Accounting & Bookkeeping & Small Business Forum

[Guest]

How do I determine COGS in a junkyard business?

I need help in determining Cost of Goods Sold for a new business venture I am starting.

The business model is similar to how a junkyard operates. I purchase a large lot of equipment and sell it off piece by piece. At some point, the last portions of the lot must be scrapped. It may take months or even years to go through a complete lot. So the question is: How do I determine and account for COGS as I sell off each piece?

A simple example is to purchase a wrecked car for $300 then sell off the engine for $400, transmission for $300, tires for $100, and stereo for $100. When it appears there is little value left, scrap the remainder with a disposal charge of $200.

In my case, I would have hundreds different cars (or in my case, equipment) being sold off piece by piece.

Can anyone refer me to any books or websites or even point me in the right direction where I can find out more information on this type of accounting for Cost of Goods Sold?

[Guest]

In my opinion, you have two methods to choose from:

1) The simple method: Using cash accounting, charge it all to Cost of Goods Sold when you buy it.

2) The more accurate method: Determine, based on history or your best judgement, what your historical cost is as a percentage of sales then calculate the cost each month based on the total sales. You'll need to be vigilant at watching the inventory value in the Balance Sheet to see that it seems reasonable.

To calculate the historical percentage, add up the cost of everything you have purchased in the last two years and determine the percentage of that when compared to sales.

If you don't have history, or you don't feel that the past reflects well the future, you'll need to estimate what revenue you THINK will be generated from a sale and calculate the cost percentage of the sale. Then, as you sell from that lot, you'll want to use that percentage.