The great kluge for tracking manufacturing
Companies with
manufacturing processes that are fairly
small, but too large for the minimal system,
can consider a more complicated
approach. The system works (or can be
made to work). It runs counter to the
general QuickBooks concept, because its
complexity may make it difficult to set up
and to learn and harder to control. It
is assembled as a linkage of transactions,
used contrary to their intended
purpose. That fits the dictionary
definition of a kluge.
The general concept is
based on setting your manufacturing operation
up as a fictitious customer. The
materials and labor are sold to this
customer, and the finished products are
bought back. That idea does not seem
complex. Doing it, using the tools in
QuickBooks, proves to be somewhat involved.
Piece parts and material
must have been purchased into
inventory. Employees work to assemble
the finished products, and are paid through
the usual payroll system. The company
sells the materials and employee services to
a fictitious customer set up to represent
manufacturing. The sales prices are
kept exactly at cost, to the extent that
costs can be determined. The total of
the sale amounts then represents the cost of
the products. The proceeds from these
sales go to an imaginary bank account.
This account represents the value of Work in
Process (WIP) so the discussion calls it the
WIP Bank.
Labor is used and the
materials no longer exist in their original
form. Expenses must be recorded.
These expenses are exactly equal and opposite
to the income from selling the labor and
services, and add up to a net zero
income. This operation is banished to
the Other Income and Other Expense area of
the P&L report.
As products are completed,
the WIP Bank “buys” the finished goods at
manufacturing cost, putting them into
inventory for sale to a real customer.
The WIP Bank value associated with the
building of each product goes to zero, which
is correct, since the work on it is
completed. Manufacturing cost has been
matched to manufacturing income and net
income from the operation is also zero.
This system has been
carefully assembled and tested using the
existing functions of QuickBooks. The
pieces are hand fitted together in a manner
that mathematicians describe as “necessary
and sufficient.” They are sufficient to
do the job, and all the steps are
necessary. The system delivers results
when you can run reports to show what has
happened. The names, accounts, items,
and transactions are set up so that needed
information can come back in reports.
The only predictable
factor is that each business will be
different. You may build a single
product, or many. Products may be built one
at a time, in standard lot sizes, or in
varied amounts. They may need only a small
amount of material, or a long list of piece
parts. The process may take only a few hours,
or many months. Labor may need to be
carefully recorded, or it may be covered well
enough by use of a basic standard
amount. Costs may be stable, or they
may vary greatly from one purchase to the
next.
The description has been
confined to a single track format, with only
one mode described for each step. The
term “lot” is used to refer to products
started at one time and completed at one
time. All of the materials are
collected together in one lump. Below
the description are comments about
alternative steps for some types of
manufacturing operations. Before
starting any setup, the description and
comments should be read for
understanding. I expect that you will
agree with my recommendation that any system
of this nature should be set up by an
accountant who is familiar with QuickBooks.
As described here, the
system also assumes the use of QuickBooks Pro
5. It is a little less convenient in
earlier versions.
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