{"id":17368,"date":"2021-03-31T23:39:53","date_gmt":"2021-03-31T20:39:53","guid":{"rendered":"https:\/\/www.become.co\/blog\/?p=17368"},"modified":"2021-05-02T11:34:00","modified_gmt":"2021-05-02T08:34:00","slug":"how-to-calculate-cost-of-goods-sold","status":"publish","type":"post","link":"https:\/\/www.become.co\/blog\/how-to-calculate-cost-of-goods-sold\/","title":{"rendered":"How to Calculate Cost of Goods Sold for  Ecommerce"},"content":{"rendered":"\n<p><span style=\"font-weight: 400;\">Unlike the cogs of a wheel, the <a href=\"https:\/\/www.investopedia.com\/terms\/c\/cogs.asp#:~:text=Cost%20of%20goods%20sold%20(COGS)%20refers%20to%20the%20direct%20costs,costs%20and%20sales%20force%20costs.\" target=\"_blank\" rel=\"noopener\">COGS<\/a> of an ecommerce business play a hugely significant role in the store\u2019s profitability. Find out <\/span><span style=\"font-weight: 400;\">what is cost of goods sold<\/span><span style=\"font-weight: 400;\">, <\/span><span style=\"font-weight: 400;\">how to calculate cost of goods sold,<\/span><span style=\"font-weight: 400;\"> and why you need to track them to remain profitable.<\/span><\/p>\n\n<h2><span style=\"font-weight: 400;\">What is cost of goods sold<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Cost of goods sold, simply known as COGS or cost of sales, are the direct costs incurred by a business to sell its products. It\u2019s not just the cost of the item itself, but every production, material and labor expense associated with said product. However, COGS exclude indirect costs such as marketing, overheads and other operating expenses (OPEX).<\/span><\/p>\n<p><span style=\"font-weight: 400;\">\u00a0<\/span><span style=\"font-weight: 400;\">If you\u2019re unsure <\/span><span style=\"font-weight: 400;\">what is included in cost of goods sold<\/span><span style=\"font-weight: 400;\">, 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.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">COGS vary based on your e commerce business model. For example, a <a href=\"https:\/\/www.become.co\/blog\/make-money-dropshipping-shopify\/\">dropshipper<\/a>\u2019s COGS include their product cost from their supplier but don\u2019t include any shipping-related costs, as the supplier delivers directly to the end customer.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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\u2019t form part of COGS.\u00a0<\/span><\/p>\n\n<h2><span style=\"font-weight: 400;\">COGS formula: How to calculate cost of goods sold<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">COGS are calculated using this accounting formula:<\/span><\/p>\n<p><img decoding=\"async\" class=\"alignnone wp-image-17371 size-full\" src=\"https:\/\/www.become.co\/blog\/wp-content\/uploads\/2021\/03\/Frame-5.png\" alt=\"How to calculate cost of goods sold\" width=\"1200\" height=\"470\" srcset=\"https:\/\/www.become.co\/blog\/wp-content\/uploads\/2021\/03\/Frame-5.png 1200w, https:\/\/www.become.co\/blog\/wp-content\/uploads\/2021\/03\/Frame-5-300x118.png 300w, https:\/\/www.become.co\/blog\/wp-content\/uploads\/2021\/03\/Frame-5-768x301.png 768w, https:\/\/www.become.co\/blog\/wp-content\/uploads\/2021\/03\/Frame-5-604x237.png 604w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><\/p>\n<p><span style=\"font-weight: 400;\">In the <\/span><span style=\"font-weight: 400;\">cost of goods sold formula, <\/span><span style=\"font-weight: 400;\">the beginning inventory is any leftover inventory from the previous accounting period. You\u2019ll 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. The accounting period is not necessarily a year, and may even be a month or a quarter.<\/span><\/p>\n\n<h2><span style=\"font-weight: 400;\">Example of cost of goods sold<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Assuming an <a href=\"https:\/\/www.become.co\/blog\/e-commerce-inventory-management-challenges\/\">e-commerce business records its inventory<\/a> on a calendar year basis, it would record beginning inventory on the 1st January and ending inventory on the 31st December.