topic Are packaging costs considered part of Inventory Costs? in Business & farm

Are packaging costs considered part of Inventory Costs?

vivianvulpone — Mon, 03 Jun 2019 17:45:02 GMT

The IRS says "Containers and packages that are an integra...

IsabellaG — Mon, 03 Jun 2019 17:45:04 GMT

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

Re: The IRS says "Containers and packages that are an integra...

A_Granado — Thu, 10 Oct 2019 19:07:12 GMT

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?

Re: The IRS says "Containers and packages that are an integra...

Critter — Thu, 10 Oct 2019 21:20:17 GMT

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.

Re: Are packaging costs considered part of Inventory Costs?

Carl — Thu, 10 Oct 2019 22:56:31 GMT

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.

Re: Are packaging costs considered part of Inventory Costs?

A_Granado — Fri, 11 Oct 2019 19:39:16 GMT

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.

Re: Are packaging costs considered part of Inventory Costs?

Critter — Sat, 12 Oct 2019 01:03:13 GMT

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.

Re: Are packaging costs considered part of Inventory Costs?

Carl — Sat, 12 Oct 2019 02:25:15 GMT

The shipping items are an expense to be deducted currently.

I think you meant "concurrently". 🙂

Re: Are packaging costs considered part of Inventory Costs?

hunnybuns2009 — Fri, 12 Mar 2021 20:38:06 GMT

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.

Re: Are packaging costs considered part of Inventory Costs?

ReneeM7122 — Fri, 12 Mar 2021 21:17:34 GMT

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

@hunnybuns2009

Re: Are packaging costs considered part of Inventory Costs?

hunnybuns2009 — Fri, 12 Mar 2021 22:17:39 GMT

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.

Re: Are packaging costs considered part of Inventory Costs?

ReneeM7122 — Fri, 12 Mar 2021 23:43:35 GMT

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

Re: Are packaging costs considered part of Inventory Costs?

hunnybuns2009 — Mon, 15 Mar 2021 21:20:05 GMT

Thank you!

Re: Are packaging costs considered part of Inventory Costs?

Rich Bake — Mon, 30 May 2022 14:13:34 GMT

No, it is definitely not

Re: Are packaging costs considered part of Inventory Costs?

Critter-3 — Mon, 30 May 2022 15:06:51 GMT

@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.

Re: Are packaging costs considered part of Inventory Costs?

hunnybuns2009 — Wed, 05 Apr 2023 15:11:38 GMT

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.

Re: Are packaging costs considered part of Inventory Costs?

PatriciaV — Wed, 05 Apr 2023 16:02:44 GMT

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.

Re: Are packaging costs considered part of Inventory Costs?

hunnybuns2009 — Wed, 05 Apr 2023 18:05:33 GMT

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??)

Re: Are packaging costs considered part of Inventory Costs?

hunnybuns2009 — Thu, 06 Apr 2023 16:02:37 GMT

"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?

Re: Are packaging costs considered part of Inventory Costs?

DaveF1006 — Thu, 06 Apr 2023 16:49:25 GMT

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