Customizing Your Chart of Accounts

When do you classify an expense as a cost of goods (COGS), and when do you classify it as an expense?"

 

Mike: Suppose I advertise a product in a magazine or on TV and I hire a company to process the incoming calls from customers wishing to place orders for the product. Should the answering service's fees be considered Cost of Goods sold or general expense? Also, is the cost of advertising COGS or general expense?

Madeline: Cost of goods would be the costs of your product, but not advertising or customer support.

 

Mike: Okay thanks, but every time the "order-taking company" takes an order over the phone, it costs me $2 or $3. Is COGS always and exclusively the cost of materials needed to produce the product?

Madeline: Actually, I see your point. There's no law that says you can't have it as COGS. It's a marketing expense, but it's a direct cost. I'd call the account, "Sales process fee". That sounds like a direct cost, and a banker would understand it too, don't you think?

Conclusion: Every business owner has different challenges, which is why the book, Radically Simple Accounting, guides you through customizing your chart of accounts for your business.