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How to theoretically graph impact of an incorrect COGS

john lee's Profile

I work at a small manufacturing business and we currently write off Inventory into COGS as soon as we purchase it - we have no inventory account. We also do not track hours per job, so payroll/labor is certainly also incorrectly incorporated into COGS. I am not an accountant, but I have done enough research to setup a cost accounting system at our company to fix these problems. I need additional help convincing my boss the importance and value that this system adds to our company.

1. Any suggestions on how to show the value of this? Obviously I can list off that our balance sheets are incorrect, our inventory isnt under control, cant calculate margins, etc. which this fixes.

2. Is there any way to mathematically graph COGS vs some important dependent variable to show how an incorrect COGS can be dangerous?


Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

It's simple logic.
Items you purchase are not COGS until you sell them. It's in the meaning of the word COGS :) - if he understands that materials on hand (i.e. not yet sold) are not part of the cost of what has been sold, maybe he'll see the mismatch.

Or, maybe he is doing this to reduce income tax.

Topic Expert
Wayne Spivak
Title: President & CFO
LinkedIn Profile
(President & CFO, |

Talk, if you can, with the company CPA who does the taxes. What does s/he say? How does the company handle bank loans or other financing? Anyone that takes a short look at your company will know that not having inventory of raw materials, WIP and finished goods is an impossibility.

So, somewhere along the way, maybe the owner doesn't realize he's either a) fooling him/herself, b) committing fraud and ultimately c) making managing his business extremely difficult.


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