Cost of Goods Sold in QuickBooks: A Detailed Guide (How it Works and How to Use it Right)

Running a construction business can feel like juggling too many things at once. Between managing crews, ordering materials, and meeting deadlines, it’s easy to overlook where your money is going. That’s why understanding the Cost of Goods Sold (COGS) is so important. It’s the number that shows exactly how much your projects are costing you—and helps you figure out if you’re making a profit.

Think about it: materials, labor, tools—these are just a few of the costs you deal with every day. If you’re not careful, it’s easy to lose track. COGS in QuickBooks Desktop or Online helps to make it simple to track and calculate your costs. No more guessing. No more worrying about missing details.

Let’s talk more about COGS in this article. We’ll cover

• How COGS impacts your profitability and pricing decisions.
• Step-by-step instructions to make sure everything is set up correctly.
• Practical advice to save time and avoid common mistakes.
• Solutions to common issues and ways to get more out of QuickBooks.

Whether you’re a contractor or managing a crew, you’ll learn how to take control of your business finances and stay profitable. Let’s get started!

What is Cost of Goods Sold (COGS)?

COGS is the total of all the direct costs it takes to produce what you’re selling or building. For construction businesses, this means the cost of materials, labor, and other expenses directly tied to the job.

Whether you’re putting up a new building or remodeling a kitchen, COGS gives you a clear picture of what it really costs to get the work done. That’s job costing for contruction made easy!

Key Components

Understanding what’s included (and what’s not) in COGS is important. Here’s the breakdown:

Direct Costs (What’s Included):

• Raw Materials: Lumber, concrete, nails—whatever you need to get the job done.
• Labor Costs: Wages for the crew working directly on the project.
• Overhead Costs: Equipment rentals, utility costs for the site, and similar expenses tied directly to production.

Exclusions (What’s Not Included):

• Marketing and Sales: Advertising campaigns and customer acquisition costs.
• Administrative Expenses: Office rent, salaries for managers, or general overhead.
• Indirect Costs: Things like legal fees or accounting services that aren’t tied to specific projects.

Workyard integrates with QuickBooks to streamline accounting for your constuction business.

Find out more

Why COGS Matters for Your Business

For construction businesses, every decision impacts your bottom line. If you’re diving into construction project management, a good grasp of COGS helps you make smarter choices about pricing, costs, and where to invest your time and money.

It’s like having a map that shows you where your money is going—and how to make the most of it.

Impact on Profitability

Getting your COGS right can make a huge difference in your profits. Why? Because it directly affects your pricing and how much money you keep after covering your project costs.

How Does COGS Influence Profitability?
COGS is subtracted from your revenue to calculate gross profit, which shows how much money you’re making before overhead expenses like office rent or marketing. The lower your COGS, the higher your gross profit.

Here’s a quick example:

• You sell a construction service for $10,000.
• Your direct costs (COGS) include $3,000 for materials and $2,000 for labor, totaling $5,000.
• Your gross profit is $10,000 – $5,000 = $5,000.
• Your gross profit margin is ($5,000 ÷ $10,000) x 100 = 50%.

This number helps you see if your prices are high enough to cover costs while leaving room for profit. If your margin is low, it might mean you need to cut costs or adjust pricing.

Strategic Decision-Making

Beyond tracking profits, COGS is a tool for making smarter business decisions. It’s not just about what you’re spending—it’s about how you’re spending.

Allocate Resources Wisely
When you know exactly how much each project or job costs, you can see which ones are worth your time. For example, if one type of project has a higher COGS but brings in less profit, it might be time to focus on more profitable work.

Plan for Growth
COGS data can guide your decisions about scaling your business. Thinking about buying new equipment or hiring more staff? Look at your COGS trends first. If your direct costs are consistently eating into your profits, it’s a sign to optimize before expanding.

Example: If you notice labor costs are consistently high, you might consider training your crew to work more efficiently or investing in tools to speed up the process. This can lower your COGS and free up money for other investments.

Accurate Reports

Accurate COGS calculations are critical for producing reliable financial reports. These reports help you understand your business performance and make important decisions.

Why Do Accurate Reports Matter?

• Tax Time: COGS directly impacts your taxable income. Incorrect COGS figures could lead to overpaying taxes or triggering audits.
• Lender Confidence: Financial institutions often review your reports before approving loans. Accurate COGS gives them confidence in your numbers.
• Tracking Trends: Reports showing your COGS over time let you identify patterns. For example, rising material costs may signal it’s time to renegotiate with suppliers.

