Cost of Goods Sold

Cost of Goods Sold or COGS is a key metric on the financial statements as it is subtracted from a company’s Net Revenues to determine the Contribution Margin 1. The Contribution Margin 1 is a profitability measure that evaluates how efficient you are in managing your supplies in the production process. So let's take a look at the development of your COGS!

Definitions

Before you dive into data analysis, let's make sure that we are on the same page.

  Please make sure you have the Cost per Item set for all your variants and products.

You can evaluate your COGS based on the following metrics:

What’s Included in COGS?

A simple way to think about COGS is all the costs involved with getting an item into your inventory and prepared for sale. 

The following costs are often included in COGS:

1. Product cost: How much it costs to order items from your manufacturer or distributor
2. Freight in: How much it costs to get those purchased products delivered to you
3. Duties and fees: Any costs associated with design, kitting, or assembly of the products

What’s Excluded From COGS?

Now, there’s a whole lot more that goes into selling a product than what is listed above.

But accounting professionals like to break these things out into other categories so business owners can observe and optimize things separately. The following are things not included in COGS:

1. Rent: For example, the monthly cost of your warehouse or storage facilities
2. Online advertising: Digital ads through Facebook, Instagram, or YouTube
3. Payment processing fees: Stripe or PayPal per-transaction costs
4. Product R&D: The design and development required to bring the product to its finished state
5. Freight out/Shipping Revenue: Delivery to the customers
6. Marketplace fees: Charges from platforms like Shopify or Amazon
7. Employee salaries: This includes contractors like designers or market researchers

You must account for these expenses, of course, but they are recorded in a separate line item — usually operating expenses (OPEX).  

Use Cases

This report provides you with an overview of your Cost of Goods Sold. Use the data and:

• Find out if your Cost of Goods Sold is in line with our revenue growth
• Identify if you are able to lower your COGS over time to increase your Contribution Margin 1
• Validate your pricing strategy
• Measure the impact of Product Returns on your Costs
• Have visibility of one of the main inputs for other calculations, like LTV or Gross Margin.
  
  

How to Get More Details

The gross and net buying prices are shown as a color-coded column chart followed by absolute figures. Trends get even more clear by the growth rate comparing each data point with the previous period.

For running observation periods that have not yet been completed, e.g. the current week or month, RetentionX extrapolates the run rate based on the historical data. 

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