Cost of Goods Sold (COGS) Amazon: Formula, Accounting Tips (2024)

TL;DR - How to Calculate Cost of Goods Sold as an Amazon Seller

Here is a quick overview of how to calculate your Amazon COGS:

• Step 1: Create a detailed spreadsheet of your products
• Step 2: Calculate monthly sales for each SKU
• Step 3: Multiply the per-unit cost by units sold
• Step 4: Add up COGS per SKU
• Step 5: Enter total monthly COGS into your accounting system
• Step 6: Determine the initial inventory cost
• Step 7: Add cost of inventory purchases
• Step 8: Calculate the ending inventory
• Step 9: Use the standard COGS formula

Of course, manually doing all the heavy lifting can be extremely tedious. That's where our automated accounting software, Link My Books, comes in.

We are a bookkeeping tool for e-commerce sellers and accountants that automates the entire bookkeeping process, saving time and money.

Link My Books sits between your sales channels (e.g., Amazon, eBay) and accounting platforms like Xero and QuickBooks, acting as the middleman handling complex data collection. It also automates income/expense categorization.

Schedule a demo with us today to get started.

Standing Out in the Amazon Jungle: A Different Approach to COGS

When it comes to managing an Amazon business, there's a common pitfall: obsessing over sales figures while neglecting the nuances of COGS. In this bustling marketplace, where competition is fierce and margins are thin, understanding and optimizing COGS is not just beneficial – it's essential for survival and success.

But here's where we diverge from the standard narrative. While most resources will guide you through a generic analysis of COGS, our approach digs deeper. We don't just skim the surface with basic cost calculations; we delve into the often-missed intricacies that can significantly impact your bottom line.

eCommerce Accounting doesn't have to be painful or difficult, follow along and we'll give you all the information you need about Amazon COGS

Go Beyond the Numbers

We believe that understanding COGS on Amazon isn't just about crunching numbers; it's about comprehending the ecosystem of Amazon's marketplace and how your products fit within it. This involves:

• Analyzing market trends and consumer behaviors to optimize pricing.
• Understanding Amazon's fee structure to reduce unnecessary costs.
• Leveraging Amazon's vast data to make informed decisions about inventory management.

In short, we're not here to rehash what you already know. We're here to provide insights that can transform how you view and manage COGS on Amazon, turning it from a mere accounting task into a strategic tool for business growth and sustainability.

Stay with us as we guide you through the critical steps and strategies to master COGS on Amazon, with insights and tips that you won't find anywhere else.

What is the Cost of Goods Sold (COGS) on Amazon?

Understanding the Cost of Goods Sold (COGS) is vital for any Amazon seller. COGS refers to the direct costs attributable to the production of the goods sold by a company. On Amazon, this includes various expenses directly tied to your product's lifecycle. However, it's equally important to know what COGS does not include, as this can be a common area of confusion for many sellers.

What is Included in Amazon COGS?

COGS on Amazon encompasses all the direct costs associated with the creation and selling of your product. This typically includes:

• Purchase Price of the Product: The amount paid to acquire or manufacture the product.
• Amazon FBA Fees: Fees for Fulfillment by Amazon, if applicable.
• Shipping and Handling Costs: Costs involved in getting the product to Amazon's warehouse and to the customer.
• Packaging Materials: Direct costs of packaging materials used for your product.
• Direct Labor Costs: If you manufacture your product, this includes the labor costs directly tied to production.

