Feb 3, 2018
Episode 185- Tax talk. Why you should Treat your business like a restaurant
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For merchants cost accounting is rather useful. The idea behind it
is simple: buy cheap, sell expensive. To maximize your profits, you
should use your limited resources (money) for activities that give
you the best return on your investment. Manufacturing on the other
hand, was usually less concerned with book keeping. With the
different materials coming in and products going out, tools needed,
and time used, it would have been difficult to keep track of it
all.
Historically manufacturers probably used more of a gut-feeling
approach and experience to set their prices. Besides, their goal
was often not profit maximization but merely to have a good life.
As Daniel Defoe observed: “There’s nothing more frequent, than for
an Englishman to work till he has got his pocket full of money, and
then go and be […] drunk, till, tis all gone.”
When manufacturing products each item has a specific COG(cost of
goods) required to complete. This incudes the raw material to
create,(direct cost), plus the gases, and labor(indirect costs)
Part of this issue is whether or not we should determine the waste
left after the manufacturing process of said item. Whether you pull
points or attach blowpipes, there will be material that is scrap
and considered waste. In some fields scrap is considered reusable
so for this chat I will be referring to the leftovers as waste
which is unable to be reused and therefor sold. To use the food
industry for a reference they have plenty of waste associated with
the manufacturing of meals.
For example: If broccoli is on the menu, then a bulk order of
broccoli is needed. Say each head of broccoli weighs 1lb and comes
in a 10lb box that cost $20.00. . This would mean the cost of each
unit of broccoli costs $2.00. When the broccoli is being prepped to
cook a portion of the broccoli is removed and would be considered
waste. Lets say 50% is how much of the broccoli is removed which
would mean 50% is left. This would bring the true cost of each unit
to $4.00 per head of broccoli since technically we just removed 50%
of the weight but it still cost us $20.00 total for the initial
10lb box.
We can use the same mathematical concept when it comes to
calculating cost of goods manufactured. Say for example initial
material weighed 2lb.to create a- 3" wrap and rake spoon with .50
to make in direct cost (raw material)and an additional indirect
cost(overhead) of .50. This unit would initially cost $1.00 to
manufacture. After the item is made you are left with a little bit
of waste which for the sake of this example lets call it 1/2lb. of
material leaving the final product weighing 1.5lbs
When we estimated our baseline costs for this item we figured a 3"w/r spoon weighs 2lbs (chunky spoon) which costs $1.00 to make, so if we do the math and break down the cost, we can determine
SPOOON= initial cost to manufacture $1.00
(raw material + overhead)
Total weight = 2 lbs- 1/2 lb waste leftover after manufacturing
waste = $.50
now if you work for a week and manufacture 100- 3'wrap and rakes
you will have an estimated amount of waste at $25.00 multiply that
by 12- months and you'll see that theres approx $300.00 in waste.
this is one way to look at it.. 100(3”w/r)/week=$25.00 in waste
the other perspective is to increase the direct cost to manufacture
each item by adding the waste back into the peice. We figured to
waste cost $.50 and the actual item when complete weighs 1.5lbs. so
you can then add the $.50 back into the cost to manufacture the
item which would mean the 1.5lbs of material costs $1.00.
in the end talk to your accountant and ask them what they recomend
you do to keep track of this info. whether A- you seperate the true
cost to manufacture from waste. or B. you ignore the waste but
increase the cost of goods by the amount of the value you
predetermined for the item manufactured.
Either way before you begin adding new items to your catalog,
estimate the direct cost(raw material) to manufacture as well as
Overhead(indirect cost) when figuring out costs per item made. this
will not only give you a baseline cost of your new products it will
also give you a base line number to price your item to be sold at
both wholesale and retail.
reference http://www.accountingcoach.com/
Manufacturing cost is the sum of costs of all resources consumed in
the process of making a product. The manufacturing cost is
classified into three categories: direct materials cost, direct
labor cost and manufacturing overhead.
What are manufacturing costs?
Manufacturing costs are the costs necessary to convert raw materials into products. All manufacturing costs must be attached to the units produced for external financial reporting under US GAAP. The resulting unit costs are used for inventory valuation on the balance sheet and for the calculation of the cost of goods sold on the income statement.
Manufacturing costs are typically divided into three
categories...
1. Direct materials. This is the cost of the materials which become
part of the finished product. For example, the cost of wood is a
direct material in the manufacture of wooden furniture.
2. Direct labor. This is the cost of the wages of the individuals
who are physically involved in converting raw materials into a
finished product. For example, the wages of the person cutting wood
into the specified lengths and the wages of the assemblers are
direct labor costs in a furniture factory.
3. Factory overhead or manufacturing overhead. Factory overhead
refers to all other costs incurred in the manufacturing activity
which cannot be directly traced to physical units in an
economically feasible way. The wages of the person who inspects the
completed furniture and the depreciation on the factory equipment
are part of the factory overhead costs. Factory overhead is also
described as indirect manufacturing costs.
Deduction for Food Waste
Restaurants, grocers and other businesses that carry food in inventory can deduct the cost of purchasing all of their food supplies like any other ordinary business expense. The business gains the tax deduction as soon as it incurs the expense, regardless of whether the food is sold to a customer or tossed into a dumpster. Because the deduction reduces the business’ taxable income, the total savings depends on at what rate the business is taxed.