Shopify accounting: Cost of goods sold (COGS) and how to track it
Kaci Carson
January 10, 2024
Tracking the cost of goods sold (COGS) is vital for your Shopify storefront because of how much it reveals about the underlying financial health and overall profitability of your business. COGS refers to what you pay for the goods you sell—the raw materials, labor, shipping and other direct costs involved in the production of goods.
By keeping a close eye on COGS in your Shopify store, you’re able to gain insight into your gross profit margins for each product and can make important decisions around how you price your store items. In this article, we’ll go through how to access the Shopify COGS report and how to maintain best practices in managing the Shopify cost of goods sold.
How to calculate COGS (cost of goods sold)
To determine your Shopify COGS, you need to calculate the total costs of producing the goods you sell. The basic formula is: COGS = Beginning Inventory (the value of your inventory at the start of the period) + Purchases (the materials, labor, and other expenses used to produce inventory) – Ending Inventory (the value of remaining inventory at the end of the period).
To evaluate inventory for COGS, you need to consistently track the costs you pay for each item. You can do this by enabling “Track inventory” for each product in Shopify. Whenever you purchase new inventory, it’s important to record what you paid for those items.
Some businesses use the weighted average method, in which they divide the total cost of new inventory by the number of items to determine the total amount per unit of inventory. Others use LIFO (Last in, First out) or FIFO (First in, First out) methods to determine the value of remaining inventory. Note that while the U.S Generally Accepted Accounting Principles (GAAP) allow both LIFO and FIFO, the International Financial Reporting Standards (IFRS) have banned LIFO.
The most important part is picking an inventory valuation method and sticking to it consistently to get an accurate picture of your COGS over time. By diligently monitoring all costs incurred to purchase and sell your products, you’ll gain insight into how much capital and profit margin you require to operate a sustainable business.
Setting up COGS tracking in Shopify
To start monitoring COGS in Shopify, you first need to enable inventory tracking for each product. Under the Product page, check “Track inventory” and “Enable fulfillment service” to monitor stock levels and fulfillment costs for each item. With these options turned on, you can then begin recording data in the Inventory, Purchases, and Cost adjustments sections.
In the Inventory section, enter how much you paid for all inventory currently in stock. As you buy new stock, use the Purchases area to specify the details of those transactions, including costs per unit. The Purchases view keeps a running log of all inventory you’ve acquired to help determine beginning inventory for the next period. The Cost adjustments section can track any changes in costs for your inventory over time.
With inventory and cost data in place for each product, you can then leverage Shopify’s COGS reports to analyze your margins. The Cost of Goods Sold report summarizes COGS for a custom period, separating out variables like product costs, fulfillment fees, and total COGS as a percentage of revenue. The Product Profitability report incorporates revenue, costs, and inventory valuations to show which products are best sellers. These reports are key to optimizing your revenue and inventory planning based on how costs and sales can change over time.
Best practices for managing COGS in Shopify
To fully benefit from COGS tracking in Shopify, consider an accounting integration to connect Shopify with your accounting software. Through Amaka’s accounting integrations for Shopify sales, payments and COGS data gets synced to QuickBooks Online, Xero or MYOB automatically. This eliminates manual data entry, saving time and reducing errors, helping you maintain best practices in your Shopify store management.
It’s also important to perform regular reviews of costs to catch any incorrect amounts or details. Check COGS reports weekly or monthly to monitor how costs and margins change over time, and which products generate the highest or lowest profit. This will help you to make strategic pricing or inventory changes based on the data. COGS reporting reveals where you stand and the paths to move forward profitably, helping manage your business well.
Shopify accounting eBook
Learn how to automate your Shopify accounting and spend less than an hour on your books every month.
How to integrate Shopify with your accounting software
Integrating Shopify with your accounting software is a simple process. We’ll use Shopify + QuickBooks Online as an example. To get started, consider your set up options, this can include our Guided set up, Advanced set up or our 2-Minute Express set up options. Our Guided set up includes a one-on-one Zoom call with our customer support team, who are here to help answer all questions along the way while setting up the integration with you. The Advanced set up option allows for custom mapping.
To add the integration using the 2-Minute Express set up option, follow the steps below:
- To get started, click Register or sign in on the Amaka dashboard
- Click the New integration button then select Shopify + QuickBooks Online from the integrations options
- Then proceed to Sign in to your Shopify account by clicking on the Connect new account button underneath Shopify logo. It’s important to go through the guided authentication process for all permissions to be granted
- Following the same steps, proceed to authenticate your QuickBooks Online account, then click Save + Continue.
- Next, choose your preferred setup method, invoice breakdown, invoice format, mapping and scheduler options to complete the integration setup
- Click Save + Continue to finish activating the integration
How to reduce your COGS
If your objective is to decrease the cost of goods sold (COGS) for your e-commerce business, there are several approaches you can take. Depending on your specific circumstances, reducing COGS may be more favorable than raising prices (although you can consider both options). Here are a few essential strategies, but please bear in mind that not all of them may be applicable to your situation.
- Utilize economies of scale – Whether you source products from a supplier or manufacture them in-house, as your store grows, explore the possibility of obtaining bulk purchase discounts.
- Consider switching suppliers – This also applies to materials or manufacturers altogether. If negotiating with your current business partners based on economies of scale is not yielding satisfactory results, it may be worthwhile to explore alternatives. This could involve selecting a supplier with lower shipping costs, opting for less expensive materials in your manufacturing process, or exploring offshore manufacturing options.
- Evaluate product sales – Look into which products aren’t selling well. Even if these products have a good profit margin, they can negatively impact your COGS if they remain unsold on your shelves. Look for ways to reduce inventory turnover rates or consider discontinuing these products altogether.
- Identify and address errors – It’s important to address anything that is inhibiting growth in your supply chain. For instance, you may discover issues such as damaged materials, lost goods in the shipping process, or labor inefficiencies. Take steps to rectify these problems and streamline your operations.
- Maximize automation in your workflows – As an accounting integration solution, we recognize the significance of automation. If labor costs constitute a significant portion of your COGS, implementing automation can have a substantial impact. This could involve replacing manual processes with machines or introducing software that enhances your team’s overall efficiency.
How COGS impact your financial statements
The financial statement that COGS will appear on is the income statement, also known as the profit and loss (P&L) statement. It actually appears in the direct revenues section and helps to calculate your gross profit and gross margins (Gross Profit = Revenue – Cost of Goods Sold (COGS) – Other Direct Expenses).
Key takeaways on Shopify and cost of goods sold
With the right knowledge surrounding management of your Shopify cost of goods sold, you’re able to understand how to track access reports to enhance your business accounting practices. Maintaining best practices for your Shopify storefront allows you to maintain compliance and ensure your business is operating smoothly.
The use of accounting integrations to connect Shopify with your accounting software streamlines the process of your Shopify COGS reporting and tracking, opening up more time for you to spend on other important tasks for your business.
What’s next?
List your practice
Join our directory and showcase your expertise to 1,000’s of merchants.
