Our company purchases a raw material in bulk (10 kgs packages). This
raw material is then repackaged into 3 separate products sold to the
public. Each of these products varies in weight (15gms to 250 gms)
What is the best way to deal with the proper credit and debits to both
COGS and Sales accounts. Specifically:

1. How should the raw material be set-up initially? 
2. How do each of the 3 products are also to be set-up.

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Clarification of Question by fertico-ga on 30 Jun 2003 22:02 PDT

respree-ga:
           Thank you for your comments, however, I am interested in
addressing the specifics of points 1 & 2. The Quickbooks (2001) item
screen window has field to record purchase and selling price. The
selling related fields are "Cost", "Expense Account", "Preferred
Vendor". On the buy side, "Sales Price" and "Income Account". I need
to establish how these fieldls need to be set up for the raw material
(when initially purchased) as well as for each of the items sold and
that contain the same raw material. I want to ensure that COGS and
Sales are being updated properly. Thank you.

Inventory - DR
Accounts Payable - CR
  to record purchases of raw materials

COS - DR
Inventory - CR
  to record cost of sales

A/R - DR 
Sales - CR
  to record sales

Above are the journal entries you will need to record.  DR means
debit, CR means credit.  It makes certain assumptions; 1) that you pay
for your credit on terms (as opposed to cash) and 2) that you sell on
account (accounts receivable), as opposed to cash.  If these
assumptions are incorrect and you pay for your purchases or sell to
your customers with cash, substitute "Cash" as the account in place of
A/R and/or A/P.

The best way to set up an accounting system is to have some kind of
subsidiary system to keep track of your raw materials.  In concept, it
is a simple practice of keeping track of your in's and out's. 
Purchases are in's (or additions) to you inventory.  Sales (to be more
specific, cost of sales) are out's (or subtractions) from your
inventory.  If you have a small business and relatively low activity,
you can even do this on a spreadsheet (like Excel).  If your needs are
more complex, you will need to purchase an inventory accounting
package.

Your beginning inventory PLUS purchases MINUS COS equals your ending
inventory.  In theory, this should agree to the amount of inventory on
hand at the end of the accounting period (typically, at month end). 
In practice, it is not always practical to perform a physical count of
your on hand inventory.  Typically, companies perform a physical
inventory 1 to 4 times a year (definitely at year end) to verify that
their subsidiary inventory accounting systems agrees to what is
physically on hand.  Any variance (such as shrinkage [theft]) is
charged (or absorbed) by the Cost of Sales account.

How do you calculate the cost of sales (i.e. the 'minuses' from
inventory).  Most companies set up their products with an item number.
 Some companies call this item number a "SKU" (Stock Keeping Unit). 
Just as you should have a system for keeping track of inventory, you
should also have a system for keeping track of your sales.

Cost of sales calculation is as follows.

Number of grams sold during the month TIMES cost per gram.

How do you figure out the number of grams you've sold.

Each SKU should have a fixed number of grams.  Multiply the grams per
unit TIMES the number of units sold for each SKU.

The above examples illustrate a very simple methodology for
calculating these entries.  The entries may vary depending on the
complexity of your business.

I hope this helps you a little.

Hi fertico:

I'm afraid I don't have any experience with QuickBooks, which is a
small company accounting package.  I am more accustomed to accounting
packages used by billion dollar companies.  I guess I misunderstood
the question.  I thought you were asking for general accounting
advice, rather than a specific question on QuickBooks.

Without a rudamentary understanding of the QuickBooks architecture, it
is difficult for me to guide you.  However, I'd be glad to take an
educated guess.

It appears that what you are describing is the establishment of what I
would call an "Inventory Master."  This is a subsidiary (inventory)
program (which feeds to your main system called the "general ledger"
or G/L) that keeps track of non-accounting related information, but
are needed for your accounting system.

As I mentioned, you probably want to assign each unique item that you
sell a unique identification number (SKU).  Each SKU has a certain
profile to it.

1. What is the SKU number
2. How much does the item cost
3. What do you plan to sell it for
4. When you sell this item, what general ledger account are sales
recorded to
5. When you purchase this item, what general ledger account are
purchases recorded to.

Based on this information, this subsidiary inventory module is trying
to valuate your inventory at the end of each accounting period in
addition to telling you how many units of each item are on hand.  How
does it do this?  It knows the cost of each item (because you told it)
and multiplies it by the number of units on hand.  How does it know
this?  You basically told it.  You'll need to load an intial amount of
inventory that you have on hand (basically, count up what you have). 
As time goes on, you are going to make sales (which will subtract from
your on hand inventory) and you are going to make purchases of more
raw materials (which are going to add to you on hand inventory).  The
total of those three components will determine your ending inventory.

You will also need to set up your general ledger, which involves a
Chart of Accounts.  Here is an example of  'very abbreviated version
of it.'

Account Nbr     Account Name
100             Cash
123             Accounts Receviable
130             Inventory
200             Accounts Payable
300             Capital
400             Sales
500             Cost of Sales
600             Payoll Expense
601             Rent Expense
602             Supplies
6xx             And so for, describing other operating expenses.

The answer to "Expense Account" in your commment relates to the
general ledger account number that represents "Income" (in this case
#400), "(inventory) Cost" (in this case, #130).

I'm sorry this is a bit long winded, but its important for you to
understand 'why' you're doing this, rather than just 'how' to do it. 
Its difficult to transfer my 20 years of accounting experience to you
in this short memo, but those are the basics.

Please let me know if you need more help.