Q: How do you determine the COGS percentage for a business with variable product costs and multiple sales channels?

A: Determining the Cost of Goods Sold (COGS) percentage for a business with variable product costs and multiple sales channels involves a multi-step process:

  1. Calculate the average COGS percentage:
    • Use the formula: (2023 Total Gross Sales) รท (Inventory Consumed)
    • Inventory Consumed = (2023 Ending Inventory - Beginning Inventory)
  2. Adjust COGS percentage by sales channel:
    • Collaborate with founders to refine percentages
    • Consider channel weights in total sales
    • Example: Shopify DTC often has the lowest COGS percentage
    • B2B/Wholesale channels may have 20-30% lower COGS percentage due to price discounts
  3. Further refine COGS percentage:
    • Adjust by time period to match product cycles
    • Adjust by product category (requires category-specific income and COGS accounts)

Key principle: Always pair COGS accounts with corresponding income accounts. Automatically calculate and create journal entries for both income and COGS accounts during revenue recognition for all order types (Shopify, Amazon, Invoice).

This approach ensures precise matching of COGS with revenue recognition on a per-order basis, accounting for the variability in product costs and sales channels.

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