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Cost of Goods Sold/Manufacturing Overhead Question

Charles Wilson's Profile

My company manufactures products on a vessel at sea. We harvest our primary raw material. During the operating season, we come to port when the hold is full and offload product which is then moved into the distribution chain. We are billed specifically for this offloading activity. Prior to my arrival, this had been treated both as a period expense at one point in time, and as a component of Manufacturing Overhead, and therefore COGS at another. It seems to me that the latter is correct, and that all expenses related to subsequent movement of product are best classed as selling costs. I would appreciate any feedback or thoughts on the proper way to handle this going forward.

Answers

Robert Meybohm
Title: Owner
Company: Meybohm & Bodell, LLC
LinkedIn Profile
(Owner, Meybohm & Bodell, LLC) |

If you consider the ship as the factory and view it like a traditional mfg operation, when the FedEx or UPS or other common carrier truck pulls into the freight bay to pick up (be loaded with product) this activity and cost is not associated with the costs incurred to create the goods; hence a period cost. Seems to me that you have the identical situation here. Period cost.

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Is the product purely a finished good that your company does nothing additional (processing, packaging, boxing, etc.) once you come into port.

In other terms, once docked, the only activity is moving the finished product from your hold (warehouse) to the common carrier.

If this is the case, Robert is 100% correct.

Anonymous
(CFO/Board Advisor) |

What do you mean by the product is "moved into the distribution chain"? Is the product moved from the dock to a warehouse for storage until sold? If so, aren't these costs just the same as "freight-in" for purchased products, and thus part of Overhead which should be considered in determining value of inventory, and ultimately COGS?

If "moved into the distribution chain" means shipped to customers, then isn't this just "freight-out", a period cost, but also part of COGS?

So, the real question to answer is: Are the costs to move the product into the distribution change freight-in or freight-out?

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