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TPick77
Level 1

Inventory accounting

My small company revolves around mainly one product (invented by me over 20 years ago) which is an indoor snow machine that we manufacture and assembly in our small shop.  We usually have completed units on the shelf but sometimes they are made to order. It’s made from a die cut corrugated panel (typical corrugated box) and using a customized design that we double fold and hot glue into a rectangular trough like box that is 4 feet long, 7 inches deep and 13 inches wide.  From there we add a motor on a bracket and about 30 other small parts in the assembly process that range from staples to hot glue to small nuts and bolts to wood dowels and aluminum linkage. 

Inventory has always been a roughly calculated number and frustrating to say the least as our COGS and inventory balance seem to always be at odds.  We have tried doing it just off the number of motors we have on the shelf but the account for maybe 20% of the entire cost. Given the likely hood that any correction or change now in a new system may change prior year tax forms (most likely in our favor)  what would be the best way to move forward ? I have QB Pro Desktop. 

4 Comments 4
Anonymous
Not applicable

Inventory accounting

Your machine is too complex to be treated as an 'assembly' in QB - so we wont discuss that.

Self-produced inventory items have to be manually added into inventory - both quantity & value.  Quantity is easy - value is the key question.  Since you've been doing this so long I expect you already have a full schedule of needed parts per unit, and a good estimate of assembly time. Put this into excel and update the prices of components based on your most recent purchases. If you employ anyone to do assembly then also include their wage rate and the estimated assembly time.  Include your own time if you pay yourself wages from the business. Now you have of estimate of cost per unit.

Also use this same sheet and list the quantities of parts on hand per item extended and tallied to produce an estimate of parts inventory on hand.

There are a couple of different ways of doing the actual accounting. In you case I suggest that all the component parts & labour be categorised into 'Cost of Goods' type accounts. Then add 2 other Cost of Goods accounts called 'Parts used in production' and 'parts inventory change'.

The machine is an 'inventory item' and that needs 3 settings for inventory, cost and revenue. Inventory goes to "finished goods inventory' asset, cost points to a COG account "cost of machines sold", sales points to sales revenue "machines sold"

All other parts are non-inventory type items that point to CoGS account.

After assembly make the 'inventory adjustment' to add 1 machine into stock, at the cost tally, and the 'adjustment' account is 'Part Used in Production'.

When selling the machine, create an invoice or sales receipt with 1 "Machine" item

At the end of the year/month update the schedule of parts on hand and set that value in an "Parts Inventory" asset, with the offset going to 'parts inventory change'.

Thats all of it.

You may get other advice about putting the item purchases into WIP assets - but doing it this way ensures that if your cost per machine production estimate is wrong - you will still end up with the right income tally - eventually.

 

 

TPick77
Level 1

Inventory accounting

Thank you Mike for the response. We have decided that, because we are a small business, to only track quantity in the inventory and not value. Why? We would end up spending too much time and money on it. Frankly, I've never really understood the tax side of this when it's clear that every part is purchased and posted as COGS, and other expense lines (labor) are created. When I sell...it's income. As they say, keep it simple stupid....and when it comes to tax prep I feel stupid.

Tim

 

 

TPick77
Level 1

Inventory accounting

Thank you Mike for the response. We have decided that, because we are a small business, to only track quantity in the inventory and not value. Why? We would end up spending too much time on it. Frankly, I've never really understood the tax side of this when it's clear that every part is purchased and posted as COGS, and other expense lines (labor) are created. When I sell...it's income. As they say, keep it simple stupid....and when it comes to tax prep I feel stupid.

Tim

Rustler
Level 15

Inventory accounting

@TPick77 

 

Typically inventory, especially for final products, is composed of the major items. Common hardware (nuts & bolts) glue, staples, paint, etc are just expensed to COGS when purchased.

So if it were me I would uncomplicate things.

 

Stock the die cut cardboard, the motor and the linkage (and anything else that is not small generic stuff)

then in premier and higher create an assembly type item for the machine, in the assembly item BOM list the cardboard, motor and linkage. Issue the build command for the assembly and inventory of the BOM items will be reduced, and you sell the assembly item.

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