How to Calculate COGS for E-commerce

What is COGS?

Cost of Goods Sold (COGS) represents the direct costs attributable to the products you sell. In accounting, COGS appears on your Profit & Loss statement and is deducted from revenue to calculate gross profit.

For e-commerce operators, COGS is more than an accounting line — it's the foundation of every profitability decision: how to price products, which products to advertise, what ROAS target to set, and which SKUs are worth keeping in your range.

What to Include in COGS

The following costs are direct product costs and belong in your COGS calculation:

1. Product Purchase Price

The price you pay your supplier per unit, net of any trade discounts. If you buy in bulk and receive a volume discount, use the actual discounted price paid. If supplier prices vary by order, use a weighted average cost (WAC) or FIFO method.

2. Inbound Freight & Shipping to Warehouse

The cost of transporting goods from your supplier to your warehouse or fulfilment centre. This includes ocean freight, air freight, domestic haulage from port, and any inland delivery charges. Divide total freight cost by units received to get a per-unit figure.

3. Customs Duties & Import Taxes

Import duties (tariffs) applied at customs when goods enter your country. In the UK, typical duties range from 0% to 12% of the customs value depending on the commodity code. Always include these — for imported goods they are often the largest hidden cost.

4. Inbound Packaging Materials

Primary packaging that comes with the product (boxes, poly bags, blister packs) sourced from your supplier or produced to pack the product. Tertiary packaging for transit is also included here.

5. Quality Control & Inspection Costs

If you pay for pre-shipment inspections or quality audits (common for manufacturers using third-party QC firms), these are a direct cost of procuring sellable goods.

6. Manufacturing Labour (for own-manufactured goods)

If you manufacture your own products, direct labour costs — the wages of workers directly assembling or producing goods — form part of COGS. This does not include management, admin, or indirect staff.

What NOT to Include in COGS

The following are operating expenses, not COGS. Including them in COGS distorts your gross margin and makes it impossible to compare against industry benchmarks correctly.

• Outbound customer shipping — the cost of sending orders to customers
• Marketing & advertising spend — Google Ads, Meta, influencer fees
• Platform & marketplace fees — Shopify subscriptions, Amazon FBA fees, eBay commissions
• Payment processing fees — Stripe, PayPal, Klarna charges
• Returns handling costs — postage, restocking labour, write-offs
• Customer service costs — support staff wages, helpdesk software
• Warehouse rent & utilities (these are overheads, not direct COGS)
• Depreciation of equipment

The COGS Formula

Accounting COGS Formula (P&L)

For your income statement, COGS is calculated as:

Per-Unit COGS Formula (for pricing & advertising)

For per-SKU profitability and setting advertising targets, you need a per-unit figure:

Worked Example

How to Track COGS

Shopify

Shopify allows you to enter a "Cost per item" on each product variant. This feeds into Shopify's margin reports. However, Shopify only stores the product purchase price — it does not automatically factor in freight or duties. You need to calculate the true landed cost and enter that as your cost-per-item.

WooCommerce

WooCommerce's built-in reports do not include COGS tracking. You'll need a plugin such as WooCommerce Cost of Goods (SkyVerge) or integrate with accounting software that tracks stock costs (e.g., Xero with inventory enabled).

Spreadsheet Method

For smaller catalogues (under 200 SKUs), a product cost spreadsheet works well. Maintain columns for: SKU, supplier cost, freight allocation, duties, packaging, and calculated unit COGS. Update after every purchase order.

Accounting Software

Xero and QuickBooks both support inventory cost tracking using FIFO or weighted average cost methods. This is the most accurate approach for businesses with fluctuating supplier prices or exchange rate exposure.

COGS & Gross Profit

Gross profit is the first profitability line on your P&L and the most directly controlled by your COGS accuracy:

Gross margin varies considerably by e-commerce category. Consumer electronics typically operates at 20–35% gross margin; apparel at 45–65%; health & beauty at 50–70%. Your gross margin must comfortably cover all operating expenses and leave a net profit.

Common COGS Mistakes

• Using supplier invoice price only — The most common error. Freight and duties can add 20–35% to a product's true cost.
• Not allocating freight per unit — Lumping all freight as a single overhead instead of dividing by units received distorts per-SKU profitability.
• Ignoring currency fluctuation — If you buy in USD or CNY and sell in GBP, exchange rate movements change your effective COGS. Review quarterly.
• Using RRP instead of actual paid price — Always use the price actually invoiced, net of discounts.
• Not updating COGS after price changes — Supplier price increases that aren't reflected in your cost data lead to margin erosion you won't notice until it's too late.
• Including outbound shipping in COGS — This inflates COGS and understates gross margin, making your business look less profitable than it is to buyers and investors.

Frequently Asked Questions

Next Steps

Accurate COGS is the first step to running profitable Google Shopping campaigns. Once you know your true per-unit cost, you can calculate the exact ROAS target each product needs — and stop wasting budget on products that look profitable but aren't.