Is shipping part of COGS? How to calculate the true cost of goods sold

December 23, 2022

While inbound shipping costs are considered COGS (Cost of Goods Sold), shipping to the consumer or outbound order shipping cost is not. Shipping costs must be carefully monitored in an effort to maximize ROI.

Many factors play into the Cost of Goods Sold (COGS). Some are much more obvious than others, but as an online retailer, you must diligently monitor each facet of COGS to return a profit while remaining competitive.

Consumers are now extremely skilled at price comparison, and, ultimately, the cost is the overarching deciding factor. In this article, we’ll review ways to reduce fulfillment costs to keep your overall per-product cost down and customer satisfaction up!

Key Takeaways:

Your product sale price must exceed your COGS.
Calculate the material cost. Always considering direct and indirect costs.
Include all pick-and-pack fulfillment fees in your COGS.
Consider eating shipping costs in an effort to remain competitive.
Consider all overhead costs from real estate to tools, marketing, website development and maintenance, and more. A good rule of thumb is to include these things in a per-unit cost since they are not product specific.
Inbound freight on inventory can be expensed to cogs immediately if you are a small business taxpayer.
The included shipping cost reduction checklist will help you minimize shipping costs, thus lowering your COGS overall.

Three main categories go into calculating COGS. Let’s explore each one.

Material costs

Material costs–also referred to as direct material costs or raw material costs–include everything it takes to create a product.Material costs include direct and indirect costs.

Direct costs include the materials required to create a product.

Indirect costs may relate to the cost of transportation to gather and produce materials, handling costs, and the cost of co-packing and other packaging options.

Even if you don’t manufacture or design your own products, you will still need to consider direct and indirect material costs in your COGS.

One often overlooked cost to consider is inventory storage. This includes shelved items awaiting sale or those being incrementally phased into your inventory count. All of this affects your profit.

Fulfillment Costs

Once you have your products, additional costs are incurred once a sale is made.

Fulfillment costs for pick-and-pack and shipping materials are part of every sale.

Next, shipping is another potential cost to get your customer’s order out the door. Many retailers eat some or all shipping costs to appeal to customers.

Shipping Costs

As mentioned above, inbound shipping costs are part of COGS. However, shipping to the consumer is not.

It’s important to stay on top of these expenses as they affect your bottom line significantly and can eat away at your profit if you don’t have a shipping cost reduction strategy in place.

Many people are familiar with standard shipping procedures and options; however, we’d like to help you take a closer look at shipping options so you can maximize profit and minimize frustration.

Refer to our detailed shipping checklist to see our top tips for reducing shipping expenses.

Overhead for goods sold

Beyond the obvious material and fulfillment costs, other overhead costs must be accounted for.

Since these costs are often not product-specific, many online retailers will come up with a per-unit cost that gets applied across the board to all goods sold as an average.

These overhead costs can include expenses like website development and hosting, customer support, and marketing expenses. Accounting and other support services should be included as well.

Shipping Cost Reduction Checklist

We know that there’s much to consider when you compare shipping rates. After 60+ years in the business, Kable Product Services has the shipping process down to a science. In an effort to simplify the process, we’ve created this checklist for you.

Reduce Carrier penalties

Data Accuracy – improving the accuracy of shipping data will help ensure that your shipping procedures are timely, cost-effective, and don’t derail the supply chain entirely.
Engage with a carrier auditing firm – fact-check the carriers! It’s important to make sure that you aren’t being penalized or otherwise overcharged in error. These fees may go unnoticed for a time but ultimately affect your bottom line when compounded.

Strategies to enable

Rate Shop – don’t simply go with what you know. There are many options available for shipping. It’s important to explore every avenue. Ask questions, do your homework, and be certain you’re making an informed decision about your carrier.
Rate Shop Ground vs. Air – Air freight usually costs more, but it’s also the fastest shipping option. You’ll want to weigh the opportunity cost between these two options. Decide what’s the best way to deliver goods sold for your budget and your consumer.
Rate Shop LTL vs. Parcel – Parcels are smaller, meaning they can be moved quickly and without assistance. They are easier to transport and in higher quantity of goods sold.

