Learning About the Merchandising and Manufacturing Inventory
There are two basic types of inventory: merchandising and manufacturing. A merchandiser is a retail business like an art gallery or museum gift shop. The business purchases goods from an arts and crafts manufacturer and in turn sells them to the end user - a consumer like you or me. Easy to account for, you only have to worry about purchases.
If you make the arts and crafts items, you are the manufacturer and your invoice is divided into three components: raw material, work in process and finished goods. This article explains the difference between raw materials, work in process and finished goods.
Understanding Cost of Goods Sold
The cost of goods sold (COGS) reflects all costs directly tied to any product a company makes or sells, be it a merchandiser or a manufacturing company. As merchandisers sell a product they purchase from a manufacturer their COGS will be easier to compute. This is because they only have one type of inventory to keep track of – goods they purchase for resale.
To figure a manufacturing company’s COGS you first have to calculate the cost of goods manufactured. What appears to be a simple single line item in the cost of goods sold for a manufacturing company is really a calculation in which many different variables are added and subtracted.
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.
Step-by-step, this article shows you how to factor in direct materials and work in process when calculating cost of goods sold.