Discussion:Tough client
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| 4 October 2007 | |
| So I was referred by my other clients to a business owner who sells furniture. I went in to meet with him, ask questions and see if its one that I would like to take on. My problem with him falls on the COGS of his business. When I asked for an inventory amount he looked around and said a number. I then asked how he tracks his purchases to sales..to no surprise, he gave me an odd look and said, "by the checks i write".
Here is my question... He purchases bulk inventory (chairs,desks,lamps,cubicles) for a fixed price. Ex. I saw a wrapped bulk of used furniture on a pallette that had all types of furniture that he bought for 500.00. It would be too difficult to identify what each item is worth. He figured his markup averages 45% (from 3-6 invoices that i actually saw). What would be the best way to calculate his COGS every month? Just average COGS by 45% of sales? | |
| 4 October 2007 | |
| I think that's actually called the "retail method", and I think it's pretty common. But I defer to some of the CPA's and other more experienced accountants and bookkeepers here. | |
| 4 October 2007 | |
| I doubt that ratio is accurate.
If item costs $ 100, markup is 45% to $ 145 Sales $ 145 COGS 100 GP $ 45 $ 100/$145 = 69% Quite a bit different than 45% | |
Bushmaster (talk|edits) said: | 5 October 2007 |
| It is very common to use this method especially in the convenience store business. But it should be checked against an actual inventory once in a while (yearly or every other year). A more accurate method would be to take the $500 palate of stuff and identify what you are going to sell it for. Then add up the sales price and allocate the $500 of cost based on the sales price of each. Do that a few times and you will see the true markup. Most likely, it won't make much of a difference. Would suggest an actual inventory every so often just so your inventory doesn't get to far out of whack.
The ratio is accurate as long as you are trying to get COGS. Take his sales and divide by 1.45 to get the COGS and adjust the rest of the purchases to inventory. | |
