If you ask most CPG founders what their cost of goods sold is, they will give you a number pulled straight from their co-manufacturer's invoice. That number is almost certainly wrong — and the gap between what they think their COGS is and what it actually is can be the difference between a profitable brand and one that is quietly bleeding cash on every unit sold.
The COGS Reality Check
We see this constantly. A brand reports 55% gross margins on their investor deck, but when we rebuild their P&L with fully loaded COGS, that number drops to 38%. Suddenly the business looks very different — and so do the strategic decisions that follow.
The Most Common COGS Mistakes We See
The root problem is simple: most emerging CPG brands treat COGS as “whatever the co-man charges me per unit.” But your true cost of goods sold includes every dollar it takes to get a finished product ready to sell. Here are the costs that most brands miss.
Freight-In and Inbound Logistics
Your co-manufacturer produces your product in Ohio, but your 3PL is in Nevada. The cost to ship finished goods from production to your warehouse is part of COGS — not an operating expense. This also includes the cost of receiving raw materials at the co-man, drayage from ports if you are importing ingredients, and any LTL or FTL charges for moving inventory between facilities.
Hidden Freight-In Cost per Unit ($5.99 Retail Item)
Watch Out
Co-Manufacturer Overhead and Hidden Fees
Your per-unit production cost from the co-man is not the whole story. Most co-manufacturing agreements include additional charges that brands either forget to capitalize or misclassify:
Minimum run charges — if your batch does not meet the minimum volume, you are paying a premium per unit that needs to be reflected
Changeover and setup fees — these should be allocated across the units produced in that run
Quality testing and lab fees — third-party testing, shelf-life studies, and certifications tied to production
Packaging overage — co-mans typically order 5-10% extra packaging materials to account for line waste
Storage at the co-man — if your product sits at the facility before shipment, you are often paying daily pallet fees
Raw Material Waste and Shrinkage
Production is not a perfectly efficient process. Depending on your product type, you can expect 2-8% raw material waste during manufacturing. If your formula calls for 100 lbs of ingredients per batch, you are actually using 105-108 lbs. That waste is part of your COGS.
Typical Waste and Shrinkage Rates
Shrinkage continues after production. Damaged goods during transit, expired inventory, and quality holds all represent product you paid to produce but will never sell. A well-run CPG brand tracks shrinkage as a separate line item within COGS rather than letting it silently inflate their per-unit cost.
Packaging and Component Costs
Many brands track the cost of their primary packaging — the bottle, the pouch, the box — but forget to include secondary and tertiary packaging in their COGS calculation. Shipper cases, inner packs, pallet wrap, labels, and printed masters all have real costs that add up quickly, especially at lower volumes where you cannot negotiate bulk pricing.
Warehousing and Storage Before Sale
This is a gray area in accounting, but for CPG brands using a 3PL, the storage costs for finished goods inventory arguably belong in COGS as an inventory carrying cost. At minimum, you should understand what your all-in warehousing cost per unit is, because it directly affects your true landed cost and your decisions about inventory levels.
How to Calculate Your True COGS
Here is the framework we use with every CPG client. Your true COGS per unit should include all of the following:
True COGS Formula (Per Unit)
Build a spreadsheet that calculates this on a per-SKU, per-unit basis. Update it every time you do a production run, because your costs shift with volume, ingredient pricing, and freight rates.
Key Insight
Why This Matters for Margin Decisions
When your COGS is wrong, every downstream financial decision is built on a flawed foundation. Consider the impact:
COGS Error: Cascading Impact on a $5.99 Item
Pricing strategy — if you think your COGS is $2.10 but it is actually $2.75, your retail price of $5.99 does not yield the 65% gross margin you told your board about. It yields 54%. That changes whether your price point is sustainable.
Trade spend decisions — you agree to a 20% off promotional price thinking you still have room. But with true COGS, that promotion is now margin-negative.
Channel strategy — DTC looks profitable until you add the real COGS. Amazon looks like a growth engine until the fees stack on top of accurate unit costs.
Investor reporting — presenting inflated gross margins to investors is not just misleading, it creates problems during due diligence when a sophisticated fund recalculates your numbers.
Practical Steps to Fix Your COGS Today
If you suspect your COGS is understated, here is how to fix it methodically:
Audit Your Last Three Production Runs
Pull every invoice associated with your most recent production runs — not just the co-man invoice, but freight bills, packaging purchase orders, testing invoices, and storage fees. Map each cost to the units produced in that run.
Build a Landed Cost Model Per SKU
Create a model that captures every cost component listed above. Make it dynamic so you can update inputs as costs change. Your COGS is not a static number — it moves with commodity prices, freight markets, and your production volume.
Establish a Shrinkage Reserve
Track your actual spoilage, damage, and expiry rates over 6-12 months. Use the historical average to set a shrinkage reserve percentage that gets added to your per-unit COGS. For most CPG brands, this is 2-5% of production cost.
Reconcile Monthly
Your COGS should be reconciled monthly against actual invoices and inventory counts. If your books show one COGS figure but your invoices tell a different story, you have a problem — and it compounds over time.
Restate Your P&L
Once you have your true COGS, restate your P&L with the corrected numbers. Yes, your gross margin will look worse. But now you are making decisions based on reality instead of a number that makes you feel good but is quietly destroying your business.
The Bottom Line
Get Your COGS Right