What COGS on Amazon is NOT

Conversely, there are certain expenses that should not be included in your COGS calculation on Amazon. These typically involve:

• Marketing and Advertising Costs: Expenses related to promoting your product.
• Amazon Seller Subscription Fees: Monthly fees for using the Amazon platform.
• Storage Fees: Long-term storage fees charged by Amazon.
• Administrative Costs: Costs related to the overall administration of your business, not specific to any single product.
• Software Subscriptions: Costs for any software used to manage your online business.

| Is COGS in Amazon | Is NOT COGS in Amazon ||-------------------------------|---------------------------------|| Purchase Price of the Product | Marketing and Advertising Costs || Amazon FBA Fees | Amazon Seller Subscription Fees || Shipping and Handling Costs | Storage Fees || Packaging Materials | Administrative Costs || Direct Labor Costs | Software Subscriptions |

Reasons Every Amazon Seller Should Track COGS

Here are the key reasons you should be tracking COGS for your Amazon business:

• Calculate True Profitability: COGS allows you to calculate gross and net e-commerce profit margins accurately. This can help you make smarter pricing decisions.
• Optimize Sourcing: Knowing exact product costs allows you to identify profitable vs. unprofitable items and make changes to improve profitability.
• Simplify Tax Preparation: COGS is a deductible business expense that can lower your taxable income. Accurate tracking not only ensures compliance but also maximizes potential tax benefits for your business.‍
• Improve Inventory Management: Correctly accounting for COGS helps ensure your inventory records and valuation methods are accurate.

How to Calculate COGS on Amazon

Tracking COGS can seem complicated, but breaking it down step-by-step can make it manageable.

Here is the process:

• Step #1: Create a Detailed Spreadsheet
• Step #2: Calculate Monthly SKU Sales
• Step #3: Multiply Per Unit Cost by Units Sold
• Step #4: Total COGS per SKU
• Step #5: Enter Total Monthly COGS into Accounting System
• Step #6: Determine Initial Inventory Cost
• Step #7: Add Cost of Inventory Purchases
• Step #8: Calculate Ending Inventory
• Step #9: Use Standard COGS Formula

Step #1: Create a Detailed Spreadsheet

First, we need to map out product details like SKUs and individual costs. Building this foundation requires tracking SKU and per unit value across goods:

• Objective: List each Stock Keeping Unit (SKU) in Column A of your spreadsheet. In Column B, assign a Per Unit Value for each SKU.
• Components of Per Unit Value:
  • Factory Cost: The invoice total divided by the number of units, giving you the cost per individual unit.
  • Tariffs and Duties: Include any customs or import duties paid for the inventory.
  • Freight Costs: Account for the transportation expenses incurred to get the inventory to your warehouse.
  • Miscellaneous Fulfillment Costs: Other costs directly related to preparing the inventory for sale, not including Amazon FBA fees.

Step #2: Calculate Monthly SKU Sales

Next, focus on monthly sales tracking to understand how many units of each SKU you're selling:

• Method: For each SKU, record the number of units sold during the specific month you are analyzing.
• Importance: This step helps in understanding the sales volume and turnover for each product, crucial for accurate COGS calculation.

Step #3: Multiply Per Unit Cost by Units Sold

Plugging sales quantity and per unit costs into the formula gives the COGS calculation per SKU:

• Calculation: Multiply the Per Unit Cost (from Step #1) by the total number of units sold (from Step #2) for each SKU.
• Outcome: This gives the total COGS for each SKU, reflecting the direct cost of goods sold during the month.

Step #4: Add Up COGS per SKU

Adding up the COGS for each product gives the complete cost picture.

Consolidating COGS figures into one overall number pulls everything into consolidated data for accurate reporting:

• Process: Add up the COGS amounts calculated for each SKU.
• Result: This provides the total COGS amount for the entire month across all SKUs.

Step #5: Enter Total Monthly COGS into the Accounting System

Now that we've got our total COGS, it's time for accounting integration. Move the final COGS total into the accounting system for proper integration with the books and records:

• Procedure: Transfer the total COGS for the month from its temporary storage (like an Inventory Asset account) to the COGS account in your accounting system.
• Significance: This ensures that your accounting records accurately reflect the costs associated with the goods sold during the month.

