Are packaging costs considered part of Inventory Costs?

[hunnybuns2009]

I hate to resurrect such an old thread but here I am again.  Almost 2 years later.

I need clarification on how I've got my finished products set up in Chart of Accounts.  

I buy bottles, labels, and paint.  All allocated to Expense Account:  Packaging or to Supplies, (COG accounts) respectively. 

I end up with a finished product which I have been allocating to Income Account:  Merchandise Sales.  This is an account set up years ago when I was working with a CPA.  Is this correct?  

I'm having some difficulty with COGS at year end for my TurboTax entries, and must be sure I'm doing it right.  

[PatriciaV]

The finished product becomes merchandise. When that is sold, your profit is selling price less merchandise cost. I'm not sure why you would record the finished product in an income account.

Cost of Goods Sold, shown on Part III of Schedule C, is fairly easy to calculate.

• Beginning Inventory (ending inventory on last year's return)
• Plus: Purchases of direct materials (what goes into your finished product)
• Plus: Labor you paid to others
• Plus: Materials and supplies (included in your finished product)
• Less: Ending Inventory (based on a physical count of finished product and unused materials/supplies)
• = COGS

As long as your accounting entries are accurate and consistent, you should have the numbers to complete this equation.

[hunnybuns2009]

Hi Patricia,

Thanks for your answer.  I've read similar in other places, and that's why I'm questioning how my QB is set up now.  Now, to be clear, I don't do any of those calculations - I rely on QB Retail Edition 2014 to do them for me. 

What I really need is the Income Account that I should be using for my finished products...on a micro level if that makes sense 🙂   If I get it right at the product level, my yearly COGS on Balance Sheet should be right, right?  Exactly what Income Account should my finished product properly be allocated to?   Currently, and for 10 preceding years, it's been Merchandise Sales.  

Again, if it helps:  I buy bottles, caps, jars, (Packaging expense) fill them with paints (Supplies expense), label them (Packaging) , and sell them = Merchandise Sales.    (maybe I'm overthinking this??)

[hunnybuns2009]

"I'm not sure why you would record the finished product in an income account."

Because my accountant set up my original QB Retail that way in 2009.  I'm not an accountant - I didn't know this might be a mistake.  

What seems logical to me is that if I allocate a cap, a bottle, the paint to fill it, and a label to Supplies (COGS), then when it is sold as a finished product, it will then debit Supplies (COGS).   What is left over is profit.  
Is this correct, or is my logic not sound?

The total line item for COGS on my yr end balance sheet was, let's say $19,800.  Gross sales were $40,000. Where I was getting stuck, and scared for doing my taxes was in the fact that the sub-accounts under COGS (Packaging, Supplies, Materials, and Shipping) individually only added up to $6600.   This was leaving me with a staggering self employment tax to pay.   Only when I plugged in the entire COGS total ($26,300) did I arrive at a reasonable amount on my Federal return.  

What is scary is, when I do Quick Report on COGS (the large line item) I see a listing of every single retail sale made in 2022 in addition to all of the Supplies, Materials, and Packaging purchased in 2022.  Does this sound right to you?

[DaveF1006]

Some of these questions or issues seem to be related to how Quick Books is handling the transactions.  While we can comment on tax matters, we are not Quick Book experts, thus cannot comment on reporting discrepancies that may be generated in the Quick Books program.

Please contact Quick Books by selecting this link. i would suggest calling them and have one of their team of experts to settle any discrepancies in your Quick Book reports.

@hunnybuns2009 

[hunnybuns2009]

Thank you!  I'll head over to the Quickbooks community forum.