Understanding the Cost of Goods Sold (COGS) is essential for running a successful Shopify store. When you know exactly how much it costs to produce or source your products, you can price them better and make smarter business decisions.

If you’re new to Shopify or looking to streamline your store’s finances, this guide will explain everything you need to know about COGS, from its definition to how you can track it effectively in Shopify.

Let’s dive in!

Key Takeaways

• COGS represents the direct production costs of items sold, encompassing materials and labor. It excludes indirect expenses like distribution and marketing.
• Materials, labor, and operations are the key elements that are pivotal in determining this essential metric.
• In the intricate world of retail, understanding the nuances of Shopify Cost Per Item is essential, serving as the linchpin for managing cash flow effectively, strategic tax management, and precise expense tracking for profitability.

What Is Shopify Cost of Goods Sold (COGS)?

Shopify Cost of Goods Sold (COGS) is a vital metric directly impacting profitability. Essentially, COGS refers to the direct costs of producing the goods your business sells. This includes the cost of materials and labor directly involved in producing and manufacturing retail products. In simpler terms, it accounts for the expenses directly tied to creating the items you sell through your Shopify store.

Referred to as the “cost of sales” or “COGS report,” this metric provides a clear financial picture; businesses can accurately assess their profit margins and make informed decisions about pricing, inventory management, and overall business strategies.

What Affects The Cost of Goods Sold?

The Cost of Goods Sold (COGS) is influenced by various factors directly impacting the expenses involved in producing or sourcing products. Here are the key elements:

• Materials: This includes the cost of all the parts and raw materials used to make your products. It also includes anything you buy to resell or to help with production. These costs make up a big chunk of your wholesale price.
• Labor: This covers the cost of your workforce, including the people who assemble products, ship parts, and handle related tasks. It also includes the cost of machines, tools, and shipping those things to your warehouse. Labor is a major part of your wholesale price.
• Operations: This is everything else that goes into making and selling your products, like office staff, software, rent, utilities, and advertising costs. Managing these costs well is important for pricing your products competitively and making a profit.

Cost Of Goods Sold Formula

This widely accepted Cost of Goods Sold Shopify formula used by accountants simplifies the calculation:

(Beginning Inventory + Purchases During the Period) – Ending Inventory = COGS

Calculating Cost of Goods Sold Example

Let’s break down the formula with an example for clarity. Suppose a company starts the year with a beginning inventory valued at $50,000. Throughout the year, they make purchases totaling $100,000. By the year-end, the remaining inventory is valued at $30,000. Applying the COGS formula:

($50,000 (Beginning Inventory) + $100,000 (Purchases)) – $30,000 (Ending Inventory) = $120,000 COGS

In this scenario, the Cost of Goods Sold for the year equals $120,000. This figure represents the total cost incurred by the company in producing and selling its goods during the specified period. By accurately calculating COGS, businesses gain crucial insights into their profitability, aiding in pricing strategies, financial planning, and overall decision-making processes.

How To Calculate Shopify COGS: A Step-by-step Guide

To enable the Shopify COGS report, you’ll need to follow a series of steps to enable tracking and collect relevant data.

Step 1: Enable Inventory Tracking: 

On the Product page, ensure you’ve checked both “Track inventory” and “Enable fulfillment service.” These settings allow you to monitor each item’s stock levels and fulfillment costs.

Step 2: Record Inventory Costs: 

In the Inventory section, record the purchase cost of all inventory items currently in stock. This step provides a baseline for your cost calculations.

Step 3: Document Purchase Transactions:

Utilize the Purchases area to specify the details of transactions when you acquire new stock. This includes costs per unit, which helps maintain a running log of all your acquired inventory. It aids in determining the beginning inventory for subsequent periods.

Step 4: Track Cost Adjustments: 

The Cost Adjustments section is where you can monitor any changes in costs for your inventory over time. Keeping this data up to date is essential for accurate COGS calculations.

Step 5: Leverage COGS Reports: 

With inventory and cost data now in place for each product, you can make the most of Shopify’s COGS reports to analyze your margins. 

The Cost of Goods Sold report summarizes COGS for a custom period, breaking down variables like product costs, fulfillment fees, and total COGS as a percentage of revenue. The Product Profitability report combines data on revenue, costs, and inventory valuations to identify your best-selling products.

You can change the time frame to see how your business performs

Read more: How To Purchase Shopify Plans | Step-by-step Guide

Advanced COGS Management with Shopify Apps

Elevate your e-commerce financial strategies with advanced COGS management through tailored Shopify apps like QuickBooks Online, Xero, and MYOB. Here are some helpful information you should not miss.

