Woodworking Business COGS

by Mike
(Ontario)

I was top of the class in accounting back in high school, but that was 35 years ago. I'm starting a woodworking business now and after many hours of book reading and Internet searching, I think I have my bookkeeping setup pretty much figured out, except for questions related to COGS.

My business will be woodworking, specializing in manufacturing custom orders. I was having trouble remembering how to deal with the inventory/COGS side of bookkeeping, but here is what I have figured out. Someone please let me know if I have it correct.

I buy wood, paint, nails, etc, anything directly used for production of goods, and that would go in "Raw Materials (#1200)" in Current Assets. I buy saw blades, paint brushes, anything used for production that has a short life, and they go in "Disposable Tools (#1250)" in Current Assets. Once a month, I figure out the actual value of what is left in my "Raw Materials" and "Disposable Tools" inventory and make a couple entries to transfer the differences to my COGS accounts. Credit the "Raw Materials" and "Disposable Tools" accounts to bring them to the correct balances and debit the "COGS Raw Materials (#5000)" and "COGS Disposable Tools (#5050)" accounts to match.

Is that the correct way to deal with that?

And, what about the value of the raw materials? Do I keep a special purpose ledger with probably 1000's of accounts to keep track of how many feet of 1x4 select pine, 1x4 common pine, 1x4 white maple, 1x8 white maple, 1" dowel, etc, and how many square feet of 1/2" G1S fir plywood, etc, or do I group them together, like pine, maple, dowels, plywood, etc? Is it my choice how detailed I want to break it all down? For pricing, I'd almost have to keep every different size separate, since 1x8 pine isn't exactly double the cost per foot of 1x4 pine, and select pine is double the cost of common pine.

Do I keep a separate account for every type and size of material I use?

I hope I don't spend more time bookkeeping than woodworking. Thanks for any help.

Hi Mike,

The best place to look for articles on inventory is The Sleeter Group --- IMHO.

Check out this article and hopefully it will give you a few options on how to proceed ...

sleeter.com/blog/2011/02/groups-for-custom-manufacturers/

Most of their solutions discuss QuickBooks or QB add ons - but it still gives you a starting point. Good luck and wishing your lots of success in your business endeavor.

Another option is to perhaps check out Esther Friedberg Karp of EFK CompuBooks Inc.. She is out of Ontario. I tried to find a website but she doesn't appear to have one ... which is weird in this day and age. She does have a Linked-In page though.

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Nov 03, 2015

It's a bit more clear now
by: Mike

Thanks for the link. That link and some of his other posts helped. From that, and some further searching, it looks like my bookkeeping needs to be even more complicated than I thought. Just converting assets to COGS is apparently skipping a step. When something is made but not sold yet, records need to be changed. I never even thought about that part. I found another site that covers the manufacturing records quite well at simplestudies.com/manufacturing-nonmanufacturing-costs.html.

So, my current understanding is:
- buy raw materials and disposable tools and put them in their asset accounts
- when something is made, transfer from raw materials and disposable tools to finished goods inventory asset account
- when a product gets sold, whether it was already sold or got sold later, the inventory asset value then goes to COGS.

I remember when I was younger I was able to soak in new information like a sponge. Now I think everything is dripping back out. lol

Anyway, I'll set up my bookkeeping this week and see where I need to make changes as I use it.

As for raw materials, my searching did remind me of FIFO, LIFO, and weighted average. Since I don't plan to have a large supply of any particular type and size of wood, I think I'll keep it simple and use weighted average. For how detailed a list to have, I will just keep track of how many board feet I have of each type of wood. An inventory count for hard maple, soft maple, common pine, select pine, etc. At lumber mills, wood is sold by the board foot. A 1x4 will be half as much per foot of length as a 1x8. Lumber yards, like Home Hardware, sell by the lineal foot which complicates it, but whatever I buy there, I'll just calculate how many board feet I got and enter it that way. If I'm ever curious how much I have of a specific size, like 1x8 oak, take a few seconds and look.

I can just imagine big companies doing their record keeping before computers.

Nov 03, 2015

Disposable Tools
by: Lake

Mike, take time to do a search on my site with the words "small tools". Be sure to read the restaurant article that could apply to you regarding aggregate purchases ... as well as the chat on "What You Should Know About CCA". You can expense small tools under $500. Look at class 8 & 12. You might want to consider tracking your assets by CCA class to make your tax preparation easier.

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