How to calculate COGS
Your cost of goods sold is what a unit cost you landed: the supplier invoice, plus freight in, plus duty and clearing, plus inbound handling, divided by the units that arrived. It is recognised when the item sells, not when you paid for it. On the shipment worked through below the supplier invoice is three quarters of the real figure, and the missing quarter is missing in the direction that flatters you.
This cost is charged , .
Your shipment
One shipment, taken apart. The supplier invoice is the tall block; the other three are the ones no document from your supplier shows. It stacks: a two unit order carries it twice and a bundle carries its components.
landed cost, per unit
On one order of 1 unit at 49.00 plus 4.90 shipping, it books 16.46.
Your P&L, on that order
At most, because 2 costs are still missing. A cost you have not given has no figure at all, never a zero. Everything you type stays in your browser.
What is in it, and what is not
The test is physical. Everything you spend to get a unit into your warehouse in sellable condition is product cost. Everything you spend after a customer orders it is not.
So this is product cost: the supplier invoice, freight to your warehouse, import duty, customs clearing, inbound handling, inspection, and any packaging that is part of the product rather than part of the shipment.
This is not: outbound shipping, pick and pack, storage, payment processing, marketplace commission, returns handling, advertising. Those are real and they belong on the statement, but below gross profit. Putting them in product cost makes your gross margin look like a different business.
Import VAT is not a cost if you are registered, because you reclaim it. Duty is, because you do not. Mixing those two is one of the more expensive mistakes on this list.
A worked shipment
A shipment of 500 units.
Supplier invoice 500 x 12.00 6,000.00
Freight and insurance 1,400.00
Customs value (goods + freight) 7,400.00
Duty at 6.5% 481.00
Broker and clearing 150.00
Inbound handling 200.00
---------
Total landed 8,231.00
Landed cost per unit 16.46The supplier price is 12.00. The unit costs 16.46. Sell it at 49.00 ex VAT and the two readings are 75.5% gross margin and 66.4%. Nine points, on the most quoted number in the business, and every decision downstream is made against it.
Splitting freight across a mixed shipment
One container, two products. 500 units of A at 2 kg each, 300 units of B at 0.5 kg. Freight 1,400.
Split it per unit and each of the 800 units carries 1.75, which charges B nearly three times what it costs to move. Split it by weight, which is what the carrier billed you on:
A 1,000 kg of 1,150 1,217.39 2.43 per unit
B 150 kg of 1,150 182.61 0.61 per unitUse the basis the cost was actually charged on. Weight or volume for freight. Value for duty, because duty is a percentage of value. Unit count only when the cost really is per unit, like a label.
Which shipment's cost a sale draws from
Landed cost changes between shipments, so you have to decide which one a given sale consumes.
A flat rate per product is the honest starting point: one landed cost per product, dated, updated when a shipment lands at a materially different number.
FIFO consumes the oldest stock first, which is what physically happens in most warehouses. Weighted average pools what is on hand and charges the average. The two rarely differ much: 500 units at 16.46 then 400 at 18.90, selling 700, is 12,010.00 under FIFO against 12,281.11 under weighted average. That is 271.11 on 700 units, about 0.39 each.
Pick one, write down which, and keep it, so that a change in gross margin means something changed in the business. LIFO is a US tax construct and is not permitted under IFRS.
Bundles, replacements and returns
A bundle costs the sum of its components. Not the price of one item doubled, not an estimate.
A warranty replacement is a cost of the sale that caused it. You shipped a second unit and were paid for one. Whether it sits here or in a returns line is your choice, but it has to sit somewhere.
A return that comes back sellable is not a cost of goods. The unit went back into stock. What it cost you is the return freight and the handling, and those are fulfilment.
The check
There is an identity that tells you whether your per-unit number is right, and it does not depend on your rate card at all:
opening inventory + purchases - closing inventory = cost of goods soldCount what you had at the start of a period, add what you bought, subtract what you had at the end, and compare it against your per-unit cost multiplied by units sold. If those disagree by more than a couple of per cent, one of them is wrong: usually a landed cost nobody updated, or shrinkage nobody booked. Do it quarterly.
Where it usually goes wrong
This is one line of the statement. See where it sits.
The other guides
Vecks works all of this out on your own orders and shows you where each figure came from. Ask for a seat.