Cost of Goods Sold (COGS) is one of the most confusing parts of handmade business bookkeeping — not because you’re bad at business or at math — but because nobody explains it in “normal – human” language.
In this post, I’m going to show you how to calculate COGS step-by-step, using a real example (a custom amigurumi witch), so you can see exactly how materials move from “inventory” to “sold item.”
And yes — there are a few steps. They are harder to write than they are to actually do. But once you see the flow once, it gets way easier to repeat (and as a BONUS I’ll show you how it’s done in the 10-Minute Bookkeeper Handmade Business Spreadsheet Bookkeeping System which includes the Handmade Product Pricing & COGS Calculator).
This is Part 7 of the Inventory + COGS for Handmade Businesses series.
Quick heads-up before we dive in
There are two different ways people use the phrase “COGS”:
- COGS for one specific item (what it cost you to make + sell this product)
- COGS for tax time (the big-picture annual calculation across everything you sold)
Today we’re doing #1 – the per-item version – because that’s the clearest way to understand the moving parts.
If you’re short on time, use the Table of Contents below to jump to the section you’re most interested in.
Table of Contents
- What COGS means (for one handmade item)
- What you need to track
- Step-by-step: calculate COGS for a crochet amigurumi witch
- The bookkeeping flow (materials → finished item → sold)
- Pricing: how to use your numbers without guesswork
- Step-by-step video
- Common COGS mistakes makers make (and how to avoid them)
- FAQ
What COGS means (for one handmade item)
When we’re talking about a specific product you make to sell (like my witch), COGS is the total cost of producing and selling that item.
For most handmade sellers, that usually includes:
1) Direct materials used
The yarn, stuffing, safety eyes, buttons, tags, packaging that you treat as “product packaging,” etc.
2) Selling fees tied to that sale
Things like Etsy fees, payment processing fees, marketplace transaction fees …. the sneaky little costs that nibble away at profit.
IMPORTANT NOTE: Some bookkeeping systems (and Tax Pro’s) put selling fees in “Fees” or “Merchant Fees” as an Expense instead of COGS. Either way, it’s ok for tax time, but the key here is that you still account for them when you’re figuring out your true profit per item.
👉 What I want you to walk away with is this:
COGS is not just yarn.
It’s yarn plus the costs required to make and sell the item.
The “things” you need to track (aka the stuff that makes this easier later)
ld for a specific item and I’ll use a crochet amigurumi witch that I recently finished as an example.
The “things” you need to keep track of in order to figure out Cost of Goods Sold
To calculate COGS for any handmade item, you need 4 types of info:
- How much of each material you used (yards, ounces, grams, pieces, etc.)
- Your cost for those materials (what you actually paid)
- Any per-sale selling fees (Etsy, Shopify, PayPal, Stripe, etc.)
- Your time (not technically COGS, but crucial for pricing – we’ll use it in the pricing step)
Maker-friendly tracking tip
You need something living in your project bag to track what you used — a note card, a mini notebook, your phone notes, or a printed copy of the Handmade Product Pricing + COGS Calculator).
Because “I’ll remember” is a liar! 😅
Step-by-step: Calculate COGS for an amigurumi witch (real example)
Here’s the exact flow I use.
Step 1: Track the materials used while you make the item
For my witch, I tracked things like:
- Yarn color A: ___ yards
- Yarn color B: ___ yards
- Stuffing: ___ ounces (or grams)
- Safety eyes: ___ pair
- Fiberfill / felt / buttons / tag: ___ quantity
- Packaging (if you include it per item): ___
Your job here is simple: write down quantities as you go – it ONLY takes a minute or two.
Step 2: Convert “amount used” into “cost”
Now we take your tracking list and turn it into real money.
You’ll need your material costs from wherever you track inventory purchases (bookkeeping software, spreadsheet, receipts, etc.).
Then do the math:
- Cost per unit (yard, ounce, piece) x quantity used = cost used
Example (fake numbers used here just to show the math – real numbers used in the video)
- Yarn cost per yard: $0.12 x 45 yards used = $5.40
- Stuffing cost per ounce: $0.50 x 2 oz used = $1.00
- Safety eyes: $0.30 x 1 pair = $0.30
Repeat that for every material used.
