The term COGS is an abbreviation of Cost Of Goods Sold. In general, it refers to the direct cost associated with creating or manufacturing a product. For example, raw materials and labor can be included as part of your COGS calculation for inventory purposes. You might also include factory overhead expenses such as equipment depreciation and repairs, insurance, property taxes and utilities in this expense calculation as well.
Cost of goods sold (COGS) is the direct costs attributed to an item, which go into its production. According to GAAP (Generally Accepted Accounting Principles), cost of goods sold must be reported on the income statement when preparing financial statements, and includes all expenses associated with making a product or providing a service.
The “cost” in COGS refers to the outlay required to produce something in addition to the selling price. For example, in retail businesses, COGS can include wholesale prices paid for inventory as well as transportation fees and any other relevant costs up until the point that it is received by the company.
The formula used in small business accounting for finding COGS takes into consideration your actual purchases subtracted by your supplier’s invoice cost for goods acquired during the time period under review (a month, quarter or year). Because you can’t know exactly how much your COGS is unless you actually produce and sell a product – this number will be estimated.
A small business owner has control over many variables that affect COGS; however, there are several external factors beyond his or her control as well – such as the price of raw materials and inflation rates. As a general rule, if you make more products, your business will have higher direct costs. On the other hand, if you only make one product at a time with lots of labor involved in making each unit your COGS will be higher too.
The formula used to calculate cost of goods sold (COGS) is:
COGS = beginning inventory + purchases – ending inventory
This simple equation can be extended to include other, non-inventory items you would like to track. For example if you sell services rather than products, COGS could become COGS= beginning labor + materials – ending labor. In the case of a service business where labor and materials are “intermingled” it might be more appropriate to use another type of formula that calculates cost of sales.
Although the initial outlay for raw materials may help your supplier offer a discounted price, accounting standards require that only the seller’s acquisition cost is included in COGS – not wholesale prices paid by suppliers. Only expenses associated directly with making an item – not those that apply to an entire factory – such as rent and utilities, can be included. For example, if you purchase a refrigerator for $500 and use it in your manufacturing process, this cost is recorded as part of COGS. If the same fridge sits in your company break room – it would not be included .
In addition, costs associated with direct labor and indirect labor (such as time spent on quality control) must be allocated to inventory items based on predetermined rates- usually by dividing total labor hours by the number of units produced during that period.
What are COGS for Amazon FBA stores?
COGS stands for Cost of Goods Sold. It’s also sometimes referred to as COGS or cost of sales. In an Amazon business, COGS is the sum of all expenses that you paid to purchase your product inventory that you plan to resell on Amazon FBA.
For example, say a new private label seller purchases a pack of 100 mens tee shirts from a supplier in China and ended up spending $9 per shirt including shipping, import fees and everything else involved in bringing the goods into the United States. That would be a total investment of $900 right there before any profit markup is added during the product listing process.
The $9 spent per shirt not including anything else such as salary costs, marketing costs etc. would be the COGS or cost of goods sold.
Amazon FBA sellers are required to list products with a sale price at least 10% higher than their COGS in order to stay compliant with Amazon’s pricing policy.
When you create your product listing, enter the product cost plus any shipping charges into the “Selling Price” field instead of simply entering one flat price for your item.
Accounting for other costs associated with selling on Amazon including salary, marketing, other fees etc should not be included when calculating your COGS since these expenses are not required by Amazon and can vary greatly based on how you run your business.
Some sellers prefer to use cost of sales as their preferred data point, arguing that they already have COGS listed on their Income Statement from a business account due to complying with GAAP regulations which require U.S companies to list all operating expenses including overhead costs such as salary, rent etc.
Other sellers prefer the simplicity of calculating COGS since most income statements do not include non-operating or depreciation expenses which can make the income statement more difficult to understand without prior financial knowledge.
How is COGS calculated for Amazon FBA stores?
The cost of goods (products) you purchase for resale on Amazon’s platform, also referred to as inventory or stock, is entered in two different places in your account. One set of costs goes into the Income section and it includes your invoices minus any discounts received and not including shipping fees charged by suppliers; this number shows up under Purchase price (USD).
The other set goes into the Inventory section and that is simply what you paid for each product including any shipping charges when ordering from a supplier, so it will be slightly higher than what you sold it for when you resold the product on Amazon. The difference of those two numbers is what you put under COGS (cost of goods sold) in your Profit and Loss Statement.
The Amazon FBA business is unique due to the fact that it is a marketplace and has thousands of products available. Those products are sold by other Amazon sellers (3rd party) which means margins are low even on the best selling items because if you simply took your retail price and added 20% profit margin there would be hundreds of sellers doing the same thing. This means that you have to come up with a way to differentiate yourself from others in order to set yourself apart, not just online but also offline as well. One of those ways is offering better prices than everyone else so your customers will see your offer at checkout instead of someone else’s. Another way is finding alternate revenue streams using Amazon FBA such as third-party seller services, selling on Amazon FBA through your own store or even across other marketplaces.
As an FBA seller, knowing your actual amazon fba cost of goods sold can be advantageous when creating financial statements to share with investors or new hires since it clearly shows how much money was spent on inventory that month and what percentage return you receive after selling it.
