Understanding Cost of Goods Sold (COGS)
Let's dive a little more into the expenses going to start with the media's thing first cogsa what the heck is ka gse wilmore jargon for you cost of goods sold um cost of goods sold basically refers to anything that goes into the stuff that you actually make so it includes if you actually like by stuff outright and then resell it so like when I was selling my plush meets I also had these little buttons that said I love you more than ham and now it stick it on the hand it was a fabulous marketing tool and people loved them sometimes people would buy the toy for like thirty five dollars just to get the one dollar button um it was one of the greatest decisions I ever made uh but after a while like I was making these by hand on first with one of those like crank crimp button makers um and I was getting serious pains in my hands it was really bad. Um and then I realized there are people who are set up to make these way more quickly and efficiently than I wass and I could get you know, like a...
h thousand of, um for two hundred fifty dollars you know, like pay twenty five cents a button and not like horribly injured the thing that I needed to make the rest of my living with, uh so that was inventory that I just purchased outright which is down here and then there's materials and supplies that go into the actual thing that you're making actually I'm gonna take that hand back again if you wouldn't mind thank you so the things that actually go into making your product are part of your materials and supplies so the button count stuffing counts the fabric counts the thread um all that counts uh the uh scissors that you used to cut the fabric does not count because it does not end up in a customer's hands if a customer pulls it out of the box and then snuggle it and they love it forever that's part of your cost of goods sold if it does not go in the box with the product to the customer it's not part of your cost of goods sold any questions about the materials and supplies versus like tools think that tripped me up a lot in the beginning I was like well you know I used this uh whatever it was this needle to sew like a thousand toys with and you know I go through needles on a regular basis and I'm using them up and they're my supplies right but hopefully no needles ended up in a box going to a customer's so they're not part of the cost of goods sold they were part of my office supplies um then there's product packaging which is uh also something that really trip me up. So if you have packaging for your product like let's say, uh, we're talking about those buttons again if you sell four buttons on a card, right, it has, like the name of your business and a little logo on it. Um, that's, part of the product packaging the bubble wrap you put it in before you stuff it in the envelope is not part of your product packaging that's part of your shipping supplies. So if it would appear let's, say, on a store shelf with or in that packaging it's part of your product it's, part of your cost of goods sold if it's something that the customer would probably throw away immediately upon getting it, um, it might not be that makes sense. So like, this gets tricky in the sort of gift wrap e area because a lot of people especially like jewelry designers, um, you know, they'll put a pair of earrings on a card and then it will go inside ah, like fancy cushion box and then that will get stamped and we'll have a ribbon on it. Um and then that will get wrapped in bubble wrap and stuck in a box and shipped off um, I would tend to say that just the card is part of the product packaging not really part of your cost of goods sold and that all of that other stuff the cushion the box the ribbon um is part of your shipping supplies uh because chances are when the customer gets that stuff they're not going to keep you know the customer's not gonna keep the earrings in the box on the fuzzy whatever that stuff is called the fuzzy cushion you know with the lid and the ribbon around it um it is not the product right the box that it comes in is not part of the product if that makes sense um but for example I have another toy line I should have brought this in with me um of glow in the dark deep sea creatures and they each come in like a little plastic reusable carrying case um I mean that's how they're sold on store shelves um and it's something that you are meant to keep forever and ever and ever you can put your fish back in this undersea bag and has a little handle cut out of it um and even though I don't ship my products in anything other than that plastic bag and stuff it in an envelope um that that plastic bag is not like a shipping supply it's part of the product my toys would never be sold that way they'd never be displayed without it they'd never be sold without it um do we have any questions about that or anything the people have a little bit of confusion so maybe you just run through some just clarifying points for example read scorpio is asking so now she does not actually charge for shipping but there's still a shipping cost? Obviously so where does that go on on your um you still put it in your expenses even though you've not passed it on to your customer that's correct. So you will not have an income account for shipping although I would definitely recommend starting to charge for that unless your profit margins are so high that you can afford to include shipping um it will still be an expense obviously because you know, unless someone is magically giving you shipping supplies and postage for free you'll have to track it as a cost of doing business. Um but yeah, you might not have that as an as an income account she managed to find mariana the anglerfish wonderful years together I could depend for bringing her in. Uh thank you, ben. Uh yeah. So this here is an example. Um if I sold these on their own and I just put them in a brown shopping bag and handed them to people that brown shopping bag would not be part of the product packaging it would not be part of the cost of goods sold, but thiss is especially printed bag for this toy specifically um, that is part of the package you are. You know, if you're a little kid, you're meant id, like take it to grandma's house like this and carry with you, and then it doesn't get, uh, damaged in transit. Um, keeps all your pieces together. Uh, so this is part of product packaging the card that you put those earrings on his product packaging the shopping bag you handed to someone in the padded envelope you shifted in is shipping supplies. It is not part of your cost of goods sold because the whole point of tracking your cost of goods sold as a separate category is to figure out, um, how much does it cost to make each product right that's the meat of it? Um, a shopping bag has nothing to do with the cost of what it takes to make this product, but this bag definitely does. This bag is part of this product. Um, that packaging that I was talking about, um uh earlier with hand where I was wrapping it up with like, hand cut leaves and put it on a tray. And then I wrapped it in plastic wrap and stuck in delhi sticker on it like that's also product packaging me cause that's how it was sold that's how it was delivered, um and all of the time and the cost of the materials that went into that were part of that product like I would never deliver a ham without that um now I do of course well I don't make these anymore at all but later on I stopped doing that because I cut smarter um but yeah product packaging any other questions about that include like a business card etcetera that steakhouses packaging was that just something