Step 3: Add up your material total
This gives you:
👉 Direct materials cost for this item
This is the number most makers stop at … but don’t stop yet.
Step 4: Add per-sale fees (so your COGS reflects reality)
Many times you won’t know the exact fee until AFTER you actually sell the item. But if you sell on Etsy, Shopify, with PayPal or Square – you should be able to make an “educated guess”.
👉 Add the estimated fees tied to that sale (real fees get entered in your bookkeeping system when the item actually sells)
Now you have an estimated “cost to make + sell” picture.
COGS for the item = materials used + selling fees (for that item)
The simple bookkeeping flow (materials ➡️ finished item ➡️ sold)
Here’s the story your bookkeeping needs to tell:
1) You buy materials
They go into your materials stash records (aka: what you have on hand + what it cost you)
2) You use materials to make an item
You assign part of your stash cost to that finished item – this is where your per-project tracker earns it’s keep.
3) You sell the finished item
Now you can clearly see:
- Income from the sale
- The item’s materials cost
- The selling fees
- and your real profit (without guessing)
Same story every time. Different project bag.
Pricing: how to use these numbers without guessing
Once you know your materials cost, you can stop playing the “random price wheel” game.
Here’s a simple pricing flow that keeps you grounded:
- Materials cost (from worksheet)
- Labor (hours x your fair hourly wage)
- Overhead cushion (a small percentage or flat amount per item)
- Profit (because this is a business, not a charity craft-a-thon)
- Reality check against your market/customer
Your numbers don’t make the decision for you — but they should stop you from pricing based on vibes, caffeine, and a low-ball price on Etsy.
Want me to make this super simple for you?
If you want a system that helps you do your bookkeeping, track your materials + finished items, calculates per item COGS AND helps you with your pricing so you can:
- stop guess what things cost
- price with confidence
- and actually anticipate what you made in profit after fees
Watch the video below 👇
Common COGS mistakes handmade sellers make
Mistake #1: Only counting materials (and forgetting the selling fees)
You didn’t get to “keep” that money — the platform took a bite. Count it.
Mistake #2: Not tracking quantities used (so you’re forced to guess later)
If you’re guessing later, you’ll usually undercount. That means you underprice.
Mistake #3: Mixing/confusing “pricing math” with “tax time COGS math”
Per-item COGS helps pricing and profit decisions.
Tax-time COGS is a bigger annual calculation.
Same vocabulary, different use. Totally confusing!
Mistake #4: Treating your stash like it magically disappears
If inventory isn’t adjusted when you use materials, your books get weird fast! Here’s what can happen:
- inventory looks too high
- COGS looks too low
- profit looks way better than it really is
Frequently Asked Questions
Do I have to track COGS per item?
No. But if you want better pricing and profit-per-item, it’s the best way. If you make a high volume of low-cost items, you may choose a simpler approach — but you still need a consistent method.
Are selling fees “COGS” or an expense?
Bookkeeping systems and tax advice vary. Some put them in COGS, some keep them as fees/expenses – especially at tax time. Either way, for profit clarity, I prefer to treat them as COGS because I can link the Etsy, PayPal, etc. fee directly to the cost of a single product.
What about my time — is that COGS?
Typically, no. Most handmade sellers are sole proprietors and take an owner’s draw (which doesn’t count at tax time). But it absolutely belongs in pricing. If you don’t pay yourself on paper, you’ll pay for it with burnout.
Want my simple tracker for this?
If you want an easy way to track materials used, calculate COGS automatically, get pricing suggestions, and keep a clean record you can reuse….
🎁 Grab my free Project Cost of Goods Sold & Pricing Worksheet It walks you through the exact numbers (without you having to do calculator gymnastics). Request it here.
And if you’re ready for the full “keep it simple” system (income, expenses, and inventory tracking without spreadsheet chaos), check out the 10-Minute Bookkeeper — it’s built specifically for handmade businesses. Learn more here.
Coming up in Part 8 of this series, we’ll be talking about When Inventory & COGS Actually Hit Your Bookkeeping (And Your Taxes).
