost of goods sold (COGS) is the direct cost of producing or purchasing the goods a company sells during a period, including materials and direct labor, and excluding indirect expenses such as rent, administration, and selling costs.
In Plain English
Cost of goods sold is what it costs you to make or buy the things you sell, and nothing else. The materials, the packaging, and the time it takes to put each one together. Divide that by how many you make, and you have the cost of one.
Why It Matters
Why Do So Many Owners Get Their Costs Wrong?
Because they have never counted one unit. They know what the supplies cost in bulk and what the product sells for, and they assume the gap is healthy. The guess almost always leaves something out, and the thing it leaves out most often is labor, especially the owner's own hours.
The costs that go into one specific unit are your direct costs. Rent, the delivery van, and your Saturday at the market are not part of it. Those are overhead, and they come next. Start with what goes into the product itself.
Signs you have this problem:
- You set prices by looking at competitors and hoping.
- You have never written down every material that goes into one unit.
- You leave out labor because you do the work yourself.
- You sell a smaller or "value" version and assume it makes the same money.
- You do not know which product makes you the most money per unit.
- Raising a price feels like cheating your customers.
What It Looks Like
What It Looks Like When Nobody Has Costed the Jar
From the Fabled Forest · Chapter 7
Beatrix the Bee sells honey in large jars and, newly, in small jars a third the size. The small ones fly off the shelf. Families buy three. Then Pedro the Parrot told the whole square that she sold them for less than they cost. She suspected he was right and did not know how to check.
Doctor Owl had her count twenty small jars, line by line: the honey from the hives, the glass and lids, the labels, and two hours of her helper Moss's time to fill and label them. Eight coins to make twenty. They sold for twenty. The small jars were not losing money.
But three small jars held the same honey as one large jar and sold for the same coins, while costing more in glass and taking six hours of Moss's week instead of forty minutes. Beatrix raised the small jar price, nervously. Nobody stopped buying.
Beatrix's story is Chapter 7 of Accounting and Finance for Small Businesses, Book 2 of Dr. Paul's Fabled Forest Business School Series.
The Fix
How to Calculate Cost of Goods Sold in 5 Steps
Pick one product or service. Just one. You can do the rest once the first one is done.
List every material in one unit.
Raw materials, ingredients, parts, packaging, labels. If you buy in bulk, divide the bulk price by how many units it makes.
Time one unit from start to finish.
Watch it get made, or time yourself. Batching is fine: time twenty and divide by twenty.
Put a dollar value on the time.
Use what you would pay someone to do it, even if you do it yourself. Your hour has a cost whether or not you write yourself a check.
Add it up to get the unit cost.
Materials plus labor equals the unit cost. That is your floor. Below it, every sale loses money before rent is even counted.
Compare it to your price, then do the next product.
Look at the gap. Then cost your next best seller. Different sizes and versions can have very different gaps, even with the same ingredients.
Dr. Paul's Insight
The single most common mistake is leaving out labor because "I do it myself." When you eventually hire help, that time suddenly costs real money, and a product that looked profitable stops being profitable overnight. Cost your time from day one. Also, your accountant may include a share of production overhead in COGS for the tax return. For pricing decisions, starting with direct costs only is the cleaner view.
Sample: A Unit Cost Sheet
One product, every line. Do it in batches when single units are too small to time.
| Line | Cost per batch | Cost per jar |
|---|---|---|
| Honey (hive costs divided by jars) | $20.00 | $1.00 |
| Jars and lids | $40.00 | $2.00 |
| Labels | $10.00 | $0.50 |
| Labor: 2 hours to fill, cap, label | $30.00 | $1.50 |
| Unit cost | $100.00 | $5.00 |
| Selling price | $140.00 | $7.00 |
Sample for illustration. Use your own supplier prices and the wage you would pay for the work.
Watch
Video: How to Cost One Unit of What You Sell
How to Calculate Cost of Goods Sold (COGS) and Unit Cost
Dr. Paul builds a unit cost sheet line by line, including labor, on screen.
From the Book
You Simply Have Never Divided
Chapter 7 · Cost of Goods Sold
What Does a Jar Cost?: A Bee's Arithmetic
"How many jars does one hive give you in a season?"
"Forty large. Or a hundred and twenty small. A small jar is a third of a large."
"Then you know what honey costs per jar," said Doctor Owl. "You simply have never divided."
What did one small jar really cost, and why did the answer surprise everyone, including Pedro? Find out in Chapter 7. Book 2 of Dr. Paul's Fabled Forest Business School Series.
Get the Book on Amazon →FAQ
Cost of Goods Sold Questions
What is included in cost of goods sold?
How do you calculate unit cost?
Should I include my own labor in COGS?
What is the difference between COGS and overhead?
Keep Going
Related Foundations
Unit cost feeds four other foundations. Every price and margin decision starts here. New to a term on this page? Every one is in the accounting and finance glossary.
Foundation 8 · Overhead and Profit Margin
Subtract unit cost from price, then add the roof of overhead on top.
Foundation 14 · Pricing Strategy
Your unit cost is the floor every price has to start above.
Foundation 19 · Break-Even Analysis
Use what each unit leaves to find how many sales cover a new cost.
Foundation 15 · Discounting and Contribution Margin
Know what each sale leaves before you offer a discount.
Written by Dr. Paul Borosky, DBA, MBA, business consultant, author, and educator with an MBA focused in finance. Want help costing your products line by line? See fractional CFO services.
This page is for general educational purposes only. It is not legal, financial, tax, accounting, or lending advice. Tax rules change by place and by year. Dollar figures are illustrations. The Fabled Forest and its characters are fictional. For decisions about your own business, consult a qualified professional.