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

Begging and ending inventory can be extracted from the balance sheet for the previous period and this period.

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 $

What Are The Costs Included Under COGS?

  • Product Cost (Wholesale price from supplier)
  • Freight
  • Handling
  • Labeling & barcoding
  • Customs Duties
  • Adjustments (Obsolescence, damage,..)

Is Obsolete Inventory a Cost of Goods Sold?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.

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.

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 should be included for retail & e-commerce businesses.