View Full Version : Cost Of Goods Sold (COGS) VS. Supplies

04-08-2016, 04:17 PM
Hey guys,
I have been trying to figure this out for a while now, and I have been reading a lot of conflicting stuff on the internet. Figured it would be worth asking you guys about and get some discussion going on it

My main question is I am confused as to when to put things under COGS, and when to put things under supplies. I will get into more detail below.

One of the things we do is we manufacture consumer electronics, so lets use this as an example:
This consists of ordering blank circuit boards (PCBs) that we have designed. We then solder misc. components onto the circuit boards. These circuit boards are then assembled into an enclosure and packaged.

When we order components for a batch of boards, we generally order 5% extra components due to manufacturing process loss. Also, depending on the quantity of devices we are building, prices/shipping varies quite a bit.
We have a pretty good idea what these devices cost because we have a BOM (bill of materials - basically a list of all components on the circuit board, their location on the PCB, and their cost - including the enclosure) but this is still not 100% accurate for the above reasons.

So here is where my confusion starts to comes into play, I'm going to make up some numbers as an example:
Lets say we built 1000 devices in 2015, and only sold 300 of them. Lets say the BOM total says the cost is $100 per device. In this case, we would only be able to write off the ones we sold which would be 300 * 100 = $30,000 is that correct? So if we spent $100,000 to manufacture the entire batch, but only sold 300, we would be sitting on $70,000 that we are unable to write off until they are sold, is that correct?

There are supplies that are used in the process of creating the devices such as solder, flux, etc. and this is obviously not included in the BOM. So these are sort of considered operating costs and fall under the supplies category... at which point the entire cost of these supplies can be written off the year we purchase them.

So instead of sitting on the $70,000 that we can't write off, whats stopping someone from listing all of the components used to manufacture the devices under the supplies category so you can write them off the same year? Also, the BOM doesn't account for money actually spent, because there are discounts associated with ordering more/less quantities, there are shipping costs for ordering from different manufacturers, 5% of the components can be lost or damaged in the manufacturing process, flux & solder, etc. So it seems that you would be screwing yourself over if you use any of that for the COGS? It seems way easier and more accurate to put everything into the supplies category, but this doesn't seem right?

It seems the more stuff you pull out of the COGS and put into supplies, the less accurate your actual costs are, is that correct? But its not feasible to get that granular and put everything into the COGS (such as breaking down some of the operating costs and put that into the COGS).

How is this supposed to be done? Thanks for taking the time to read this and any help/advice is greatly appreciated!

Charles A. Cruz
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07-18-2020, 01:47 AM
Cost of products sold is the conveying estimation of merchandise sold during a specific period. Expenses are related with specific merchandise utilizing one of the few recipes, including explicit recognizable proof, first-in first-out, or normal expense.

11-17-2020, 03:48 AM
Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a company. This amount includes the cost of the materials and labor directly used to create the good. It excludes indirect expenses, such as distribution costs and sales force costs.

11-18-2020, 10:15 AM
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11-27-2020, 03:34 PM
Those two things are the determinant of the success of your business. Some business have strategies build around those two parameters. - Marla Ahlgrimm (http://www.marlaahlgrimmexpert.com/)

03-18-2021, 09:15 AM
Materials used in the manufacturing of retail goods become part of the costs of goods sold or COGS. These are deductible expenses subtracted from revenue generated for income purposes. Supplies purchased are assets until used.

04-10-2021, 12:29 AM
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