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What is COGS? How to Calculate Cost of Goods Sold?

Return on investment (ROI) is one of the most important metrics that helps a business understand how profitable a certain project is. You can use ROI to measure almost any type of investment, which makes it useful in all kinds of business situations. But there are so many accounting terms and acronyms that it’s hard to know where to begin when you’re trying to figure out if your business is making money or not.

COGS stands for Cost of Goods Sold” and it measures the cost of purchasing inventory, raw materials, and other goods that your business sells. It isn’t just relevant to manufacturers – every business has COGS. In this blog post, we explain everything you need to know about COGS so you can calculate it accurately whether it be your Amazon business or any other kind of business you own.

What is COGS?

What is COGS Cost of Goods Sold

COGS stands for “cost of goods sold”, which is the total cost of the inventory you purchased and sold to customers during a certain period. The cost of the goods sold includes: –

  1. The price you paid for inventory
  2. The cost of shipping the goods to your warehouse or store
  3. Any taxes, duties, or tariffs you had to pay to import inventory into your country
  4. The cost of inspecting or testing the goods
  5. Any costs associated with storing the goods before you sell them
  6. Any costs associated with repackaging or refurbishing goods that are damaged or broken.

Why is COGS Important to Your Business?

Your COGS are an important factor in your bottom line of your Amazon business because they’re part of your break-even formula. The break-even formula is the amount of money you need to spend to stay in business and break even. COGS are only one part of your break-even formula, but it’s the most important one. This is because it determines the cost of each product. So if you know the COGS of your products and services, you can calculate the break-even point for your business with just one more formula.

The Break-Even Formula (BEP)

The break-even formula is a simple equation that takes into account your fixed costs and your variable costs. It tells you the amount of money you need to spend to stay in business and break even. Your fixed costs are the expenses that don’t change with sales volume, like rent, insurance, and salaries. Your variable costs are the expenses that increase or decrease with sales volume, like materials and shipping.

The break-even formula is: Fixed Costs / (1 – Variable Costs/Revenue) = Break-Even Point

The formula shows how much you need to sell to cover your fixed costs and reach a point where your revenue exceeds your variable costs. In other words, it shows how much money you need to spend before you start making money.

How to Calculate COGS?

The formula for calculating COGS is simple: COGS = Inventory value – Net Sales. If you want to calculate COGS for the previous month, you can use your inventory value and the sales figures from last month. If you use Sellerboard, you don’t have to manually calculate COGS. Since Sellerboard is an accounting software, it calculates COGS for you. All you have to do is enter the purchase price of the goods you sold last month, and the software will do the rest.

Why is Knowing your COGS so Important?

If you want to know whether your business is profitable, you have to know your COGS. Combined with your other business expenses, it will tell you how much money you need to make in sales to break even. If you have more COGS than sales, you have to figure out how to lower the COGS of your products or services. If you have more sales than COGS, you’re profitable, which is the goal of running a business. But it isn’t as simple as that: If you have more COGS than sales, you’re also in danger of going out of business.

The lower your COGS, the more likely you’ll stay in business and be profitable.

The Balance Sheet

The balance sheet is another one of those financial statements that you’ve probably heard of. But did you know that it’s not a statement at all? It’s a table. It shows the assets, liabilities and equity of your business at a specific point in time. The balance sheet is also called the statement of financial position because it shows where your business stands financially on a certain day.

What is an Asset?

Assets are things that give your company value and help it make money: cash, inventory, equipment, vehicles, licenses, real estate and so on. You can also think of assets as things you own that have value to other people: A building or piece of land might be worth money to someone else if they want to use it for something else or if they want to sell it

Summary: Understanding Cost of Goods Sold

COGS stands for “cost of goods sold”, which is the total cost of the inventory you purchased and sold to customers during a certain period.

The COGS formula is simple: COGS = Inventory value – Net Sales.

If you want to know whether your business is profitable, you have to know your COGS. Combined with your other business expenses, it will tell you how much money you need to make in sales to break even. If you have more COGS than sales, you have to figure out how to lower the COGS of your products or services. If you have more sales in your Amazon business than COGS, you’re profitable, which is the goal of running a business.