Trusted by some of the global industry leaders like Coca-Cola, Ford, LG, and Nike, Magento has earned its place among the leading eCommerce platforms. However, business owners need to embrace the fact that with great power comes great responsibility—business owners must keep a close eye on numerous KPIs to keep their operations on track.
One of the key performance metrics any Magento business owner should keep tabs on regularly is the cost of goods sold or just COGS. This metric is like the security blanket that helps you constrain your prices – price your products too low, and your profits could take a hit.
As your business grows and sales on your Magento site increase, tracking COGS becomes essential. But how do you do it effectively? Fasten your seatbelts because today we are going to explain how cost attributes can turn into your hidden strategy in managing COGS for your Magento store.
Can you track COGS in Magento?
Ah, the million-dollar question.
Yes, Magento does offer some tools to track your cost of goods sold (COGS), but—and it’s a big but—the functionality is somewhat limited. If you’re looking for more sophisticated COGS tracking, you might need to consider additional software integrations or custom development to get the full picture.
Sure, third-party solutions and extensions make sense, but what about Magento’s own tools?
Magento offers a built-in cost attribute that lets you track the cost of each product—perfect if you’re using the Average Cost method for inventory valuation. By storing the average cost per product, Magento can help you crunch the numbers and calculate COGS for sold items. But this setup is pretty basic and might not cut it for everyone, especially if you’re using other inventory methods like FIFO (First In, First Out) or LIFO (Last In, First Out).
However, if you’re dealing with fluctuating costs or different accounting methods, you’ll probably need to consider custom solutions for advanced COGS tracking. And we’ll cover them in a minute, but first, let’s quickly revisit why COGS is a big deal for eCommerce businesses.
💡 Quick tip: Want to know what happens if your accounts don’t match? Spoiler alert—it leads to inaccurate financial reports, potential tax issues, and even increased bank fees. Learn how to avoid that mess with the full guide on what happens if reconciliation doesn’t balance.
What is cost of goods sold?
As the name hints, COGS captures the direct costs associated with the production or purchase of the goods that a company sells during a specific period. It covers everything from raw materials and labor to overhead expenses directly linked to the manufacturing process.
In short, COGS is the sum of what it truly costs to get your products ready for sale.
Key components of COGS
When it comes to calculating COGS, you need to take into account various costs directly tied to getting your products ready for sale:
- Direct materials;
- Direct labor;
- Manufacturing overhead;
- Freight and shipping costs (but not the cost of shipping products to customers);
- Direct costs of production.
But first, every business should have the COGS formula at the ready:
- Starting inventory is the value of what’s left over from the previous period, including unsold products and raw materials.
- Purchases made during the period refer to the total cost of new inventory brought in—whether it’s raw materials, parts, or finished goods.
- Ending inventory is the value of what’s still on the shelves at the end of the period.
Want to see how it works? Say you’re selling handcrafted candles.
At the beginning of the month, you have candles and raw materials worth $2,000 sitting in your warehouse. Throughout the month, you spend $1,500 on new materials to make more candles. By the end of the month, you still have $1,200 worth of candles and materials left.
COGS = $2,000 + $1,500 – $1,200 = $2,300
So, your COGS for the month is $2,300, representing the total cost directly associated with the candles you sold during that period. This example is straightforward, reflecting a best-case scenario, but it clearly illustrates the essence of COGS calculation.
To determine if this is a “good” result, you might want to compare it to your total sales revenue for the month. If your revenue significantly exceeds $2,300, then you’re making a healthy profit. However, if your sales are close to or less than $2,300, you may need to reassess your pricing, cost management, or sales strategy to improve profitability.
Why is COGS important for eCommerce businesses?
Source: Freepik
In short, accurate COGS data is the backbone of strategic pricing and understanding your bottom line. Knowing exactly how much you spend to produce or acquire your products lets you set prices that not only cover costs but also generate profit.
Here’s why COGS is a big deal:
1. COGS has a direct impact on gross profit
COGS shows how efficiently you’re producing or sourcing your goods compared to your sales. For example, if an eCommerce business has $100,000 in sales and $60,000 in COGS, the gross profit is $40,000. This number is the foundation of your business’s profitability before operating costs come into play.
2. COGS influences financial statements
On the income statement, COGS is a major expense. A higher COGS will shrink your net income, while a lower COGS can boost it. If you manage to negotiate better deals with suppliers or streamline your production processes, lower COGS can result in a healthier bottom line on your financial statements.
3. COGS affects how much tax a business has to pay
Accurately tracking and reporting COGS can reduce your taxable income, which in turn lowers your tax bill. For instance, if a business has $150,000 in revenue and $90,000 in COGS, its taxable income is $60,000. Correctly accounting for all allowable COGS ensures that businesses don’t overpay on taxes, preserving cash flow for reinvestment or other needs.
4. COGS helps with setting prices
Knowing your COGS helps you set the right prices. Say your COGS for a product is $30 and you aim for a 50% profit margin, your selling price should be $60. This ensures that your pricing aligns with financial goals and allows for strategic adjustments based on market trends or cost fluctuations.
💡 Quick tip: Magento 2 POS by Magestore can supercharge your COGS tracking by syncing physical and online sales channels in real-time. This integration ensures your inventory is always up-to-date, giving you a clear, accurate picture of COGS whether sales happen in-store or online.
