COGS is a number most sellers ignore until it catches up with them. The truth is, it drives almost every decision you make. In ecommerce, even a tiny 1–2 percent shift in COGS can impact your profit more than a big jump in sales. Revenue shows motion, but COGS shows whether the business is really working.
When this number is dialed in, margins stop jumping around, pricing becomes intentional, and inventory planning stops feeling like guesswork. Whether you’re on Amazon, Shopify, or everywhere at once, tight COGS is one of the simplest ways to protect profit and scale without chaos.
Let’s break down how to get it right and keep it accurate as you grow.
What is Cost of Goods Sold (COGS)?
COGS is the total cost of the products you actually sold. Think of it as the money you spend to get inventory ready for a customer. For eCommerce sellers, that usually includes what you paid your supplier, manufacturing costs, packaging, prep work, and any direct labor tied to creating that item.
It doesn’t include overhead like software subscriptions, ad spend, shipping to the customer, or team salaries. Those belong in operating expenses. COGS sits right under revenue on your income statement and plays a massive role in how much profit you actually keep.
Why COGS Tracking Makes or Breaks eCommerce Profitability
If you don’t know your true COGS, you don’t actually know your profit. You might think a product is performing well because revenue looks strong, but once you factor in what it really costs to land, prepare, and sell that item, the story can change fast.
COGS quietly shapes almost every important financial metric, and here's why:
It Shapes Your Gross Profit Margin
Your gross profit margin only makes sense when COGS is accurate. If the number is wrong, every margin you calculate, either by SKU, by marketplace, or by campaign, is off.
Sellers who keep COGS tight can spot weak products quickly and scale the winners with confidence.
It Shows The True Cost of Doing Business
Revenue is easy to celebrate. What matters is how much money you keep. Tracking COGS forces you to look at the real inputs behind each sale.
That clarity helps you manage supplier negotiations, adjust pricing, plan inventory, and decide where to reinvest.
It Impacts Your Inventory Velocity
Inventory turnover relies on COGS. If COGS is inflated or outdated, you’ll misread how fast your products move. That leads to two classic problems:
- Stockouts from under-ordering
- Dead stock from over-ordering
Both hurt your margins, and both usually come from the same root issue: unclear COGS.
It Matters for Taxes and Compliance
Your P&L reports COGS as a business expense. If it’s not appropriately tracked, your taxable income can be incorrect. That opens the door to IRS issues you don’t want.
What to Include in eCommerce COGS (and What to Leave Out)
COGS only covers the costs directly tied to getting a product ready to sell. If the cost exists because you bought or produced the item, it usually belongs in COGS. If it’s something you’d pay for even without purchasing inventory, it’s an operating expense.
A quick test that helps every seller: Would this cost exist if I didn’t buy this product?
If the answer is no, it likely belongs in COGS.
What does belong in COGS
These are the core direct costs most ecommerce brands include:
- Purchase price from your supplier
- Inbound freight and shipping to your warehouse (air, sea, courier)
- Import duties, tariffs, and customs fees
- Product packaging that’s part of the item itself
- Allocated freight or duty when multiple SKUs share the same shipment
- Direct labor or touch-up work is required to make a returned item sellable again
- Supplier discounts or credits that adjust the true landed cost
This gives you a clear landed cost per unit, which feeds directly into accurate margins.
What doesn’t belong in COGS
A lot of sellers accidentally bury operating expenses inside COGS, which makes margins look worse than they really are. Keep these out:
- Outbound shipping to customers
- Amazon marketplace fees or Shopify transaction fees
- PPC, ads, and marketing
- 3PL storage and warehouse rent
- Salaries not tied to production
- Office expenses, software, utilities
These are overhead. They’re part of running the business, not part of producing a unit of inventory.
How to Calculate COGS for Your Business
Calculating COGS isn’t complicated, but you need to stay consistent. The whole point is to understand what you spent to get products ready for sale during a specific period. Once you lock in that clarity, every profit metric becomes easier to read.
The basic formula looks like this:
COGS = Beginning Inventory + Purchases – Ending Inventory
Let’s break down what each part really means for an eCommerce business:
Beginning inventory
This includes the value of all sellable inventory you had at the start of the period. Think of it as your opening balance.
