Yeah this is some managerial accounting stuff. If you’re lucky, the price doesn’t fluctuate too much but let’s assume your purchase of $10k is a one time thing and you don’t need to worry about price fluctuations. Let’s say the $10k got you 1,000 “units” of raw metal so all of those units have the same cost per unit. If you have price fluctuations you could simply take an average, but there are other methods I won’t go into.

Step 1. that raw material gets booked on the balance sheet as Raw Materials inventory. It’s not expensed on the P&L yet.

Step 2. You make the “thing”. The amount of raw materials used to make the thing now gets moved to Finished Goods Inventory. You’re moving it from one part of the balance sheet to another.

Step 3. You sell the thing. NOW you get to write off the cost of the goods you actually sold. Let’s say you sold $1k worth of stuff - your cost of goods sold (COGS) is now $1k and it offsets the income from your sale. You still have $9k worth of finished goods on your balance sheet.

Generally speaking, without tracking inventory constantly, the idea is to do an inventory count at the end of the year, or very close to it. Let’s say you do your count, and you see that you only have $2k worth of inventory left as of December 31, 2023. Well, all else being equal, that tells me that your cost of goods sold should be $8k in this scenario. By doing the inventory count and looking at your sales, you can “back into” your COGS.

All of this definitely becomes a monumental pain in the ass when you figure in inventory in transit, inventory sitting in amazon warehouses, returns blah blah etc.