Shipping Costs in Cost of Goods Sold

"Freight in," that is into your warehouse, should be included in PPB (Paper, Printing and Binding), and in the inventory value of your books.

Because you asked this, I'm going to go further and add some other things that you may already know. On the other hand, many of the other readers may not. I hope you'll forgive me.

COGS should be divided into 3 portions, called PPB, Plant and Royalties. Plant costs include all the fixed costs of preparing a book for printing (design, editorial, art, proofreading, . . . ).

Only PPB is part of the inventory value of your books. Doing it otherwise can lead to painful mistakes.

In fact, I strongly urge all my clients to switch to accrual accounting, and to establish proper accounts for each of these three elements of COGS.

How are royalties a COGS item? I thought this was an expense.

COGS is a type of expense.

You may have to do a journal entry to enter royalties, and plant, instead of having it happen with the adjustment to inventory, as PPB does. Still, they are part of COGS.

Your P&L format should look something like this (I'm sure you know most or all of this, but for completeness' sake):

Gross Sales
less Return (or Return Reserve)
=Net Sales

+ Sub Rights Revenue less Author Share
= Net Revenue

Less COGS:
PPB
Plant
Royalties Earned (or Accrued)
subtotal COGS

= Gross Margin

Less Cost of Selling
Distributor
Sales Commissions
Fufillment
Freight Out
subtotal Cost of Selling

Less Marketing
Less General and Admin

= Operating Income

Less Extraordinary Items
Less Interest and Taxes

= Net Income

Does that clarify anything?

Marion Gropen