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Cost of Sales Question

Yesterday I got a Cost of Sales accounting question about packaging materials. Some background on this subject: The guideline for determining whether an item is a Cost of Sales expense or a General Expense item is this: If you have no business, you have no Cost of Sales. Since packaging materials are required only if you have a sale, then ALL packaging material is accounted as a Cost of Sales expense. But wait . . . there's more to this question.

The photographer was referring to a packaging item designed especially to create "buzz" by the recipient because of its unique design . . . referring specifically to the BellaGrafica bag shown below:

The photographer wondered that since the primary purpose of the bag is to have an excited mom show it around to all of her friends because it is personalized with her child's portrait, perhaps the cost of the bags should be accounted to Advertising, which is a General Expense. Yes, that's a valid argument; but it's far more practical to account it to Cost of Sales, which will insure that this cost is included when you are pricing. In effect, Mom is paying for the bag, and as a COS item, it is marked up; thus there's more profit for you. If you account it to advertising, the cost becomes a drain on your business, and there is no pricing mark-up. See the difference? It is huge. In my opinion, there is nothing sweeter—or smarter—than having clients pay for your marketing!

For pricing on this wonderful shopping bag, click