Cost of Goods Sold (COGS) versus Expenses ?

Hi everyone,

Have another question and curious for e-commerce which items would be a COGS and which items should be an expense. Not sure if I have this correct or not, but right now working this way for a business plan expense account portion of the plan.

COGS
Widget Inventory + Shipping
Dropship and Warehouse fulfillment charges

Expenses (Overhead)
Marketing (SEO, PPC, etc.)
Merhcant Account
Rent
Salary
Credit Card Fee
Shipping Supplies
Office Supplies
Outgoing Shipping to Customer
etc......


Basically, the way I am treating COGS is any cost associated with buying inventory from suppliers, quite simple.

Any thoughts?

 

Also curious, where would ales tax collection fit into all this.

Understand the income tax portion, just not how to throw in sales tax (canadian here, so GST and PST/RST, not sure on US tax system).

 

Actually think figured it out, sales tax does not need to be on here, can be treated seperatly on its own. As I have to do is collect and remit the customers sales tax...lol...stupid me.

 

Your COGS looks right to me. Although I would write it like this.
Item Cost
Shipping Cost
Dropship/Warehouse Fulfillment

As for your tax. Your right, if your in the US, any tax you collect in state you will have to remit quarterly. If goods sold in state, you charge state tax, then add county tax...which differs by county. Make sure to get the list, and embed that into your ecommerce program...unless you want to be audited if you become huge.

Out of state tax is your client/customer/purchasers responsibility...again in US...so they have to remit, and YOU do not have to charge tax.

Hope that clears up the ecommerce question.

Your overhead will grow much more then COGS will ever.lol...if you break it down like an accountant would.
One sharpie, two sharpie...wait a minute who bought 2 sharpies this month?? You only need 1...

Oh my god corporate.....lol

 

Thank Motex, been picking my brain on this whole COGS thing, lol.

Now I am trying to figure out exactly how to make estimates on COGS, I have sales figures based upon website traffic, conversion rates, and average order value. Just not sure how to estimate COGS for these values.

Based upon another thread I posted http://forums.digitalpoint.com/showthread.php?t=1008997 if we use these same figures curious how would COGS play into this:

50 sales a month
Average Order Value (AOV) = $102.00

Sales Revenue = 50 x $102.00 = $5,100.00

COGS
Assumptions:1.) 20% markup to customer, so total cost for me to buy inventory will be $81.60 (20% less
$102.00), this includes shipping.
2.) For shipping of inventory from my supplier to my location, will assume 10% of this $81.60 will be
for shipping. Which would mean $8.16 for shipping.

Using these figures above can now plug in the final cost for my COGS

COGS for one month

Item Cost = 50 items x ($81.60 - $8.16) = $3672.00
Shipping Cost = 50 items x $8.16 = $408.00
Total COGS = $4080.00

These are all very conservative figures, but should give me a rough idea. As truly my COGS will be a bit lower based upon bulk shipping and etc...

What are peoples thoughts???

 

Hey wguttrid,

If you are doing direct response marketing, I believe, you can factor in the "marketing" to your cost of goods sold...

 

Hey quangvan, will be doing PPC, think I know what you mean. See what google comes up with, thought about where marketing should go exactly as you can tie this cost in with ROI.

 

Another question, for the Average Order Value (AOV) does this include the shipping cost or total cost the customer paid for the item bought?

I assume the total cost is calculated into the average order value and thus total revenue due to shipping (carrier, packaing, label) being an expense.

The reason I am asking is I think I miscalculated above, the $102.00 is an industry AOV and thus would include customer shipping already in it, which means my numbers should be lower then they are.

 

Found the information to answer the AOV question, see link http://articles.directorym.net/Order_Up_Turn_Shoppers_into_Big_Spenders-a889032.htm

Note, when figuring out your AOV, always exclude from the revenue amount any sales taxes and shipping costs, unless shipping is a profit-maker for you. Taxes and shipping are not merchandise for sale, so, do not include those in your totals.

 

Hi,

According to a post on another forum, containers belongs under COGS.

The post said,

"According to the IRS...containers….should be included in inventory (see IRS website, search keyword “inventory”). "

"...it appears that those shipping labels and packaging materials are not deductible when purchased…but deductible when the goods are actually sold (they will be included as inventory). However, there is an exception to this rule. The exception is called the Incidental Supplies Exception under Regulation 1.162-3. The Incidental Supplies Exception allows a taxpayer to deduct the cost of supplies in the year purchased provided 4 conditions are met, these are: 1) Supplies are minor or secondary importance, 2) Taxpayer must not keep a record of consumption for the supplies, 3) Taxpayer must not take a physical inventory of the supplies at the beginning and end of the tax year, and 4) the deduction of supplies in the year purchased cannot distort taxable income (in other words..if I deduct the amounts in the current year..it will not overly skew my taxable income).

In conclusion, it depends if those shipping labels and packaging materials you mentioned qualify as “Incidental Supplies.” If they qualify, you can deduct them in the taxable year they are purchased. If not, they need to be included as inventory and deducted when sold."

I'm not allowed to put links in my posts yet, but the forum I got this from is
accounting-and-bookkeeping-tips.com post # 6476. If you search the forum for COGS you'll find it.

So to me this says that boxes for shipping are COGS because they are containers but packing peanuts, labels, etc. are expenses because they are incidental and you don't really inventory them.

 

Well, the post from that other forum doesn't come up when I search for COGS. But if you change the PID in the browser bar to 6476, you'll see it.