LTL packages are shipped and delivered on pallets in most cases. They are less likely to be damaged and require fewer checkpoint stops. It’s important to weigh the opportunity cost and make an informed decision depending on the nature of your inventory now and in the future.
Rate Shop for Reverse Logistics – considering every facet of the shipping procedure makes a difference.
Un-consolidate your volume – consider using more than 1 or 2 carriers to gain certain carrier advantages (USPS for final mile delivery, DHL for International, Regional carrier efficiencies, etc.)
Rate consolidation – use a rate consolidator, another rate provider, or other carriers and services (cubic, etc.)
Optimize your package sizes, weights, and dimensions, – or consider using flat-rate boxes for goods sold.
Optimize your packaging, cartons vs. bags – reducing waste in shipping will save shipping expenses, and your customers will appreciate fewer trash items and recyclables.
Use an aggregate shipping spend – when analyzing carriers and services, use your aggregate shipping spend from all divisions/business units.
Upgrade/add advanced TMS – gain labor efficiency through integration, automation, configuration, and customization
Automate the auditing of your carrier invoices – always fact-check your carrier invoices for accuracy.
Zone Skipping – add zone skipping or line hauling, potentially with other local businesses, to maximize load density.
Ship-from-store – add ship-from-store options to reduce shipping costs.
Local pick-ups – add pick-ups at the store, at lockers, or other access points – various off-site ship-to solutions will help minimize ship costs as the courier will make fewer stops.
Fulfillment Locations – add or move fulfillment locations. If order volume is high enough, more options could improve shipping times while eliminating the expense of air or long-distance ground shipping. Over time, this may help minimize shipping expenses.
Contract with a 3rd party fulfillment center with a geographically distributed facility – this will improve your shipping times and minimize shipping costs on goods sold. A 3PL has already done the legwork in shipping negotiations and inventory storage on your behalf.
Review returns reason codes – make sure you know what’s working and what isn’t. Returned items incur more shipping costs and contribute to wasted labor, space, and resources.
Identify products that are most often returned and make impactful changes for improvement – make sure you’re spending your time and using your space wisely. It pays to continuously self-audit your sales data.
Benchmark your rates against other rates within your industry – this is important to remain visible and competitive in your market.
Track everything diligently in Quickbooks or your accounting software – using consistent and accurate bookkeeping will allow you to identify all of your shipping costs at a granular level at any time.

Decoding 3PL Shipping Costs and Cost Calculations in E-commerce

In e-commerce, managing shipping costs is a critical aspect of maintaining profitability. This is where understanding 3PL (Third-Party Logistics) shipping costs and their calculation becomes vital. 3PL providers like Kable Product Services offer comprehensive solutions for handling inventory, fulfillment, and shipping, but it’s essential to grasp how these services impact your overall costs.

Here’s how you can perform 3PL cost calculation:

Service Fees: 3PL providers charge for storage, order fulfillment, and shipping. These fees can vary based on the volume of products, the complexity of handling, and the speed of delivery required.
Volume Discounts: Many 3PLs offer discounts based on the volume of orders processed. Understanding these tiers and planning your inventory accordingly can lead to significant savings.
Shipping Rates: 3PLs often have negotiated rates with carriers, which can be lower than what individual businesses might secure independently. Understanding these rates and how they fit into your pricing strategy is crucial.
Additional Services: Some 3PLs provide value-added services like kitting, custom packaging, or international shipping. While these can enhance customer experience, they add to the cost and should be factored into your calculations.

How to Calculate Freight Cost Per Unit

Reducing order fulfillment costs begins with effectively managing inbound freight costs, a key component of your fulfillment center cost. Here’s a concise guide to calculating the freight cost per unit:

Sum Up Inbound Freight Costs: Total all inbound freight expenses over a specific period.
Count Total Units Received: Determine the number of units received in this timeframe.
Calculate Per Unit Cost: Divide the total freight costs by the total units received to find the cost per unit.

This calculation is crucial for strategies aimed at reducing fulfillment costs. Key benefits include:

Negotiation Leverage: Better rates with carriers and suppliers.
Inventory Optimization: Adjusting order quantities and frequency.
Cost Monitoring: Regular review leads to ongoing savings.

Effective management of these costs can significantly reduce your overall order fulfillment and fulfillment center costs, enhancing profitability and competitive pricing.

Interested in a quick shipping or product fulfillment analysis? Contact Kable Product Services to receive a free, small parcel shipping analysis.

Growing your business while remaining profitable and competitive can be challenging, but don’t let that discourage you.

Commit to the upfront work involved with calculating your costs from every angle. When you quantify and understand your true expenses and COGS, you will minimize loss overall.

We are here when you need us for your eCommerce retail shipping needs! Kable Product Services is here to help answer any questions you may have related to evaluating your shipping options and understanding the related costs.

Please call or email us today to continue the conversation about COGS and shipping for your eCommerce store.