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Author: RBMunkin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 121592  
Subject: COGS Date: 9/18/2012 10:22 AM
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Hi,
Correct me if I'm wrong, but I believe if a person has a small manufacturing business, but doesn't keep inventory - basically buys material, makes a product, sells it all pretty much at the same time for each order placed, they don't have to deal with Cost Of Goods Sold, do they? They can simply expense the materials they buy.

Thanks,
RB
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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116600 of 121592
Subject: Re: COGS Date: 9/18/2012 11:58 AM
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Correct me if I'm wrong, but I believe if a person has a small manufacturing business, but doesn't keep inventory - basically buys material, makes a product, sells it all pretty much at the same time for each order placed, they don't have to deal with Cost Of Goods Sold, do they? They can simply expense the materials they buy.
==============================
"But doesn't keep inventory?" - That means that on New Year's Eve, as the crystal ball is falling in Times Square, there is no raw material sitting in the shop, and there are no half-finished jobs in process. If that's true then you don't have to keep track of inventory. (And work-in-process includes labor, and an overhead component, too.)

And if you do just expense the materials you buy, that, and your labor and related costs, are still Cost of Goods Sold. You just aren't adjusting for inventory changes.

And if you're running a manufacturing business of any kind, you really should be working with an accountant, and talk to him/her about this.

Bill

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Author: RBMunkin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116601 of 121592
Subject: Re: COGS Date: 9/18/2012 12:05 PM
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"And if you do just expense the materials you buy, that, and your labor and related costs, are still Cost of Goods Sold. You just aren't adjusting for inventory changes."

How about here:
http://www.irs.gov/Businesses/Small-Businesses-&-Self-Em...
where it says "This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million."

They might have the tiniest raw material left over after the ball drops but it's so insignificant I thought the IRS rules allow for ignoring such amounts to simplify taxes for such tiny businesses.
Isn't that the point of this $10M rule? The business I'm talking about is closer to $35K! That's about 0.35% of the $10M!

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Author: ptheland Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116602 of 121592
Subject: Re: COGS Date: 9/18/2012 12:08 PM
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"This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million."


That is referring to the Uniform Capitalization Rules mentioned in the paragraph above the statement you quoted.

It is not referring to the need to account for your inventory.

--Peter

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Author: RBMunkin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116603 of 121592
Subject: Re: COGS Date: 9/18/2012 12:19 PM
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Just to make sure I'm understanding the math correctly, a simple example:
If beginning inventory and ending inventory are the same, whether zero or not, the bottom line would be the same as if all COGS were expensed instead, right?

Also, would you consider the following costs COGS? I wouldn't think so.
1. Shipping of the finished product to the customer.
2. Royalty payments (where a small percentage of the sale goes to a third party).

Thanks,
RB

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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116604 of 121592
Subject: Re: COGS Date: 9/18/2012 12:27 PM
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If beginning inventory and ending inventory are the same, whether zero or not, the bottom line would be the same as if all COGS were expensed instead, right?

Correct.

Also, would you consider the following costs COGS? I wouldn't think so.
1. Shipping of the finished product to the customer.


No - you're correct.

2. Royalty payments (where a small percentage of the sale goes to a third party).

No -you're correct.

Bill

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Author: RBMunkin Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116605 of 121592
Subject: Re: COGS Date: 9/18/2012 12:39 PM
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"That is referring to the Uniform Capitalization Rules mentioned in the paragraph above the statement you quoted."

I guess I'm having a bit of trouble with this distinction. When it says:

"Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities."

I took that to mean that instead of directly expensing a cost that you must add it to COGS. So then when it said:

"This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million."

I thought that might mean that you don't have to bother with COGS.

RB

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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 116606 of 121592
Subject: Re: COGS Date: 9/18/2012 2:03 PM
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"That is referring to the Uniform Capitalization Rules mentioned in the paragraph above the statement you quoted."

I guess I'm having a bit of trouble with this distinction. When it says:

"Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities."

I took that to mean that instead of directly expensing a cost that you must add it to COGS. So then when it said:

"This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million."

I thought that might mean that you don't have to bother with COGS.

RB

========================
No, it means you don't have to follow UNICAP (Code Section 263A) and use one of several acceptable methods for allocating part of cost of goods manufactured AND indirect costs and "mixed service costs" to ending inventory.

Bill

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