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Sorting - Is it part of COGS

Hi All, We have a third party warehouse that does our packaging and shipping to the customer. Recently, they got some damaged product from our supplier. They proposed to sort these and we agreed to pay for their labor cost. Today, I received this huge bill and I am not sure if I should be treating this cost as part of cost of goods sold. Thanks

Answers

John Herndon
Title: Senior Consultant
Company: NOWCFO
(Senior Consultant, NOWCFO) |

Technically, yes the labor costs are part of inventory. However, capitalizing the labor costs into inventory will lead to PPV later if you stay with the same part number. The reason is that having a small volume of inventory with the same part number but a different cost will either lead to PPV for the small lot or for the remaining stock. You cannot have two std costs for the same part.

I suggest capitalizing the labor costs and bleeding off over the inventory turn for that group. In other words, if that inventory turns 12 times per year then apportion the costs over 12 months. That would be consistent with US GAAP.

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

John,

Assuming they use standard costing you've given good advice.

If they don't, then why not just add the labor costs to that item, and as it sells, they bleed off the added cost.

This will give you the correct cost under LIFO or FIFO

Note: If they use the retail method or LCM to obtain cost, there will probably be an error in calculation.

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