Are direct administrative costs seen as cost of sales? - The Book-keepers Forum (UK)

Alpine man · Veteran Member

Are direct administrative costs seen as cost of sales?

Rhianrach · Expert

I have packaging as a purchase (5003 in sage) which would be a direct cost of sale. Your ink paper etc would be an overhead (printing and stationery 7500 and 7504 in sage), if your leaflets are for advertising then the cost of producing them would be a direct expense (6201 in sage). I stand as ever to be corrected however. smile

Not too sure about the equipment, but I always thought equipment was a fixed asset as they are likely to last longer than a year and therefore go in the BS section, but once again I could be completely wrong.

Not sure about the last bit,... sorry hmm

Steve

Alpine man · Veteran Member

I think this is a funny one because admin is often NOT directly related to the specific sale but if it goes out WITH the sale surely common sense prevails it being a cost of sale. Not to take away anything from what you said ,thanks for that , I will see if I get a few more answers as well. Ink well...., even that should be a cost of sale in this case ? . All good fun.

David.

-- Edited by Alpine man on Sunday 11th of April 2010 05:44:35 PM

Rhianrach · Expert

Alpine man wrote:

Okay thanks for that I will see if I get a few more answers as well.

David.

Highly recommended wink

Steve

Shamus · Forum Moderator & Expert

Hi,

not a lot of time so I'll leave the first point for now.

lower priced items should be expensed. Take the idea of a stapler. It lasts for years so should be a fixed asset but it's too cheap to depreciate so it gets bundled as stationary.

The items that you speak of cannot be taken as cost of sales if they are not direct costs related to the period as such would skew the profit figure for the year.

For tax purposes remember that there is no deminimus amount regardless of what common sense dictates. (although such of course is only theoretical as AIA means that you'll have first year write off on the whole lot anyway).

Also, although one item may seem small a group of items may need to be judged as a whole. So, if you bought one propagator for £30 then it seems sensible to write it off in the year. However, if you bought 10 propogators in the year then they should be viewed as a group rather than individually and taken to the fixed asset register.

Basically you need to apply the materiality tests to your computations to determine whether the items must be capitalised. (taking also into account that similar small items must be viewed as a group).

The materiality minimum limits are :

-- Edited by Shamus on Sunday 11th of April 2010 06:19:05 PM

Shamus · Forum Moderator & Expert

Hi,

not a lot of time so I'll leave the first point for now.

lower priced items should be expensed. Take the idea of a stapler. It lasts for years so should be a fixed asset but it's too cheap to depreciate so it gets bundled as stationary.

The items that you speak of cannot be taken as cost of sales if they are not direct costs related to the period as such would skew the profit figure for the year.

For tax purposes remember that there is no deminimus amount regardless of what common sense dictates. (although such of course is only theoretical as AIA means that you'll have first year write off on the whole lot anyway).

Also, although one item may seem small a group of items may need to be judged as a whole. So, if you bought one propagator for £30 then it seems sensible to write it off in the year. However, if you bought 10 propogators in the year then they should be viewed as a group rather than individually and taken to the fixed asset register.

Basically you need to apply the materiality tests to your computations to determine whether the items must be capitalised. (taking also into account that similar small items must be viewed as a group).

The materiality minimum limits are :

less than 0.5% of turnover

less than 5% of Pre Tax Profits

less than 1% of total assets.

If the asset or group of assets can pass all three of the above tests then it is probably ok to expense rather than capitalise.

On the last point how you pay for items is immaterial. You seem to be getting tied up with the idea of the credit card but such is immaterial. The reality is that everything that you put through your books must have an invoice / receipt. It is those, not the balance of your credit card that matters.

Just to emphasise that last point. If you don't have the proper paperwork then you cannot put the expense through your books. That includes lower value items.

hope that this helps,

Shaun.

P.S. Sorry, the less than sign made the message stop. Hope that this reinstates it!

Alpine man · Veteran Member

I understand that they are not capital items predominantly as I mentioned. What I am concerned about is whether they are a administrative cost or a direct cost in my particular situation. As I say a box is sent to the customer directly with a paper, packing , tape etc . I am assuming therefore that these are direct costs and not administrative. I apologise if I should have understood your answer above Shamus but I think it talked of whether it was capital or an expense. I do not have that problem as I understand this really. Its more a question of which expense goes in which column. In previous postings I had asked about cost of sale but I only talked about plants, pots, compost as a cost of sale. I now am thinking the admin costs are direct costs due to there direct nature but not a cost of sale.

