How to Understand And Calculate COGS in Amazon FBA Store
The term COGS is an abbreviation of the Cost Of Goods Sold. And it’s the most straightforward type of accounting for Amazon.
For example, your COGS calculation can include raw materials and labor for inventory purposes. In this expense calculation, you might also include factory overhead expenses such as equipment depreciation and repairs, insurance, property taxes, and utilities.
Cost of goods sold (COGS) is the direct costs attributed to an item that goes into its production. According to GAAP (Generally Accepted Accounting Principles), the 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.
What Is the Cost of Goods Sold Formula
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, transportation fees, and any other relevant costs until the company receives them.
The formula used in small business accounting for finding COGS considers your actual purchases subtracted by your supplier’s invoice cost for goods acquired during the period under review (a month, quarter, or year).
This number will be estimated because you can’t know precisely how much your COGS is unless you produce and sell a product.
A small business owner controls many variables that affect COGS; however, there are several external factors beyond their power, such as the price of raw materials and inflation rates.
Generally, if you make more products, your business will have higher direct costs. On the other hand, if you make only one product at a time with lots of labor involved in making each unit, your COGS will also be higher.
The formula used to calculate the 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 the 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 manufacturing, this cost is recorded as part of COGS. It will not be included if the same fridge sits in your company break room.
In addition, direct and indirect labor costs (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.
Further Reading
What is 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 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 t-shirts from a Chinese supplier and ends 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 before any profit markup is added during the product listing.
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 must list products with a sale price at least 10% higher than their COGS to stay compliant with Amazon’s pricing policy.
When creating your product listing, enter the product cost plus 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, additional fees, etc., should not be included when calculating your COGS. Amazon does not require these expenses and can vary significantly based on how you run your business.
Some sellers prefer to use the 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, making the income statement more challenging to understand without prior financial knowledge.
Further Reading
How is COGS calculated for Amazon FBA stores?
The cost of goods (products) you purchase for resale on Amazon’s platform, also called inventory or stock, is entered in two different places in your account.
One set of costs goes into the Income section and 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, Which 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 between those numbers is what you put under COGS (cost of goods sold) in your Profit and Loss Statement.
The Amazon FBA business is unique because it is a marketplace with thousands of available products.
Those products are sold by other Amazon sellers (3rd party), which means margins are low even on the best-selling items because if you took your retail price and added a 20% profit margin, hundreds of sellers would do the same.
This means that you have to devise a way to differentiate yourself from others to set yourself apart, not just online but also offline.
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 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. 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 to understand how much profit another product makes compared to the COGS for each product – allowing you to make better business decisions on which products are worth shipping in from overseas (or not) depending on their profitability.
There are two other 2 ways to do it as well:
Further Reading
Accrual Basis Accounting
In an accrual basis accounting system, rather than deducting the cost of goods sold in the month you acquire them, you remove the items you’ve purchased as soon as you sell them.
Using Inventory accounts in your bookkeeping software to “park” your goods until you sell them is a more hands-on method.
The advantage of accrual basis accounting is that you have real-time insight into your business’s financial health.
The disadvantage of this approach is that it’s more challenging than simply keeping track of each expense in the month you write the check.
However, most accounting firms advise sellers to utilize this accounting style since it provides more significant financial insight into your company’s records.
The essential thing to know about accrual accounting is that spending cash does not necessarily equal incurring an expense when keeping your books.
Cash Basis Accounting
The cash basis is advantageous since it is the most basic form of accounting. For example, a purchase of $10,000 for 1000 units from a vendor. This amount will be immediately recorded in your records.
The disadvantage of cash basis accounting is that you don’t have accurate information on your earnings. Cash basis accounting may cause it to appear as if you lost money when you make a significant purchase of inventory in a given month.
When you’re in a month without inventory purchases, it’s easy to think your company is insanely profitable. You may be somewhere in the middle, but you won’t know! This brings me to the most dangerous side effect of cash basis accounting: it isn’t accurate.
Further Reading
Why is COGS important for Amazon FBA stores?
The key to running a profitable FBA business is giving customers an outstanding buying experience by providing 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 your plan type: e-commerce or retail arbitrage.
Using COGS as a metric for revenue is:
- One of the critical ways FBA sellers can track their earnings and profitability is as an Amazon FBA store.
- It also allows you to understand better 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 costs them to manufacture and sell their products on a day-to-day basis would be very difficult 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.) and the manufacturing costs associated with producing your product(s).
Assuming you already have your manufactured products ready for selling at home or elsewhere, 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 essential notes about COGS and Amazon FBA business
Amazon FBA business & COGS reduction:
COGS on Amazon FBA is not forever, and there are ways to reduce them, which can be done by increasing revenue or finding alternative ways to save money. The most effective way to do this is by:
- You are consistently selling more products, but with time because otherwise, you will not see any short-term results. For example, if your product costs $5, then selling two instead of one means a 50% profit margin, which is much better than 20%.
- Another step is finding alternate revenue streams, reducing costs, or using the Amazon FBA fee reimbursement program. It doesn’t matter how you do it; all that matters is that options are 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 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 sell FBM (Fulfillment by Merchant) or use 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 estimates 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; for others, Amazon calculates a lower standard cost than your cost to buy the product.
Further Reading
2) Required COGS
Required COGS exists only if the item is 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 is directly proportional to expenses, so if you reduce one, the 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 product prices, find new customers willing to pay more or increase shipping costs 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 afterward.
If there is one thing to remember about COGS, this number depends on many factors, so using various tools at your disposal is best for better results.
Further Reading
Amazon FBA business & COGS reduction
COGS are not forever and can, under certain conditions, be reduced. The best way to do that is by:
You were consistently selling more products will eventually mean better profit margins because you make fewer 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, reduce costs or use the Amazon FBA fee reimbursement program. It doesn’t matter how you do it; all that matters is that options are 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 on Amazon FBA stores is similar to that of Amazon itself, though at a slightly earlier stage in the growth cycle. COGS appears to be an essential 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 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.
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).
Further Reading
FAQ
What are Amazon COGS?
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.
What are examples of cost of good sold?
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 business.
Are Amazon FBA fees COGS?
Yes, COGS are costs that include Amazon Fees, Order Fees, FBA Fees, and so on. The cost component in the product’s pricing structure is known as Amazon Cost of Goods Sold, and if it’s too high, you may try to reduce expenses.
Are delivery costs COGS?
The cost of delivery is not included in COGS. The IRS allows firms to deduct the COGS for any items they either create themselves or buy with the intention of reselling.
How do you get the cost of goods sold for Amazon stores?
Subtract the value of closing inventory from the total value of inventory available for sale. The answer is COGS. This is the simplest way to calculate COGS. In case you have multiple products, you have the option to calculate gross profit for each product separately
What can we do for you? Know how we will increase your cash flow for your Amazon store by booking a free consultation call with Alan Chen, CEO of Free Cash Flow,
