Craft Business Cost of Goods Sold: Formula and Calculator

Cost of goods sold for a craft business is the cost of the materials and paid labor that went into what you sold this year: what you had in stock on January 1, plus what you bought during the year, plus labor you paid others to make the products, minus what's still in stock on December 31, all at cost. For a sole proprietor, Schedule C lays it out in Part III, lines 35 to 42, and the result goes on line 4. Two things trip makers up: the closing count, which has to be a real count at what things cost, and your own time, which is never a cost of goods sold for tax. In the example below, a candle maker starts the year with $4,000 of stock, buys $26,380 of materials, pays a part-time pourer $8,400, ends the year with $4,512 on the shelves, and has a cost of goods sold of $34,268 against $78,000 of sales. Below is the formula, what counts, the example, the closing count, and a free calculator.

The short version

• Cost of goods sold = opening inventory + purchases + paid labor and other costs − closing inventory.
• Opening inventory is last year's closing inventory.
• Purchases: materials and packaging bought this year, less anything you took for personal use.
• Labor: people you paid to make the product, never what you paid yourself.
• Closing inventory: a real count of materials and finished goods, at cost.
• Schedule C Part III, lines 35 to 42, follows the same order.
• TaroStack keeps stock at cost all year, so the closing figure is a report, not a weekend. More below.

The formula, as Schedule C lays it out

That's the order on the form (Schedule C). The instructions also have a simpler route for a small business taxpayer, one averaging $31 million or less a year in gross receipts over the three prior years, which may treat inventory as non-incidental materials and supplies instead (instructions). Which method you use, and which costs go on which line, is for whoever prepares your return. This is general information, not tax advice.

What counts, and what doesn't

Your own time matters for pricing, and every pricing article here counts it. It isn't a cost of goods sold on the tax form: what's left after cost of goods sold and expenses is what pays you.

A candle maker's year

Lehua Glow, a made-up candle maker I use in these examples, adds up its year:

With $78,000 of sales, the gross profit is $43,732, a gross margin of 56.1%. Booth fees, the website and insurance come out of that as expenses, and what's left pays the owner.

The closing count

The December 31 figure is a count, not a guess, and every item is valued at what it cost you:

The finished candles are valued at their materials plus the paid pourer's share, $4.60 for a 9 oz jar, not at the $6.41 full cost in how to price homemade candles, because that one includes the owner's time and overhead. How to run the count itself is in year-end inventory count, and how the same formula works for a bakery is in how to calculate COGS for a bakery.

Get the calculator

Download the craft business cost of goods sold calculator. The Closing count sheet takes each material and finished product, counted, at cost, and adds up your closing inventory. The Cost of goods sold sheet lays out lines 35 to 42, takes the closing figure from the count, and works out the gross profit and margin on your sales. It's an ordinary Excel file with no macros, and it works in Google Sheets, LibreOffice and Numbers.

Where this stops working

The formula is simple; the inputs aren't. The year's purchases are scattered across card statements and supplier emails, the closing count happens in a cold garage on December 31, and the cost per unit of a finished candle is whatever the spreadsheet said in March. Get the count wrong by 200 candles and the cost of goods sold, and the tax on it, move with it.

How TaroStack does it

TaroStack keeps the numbers the formula needs, all year.

Stock at cost, every day. Receiving a delivery adds stock at what you paid, freight and other landed costs included, with FIFO cost layers, and recording a batch takes materials off stock at their cost and puts the candles on at theirs. Stock value is shown by site and month, so the December 31 figure is a report.

A count that's easy to trust. Counting works on a phone, and before a count is posted it shows what each difference is worth in dollars, so a typo doesn't move the books. Corrections are recorded as corrections, with reasons, and can be undone.

And lists for your accountant. Every list exports to CSV, and you can import your QuickBooks or Xero lists to start. Margins are reported by product, on what things actually cost.

Stock value, counting, recipes and batches are on every plan, from $49 a month. The first 30 days are free, with no credit card. If you'd like a hand setting up, ask, and we'll do it with you.

Questions people also ask

What is the cost of goods sold formula for a craft business?

Opening inventory, plus purchases, plus paid labor and other costs of making the product, minus closing inventory, all at cost. Schedule C Part III lays it out as lines 35 to 42.

Does cost of goods sold include my own labor?

Not on Schedule C: line 37 is the cost of labor, and the form says not to include amounts paid to yourself. Count your time when you price, but not in cost of goods sold.

What counts as inventory for a craft business?

Materials and packaging on hand, and finished products not yet sold, valued at what they cost you. Tools and equipment aren't inventory.

Do I have to count my inventory at the end of the year?

To work out cost of goods sold the usual way, yes: the closing inventory is a count at cost. Software that keeps stock at cost all year makes that figure a report rather than a count, though a count still checks it.