If you produce a product that is sold to someone else inventory/cost of goods sold is still the most appropriate place to record the materials costs. This is true no matter what your customer may do with the product you sell. If you have items that are specifically identifiable in the final product you will record them under the inventory section as materials. If the item is not specifically identifiable (like glue or screws, etc) then these items do not need to be inventoried and can be recorded as a supply expenses under other common business expenses.
You should record the sell of your product no mater who you sell it too. Sales to individuals is reported the same as sales to a manufacturer.
There is not a credit for product given away. You get the deduction for this product when you take them out of your ending inventory. The deduction is the amount it cost you to produce the product and not the amount you could have sold the product for. To take the deduction, when you calculate your ending inventory, treat the product given away the same as you do the product sold. For example, if in beginning inventory you had 2 items and made 10 more during the year you would have 12 items to sell during the year. If you sold 5 of them and gave 3 of them away your ending inventory would be 4 items. You would then be able to deduct the cost of the 8 items you "sold" during the year.
