Need help figuring out how to track material costs for a craft business

[disneysteve]

My wife is trying to make more of a business out of her sewing endeavors. She has sold many items over the years but just to friends. She's never really made it a business or tried to sell to the general public.

She has a lot of organizational questions but a big one right now is how to track the cost of her materials, like fabric and thread and hardware (for purses and such). She buys dozens of different fabrics and pays many different prices for them depending on where she got them, if they were on sale, if she had a coupon, if they were on the clearance rack, etc. So she might use the same pattern to make a particular item out of 4 different fabrics that cost her 4 different amounts but she still needs to have one set sale price for that item. And then she might make some other item out of some of that same fabric. She might buy some hardware new on Amazon that cost $1 per piece but repurpose some other hardware from bags she bought at yard sales and cost her a few cents per piece.

How does she log her purchases in a way that makes sense? Does she need to itemize every purchase or can she just say she spent X amount on fabric today and keep a running total of her average cost per yard?

I know how I tracked everything with my collectibles business but that was different as I was buying an item and then turning around and reselling the same item. I wasn't buying materials to make into something else.

Thanks for any insight you may have.

[cypher1]

I am by no means a business owner (nor an accountant), but from an accounting standpoint with raw materials inventory, it may just be easier for her to simply keep a spreadsheet or list of material transactions for inventory. Otherwise I'm sure others on here may have other apps to recommend for tracking and automate.

Probably more info than you care to know, but If they're trying to calculate or compute ending inventory and cost of goods sold (COGS) with the use of their materials, that can be applied using different cost flow assumptions, either:

Specific identification - company identifies each unit sold, each unit remaining at end of inventory which includes actual costs of those particular units in COGS and ending inventory
FIFO (first-in, first-out) - assuming costs move through inventory in chronological order, first inventory purchase costs incurred are first transferred to COGS. IE think of selling milk, selling oldest first since it expires sooner. That results in the earliest (and oldest) costs incurred being allocated to COGS, while most recent costs are allocated to ending inventory.
average cost - cost of ending inventory and COGS is based on the average of COGS available at a particular point in time.
LIFO (last-in, first-out) - allocates cost of goods available for sale between ending inventory and COGS based on most recent purchases (last in) are the first ones sold (first out). Results in the most recent costs incurred being allocated to COGS, while the earliest (and oldest) costs are allocated to ending inventory.

Typically cost of materials rise over time, and there are different advantages and disadvantages of using either method for cost flow assumption. FIFO produces lowest COGS due to earliest and lowest costs, so gross profit (and income) is highest). LIFO produces highest COGS and lowest gross profit (and income) because it includes most recent and highest costs. Average cost amounts are between FIFO and LIFO extremes because ending inventory and COGS include an average of both lower and higher cost of the period.

I didn't include periodic vs perpetual inventory systems either. OR to simplify tracking and costs for now, disregard what I said earlier and start with tracking material costs and either calculate with an average cost per period or month. If the costs of materials are pretty consistent, then don't focus on rising prices, and do an average cost per yard like you initially asked about.