Ask an Australian ecommerce seller what their best-selling product costs to make and land, and half of them can only give you the supplier invoice price. Which isn’t the real cost. Not even close.

Freight from the supplier’s warehouse to your fulfilment location. Import duties. Customs brokerage. Prep and labelling. Inbound shipping to Amazon FBA if that’s your model. Any of these missing from your cost figure and your gross margin is inflated on paper while your bank balance quietly disagrees.

That gap between the cost you think you’re paying and the cost you’re actually paying is what proper COGS tracking closes. Get it right and you know your real margin by product. Get it wrong and you’re pricing, discounting and marketing based on numbers that don’t reflect reality.

This is a practical guide to COGS tracking ecommerce Australia what actually goes into cost of goods sold for online sellers, how to track it in Xero, where sellers most often get caught out, and how to get the visibility you need to make real pricing decisions.

What COGS actually is

Cost of Goods Sold is what it cost you to acquire or produce the products you sold in a given period. It’s a direct cost of revenue not an operating expense and it sits on your Profit and Loss statement between Sales and Gross Profit.

The formula is straightforward. Opening inventory, plus purchases and other landed costs during the period, minus closing inventory. Whatever’s left is what you sold.

For a service business, COGS doesn’t really apply. For an ecommerce business, it’s one of the most important numbers you can track. It’s what separates revenue from profit and if it’s wrong, everything downstream is wrong too.

Why COGS matters more for ecommerce than any other business type

Ecommerce operates on a different cost structure than most other businesses. Product margins are relatively thin. Platform fees eat a chunk of every sale. Shipping and returns add friction. Advertising costs money before it converts.

In that environment, even a small COGS error changes everything.

A product you think costs $12 landed but actually costs $14 landed means a 15% understatement of your true cost. If you priced that product at $30 expecting a $18 margin, you’re actually making $16. Sell 5,000 units and the gap is $10,000 you didn’t know you were missing.

Multiply that across every SKU in the catalogue and you can see why sellers whose COGS is off end up wondering why their profitable-looking business isn’t leaving much cash in the bank at the end of the year.

What goes into ecommerce COGS: landed cost

The proper cost figure for each unit isn’t the supplier invoice price. It’s the landed cost the total cost of getting one unit ready to sell in your fulfilment location.

The components:

• Purchase price from the supplier (obvious)
• International freight (sea or air, per unit share)
• Customs duties and import taxes
• Customs brokerage fees
• Local port and warehouse handling charges
• Insurance on the shipment
• Inbound freight to your fulfilment centre or FBA warehouse
• Prep and labelling costs (for FBA especially)
• Any consumables specific to the product (custom packaging, inserts)
  
  

For a business importing containers of product from overseas, freight and duties often add 15% to 30% on top of the supplier invoice price. Sellers who use just the supplier price as COGS underestimate their cost base by exactly that much.

For businesses making products themselves (Etsy sellers, small manufacturers), landed cost is different but the same principle applies. Raw materials, packaging materials, shipping supplies, and any consumables directly attached to producing the product.

How to calculate landed cost per unit

There are two main approaches. Both are valid the right one depends on how consistent your product costs are.

Actual cost method allocates every specific shipment’s costs to the units in that shipment. If shipment A cost $10 per unit and shipment B (same product, different arrival date) cost $11 per unit due to a freight rate change, the units sell out at their actual costs. This is the most accurate approach but requires proper batch tracking.

Weighted average cost method takes the total value of inventory on hand and divides by units. When new stock arrives at a different cost, the average shifts. Simpler to maintain, and for most ecommerce businesses it produces a fair reflection of margin without the overhead of tracking individual shipments.

For Australian sellers using Xero, the choice usually comes down to whether you’re using Xero’s inventory feature alone (weighted average) or a dedicated inventory system that supports FIFO or actual cost.

COGS in Xero how it actually works

Xero handles COGS through the inventory function or through manual journal entries, depending on how you’ve set it up.