QuickBooks to the Rescue
QuickBooks simplifies this process by automatically generating detailed reports, such as Profit & Loss Statements or COGS Summaries, ensuring your numbers are always accurate and easy to access.

Setting Up COGS in QuickBooks

Getting your COGS set up in QuickBooks is easier than you might think. Once it’s done, you’ll have a clear view of your direct costs and how they impact your bottom line. This section walks you through the setup process step by step, so you can start tracking your COGS accurately.

Creating COGS Accounts

To track your COGS in QuickBooks, the first step is to create a dedicated account in the Chart of Accounts. Think of this as the foundation for organizing all your cost-related transactions.

Step-by-Step Guide to Creating a COGS Account:

1. Open QuickBooks and go to the Gear icon in the upper right corner.
2. Click on Chart of Accounts under the “Your Company” section.
3. Select the New button to create a new account.
4. Choose Cost of Goods Sold as the Account Type.
5. From the Detail Type dropdown, pick an option that best fits your business, like Other Costs of Service – COS or something similar.
6. Give your account a name, like “COGS – Construction Projects,” to make it easy to identify.
7. Click Save and Close to finalize.

By setting this up, you create a home for all your direct costs like materials and labor. It’s simple, but it’s the key to staying organized.

Why Choosing the Right Account Type Matters:
Picking the correct account type ensures QuickBooks knows how to handle these costs. It links them to your income statement and helps you calculate gross profit automatically.

Linking COGS to Inventory

If your business involves keeping inventory—like materials or supplies—you’ll need to link those items to your COGS account. This way, every time you sell an item, QuickBooks automatically adjusts your COGS and inventory balance.

How to Link Inventory Items to COGS:

1. Go to the Sales menu and select Products and Services.
2. Click New to create an item or select an existing item to edit.
3. Choose the type of item (e.g., Inventory, Non-Inventory, or Service).
4. Fill in the item details, including the purchase price, sales price, and description.
5. In the Expense Account field, select your COGS account from the dropdown.
6. Save the item.

What Happens Next?
Whenever you sell an item, QuickBooks automatically:

• Debits your COGS account (adds the cost to your expenses).
• Credits your Inventory Asset account (reduces the value of your inventory).

This automation saves time and ensures your financial statements are always accurate.

Calculating and Tracking COGS in QuickBooks

Once you’ve set up COGS in QuickBooks, the next step is understanding how to calculate it and use QuickBooks tools to keep track of it. Don’t worry—it’s simpler than it sounds. QuickBooks does most of the heavy lifting, and with the right reports, you’ll always have a clear picture of your costs.

The COGS Formula

At its core, calculating COGS comes down to a simple formula:

COGS = Beginning Inventory + Purchases – Ending Inventory

This formula tracks how much inventory you started with, what you added during the period, and how much you had left at the end. Let’s break it down with an example:

Example:

• Beginning Inventory: At the start of the month, you have materials worth $5,000.
• Purchases: During the month, you buy another $10,000 worth of materials.
• Ending Inventory: At the end of the month, you still have materials worth $3,000.

Using the formula:
COGS = $5,000 (Beginning Inventory) + $10,000 (Purchases) – $3,000 (Ending Inventory)
COGS = $12,000

This means you used $12,000 worth of materials to complete your projects during the month.

QuickBooks can automate much of this process if you’ve linked your inventory to your COGS account. Every purchase and sale updates the necessary fields, saving you time and reducing errors.

Tools and Reports

QuickBooks provides powerful tools to help you track and analyze your COGS. Here are the key features you’ll want to use:

1. Inventory Valuation Summary
This report gives you a snapshot of your inventory value and helps you calculate COGS. It shows:

• The value of your beginning inventory.
• Purchases made during the period.
• Ending inventory value.

2. Transaction Journal
Want to see the details behind a sale or purchase? The Transaction Journal report lets you drill down into individual transactions. You can confirm that inventory adjustments and COGS entries are correct.

3. Profit & Loss Statement
This report summarizes your revenue and expenses, including COGS, giving you a clear view of your gross profit.

How to Customize Reports for Better Insights

QuickBooks makes it easy to tailor reports to your needs:

• Filter by Date: Focus on a specific time frame, such as a week or month.
• Sort by Product or Job: See which projects or items contribute the most to your COGS.
• Add Custom Fields: Track additional details, like supplier information or labor costs.

Example: Let’s say you’re trying to figure out which supplier offers the best prices for materials. By filtering the Inventory Valuation Summary by supplier, you can see which one gives you the best value for your money.

