Calculating Cost of Goods Sold (COGS) correctly helps you determine your profit, set prices, and comply with tax regulations. But how exactly do you calculate COGS, and what should European e-commerce sellers keep in mind? Let’s break it down with examples.
What is COGS and Why Does It Matter?
COGS (Cost of Goods Sold) represents the direct costs of producing or purchasing the products you sell. This includes the cost of materials, manufacturing, shipping, and other expenses directly tied to the product.
Why is COGS Important?
Calculates true profit – Subtracting COGS from revenue gives you gross profit.
Affects taxes – In most European countries, COGS is deductible, reducing taxable income.
Optimizes pricing – Knowing your real costs helps you set the right price.
How to Calculate COGS (Basic Formula)
The general formula for COGS is:
COGS = Opening Inventory + Purchases – Closing Inventory
Step-by-Step Breakdown
Opening Inventory – The value of unsold stock at the beginning of the period.
Purchases – The total cost of new inventory bought during the period.
Closing Inventory – The value of remaining stock at the end of the period.
Example Calculation
Let’s say you run a small European online store selling handmade leather wallets.
Opening Inventory (January 1st) = €5,000
Purchases (New Stock Bought) = €12,000
Closing Inventory (December 31st) = €4,000
COGS = €5,000 + €12,000 – €4,000 = €13,000
This means your cost of goods sold for the year is €13,000.
What to Include in COGS?
Not all costs are included in COGS. Here’s what to count:
✅ Included Costs:
Product costs (manufacturing or wholesale purchase price)
Shipping to your warehouse (but not shipping to customers)
Customs and import duties
Packaging (if necessary for sale)
Direct labor costs (for handmade goods)
❌ Not Included in COGS:
Marketing and advertising costs
Website fees (hosting, domain, etc.)
Warehouse rent or office expenses
Shipping costs to customers (These fall under operating expenses)
Special Considerations for European E-commerce Sellers
1. VAT and COGS
In most European countries, VAT (Value-Added Tax) is not part of COGS unless you are unable to reclaim it (e.g., if you’re VAT-exempt). Always keep VAT separate when tracking costs.
2. Currency Fluctuations
If you purchase goods in USD or GBP but sell in EUR, exchange rate changes can impact your true COGS. Use accounting software to adjust for this.
3. Inventory Valuation Methods
In Europe, you can use different inventory valuation methods, such as:
FIFO (First In, First Out) – Assumes older stock is sold first.
Weighted Average Cost – Spreads out costs evenly across all inventory.
Check your country’s tax regulations to see which method is required.
How to Track and Optimize COGS
1. Use Accounting Software
Tools like Xero, QuickBooks, or Odoo can automatically track inventory costs and COGS.
2. Negotiate with Suppliers
Lowering product costs will directly improve your profit margins. Always compare multiple suppliers and negotiate better terms.
3. Reduce Wastage and Returns
Unsold or returned items increase costs. Optimize your supply chain to minimize unnecessary stock.
4. Automate Inventory Management
Using inventory tracking software can help you reduce errors and ensure accuracy in your COGS calculations.
Final Thoughts
Understanding and calculating COGS helps European e-commerce sellers manage costs and follow tax rules. By keeping track of inventory, managing costs, and using the right accounting methods, you can keep your business running smoothly.
Next Steps:
Review your current COGS calculation
Use accounting software to streamline tracking
Optimize supplier and inventory costs
By tracking COGS properly, you’ll have a clearer picture of your business’s financial health and be able to scale successfully.
Ready to Optimize Your COGS and Streamline Your E-commerce Finances?
Don’t let complex COGS calculations and inventory management slow down your business growth. Our team of e-commerce specialists can help you:
- Set up your e commerce bookkeeping
- Ensure VAT compliance across your European operations
- Optimize your financial reporting for better business decisions
Book a free call today to discuss your e-commerce bookkeeping, VAT or EPR needs!
