What is the difference between cost of purchases and materials and supplies?

[klnickols]

I am a dressmaker. I purchase fabric and materials that go into the final product (fabric, thread, interfacings). I also purchase items that are consumed during the manufacturing process (pattern paper, rotary blades, etc.). Do I classify each of these things as "cost of purchases" or "materials and supplies"?

Where would I put items such as labels? "Cost of Purchases" or "Materials and Supplies"?

I also have expenses such as fabric sample cards that I use to show my clients in order to sell fabrics for dresses. What would this be classified under?

[FlowY]

Hi!  Would I only consider "cost of purchases" as a finished item purchased for resell only??  What if I am making an item from raw materials?  Would those materials be considered "materials and supplies" instead?

[ValerieE]

Hi klnickols!

That is a great question!

Generally materials that are included in your cost of goods sold are any items that can be specifically identified with a finished product.  They are also items that are consumed in the production of your inventory.  Your fabric is a good example of this.  

Supplies that are not included in your cost of goods sold are items that are used multiple times even if they are used to produce your inventory.  Needles are a good example here.  I would say your fabric sample cards are also included in this category.  Patterns are also a good example of a supply expense.  You may purchase a pattern and only use it once, but since you do not sell it with the item it would be a supply rather than a material.

 Items you include in cost of goods sold should also be countable.  For example you can tell how many yards of fabric you have left.  This is countable.  This is important because anything you report as cost of goods sold has to be inventoried at the end of the year to come up with your ending inventory.  Your ending inventory includes items that were made but not sold and raw materials waiting to be made into items for sale.

You can also look to the price of the supplies.  You do not need to track in inventory items that cost your pennies each.  While there is not a set amount to make this decision it does not make sense to spend more money and time to track and inventory an item that it costs to buy it.

I hope this helps.  If it does not adequately address your concern, please reply to this post so that I may continue to assist you.

Thank you for using Turbo Tax!

[mbalog]

Great explanation! Thanks!

[drakeel]

I have a complicated question that sort of follows this thread. My wife has turned her hobby of making girls hair bows and clips into a business. She has spools of ribbon that may have cost $1.00-$3.00 each and she has hundreds of these spools. Some were purchased in 2013 when she turned the hobby into a business and some were accumulated when it was a hobby.. Should she unravel each spool to determine how many total yards she has? We have the receipts from the purchases so can we add up the inventory that way?

[ValerieE]

I hate to say, "unravel the spools", but you do need an accurate way to value your inventory.  For the future I would suggest your wife develop a simple way to track her ribbon usage.  If she uses the same amount of ribbon for each bow she could simply use tick marks on the ribbon package.  If the amount varies from bow to bow a log sheet might be easier.  It doesn't need to be complicated.

[ARD1]

How about we add yarn to the question....I decided to turn my hobby into a business as well and trying to get a grip on taxes. I did my inventory of completed items (62 hats) and I have receipts for all the yarn bought in 2013 but I don't have # of skeins of yarn at each price point.  It sounds like I need to add my finished product inventory AND my yarn stash?  Plus if I make my own hats, how do I know how to value them--I know it is one price to buy them and a different to sell them but should I give a fixed price to each size and use that as my cost?

[ValerieE]

Your ending inventory would include your finished product and your unused yarn.  The value of your finished hats would be based on the amount of yarn and other notions needed to produce the hat.

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[petite25]

So what would be considered "Cost of Purchases"?  I understand materials and supplies but am a bit confused on what to state for Cost Of Purchases.  I have a shop and sell craft items which take multiple pieces to produce the final product. I listed these items as Materials & Supplies.

[ValerieE]

Cost of purchases are generally the cost for pre-made items that you can resell without much alteration.

[bbv72]

I have another problem....at first I just estimated our inventory...now I just keep it the same every year...after this year my inventory increased because I had an order canceled and stuck with the finish product...then I have material that hasn't been used due to my customer discontinuing the item from her catalog....how can I fix this?

[washingtoncuts]

I have prints done of my artwork that I sell should they be listed under "Cost of Purchases"? Since I payed for them.

[lauriefolino]

If you sell less that $1 million dollars a year it is not required to know your ending inventory if you are a dressmaker, crafter, etc.

[johnny2]

Hi I am a Product Developer and my material costs are specific for making prototypes of consumer products in the attempt of Licensing to a manufacturer and also making small batches of samples (50 or so) that may or may not be sold. Sold products are for the testing by the end user and trying to obtain product feedback but they keep the product afterwards. Unsold products would be provided at no charge to manufacturers for review and consideration of Licensing opportunities.  Where is the best place for separating material costs and do I report sales of these products to individuals?  Is there a credit available for product provided without compensation?