What is Period-Based Cost Of Goods ?

Defining Cost Of Goods To Calculate True Profit

  • In order to calculate our true profit when selling a unit of our product , we need to know how much it costs us to land one unit of that product on the shelves of an Amazon warehouse.
  • That Unit Cost is usually the sum of all the individual products and services we paid for during the product’s journey between dreaming which product we want to sell and  receiving the ‘We have shipped the product you sold” email in our inbox.

Cost Elements – The Granular Sub-cost

  • Typically, a product’s Unit Cost amount is  a combination of individual expense items like, for example,
    • Manufacturing costs
    • Printing costs
    • Packaging costs
    • Labelling costs
    • Shipping costs
    • Customs & Duty costs
    • Inspection costs
    • Handling costs
  • and many more items of that nature.
  • In SellerLegend, we call each one of these individual cost items a ‘Cost Element’

Cost Per Unit

  • Some Cost Elements are conveniently quoted to you in currency amount per unit. For example, the cost of manufacture may be given to us as $3.99 per unit.
  • Some other cost elements may be quoted to you as currency amount for a service. For example, shipping costs may be quoted to you as $2,285 to ship a consignment of 500 Lb from point A to point B.
    • In such instances, we need to first convert the quoted amount for the shipping service as a whole to its cost per unit.
    • Say the 500 Lb relate to a consignment of 400 units of your product; then, each unit would carry a shipping Cost Element of $2,285/400 =  $5.71 per unit.
    • Any cost incurred related to the product, which is not expressed in an amount per unit, must first be converted as above to yield the ‘Cost Per Unit’ for a Cost Element.
    • SellerLegend assists you in converting overall service costs to Cost Per Unit, when using the Detailed COGS Entry Form. Please familiarize yourself with the differences between the Detailed COGS Entry Form Vs. the Simple COGS Entry Form here.

Cost Of Goods Sold (COGs) Value

  • Once all the Cost Elements and their respective Cost Per Unit are defined, adding all the Costs Per Unit together yields the Cost Of Goods Sold (abbreviated COGs) value.
  • To calculate true profit, we will eventually need to subtract the COGS value from the revenue (but this is not relevant to this particular COGS discussion)

Cost Periods

  • Once you have calculated the Cost Of Goods for a shipment of your product, that COGs remains set and does not change for all the units in a particular shipment. You have paid a set price per unit for all the units of a shipment.
  • Once you run out of stock and need to reorder, it is likely that the Cost Of Goods will change.
  • For example:
    • Manufacturing costs could go up due to higher commodity prices.
    • Or they  could go down because you are ordering higher quantities and you get a volume discount.
    • Shipping costs may vary due the period of shipping (think Chinese New Year).
    • Or you may want to have a manual inspection of a higher or lower percentage of your shipped units …
  • So, the COGs you obtained for your last shipment may be different from the COGS you will obtain for your next shipment.
  • The differences in COGS will positively or negatively affect your profit. Hence, you need to be able to assign the proper COGs to a specific sale, based on the Sold Date and the specific COGs which was active at the time of sale
  • That’s why SellerLegend implements Period-Based Cost Of Goods. It is a means of keeping track of the correct price for a unit sold at the point in time of your customer’s order.
  • In essence, you indicate to SellerLegend that the COGS was $X for product Y for a period between a specific from and a specific to date. And for every new consignment where  the COGS changes, you define a new COGS for a new period between a from date and a to date.

Tips And Tricks!

  • It is permissible to future-date COGS. The future dated cost will only become applicable when the future date is reached
  • It is permissible to change COGS date and COGS unit prices retrospectively. SellerLegend will automatically reassign COGS to the orders based on the new dates and prices. Your profit will instantly be recalculated accordingly as well.
  • It is permissible to change the dates of the Cost Periods at any time. SellerLegend will automatically and retrospectively adjust the prices for any orders.

The COGS Concepts Explained Using The COGS UI

  • In this section, we will use the COGS UI to help you form a visual representation of Cost Periods Vs Cost Elements
  • If you want to perform a bulk COGS upload you do not use the UI, you use an Excel sheet, explained at this link COGS Bulk Upload
Cost Periods Vs Cost Elements
  • The following image shows a product with 2 cost periods
    • Notice that the UI shows the cost elements in reverse chronological order, with the most recent one first
    • The first (oldest) cost period runs from March 13, 2013 to March 13, 2022
    • The second (most recent) cost period runs from March 14, 2022 and runs forever (that is, until you eventually decide to add a more recent cost period)
    • The most recent Cost Period has just one Cost Element (manufacturer costs), and has a product price of $3.38/unit
    • The oldest Cost Period has 3 Cost Elements (Manufacturer, Packaging, Photography) and the combined price for the 3 cost elements is $3.63

Adding And Deleting Cost Periods and Cost Elements
  • The following image shows the UI mechanism to add , delete and edit cost periods and cost elements within the cost periods

How To Read A COGS Entry Form
  • The following image shows a high-level recap of the previous 2 images for added clarity


Related Posts

Malcare WordPress Security