9 replies to this topic

[dvoigt]

Ok so I understand the concept of cost of goods sold. I sell something for $100 that has $40 in materials in it, therefore my cost of goods sold is $40 and my profit would be $60. This $60 is what I could be taxed on. Right?

But what if I have material that I don’t know what I paid for? Or what if I got a great deal on wood, like I bought 4/4 rough maple which ended up being curly maple, so I would have gotten the wood at a discount? How can you write off stuff then? Or do you just have to figure the actual cost of the wood rather than value of the wood?

Another example is that I picked up a nice piece of 3x3x18” piece of maple burl for a steal, If I was to buy it Woodcraft I’m sure it would be like $50 peppermill blank. While I would charge more for a finished piece made from this, my COGS would need to be based on the deal I got on the wood and not a “replacement” value for the wood. Right?

I just want to make sure that I’m maximizing my writing offs

Derek

[CalDIY]

I run a few "d.b.a." business, and currently one S-Corp... I am NOT a lawyer not CPA, so here, take this big'ol grain of salt along with this...

You are mostly likely running your business under a "cash" basis, so 'cost of goods sold' (COGS) would be based on actual spend, not "what it's worth". It gets pretty ugly, but I *think* (after multiple go-rounds with the CPA, including multiple mentions of "don't be such a f*ing engineer") it really comes down to this for a CASH business:

(StartingInventory + MoneyThatWentIntoProductMaterials) - EndingInventory = CostOfGoodsSold

A few points:
When you start out, "StartingInventory" should be *zero*. If you are a running concern, then it's whatever you declared for "EndingInventory" last year.

"MoneyThatWentIntoProductMaterials" means pretty much what it sounds like - every bit of material you bought that is "mostly" intended to go into product. Generally does not include things like "glue", which is generally an expense - also a write-off, but separate from COGS

"EndingInventory" includes raw materials left over, AND finished goods - and finished goods generally have labor costs/expenses built into them, as well. This kinda is where your "materials lost to processing" comes in - the "scraps" are lost from inventory

According to the CPA (who isn't always the most helpful), the IRS assumes you count *every damn thing* that can be counted in your inventory - for my wife's jewelry business, he assumes we count each-and-every teeny tiny little stone of hundreds in each of her hundreds of drawers....

the basic idea is that you don't necessarily track the COGS directly in each item you make/sell; rather, you count up the bulk of starting and ending inventory, plus what you bought, and voila, there's your COGS

BTW, if you DO keep track of your actual materials/supplies cost for each of your products (hm. yes, some of us are obsessive engineers), then an alternate way to find you "ending inventory" is:

(StartingInventory + MoneyThatWentIntoProductMaterials) - CostOfGoodsSold = EndingInventory

... but this only works if you obsessively have kept records of material used and wasted...

Blah, Blah, Blah - COGS only comes from what you PAID, not what it "should be worth" (but PRICING should be based on "what is should be worth", so you can afford to sell another one...)

[CessnaPilotBarry]

I'm not a CPA, but every business I've been involved in wrote off actual costs, not mythical perceived value. Expenses that are subtracted from income have to be actual values paid, with matching backup documentation.

If you got the materials for a steal, you still come out ahead even if you pay more taxes.

[dwacker]

Woodworking is not retail. If you run it as such you are throwing money in the trash. If your interested ill explain how to have your cake and eat it also.

Don

[dvoigt]

dwacker, on 22 February 2012 - 06:38 AM, said:

Woodworking is not retail. If you run it as such you are throwing money in the trash. If your interested ill explain how to have your cake and eat it also.

Don

Well there certainly a retail aspect to it, but it isn't like a buy/sell business. After all you are selling something, and need to collect sales tax and all that. So why do you say it isn't retail?

Please let me know if there is a better way to do it!

[dwacker]

dvoigt, on 22 February 2012 - 08:57 AM, said:

Well there certainly a retail aspect to it, but it isn't like a buy/sell business. After all you are selling something, and need to collect sales tax and all that. So why do you say it isn't retail?

Please let me know if there is a better way to do it!

Woodworking as an industry is not retail its manufacturing period. Wether or not you do it full time or not you can benefit from understanding the differences and applying the same principles to a degree. If you do it for a living and are running with a typical retail cost plus mentality you are throwing money away with every job. That aside.......

In the OP's example of finding curly maple in a batch of straight grain then its not inventory. Its defective raw materials which is part of COGS. Its defective because it cannot be used for its intended purpose due to grain defects. You are allowed to stock pile defective material as long as you have a disposal plan. It can be something as simple as a yearly penny a pound sale or just throwing it in the trash. If you pull from the defective material pile its just brought in at no cost at the time of use.




Don

[hhh]

==> In the OP's example of finding curly maple in a batch of straight grain then its not inventory. Its defective raw materials which is part of COGS. Its defective because it cannot be used for its intended purpose due to grain defects. You are allowed to stock pile defective material as long as you have a disposal plan. It can be something as simple as a yearly penny a pound sale or just throwing it in the trash. If you pull from the defective material pile its just brought in at no cost at the time of use.


+1. Assuming we are all talking actual cost accounting for a bespoke shop and not standards-based COGS for a small production shop producing say balusters.

[dwacker]

hhh, on 22 February 2012 - 12:18 PM, said:

==> In the OP's example of finding curly maple in a batch of straight grain then its not inventory. Its defective raw materials which is part of COGS. Its defective because it cannot be used for its intended purpose due to grain defects. You are allowed to stock pile defective material as long as you have a disposal plan. It can be something as simple as a yearly penny a pound sale or just throwing it in the trash. If you pull from the defective material pile its just brought in at no cost at the time of use.


+1. Assuming we are all talking actual cost accounting for a bespoke shop and not standards-based COGS for a small production shop producing say balusters.

Actually its alot easier to get away with in a production shop. COGS in manufacturing is not calculated the same as retail. If your doing this at home in your garage as a sole proprietor its probably best to impliment some sort of job naming or purchase order system. Could be as simple as joes desk but every purchase made that you intend to add to your cogs should be clearly intended (documented) for joes desk. If you bought a "bad" board, then so be it everyone gets a "bad" board every now and again. The board is still part of your cogs. If you decide to go dumpster diving........... then bring it back at no cost. Just as you would if you decided to go through the scrap pile and cut up a whole bunch of glue blocks. The labor to cut up the blocks would go toward your cogs but the material remains free.

Don

[CessnaPilotBarry]

Interesting...

[hhh]

==>Actually its alot easier to get away with in a production shop.
+1, Interesting idea as a retail model... I didn't think of it. Was just thinking along the lines of an actual cost mfg model. In my real world company, we used actual mfg until we had the unit volume to go standard COGS.