RE: cost of goods sold- confused on cost of goods and 'materials & supplies' our small bussiness we buy wood, fabric polymer clay etc. to make items to sell. Sometimes we buy a physical finished item such as a backpack. Do we need to separate the two.

[Cynthiad66]

No.  The cost of the backpack is treated the same.  It is the cost of an item sold.  For your record keeping I would keep records of the finished products separate for you own purposes.

Cost of goods sold refers to the direct cost of producing the goods sold by a business. 

If your business produces income by manufacturing, selling or purchasing goods, you can deduct some of your expenses in the Cost of Goods Sold section of your Schedule C. In order to complete this section, you will need to input your beginning and ending inventory amounts.  Expenses that are included in the Cost of Goods Sold cannot be entered as both business expenses and cost of goods sold expenses.

What are the 4 types of expenses used to figure cost of goods sold?

1. Cost of products or raw materials (this includes freight)
2. Storage
3. Direct Labor Cost for workers producing products (includes contributions to pensions and annuity plans)
4. Factory Overhead

If you need additional assistance, please return to the forum.