What Is Cost of Goods Sold (COGS) and How to Calculate It for Your Business in Nigeria

What Is Cost of Goods Sold (COGS) and How to Calculate It for Your Business in Nigeria

Introduction

Many Nigerian business owners know roughly how much they are selling each month. Far fewer know exactly how much it costs them to make those sales. That gap between what you earn and what you actually spent to earn it is where most pricing mistakes, profit miscalculations, and financial surprises come from.

The number that closes that gap is called Cost of Goods Sold, or COGS.

COGS is one of the most important figures in your business finances. It sits directly beneath your turnover on your Profit and Loss statement, and everything below it your gross profit, your net profit, your tax liability depends on getting it right.

This article explains what COGS is, what it includes, how to calculate it step by step, and how Zerrar helps you track it so your numbers are always accurate.

What Is Cost of Goods Sold (COGS)?

Cost of Goods Sold is the total direct cost of the products your business sold during a specific period.

It is not what you paid for all the stock you bought it is specifically the cost of the stock you actually sold. Stock sitting in your store that has not been sold yet does not count as COGS.

Think of it this way. If you buy 20 dresses at ₦7,000 each but only sell 15 of them this month, your COGS for this month is 15 × ₦7,000 = ₦105,000. The 5 unsold dresses remain as inventory they become COGS next month when they are sold.

COGS only covers the direct cost of the product itself what you paid your supplier for it. It does not include rent, delivery fees, advertising, or other running costs. Those are called operating expenses and are treated separately.

Why Is COGS Important?

Understanding your COGS matters for several critical reasons.

It determines your gross profit. Gross profit is your turnover minus COGS. If your COGS is wrong, your gross profit is wrong and every financial decision you make from there is built on a false foundation.

It tells you whether your pricing is correct. If your COGS is higher than you think, your real profit is lower than you think. Many Nigerian merchants undercharge because they have not properly accounted for all the costs that go into a product.

It is required for accurate tax reporting. COGS reduces your taxable profit. Businesses that underreport their COGS end up overpaying tax. Businesses that overreport their COGS deliberately or accidentally risk penalties from FIRS.

It helps you identify your most and least profitable products. When you know the cost of every product you sell, you can see clearly which items make you the most money and which are barely worth stocking.

It is essential for inventory management. Tracking COGS forces you to track what you buy, what you sell, and what remains in stock which is the foundation of good inventory management.

What Is Included in COGS?

For a product-based business which covers most Nigerian merchants selling fashion, hair, beauty, food, home goods, and similar products COGS includes the following:

The purchase price from your supplier This is the most obvious component. Whatever you paid your supplier for the product is the starting point of your COGS.

Import duties and customs charges If you import products, any duties, levies, or customs fees paid to bring those goods into Nigeria are part of the cost of those goods.

Freight and shipping costs to receive the goods If you paid to have products shipped from your supplier to you whether from China, the UK, or another state in Nigeria that cost is part of your COGS.

Packaging that is specific to the product If you include a branded box, dust bag, or product-specific packaging that goes with every unit sold, that packaging cost is part of COGS. Generic packaging used across many products is usually treated as an operating expense instead.

What is NOT included in COGS:

• Rent for your store or warehouse
• Staff salaries (unless those staff are directly involved in making the product)
• Delivery fees to send orders to customers
• Advertising and marketing costs
• Platform commissions
• Data subscriptions and phone bills
• Generator fuel and utilities

Those costs belong in your operating expenses section, not COGS.

How to Calculate COGS: Step-by-Step

There is a standard formula used to calculate COGS accurately:

COGS = Opening Stock + Purchases During the Period − Closing Stock

Here is what each term means:

Opening Stock: the value of all inventory you had at the start of the period.

Purchases During the Period: the total cost of all new stock you bought during the period.

Closing Stock: the value of all inventory you still have unsold at the end of the period.

Worked Example: Adaeze's January COGS:

Adaeze starts January with ₦85,000 worth of stock already on hand.

During January she buys:

• 10 dresses from her supplier at ₦7,000 each = ₦70,000
• 5 bags at ₦4,000 each = ₦20,000
• 3 shoes at ₦6,000 each = ₦18,000
• Total purchases = ₦108,000

At the end of January, she counts her remaining stock and values it at ₦65,000.

Adaeze's January COGS: ₦85,000 (opening stock) + ₦108,000 (purchases) − ₦65,000 (closing stock) = ₦128,000

This means the direct cost of the products Adaeze actually sold in January was ₦128,000 not just the ₦108,000 she spent buying stock that month.

COGS for Different Business Types

How you calculate COGS depends on what kind of business you run.

Resellers (fashion, hair, beauty, home goods) You buy finished products and sell them. Your COGS is simply what you paid your supplier for the products you sold, including any import or freight costs to receive them.

Food businesses and meal prep Your COGS includes every ingredient that went into the meals you sold. If you make 50 packs of jollof rice, your COGS includes the cost of rice, tomatoes, oil, seasoning, and every other ingredient used for those 50 packs divided per unit.