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">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\u2019s COGS:<\/span><\/p>\n<p><img decoding=\"async\" class=\"alignnone size-full wp-image-17372\" src=\"https:\/\/www.become.co\/blog\/wp-content\/uploads\/2021\/03\/Frame-6.png\" alt=\"Calculate COGs example\" width=\"1200\" height=\"470\" srcset=\"https:\/\/www.become.co\/blog\/wp-content\/uploads\/2021\/03\/Frame-6.png 1200w, https:\/\/www.become.co\/blog\/wp-content\/uploads\/2021\/03\/Frame-6-300x118.png 300w, https:\/\/www.become.co\/blog\/wp-content\/uploads\/2021\/03\/Frame-6-768x301.png 768w, https:\/\/www.become.co\/blog\/wp-content\/uploads\/2021\/03\/Frame-6-604x237.png 604w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><\/p>\n\n<h2><span style=\"font-weight: 400;\">Cost of goods sold calculator<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">When it comes to calculating your store\u2019s COGS, you could either use an accountant to help you calculate your COGS or you could do it yourself. If you\u2019re unsure <\/span><span style=\"font-weight: 400;\">how to calculate cost of goods sold, you<\/span><span style=\"font-weight: 400;\"> could outsource your COGS calculation to a professional or use an online tool to help you out. Whichever route you take, you\u2019ll still need to understand how the COGS formula works so you can provide the right information to your financial representative. Calculating COGS is something you\u2019re going to want to get 100% accurate, as any miscalculation can skew your profit calculation.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Being an online seller gives you the added advantage of having access to <a href=\"https:\/\/www.become.co\/blog\/best-shopify-apps-to-increase-profit\/\">online tools<\/a> to help you automate your COGS calculation. If you use a cost of goods sold calculator, you simply need to plug in the numbers and they\u2019ll get automatically crunched for you.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Before you get to the calculation stage, you need to decide which of the following accounting method you\u2019ll be using (an accountant can help you with this stage):<\/span><\/p>\n<ol>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\"><strong>FIFO cost of goods sold<\/strong> &#8211; this accounting method uses the cost of the products that were produced or purchased first from suppliers (first-in-first-out)\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\"><strong>LIFO cost of goods sold<\/strong> &#8211; with LIFO, COGS are calculated based on products that were produced or purchased from suppliers last (last-in-first-out).<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\"><strong>Weighted average<\/strong> &#8211; this method takes the total cost of goods divided by the number of units available and then multiplies this number by the actual number of units sold to get the average cost of goods sold.<\/span><\/li>\n<\/ol>\n<p><img decoding=\"async\" class=\"alignnone size-full wp-image-17378\" src=\"https:\/\/www.become.co\/blog\/wp-content\/uploads\/2021\/03\/GettyImages-1210556693-2-1-scaled.jpg\" alt=\"Confused businessman\" width=\"1024\" height=\"683\" srcset=\"https:\/\/www.become.co\/blog\/wp-content\/uploads\/2021\/03\/GettyImages-1210556693-2-1-scaled.jpg 1024w, https:\/\/www.become.co\/blog\/wp-content\/uploads\/2021\/03\/GettyImages-1210556693-2-1-300x200.jpg 300w, https:\/\/www.become.co\/blog\/wp-content\/uploads\/2021\/03\/GettyImages-1210556693-2-1-1200x800.jpg 1200w, https:\/\/www.become.co\/blog\/wp-content\/uploads\/2021\/03\/GettyImages-1210556693-2-1-768x512.jpg 768w, https:\/\/www.become.co\/blog\/wp-content\/uploads\/2021\/03\/GettyImages-1210556693-2-1-1536x1024.jpg 1536w, https:\/\/www.become.co\/blog\/wp-content\/uploads\/2021\/03\/GettyImages-1210556693-2-1-2048x1365.jpg 2048w, https:\/\/www.become.co\/blog\/wp-content\/uploads\/2021\/03\/GettyImages-1210556693-2-1-405x270.jpg 405w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/p>\n<p><span style=\"font-weight: 400;\">Confused somewhat? Let\u2019s use some example numbers to clear things up. Just say you sell toothbrushes and the cost of the first 5 toothbrushes that you purchase from your supplier cost you $2 each. Due to increased plastic costs, the next 2 toothbrushes you buy cost you $2.50. During the next period, you sell 4 toothbrushes. Using the FIFO cost of goods sold method, your COGS would be $8 ($2 x 4 = $8). If you use LIFO cost of goods sold, your COGS would be ($2.50 x 2) + ($2 x 2) = $9. If you went with the weighted average method, your calculation would be: ($15\/7) x 4 =$8.50.