that does not going to cost uh if you include a business card that's not really part of your uh packaging because the business card is not part of the product nobody is going to cuddle your business card at night and sit with it in the dark but what the business card is is it's part of um your advertising and promotion I've even listed business cards right there. Um we haven't gotten to it yet but we will uh and it's designed even though you ship it with the product um it is not technically part of the product itself it's designed to get people to remember you and to buy more products in the future. Right? Um yeah jack you so but if you're trying to, like, figure out for each gadget a that you send out how much you actually spent with like the business card with the thank you know with the packaging with actually the cost of the good soul where would you look to get that per item breakdown? I am going to show you that when we get to the ledger and we get to individual product profitability um the short answer is that in the notes on your ledger is where you can track things by yeah product or by any breakdown that you want that's a great question, though yeah, any other questions about, um your materials supplies product packaging? We've already covered inventory general question from somebody who is using young that she actually had for years and years and years so she bought it before she actually started her business, eh? So now she's using this material had should she be estimating that as part of the cost? Or is that really just something that it doesn't count because there's no hasn't occurred and expense for this particular product? Well, there are two ways that you can handle that you can either try and estimate how much it cost um and put it in as an expense or you can market in as some of that boehner's equity that we talked about earlier. Um you can count it as a contribution from your personal self to your business and so um it would not count as an expense because you made it years and years ago you don't even remember how much it cost um but it is uh it becomes part of what you have to work with so um I would treat that in that case probably more along the lines of the owner's equity um than anything else I mean if you're if you're getting stuff for free like that's great you can either track it with zero cost just so you have it in your inventory um as part of your materials er or you could count it as a little gift that you gave to yourself in equity and you could assign a value to it or not um yeah sky are will's asked that question actually thirteen people voted on that a lot of people are using materials that they may have had for a long time yes dash busting do it that's great that's fantastic way to be frugal in environmentally friendly all right guys okay ah so we've covered inventory stuff that you buy outright and then resell that you don't do anything with like those buttons that I talked about um and then production labor and we're going to go into different kinds of labor and different kinds of people doing stuff for you and what boxes to put them in um but if you hire someone uh either as an employee or on a contract basis to help you make your products specifically you would put that under the cost of goods sold under production labor you do not count your own time under there and I know that we just spent a lot of time talking about how your own time is very valuable on into the basis for all of your profitability and it is it so important uh but it's not part of production labor in this uh breakdown because it's not expense right? Um what you have to give to your business is still that owners equity you are not an expense of your own business and these air just expenses. So if you pay somebody else to help you weld to help you paint signs to help you print fabric um, those folks would go under production labor for cost of goods sold and I will mention that if you hire anybody to do anything for you for more than six hundred dollars in the us, you'll need to fill out one of those ten, ninety nine forms for them. Um, which if you do any consulting or contracting, you know that you get at the end of the year. Any questions about thie production? Labor? Yes. Um so if I were to outsource water jet cutting say toe have some pieces cut from the sheet steel and I use the company um, do I have to give them into ninety nine if I pay over a six hundred or is it only for, like individual contractors you're like well, so that's the question are you paying them that's a really good question? Are you paying them for the service or you paying them for the product? Are you paying someone you know for there time and money like when you get the bill back are they saying like fifty hours of cutting at you know, twenty dollars an hour equals a thousand dollars or are you getting a bill that says sixteen sheets of you know, cut steve you know, custom cut steel and it's a product if they're charted the bill is coming in for a service um then in all likelihood you wantto put together a ten, ninety nine but for specific like instances and questions like that I would recommend talking to a c p a I am not a c p a I'm not going to make like, uh specific legal recommendations about when you need which forms um but in general, if it's a service there a contractor and they get a ten, ninety nine if it's a product that you're getting back um then you're just paying for that as a product right as a wholesale product? Thanks. Thanks. Yeah. All right. And then let's finish out the cost of goods sold category before we see if they're any more questions online. Um other cost of goods sold expenses would include stuff like storage um for a while I had so much inventory and this tiny little apartment cause I live in san francisco and it's expensive um I literally had the boxes we had this sort of like little breakfast nook you know, bay window thing where we could shove this like two person table and I had so many boxes of inventory that they were completely piled up in front of the table and then they started going on top of the table and then pretty soon they were like halfway up the windows and the apartment was dark because delight wasn't getting in because I had it was the bane of my husband's existence if you're watching, I'm so sorry for like years and this tiny little apartment boxes piled up so high that we weren't even getting light in the windows. So eventually I started paying for outside storage uh so that I could, you know, put these things in a warehouse and not have them taking over my life at home. Um and that's part of the cost of goods sold as well. Um if you have them in a warehouse like a fulfillment house where people also will pack and ship them out two customers um then you if they separate out the storage fees, you could put the storage under here and then put the shipping um, further down, uh you would put it under contract. Labour, if there, if you're paying people to do this for you, not in the cost of goods sold, and you would pay for it in your office supplies of your shipping supplies category. Um, if they don't separate it out, I would probably put everything outside of cost of goods sold just because it will sort of artificially inflate how much your cost of goods sold. Cost if you're putting in all of this, like shipping labor as well, um, and that's, probably worse than missing the cost of the storage in that equation. If that makes any sense, you can also always sort of estimate. Or ask them. For heaven's sake. Like how much of this semi paying for storage and how much is going towards actually packing and shipping stuff.