COGS vs. Operating Expenses: What CPG Founders Get Wrong

If there's one mistake that shows up in almost every early-stage CPG brand's books, it's this: costs that belong in COGS end up in operating expenses, or vice versa. It seems like a minor classification issue, but it directly distorts your gross margin — and gross margin is the first number any investor, lender, or potential buyer looks at.

Getting this wrong doesn't just make your books messy. It makes your business look either more or less profitable than it actually is. Neither is good.

Why It Matters So Much

Your income statement has two major cost sections. COGS captures everything directly tied to producing your product — the costs that only exist because you made something to sell. Operating expenses cover everything else it takes to run the business.

The line between them determines your gross margin. If you accidentally put a production cost into operating expenses, your gross margin looks artificially high. That might feel good until an investor does due diligence and recalculates it. If you dump an operating cost into COGS, your margins look tighter than they are, and you might underprice your product or panic about profitability that's actually fine.

The Gray Areas That Trip Up CPG Founders

Some costs are obvious. Ingredients go in COGS. Your office internet bill is an operating expense. But CPG brands have a lot of costs that live in a gray area, and that's where mistakes happen.

Freight and shipping. Inbound freight — getting raw materials to your co-packer or finished goods to your warehouse — is COGS. Outbound freight to customers is where it gets tricky. If you're selling DTC and offering free shipping, many founders book that as a marketing expense. But if shipping is a standard cost of fulfilling every order, there's a strong argument it belongs in COGS. Pick a method, be consistent, and be ready to explain your reasoning.

Packaging and design. The physical packaging that goes on your product (bottles, labels, boxes) is COGS. But what about the design work to create that packaging? That's generally an operating expense — it's a one-time creative cost, not a per-unit production cost. The same goes for photography for your packaging.

Amazon and retailer fees. This is one of the most commonly misclassified costs in CPG. Amazon referral fees, FBA fees, and retailer chargebacks are not production costs — they're the cost of selling through that channel. These typically belong in operating expenses (or a separate "selling expenses" category), not COGS. Lumping them into COGS makes it impossible to compare your margins across channels.

Samples and trade spend. The cost to produce samples is COGS until the moment you give them away — then the cost should move to marketing or promotional expense. Slotting fees, trade promotions, and scan-backs are operating/selling expenses, not COGS, even though they feel directly tied to revenue.

Quality testing and certifications. Lab testing for each production run? That's a reasonable COGS item. Annual organic certification or FDA facility registration? Operating expense — those are costs of being in business, not costs of producing a specific unit.

Warehousing. This one depends. If you're paying for storage of raw materials or finished goods as part of your production flow, there's a case for COGS. If it's general warehouse space for your operations, it's an operating expense. Most CPG brands at the early stage keep it simple and book warehousing as an operating expense.

A Simple Test

When you're not sure where a cost belongs, ask yourself: Does this cost go up proportionally when I produce or sell more units?

If yes, it's probably COGS. If it stays roughly the same regardless of how many units you sell, it's probably an operating expense.

Your co-packing fee scales with production volume — that's COGS. Your bookkeeper's monthly fee stays the same whether you sell 100 units or 10,000 — that's an operating expense.

How to Set Up Your Chart of Accounts

A clean chart of accounts makes this much easier. Here's a structure that works well for most CPG brands:

COGS (5000s):

• 5010 — Raw Materials / Ingredients
• 5020 — Packaging Materials
• 5030 — Co-Packing / Manufacturing Fees
• 5040 — Inbound Freight
• 5050 — Production Quality Testing

Operating Expenses (6000s–7000s):

• 6010 — Outbound Shipping / Fulfillment
• 6020 — Amazon / Marketplace Fees
• 6030 — Slotting Fees / Trade Spend
• 6040 — Samples / Promotional Product
• 6050 — Warehousing
• 7010 — Salaries / Payroll
• 7020 — Marketing / Advertising
• 7030 — Software / Subscriptions
• 7040 — Professional Services (legal, accounting)

This isn't the only right way to do it, but it gives you a clear separation and makes your gross margin meaningful.

What to Do If Your Books Are Already a Mess

If you've been misclassifying costs, don't panic. Pull your last 12 months of transactions and go through your COGS and operating expense accounts line by line. Reclassify anything that's in the wrong bucket. Yes, it's tedious. But once it's done, you'll have financial statements that actually tell you how your business is performing — and that hold up when someone else looks at them.

The best time to fix this is before you need clean financials for a fundraise, a loan application, or a retailer pitch. The worst time is when you're already in the middle of one.

The Bottom Line

The COGS vs. operating expense distinction isn't just an accounting technicality. It's the foundation of understanding your unit economics. A CPG brand with a 60% gross margin tells a completely different story than one with a 40% gross margin — and if the only difference is how costs are classified, one of those stories is wrong.

Take the time to get this right. It pays off every time you look at your P&L, every time you set pricing, and every time you sit across from someone who's deciding whether to invest in your brand.

Beck & Call Bookkeeping helps CPG founders build financial statements that tell the real story. If you're not sure whether your costs are landing in the right place, let's talk. Get in touch →