<\/span><\/p>\n\n<h2><span style=\"font-weight: 400;\">Cost of goods sold and profitability<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">It\u2019s essential to keep track of COGS to ensure that you\u2019re remaining profitable. Profits are calculated by deducting expenses from your revenue, so if you get your COGS calculation wrong, you\u2019ll have an inaccurate profitability assessment.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">This is the role COGS play in the <\/span><a href=\"https:\/\/www.become.co\/blog\/gross-profit-vs-net-profit\/\"><span style=\"font-weight: 400;\">gross profit calculation<\/span><\/a><span style=\"font-weight: 400;\">:<\/span><\/p>\n<blockquote>\n<p><b>Gross Profit <\/b><span style=\"font-weight: 400;\">= Gross Revenue \u2013 COGS<\/span><\/p>\n<\/blockquote>\n<p><span style=\"font-weight: 400;\">And then <a href=\"https:\/\/www.become.co\/blog\/net-profit-gross-profit-shopify\/\">net profits<\/a> are calculated using this formula:<\/span><\/p>\n<blockquote>\n<p><b>Net Profit <\/b><span style=\"font-weight: 400;\">= Revenue \u2013 COGS \u2013 Expenses<\/span><\/p>\n<\/blockquote>\n<p><span style=\"font-weight: 400;\">(which is essentially gross profit less all other expenses and taxes)<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Get your COGS wrong, and your entire profit calculation will be wrong too.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">If you&#8217;re not 100% confident about how to calculate cost of goods sold, you can automate and use <a href=\"https:\/\/www.become.co\/shopify\/landing\/?utm_source=blog&amp;utm_medium=article&amp;utm_campaign=calculate-cost-of-goods-sold\">BeProfit &#8211; Profit Tracker<\/a>. The app collects your COGS and all other expenses to give you a full picture of your store\u2019s profitability. You can easily upload all your products\u2019 COGS into the BeProfit app by auto-syncing with your e-commerce platform, as a CSV file, or a quick and easy manual upload for a short product list.<\/span><\/p>\n<p><a href=\"https:\/\/www.become.co\/shopify\/landing\/?utm_source=blog&amp;utm_medium=article&amp;utm_campaign=calculate-cost-of-goods-sold\"><img decoding=\"async\" class=\"alignnone wp-image-16289 size-full\" src=\"https:\/\/www.become.co\/blog\/wp-content\/uploads\/2020\/12\/BeProfit_Blog_Banner-scaled.jpg\" alt=\"Calculate profit with BeProfit - Profit Tracker\" width=\"1024\" height=\"341\" srcset=\"https:\/\/www.become.co\/blog\/wp-content\/uploads\/2020\/12\/BeProfit_Blog_Banner-scaled.jpg 1024w, https:\/\/www.become.co\/blog\/wp-content\/uploads\/2020\/12\/BeProfit_Blog_Banner-300x100.jpg 300w, https:\/\/www.become.co\/blog\/wp-content\/uploads\/2020\/12\/BeProfit_Blog_Banner-768x256.jpg 768w, https:\/\/www.become.co\/blog\/wp-content\/uploads\/2020\/12\/BeProfit_Blog_Banner-604x201.jpg 604w\" sizes=\"(max-width: 1024px) 100vw, 1024px\" \/><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Discover how to calculate the cost of goods sold for your ecommerce store. Learn the formula or use a COGS calculator and optimize your store!<\/p>\n","protected":false},"author":1,"featured_media":17394,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[446,1,12],"tags":[458,308],"class_list":["post-17368","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-e-commerce","category-uncategorized","category-us-resources","tag-cogs","tag-profit"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>How to Calculate Cost of Goods Sold for Ecommerce - Business Funding Blog<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.become.co\/blog\/how-to-calculate-cost-of-goods-sold\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"How to Calculate Cost of Goods Sold for Ecommerce - Business Funding Blog\" \/>\n<meta property=\"og:description\" content=\"Discover how to calculate the cost of goods sold for your ecommerce store. 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