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Should Engineering and Purchasing Salaries be included in Cost of Sales for a Manufacturing Company?

Ed Becmer's Profile

I have seen it presented both ways, but want to get other's opinions. Another way to present engineering salaries is to have a separate caption in the GAAP financials as Engineering Costs similar to total G & A and Sales & Marketing Expenses. This lets the reader know the company is investing in researching and developing new products.

Answers

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

Ed
Are you talking about Management Reporting or external reporting? The former may be more relevant for the company leadership to make decisions.
But in short, both functions seem to fall under "indirect overhead" thus not part of the product COGS.
Regards
Len
PS - a useful metric for me would be correlating the spend in these areas with:
1. number of new products developed/brought to market
2. potential new product contribution to sales and margins
3, savings in current product costs through redesign and re-sourcing components

Ed Becmer
Title: Owner
Company: Becmer and Associates
(Owner, Becmer and Associates) |

Thanks Len.

Ed Becmer
Title: Owner
Company: Becmer and Associates
(Owner, Becmer and Associates) |
Mark Sutherland
Title: CFO
Company: Profit By Design CFO & Controller Servic..
(CFO, Profit By Design CFO & Controller Services) |

I teach managerial accounting, so I can give you a "textbook" answer. In Activity Based Costing, purchasing is a "batch level" cost, and engineering is a "product level cost", both of which are considered Mfg OH costs, to be allocated to products based on cost pool activity rates and each product's allocation base/cost driver activity levels (activity rate x product "x" activity level = cost pool amount applied/allocated to product "x").

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