You've poured your heart into creating stunning handmade jewellery, candles that smell like heaven, or prints that people actually want to hang on their walls. You're selling products, making sales, feeling like a boss. But then tax time rolls around, and you're staring at your accounts thinking: "Am I actually making money, or just breaking even?"
Here's the thing that trips up most creatives: you can have a killer product and decent sales, but if you don't understand your Cost of Goods Sold (COGS), you're essentially performing without knowing if anyone's actually paying attention. COGS is the financial metric that tells you whether your creative business is hitting the high notes or just making noise. And for Australian creatives in 2026, understanding this concept isn't just accounting jargon—it’s the difference between building a sustainable business and burning out whilst barely covering costs.
Let's strip away the corporate-speak and break down COGS in a way that actually makes sense for makers, artists, and creative entrepreneurs.
Cost of Goods Sold represents every direct expense you incur to create or purchase the products you sell. Think of it as your production baseline—the financial floor beneath everything you make. If you're a ceramicist, it's your clay, glaze, kiln electricity, and the time you spend actually throwing pots. If you're a jewellery maker, it's beads, findings, wire, and the hours you spend assembling pieces.
Here's what makes COGS crucial for your creative business: it directly determines three things that keep you in business or push you out. First, it reveals your gross profit (Revenue minus COGS), which shows how efficiently you're producing. Second, it establishes your pricing floor—charge less than COGS and you're literally paying people to take your products. Third, COGS is a tax-deductible expense that significantly reduces your taxable income when you lodge your return with the Australian Taxation Office.
The creatives who thrive in 2026 aren't necessarily those with the most Instagram followers or the trendiest products. They're the ones who know their numbers cold. When you understand COGS, you can answer critical questions: Should I wholesale to that boutique? Can I afford to run that promotion? Is this product line actually profitable or just popular?
According to Australian accounting standards (AASB 102), COGS should include all costs necessary to bring your inventory to its present location and condition. For you, that means materials, production labour, and direct overhead—but critically, not marketing, administration, or general business expenses.
This is where creative businesses often go off-key. COGS isn't a catch-all for every expense—it’s specifically about direct production costs.
Your COGS Should Include:
Your raw materials and supplies are the obvious starting point. That's every physical component that goes into your finished product: fabric, paint, clay, beads, wood, wax, fragrance oils. It also includes consumables like thread, glue, or solvents used during production. Don't forget packaging materials that directly protect your product—boxes, tissue paper, bubble wrap, labels. If you're importing materials, include freight-in costs, customs duties, and import fees.
Direct labour absolutely belongs in COGS, even if you're a solo creative. Industry recommendations suggest valuing your production time at minimum $15-20 per hour, though skilled artisans should charge considerably more. Here's the critical distinction: only count time spent actually making products. Photographing items, posting on social media, answering customer emails—that's not production labour.
For Australian creatives operating from home studios or dedicated workshops, you can include production-specific utilities and equipment depreciation. If your kiln runs eight hours creating a batch of ceramics, that electricity cost belongs in COGS. Storage costs for inventory awaiting sale also qualify.
What You Must Exclude from COGS:
This is where the ATO gets particular. Marketing and advertising expenses—even directly promoting specific products—cannot be included in COGS. That means your Etsy fees, Instagram ads, photography costs, and email marketing platforms are operating expenses, not COGS.
Administrative overhead like general office rent, utilities for non-production spaces, insurance, professional services (hey, that's us!), and office supplies stay separate. Your personal owner's wage comes from profit, not COGS. Shipping costs to deliver finished products to customers are distribution expenses, not production costs. Interest on business loans and equipment purchases go on your balance sheet, not into COGS calculations.
The distinction matters for two reasons: accurate COGS enables correct pricing decisions, and the ATO requires proper expense categorisation for tax compliance. Mix these up, and you're either underpricing your products or inviting scrutiny during an audit.
Let's get practical. The standard retail formula goes like this:
COGS = Beginning Inventory + Purchases During Period - Ending Inventory
But as a creative making products, you need a more nuanced approach:
COGS = Raw Materials + Manufacturing/Production Costs + Direct Labour + Storage Costs + Applicable Freight
Here's how this works in practice. Say you're making luxury candles. You purchase 5 kg of soy wax for $25 (that's $5 per kg). You buy fragrance oils at $40 per 100 ml bottle. Each candle uses 200 grams of wax and 20 ml of fragrance oil. You purchase glass vessels at $3.50 each, wicks at $0.30 per unit, and custom labels at $0.50 each.
