For COGS and Schedule C, it's really important to know the difference between a supply as they need to be handled differently from a cost and inventory perspective.

Supplies

Supplies are defined as:

a) Materials not used directly in the manufacture of your products (e.g. envelopes, packaging) or

b) Materials used in the production of your products that are not able to be inventoried due to an inability to accurately measure the material (e.g. thread)

If you think your material is a supply, it should generally be tracked as an expense rather than a material. This is because supplies are typically claimable only within the year that they were purchased (materials used to produce your products are on the other hand treated as an "asset until sold" - we'll cover that in the section below).

If you are using Craftybase for your bookkeeping + inventory, you have two options for tracking your supplies: you can either a) enter it just as an expense or b)create a "non-inventoriable" material and link it to your expense (in this case, Craftybase will recognise that the material is non-inventoriable and will assign the expense cost directly to your expenses tally to ensure it does not get included in COGS). This is good for situations where you'd like to keep a photo or a description of the supply item purchased.

Materials

Materials on the other hand are defined as any thing you consume directly in the manufacture of your products. For a handmade business, this will mostly be what you are dealing with on a day-to-day basis. Materials are always added to your inventory instantly when purchased, which is treated as an "asset until sold". So what does this mean exactly? It means that you don't claim the purchase of the materials up-front, rather you claim it in small amounts slowly over time as you sell the products containing the materials (this tally is known as your COGS - "cost of goods sold").

This is a tricky thing to track, so you'll most definitely need inventory software or a pretty amazing spreadsheet to do the crazy calculations that COGS require. Otherwise, you'll be needing to maintain a rolling average of your material costs and manufacture costs over time yourself to ensure you are attributing the correct costs to each item you sell.

If you are already using Craftybase to track your COGS, you'll simply be adding in your material and then linking an expense whenever you purchase more stock - this will trigger the rolling average calculations you need. From here, including the material in each manufacture will ensure that your material usage tally will be correct on your Schedule C Guidance report.