COGS V. Inventory Expense

Jeet,

I too, am new to QB's and bookkeeping.

COGS (Cost Of Goods Sold) example: I buy a table for $100 and sell it to a customer for $150.

The COGS was $100.

But I make tables too...so bought a unit of lumber $786. Nails $54, screws $89, brackets $325, stain $123. Those are all EXPENSES.

Then I take some of each of those things and make a bunch tables to sell. IF I could make 10 tables from ALL of the above items I would figure out they cost me $137.70 each in materials to make and each one took me an hour to make and I figure I am worth $60 an hour...then 137.70 + $60 = each table costs me (COGS) $197.70 and I sell them so I make 40% on them I sell them at $329.50.

EXPENSES are what you pay to buy materials.
Then figure out what it costs to make each item you are selling and then you will have your COGS for EACH item you sell.

I don't think you should have an EXPENSE account called INVENTORY, probably (to me it seems) INVENTORY should be the finished product you have for sale.

Since I am so new to Quickbooks, I have no idea how you would keep track of your INVENTORY without making what you are selling an INVENTORY item.

That help? Could someone reply that does know how to do it in Quickbooks? Thanks from me too.

Ken

We a sushi processing/packaging/wholsesale company. I'm confused about COGS and cost of sale-supplies. We buy ingredients in bulk and prepare sushi packages. In the item list, i have inventory parts for ingredients and inventory assembly for finished sushi packaged ie. california rolls etc. For sushi packaged, is that under COGS and inventory parts-ingredients are COGS-suppplies? Also, i'm not selling the ingredients, so i should leave the income field blank?

I'm not an accountant but I understand things a little differently - hopefully an expert will chime in and we can both get it straight. As I understand it ..

Expenses are the cost of running the business, things like utilities, paper clips, paper, etc.

In your example nails, lumber etc would be inventory items since they are purchased to make an item for resale. The item for resale you make would be an inventory assembly (table)- composed of some quantity of each of the items purchased for that purpose + labor. When the table is sold (the inventory assembly is sold) then the cost of goods sold account would reflect the total of the items used to build that assembly.

Rustler

Agreed. Inventory is not an "expense" account.

It is an asset account.

Floyd

So in my case, the sushi company, my ingredients (ie. avocado, rice, seaweed ) consider as inventory parts and the final product (california roll) is inventory assembly. Both of which should belong to COGS?

Yes, the califonia roll would be the assembly you make from the ingrediants. When you build the assembly (the roll) QB will deduct the items (ingrediants) from inventory. When you sell the assembly (roll) QB will put the cost of the ingrediants in the COGS account that is specified for each item on the item screen.

Rustler

Hi Everybody,
I am not familiar with the Manufacturing QB software so I don't know about the Inventory Assembly function, but I can tell you that Inventory is an Asset account that appears on the Balance Sheet, a financial statement. There are essentially three financial statements a business must concern itself with, an Income Statement, a.k.a. a Profit & Loss Statement, a Balance Sheet, and a Trial Balance. The Balance Sheet lists only Assets, Liabilities & Equity. The Income Statement lists only Revenues & Expenses. The Trial Balance lists all activity posted to a particular account in your Chart of Accounts. COGS is indeed an expense account, but a direct expense, versus an indirect expense and as such, COGS expenses are accounted for in a seperate section of your Chart of Accounts. That is, COGS are the direct costs associated with making your product, labor, materials, etc. Indirect costs are your overhead items, like office expenses, utilities, advertising, etc. Usually when you set up your Chart of Accounts, the Assets are 100 account numbers, the Liabilities are 200 accounts, Equity is 300, Revenue is 400, COGS for materials is 500, COGS for labor is 600, Expenses are 700. You can then have 800 for Other Income and 900 for Other Expense. All Raw Materials that you buy that are used to build or make your end product to be sold are Inventory items. As they are being assembled, they are WIP (Work In Process) and when they are finished, they are Finished Goods waiting to be sold.

Thank you for clarifying for me.
The food cost varies each time we purchase our ingredients...will QB automatically calculates the cost per assembly. In the item window, it ask for the cost of the item/ingredients, but since it changes by the weeks...how will that affect the true cost of my final product? Also, how many digits does QB actually calculates? Since certain ingredients used is $.001, even though it is not included in the assembly cost, will QB calculates over thousands and thousands of assembly build?

I have no idea how many decimals QB uses in its calculation before rounding for presentation on the screen. Or if QB keeps the decimal in the data file and only presents the result as a rounded figure - maybe an employee will chime in and educate us both.

As far as costs for the assembly. QB takes the cost for each item directly from the inventory item itself. If you change the cost of the item in the assembly, the resulting cost of the assembly displays the change.

BUT, when the assembly is sold the actual costs sent to the COGS acount is what the inventory item shows not what the assebly item reflects. In other words it ignores your increased cost input in the assembly bill of lading and uses the inventory cost on file for the item(s) itself.

QB uses average inventory costs. The average is taken by adding up all purchases since the start of the business file (not just the current year) and dividing by the number of items. QB does this each time a purchase is made and the resulting number is the "cost" of each item in presently in inventory.

Rustler

FYI, I am in the lumber industry, where we sell in the lineal foot vs. our vendor bills that come in board feet. Anyhow, QB calculates to multiple decimal places when averaging the COGS. I use this to add value to raw materials when I send lumber to be prefinished. I need to know the cost of the material at that time to further understand the finished goods pricing after I get billed from the prefinisher.