Your material cost breaks down to:
Now add labour. Time studies show each candle takes 15 minutes to pour, cure, and package. At $20/hour, that's $5.00 labour per candle.
Total COGS per candle: $19.50
This is your absolute minimum—charge less and you're subsidising customers with your own money. For bulk materials, always divide total purchase cost by quantity to get accurate per-unit costs. Those 100 beads for $10? That's $0.10 per bead, and proper tracking means you know exactly what each finished piece costs to produce.
| Candle Component | Cost Calculation | Per Unit Cost |
|---|---|---|
| Soy Wax (200g) | 0.2 kg × $5/kg | $1.00 |
| Fragrance Oil (20ml) | 20 ml × $0.40/ml | $8.00 |
| Glass Vessel | Per unit purchase | $3.50 |
| Wick | Per unit purchase | $0.30 |
| Custom Label | Per unit purchase | $0.50 |
| Gift Box | Per unit purchase | $1.20 |
| Direct Labour (15 min @ $20/hr) | 0.25 × $20 | $5.00 |
| TOTAL COGS | $19.50 |
Here's where Australian accounting standards intersect with creative business reality. The inventory valuation method you choose directly impacts both your COGS and your taxable income. According to AASB 102, you must apply your chosen method consistently—you can't switch yearly without justification.
FIFO (First-In, First-Out) assumes you sell your oldest inventory first. During periods of rising material costs (which, let’s be honest, describes 2024-2026 for most supplies), FIFO results in lower COGS, higher reported profits, and higher tax liability. It works well for creatives making perishable or trend-dependent products—bath products, fashion items, or seasonal goods.
Weighted Average Cost calculates the average cost across all your inventory. The formula divides your total inventory cost by total units to establish an average per-unit cost. This method smooths out price fluctuations and works brilliantly for creatives purchasing materials in bulk or making identical products. If you buy wax at different prices throughout the year, WAC prevents profit distortion when prices spike or drop.
Specific Identification tracks the actual cost of each individual item sold. This is ideal for high-value, unique pieces—bespoke jewellery, original paintings, custom furniture. It's the most accurate method but requires meticulous record-keeping. For pieces where materials vary significantly, this method ensures precise COGS calculation.
Important note for Australian creatives: LIFO (Last-In, First-Out) is not permitted under International Financial Reporting Standards, which Australia follows. Don't use it, don't read about it, don't let your mate who watches too much American business content convince you it's allowed here.
Once you choose a method, stick with it. Consistency matters more than perfection, and the ATO expects year-over-year comparability in your tax reporting.
This is where understanding COGS transforms from accounting exercise into business strategy. Your COGS establishes the foundation for profitable pricing—ignore it, and you're busking without a guitar case.
The industry-standard pricing formula for handmade products is:
Retail Price = COGS × 3 to 4
Using our candle example with $19.50 COGS:
This multiplier isn't arbitrary. It needs to cover your COGS, allocate overhead expenses (studio rent, utilities, software subscriptions), compensate you for non-production labour (marketing, admin, customer service), provide profit, and allow margin for wholesale discounts if you sell to retailers.
Healthy gross profit margins for creative businesses typically range:
Calculate your gross profit margin with this formula:
Gross Profit Margin = ((Revenue - COGS) ÷ Revenue) × 100
If you're selling those candles at $68.25: Gross Profit Margin = (($68.25 - $19.50) ÷ $68.25) × 100 = 71.4%
That's healthy for luxury handmade goods. Anything below 25% suggests serious profitability concerns—you're working too hard for too little return.
Track your COGS-to-revenue ratio monthly. The formula is simple:
(COGS ÷ Total Revenue) × 100 = COGS Percentage
If your COGS percentage trends upward whilst revenue stays flat, investigate immediately. Rising material costs, production inefficiencies, or excessive waste might be eating your margins. Professional services and luxury handmade businesses should target 15-30% COGS-to-revenue ratios. Standard handmade products typically run 25-40%. Anything exceeding 65% signals you're likely operating unprofitably once overhead and labour are factored in.
The Australian Taxation Office treats COGS as a direct deduction from business income, significantly impacting your tax liability. This isn't optional optimisation—it's mandatory reporting that affects every creative sole trader, partnership, and company structure.
