Manufacturing - Expenses & COGS

ProductionsUnlimitedInc · ‎February 07, 2019

My question is similar to this one: https://quickbooks.intuit.com/community/Reports-and-accounting/Should-I-list-our-cost-to-manufacture...

However, we use QB Enterprise on Desktop.

As a specific example, we have a product we will be soon adding to our inventory that we manufacture. This is the process:

1. We purchase a component from a vendor.

2. We weld or alter the component in house.

3. We also send the component to be cut or painted by another vendor.

4. The finished item is sold as inventory individually and also grouped into larger purchases.

My question is this. Do we follow the Work In Progress bank and dummy vendor suggestion from the article above, or do we somehow use Inventory Assembly to create the finished product? Or, do we just create the inventory item once it is complete? I am also concerned, as they are in the above article, about double counting of expenses by listing the item cost and also paying the vendor.

As an added bonus, the cost to have the vendor cut/paint/alter the raw material changes, depending on the amount we send to the vendor. There is not a set cost per item. This is what makes me dubious about using Inventory Assembly for this.

Thank you in advance for any advice.

qbteachmt · ‎February 13, 2019

For this, this is up to you:"Specifically, are you using Inventory Items or Non-Inventory for your WIP materials?"

If you manage it as inventory, individually by Quantity, you also know there is Cost Basis tracking per unit, which sill be average or FIFO, depending on your program and settings. If there is one Overall cost, such as I have a huge import duty and broker fee, I might use an Other Charge type item, or Two, to track Broker Fees and Import Duties as those individual WIP items, to show a total incurred for each type of cost is going to need to be fully invested in the end production run for this Lot and allocated as part of cost per unit completed. Example: The order is for 15,000 golf balls, and when all the shipping, inspection, prep and packaging is done, the total cost is allocated into 14,855 balls. The rest were Scrap.

"When you do the Inventory Adjustment to add the finished product to inventory, does there also need to be a second adjustment to adjust the WIP items?"

Only if they are Inventory. Let's review that WIP = an Asset. Inventory = an Asset. If you track WIP as something to be counted and managed, then yes, the Adjust Inventory Screen would allow you to offset them by item name. Example:

QB Pro does not have Builds. So if I stock various table legs as I make them, I would use a Raw Materials WIP account to hold the purchase of raw stock. When I produce Legs, I use Adjust inventory to put the legs as finished products on hand with qty, of the various type I produced, and top left, I clear the Value from WIP as a generic Total. Later, I assemble some Tables, and I can use Adjust inventory to Reduce the count of the specific Legs and Tops, if I made the tops in advance. Or, I populate Tables with Qty, reduce Legs, and pull the remaining value for this production run from the WIP account where I posted the purchase of Tree Slabs that I used to make the Table Tops in this production cycle. Now I have fewer legs, less raw materials, and a Count of completed tables, fully costed and ready to sell.

I teach this as: If you can map out what happened, we can use QB to show it happened that same way.

"For the adding entry, we would use the COGS as the Adjustment Account"

Not that I see in this discussion. Cost of Goods Sold in populated from the Sale. Not from anything in production, other than, you might need to throw out waste or account for shrinkage.

"and for the subtracting entry we would use the WIP Other Current Asset as the Adjustment Account, yes?"

No. If you put something Into WIP, you eventually should show it was used and is still on hand as this Other Thing, or sold.

"On the other hand, when you say you create a $0 Bill, do you mean that you are balancing the costs between the Expense tab and the Item Tab?"

Don't think of this as "cost." It's Values. It's a data entry worksheet for offsetting values. Example:

That same Table production run...

WIP Bill

Negative 4 legs on the Items tab

Positive 1 Table on the Items tab

Pull any WIP Value for raw materials for the table, from WIP account, on the Expenses tab as Negative

hit Recalc

Should = $0

Table is now Fully Costed, WIP is reduced by Table top Raw Materials used, 4 legs are invested from inventory to Table basis.

View solution in original post

qbteachmt · ‎February 07, 2019

Bank is a type of Asset; WIP is an Other Current Asset. Rustler uses WIP as Bank. I don't, especially if the Spending for the various components are From Checking or on the Credit card, already, so I post to WIP = Other Current Asset. I do this using items, for manufacturing. Example for a Sports Equipment Manufacturer: We have "WIP ITEMS" for Packaging and for Labeling and for Broker Fees and for Pallets and for individual Balls and then we Build Assembly for 6-packs and 12-packs Retail Boxes, then the retail Boxes are put into Shipper Cartons, Palletized and shipped. In other words, map out your process, and that helps you know what goes where, and from which type of activity.

The reason to use WIP is the need for Holding onto an invested value, to fully cost something as the end product. I do WIP Items for Property Flipping, too: windows, doors, flooring allowance, landscape. That way, you use them on Estimates and can manage Contracts with Subs, and progress and cost planning. And at the end, there is the total invested in the WIP project, to be COGS when it sells.

The reason to use Build or to use WIP vendor, is driven by your processes in real life. As an example: when your plating or coating contractor is a Flat Fee, not per unit, it's impossible to account for this properly in a Build quantity. It is much easier to use Adjust inventory and put 6 trailers on hand, pulling all Painting cost and WIP generic values not tracked per Completed unit, into the entry that I just created 5 trailers, and this entry will Split and Allocate $ per Unit.

Right here: "As an added bonus, the cost to have the vendor cut/paint/alter the raw material changes, depending on the amount we send to the vendor. There is not a set cost per item. This is what makes me dubious about using Inventory Assembly for this."

I would post all costs to WIP Other Current Asset. At the end of the production run, I use Adjust Inventory. Or, I can use WIP Vendor and create a $0 Bill.

Here's another difference only you can decide if it matters: Tracking. One of my clients is a Nutritional Supplements manufacturer. Everything needs to be tracked by Lot Number. We cannot simply use Adjust Inventory. We use a $0 Bill with the Vendor Name of WIP, which allows use to use Ref # and to document on the Items tab, the details that also matter for their requirements.

Hope that helps.

ProductionsUnlimitedInc · ‎February 13, 2019

Thank you so much for the insight.

A couple of detail questions. You said "I post to WIP = Other Current Asset. I do this using items, for manufacturing." Specifically, are you using Inventory Items or Non-Inventory for your WIP materials?

"I would post all costs to WIP Other Current Asset. At the end of the production run, I use Adjust Inventory. Or, I can use WIP Vendor and create a $0 Bill."

When you do the Inventory Adjustment to add the finished product to inventory, does there also need to be a second adjustment to adjust the WIP items? For the adding entry, we would use the COGS as the Adjustment Account and for the subtracting entry we would use the WIP Other Current Asset as the Adjustment Account, yes?

On the other hand, when you say you create a $0 Bill, do you mean that you are balancing the costs between the Expense tab and the Item Tab?

qbteachmt · ‎February 13, 2019