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Tracking productionAs the scenario opens, the piece parts have been purchased and are in inventory. The first step sells the necessary items to the Mfg company. The Cash Sale form is used. There is no value in running this through receivables. The items must always be sold to manufacturing at cost. If the purchase price varies, care will be needed. The items are sold from inventory, and charged out of inventory at average unit cost. The average value must be used as the sale price, and can be found in an Inventory Valuation report. It may be convenient to display the Cash Sale form in one window, and the report in another, to copy the prices. Because accountants may be reading this explanation, the related debits and credits are shown. Dr WIP bank 100 Cr Mfg Income:Matl (Other Income account) 100 This transaction shows sales income for transferring the the value of all materials to manufacturing. The deposit to WIP Bank represents the value of work in process. The value of the material is now included in the WIP Bank, so it must be removed from the inventory account. When any inventory item is sold, the sales form initiates a less visible adjustment to the Inventory Asset account. The item is valued at the current average for this item, and charged to the account named in the COGS field of the item. As long as the sale price of the part is also exactly at the average cost figure, Mfg Income and Mfg Cost are exactly equal, for a net Other Income of zero. Dr Mfg Cost:Matl (Other Expense account) 100 Cr Inventory Asset 100 While in manufacturing, employees do work building the product. Time tracking captures this work to a service item, with a value of $200. This should be the best possible estimate of actual direct labor cost. A Cash Sale form is used to sell this labor to manufacturing using the appropriate service item for Mfg Labor. Note that this is a sales income transaction. Dr WIP Bank 200 Cr Mfg Income:Labor (Other Income account) 200 The labor portion now has a net income amount. A balancing expense transaction is needed. Payroll pays the employees, charging their pay (and taxes) to Payroll Expense. If labor cost is to be included in COGS of the product, that portion of labor expense used to manufacture the products must be moved into Mfg Cost:Labor. A general journal entry performs the move. Dr Mfg Cost:Labor(Other expense account) 200 Cr Payroll Expense 200 This has rolled the cost from payroll expense to the Mfg Expense account, which will include it in the manufacturing cost. A manager may object that payroll cost is payroll cost, and should be accounted as such. That is fine if you want it, but if that is followed, labor cost can’t be included in COGS. The point of this action is to move an appropriate amount of payroll cost into COGS. If you do not move the Payroll Expense figure into Mfg Expense, then labor must not be billed to the “Mfg” accounts. If it were to be billed, these accounts would end up with a net income balance. The cycle is completed by using the WIP bank balance to buy the lot of finished products from manufacturing, valued at the total of material and labor consumed. They are moved back into inventory with Write Checks. The Qty field will receive the number of product units which manufacturing finished. The dollar amount will be the total of the costs billed to manufacturing for this lot. This sum may be found by generating a Sales by Customer report (summary or detail). This report must be filtered by Customer:Job and cover the time period when raw stock and labor were sold to manufacturing. The sales total is the total cost of the products, and that amount becomes the total inventory value of the finished products. Dr Inventory Asset 300 Cr WIP bank 300 WIP (the WIP Bank) is now zero for transactions related to the building of this lot. Mfg Income and Mfg Cost accounts show a net zero income. The Product items have been taken into inventory at manufacturing cost. |
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