How to allocate Cost of Goods Sold for a manufacturer
I am a small manufacturer. I have small indirect materials and supplies that I use to make my product. However, the cost of the supplies is not very significant. Is it okay for me to expense those items out to COGS even if they are not completely used up?
Yes, that is okay, as long as the supplies are used in a decent time frame.
In accounting, we have what we call the "matching principle". This means we try to match revenue and expenses.
If you purchase 6 months worth of supplies, but expense them all in 1 month, that's not a very good matching.
If you use the supplies up in a month or two, then I'd say it's okay.
I worked with a small manufacturer - he made dies - and we had a COGS account we called "Tooling Supplies". In that account we posted small tools that were used up quickly, but were essential to the manufacturing process.
Just make sure the supplies you post to COGS are actually used in the manufacturing process, not just used in your shop. And it would be better if they were used up within a month or two.
Hope that helps.
Thanks for stopping by, John!