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Chart Of Accounts Construction - COGs or Expenses?

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I am trying to create a chart of accounts for a small business of 2 owners/employees manufacturing and selling garden rooms. The garden rooms are prefabricated in a workshop and delivered to the customer once complete.

Some advice on how to categorise the direct materials and indirect materials used would be appreciated. At present, I have these materials categorised as shown in the attachment. Items such as a kitchen sink, shower tray, taps etc are easy to quantify and I have put them under Job Related Costs> Material Cost (COST OF GOODS SOLD).

Items such as timber, cladding, MDF sheeting are bought in bulk amounts and one bulk purchase may not necessarily all be consumed in the building of one garden room. These items seem too arbitrary to be classed as COGs, but at the same time form the bulk of the material and expense of each garden room and therefore doesn’t seem right to be classed as just a Shop Supply Expense.

Items such as glue, tape, nails, screws, sandpaper etc make sense to be listed as a Shop Supply Expense as they are either relatively low in value or not directly forming part of the finished product. Any suggestions would be appreciated. Thanks


Replies (6)

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By Duggimon
14th Oct 2019 14:07

I'd probably just put all the materials under materials and call it done.

Anything not used up entirely in a single build goes in stock.

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By spidersong
14th Oct 2019 14:23

I'd be putting them all down as COGS myself, if you wanted to you could split them to something like Individually Attributable Costs and Non-Individually Attributable Costs or something if you wanted to for analysis of the things that get spread around a number of jobs.

But at the end of the day COGS is those items of expenditure that are directly attributable to the production of goods or services sold by the business, so if the product consists of fibre board, nails, glue, frame, glass etc then I'd put all those down as COGS, otherwise you're going to have a rather imbalanced view of your direct costs and your overhead costs if you're putting everything else down as expenses.

Expenses I'd tend to put as those items not attributable to the manufacture of goods, so office furniture, advertising, accountancy etc. If you haven't got the nails, glue, MDF down as cost of sale then how are you going to work out how much you're spending on each unit?

Fair enough sandpaper and hand-tools as expenses, and larger tools as assets, but unless the nails etc are being used in something else than the end product then I'd be putting them in the Chart as part of the cost of those end products.

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paddle steamer
14th Oct 2019 14:35

I would extend that and would also put consumables, screws, sealant, sandpaper , rags etc in COGS.

I would create a small tools and consumables heading within COGS to deal with it and set a policy re at what figure tools are treated as capital expenditure e.g. things like paint brushes/kettles/masking tape just go there whereas replacement Makita does not, materials of significant value bought particularly for a job go against that job cost the rest are just COGS unallocated.

When we did small works and I was running a job cost system there got a point where it was simpler to not job allocate these sorts of things and just absorb by either recharging expressly purchased significant value materials with a mark up or recharge within hourly labour recharge rates.(I used to add 20% to materials and then used fixed hourly labour rates)

Life is really to short to try to calculate on which jobs the box of 1000 screws was used.

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By kiwilondon99
14th Oct 2019 14:40

Use say, a 'constructed/delivered built off site and delivered [ or even made by you ]
then say 'fit out category' whcih covers small one off buys used for the completion

you may fo course buy 24 taps and 48 sockets in one purchase - and only use ' couple- the balance would be stock

you could create another category or sub categoruyinto each

it will depend on how much value each end product is - and for waht purposes you require data + at what level [why spend a day analsying a couple of dozen input invs for a £few]

simple accounts or simple prorerct/job accounts, depending on what you require will assist you

keep overhead costs [ accounant bank genral well away from these accounts = + = ensure they do not form part of your gross profit
items such as payroll + advertising : take a view on these - generally indirect cos[ and maybe within GP again depending on your size and info needs ]

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By ddub7835
14th Oct 2019 15:10

Thanks for all of your help, it's much appreciated.

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By kestrepo
14th Oct 2019 15:27

I second the stock method. Add items bought into stock and draw them down to cost of sales then allocate them to each room as it is fabricated. This will give you the ability to determine how much each finished room costs to make and to see what it was sold for. It would also add perceived value to the company since the stock will be shown as an asset on the balance sheet. Hopefully your client would see that as a positive! You could in the future add to this further by allocating the time spent (labour) to manufacture each room too.

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