Inventory & Warehousing question

[rhakim]

Two questions for you pros out there:

As part of my business, I resell health products. Problem is that I buy them in several countries, store them in several locations, and then ship them to my sales office as needed.

By searching through this board, I understand that QB (I'm using Pro 2003) cannot really handle this well. I'm willing to put up with having a separate inventory item prefix for each location. Two questions:

1) When I ship an item from say Canada to USA, do I just do an inventory adjustment and adjust one of them up and one down?

2) Would doing this screw up my COGS?

3) Would I just charge the shipping costs to my standard "Postage & Freight" expense or should I create a Chart of Accounts line under COGS to represent inter-warehouse shipping?

Second...

I also have another sideline where I buy various raw materials, paint, wood, glue, etc. and make stuff with it. I have tons of this raw material, and so far I've just been expensing it straight out to a COGS item called "Crafts Inputs" and then when I make an item, I do an inventory adjustment and add 1 to the line item for the craft I made. That does artificially inflate my COGS I realize, but how they heck should I know how many widgets a pot of glue will make when each widget is a little different and that pot of glue could go to making five different kinds of widgets?

Question is from an accounting perspective, is there a better way I should be handling this?


Thank you!!

Richard

[Scooby Doo]

Your second question. I sometimes make inventory from raw materials. When I record the purchase of raw materials, I place the purchase into an assett account named 'raw materials'. I can then see my total raw mats on the Balance Sheet.
If I use $1,000 making ten widgets, I make an inventory adjustment, adding ten (making sure that the value of widgets rises by $1.000). Then, I open the 'raw materials' ledger and decrease the amount by $1,000. Choose 'inventory adjustment' as the account.
By doing this, $1,000 moves between assett accts ('raw materials' to 'inventory assett'), but nothing else is affected. I am no accountant, but this seems correct to me.

[royg]

Hello, Richard,

I'll take a stab at your questions:

First the inventory relocation problem.

As I understand your situation, you are setting up a separate item for each item in each warehouse. Thus a 500 gm jar of miracleA in Canada might have item# CAMA500, while the same jar in the US might be # USMA500.

If this is the case, you certainly can increase inventory of one and decrease inventory of the other with no problems.

I would try to use the inventory adjustment form. Just make sure that your adjustment account is correct. For some reason QBs seems to default to an equity account (?!?)

As far as COGS, if these will be the same for each warehouse (e.g., if you always buy miracleA in Canada) there won't be any problem.

If the COGS will vary from place to place, you could transfer the goods by, in essence, selling them (at no cost) to yourself. This would allow you to keep very different COGS for different sites (if, for example, you decided to add cost of shipping from one location to another as part of COGS of second location, if COGS would otherwise vary wildly between the two sites).

To give an example of this rather convoluted situation: Let's say that CAMA500 usually costs about CAN$ 7.00. The same product purchased in the US, USMA500, usually costs about US$ 5.00. Now it might be cost effective to ship product from one site to the other, depending on the CAN$ to US$ conversion rate, price of shipping, or availability in either market.

But you don't want to stock your US warehouse with cheaper CAMA500 (assuming a good conversion rate, etc.) if it's going to skew the COGS average for the US product. . .this will result in destroying the COGS numbers as a decision-making tool.

For the third question:

From an accounting perspective, I believe it doesn't matter, as long as the shipping expense gets reported the same way in the end, either as part of the cost of buying the goods, or as part of the cost of selling the goods.

But from a management perspective, it might make a world of difference. In my previous (convoluted) example, you would want to know how much it costs to ship CAMA500 to your US site so that you can decide whether you want to buy more CAMA500 or USMA500 to restock your supply. You would want to see the cost of shipping reflected in the item's COGS.

If this doesn't matter to you, it shouldn't matter to anyone else. Just make sure you keep your COGS costs separate from shipping expenses.

As always, once you have a good idea of what you want to do, consult with a tax person to be sure you aren't running afoul of regulations somewhere. This is particularly important when dealing with tax laws in multiple countries (such as GSTs or VATs).

For your second set of questions:

There are, in the US, at least two acceptable ways of dealing with COGS such as pots of glue. Basically, most any scheme will work as long as it yields roughly the same numbers and it passes the "ho hum" test--(does it really have a significant impact in your financial statements?)

Method 1:

Estimate how long a pot of glue will last. Then figure out how many widgets (roughly) will be done over this span of time. Then add the amount to each widget as COGS.

Method 2:

Separate your COGS materials into two piles: Big stuff and little stuff. The big stuff will vary from item to item and will be calculated into each item's COGS. The little stuff is too little to worry about counting or measuring.

Figure out the ratio of the big stuff to little stuff for all of your products as a group (e.g., your ratio might be 86% big to 14% little stuff). Now, whenever you figure your COGS for an item, add on an item "consumables" that is 14% of the total COGS. Every now and then, you can take a look at the numbers to make sure your ratios are holding steady.

Whichever method you use, remember that it serves mostly as your management tool. That is, your taxes and reports are going to be figured based on totals, not individual items.

Thus you should decide how much information will be helpful to your own decision making, then balance that with the cost of entering extra information. Whatever you decide, don't waste time entering information you know is no good. This will accomplish nothing.

I do hope this is helpful,

Roy