How to properly calculate cost of goods for retail?

[xbitllc]

Hi all, I'm doing inventory to prep for tax season, but I had questions about Cost of Goods (COGS).

1. Do I factor shipping costs into COGS? I have an invoice for $1.4k and around $300 of it is for shipping. Should I divide the shipping cost equally amongst every line of the invoice? Or write this off separately as "Shipping/Postage"? My gut is telling me to evenly spread the shipping across all the items, since the shipping is literally a direct cost associated with the product.

2. What about sales tax? If I paid taxes or customs/duties for items, should I also evenly split those costs across all the products on the invoice?

3. How do I round? If I split shipping and taxes/customs/duties amongst all the items on a given invoice, what if I end up with a weird number like $0.[removed]? Do I round up to the nearest cent? Or always round down?

Appreciate any insight on this. Thank you!

Here is an example of how I rationalize COGS calculation for shipping:

Say I buy phone charging cables. 10 black, 10 white, 10 red, 10 blue. They're sold in packs of 10 for $5. So my sub-total is $20. Shipping is $8.

Example Invoice/Receipt:

10pcs USB C Charging Cable, Red.....................$5

10pcs USB C Charging Cable, Blue.....................$5

10pcs USB C Charging Cable, Black.....................$5

10pcs USB C Charging Cable, White.....................$5

Shipping...................................................................$8

Since I am buying 4 types of products (4 lines on the invoice), do I take that $8 and divide it evenly into the black cables, the white cables, the red cables, and the blue cables? That would mean to add $2 per 10 pack.

So really it's like this:

10pcs USB C Charging Cable, Red.....................$7 <-$2 for shipping
10pcs USB C Charging Cable, Blue.....................$7 <-$2 for shipping
10pcs USB C Charging Cable, Black.....................$7 <-$2 for shipping
10pcs USB C Charging Cable, White.....................$7 <-$2 for shipping

To me this seems like the logical way of calculating the COGs, but then comes the issue of including sales tax/duties and the rounding.

What if the shipping was some weird number like $9.80? 4/9.80 = [phone number removed] per line. So would I round up to $0.41? Or just round it to $0.40?

[AliciaP1 · Accepted solution]

Yes, you have all the right ideas for handling your Cost of Goods Sold.  

For question 1 regarding shipping costs, you can allocate the shipping evenly for similar products in a shipment, but I would suggest weighting the shipping if a shipment included heavy or bulky things with small and light things to more accurately reflect the true cost.

For question 2 regarding sales tax, you can allocate evenly if the different items on the invoice are the same price.  Again, weighting the tax is more appropriate if the shipment includes items of different prices.  When weighting sales tax the best thing to do is just use the tax rate multiplied by the item price and add it on.

For question 3 regarding rounding, your method to handle rounding is reasonable, but you need to have a "rounding" item in your inventory as well so your cash transaction matches.  If your invoice totals $573.98 but your separately listed inventory items for the purchase total $574, you need to have an item to hold the $-.02 rounding so your cash-out-the-door transaction matches your total inventory in. As for rounding items to the penny, as long as you treat each rounded transaction consistently, your method is up to you.