stoopid question

Do rent payments for your manufacturing plant go into Overhead (which is part of Total COGS on this model I’m looking at) or do they go into SG&A? Thanks!

Rent for a manufacturing plant would go into overhead because it is a necessary cost needed to finish the product. We would not be able to trace rent directly to each unit in an economic fashion thus making rent an indirect cost (overhead). Overhead is usually allocated based on a “cost driver,” i.e. cost per/unit, floor space of a specific product segment etc… COGM = Beg. Inv. + Purchases + DL + DM - End. Inv

Forgot WIP and Overhead in that equation…

COGM = DL + DM {Raw Beg. Inv. + Purchases - Raw End. Inv.} + Overhead + Beg. WIP - End WIP

so i think what bartok is saying, and if i do i agree with him, that the answer is yes and no. some would be expensed as part of cost of goods sold and some would be capitalized into inventory with any other overhead costs of the facility. essentially, all of the rent expense is capitalized into inventory and expensed when the inventory is sold; depending on how much inventory you still have on hand determines how much of the rent expense was expensed by the end of the period. now that assumes that the facility is only used for manufacuring. if, however, some of that building is the manufacuring plant and some is the office where accounts payable folks sit, then some of the rent would be allocated to manufacturing and some would be allocated to sg&a and expensed right away. now as far as modeling it, that depends on how precise you want to be. if you’re comparing to historical periods, especially publicly reported periods, rent expense will be included in inventory, etc. if want to keep it there, you could try to allocate annual rent based on estimated units produced, or something like that. in other words, if you produced 1,000,000 units and your rent was $1,000,000, rent expense was $1 per unit. then you get into fifo/lifo issues when you try to say how much of the inventory made this year is still in inventory and how much to expense via cogs. to me that seems really complicated to try and not worth the effort. but i don’t know what your purposes are.

I’m pretty sure that rent on facilities goes into SG&A, since it is not a variable cost (doesn’t change with the quantity produced, except for very very large changes that might require an additional factory to be rented). COGS is basically for the labor and materials that can be directly attributed to a specific product or service. The remainder is overhead, which includes rent. Ah, that’s what Bartok said… oops.

rent (and so is depreciation if they own the building) is part of manufacturing overhead, which is included in inventory. rent is included in inventory as it is allocated to specific products based on some kind of driver. so, using the example i mentioned before, assume your rent is $1,000,000 per year and you expect to make about 1,000,000 units that year. at the end of the year, assume you have on hand 100,000 units you’d made during the year. that means that of the $1,000,000 spent on rent, $900,000 would have been run through cogs and $100,000 would be sitting capitalized in inventory. if you had rent expense of $2,000,000 and about half of your building was full of people involved in purchasing or ap or something that wasn’t related to production, you would expense half of your rent expense in sg&a ($1 mill) and allocated the rent to inventory like i just mentioned.

Super, thanks for all the responses. I’m putting it in Overhead. Here’s another one: in addition to a manufacturing plant, my company also has a delivery operation that delivers the widgets. Labor for my delivery drivers would go into SG&A, right? My other option would be to put it in the Labor section of COGS.

for inventory, inbound and other costs to make something are capitalizable. outbound expenses are expensed. so, for example, you’re a distributor, the shipping costs you pay to bring the product into the warehouse is added to inventory. the shipping costs you pay to take to your customers is expensed in sg&a.

I think this one could go both ways, if the company sells a service and the service is delivery of x (i.e. widgets) and x is manufactured by a different company or subsidiary, labor would go into COGS. Does FedEx and Purolator expense direct labor for their shipping business (i.e truck and delivery personnel) or to they trace the costs to some type of inventory account? Hmmm… I should probably pull up the financial statements. Good discussion…

if the service is delivery, that’s a different story. the depreciation of the trucks and the salaries of the drivers, as well as any other expense to provide the service is expensed. its also difference because you don’t have inventory like you do if you manufacture it.