Simple but Accurate Ways to Calculate COGS
E-commerce sellers battle stiff price competition…one of the core parts of pricing is the cost per unit of each item you sell. This eventually becomes part of the Cost of Goods Sold on a monthly basis.
Gross margin is an important figure that needs to be monitored and analyzed by e-commerce sellers. Knowing whether you earn a profit on a certain type of product or SKU is very valuable data.
Overall, you will need a good amount of Gross profit to support the operating expenses of running your business.
Overall profit or Net Income involves all income and costs – it’s a broader area. For now, we will focus on getting your Cost of Goods Sold every month accurately.
For very small operations, a yearly computation of Cost of Goods Sold may be enough but for most e-commerce businesses having steady sales per month…or for business owners who like more clarity on their business…getting COGS per month is very important to arrive at Gross Profit accurately.
So what are the costs required?
1. Get an accurate purchase cost amount
This is the amount you paid when you buy your inventory usually found on the purchase order or supplier invoice.
2. Shipping Costs
These are shipping or freight costs to move your inventory from the Supplier location/manufacturer site to the warehouse of your e-commerce platform.
3. Packaging Costs
If you manufacture your products, this is the package supplies used to pack your finished products.
If you buy already made products but put custom branding or custom packaging on your products before putting them on sale then it will be part of the product costs.
4. Facilities / Storage costs
These are undeniably part of the Cost of Goods Sold but are too complicated to track per item or SKU.
Because of this, you recognize this cost of goods sold account on whatever has been paid as storage fees.
Simple Method to Calculate COGS:
1. Compute the Cost per Unit of each product
- Get the number of units purchased per order+
- Account for all the costs above.
- Divide the Total Cost by the Total units purchased
- Now you get the Cost per Unit
2. Calculate the Cost of Goods Sold
- Get the Total Units Sold for the month
- Multiply the Units Sold by the Cost per Unit
- The resulting amount is the Cost of Goods Sold
3. Account for other Costs of Goods Sold items
- Other cost of goods sold not included in the unit cost computation will be added as another COGS line item in the profit and loss.
A2X further simplifies this process. Using A2X, we just need to get the Cost per Unit of each SKU of your inventory. Input it to the app, and the app will calculate and sync the COGS to QuickBooks Online!
LATEST POSTS!
