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Inventory Costs for Subscription Boxes

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Hello, My company is not a manufacturing company, however we assemble boxes of items and ship to customers as a subscription service. The entire shipment includes the label, mailer, box, card, sticker, bubble wrap, tissue paper. Currently, we purchase the box and mailers from vendors in China and once the shipments arrive, we classify these as inventory assets. When the boxes are sent to customers, we amortize into COGS. We're not doing this for other items - they are directly expensed. What is the easiest way to track these costs so they are properly deferred and recognized as shipments are sent? Should we expense costs over $X amount? Any suggestions are greatly appreciated. Thanks!

Answers

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

Does your accounting system not have a "kit" function, where it relieves the component items from inventory and sells the "kit" to the customer. The Bill of Materials (BOM) can consist of inventory items you listed " label, mailer, box, card, sticker, bubble wrap, tissue paper".

Unless the items in your list are custom made for that particular customer, why would you not just expense all of it?

(Agent, JKS Solutions, Inc.) |

They are not custom made, but if we directly expense, our COGS numbers will fluctuate significantly. We buy in bulk from overseas vendors and the cost of an item could be $.19 but we buy $70,000 worth at a time.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

I am not too familiar with the subscription model but what I do know is that the business model will affect accounting treatment. It would be better if you explain further your business model....ala Birchbox? or ala Dollar Shave? or something else?

With that said, I am sure people here will chime in once they know the model.

(Agent, JKS Solutions, Inc.) |

Thanks Emerson. It is very similar to a Birchbox model... We compile a box with multiple items and provide to customers.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

Shouldn't your cost be identifiable each and every month (different months, different samples and corresponding costs)? Say, your total cost for Jan box is $20. Then you can directly match that cost to the corresponding subscription revenue once they are shipped. (Total shipment x $20 = COGS) Technically, your costs (assuming different samples have different prices) would vary each and every month. I believe you are doing the right thing charging it to COGS opposite Subscription Revenue.

In the absence of an ERP (inventory cost and control --> finished packages ---> COGS), physical control and constant inventory would be one way to mitigate pilferage and have a "semblance" of control over it. There should also be lots of counterchecks from a number of sources....mainly based on shipment numbers.

I would record incoming items as Inventory and at the end of the month, deduct the total shipments. This will give you your ending inventory.

I hope that made sense. I myself got confused along the way...lol. Send me a message if you need clarification or more help.

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

My take would be they are shipping supplies and expensed.

The other alternative is again, bring them in an inventory items and use a "kit" algorithm to expense them when you build your box.

Kim Zarraga
Title: Accounting Manager
Company: Bio-Rad Laboratories
(Accounting Manager, Bio-Rad Laboratories) |

You will also want to look at the sales and use tax implications of your decision. The rules different by state, but generally packaging materials (inventory) would be free from S&U tax, shipping materials would be subject to S&U tax.

Dawn Hall
Title: Chief Financial Officer
Company: Bionix Development Corp
(Chief Financial Officer, Bionix Development Corp) |

Do you have an ERP system? The company I work for is also a manufacturing company and while we do not have subscription services, we do capture the same costs in our COGS. When we submit a PO to a vendor, it is generated from our ERP, and when product is received, an inventory receipt and invoice are processed against the PO in the system. We have Bill of Materials set up for all products and that reduces inventory quantities and allocates cost to each item sold. This works for items that are actually considered "inventory" and for items that are expensed such as boxes or re-order cards. The system will also track the inventory layers associated with buying product at different price breaks. If you have an ERP system, let it work for you. If you don't have one, you might need one.

Anonymous
(Finance Director / Controller) |

Dawn - mind sharing which ERP you use?

(Agent, JKS Solutions, Inc.) |

Thanks Kim.

Dawn -
We don't have an ERP system in place yet but will in the next year or so.

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