Tailors and custom clothing Your COGS includes fabric, thread, zips, buttons, and any other materials that go directly into each garment produced.

Jewellery makers Your COGS includes beads, wire, clasps, metals, and all materials used in each piece sold.

In every case, the principle is the same only the direct cost of what you actually sold counts as COGS.

Common Mistakes to Avoid

Counting all stock purchases as COGS Only the cost of stock you actually sold belongs in COGS. If you bought ₦500,000 worth of stock but only sold ₦200,000 worth, your COGS is ₦200,000 not ₦500,000. The rest is still sitting in your inventory.

Forgetting import and freight costs Many merchants record only the price they paid the supplier and forget the additional costs to bring the goods in. If you paid ₦50,000 for goods and ₦8,000 to ship them to you, your actual cost per unit must include the freight otherwise your margin calculations are overstated.

Not doing a stock count COGS cannot be calculated accurately without knowing your opening and closing stock values. Merchants who never count their inventory are essentially guessing their COGS and therefore guessing their profit.

Mixing COGS with operating expenses Delivery fees to send orders to customers are not COGS they are operating expenses. Your staff salaries are not COGS unless those staff directly make your products. Keeping these separate is important for accurate financial reporting.

Using selling price instead of cost price COGS is always calculated at cost what you paid not at the price you sold for. Using selling prices in your COGS calculation is a fundamental error that will completely distort your profit figures.

How COGS Affects Your Pricing

One of the most practical uses of knowing your COGS is making sure your prices are right.

A simple pricing formula used by Nigerian merchants:

Minimum Selling Price = COGS + Operating Expenses Allocation + Desired Profit

Example: Ngozi pricing a wig:

• She bought the wig for ₦12,000
• She paid ₦1,500 in shipping to receive it
• Her COGS per wig = ₦13,500
• She allocates roughly ₦1,500 of her monthly operating expenses to each wig sold
• She wants at least ₦5,000 profit per wig
• Minimum selling price = ₦13,500 + ₦1,500 + ₦5,000 = ₦20,000

If Ngozi was selling at ₦18,000 because she only counted the ₦12,000 supplier cost, she was making far less profit than she thought and might even have been losing money on some units once expenses were factored in.

Knowing your real COGS is the difference between pricing with confidence and pricing on hope.

How Zerrar Helps You Track COGS

Zerrar makes COGS tracking straightforward by letting you record the cost price of every product alongside its selling price.

What Zerrar does for you:

• You enter the cost price of each product when adding it to your inventory
• Every time a sale is made, Zerrar records both the revenue and the cost of the item sold
• Your gross profit per product is calculated automatically
• Your best and worst performing products by profitability are visible at a glance
• Sales exports in CSV, PDF, and Excel give your accountant the data needed to prepare accurate financial statements

On the Starter plan and above, Zerrar shows you a full profit vs revenue breakdown so you can see in real time how your COGS is affecting your margins. On the Pro and Growth plans, you get profitability reports per product and per branch so you know exactly which items and which locations are driving your real profit.

Frequently Asked Questions

Is COGS the same as cost price? Cost price is the amount you paid per unit. COGS is the total cost of all units you actually sold in a given period. COGS is calculated from cost prices but they are not the same number.

What if I do not know the cost price of old stock? Use your best estimate based on invoices, bank statements, or supplier records. Going forward, record cost prices for every product from the start this is where Zerrar's inventory system helps significantly.

Does COGS include delivery fees I charge customers? No. Delivery fees you charge customers are revenue. Delivery fees you pay to receive stock from your supplier are part of COGS. Delivery fees you pay to send orders to customers are operating expenses.

My business makes custom products how do I calculate COGS? Add up every material cost that goes into each unit produced. Divide your total material costs by the number of units made to get a cost per unit. That cost per unit is your COGS per item sold.

How often should I calculate COGS? Monthly is standard for most small businesses. If you have high stock turnover like a food business weekly calculation gives you a clearer picture.

Does COGS affect my tax? Yes. COGS reduces your gross profit, which reduces your taxable profit. Accurately recording COGS means you are not overpaying tax on money that was simply the cost of your products.

Conclusion

Cost of Goods Sold is not a complicated concept it is simply the direct cost of the products your business sold. But it is a number that affects everything: your gross profit, your pricing, your inventory decisions, and your tax liability.

Nigerian merchants who track their COGS properly price with confidence, spot unprofitable products early, and build businesses on accurate numbers. Those who ignore it are often working hard for margins that are far thinner than they realise.

You do not have to track it manually. Zerrar records your cost prices, calculates your COGS automatically with every sale, and gives you the profit data you need to make smarter decisions all in one place.

Call to Action

Know your real cost of selling not just what you charge, but what it actually costs you to sell it.

Sign up for Zerrar today at https://app.zerrar.com and start tracking your COGS, profit, and inventory automatically free, with no credit card required.

Already on Zerrar? Go to your product list right now and make sure every item has a cost price entered. Your profit reports depend on it.