Setting up cost attributes in Magento
Being the third most popular eCommerce platform after WooCommerce and Shopify, Magento offers powerful tools designed to help businesses scale and grow. So, how does Magento simplify COGS tracking?
We’ve already mentioned that cost attributes in Magento are used to track the cost of each product, helping you manage and calculate the cost of goods sold (COGS). But before you get down to the setup, a few things to remember:
- The cost attribute isn’t automatically enabled for all product types—you’ll need to activate it manually through the admin panel.
- The cost attribute is typically scoped at the website level, meaning it can differ across various websites under the same Magento setup.
- If the default cost attribute doesn’t quite fit your needs, you can create custom attributes to track additional cost-related data.
- Magento doesn’t automatically calculate the average cost. You’ll have to manually update the cost attribute or implement custom scripts/extensions to handle this.
Now, let’s get to the actual setup.
Step 1: Create a custom attribute for cost
First, head over to your Magento 2 Admin Panel and go to Stores → Attributes → Product → Add new attribute.
This will bring up a form where you can define the details of your new attribute. Start by naming it—something straightforward like “Cost” or “Product Cost” works great. Next, choose an input type that makes sense for your data, such as “Text Field” or “Price.”
Note: You’ll also need to set an internal attribute code, like ‘product_cost,’ which Magento will use behind the scenes.
Step 2: Configure advanced properties
Next up, decide how you want this cost attribute to behave across your store. Is it going to be the same for all your websites (global), or do you need it to differ by site or store view? Most of the time, keeping it global is the way to go for consistency.
Note: While configuring, consider keeping this attribute internal, meaning it won’t show up on product listings or be used for sorting/filtering. This keeps things clean and focused on the backend.
Step 3: Assign the attribute to attribute sets
After you’ve created the attribute, you’ll need to assign it to the right places. Head over to Stores → Attributes → Attribute Set and make sure your new cost attribute is included in all relevant product types.
Once that’s done, save your changes.
Now, every time you add or edit a product, this cost attribute will be there, ready to help you track the true cost of your goods.
What’s next?
So, you’ve got your cost attributes set up—how does this help with COGS calculation?
Cost attributes let you input the exact cost associated with each product directly into Magento. As your inventory levels change, Magento automatically updates these costs, ensuring your COGS calculations are always accurate and up-to-date. This is especially important for determining gross profit and maintaining a clear picture of your business’s financial health.
Best practices for managing cost data in Magento
1. Enable and maintain accurate cost attributes
Ensure that the cost attribute is enabled in Magento to store the cost price of each product. As costs can fluctuate, regularly update the cost attribute to reflect the most current data. This ensures that your COGS calculations are accurate and up-to-date.
2. Implement automation tools into the workflow
Automation tools can lighten your process and totally eliminate manual data entry errors, especially when adding Magento to Square QuickBooks integration (or when adding any other sales or payment platform in use to your QuickBooks). Managing data from multiple sources is tricky, but with tools like Synder, you can connect 30+ channels and customize the settings to fit your unique business needs. In other words, Synder becomes the central hub for all your financial data, tailored specifically to your business.
Curious about how data flows between Magento, Square, and QuickBooks? Synder automatically captures your Magento store orders and Square payment data, syncing everything directly into your QuickBooks account—whether it’s the Online or Desktop version. This gives you all the info you need for accurate, comprehensive records. With this level of automation, preparing for reconciliation becomes hassle-free, and your financial reports will be more detailed than ever.
In case you need to track your offline sales as well, automating the workflow between Magento and QuickBooks with POS by Magestore could be your answer. This integration syncs orders, customer info, and product data in real time, giving you a complete view of your online and offline performance all in one place.
3. Integrate with an ERP system
As was said above, expanding on Magento’s capabilities, and integrating with an ERP system can take your cost management to the next level. An ERP can handle more complex cost tracking methods like FIFO, LIFO, and average costing, offering deeper insights and more comprehensive financial reports.
4. Track changes as soon as they happen
The only thing worse than missing data is discovering the gap when it’s too late—like during a financial report or reconciliation. Implement a system that tracks cost changes as they happen, so you can review historical data and see how fluctuations impact your pricing and profitability.
5. Generate custom reports
If Magento’s built-in reports aren’t meeting your needs, consider developing custom reports tailored to your specific needs. Custom reports can provide deeper insights into cost data, inventory levels, and COGS, giving you the information you need to make informed business decisions.
Conclusion
Magento may be a sales channel like Shopify or Amazon, but it’s in a league of its own when it comes to flexibility and customization. While Magento offers features that other eCommerce platforms may lack, it also requires more time to grasp the workflow, and you might need to start from scratch if you’re used to other platforms.
But the best part? It’ll be worth it. Understanding how to navigate and optimize Magento can transform it from just another tool into a powerful engine driving your business success.
Author:
Anastasia Su
Anastasia is a marketing specialist at Synder, a G2, GetApp & Software Advice high-performer for the past 5 years. As a content creator and Synder expert, she focuses on integrations between accounting software such as QuickBooks and Xero, and various payment platforms and online marketplaces, including Stripe, Shopify, and Amazon.