Managing COGS

Managing COGS effectively means keeping your business on track and ensuring your projects stay profitable. Let’s talk about some best practices to follow and common mistakes to avoid. These small details can do big for streamlining your finances and saving yourself a lot of headaches.

Best Practices

To get the most out of your COGS tracking, follow these simple yet effective strategies:

1. Reconcile Regularly
It’s easy for inventory numbers or cost entries to go out of sync, especially if you’re managing multiple projects. Regularly reconciling your inventory and costs ensures your records are accurate.

• Use QuickBooks’ Inventory Valuation Summary to compare physical inventory counts with your records.
• Review COGS entries in your Profit & Loss Statement to spot discrepancies.

2. Use Class Tracking
QuickBooks’ Class Tracking feature lets you categorize expenses by department, project, or location. This makes it easier to see where your money is going and identify areas where you might be overspending.

Example: Assign materials and labor to specific projects, so you can quickly see which ones are the most profitable.

3. Set Up Alerts
QuickBooks allows you to create cost thresholds and receive alerts if your expenses exceed them. This helps you stay proactive and address issues before they become major problems.

Example: If material costs for a project start creeping above budget, you’ll get notified right away, allowing you to adjust plans as needed.

Common Pitfalls and How to Avoid Them

Even with the best tools, mistakes can happen. It helps to be cautious. Here are some common pitfalls to watch out for—and how to avoid them:

1. Misclassifying Expenses
Not all expenses belong in COGS. Misclassifying items, like general overhead or marketing costs, can distort your financial reports.

How to Avoid It:

• Double-check that expenses linked to your COGS account are directly tied to project production (e.g., materials, labor).
• Use detailed descriptions when entering transactions to make future reviews easier.

2. Failing to Update Inventory
If you don’t update your inventory regularly, your COGS calculations will be off, and your financial reports won’t be accurate.

How to Avoid It:

• Use QuickBooks’ automated inventory tracking to record sales and purchases in real time.
• Conduct regular physical inventory checks to ensure your digital records match what you actually have.

3. Overlooking Reconciliation Discrepancies
Unaddressed discrepancies between your records and reality can snowball into bigger problems, like overpaying taxes or making poor budgeting decisions.

How to Avoid It:

• Schedule monthly reconciliations to review your inventory, purchases, and COGS entries.
• Use QuickBooks reports, like the Transaction Journal, to investigate and resolve issues.

• Misclassification of expenses.
• Failing to update inventory or reconcile discrepancies.

Find out more about QuickBooks:

• QuickBooks Projects: Tips, Tricks, and Tutorials for Effective Use
• QuickBooks Bill Pay Guide: Setup, Optimization, Integrations, and More
• QuickBooks Simple Start Reviewed and Compared: What’s Your Best Option?
• QuickBooks Construction Cost Codes: How They Work and How to Use Them Effectively
• QuickBooks Expense Tracking: How-To Guide and Top Integrations

Troubleshooting COGS in QuickBooks

We’ve said it before, and we’ll say it again: even with the best tools, things can occasionally go wrong when managing COGS in QuickBooks. You could miss data in reports to inventory mismatches and disrupt your financial tracking completely.

But don’t worry. Most problems have straightforward solutions. Let’s dive into the most common issues and how to fix them.

Common Issues

1. COGS Not Showing on Reports
Sometimes, your COGS numbers might not appear in your Profit & Loss or other financial reports. This can happen due to incorrect account setup or missing links between inventory and COGS.

2. Incorrect Inventory Adjustments Impacting COGS
Errors in inventory adjustments—such as incorrect quantities or costs—can lead to inaccurate COGS calculations. This can distort your financial reports and misrepresent your project costs.

Solutions

Here’s how to address these common COGS-related issues in QuickBooks:

1. Fixing COGS Not Showing on Reports

• Step 1: Check the setup of your COGS account.
  • Go to the Chart of Accounts and ensure your COGS account is correctly categorized under “Cost of Goods Sold.”
• Step 2: Verify that inventory items are linked to the COGS account.
  • Navigate to Products and Services, select an item, and check that the Expense Account field is set to your COGS account.
• Step 3: Run the appropriate report.
  • Go to the Reports menu and select Profit & Loss or COGS Summary. Filter the report by date range and ensure the relevant transactions are included.

2. Correcting Inventory Adjustments That Affect COGS

• Step 1: Open the Inventory Valuation Summary report.
  • Look for any discrepancies between recorded inventory and actual stock.
• Step 2: Adjust inventory as needed.
  • Go to Products and Services, select the item, and click Adjust Quantity/Value on Hand. Update the numbers to reflect accurate quantities and costs.
• Step 3: Recalculate COGS.
  • After adjustments, run the Transaction Journal to ensure that inventory and COGS entries match.