The inventory function lets you set a unit cost against each tracked product. When you sell a unit, Xero automatically posts the cost to the Cost of Goods Sold account and reduces inventory on the balance sheet. Your P&L reflects the sale and the cost simultaneously.

The manual journal approach requires you to calculate COGS at month or quarter end. Add up purchases during the period, add opening stock, subtract closing stock (from a stocktake or inventory system), and post the resulting COGS figure through a journal entry.

Both work. The manual approach saves you setting up detailed inventory tracking but requires discipline at month-end. The inventory function keeps things current in real time but needs the initial setup done properly.

For ecommerce sellers doing meaningful volume, an integrated approach usually works best a dedicated inventory management system (Cin7, DEAR, Unleashed) that syncs with Xero and handles the COGS journals automatically as sales happen.

GST treatment on COGS-related costs for Australian sellers

Most of the landed cost components attract GST if the supplier is Australian, or Import GST if the goods are coming from overseas.

Domestic purchases from Australian suppliers include GST that’s claimable as an input tax credit on your BAS. Standard treatment.

Imports over $1,000 attract Import GST at the border, generally paid to the customs broker on behalf of the ATO. The Import GST is claimable through your BAS in the same way as domestic GST credits, provided you have the proper Import Declaration.

Imports under $1,000 are subject to different rules under the low-value goods regime. For businesses importing at scale, this rarely applies — but it matters for smaller Etsy or Amazon sellers importing materials in low volumes.

Freight, brokerage, insurance and prep costs generally include GST when provided by Australian service providers. All claimable if you’re registered for GST and coded correctly in Xero.

Missing GST credits on any of these categories is a common cost leak for ecommerce sellers. Sellers who lump landed cost as one figure and code it as GST-Free (because the supplier invoice from overseas didn’t include GST) miss the input tax credits on the Australian side of the equation.

Common COGS mistakes we see

Using supplier invoice price only. The biggest one, by a distance. Freight, duties, and prep costs are real and need to be in your unit cost.

Undervaluing packaging and prep. For made-to-order and handmade sellers especially, packaging materials add real cost per unit. Ignoring them means understating COGS by 5-10% on smaller items.

Not adjusting for FX movements on overseas purchases. If you paid a supplier in USD three months ago and the AUD has moved 4% since, the effective cost of that inventory has changed. Sellers using a stale cost figure miss the FX effect.

Recording COGS only at year-end. If you’re only calculating COGS annually, your quarterly P&Ls don’t show real gross margin and you have no interim visibility. Monthly COGS tracking is the standard for ecommerce.

Not doing a proper stocktake. If your closing inventory figure is a guess rather than a count, your COGS calculation is wrong. Physical stocktakes at least twice a year are worth the time.

Ignoring damaged, lost, or written-off stock. Damage, shrinkage, and expired inventory need to be written off from inventory as a loss, not carried indefinitely on the balance sheet.

Coding freight and duties as general operating expenses. Landed cost components belong in COGS, not in operating expenses. Miscoded, they distort both gross margin and net margin.

Not tracking product-level margin. Aggregate margin at the business level is useful. Margin by product or SKU is what tells you which lines are actually making money and which are losing you money in a way you didn’t notice.

Inventory systems that work with Xero

For low-SKU businesses, Xero’s built-in inventory function is enough. Set unit costs, track stock, and let Xero handle the COGS journals as sales happen.

For businesses with more complexity, dedicated inventory management systems are worth considering. The main options for Australian ecommerce sellers:

Cin7 Core (formerly DEAR Inventory) mid-market strength, integrates with most ecommerce platforms and Xero, handles landed cost calculation natively.

Unleashed Software Australian-designed, strong at manufacturing and wholesale, integrates cleanly with Xero.

Cin7 Omni enterprise-grade, better suited to businesses with multiple sales channels, warehouses, or B2B alongside DTC.

Ordoro, TradeGecko (now QuickBooks Commerce) historically popular but coverage has shifted.

