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taxadvisor.uk
taxadvisor.uk, Chartered Certified Accountant
Category: Tax
Satisfied Customers: 4802
Experience:  FCCA - over 35 years experience as a qualified accountant (UK based Practitioner)
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Hi I just wanted to find out where the following costs will

Resolved Question:

Hi
I just wanted to find out where the following costs will be included on the financial statements of a company.
In a retail business for example:
Purchases
Freight in
Receipt of goods Handling charges
Storage of goods in a warehouse before they are transported to the shop for sale
Cost of transporting the goods to the shop
Packing of the product to enable the customer take the goods home ( mind you the packaging has a logo on it)
Delivery vans cost
Petrol for the delivery van
Submitted: 2 years ago.
Category: Tax
Expert:  taxadvisor.uk replied 2 years ago.
Hello and welcome to the site. Thank you for your question.

I will revert to you shortly with my explanations
Many thanks
Customer: replied 2 years ago.

ok thanks I am waiting.

I think what I need clarification on is what should be included in calculating the Gross profit margins.

Customer: replied 2 years ago.

hi are you sending a reply as i haven't had any just yet ?

Expert:  taxadvisor.uk replied 2 years ago.
I will be with you in less than 5 mins

Just drafting it

many thanks
Customer: replied 2 years ago.

ok thanks

Expert:  taxadvisor.uk replied 2 years ago.

Ashley, thank you for your patience

In a retail business for example:

Classification of costs

Purchases

Purchases

Other direct costs

Freight in
Receipt of goods Handling charges
Storage of goods in a warehouse before they are transported to the shop for sale
Cost of transporting the goods to the shop
Packing of the product to enable the customer take the goods home ( mind you the packaging has a logo on it)

If these costs are associated with transportation of good to point of sale then I would incluse them as other direct costs for Gross Margin calculation otherwise they are overhead costs within distribution costs


Delivery vans cost
Petrol for the delivery van

I hope this is helpful and answers your question.

If you have any other questions, please ask me before you rate my service – I’ll be happy to respond.

Customer: replied 2 years ago.

so are you saying that any costs that we incur before the goods arrive at the shop should be included in the cost of sale ?

some of the goods are sold from our warehouse and transported directly to the customer ??

Just being careful here about the storage costs ?

The van is used both for delivery of goods to the shop and delivery of goods to customers...

Expert:  taxadvisor.uk replied 2 years ago.

Ashley, thank you for yourreply.

Where you have costs that would fit in more than one catergory/classification then you may wish to consider apportionment of these into
other direct costs
distribution costs

It all depends on the degree of accuracy you want in your costings for GM analysis.

You may come to a view that 40% of the van costs are transport from warehouse to shop for resale and 60% relates to delieries direct to customer (distribution costs).

I hope this is helpful.

Customer: replied 2 years ago.

so are you saying definitely that the storage costs should be COGS

Expert:  taxadvisor.uk replied 2 years ago.
ntervenAshley, thank you fo ryour reply..

I would... just consider the reason why you have storage because you don't have enough space to do what you have to do make the sale. If you were able to buy in the goods where it was not necessary to carry out any tasks prior to resale then the cost won't be there.

As I said earlier, all depends on the level of detail and closeness you want to classification of costs. If you are just storing goods and they are going to be distributed without any intervention then one could argue they are distribution costs.

I hope this is helpful
Customer: replied 2 years ago.

our shop is not big enough to contain all the stock for sale so some it has to be held at the warehouse - what is the definitive answer because IAS 2 doesn't really help so much

Expert:  taxadvisor.uk replied 2 years ago.

Ashley, thank you for your reply.

A simplified definition of cost for inventory/gross margin analysis


Cost includes purchase cost and any cost necessary to bring inventory (stock) to its present location and condition. These costs include direct costs, conversion costs and other costs such as transportation and handling charges.

General and administrative costs which cannot reasonabely be attributed to the cost of inventory are not included. Similarly, selling and distribution expenses, storage costs should not be included in the cost of inventory.

If need of storage space is paramount to convert the goods before they can be sold then I would be inclined to include them as cost of sales.

General storage costs are part of overheads.

I hope this is helpful.

Customer: replied 2 years ago.

The goods need to be stored at a certain temperature otherwise they will no longer be fit for sale. also some of the goods are stored in bond and later cleared duty paid before they can be sold ...

Expert:  taxadvisor.uk replied 2 years ago.
Ashley, thank you for your reply.

