Are packaging costs considered part of Inventory Costs?

[IsabellaG · Accepted solution]

The IRS says "Containers and packages that are an integral part of the product manufactured are a part of your cost of goods sold.If they are not an integral part of the manufactured product, their costs are shipping or selling expenses."

So if you have a product that you are selling and the packaging for it is what would be included if you were displaying on a store shelf, then it's part of Inventory Costs. For example a pretty velvet box for jewelry is part of inventory costs.

But if you have packaging costs for shipping your merchandise, like shipping boxes and bubble wrap, tape,etc, that is part of shipping costs.

https://www.irs.gov/publications/p334/ch06.html

[A_Granado]

What if you own an online boutique and you have to ship out all your orders, is that considered COGS? Also, what if I pre-buy a bunch of boxes for future orders, is that considered inventory? If so how do I chart this and or categorize it in the inventory and or chart of accounts?  

[Critter]

If you manufactured the items and boxed them individually for sale prior to whole selling them then that is added to the basis since it is the cost of manufacturing the product.

In your situation you are boxing them up for shipping ... the cost of shipping supplies are entered as either supplies or shipping costs and NOT in the COGS section.

[Carl]

COGS (Cost of Goods Sold) section in the TurboTax programs asks for a number of things. Here's the breakdown.

Cost of Purchases - What *you* paid for the product you are selling. This includes all materials that become "a physical part of" the finished product.

Labor Costs - What you paid for someone to manufacture the product from start to finish. This person (or persons(s) *must* have physically touched the product you are claiming costs for in the "Cost of Purchases" box. If you have already reported your labor costs elsewhere, then  you will *NOT* claim those labor costs here. For example, if what you paid a W-2 employee is already included in their W-2, or what you paid a 1099-MISC contractor is already reported and claimed elsewhere, you will *NOT* claim that labor cost here. To do so would be double-dipping.

Materials and Supplies - Items used in the manufacturing or sales prep that do not become a part of the finished product, but are not considered actual raw materials. For example, if you manufacture mirrors one of the last things you're going to do is clean that mirror before you package it. For that you will probably use Windex and paper towels.  The Windex and towels do not become a part of the finished product. It is "consumed" during your manufacturing process. So this is a materials & supply expense. Other examples would include sand paper, abrasive rubbing compounds, etc.

Other Costs to Prepare for Sales - These are costs incurred that are not "a physical part of" the product being sold, yet are necessary in order to sell the product. This includes packaging materials, boxes, containers, displays, shipping costs, etc.

[A_Granado]

That's what I thought, but I am getting different information pertaining the "COGS". There is no physically store or shop to purchase our garments. Everything is ordered online and shipped. The boxes necessary to sell the product. We pre-purchase the boxes, inserts and tissue paper aka packaging to save money instead of buying individually. The only thing we charge for is the postage, the packing itself is a cost we acquire.  

[Critter]

Ok ... you are NOT manufacturing the items ... you buy goods to resell and they come ready to sell. 

What you do is package them for shipping AFTER you bought and sold the item ... it is a shipping expense and not part of the COGS.  The shipping items are an expense to be deducted currently. 

[Carl]

The shipping items are an expense to be deducted currently.

I think you meant "concurrently". 🙂

[hunnybuns2009]

I would like some clarification to this comment:  "Materials and Supplies - Items used in the manufacturing or sales prep that do not become a part of the finished product, but are not considered actual raw materials. "
My understanding has always been that Materials and Supplies are EXACTLY the items used in manufacturing that DO become part of the finished product. 

I buy paints and mediums, remix them into smaller quantities, rebottle them, label them and sell as a finished product.  If I were to follow your advice above, what would I then call the paints and mediums that I purchase to create my branded products?  Thanks.  

[ReneeM7122]

The bottles and labels in your paint products are considered cost of goods sold.

@hunnybuns2009

[hunnybuns2009]

I need to clarify - confusing due to the title of this thread.  What are the bulk paints allocated to?  I understand the bottles and labeling part.  Thanks again.  

[ReneeM7122]

The liquid paint itself is a direct material, which is a cost accounting term. 

On Schedule C, the paint falls under the supplies category. 

Use this category to categorize items you buy and then sell or use to make the products you sell. This includes raw materials, packaging, and shipping.

You can categorize these types of transactions as supplies:

• Art supplies
• Fabric and other craft materials
• Wood and metal supplies
• Food and beverages you sell as packaged goods, or you use as ingredients
• Fitness equipment you sell to clients
• Learning materials (books, notebooks, flashcards, and so on) you sell to students
• Organization materials or systems that you sell to clients
• Home furnishings you restore or upcycle and re-sell
• Specialized paper for photos or print-making

@hunnybuns2009

[hunnybuns2009]

Thank you!

[Rich Bake]

No, it is definitely not

[Critter-3]

@Rich Bake 

What does your post even mean ?   You have posted to several threads on various matters so what is the purpose of this post ?

When calculating the cost of the product being manufactured the cost to package it for sale is part of the inventory costs and is used to determine total cost per unit so you know how much to price the item for sale.  

Packaging for shipping is reported as part of the shipping costs and/or general supplies ... whichever works best with the bookkeeping system you use.