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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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Last modified: May 21, 2004