Step #6: Determine Initial Inventory Cost

Then, we evaluate the existing inventory's cost basis. This initial inventory evaluation establishes a starting point for tracking:

• Assessment: Evaluate the cost of the inventory at the start of the accounting period.
• Inclusions: Factor in all expenses required to make the goods ready for sale, including purchase costs, direct labor, and material costs.

Step #7: Add Cost of Inventory Purchases

Record the new costs as fresh inventory arrives. Monitoring and tracking new purchases ensures our cumulative cost totals stay current:

• Action: Include the cost of additional inventory purchased during the accounting period.
• Purpose: This step ensures that all inventory costs are accounted for in the COGS calculation.

Step #8: Calculate Ending Inventory

Finally, we revalue the unsold goods left at the close of the period. This end-of-period inventory assessment finalizes cumulative costs:

• Evaluation: Determine the cost of unsold inventory at the end of the accounting period.
• Relevance: Understanding the value of remaining inventory is crucial for accurate financial reporting and inventory management.

Step #9: Use Standard COGS Formula

With all necessary inputs collected, the final COGS calculation occurs. Plugging the data into the standard formula completes the process:

• Formula: Apply Beginning Inventory + Purchases – Ending Inventory = Cost of Goods Sold.
• Considerations: If your business involves manufacturing labor costs or direct sales costs, include these in the calculation. The inventory accounting method (LIFO, FIFO, etc.) also affects how you calculate and report inventory costs.

Common Challenges in Tracking Amazon COGS

Here are some common issues you may face while tracking Amazon COGS:

• Fluctuating Costs: Supplier prices change, shipping rates vary.
• Multiple SKUs: If you sell a variety of products, keeping track of costs for each can be overwhelming.
• Inventory Valuation: Deciding whether to use FIFO (First-In-First-Out), LIFO (Last-In-First-Out), or the average cost method can be confusing.
• Currency Fluctuations: If you're sourcing internationally, fluctuating exchange rates can impact your COGS.
• Amazon Fees: While not part of COGS, Amazon's various fees can complicate your overall cost calculations.

Automating COGS also comes with some unique challenges:

• Matching Costs to Sales Timing: The software needs to pair up the costs of manufacturing a product to the month it was actually sold. This requires analyzing order data.
• Inventory and COGS Errors: Incorrect recording of inventory value or using wrong formulas can lead to common COGS calculation mistakes, which can impact overall accuracy.
• Complex Sales Tax Calculations: E-commerce sales tax compliance is tricky. Sales tax software and professional advice are essential to avoid miscalculations and legal issues.

We understand that managing these complexities can be overwhelming. That's where Link My Books comes in.

We've designed this tool to simplify your e-commerce bookkeeping. It automates the process of syncing your Amazon payouts with your accounting software. Our system accurately breaks down all sales, refunds, fees, and taxes, saving you time and reducing errors.

Ready to streamline your COGS tracking and overall bookkeeping? Start your free 14-day trial and see how we can transform your Amazon accounting experience.

How to Account for COGS When Bookkeeping

While COGS calculations are crucial, ensuring you account for them across broader financials is equally essential. It can provide accurate record-keeping and healthy cash flow management.

Here’s how you can accurately account for COGS while bookkeeping:

• Step #1: Track All Business Expenses
• Step #2: Record Expenses and Income in a Spreadsheet
• Step #3: Keep Comprehensive Records
• Step #4: Choose the Right Accounting Software
• Step #5: Record COGS and Inventory
• Step #6: Understand the Difference Between Bookkeeping and Accounting

Step #1: Track All Business Expenses

Let's start by getting a handle on all your business costs. Understanding COGS and operating expenses is critical to keeping your finances in check:

• COGS: Includes direct costs such as payments to suppliers, product inspectors, shipping agents, and contractors for design and packaging. These expenses are integral to the production and preparation of goods for sale.
• Operating Expenses: Encompasses the broader costs of running a business, like advertising, account fees, office supplies, and business-related travel. These are not directly tied to the production of goods but are necessary for the overall operation of the business.