Based on what you have said, there certainly is an argument for classifying these costs as cost of sales otherwise they would not realise anything..

I hope this is helpful.

If you are happy and there are no more issues I will appreciate if you would kindly rate the service I provided to ensure I get credited for it.

Customer: replied 2 years ago.

I am sorry that i have not rated your answer just yet. I do not feel fully satisfied with the responses i have received perhaps because i am still confused as what you are stating is what i have read on the internet but i am looking for a more detailed explanation.

when i read ias 2 if i was dealing with a manufacturing company i will not have any problems at all determining what falls into cogs and what doesn't to work out the gross profit margin. but as this is a situation where the goods have be produced already (wines) and are just being purchased from different sources it is difficult to ascertain what the COGs is. If i were to leave some of the expenses out i feel that the Gross margin will be a lot higher than it should because to me it appears that these expenses have been incurred in order to sell the product... so i need to understand it better.

Freight in i know is automatically added to the purchase price.

But where do you draw the line... is freight in only freight from the supplier to us or freight from the warehouse to the shop...

storage will normally be a straight overhead as rent but if these wines are not stored in those conditions they are a write off ! But again one can argue that the shop which has the right condition does not have enough space that is the reason we have to hire the storage facilities....

what about the fans ... hired to keep the wines in the right condition before sale...

Customer: replied 2 years ago.

also we have a sales force of about 12 staff who are paid only on commission. so they are paid only when they well something... is this part of cogs or should be recognised as overheads under gross wages..

Expert:  taxadvisor.uk replied 2 years ago.
Ashley, thank you for your reply.

You have to draw a line somewhere... there is no real science on these classifications..one has to use common sense.

One could argue a majority of the costs of running the operation should be part of cost of sales because it has to do with precurement of goods for resale.

Sales staff on commission are overhead cost.

If I were your accountant I will have little or no problem in justifying the classification I have outlined for costs identified.

I am not sure how I can help you more.

I hope this is helpful.
Customer: replied 2 years ago.

so the conclusion we are drawing is my gross margin figure should be:

Sales

Less

COGS:

Opening Stock

Add purchases

Add Freight In

Add RHD charges

Add Packaging costs for bottles going out ( i would have thought this is selling and distribution)

Add Storage charges ?? ( not so sure about this because it looks like an overhead)

Add Charges for transportation of goods to the shop( this looks like a selling costs )

Less closing stock

Expert:  taxadvisor.uk replied 2 years ago.
Ashley, thank you for your reply

I agree with your understanding with some qualification as follows:

Add Packaging costs for bottles going out ( i would have thought this is selling and distribution) - these would be distribution costs if they related to packaging as per customer requirement.. ie the customer has bought the goods and they have to be packaged for transportion to customer.
If you are packing them for in transit from a storage place to the shop to be sold then they are part of COGS.

Add Charges for transportation of goods to the shop( this looks like a selling costs ) - I see them as carriage in and therefore part of COGS.

I hope this is helpful
taxadvisor.uk, Chartered Certified Accountant
Category: Tax
Satisfied Customers: 4802
Experience: FCCA - over 35 years experience as a qualified accountant (UK based Practitioner)
taxadvisor.uk and 2 other Tax Specialists are ready to help you
Expert:  taxadvisor.uk replied 2 years ago.

Hello Ashley

I notice you have viewed my last response to your question on classification of expense headings for calculation of COGS (</spanCustomerLast Viewed on 09/10/2014 at 12:43).


Just checking to see if you have any issues relating to your question that I may not have addressed. Please let me know if I can be of further assistance.


If you are happy and there are no more issues I will appreciate if you would kindly rate the service I provided to you.

Customer: replied 2 years ago.

if the goods are already in the present condition and location in the warehouse how can the warehouse costs be a cogs ?

could you quote me an example of how a retail company treats their storage in their financial accounts for me to me certain about this ?

Expert:  taxadvisor.uk replied 2 years ago.
Ashley, thank you for your reply.

As I said before, allocation of overhead costs into above the line or below the line is not science. Goods inwards area to stock materials before they are put into a saleable condition could be treated as an overhead cost before arriving at gross margin.

You stated you have to store the drinks under certain conditions before they can be sold and you have warehouse facilities for that. One could argue this overhead is above the line before arriving at gross margin. If you were buying drinks from a source that had provided you this facility and the goods were coming in and out with no storage at your end (just in time) then these costs would have been reflected in your buying in price (cost of sales).

I hope this is helpful.

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