C O G

iceref

CGF, Certified Grumble Framer
Joined
May 27, 2001
Posts
195
Location
Omaha, NE
Since my move to Omaha I've been pretty busy getting set up but now it's finished. I made a promise when I left St. Louis that I would revamp my pricing. This has probably been asked before but is labor included when calculating Cost of Goods Sold? As always, thanks in advance.

I'll forget I wasn't nominated for any of the grumble characteristics. Out of sight, out of mind. Just kidding.

Mike
Omaha - Not loving it
 
If you accountant is thinking simply as a retail store they are correct.

HOWEVER, we manufacture and sell. This a called a vertically intergrated business. The labor needed to transform raw materials (moulding, glass, mat board) into finished goods (a custom frame) are indeed part of cost of goods sold (per IRS and AICPA cost accounting standard procedures).

Sherry, your accountant is just taking the easy way out in what he might have told you to simplify you life.
 
Every accountant will have a difference of opinion. Mine believes that labor is part of COG if you have employees. If you work alone, or husband/wife shop the answer is no.

The idea is, if you pay someone you incurred a cost. If you did it, there was no cost involved.
 
This another one of those issues that we debate to death on an emotional level, but don't really do it the way many espouse.

The simplest answer, and the fact that you are asking the least informed source begs you to do what I suggest, is to do whatever your CPA tells you and to do it consistently. At least that way you will have a comparative that is meaningful.

For those that do feel strongly that you should add the labor component to your CoG, I have to ask: Do you also include all taxes, insurance, FICA and the entire host of directly related expenses to this number, as well?

End of the day, you still spent the money but now have to break out so many hours for framing, so many hours for counter help and so many other expenses for that one employee.

And, what did it tell you?

If you have a gazillion employees and they do nothing but frame all day (and nothing else) then you might get a meaningful comparative.

The other 99%, just do what your accountant suggests.
 
Both. Sales only positions are not included in COGS, production positions are included 100%, sales/production positions (i.e. fitting inbetween customers) is split with an appropriate percentage to each. I don't remember why I do it that way, all I know is that when the argument came to pass it was short and the accountant won.
 
Johnny's example is exactly the accounting nightmare that I suggested, but I do agree that if it is th emethod the accountant chose, do it.

But, I would love for Johnny, or anyone else, to list the upper portion of their Statement of Income down to the Gross Profit line. For most, it's only about 6-8 lines.

Don't list any numbers, just Headers (like Income, Sales, Refunds/Allowances). I am dying to see how this is set up on an actual statement.

I wonder if we are discussing a difference without a distinction?
 
My prepared statements are very simple and straightforward:

Sales, net

COGS
Inventories, beginning
Purchases
Wages
Subtotal

Inventories, end

Gross Profit

Operating Expenses*

Net Income

*Operating expenses include:
Wages, sales
Taxes, payroll
Payroll Processing Fees (Paychex)


My legal expense account was getting such a workout that I now have an in house attorney. I don't know how this will be handled yet.

I understand the distinction of production and sales payroll expense is useful on several tax forms.

**The messageboard software takes away my space indenting but you get the picture.
 
Hi Johnny-Not to quibble because whatever works for you is what works for you. But, why are all payroll taxes, etc lumped into Operating Expenses.

For example, let's say you have Framer A that never does anything but framing and he earns $10/hr. Your "expense" is far greater than the $10/hr. Does any of that additional expense get factored into CoG (and thus decreasing your margin)?

And, how about Framer B that works mostly in the back, but does work some upfront counter time (Let's say 30hr back/10hrs front). Do you also add $300 to your reduction of margin, where the additional $100 is a normal Operating Expense?

I must admit that I have a partner that is a CPA and he sets up everything financial we do. If he said we were going to include a pro rata share of utilities used in production (as oppossed to the utilities used for normal Operations)in the "before" Gross Profit/Margin header, we would do it. I guess you could pro rate insurance, rent, shop supplies everything else, as well

I'm just not sure what it would tell most framers.

You mentioned the tax advantage available on several tax forms. Could you elaborate, please? I would hate to think we were leaving money on the table, tax wise

The only time we break out selling, admin or framing payroll is for Workman's Comp. Then because it has different rates for those categories.

But, I would love to call my partner and tell him that I found a way to save some taxes
 
Originally posted by johnny:
**The messageboard software takes away my space indenting but you get the picture.
FYI,

You
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...accomplish
......a
......similar
...thing
...using
......periods
;)
 
Hi Bob,

I know it saves money on the Workers Comp, but I'm not sure what else it's used for. I get into these taxes once a year, then I need a stiff drink.
I don't want to call my accountant because this year we filed for an extension and I currently owe him a motherload of paperwork, but when I do speak with him in the near future I'll ask just what these numbers are used for.
 
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