Step #2: Record Expenses and Income on a Spreadsheet

Now, let's talk about keeping tabs on your money. Monthly expense tracking and understanding Amazon fees are crucial for staying on top of your finances:

• Implement a detailed system to categorize and record all expenses and income monthly. This system should differentiate between COGS and operating expenses, providing a clear view of where funds are being allocated.
• Utilize Amazon Seller Central for an in-depth understanding of various Amazon fees. This step is crucial for accurately tracking the unique costs associated with selling on Amazon. Having an intimate understanding of Amazon Seller Fees and the implications they can have on your profit margin is essential knowledge.

Step #3: Keep Comprehensive Records

When it comes to record keeping, it's better to have too much info than not enough:

• Ensure meticulous record-keeping, ideally in a digital format. This approach is vital for efficient management and retrieval of financial data, as well as for compliance with tax regulations.

Step #4: Choose the Right Accounting Software

Right software selection can increase accounting efficiency:

• Opt for Amazon accounting software that aligns with your business needs. This software should be adept at managing ecommerce-related financial complexities and provide tools for comprehensive financial tracking and reporting.

Step #5: Record COGS and Inventory

There are a couple of ways to go about the COGS recording methods:

• Select an appropriate method for recording COGS and managing inventory, whether it's recording COGS upon sale of inventory or tracking overall inventory levels and values periodically.

Step #6: Understand the Difference Between Bookkeeping and Accounting

Consider bookkeeping as keeping a detailed record of your money, while accounting is like using that record to plan your financial future.

Leveraging financial data is all about turning those numbers into smart business moves:

• Acknowledge the difference between bookkeeping and accounting. While bookkeeping involves the recording of financial transactions, accounting encompasses the strategic use of this financial data for business growth and tax planning.

How to Streamline COGS Calculations on Amazon

Introducing Link My Books

Link My Books is an online service designed to automate and simplify accounting processes for Amazon sellers. This service is particularly useful for handling Amazon VAT complexities and navigating Xero reports, which are common challenges for Amazon sellers. Link My Books efficiently imports Amazon settlement files and generates invoices in Xero, grouping sales data by location, tax rates, and other easy-to-understand categories. This automation is available to Amazon sellers operating in both European and North American territories, ensuring comprehensive coverage regardless of where products are sold​​.

Benefits of Link My Books

1. Automated Integration: Link My Books integrates directly with Amazon and Xero accounts. It automatically summarizes and categorizes sales data every time a sale is made on Amazon. This includes data such as total Amazon sales, seller fees, advertising costs, and more. The tax rates assigned are applied to this data, which is then automatically sent to Xero as an invoice, thereby automating the bookkeeping process​​.
2. Error Reduction and Time Savings: Common errors such as using incorrect Xero reports, not reclaiming VAT on sponsored Amazon ads, and overpaying VAT on Amazon sales are avoided with Link My Books. The automation provided by Link My Books eliminates these issues, saving significant time and reducing the risk of human error. It streamlines the accounting process, turning what can be a lengthy task into a quick and efficient procedure​​.
3. Versatility for Different Business Sizes: Link My Books is suitable for businesses of various sizes. Smaller businesses may find that they can manage their Amazon records entirely through Link My Books, while others might use it in tandem with an accountant. This flexibility allows businesses to choose the level of support they need based on their size and complexity​​.
4. Flexible Pricing Plans: Link My Books offers various pricing plans based on the volume of sales per month. This flexibility allows businesses to select a plan that suits their specific needs, whether they are a small startup or a larger enterprise handling numerous industries and requiring multiple Xero reports. Pricing ranges from £ per month to £179 per month, depending on the level of support required​​

Setting Up COGS Feature in Link My Books

1. Entering Product Costs: Users need to enter their landed costs for each item sold on the Product Costs page. This includes costs like the product price paid to suppliers, shipping from suppliers to FBA or warehouses, and import duties​​.
2. Activating COGS Tracking: Upon activating the COGS feature, users are prompted to select a credit account (for inventory purchased from suppliers) and a debit account (for COGS as inventory is sold). Link My Books can create default accounts in the chart of accounts if needed​​.
3. COGS Calculations and Bookkeeping Integration: After completing the setup, Link My Books refreshes all settlements and displays a new COGS tab on the settlement pages. This allows for accurate tracking of the landed cost of each product SKU and integrates the information into the bookkeeping platform, moving values from the Inventory Asset account to the COGS account​​.

