If you handcraft and sell your arts and crafts, you technically run a manufacturing business. Because you make your product from scratch, figuring your cost of goods sold (COGS)is more complicated than figuring a merchandising cost of goods sold.
Follow along with me, using the image on this page as a guide to learn how to figure your cost of goods sold for your handcrafted arts and crafts items.
Types of Handcrafted Arts and Crafts Inventory Appearing in COGS
You have two types of inventory making up your cost of goods sold:
- Direct materials: This is the inventory the you purchase to make the products. For example, to handcraft a leather purse, you may purchase leather, zippers, snap, grommets etc.
- Work in process: This inventory category includes direct materials that have been partially but not completely made into sellable products - for example, your leather purse is missing a zipper closure or straps.
Preparing an Arts or Crafts Handcrafting Business COGS
Ok, now that you understand the two different types of inventory showing up your arts and crafts handcrafted COGS, let's walk through the accounts you affect while making the calculation. Make sure to reference the image on this page as you go:
- Beginning direct materials: how much is in your material inventory at the beginning of the accounting period.
- Net purchases: all material purchases less purchase returns or purchase discounts.
- Ending direct materials inventory: What is left in your material inventory at the end of the accounting period.
- Direct labor:This expense includes only what the company pays to workers who are directly involved in making the items the company manufactures. So if your arts or crafts business makes leather purses, direct labor includes the payroll for the employees who make the purse patterns, cut out the leather pieces, and assemble the leather pieces into a finished purse.
- Factory overhead: This expense includes all costs you incur to make your leather purses except those already included in direct materials and direct labor. It also includes indirect materials and labor.
- Indirect materials: These are materials you use for more than one product. For example, if you use grommett for both leather purses and leather belts - the grommetts are indirect rather than direct material. That's because the grommetts aren't directly associated only with the purses.
- Indirect labor: This item includes employee payroll that does not directly tie to a specific finished product. A good example of an indirect employee is a quality control inspector who makes sure that all your goods are made properly.
- Depreciation of factory equipment: For example, include the depreciation of the sewing machines the company uses to make the purses in factory overhead.
The rest of the accounts you affect are pretty self-explanatory. Start with beginning direct materials inventory, add and subtract as shown and you'll finish up with your costs of goods manufactured during the accounting period!