I'm always having a hard time determining what costs should be inventory versus COGS.?

Question

From what I understand, materials that you purchase for resale are classified as inventory but how about shipping labels, packaging materials, etc. Can someone please help me understand the difference?

Answer 1

It depends on what risks you want to take. Typically the corporations that I've managed for consider freight (of the raw materials) and labels as an expense and other packaging and raw materials as inventory. I like to count packaging in there, too, but many companies won't allow it because there is no value to the item as it can not be re-sold. In other words, many (smart) companies consider items that can be resold (even if you wouldn't typically re-sell it - does the item have a value to other based on only its own intrinsic value?). Typically, labels and packaging don't (and certainly freight is a totally lost cost as it is truly a cost of doing business) where my raw materials do have value. Other companies call anything with a threshold value - say $100 to $500 or more - inventory. I hope that helps. Good luck - and make sure thaat however you start make sure that you stay with that. Good luck!

Answer 2

Cost of goods sold is the costs that you incur while creating the item. Shipping the item is an expense you incur after the item is already in inventory. Once you first place an item in inventory it's cost is recorded, and any further expenses related to the item are not COGS.

I suppose there could be an exception if you were to modify the item after that point, but my accounting knowledge isn't that advanced.

Answer 3

COGS is cost of goods sold

it means the cost of every unit you sell.

if are re packing candies for example

1 candy cost 0.1 cents
plastic bag cost 0.3 cents
ribbon costs 0.2 cents

so for every bag of candy you sold, how much is the cost?

lets say 5 candies per bag...

so that's a dollar for every bag.

and lets just say you sell it for 1.5 dollars
less 1 dollar for cost of goods sold (cogs)
you earn 0.5 cents

cost of inventory is cost of those materials you still havent used.
how many ribbons, plastic bags and candy you still have on you that you havent touched and/or sold