The accounting system I used is one which follows a bank balance so you can check it all adds up correctly at the end whether it is a payment out or a payment received. I assumed this was correct as the book written by a leading accountant had told me you accurately follow the balance. What throws this out is when the expense is in the positive on the credit card and so will not show up in my bank balance due to credit card having to get down to zero before bank is charged again(comes with a larger refund back to the credit card). If I did not follow a bank balance system and just recorded all the expenses from receipts it would be a different system. Are you saying follow a system which does not look at my bank statement and just use the receipts or invoices ?

I am sorry if I am making things to complicated. Its mainly because I am not sure how complicated to make things in the first place. I am a complete amateur so really simple answers may be better for me. Thanks.

Wella · Expert

Hi David

I'll add my bit to the others.

First I would like to say that there are always differing opinions on how some items are treated. It is usually a "management" choice but the rule is consistency.

My view on your situation is that your business has two elements, you are a producer/ manufacturer and also a seller, which adds a slightly different slant on things.

Any item that is required to get the product to a marketable condition, such a seed or seedlings (not a gardener, I'll leave that to you), compost, flower pots, heating/ lighting (propergaters?) and any delivery costs to get your items to you etc, form part of the manufacturing costs. (There have been some interesting threads, regarding which items are manufacturing costs)

This would become the cost of sales. (imagine that you had bought the finished goods from yourself to sell.)

Anything you buy that is required to complete the selling process eg packaging, postage/ delivery out, printer ink, stationery, office heat/light etc form your general expenses as normal.

I don't quite understand your last question but it sounds like its a case of reconciling your statements with each other.

I hope this made sense as I had a heavy night last night, got in at 3 this morning after consuming several bottles of wine and my heads a bit fuzzy

Bill

Sue T · Veteran Member

Hi

One of my clients supplies goods in large quantities to the NHS and I always put the Post and Packaging as a cost of Sale, as directed by his accountant, in 5003 on Sage, as it is quite a significant cost and the goods have to be sent by special courier service otherwise he would lose the contract.

I put any other postage ie. expenses of sending out invoices to the client to normal Postage Expenses.

The way one I would sum it up was ask yourself the question "does the cost/expense add value to the sale and is that cost part of the complete sale ie do you recover that cost in the amount you charge to your client?"if it does I treat it as a cost of sale, if it doesn't I would treat it an ordinary expense.

Sue

-- Edited by Sue T on Monday 12th of April 2010 03:03:23 PM

Rhianrach · Expert

Sue T wrote:

Hi

One of my clients supplies goods in large quantities to the NHS and I always put the Post and Packaging as a cost of Sale, as directed by his accountant, in 5003 on Sage, as it is quite a significant cost and the goods have to be sent by special courier service otherwise he would lose the contract.

I put any other postage ie. expenses of sending out invoices to the client to normal Postage Expenses.

The way one I would sum it up was ask yourself the question "does the cost/expense add value to the sale and would you be able to complete the sale without that cost?"if it does I treat it as a cost of sale, if it doesn't I would treat it an ordinary expense.

Sue

To quote my daughter "snaps" I have 5003 as packaging for all food trays containers and bags that are part of the sale of the goods.

Steve

Sue T · Veteran Member

Changed my wording slightly as you posted Steve! SNAP!

Sue

-- Edited by Sue T on Monday 12th of April 2010 03:05:29 PM

Alpine man · Veteran Member

Thanks folks that's a lot of help. Much appreciated!

Can I ask Wella or anyone, is the reason that things have to be reconciled to the bank statement, thus following its balance I'm assuming, because the tax man does have to check there are no other purchases on top of your business invoices. I assume it proves your not lying about amounts of invoices you have. It would be so much easier if you did not have to follow all the money in and out transactions on your statement and you could just write down your expenses with out doing all this reconciling and checking totals.

In regard to the confusing question about my credit card all it is is I was in debt on my credit card by small amounts, (until month end when DD pays it off), but every so often I get refunded back to my credit card more than the debt so I have a positive credit figure. Until I spend enough it wont go back to debt again so I am not charged by my normal current account at my bank for the expenses. This is because my credit card is paying for it until it goes back to being in debt and only then allowing my current account to pay it off once again. Because the credit card temporarily becomes like its own account, still with different expenses, I am unsure how I record it as it cannot be part of the normal current account running balance if no charge has been taken during this short period. Normally if for example I have £ 50 debt on credit card for the month when it shows in my current account the month after I list the transactions from my CC under the bank DD where it shows in my cash book. Due the above problem scenario this would not keep with the balance unless I record in a different way, which I am unsure how too??

Sorry to be a pain but I am sure there must be an easy way even if its a separate note book and added adjustments at year end.

