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Track it. It matters.
To truly understand Cost of Goods Sold and to calculate this metric, you’ll also need to determine your actual per unit price.
Cost of goods sold (official definition): The direct costs attributable to the production of the goods sold in a company. This amount includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. In other words, it’s the accumulated total of all costs relating to a product or service which has been sold. From the factory to the warehouse floor.
This is an extremely important number to your accountant, but for an Amazon e-commerce business owner, it’s only valuable when used correctly.
For accounting purposes, cost of goods sold (COGS) refers to the carrying value of goods sold during a particular period. Costs of goods made by the business include material, labor, and allocated overhead. The costs of those goods which are not yet sold are deferred as costs of inventory until the inventory is sold or written down in value.
COGS expenses include:
1. The cost of products or raw materials, including freight or shipping charges.
2. The cost of storing products the business sells.
3. Direct labor costs for workers who produce the products.
4. Factory overhead expenses.
5. Depreciation.
For our purposes (Gross Account Profitability), it’s most important to have a sense of the percentage of COGS as it relates to revenue.
I cannot stress this enough—knowing WHO is taking WHAT portion of the pie is essential to maximizing profits.
Factors when considering Costs Per Unit (CPU):
Factory Cost
Shipping Costs
Customs Duties and Taxes
Insurance
Inspections
Transport Fees to FBA
Inventory Costs
Long-Term Storage Fees
For traditional brick and mortar retail merchants they have the luxury of being able to manage the majority in house… and probably don’t charge themselves Long Term Storage Fees. The flow of costs seems manageable.
E-commerce stores face an added challenge when calculating a product’s profitability – From production to variable shipping costs, whether your own warehouse, 3PL’s or Amazon FBA and Storage/Long Term Storage Fees. Identifying a TRUE Unit Cost seems like a daunting task.
The question remains… with all this variability, how on earth do you figure out the Per Unit Cost to get an accurate understanding of the Cost of Goods Sold.
Well, the truth is that most e-commerce businesses simply cannot… it’s more of a guesstimate + an advanced degree in spreadsheets.
With that said, we still need some level of accuracy in our unit costs to measure our account performance. Product costs can be calculated using various methods as checking bank statements or online transactions. I am sure we can all agree that it’s an extremely tedious task but highly important to know.
Why?
If you sell on Amazon, then you know (or maybe you don’t) that the fees can be astronomical.
To get an accurate picture of how much profit margin each product generates, you must figure out the cost of each unit.
Analyzing profitability on the aggregated order level can be extremely valuable to find pricing discrepancies, excess expenses in advertising costs or Cost of Goods Sold, and how promotions affect profitability.
When your unit cost is relative to your pricing… that’s the sweet spot.
Think of it like this. If you sell a product for $15 and your unit of is $2.50, then you at a 16.67% Cost. But if your cost is $5 and selling for $15, then your cost is 33.33%
That’s relative pricing. Not always easy to attain, but important to track as this affects account profitability.
In the example below, you see how COGS as an expense percent stacks up against the profit margin. Keeping these expense percentages in check lead to greater product profitability.
What to do next?
If you have been a little flaky with tracking unit cost expenses, that’s in the past now. It’s time to put your bookkeeper ???? hat on… and comb through past online transactions and round up all the costs you can find for the last order of a product, then divide by a number of units ordered.
Example: Order of 2000 Units of Product A
Factory Cost - $1200
Air Shipping - $225 (Flew 500 units)
Sea Shipping - $375 (1500 By Sea)
Customs - $87
Inspections - $525 (1500 units from Sea Shipment)
Insurance $20
Labels - $140
Total Costs - $2572
Per Unit Cost - $1.29
But, the question still remains… what about the variable fees, such as storage at the fulfillment warehouses and long-term storage fees or the partnered-carrier fees. Should these get added too?
The devil is in the details. These numbers would be advantageous in understanding the TRUE profitability of a particular product.
But with that been said, a line should be drawn between lunacy and productivity (unless you love numbers and spreadsheets -- Unfortunately I do) I suggest you focus on the latter at first. And, let the variable costs be a line item in the profit and loss report. And, keep the variable cost at an acceptable percentage of your overall revenue.