In summary, Link My Books offers a comprehensive, automated solution for streamlining COGS calculations for Amazon sellers, addressing the challenges of VAT, accounting integration, and efficient financial management.

Frequently Asked Questions (FAQs)

Still have questions on how COGS works for Amazon sellers? Here are answers to some common queries:

Are Amazon Fees Included in COGS?

No, Amazon fees are not included in the Cost of Goods Sold (COGS). COGS primarily includes the direct costs associated with the production and sale of products, such as manufacturing costs, direct labor, and materials. Amazon fees, on the other hand, are considered operating expenses and are not directly tied to the manufacturing or acquisition of the products.

What is Contra COGS on Amazon?

Contra COGS, in the context of Amazon, refers to any adjustments or deductions made against the COGS. This might include returns, discounts, or allowances that effectively reduce the total COGS. It's a way to account for situations where the cost initially recorded for goods sold needs to be adjusted due to returns or similar factors.

Is Fulfillment Included in COGS?

Yes, fulfillment costs are generally included in COGS, especially in the case of e-commerce and Amazon sales. These costs include all expenses directly related to the storage, handling, and shipping of products to customers. For Amazon sellers using Fulfillment by Amazon (FBA), the specific fulfillment fees charged by Amazon for storing, packing, and shipping products are considered part of COGS.

How Does COGS Affect My Amazon Profitability and Tax Calculations?

COGS directly impacts your profitability and taxes in two main ways:

• Profitability: COGS is subtracted from your revenue to calculate gross profit. The lower your COGS, the higher your gross profit.
• Taxes: COGS is a deductible business expense. This means it reduces your taxable income, potentially lowering your tax bill.

How Often Should I Review and Update My COGS Calculations for Amazon Products?

You should review and update your Amazon COGS calculations at least every month. This allows you to keep up with changing inventory expenses and sales totals over time. It helps ensure your profit numbers are always current.

Learn how to use our Cost of Goods Sold feature to automate this process.

Conclusion - Amazon COGS Made Easy

We hope this guide clarifies how to calculate the cost of goods sold for your Amazon business. If you're exhausted by manual calculations or complex spreadsheets, try Link My Books.

Designed just for ecommerce businesses, Link My Books connects directly to sales channels like Amazon, automatically downloading the latest reports into intuitive dashboards and accounting tools.

Our tool provides real-time visibility into COGS, revenues, expenses, fees, inventory value, trends, and other metrics.

Start a free trial of Link My Books. Our team will be happy to set up a personalized demo as well. Experience firsthand how we can transform your Amazon accounting experience.

Simplify Your Amazon Bookkeeping and Accounting Today With Link My Books

Are you tired of the complexities and challenges that come with managing your Amazon financials? It's time to make a change. With Link My Books, you can simplify your Amazon accounting and take your business to the next level.

Picture a world where financial management is hassle-free, where you can focus on growing your Amazon business while leaving the number crunching to the experts. That's the power of Link My Books.

Why wait to experience the benefits? Take the first step today and unlock a world of possibilities. When you choose Link My Books, you're choosing error-free accounting, significant time savings, and versatile support that's tailor-made for your unique business needs.

Join the countless Amazon sellers who have already revolutionized their financial management with Link My Books. Try it today and discover how easy Amazon accounting can be.

FREE 14 Day Trial!