QuickBooks Online

Price: Free to $85 per month

QuickBooks Online simplifies advanced COGS management by seamlessly connecting Shopify with its intuitive interface. This integration is particularly valuable for global merchants, allowing them to manage multiple Shopify storefronts effortlessly. 

With QuickBooks Online, businesses can accurately track income, expenses, and tax deductions, streamlining financial processes. Automating invoice, customer, and product entries reduces errors and saves time. 

It enables the effortless import of sales data from Shopify, eliminating manual data entry tasks. Moreover, QuickBooks Online ensures real-time updates between stock levels in QuickBooks Online (Plus or higher) and Shopify, providing a comprehensive solution for precise COGS management.

Xero

Price: Free to $13/month

Xero offers effortless management of ecommerce business finances through its seamless integration with Shopify. This integration synchronizes a daily summary of Shopify sales with Xero, providing a real-time overview of cash flow and business performance. 

By reconciling payouts promptly, businesses maintain financial accuracy. Xero creates daily summary invoices tailored for preferred payment gateways, ensuring clear transaction records. 

Moreover, it allows the grouping of Shopify sales by tax rate, facilitating efficient sales tax management (AU/UK/NZ only). The detailed invoices encompass sales, discounts, shipping, refunds, gift card transactions, and fees, offering a comprehensive view of financial transactions for advanced COGS management.

MYOB

Price: Free to $29/month

MYOB simplifies advanced COGS management by seamlessly connecting MYOB Business and AccountRight accounts with your Shopify store. This integration ensures efficient synchronization of ecommerce data, saving valuable time and eliminating manual data entry. 

MYOB allows the synchronization of MYOB inventory levels with Shopify, preventing overselling of products and ensuring accurate stock management. It automates invoice and order creation in MYOB based on Shopify order data, streamlining the process for timely and accurate financial records. 

With customizable fields, businesses can tailor order creation in MYOB to suit their specific needs. MYOB offers flexibility in payment and refund data flow options, enhancing the overall efficiency of invoice generation for precise COGS management.

The Importance Of Shopify Cost Per Item In Retail

Managing Cash Flow Effectively

Understanding Shopify’s Cost Per Item (COGS) is vital for managing cash flow efficiently in retail. By subtracting COGS from sales, businesses calculate gross margin and gross profit. Higher COGS results in lower gross profit margins, highlighting the need for vigilant cash flow management. Maintaining a healthy cash flow is essential for meeting financial obligations and sustaining business growth.

Strategic Tax Management

COGS significantly influences a business’s tax liability. Deducting the cost of goods used to make or purchase items sold reduces taxable income. Effectively managing COGS ensures businesses pay taxes only on their net income, decreasing the overall tax liability. This strategic tax management preserves financial resources for other essential business needs.

Precise Expense Tracking for Profitability

Product manufacturing involves various expenses, from labor and parts to third-party purchases and operational costs. Tracking these expenses meticulously is crucial for determining a healthy gross profit. 

Accurate expense tracking enables businesses to set appropriate product prices, ensuring healthy profit margins. Efficient management of COGS optimizes taxation, enhances profitability, and strengthens the financial foundation of retail ventures.

Best Practices for Managing COGS on Shopify

Implement accounting integration

Consider integrating your Shopify store with accounting software like QuickBooks Online, Xero, or MYOB using platforms like Amaka. This integration automates Shopify sales, payments, and COGS data synchronization, eliminating manual data entry. This streamlined process saves time and reduces errors, ensuring accurate financial records and best practices in store management.

Regular cost reviews

Perform regular reviews of your costs to identify any discrepancies or inaccuracies. Regularly check the Shopify COGS reports on a weekly or monthly basis. Monitoring how costs and margins change over time provides valuable insights. You can make informed decisions by analyzing which products generate the highest or lowest profits. This data-driven approach lets you strategize effectively, adjusting pricing or managing inventory based on real-time data.

Strategic decision making

COGS reporting is a powerful tool, revealing your business’s financial standing and indicating paths for profitable growth. Understanding your costs and profit margins allows you to make strategic pricing decisions, optimize your inventory, and maximize profitability. Regularly monitoring COGS helps in the day-to-day management of your Shopify store and positions your business for sustained success in the competitive e-commerce landscape.

Bottom Line

Understanding Shopify’s Cost of Goods Sold is pivotal for e-commerce success. With this insight, businesses can streamline operations, enhance profitability, and make strategic decisions that drive sustainable growth in the competitive online marketplace.

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