![]() LIFO cost of goods sold – with LIFO, COGS are calculated based on products that were produced or purchased from suppliers last (last-in-first-out).FIFO cost of goods sold – this accounting method uses the cost of the products that were produced or purchased first from suppliers (first-in-first-out).If you use a cost of goods sold calculator, you simply need to plug in the numbers and they’ll get automatically crunched for you.īefore you get to the calculation stage, you need to decide which of the following accounting method you’ll be using (an accountant can help you with this stage): Calculating COGS is something you’re going to want to get 100% accurate, as any miscalculation can skew your profit calculation.īeing an online seller gives you the added advantage of having access to online tools to help you automate your COGS calculation. Whichever route you take, you’ll still need to understand how the COGS formula works so you can provide the right information to your financial representative. If you’re unsure how to calculate cost of goods sold, you could outsource your COGS calculation to a professional or use an online tool to help you out. When it comes to calculating your store’s COGS, you could either use an accountant to help you calculate your COGS or you could do it yourself. If the business had a beginning inventory of $12,000, purchased another $7,000 worth of inventory throughout the year, and ended up with leftover inventory to the value of $3,000, this would be the formula to calculate this business’s COGS: ![]() The accounting period is not necessarily a year, and may even be a month or a quarter.Īssuming an e-commerce business records its inventory on a calendar year basis, it would record beginning inventory on the 1st January and ending inventory on the 31st December. You’ll then add on the total cost of any inventory that you bought during the current period, and deduct the value of any unsold inventory left at the end of this period. In the cost of goods sold formula, the beginning inventory is any leftover inventory from the previous accounting period. On the other hand, a warehousing ecommerce seller would need to include shipping costs from their supplier to their warehouse (or even to the home of a home-based seller), but not the shipping costs to the end customer, as this doesn’t form part of COGS.ĬOGS formula: How to calculate cost of goods soldĬOGS are calculated using this accounting formula: For example, a dropshipper’s COGS include their product cost from their supplier but don’t include any shipping-related costs, as the supplier delivers directly to the end customer. If you’re unsure what is included in cost of goods sold, you need to ask yourself if that particular cost would have arisen had there been no sale of that product? For example, if you sell toys, would you still incur marketing costs even if no products are sold? You would, which is why marketing and sales costs fall under their own separate line item in an accounting income statement.ĬOGS vary based on your e commerce business model. However, COGS exclude indirect costs such as marketing, overheads and other operating expenses (OPEX). It’s not just the cost of the item itself, but every production, material and labor expense associated with said product. Find out what is cost of goods sold, how to calculate cost of goods sold, and why you need to track them to remain profitable.Ĭost of goods sold, simply known as COGS or cost of sales, are the direct costs incurred by a business to sell its products. Unlike the cogs of a wheel, the COGS of an ecommerce business play a hugely significant role in the store’s profitability. Reading Time: 4 minutes (Last Updated On: May 2, 2021)
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