Key ATO requirements for 2026:
You must maintain detailed records of inventory, purchases, and COGS calculations. Beginning and ending inventory values must be recorded for each financial year. The ATO specifies that inventory should be valued at cost (not selling price), using one of the approved valuation methods discussed earlier. Records must be kept for a minimum of five years from the date you lodge your tax return.
For GST-registered businesses turning over more than $75,000 annually, remember that input tax credits are claimed separately on purchases. Your COGS amount excludes GST—use the GST-exclusive price when calculating production costs.
Under uniform capitalisation rules, certain indirect costs can be allocated to inventory for tax purposes. This includes allocable portions of studio rent, interest on business loans, storage, and production administration. However, these allocations require careful documentation and professional guidance to ensure ATO compliance.
Here's what proper COGS tracking means for your tax return: Let's say your creative business generates $80,000 in revenue during the financial year. Without tracking COGS, you might estimate deductions around $20,000 for various expenses, leaving $60,000 potentially taxable income. But with accurate COGS tracking showing $32,000 in direct production costs plus $20,000 in operating expenses, your taxable income drops to $28,000—a massive difference in tax liability.
The distinction between COGS and operating expenses matters significantly. COGS reduces your gross profit directly, whilst operating expenses reduce net profit. Both lower taxable income, but proper categorisation ensures accurate financial reporting and prevents ATO queries during reviews or audits.
Understanding Cost of Goods Sold isn't about becoming an accountant—it's about respecting your creative work enough to know its true financial value. When you accurately track COGS, you stop guessing at prices and start setting them strategically. You stop wondering if you're profitable and start knowing your margins cold. You stop feeling guilty about raising prices and start charging what your work actually costs to produce.
The creatives thriving in 2026 aren't necessarily the most talented (though talent helps). They're the ones who balance artistic passion with financial literacy. They understand that tracking material costs, valuing their labour, and calculating accurate COGS isn't selling out—it’s growing up. It's the difference between having an expensive hobby and running a sustainable business.
Every time you create something beautiful, you're investing materials, time, skill, and creative energy. COGS quantifies that investment and ensures you're compensated fairly. It protects you from underpricing, guides strategic decisions about product lines and wholesale opportunities, and provides the financial foundation for business growth.
Start simple: track your material purchases, time your production processes, calculate per-unit costs for bulk materials. Implement one of the inventory valuation methods that suits your business model. Review your COGS quarterly and adjust pricing as material costs change. Build these habits now, and you'll thank yourself when your creative business scales from side hustle to serious income.
Yes, absolutely. Even though you're not paying yourself a formal wage, your production time has genuine economic value and must be factored into COGS for accurate pricing and profitability analysis. Industry standards suggest valuing your time at a minimum of $15-20 per hour for starting creatives, though skilled artisans should charge considerably more. Only include time spent on actual production—not administrative tasks, marketing, or customer service. This isn't about paying yourself through COGS (that comes from profit), but about ensuring your pricing reflects the true cost of creating products.
Review and recalculate COGS quarterly at a minimum, or immediately when significant material price changes occur. The creative supplies market in 2026 remains volatile, with material costs fluctuating based on global supply chains, shipping rates, and raw material availability. If your primary materials increase by 10% or more, recalculate COGS immediately and assess whether price adjustments are necessary. Tracking your COGS-to-revenue ratio monthly can help identify troubling trends early.
Packaging materials that directly protect or present your product qualify as COGS—this includes boxes, tissue paper, bubble wrap, protective sleeves, and branded stickers that seal the packaging. However, if the materials are primarily promotional (such as business cards or flyers included in the package), they should be classified as marketing expenses rather than COGS. When in doubt, consult with your accountant to ensure proper categorisation in line with ATO guidelines.
COGS represents the direct costs incurred to produce or purchase the products you sell—this includes materials, production labour, and manufacturing overhead. Operating expenses, by contrast, cover all other costs required to run your business, such as marketing, advertising, studio rent, utilities for non-production spaces, administrative labour, and shipping costs to customers. While both reduce taxable income, COGS affects gross profit and operating expenses impact net profit. Properly distinguishing between the two is critical for accurate financial reporting and pricing strategy.
The ATO examines detailed records including purchase receipts, supplier invoices, and inventory counts, as well as calculations of beginning and ending inventory values. They verify that the expenses claimed as COGS are directly related to production and not mixed with general operating expenses. Maintaining meticulous records for at least five years, using consistent inventory valuation methods, and employing reliable accounting software can help ensure you’re prepared if an audit occurs.
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