Tips for Working with Multiple Currencies in COGS

If you’re managing costs in different currencies, QuickBooks can handle this, but setup is key:

• Enable Multicurrency: Go to the Gear Icon > Account and Settings > Advanced, and turn on the multicurrency option.
• Assign Currencies to Vendors and Items: For vendors dealing in foreign currencies, assign their currency in their profile. Similarly, set the currency for inventory purchases.
• Monitor Exchange Rate Updates: QuickBooks automatically applies current exchange rates, but you can manually adjust them if needed. Always check the rates to ensure accurate COGS calculations.

Advanced COGS Management

Once you’ve mastered the basics of COGS, it’s time to explore more advanced strategies. Understanding inventory valuation methods and integrating specialized tools can take your COGS management to the next level, helping you gain deeper insights and optimize costs.

Inventory Valuation Methods

The method you use to value your inventory directly impacts your financial reports, including your COGS and gross profit. QuickBooks supports multiple valuation methods to suit different business needs. Here’s a quick overview:

1. FIFO (First-In, First-Out)

• How It Works: Assumes the oldest inventory (first purchased) is sold first. Remaining inventory is valued at the most recent purchase costs.
• Impact on Financials: During periods of rising costs, FIFO results in lower COGS and higher gross profit, as older, cheaper inventory is used first.
• Best For: Businesses that need accurate replacement cost representation in their balance sheets.

2. LIFO (Last-In, First-Out)

• How It Works: Assumes the newest inventory (last purchased) is sold first. Remaining inventory is valued at older costs.
• Impact on Financials: During rising costs, LIFO results in higher COGS and lower gross profit, which can reduce taxable income.
• Best For: Businesses looking to minimize taxes (not supported in QuickBooks Online but can be managed manually).

3. Average Cost Method

• How It Works: Calculates the average cost of all inventory items. Each unit sold is assigned the same cost, regardless of purchase date.
• Impact on Financials: Smooths out cost fluctuations, providing stable COGS figures over time.
• Best For: Businesses with large inventories where item costs vary frequently.

How These Methods Affect QuickBooks Reports

QuickBooks automates inventory tracking based on your selected method, ensuring accurate and consistent reporting. For example:

• The Inventory Valuation Summary reflects the chosen method’s impact on inventory value and COGS.
• The Profit & Loss Statement adjusts gross profit based on the valuation method, giving you a clear view of your financial performance.

Integrating Third-Party Tools

Enhancing COGS accuracy and operational efficiency can be achieved by integrating specialized tools like Workyard with QuickBooks. In fact you can integrate Workyard with QuickBooks Online and with QuickBooks Desktop.

Benefits of Integrating Workyard

Workyard offers features tailored for construction businesses:

• Precise Labor Tracking: Utilizes a GPS time clock to accurately record employee hours and locations, ensuring labor costs are correctly attributed to each project.
• Job Costing: Automatically captures labor costs per job with each time card submission, providing real-time insights into project expenses.
• Scheduling and Dispatch: Facilitates efficient job scheduling and instant communication with crews, ensuring everyone knows where to be and what to do.

Enhancing COGS Accuracy Through Integration

By connecting Workyard with QuickBooks, you can:

• Automate Data Entry: Labor hours and costs tracked in Workyard sync directly with QuickBooks, reducing manual entry errors.
• Obtain Unified Reporting: Combine financial data from QuickBooks with operational insights from Workyard for comprehensive project cost analysis.
• Set Up Cost Alerts: Configure notifications in Workyard to alert you when labor costs approach or exceed budgeted amounts, allowing for timely interventions.

Use Case Example

A construction company integrates Workyard with QuickBooks to monitor labor costs in real-time. Supervisors receive alerts when labor expenses near budget limits, enabling them to adjust staffing promptly to prevent cost overruns.

Integrating tools like Workyard with QuickBooks streamlines operations, enhances COGS accuracy, and provides deeper insights into your construction projects, ultimately leading to better financial management and profitability.

Take Control of Your COGS Today

Keeping track of COGS doesn’t have to be complicated. When you manage your costs effectively, you’ll see exactly where your money is going and how to make the most of it.

QuickBooks gives you the tools to stay organized, and adding Workyard takes it to the next level—making it easier to track labor, manage expenses, and keep your projects profitable.

Imagine knowing exactly how much each job costs and where you can save money. That’s the power of combining QuickBooks with Workyard. Ready to simplify your finances and focus on growing your business? Try Workyard for free today and see how easy it is to stay on top of your costs.