When setting up your P&L, it can be tricky to figure out where to allocate certain expenses. COGS, or Cost of Goods Sold, is a category that many people find confusing, especially when it comes to tracking Amazon fees.
The Price of Selling on Amazon
Amazon, while a very accessible marketplace for most sellers, is not known for being financially kind when it comes to loading on fees. There are FBA fees, pick and pack fees, listing fees, referral fees, and more, all of which are important to track when you’re looking to maximize your profits.
The truth is, you could file these expenses away in a number of different categories, and adding them as marketing or advertising fees seems like it would make sense on your P&L. However, accounting-wise, the best way to categorize Amazon fees is to list them as COGS and consider them part of the cost of selling your product.
The Accounting Standard
When looking at your P&L, there are actually two COGS listings: a COGS category and a COGS line item. While the COGS line of the P&L includes any landed cost of goods sold, the category itself also encompasses fees like Amazon’s in order to give you more visibility into what goes into getting each product to your customer.
As a general accounting rule of thumb, if you can associate an expense with a specific product of yours, say a green plastic water bottle, it’s considered a variable cost and should be treated as part of COGS on your P&L. That means that the specific pick and pack fee for shipping your green water bottle, your category commission fee from Amazon for that water bottle, and other such costs are all considered COGS.
What about ad spend?
We’ve just outlined why costs associated with a specific product should be considered COGS above the Gross Profit line – but aren’t Amazon PPC advertising costs also associated with a specific product? Why do they get their own line in the Expenses category?
Generally, we set up our P&Ls so that Advertising and Marketing are below the Gross Profit line, and that’s for Amazon logistics reasons. Amazon bills for PPC ads in one lump sum, meaning it’s not as simple to pick out which dollars went towards advertising our green water bottle versus our blue water bottle, or our plastic water bottle versus our metal ones. These batch billings also don’t always land in the correct month to be correctly reconciled in the COGS category on your P&L.
However, from a CFO standpoint, it can be extremely helpful for your financial visibility to see a picture of your Gross Profit after ad spend. Advertising is considered a fixed expense, meaning how much you spend on it is not dependent on how many units you sell. But since it’s also a category in which you’re likely to spend a considerable chunk of change, understanding how it impacts your Gross Profit can provide a lot of insight into your finances.
In short, you can absolutely put Amazon ads in your COGS category, and depending on the goal of your analysis, it might make more sense to do so.
Work With Us
If you’re ready for a deeper CFO-level analysis of your books, or you just want to put your complex accounting into the capable hands of an e-commerce expert, get in touch with us today.