Purchases
This includes everything you bought during the period to restock.
Supplier invoices, inbound freight, duties, packaging that’s part of the product, the direct stuff that gets your inventory ready to sell.
Ending inventory
This is the value of what’s still sitting in your warehouse or prep center at the end of the period. You subtract this because those units haven’t been sold yet.
COGS only captures the cost of what you actually sold, not what’s still sitting in your warehouse. When the number is accurate, your gross profit and margins become much more trustworthy.
If you sell on Amazon, Shopify, or other marketplaces, syncing inventory is key; small discrepancies can throw off your COGS. Partners like EcomBalance simplify this by keeping your books aligned with your actual stock, so your COGS stays accurate.
Step-By-Step Process to Track COGS Accurately
Most COGS issues don’t come from bad math; they come from messy data. When you clean up the workflow behind the numbers, accuracy follows.
Here’s a simple process that works for Amazon, Shopify, and multi-channel sellers:
1. Lock in Your COGS Components
As we talked about what to include in COGS, you have to decide exactly what goes into yours, so you’re not reinventing the wheel every month. Once your rules are set, stick to them.
2. Track Landed Cost at the SKU Level
The landed cost is the real cost of getting a product into your warehouse. Spread shared costs (like container fees or customs charges on mixed shipments) across all SKUs fairly.
If you skip this step, your margin numbers will never match reality.
3. Update Cost Changes as They Happen
Suppliers adjust pricing, freight swings wildly, and duty rates change. If you don’t update these changes in your books, your COGS becomes fiction.
Make it a routine, either monthly or with every new shipment.
4. Sync Purchase Orders with Your Bookkeeping
Your PO data should match what you actually paid and what actually arrived. This avoids under-recording or over-recording inventory.
If you don’t keep this tight, your COGS gets distorted during the month-end close.
5. Reconcile Inventory Counts
Do a physical or 3PL count and match it to your system record. Shrinkage, damaged items, or mislabeled units all impact COGS.
Reconciliation keeps your numbers real instead of assumed.
6. Record COGS When the Product Sells
Accrual accounting is your friend here. Sell a unit → remove it from inventory → record the exact cost of that unit in COGS.
This is the only way to get a clean gross margin that reflects what happened that month.
7. Review Your Margins Regularly
Look at margins by SKU, by channel, and by promo period. This helps you catch freight spikes, supplier changes, and packaging increases before they kill your profitability.
8. Keep Documentation for Every Shipment
Invoices, freight statements, duty receipts, and packaging invoices; store them all.
Good documentation prevents errors, protects you during tax time, and makes audits painless.
If COGS tracking keeps falling through the cracks because you’re buried in Seller Central issues, we can lighten the load. Our team handles the case loops, listing fixes, reimbursements, and account health tasks that usually steal hours from your week.
When we take care of the operational chaos, you get the breathing room to stay on top of your numbers. Talk to our experts.
Best Practices for Maintaining COGS Accuracy
Once you know how to calculate COGS, the real challenge is keeping it accurate month after month.
Here’s how smart Amazon sellers and ecommerce brands stay on top of it:
Keep Your Landed Costs Updated
Supplier prices shift, freight fluctuates, and duties don’t always stay the same. If you never refresh these numbers, your books will drift, and your margins will look healthier (or worse) than they really are.
Update your landed cost per SKU any time your sourcing or shipping changes.
Track Inventory Consistently
Pick one inventory method and stick with it; FIFO is the most common for ecommerce because it mirrors how products actually move.
Mixing methods or switching mid-year almost guarantees reporting headaches later.
Sync Data From Every Sales Channel
If you sell on Amazon, Shopify, Walmart, or wholesale, make sure the COGS data rolls up in one place. Fragmented systems create gaps, and gaps turn into bad decisions.
Reconcile Inventory Monthly
Don’t wait for year-end. Monthly reconciliation helps you spot shrinkage, miscounts, damaged stock, and shipment variances early.
Catching mistakes in real time keeps COGS aligned with what actually happened.
Standardize How You Allocate Freight and Duties
Shared containers, mixed pallets, or combined shipments can get messy fast. Build a simple rule for allocating costs by weight, volume, or units so every SKU gets the right share.
Once you have a method, use it every time.
Document Your COGS Rules
When your business grows, and more people start touching your numbers, clarity matters. Document what goes into COGS, what stays out, and how you calculate landed costs.
A small amount of structure saves you from constant rework.
Use Tools Instead of Spreadsheets
Spreadsheets break, but inventory tools and accounting platforms reduce human error, especially when you’re scaling your Amazon business.
Bring in Help Before Things Get Messy
If you’re spending more time fixing COGS than running your business, it’s time to outsource.
Accurate COGS sits at the core of profitability, so it’s often the first task sellers hand off to professionals.
Common eCommerce COGS Tracking Mistakes
Most sellers don’t mess up COGS because it’s complicated. They mess it up because it’s messy.
Here are the big mistakes to watch for:
- Mixing COGS with operating costs: Ads, software, or shipping to customers shouldn’t inflate your product costs.
- Skipping landed costs: Freight, duties, and packaging all matter; just tracking the invoice isn’t enough.
- Splitting shared shipment costs wrong: Multiple SKUs in one shipment? Allocate fairly, or your margins get distorted.
- Not updating costs when prices change: Supplier hikes, new packaging, or freight changes sneak up fast.
- No SKU-level tracking: Blended averages hide which products actually make money.
When to Bring in Professional Bookkeeping Support
You can only DIY your books for a certain time before the cracks start to show. COGS gets messy fast once you’re juggling multiple SKUs, suppliers, freight methods, and sales channels.
If any of the situations below sound familiar, it’s time to hand things over to someone who lives and breathes ecommerce accounting.
Bring in a professional when:
- You can’t tell if you’re actually profitable by SKU or channel.
- Your inventory numbers never match what’s in your accounting system.
- You’re guessing at freight allocations or duty costs.
- Your books fall behind because you’re too busy running the store.
- You’re preparing for financing, an audit, or an eventual exit.
- You’re expanding into new marketplaces, and the data flow gets messy.
- You’ve outgrown spreadsheets and need clean monthly financials.
The right ecommerce bookkeeper gives you clarity you can actually use. EcomBalance’s bookkeeping service does this well. They get how Amazon, Shopify, and multichannel selling really work, and they organize your data so QuickBooks or Xero always stays clean. If COGS has turned into a guessing game, their monthly reporting and clean-up services can steady things quickly.
If you need deeper financial direction on top of bookkeeping, a fractional CFO can help you understand margins, plan inventory, and forecast cash with confidence. That’s where CFO Expertise fits naturally, especially if you’re scaling fast or preparing for an exit.
Frequently Asked Questions (FAQs)
Before we wrap up, here are a few quick answers to the questions sellers bring up most often when they start tightening up their COGS tracking:
Is Cost of Goods Sold a Debit or Credit?
COGS is recorded as a debit. It increases your expenses and reduces your net income on the profit and loss statement.
Is Cost of Revenue the Same as COGS?
Not quite. Cost of revenue can include extra expenses tied to delivering a product or service. COGS is strictly the direct cost of making or buying what you sell.
Can COGS Vary Between Different Sales Channels?
Yes. Fees, packaging, and fulfillment workflows often differ between Amazon, Shopify, wholesale, and other channels.
Those variations can change the landed cost per unit.
How Often Should You Update COGS in Your Books?
Most ecommerce brands update COGS monthly, so their margins stay accurate. If you move a lot of inventory or deal with constant price changes, updating more often might make sense.
Follow these bookkeeping tips if you're an Amazon FBA seller.
Conclusion
COGS tells you more about your business than almost any other number. When it’s accurate, you see your margins clearly, price with intent, and make inventory decisions that stay grounded in reality. The tools you use matter, but the real win comes from staying consistent and catching issues before they snowball.
If Amazon operations are eating your time or dragging you into busywork, Seller Candy can take that weight off your plate. Their team handles the Seller Central tasks that slow you down, giving you more room to focus on growth instead of firefighting.
