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Inventory & COGS - Chocolate manufacturing

This is a multi question post. I have a chocolate company and specialize in making truffles. I buy raw materials, such as flavoring, chocolates, salt, etc. to make into finished truffles to sell to vendors and customers. I also hold inventory of the finished products, I keep a certain level of products stocked for orders. I've been recording the raw materials as COGS and the finished products as non inventory items to input in invoices. For the wrapping foil (we individually wrap each one), labels, boxes and any materials to dress up the finished products I also record them as COGS for packaging. I'm questioning how I'm recoding these. What would be the best way? Should I have recorded the raw materials as an inventory item? I don't have options to add anything as inventory items right now. I have Essentials and unsure if I should upgrade to Plus to be able to use the inventory tracking. I want to be able to have all the info connect instead of trying to have multiple spreadsheets to track everything separately. Thanks 

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Re: Inventory & COGS - Chocolate manufacturing

If you have a significant amount of finished goods on hand then yes it would be much better to use real "inventory accounting" that requires a better version of QB.


However, all the other ingredients and supplies you use in the production will not be part of that inventory and you will continue to use 'non-inventory' type items for them, and I also suggest you continue expensing them to COGS (read-on). Add another COG account for 'supplies used'.


Hopefully you already have an estimate fo how much it cost you to produce each item you sell. At the end of each production batch make an inventory adjustment to create the stock, at the cost you estimated, with the 'adjustment' going to COGS-Supplies used 


If the total value of the raw materials & supplies on hand is significant than you need to also start accounting for those as Raw Material inventory.  That will likely continue to be a separate spreadsheet tally done at the month-end.  At month end make a JE to set the RM inventory asset to the right amount, with the offset going to  'COG - Supplies used'.  This posing might be (negative) if RM on hand shrinks.

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Re: Inventory & COGS - Chocolate manufacturing

So yes, with QB Plus inventory tracking you will be able to track your inventory accounts more thoroughly.


However do consider that this is still quite a simplified method of tracking your material costs because it does not factor manufacturing costs. And if you have a lot of materials with fluctuating costs then you will have to do also still do a lot of manual input, adjustments and spreadsheeting to get around this.


If you wanted to streamline this process I would suggest an app like Katana. It focuses more heavily on your manufacturing processes so that costs are tracked automatically through your purchase orders. Invoices and bills are pushed directly to QB.

Frequent Contributor *

Re: Inventory & COGS - Chocolate manufacturing

The matching principle in accounting does require you to report expenses made and revenue earned of a product in the same financial period. Which means that ideally, you should track the inventory of raw materials and finished goods, and not expense ingredients at purchase.


When it comes to inventory tracking in a manufacturing setting, then usually accounting packages don't handle it well, as there is a need to manage recipes/bills of materials and specifically track which-ingredient-at-what-cost-in-which-amount was used in a given product.


Ideally, the following accounting transactions should happen through the (financial) lifecycle of a product:


  1. Accounting raw materials as a current asset when purchased:
    Dr Raw materials (Current asset)
    Cr Accounts payable (Current liability)

  2. Tracking Work in Progress (WIP) and converting production inputs to finished goods inventory when produced:
    When ingredients are used in production:
    Dr Work in progress (Current asset)
    Cr Raw materials (Current asset)

    When production is finished:
    Dr Finished goods (Current asset)
    Cr Work in progress (Current asset)

    (In addition to raw materials, usually direct labour cost and a portion of indirect manufacturing overheads are applied to work in progress, which then carries over to finished goods. In this way direct performed labour and overhead costs are expensed at the time of sale .)

  3. Reporting COGS when product is sold and shipped:
    Dr Accounts receivable (Current asset)
    Cr Sales (Income)
    Dr Cost of Goods Sold (Expense)
    Cr Finished goods (Current asset)

For example, step (2) can be done as a manual journal entry, if you have the cost of the product correctly figured out.


In the default setup, QBO does not have most of the accounts, which are required, when you wish to perform correct manufacturing accounting. In that regard, it is best to consult your local accounting specialist with manufacturing experience to help to set up the chart of accounts and right procedures.


Ultimately, for doing this - tracking inventory and COGS -,  there are special manufacturing software tools, that can keep track of this automatically. There are several apps in the QuickBooks App Store for that. E.g. MRPeasy, which integrates with QBO, and does the product costing - tracking of inventory and consumption of materials in a given product - and Revenue-COGS recognition automatically.

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