Merchandise consumption: what it is and how to record it

When people talk about inventory outflows, most businesses think only about sales. Yet there is another outflow just as common and far less controlled: merchandise consumption. Understanding what it is and how to record it is the difference between a reliable inventory and one that never matches the physical count.

What is merchandise consumption in accounting

Merchandise consumption is the outflow of goods from inventory that is not sold to an outside customer but used internally to keep the business running. These are products that leave the warehouse, that the company has already paid for, but for which no customer pays any money. In other words, the good leaves the stockroom and becomes an expense or cost of the period, just like a consumed service, but involving merchandise that was recorded as stock. Typical examples of merchandise consumption:

Cleaning supplies used at the facilities: soap, disinfectant, toilet paper, garbage bags.
Packaging material for shipping orders: boxes, tape, stretch film, labels.
Fuel for delivery vehicles or for the production plant.
Raw materials transformed to produce: flour in a bakery, fabric in a garment workshop.
Spare parts and lubricants for machinery and equipment maintenance.
Samples given free to potential customers to promote a product.
Stationery and supplies for the office: paper reams, toner, pens.

What changes compared to a sale is not that the merchandise goes out, but why it goes out: in a sale it leaves to generate revenue, and in consumption it leaves to support business operations. That is why, even though the physical effect on stock is similar, the accounting treatment and the internal control are completely different.

Difference between consumption and sale

Sales and consumption are both inventory outflows, but they are recorded very differently and have different effects on the financial statements. Confusing them is a common mistake that throws both the warehouse and the accounting into disorder. The following table summarizes the main differences:

Criterion	Sale	Consumption
Is an invoice issued?	Yes, an invoice to the customer.	No: an internal consumption document or issue voucher is issued.
Does it generate revenue?	Yes, the sales revenue is recognized.	It generates no revenue at all.
Effect on inventory	Reduces stock by the cost of goods sold.	Also reduces stock, by the quantity consumed.
Effect on results	Records cost of sales and gross profit.	Records an operating expense or production cost of the period.
Recipient	An outside customer who pays for the good.	An internal area: kitchen, workshop, office, plant.
Supporting document	Invoice, sales receipt or electronic voucher.	An authorized consumption document signed by the person in charge.

The key difference for accounting is that a sale is linked to revenue, while consumption is linked to an expense. If a business records the sale but forgets to record consumption, its inventory will show more units than actually exist and profit will look inflated.

How merchandise consumption is recorded

Recording consumption follows a simple but rigorous process, worth standardizing so that every area applies it the same way:

Issue the consumption document: record the date, product or code, quantity, requesting area and the person who authorizes the outflow.
Reduce the stock: record the outflow in the product's stock card (kardex) so the balance is updated immediately.
Value the outflow: calculate the cost of what was consumed according to the business inventory valuation method, for example average cost.
Post it to the books: carry the consumed value to the expense account of the corresponding area, such as administrative expenses, maintenance or production, with its counterpart in inventory.

The consumption document is the internal equivalent of an outflow invoice: without the document, the outflow does not exist for the system and the stock card is outdated. That is why the most important step is the second one: the consumption outflow must reduce stock in the kardex on the same day it happens, not at month end, when no one remembers what happened to the products. In a restaurant, for example, every time the kitchen takes ingredients to prepare the day's dishes, a raw material consumption occurs. If the head chef hands in a consumption document with the quantities withdrawn, the kardex reduces flour, oil and vegetables, and the cost of those ingredients lands in the day's production cost account. If no document is handed in, the system will keep showing flour in stock that was already used at lunchtime.

Types of consumption by type of business

Consumption is not the same in every business: each activity has its own goods for internal use and its own rules to control them. Recognizing the consumption typical of each operation is the first step to recording it properly:

Restaurant: ingredients used in the kitchen, bar supplies, recipe tests and complimentary dishes.
Automotive workshop: spare parts installed during repairs, lubricants, brake fluid, rags and cleaning items.
Office or service company: stationery, toner, cleaning items, coffee and other everyday supplies.
Store or retailer: packaging material, bags, price tags and displays.
Transport company: fuel, tires, oil and maintenance spare parts.
Factory or production plant: raw materials, indirect materials, tools and machine spare parts.

The following table groups examples by type of business and points out how to control each consumption:

Type of business	Goods it usually consumes	How to control it
Restaurant	Kitchen ingredients, oil, seasonings	Daily consumption document from the kitchen and comparison with the day's sales
Automotive workshop	Spare parts, lubricants, filters	Consumption per work order or per vehicle serviced
Office	Stationery, toner, cleaning supplies	Delivery with a person responsible per area and monthly limits
Retail store	Boxes, bags, labels	Consumption tied to the number of shipments of the day
Production plant	Raw materials, machine spare parts	Consumption per production order and waste control

Why recording consumption matters

Not recording consumption is one of the most common causes of inventory differences. The problem is not noticeable on the first day, but the consequences show up quickly and cost money:

The inventory lies: the system shows stock that is no longer in the warehouse, because it left through consumption and nobody wrote it down.
Shortages look like theft: the physical count shows differences attributed to stealing, when they were really undocumented consumption.
Expenses stay hidden: if consumption is not posted, the business profit looks higher than it really is, and pricing, purchasing and budget decisions are made on false numbers.
Too much or too little is bought: believing there is still stock available leads to reordering late, or piling up products that are no longer needed.
Control by area is lost: without records, no one knows which area consumes the most, or where to correct waste or misuse.

In short: an inventory without consumption control is an inventory that lies, and no serious purchasing, pricing or profitability decision can be made on top of an inventory that lies.

How to control merchandise consumption

Controlling consumption does not require complicated processes: it is achieved with simple rules applied every day and with a clear person in charge for every outflow:

Define those responsible: each area or employee who withdraws merchandise must have a person authorized to approve the outflow.
Require a document for every outflow: no good leaves the warehouse without its consumption document, even a pencil.
Record in the kardex the same day: the consumption outflow is deducted immediately, not at month-end closing.
Assign consumption to an account or cost center: so the business knows how much the kitchen consumes, how much the workshop and how much the office.
Run cycle counts: physically review the highest-turnover products and reconcile against the kardex.
Compare against operations: ingredient consumption must relate to sales, and spare part consumption to the work orders served.
Set maximums per period: if an area requests more than normal, the waste or misuse alarm goes off.

When consumption is controlled by area or by the employee in charge, waste drops, theft is detected, and the physical inventory matches the kardex again without surprises.

Record consumption without complications

Keeping consumption control by hand, in notebooks or loose spreadsheets, always ends in the same place: inventory differences at month end. The practical solution is to use an inventory system that includes consumption records within the normal kardex flow. Kardex Tauro has the Warehouse Consumption window (Consumos de Almacén), designed to record the outflow of goods for internal use with its document, its value and its responsible person, and to keep the inventory updated immediately. With every consumption documented, the warehouse tells the truth and the business knows exactly what it has, what it spends and what it is missing.

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