Accounting for Cost of Goods Sold

Mike or Penny Novack stepbystepfarm at mtdata.com
Mon Jun 29 09:58:45 EDT 2009


The problem being described is one where there are a number of separate 
inventory items some or all of which share from a basic set of 
components purchased. The conflict between being exact to the penny 
(books balancing) and the need to estimate allocation between projects 
is more apparent than real. Here's how I would proceed were this my problem.

a) When buying the component supplies in bulk these go against a 
"supplies" account. In other words, you have (and I'll use the example 
of the person creating CDs) an inventory of blank CDs, cases, etc. not 
yet allocated to some particular project. That's an exact amount.

b) As you work on a project you assign (transfer over) your best 
estimate of the portion of these taken from the "main store" of supplies 
thus allocating a portion of the cost. This will of course not be exact 
as you don't know the wastage, etc. but that all becomes a part of the 
cost for THIS inventory item (completed CDs ready for sale).

c) You might of course be a little under or over for THIS project (batch 
of CDs) but will be wrong in the opposite sense for others or else there 
will be a net buildup or drawdown of supplies. You can either adjust for 
that annually (common in businesses with inventory for an annual 
physical check/reconciliation) or wait till adjustment takes place in 
the course of later projects. In other words, suppose you actually used 
100 more blanks on earlier projects than you though you had (physical 
inventory turns out to be under by 100) then you add those 100 to the 
next project or over the course of the next several if the amount would 
be too distorting applied to just one.

In other words, you are transferring between a "supplies" inventory and 
a "goods for sale" inventory.

Michael D Novack.



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