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Arts / Crafts Inventory or Expense?

Writing Off Raw Materials

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Question: Do I need to keep an inventory or can I just expense all costs to make my arts / crafts product?

Answer: Any type of business that buys raw materials to create a product usually needs to keep an inventory of unused raw materials.  For example, let's say you are a potter and buy clay and glaze to make mugs, bowls etc.  You buy clay in large quantities.  Your last order of clay was for 10 pounds and it cost $100.  You used 5 pounds of the clay to make holiday themed mugs for an order placed by a retail shop  and are saving the rest of the clay for the order you're making next month. 

When you ship that order of mugs you expense as cost of good sold $50 of the clay purchase (plus any other cost you incurred to make the mugs such as glaze and firing fees). The other $50 is inventory and is not written off as an expense until you use it and sell the product to a customer.  Check out my article on the topic of artists and cost of goods sold for another example.

Some arts / crafts business use a just-in-time method for ordering raw materials. What this means is that they only purchase the raw materials when they have a customer order.  In that case, if any left over raw materials is deminimis - it may be ok to just expense the entire purchase of raw materials. 

Just check at year-end that the total accumulated 'deminimis left-overs' didn't accumulate to a measurable quantity that you will be able to use in the new year.  Then you should reduce your cost of goods sold for the reasonable value of the raw materials left in inventory.

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