Understanding Cost of Goods Sold (COGS) in Australia: 2025 Guide

For Australian businesses—whether you’re running a bustling e-commerce store, a suburban café, or a manufacturing operation—knowing your numbers is critical. And few numbers are as fundamental as Cost of Goods Sold (COGS). In 2025, with supply chains evolving and tax rules shifting, understanding COGS isn’t just about compliance: it’s about profitability, pricing strategy, and business survival.

What Is COGS and Why Does It Matter?

Cost of Goods Sold (COGS) refers to the direct costs of producing or purchasing the goods a business sells during a specific period. It’s the heartbeat of your gross profit calculation—subtract COGS from your revenue, and you’ll know how much you’re actually making before overheads and tax come into play.

• For retailers: COGS covers what you paid suppliers for stock you’ve sold.

• For manufacturers: COGS includes raw materials, direct labour, and factory expenses tied to products sold.

• For hospitality: Think ingredients and drinks served to customers.

COGS is crucial for pricing products, understanding margins, and calculating tax obligations. In 2025, with inflation and supply chain volatility still in play, tracking COGS accurately can make or break your business.

2025 Policy Updates: What’s Changed for Australian Businesses?

This year, several policy tweaks and economic realities are reshaping how businesses approach COGS:

• Instant Asset Write-Off Extension: The federal government extended the temporary full expensing measures, allowing eligible businesses to immediately deduct the business portion of most depreciating assets. This impacts COGS for manufacturers and tradies investing in equipment.

• ATO Focus on Stock Valuation: The Australian Taxation Office (ATO) is sharpening its scrutiny on inventory methods. Whether you use FIFO (first-in-first-out), weighted average, or specific identification, consistency and documentation are under the spotlight.

• Supply Chain Shifts: Ongoing global disruptions and local sourcing trends are changing input costs. Many Aussie retailers and manufacturers have had to revisit supplier agreements and stock management to keep COGS predictable.

Real-world example: A Melbourne-based clothing retailer, faced with rising import costs, switched to local suppliers. While purchase prices rose slightly, shipping and customs fees dropped, and improved stock turnover helped keep COGS steady.

How to Calculate and Optimise Your COGS

COGS calculation isn’t one-size-fits-all, but the basic formula is:

COGS = Opening Inventory + Purchases During the Period – Closing Inventory

For manufacturers, add direct labour and factory overheads into the mix. Here’s how to sharpen your COGS management in 2025:

• Automate Inventory Tracking: Cloud-based accounting and inventory software can now integrate with POS and supplier systems, reducing errors and manual reconciliation.

• Negotiate with Suppliers: Inflation and exchange rate swings mean it’s worth revisiting terms, exploring local alternatives, or even bulk buying for discounts.

• Review Stock Regularly: Dead stock ties up cash and distorts your COGS. Regular stocktakes and just-in-time ordering can free up working capital.

• Consider Tax Timing: Smart inventory valuation (e.g., using lower-of-cost-or-market) can affect your taxable income. Consult your accountant on the best fit for your business model.

In practice, a Brisbane café that digitised its inventory found it could cut weekly ingredient wastage by 20%. The result? A tighter grip on COGS and a healthier bottom line, even as milk and coffee bean prices fluctuated in early 2025.

COGS and Your Business Strategy

COGS isn’t just a compliance metric—it’s a powerful lever for strategy. Here’s why:

• Pricing Power: Know your COGS and you can price for profit, not just market share.

• Tax Efficiency: Accurate COGS reporting means you claim the right deductions and avoid red flags with the ATO.

• Investor Confidence: Lenders and investors scrutinise gross margin trends. A stable or improving COGS signals operational strength.

• Resilience: In a year where economic shocks can hit supply chains overnight, knowing your COGS baseline helps you pivot fast.

For small businesses eyeing growth or succession in 2025, robust COGS tracking can be a selling point—demonstrating control, transparency, and the ability to scale profitably.