Retail Dogma

COGS: Cost of Goods Sold for Retail Businesses

Cost of Goods Sold (COGS) reports the costs associated with the products sold by the company. They are reported on the P&L statement as and expense and directly affect the gross profit of the business.

COGS in P&L statement

Gross Profit = Sales – COGS

How to Calculate COGS for a Retail or E-commerce Business?

The formula for calculating Cost of Goods Sold for retail businesses is:

COGS = Beginning Inventory + Purchases – Ending Inventory

Beginning and ending inventory can be extracted from the balance sheet for the previous period and this period. All are taken at cost value and not retail value.

Example

We want to calculate Cost of Goods Sold for the business for the year 2019.

Beginning Inventory: We get the inventory recorded on the balance sheet for the year ended 2018: 250,000 $

Ending Inventory: We get the ending inventory for 2019 from the balance sheet of 2019 : 275,000 $

Purchasing that happened during 2019: 75,000 $

COGS = Beginning Inventory + Purchases – Ending Inventory

COGS = 250,000$ + 75,000$ – 275,000$ = 50,000 $

Alternative Method

COGS can also be calculated from the system, since every item gets assigned a cost value when it is received from supplier and uploaded on the merchandising software. Then when items get sold, the POS automatically records which items have been sold and what their cost price is. From this information gross margin is calculated.

If we have sales and gross margin, we can also calculate COGS.

Retail Math Course

What Are The Costs Included Under COGS?

When items are received, the following is included in their cost value, when they are uploaded on the system:

  • Product Cost (Wholesale price from supplier)
  • Freight
  • Handling
  • Labeling & barcoding
  • Customs Duties

For P&L reporting the amount of COGS is also adjusted to include any stock that was lost due to shrinkage or damage during the reported period.

Is Obsolete Inventory a Cost of Goods Sold?

Yes, any kind of stock obsolescence is included as an expense and will reduce the value of stock on the balance sheet and will reflect in the value of Cost of Goods Sold in the P&L statement.

A D V E R T I S E M E N T

Is Packaging & Shipping included in COGS?

Packaging and shipping expenses for the products from the retailer’s warehouse to the end user are NOT included in COGS, but the packaging and shipping for the products to the retailer’s warehouse to make them ready for trading is included in COGS.

For example preparing the product by labeling, barcoding or initially packaging it in the package that will be used for display in the store is a cost of goods sold.

On the other hand, when a customer places an order online and the item is then put into a shipping box and delivered to the customer, this will not be a cost of goods sold, but rather part of operating expenses.

Is Warehousing a Cost of Goods Sold?

In retail businesses warehousing is not included in COGS and is reported under operating expenses (OPEX).

Are Merchant Fees or Paypal Fees a Part of COGS?

No, any merchant fees (Paypal, Stripe, credit card processing,..etc) are not recorded as cost of goods sold and are recorded as SG&A (selling , general & administrative) expense ( also part of OPEX).

Difference between COGS and Operating Expenses

For retail & e-commerce businesses, Cost of Goods Sold are expenses that are directly related to the products that are to be sold, while operating expenses are expenses related to operating the business.

Example of Operating Expenses:

  • Rent
  • Employees
  • Utilities
  • Sales & Marketing
  • Admin

Considerations

It should be noted that what goes or doesn’t go under cost of goods sold differs by business type, so here we have only discussed what is commonly included for retail & e-commerce businesses, and this is different from manufacturing businesses.

Furthermore, some companies follow different reporting practices, where some include store and warehouse rents in the same figure and report it as Cost of Sales. However; it is better to separate cost of the sold inventory from operating costs, for better business reporting and analysis.

You can download a P&L template tailored for retail businesses and learn the step-by-step process of creating a retail budget from this course on retail budgeting & planning.