[jpomerenke]

Ok quick question. Gross profit margin for any of you that dont know is the gross profit diveded by your sales. Gross profit is probably the most important financial percentage any businesses should follow and know.

But i have a question that i hope someone can answer. Is shipping cost a expense or is it apart of the CGS? I thought (without actually doing it) that if your shipping basically broke even every month it wouldnt affect your margins. Then i actually did the calculations and boy was i wrong.

I know that some companies will put there cost of leasing a building into the CGS instead of a expense but is shipping considered a expense or a CGS?

Example. Customer "A buys a Widget for $6.32 and pays $7.00 shipping for it. The merchant pays 3.72 for the product and he paid $7.00 exactly to ship it.

So if the shipping ISNT included the profit margins would be as follows .... 2.60 (gross Profit) /6.32 = 41% Good Margins for a retail business online by the way

With Shipping..... 2.60/13.32 = 19.5% Not so great margins.


Ok so i guarantee i will find the answer to this question before someone replies but i thought i would post it on here because i think it was a good question that people could learn something from.

By the way im betting on shipping is a indirect expense and is not included in CGS.

F&*&$#G Accounting!

[jpomerenke]

Originally posted by jpomerenke
Ok quick question. Gross profit margin for any of you that dont know is the gross profit diveded by your sales. Gross profit is probably the most important financial percentage any businesses should follow and know.

But i have a question that i hope someone can answer. Is shipping cost a expense or is it apart of the CGS? I thought (without actually doing it) that if your shipping basically broke even every month it wouldnt affect your margins. Then i actually did the calculations and boy was i wrong.

I know that some companies will put there cost of leasing a building into the CGS instead of a expense but is shipping considered a expense or a CGS?

Example. Customer "A buys a Widget for $6.32 and pays $7.00 shipping for it. The merchant pays 3.72 for the product and he paid $7.00 exactly to ship it.

So if the shipping ISNT included the profit margins would be as follows .... 2.60 (gross Profit) /6.32 = 41% Good Margins for a retail business online by the way

With Shipping..... 2.60/13.32 = 19.5% Not so great margins.


Ok so i guarantee i will find the answer to this question before someone replies but i thought i would post it on here because i think it was a good question that people could learn something from.

By the way im betting on shipping is a indirect expense and is not included in CGS.

F&*&$#G Accounting!

Ok i googled it quick and was right... its a indirect expense....

From Wikipedia, the free encyclopedia.
In accounting, the cost of goods sold describes the direct expenses incurred in producing a particular good for sale, including the actual cost of materials that comprise the good, and direct labor expense in putting the good in salable condition. Cost of goods sold does not include indirect expenses such as office expenses, accounting, shipping department, advertising, and other expenses that can not be attributed to a particular item for sale.

Subtracting the cost of goods sold from the amount billed when selling the good (sales revenue) produces the gross profit on the good.

The net profit, what most people understand as the business' income or profit, is determined by subtracting the cost of goods sold and the indirect expenses from the sales revenue.


Hope this helps someone like it helped me!

[jpomerenke]

I also just found this. I guess either way you do it the Net profit will be the same but the gross margins will be much different.

http://www.personalaccounts.co.uk/di...er1820020914am

[jpomerenke]

HMMM Ive looked a lil bit longer and really cant come up with anything .....if anyone knows the answer to the question that would be great. Is shipping expenses part of the cost of goods or is it just a expense.

Thanks

[mtd1523]

Wow that was a great conversation with yourself. j/k

From what I believe, Shipping is considered Cost of Goods Sold. I'm going to write this now, but in a little bit I am going to go get my accounting book and check it out for you. And then I will type it out on here for you straight from the book.

[mtd1523]

Here we go. I couldn't find it in my book, but I did a quick search on AskJeeves and found this website. Your answer is at the top and in the first couple of paragraphs. I hope this is what you were looking for and it is what I was originally thinking too.

http://home.swbell.net/fbris/schcinfocogs.html

[jpomerenke]

haha... i did have a convo with myself.... that is weird.

But anyways here is what i have come up with. GPM is a grey area in accounting because there are many ways to figure it. The higher or the lower the GPM doesnt really matter. All it is there for is to determine how your business does financialy quarter to quarter (which i did know). I looked over some financials of publically traded retail online businesses (overstock.com, amazon.com, etc. ) and they all seem to do it different. But i also noticed they all explained how there GPM margin was figured.

So if anyone takes anything from this remember...
-- It dont matter how you figure it because there is no right or wrong way (but it does seem that most are including shipping in CGS now).
---You should always figure your GPM because its one of the most important numbers you will need to know.

--No matter how you figure your GPM and how large or small it may be your profit margin in dollar terms will always be the same.


So who cares how you do it just so you can keep that number consistent every quarter or even make it grow

[mtd1523]

When I was initially thinking of profit margin I was talking:

(Profit) / (What I bought at) = Profit Margin.

But after looking in my accounting book it was actually:

(Gross Profit) / (net sales) which net sales would be what you sold at. SO I was doing it wrong.

But how can profit margin be calculated using what you sold at when the profit is the difference in what you bought at and what you sold at?

[jpomerenke]

Gross Profit Divided By Sales is the equation for GPM. I know that for a fact. Im very familiar with GPM but like my orginal question was is shipping a indirect expense or CGS....... and it looks like there is no right answer it is just how you chose to do it i guess.

[mtd1523]

Did you look at that website? I'm pretty sure it is a part of Cost of Goods Sold, because from my understanding CGS is everything that goes into the process of selling the product, which would be shipping....