Franchisor - Cost of Goods Sold (Franchise Supply Chain / Product Sales)
Recording the cost of goods sold associated with products sold by the franchisor to franchisees through the franchisor's supply chain operation.
| Account Name | Type | Debit ($) | Credit ($) |
|---|---|---|---|
| Cost of Products Sold - Franchise Network Supply | Expense (+) | 2,240,000.00 | - |
| Inventory - Finished Goods / Products | Asset (-) | - | 2,240,000.00 |
💡 Accountant's Note
The COGS associated with franchisor product sales to the network represents the cost of manufacturing or procuring the products (70% cost ratio = $2.24M on $3.2M product sales, 30% gross margin). This gross margin on product supply represents the franchisor's supply chain profit. Combined with royalties, the total effective 'take rate' from franchisees includes both royalty % and the margin embedded in required product purchases.
Practitioner & Systems Framework
💻 ERP Architecture
Maintain a separate COGS line for franchise network product supply, distinct from any company-operated store COGS. Inventory should be physically verified quarterly. The gross margin on product supply is often not disclosed separately in the FDD — but it represents real economic cost to franchisees that reduces their unit economics.
⚠️ Audit Flags
Auditors verify inventory valuation at the lower of cost or net realizable value (ASC 330). COGS must reconcile to the inventory roll-forward (beginning inventory + purchases - ending inventory = COGS). Transfer pricing between the franchisor and any related-party supply chain entity is a key audit focus.
📄 Required Documentation
Inventory purchase invoices, physical count documentation, COGS calculation (inventory roll-forward), product pricing to franchisees, gross margin analysis, supply chain entity related-party disclosure.
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