Defining Cost of Goods Purchased Formula (+Examples)
Table of Contents
Cost of goods purchased formula is:
Cost of Goods Purchased = Purchases + Freight-In + Other Costs – Purchase Returns and Allowances
It is the total amount spent on buying inventory during a specific period. It’s the direct cost a business pays to acquire inventory, including purchases, shipping, and other related expenses.
COGP matters because it’s the foundation for calculating your true profitability. COGP shows you the actual amount you’re spending to acquire inventory, including shipping, duties, and other direct costs—this gives a more accurate view of your real expenses.
In this guide, you’ll learn more about COGP: its definition, calculation, examples, and how it is used for your business.
What is the Cost of Goods Purchased?
Cost of Goods Purchased (COGP) is the total amount spent on buying inventory during a specific period. It’s the direct cost a business pays to acquire inventory, including purchases, shipping, and other related expenses.
While they sound similar, COGP vs. COGS isn’t the same thing. COGP tells you how much you spent on buying inventory—regardless of whether you’ve sold them yet. Meanwhile, Cost of Goods Sold (COGS) is the total direct cost of producing or purchasing the goods that a business has actually sold.
Further Reading
How to Calculate the Cost of Goods Purchased
In accounting terms, COGP formula is:
Let’s break it down:
- Purchases: Total dollar amount spent on buying inventory
- Freight-In: Shipping or transportation costs to bring the goods to your facility
- Other Costs: Any added costs directly tied to acquiring the goods (like import taxes)
- Returns and Allowances: Goods you sent back or got discounts on after purchase
Cost of Goods Purchased is a key part of calculating Cost of Goods Sold (COGS):
Example of the Cost of Goods Purchased
Using the above formula, here's an example of calculating COGP step-by-step.
Let’s say your business bought inventory this quarter with the following details:
- Total purchases: $60,000
- Freight-in charges: $2,000
- Import duty: $1,500
- Purchase returns: $3,500
Here’s how it plays out:
COGP = $60,000 + $2,000 + $1,500 – $3,500 = $60,000
So, your cost of goods purchased this quarter would be $60,000. This means you paid $60,000 to stock up on items you plan to sell (or use in production).
Further Reading
Applications of the Cost of Goods Purchased
Cost of Goods Purchased (COGP) is a key part of profitability analysis.
Even though you don’t usually see “COGP” as a separate line on the PnL Statement, it still helps calculate important numbers that do appear there—especially COGS.
Once they calculate COGS, that number appears directly on the PnL statement, and helps determine your Gross Profit.
Even though COGP isn't shown, it's a critical input behind the scenes of other business performance metrics.
Further Reading
Why Cost of Goods Purchased Matters for a Business?
COGP matters because it’s the foundation for calculating your true profit and profitability.
COGP shows you the actual amount you’re spending to acquire inventory, including shipping, duties, and other direct costs—this gives a more accurate view of your real expenses.
If you don’t accurately track how much you spent to acquire your goods (COGP), then every number that comes after like Cost of Goods Sold (COGS), profit margin, gross profit, and net profit becomes unreliable.
In short, Cost of Goods Purchased (COGP) might not get as much attention as revenue or profit, but it plays a critical role in understanding a business’s financial health.
COGP is the start of true profit. It gives you a more accurate view of your real expenses—and with TrueProfit, you can track that effortlessly to get a clearer picture of your true profitability.
Cost of Goods Purchased Formula FAQs
How do you calculate the cost of goods purchased?
To calculate the cost of goods purchased, you add up all purchases of inventory during a specific period and adjust for any purchase returns, allowances, and discounts. Then, include any additional costs needed to bring the inventory to your business, such as shipping or handling fees.
What is the formula for purchase of goods?
The basic formula for the purchase of goods is:
Purchases = Net Purchases + Purchase Returns and Allowances + Purchase Discounts
This helps you track the total inventory bought before adjustments.
What is the formula for net cost of goods purchased?
The formula for net cost of goods purchased is:
Net Cost of Goods Purchased = Purchases + Freight-In – Purchase Returns – Purchase Allowances – Purchase Discounts
This gives you a clearer view of your real inventory costs.
How to calculate cost purchased?
To calculate the cost purchased, take the total purchase amount, subtract any discounts, returns, and allowances, and then add any freight-in or delivery costs related to getting the inventory to your location.
What is cost of goods purchased?
Cost of Goods Purchased (COGP) refers to the total amount a business spends to acquire inventory during a specific period.
What is the cost of goods purchased calculation?
The cost of goods purchased calculation adds up all the expenses directly related to buying inventory. The basic formula is:
Cost of Goods Purchased = Purchases + Freight In + Insurance + Import Duties – Purchase Returns and Allowances – Purchase Discounts
What is the cost of goods purchased equation?
The equation for cost of goods purchased helps determine how much inventory was acquired during a period. It looks like this:
COGP = Gross Purchases + Freight In – Purchase Returns – Discounts
What is included in the cost of purchase?
The cost of purchase includes the price of the goods themselves, along with any costs necessary to bring the goods to your location. This can include shipping fees, insurance, import duties, and handling charges.
What is the formula for COGS?
The standard formula for Cost of Goods Sold (COGS) is:
COGS = Beginning Inventory + Purchases During the Period – Ending Inventory
This tells you how much it cost your business to sell the goods during a specific time frame.
How do COGS work?
COGS work by tracking the actual cost of producing or purchasing the goods your business sells. It's used to calculate gross profit by subtracting COGS from total revenue. Keeping COGS accurate is crucial for understanding real profitability.
What is COGS meaning?
COGS stands for Cost of Goods Sold. It refers to the total direct costs involved in producing or purchasing the products a company sells during a specific time period. It's a key metric in analyzing business performance and profitability.
Leah Tran is a Content Specialist at TrueProfit, where she crafts SEO-driven and data-backed content to help eCommerce merchants understand their true profitability. With a strong background in content writing, research, and editorial content, she focuses on making complex financial and business concepts clear, engaging, and actionable for Shopify merchants.
Related readings:
