When starting your own business, you need to have an end-to-end business plan. All of your business plan should consider several aspects such as location, future market condition, price of raw materials, selling price, profit, human resources, and many other aspects. All of these should be planned carefully in order to prevent profit loss. One of the simple way is to calculate and record the cost of goods sold (COGS) for your products.
What is COGS?
Cost-of-goods-sold (or “COGS”) are the direct costs or the buying costs involved in purchasing or making the products you sell. This could be the purchase price of things you buy or the production costs of the things you make. COGS is sometimes referred as the cost of sales or cost of services, including direct labor costs to produce each of those items. All direct expenses can be included in COGS while indirect expenses such as: marketing expenses, shipping fees, overhead costs, are all excluded from the COGS.
For example, the COGS of a furniture company which produce various kind of furniture would be the sum of the costs to purchase woods, screws, hinges, glass, paints, as well as the labor used to make the furniture. Cost for making catalog to market the cabinet, electricity needed to operate the machines, and for shipping costs is not included in the COGS.
Benefits of COGS
COGS is an important aspect on the financial statements as it subtracted from company’s revenues to get its gross profit. With this feature, the profitability of your company is measured and that evaluates how efficient your company is in managing your supplies and materials in the production process.
As we know, cost of goods sold is the cost of doing your business, it is recorded as a business expenses on the income statements. Knowing the cost of goods sold and your projected profit helps analysts, investors, and managers estimate the company’s bottom line. If COGS increase, your net income will decrease, hence the business will have less profit for its shareholders. Businesses, therefore, try to keep their COGS low so that net profits will be higher.
In general, there are three methods when calculating your COGS. FIFO, LIFO, and average cost.
Let’s say you purchased t-shirts for resale during the year, in three batches:
- Batch 1: 100 shirts at $5 each = $500
- Batch 2: 300 shirts at $5.20 each = $1,560
- Batch 3: 200 shirts at $5.25 each = $1,050
And let’s say you sold 500 shirts during the year. Let’s look at costs of products sold under each of these methods.
FIFO (First In First Out)
Stands for “first in-first out” and it costs goods on the assumption that the first goods bought are the first goods sold. So the first 500 shirts bought would be costed under FIFO at $2,545. How can we get $2,545?
- First batch consists of 100 shirts is sold out at price of $5 each so your total cost for the first batch is 500$
- Second batch consists of 300 shirts is sold out at price of $5.20 each so your total cost for the second batch is $1,560 and your total shirt sold is 400, which leave out another 100 shirts.
- In the third batch, you sold out 100 shirts (500 shirts – 400 shirts sold in batch 1 and batch 2) at price of $5.25 each so your total cost sold from batch 3 is $525 ($5,25 x 100)
- Add all of the total cost and you will get $2,585
LIFO (Last In Fast Out)
Stands for “Last in-First out” and it costs goods on the assumption that the last goods bought are the first goods sold. So the last 500 shirts bought would be costed under LIFO at $2,570. How can we get $2,570
- Third batch consists of 200 shirts is sold out at price of $5.25 so your total cost for the third batch is $1,050
- Second batch consists of 300 shirts is sold out at price of $5.20 so your total cost for the second batch is $1,560
- Since the total shirt is already 500, all you have to do is add the total cost for third and second batch ($1,050 + $1,560) which gave us $2,610
Average cost looks at all shirts bought and figures average cost per shirt. In this case you will have $2,560 for your total cost. see below for the calculation.
- Find the average cost where your total cost divided by total shirts bought which is $5.12 ( ($500 + $1560 + $1050) / 600).
- After that, multiply $5.18 with 500 (total shirt sold this year) then you will get $2,590 for your total cost.
How to Enable COGS in iSeller
Applying COGS with iSeller is very easy! Keep reading to find out!
1) Activate COGS Feature
Before you can access the COGS feature, you need to activate COGS settings so that Profit and Loss Report is activated.
You can activate COGS feature under Settings, General, then scroll down to Business Settings. Switch on th Enable Automatic Costingand select your costing method. There are three costing methods available; FIFO (First In First Out), LIFO (Last In First Out), and Average Cost – making iSeller the most advanced commerce platform in the industry.
2) Create New Product
After you activate your COGS feature (in this case automatic costing), you can create your new product with its cost of production. Notice the new Buying Price input is now available in the product form.
Let’s just say that you stock up the bracelets every 6 months, so every year you will have two batches of Seven Emperor Bracelet. In this case you stock up 100 Bracelets in Batch 1 and 200 Bracelets in Batch 2. Buying price for the first batch is Rp 135,000 and you sell it for Rp 200,000. Then on the second batch, the price for the bracelet increase to Rp 150,000.
Because the buying price of the bracelet is increased, you should change the buying price. In order to do so, you could go to Transfer menu > Add transfer > select the product and input the new amount of stock (in this case 200) and the new buying price (in this case Rp 150,000) > select the outlet where you stock your second batch (in this case main outlet) > then you can save your Seven Emperor Bracelet with new buying price.
3) View your Inventory Cost
We specially add a new report for this powerful feature. You might see something new in the lists of report, yes you’re right! There is a new Profit and Loss Report! View the image below if you miss it:
In the Profit and Loss Report, you can instantly view your profit and loss, as well as your inventory cost report. Since we haven’t receive any purchase for the bracelets, let’s focus on inventory cost report. View the image below to get what I’m talking about.
The image above is what you will see when opening Inventory Cost Report. In this report, we will focus only in the red-bordered box, I will explain to you several points inside this box:
- You get profit margin by: Potential profit / Retail Price x 100% (Rp 16,500,000 / Rp 60,000,000 x 100%)
- You get your total Cost by multiplying buying price with total quantity, in this case there are two batches of bracelets. So the calculation will be batch 1 quantity x batch 1 price (100 x 135,000) + batch 2 quantity x batch 2 price (200 x 150,000) = 43,500,000
- You get your retail price by multiplying the price you put for your bracelet with the total quantity you have (200,000 x 300 = 60,000,000)
- Finding potential profit is very easy, all you need to do is subtract retail price with your cost (60,000,000 – 43,500,000)
But definitely, you won’t need to calculate them yourself as our new Cost Report does all the heavy lifting, so you can just sit back and relax.
Accepting New Purchases
Let’s say after a year of doing business, your Seven Emperor Bracelet has been sold 235 pieces. Let’s look at our corresponding reports that is useful for you to decide further business plans, first of all we will see our Inventory Cost report.
Before we start, let’s refresh our memory regarding our current inventory. Since we use FIFO and we sold 235 bracelets, then:
- 100 Bracelets with total cost of Rp 135,000 each from Batch 1 is sold out completely.
- 135 Bracelets from batch 2 with total cost of Rp 150,000 each is sold.
- There are 65 bracelets left from batch 2 with total cost of Rp 150,000 each.
Let’s focus on the above image and deduce some of the information that we can get.
- Margin = Potential Profit / Retail Price * 100
= 3,250,000 / 13,000,000 * 100 = 25%
- Cost (FIFO) = Total quantity bracelet left which is from Batch 2 * total cost for each bracelet form Batch 2
= 65 * 150,000 = 9,750,000
- Retail Price = Total quantity bracelet left from Batch 2 * total price you set for each bracelet
= 65 * 200,000 = 13,000,000
- Potential profit = Retail Price – Cost (FIFO)
= 13,000,000 – 9,750,000 = 3,250,000
Profit and Loss by Product Report
Profit and loss by product report shows us the cost of goods sold, net profit margin, as well as net sales for every product sold. This provide the information needed for you when purchasing further supply and making sure that you doesn’t over-buy your product. This report is very useful for you to make further business decisions.
From the above image, we are going to focus with the data inside the red box only. Let’s deduce some of the information that we can get:
- Total bracelet we sold: 235 bracelets. 100 from batch 1 with a cost of Rp 135,000 each and 135 from batch 2 with a cost of Rp 150,000 each.
- Net Profit margin: Profit / Net Sales * 100
= 13,250,000 / 47,000,000 * 100 = 28.19%
- Net Sales: Total quantity sold * selling price
= 235 * Rp 200,000 = Rp 47,000,000
- Cost of Goods Sold: (Quantity sold from Batch 1 * Batch 1 Cost) + (Quantity sold from Batch 2 * Batch 2 Cost)
= (100 * Rp 135,000) + (135 * Rp 150,000)
= Rp 33,750,000
- Profit: Net Sales – Cost of Goods Sold
= Rp 47,000,000 – Rp 33,750,000
= Rp 13,250,000
Profit and Loss by Date Report
Profit and loss report by date shows us the selling information received. Like all of our features, we promote flexibility and comprehensive report which enable you to add more metrics and more dimensions as well as changing the range of date of your report. This provide extreme ease-of-use for you, whether you want comprehensive, detailed report or you want simple and clear report.
From the image above it’s quite clear regarding the data. As we could see that you can add more metrics and dimensions. Lets deduce the data stated on image above:
- Net Profit Margin: Profit / Net Sales * 100
= 13,577,500 / 48,295,000 *100
- Net Sales: Total Net Sales of all product sold on that particular date (in this case December 2017). Our system is fully-integrated with our hardwares and very precise with 0% error, which change tedious reporting into easy and simple things to do
- Cost of Goods Sold (FIFO): Just like Net Sales, COGS for this report is calculated by adding all COGS for every product sold on that particular date (in this case December 2017).
- Profit: Just like previous report, you could calculate profit by subtracting Net Sales with COGS
Refunding Purchased Products
What will happen if one day your customer wanted to refund 50 Seven Emperor Bracelets? What will happen with your COGS report? Don’t you worry! Our system is engineered by our world-class designer which promote automatic-integration and ultimate comfortability for you!
For your information, above image is the refund windows for your Seven Emperor Bracelets order. As I mentioned earlier, you can do almost everything in this refund process. You could simply choose the amount of product refunded and the specific price of the product. In this case, your customer wanted to refund 50 bracelets at once with the full price at Rp 200,000 each because of some reasons. After losing the dispute, you don’t have any choice but to re-input it to your total stock and it will surely change your P&L Report. Let’s find out what will happen with our report.
Inventory Stock Report
As we can see from the image above, the stock for the bracelet is increased to 115 units, which will automatically change your inventory cost for Seven Emperor Bracelets product. From the image above what might be a little bit challenging is figuring why my inventory cost is Rp 16,500,000? Keep reading to find out why!
From our past data, we know that:
- What’s left before the refund is 65 units of Seven Emperor bracelets with the cost of Rp 150,000 each, which make our inventory cost Rp 9.750,000 (65 * 150,000)
- Our customer refunded 50 units of Seven Emperor bracelets with the cost of Rp 135,000 each because by the rule, the first product enter, it’s the first one exit the inventory. Which make the refunded inventory cost: Rp 135,000 * 50 = Rp, 6,750,000
- Add Rp 9,750,000 with Rp 6,750,000
Profit and Loss Report by Product
From the image above we see that there’s changes in the net sales as well as the cost of goods sold. Calculating net sales is quite easy, remember after the refund, the total product sold is 185 bracelets (235 – 50 refunded bracelets) so all you have to do is just multiply 185 with the price you set for the bracelets which is Rp 200,000. Finding COGS is a little bit tricky now! Keep up with me!
- At the beginning, you sold 235 bracelets, 100 from batch 1 at Rp 135,000 each and 135 from batch 2 at Rp 150,000 each.
- Customer refunded 50 units of bracelets with the cost of Rp 135,000 (as per FIFO rule)
- Which leave 185 units of bracelets left with the customers.
- Those 185 units need to be divided again, since 50 units refunded is from batch 1, then what’s left is another 50 units from batch 1 and 135 units from batch 2.
- 50 Units with the price of Rp 135,000 has a total cost of Rp 6,750,000 and 135 units from batch 2 with the price of Rp 150,000 has a total cost of Rp 20,250,000
- Add both total cost (6,750,000 + 20,250,000) and you will get your COGS after refund!
You don’t have to worry! Eventhough it might seems complicated calculation, iSeller works perfectly and amazingly accurate! I assure you there’s zero error with our automatic calculation and it’s already proven with those various calculation we just discussed!
Profit Summary Report
Another amazing feature we provide for you is Profit Summary Report. In this feature, you will receive accurate, automatic-integrated profit summary for your business.
Similar to other reports, you can just change the date range and the channels to look at various aspect of your business. We provide the most comprehensive yet easy-to-understand report for you and the easiness for you to generate the report to your heart’s content!
COGS calculation is an important feature that is very beneficial for you as business owner. With this feature, your inventory and financial management will be a whole lot neater and more organized with automatic COGS calculation. In addition, you can calculate your total cost and projected profit and make the right decisions for your business growth. With strong focus on user experience, ultimate accuracy and flexible configuration, we build this time-saving COGS feature to help you manage and grow your business easier – and smarter! Register your store now and experience this amazing feature first-hand!