-- Edited by Alpine man on Monday 12th of April 2010 07:19:47 PM

semsley · Guru

Bank reconciliation is to check that you have not missed anything. It's a good idea to do a bank reconciliation every month for everyone whether or not in business. That way you know what money you have (or haven't) and also that the bank has not made a mistake (which is not unheard of).

Alpine man · Veteran Member

I hesitate to ask again. But I have plenty of items which are not cost of sales and are not capital introduced equiptment.

For example I have shade netting, cheap plastic units, stalkes, clips, coolglass. These are not cost of sales as far as I can see but do all indirectly aid the process. Eg coolglass is sprayed on a greenhouse to provide some shade for the plants. If this is not a cost of sale then is this what they call a direct cost for the tax return. The different books tend to say that anything under £100 is an expense, which I agree with. The definition I have for a direct cost is this which Wella has given me also (this is similar)-

Other direct costs- the direct cost are those that you have to incur in order to be able to sell your products or service and they vary according to your business

It then says a plumbers direct costs are- pipes fittings, materials and loose tools for example.

This tells me that my list above are probably direct costs.

From what I have read from the different answers I have been given the cost of sale is the raw materials and the product itself, something that adds to the value of the item.

Are my items above that are lower priced under £100 seemly becoming 'other direct costs.'

If you guys think I have finally sussed it can you let me know. Sorry to go on a bit it to much, I apologise ! Just to let you know I do read everything ,often three times, if its more complicated. I am a slow learner and more practical as a person. My apologies to you Shamus particularly if you feel I should understand things , I am doing my best. I have worked out the credit card thing my self and hope the tax man likes my version of it(I had read the answers I was given for this)

Appreciate all your efforts.

but still feeling very stupid,

David.

-- Edited by Alpine man on Tuesday 13th of April 2010 05:36:55 PM

Rhianrach · Expert

The way I see it is your saying they indirectly aid the process when in fact in my eyes and from your explaination they actually directly aid the process otherwise why use them.

A friend of mine grows flowers for competition and everything he uses is directly responsible for the outcome of prize winning flowers, including chicken poo, chemical fertiliser water irrigation pipes netting covers even stuff to sterilise the soil, petrol for the rotorvator so on and so on.
If he was to sell the plants or even the bulbs/tubors and market them as prizewinning he would include everything as a direct cost to production of said product as without them he couldn't do it, he wouldn't be selling prize winning plants/bulbs/tubors.

They would be a cost of sale.

I await correction as ever smile

Steve

Sue T · Veteran Member

Hi David

I would put the other items you mention under Misc purchases 5002 on Sage as they are still related to the sale they are just not a material purchase, they are as you said a direct cost though.

Sue

Wella · Expert

Alpine man wrote:

Other direct costs- the direct cost are those that you have to incur in order to be able to sell your products or service and they vary according to your business

It then says a plumbers direct costs are- pipes fittings, materials and loose tools for example.

This tells me that my list above are probably direct costs.
Raw materials Prime costs Production costs Total cost
Direct labour
Direct expenses
Indirect wages Secondary
costs
Indirect factory expenses
Non factory admin Sales costs
Selling costs
Distribution costs

Hi David

Told you there are differing opinions on how some expense items are treated

I copied the above chart from my previous post, which also had some debate you might light to read.

http://www.book-keepers.org.uk/index.spark?aBID=106474&p=3&topicID=34271584

Where I have put factory, you could put growing.

The way I would view the expense item is

a) Is it an expense directly related and necessary to the growing process (Prime costs)

b) Is it an expense related to the growing process, coolglass, netting etc. These would be your secondary costs, which combined with a) are your production costs and form your cost of sales (As if you hade purchased the plants from another grower, except in this case you are transfering the costs to sales)

c) Expenses that do not fall into the above would be your normal sales expenses

Hope it helps

Bill

-- Edited by Wella on Wednesday 14th of April 2010 10:23:30 AM

Alpine man · Veteran Member

Sorry Rhianrach I meant to say directly not indirectly when it comes to what the costs are.

Now I understand that they are direct costs is it true that all of these should be adjusted for as well as the cost of sales end of the year. I would assume it would just be the value of the cost of sales and raw materials that make them , NOT the direct costs , Eg shade netting which would be adjusted for.

Hope fully I am drawing to a close with the questions. I understand how to calculate cost of sale adjustments , pritty much from my book, so I wouldn't need advice for that part . Just the above.

Hope you don't mind me asking questions.

Thanks I appreciate all your help. Thanks for the table Wella as well!

David.