You can also use this information in your profit/loss statement in order to understand how much profit another product makes in comparison to the COGS for each individual product – allowing you to make better business decisions on which products are worth shipping in from overseas (or not) depending on their profitability.
Why is COGS important for Amazon FBA stores?
How does COGS affect Amazon FBA business?
The key to running a profitable FBA business is giving customers an outstanding buying experience by providing them with high quality products at low prices. The lower your costs, the more you can charge for your product and still make some money after factoring in all of Amazon’s fees. So understanding how COGS works can be very helpful. It also highly depends on which type of plan you are following: e-commerce model or retail arbitrage model .
Using COGS as a metric for revenue is:
– one of the key ways FBA sellers can track their earnings and profitability as an Amazon FBA store.
– it also allows you to better understand just how much money it costs to manufacture, market and sell each product.
This is typically not something that brick and mortar retailers or ecommerce stores use since finding just how much it cost them for manufacturing and selling their products on a day-to-day basis would be very difficult but because amazon fba stores utilize Fulfillment by Amazon (FBA) they have access to this data through seller central – making it easy for us.
For amazon FBA businesses this includes fees paid for using Amazon FBA services such as storage space for your products in an Amazon warehouse along with any order fulfillment costs (packing supplies, labor, etc.) as well as the manufacturing costs associated with producing your product(s).
Assuming you already have your manufactured products ready for selling at home or elsewhere – then selling those items on Amazon will incur additional expenses that need to be factored into your final price if you want to earn a profit on your amazon FBA business.
Other important notes about COGS and Amazon FBA business
Amazon FBA business & COGS reduction:
COGS on Amazon FBA are not forever and there are ways to reduce them which can be done by increasing revenue or finding alternative ways through which money can be saved. The most effective way to do this is by:
– consistently selling more products but with time because otherwise you will not see any result in the short term. For example, if your product costs $5 to make then selling two instead of one means a 50% profit margin which is much better than 20%.
– Another step is by finding alternate revenue streams, reducing costs across the board or even using the Amazon FBA fee reimbursement program. It doesn’t matter how you do it, all that matters is that there are options available so there is no reason for having high COGS upfront and wasting your time and efforts on something that will not make you money in the long term.
COGS & COGS account in Amazon FBA business:
Also unique to Amazon FBA businesses is the unique feature of being able to choose between two types of COGS accounts, Optional and Required:
1) Optional COGS
Optional COGS exists if you are selling FBM (Fulfillment by Merchant) or using the Inventory Assembly service. The optional cost is defined as “Standardized Cost” and is calculated by Amazon based on an average of what they pay to purchase the item from other sellers on Amazon. There are several different ways Standardized Costs can be calculated, but it boils down to this: for some items, Amazon calculates a required COGS that will always be higher than your actual purchase prices + freight costs; for some items, Amazon will calculate a required COGS that equals your purchase price + freight costs; and for some items, Amazon calculates a lower standard cost than your cost to buy the product.
2) Required COGS
Required COGS exists only if the item is being sold as a Retail Merchant fulfilling FBA. The required cost is defined as “Inventory Cost” by Amazon and matches your purchase price + freight cost to Amazon’s fulfillment center. In other words, it’s what you paid for the items or what you paid to have them shipped from your supplier to Amazon.
Amazon FBA business & COGS savings:
COGS are directly proportional to expenses so if you reduce one then other will take its place and this is not something you want because it will lower your profit margin or even make you lose money. The best way to avoid that is by constantly looking for ways to:
– increase revenue so there is no need to cut costs which can be done after everything else has already been covered. For example, instead of reducing prices on products, find new customers who are willing to pay more or increase shipping cost but keep them at reasonable levels. There are many ways to achieve what you need but don’t forget about consistency because it means without discipline afterwards. If there is one thing to remember about COGS then it’s that this number depends on many factors so it is best to use various tools at disposal for better results.
Amazon FBA business & COGS reduction
COGS are not forever and can under certain conditions be reduced. The best way to do that is by:
– consistently selling more products which eventually will mean better profit margins because you made less expenses per product sold. For example, if it costs you $5 to make one product then selling two instead of one means a 50% profit margin which is much better than 20%.
There are other ways as well such as finding:
– alternate revenue streams, reducing costs across the board or even using the Amazon FBA fee reimbursement program. It doesn’t matter how you do it, all that matters is that there are options available so there is no reason for having high COGS upfront and wasting your time and efforts on something that will not make you money in the long term.
The impact of COGS to Amazon FBA stores is similar to that of Amazon itself, though at a slightly earlier stage in the growth cycle. COGS appear to be an important consideration when evaluating FBA stores for acquisition or investment.
A key finding is the impact of outsourced logistics providers on FBA costs – costs which vary by a factor of 3-4x between competitors with identical handmade product lines and warehouses in the same region. A new FBA vendor with links to third party logistics providers will have a significant advantage over existing vendors with no such connections, whose prices are elevated as they ship themselves.
Further work can be done to track changes in COGS over time, including following brands as they scale up operations (adding more SKUs) and tracking costs across different categories (where product weight varies significantly).