The right choice depends on SKU count, sales channel complexity, and whether you’re managing landed cost across international imports. For sellers running Shopify plus Amazon plus a WooCommerce site, a dedicated inventory system that syncs across all three is usually worth the monthly cost.

When to bring in specialist COGS help

For a low-SKU store on a single platform, self-managing COGS in Xero is workable. Once complexity increases, having an ecommerce accountant set up the right structure saves months of clean-up down the track.

Signs it’s worth getting help:

• You import inventory from overseas and aren’t sure your landed cost is accurate
• You’re on multiple platforms with different sales channel margins
• Your gross margin figure feels off compared to what you expected
• Your COGS calculation is only happening at year-end and there’s no visibility during the year
• You’re on Xero’s inventory function but your actual stock counts don’t match Xero’s records
• You want a dedicated inventory system (Cin7, Unleashed) but need help choosing and setting it up
• You’re expanding into a new product category and want the COGS structure right from the start
  
  

Outback Accounting provides COGS and inventory tracking for ecommerce as part of our specialist ecommerce accounting service.
That includes Xero inventory setup, landed cost calculation methodology, month-end COGS processes, and inventory system selection for Australian ecommerce sellers across Sydney and nationally.

Frequently asked questions

What is COGS in ecommerce? Cost of Goods Sold is what it cost you to acquire or produce the products you sold in a given period. For ecommerce, this includes the supplier invoice price, international freight, customs duties, brokerage fees, inbound shipping to fulfilment centres, and any prep or labelling costs. It’s a direct cost of revenue on your P&L, sitting between Sales and Gross Profit.

Why is landed cost more accurate than the supplier invoice price? The supplier invoice is only one part of what it costs you to have a unit ready to sell. Freight, duties, insurance, brokerage and prep can add 15% to 30% to the base cost for imported goods. Using the supplier invoice alone understates your true cost and inflates your gross margin figure. Landed cost captures every input into getting a unit ready for sale.

Can Xero track COGS automatically? Yes, through Xero’s built-in inventory function. Set unit costs against tracked products, and Xero posts the cost to COGS and reduces inventory whenever a sale is recorded. For higher-volume or higher-complexity businesses, a dedicated inventory management system like Cin7 or Unleashed integrated with Xero handles this better.

How often should I calculate COGS? Monthly at minimum for ecommerce businesses. Quarterly is manageable but delays visibility. Annual calculation is what most non-ecommerce small businesses do, but it doesn’t work well for ecommerce because you lose real-time margin visibility across the year.

Do I need to include GST in COGS? No. COGS is recorded net of GST. If the GST on your inventory purchases is claimable as an input tax credit, the GST portion sits separately in your GST account, not in COGS. This applies to both domestic purchases and Import GST on international shipments over $1,000.

What’s the difference between FIFO, weighted average, and actual cost? FIFO (First In First Out) assumes the oldest inventory sold first, and its costs flow through to COGS first. Weighted average uses a rolling average unit cost that shifts as new stock arrives at different prices. Actual cost tracks each shipment’s units to their specific landed cost. For Australian ecommerce sellers, weighted average is the most common approach because it balances accuracy with practical ease of maintenance.

Do handmade Etsy sellers need to track COGS? Yes. If Etsy selling is a business (as opposed to a hobby), COGS applies. For makers, it includes raw materials, packaging materials, shipping supplies, and any consumables directly attached to producing each product. Undervaluing materials in COGS is a common mistake for handmade sellers.

Get your COGS tracking sorted

The ecommerce sellers who consistently make money aren’t necessarily the ones with the highest revenue. They’re the ones who know their real margin by product and can make pricing, discounting, and range decisions based on numbers they trust.

Proper COGS tracking is what makes that possible. If yours is patched together from supplier invoices, guesses, and year-end stocktakes, that’s exactly what our COGS and inventory tracking for ecommerce service is built to fix. Get in touch with our Sydney team to talk about setting up COGS tracking that actually shows you what your products cost.