Inventory - Manufacturing Items

As you said QBO does not do manufacturing so to get it done you have to use a work around

elect, gas, etc etc are all cost of operation, just expense them when paid. Trying to track how much was used only for production is just too time consuming and not worth the effort.

labor is payroll which is already an expense. Expense lowers net taxable profit, but if you move some portion of payroll to the inventory item it becomes part of that inventory asset, and net taxable income will increase until that item is sold. Makes no sense to me to over complicate things

materials are definitely part of item cost, raw materials on hand should be kept as inventory items

then to make something in QBO

1. in real life use inventory and note the qty and items used to make the product, make it, and note the qty you made

2. in QBO
2a. create a cash type bank account called WIP
2b. create a dummy vendor called in house
2c. Use inventory adjust, set the adjusting account to the WIP bank and lower the qty of items used
2d. use the WIP account and a check, do not print this is data entry, select the inhouse vendor, list the finished inventory item for what you made, enter the actual qty you made, and then enter the balance in the WIP account as the total cost, save

3. sell the finished inventory item

The correct way would be to adhere to the matching principle in accounting, which means that expenses should be reported in the period that revenues occurred.

Ideally, in a manufacturing setting, this should mean that costs for materials, labour, and indirect manufacturing overhead costs shouldn't be expensed when they are paid, but when the product is sold and revenue recognized.

And appears you are doing this correctly, but have not done one step: recording performed direct labour as a liability and offsetting the wages expenses by that (see example below).

In other words:

1. All these costs should become assets at first. (Product cost = direct materials + direct labour + indirect manufacturing overheads)
2. And to balance this, direct labour and indirect manufacturing overheads, that are applied, become liabilities until wages are paid and bills are received and paid.
   
   E.g. one way, all the accounting transactions would look like something in the following lines:
   
   Transactions related to manufacturing in progress:
   Dr Work in Progress (Current asset)
   Cr Materials on hand (Current asset)
   Cr Direct labour (Current liability)
   Cr Applied manufacturing overheads (Current liability)
   
   When manufacturing is finished:
   Dr Finished goods (Current asset)
   Cr Work in Progress (Current asset)
   
   When workers are paid:
   Dr Direct labour (Current liability)
   Cr Bank (Current asset)
   
   (And wages, which are not part of direct labour, are expensed to a wages expense account, thus being offset by the amount of direct labour.)
   
   When bills are received and paid:
   Dr Applied manufacturing overheads (Current liability)
   Cr Accounts payable (Current liability)
   Dr Accounts payable (Current liability)
   Cr Bank (Current asset)
   
   (Applied manufacturing overheads and actual bills might differ, in this case, the difference could be used to offset the expense account again.)
   
   
3. Once the product is sold, revenue recognized, only then this asset is expensed, moved to cost of goods sold.
   
   Dr Cost of goods sold (Expense)
   Cr Finished goods (Current asset)
   Dr Accounts receivable (Current asset)
   Cr Sales (Revenue)

All of this is quite complex in the real world, and when done manually, without any special tools to help, then this might not outweigh the benefits, thus violating the cost-benefit principle.

Instead, for doing this, there are special manufacturing software tools, that can keep track of this automatically. There are several apps in the QuickBooks app store for that. E.g. MRPeasy, which integrates with QBO, and does the product costing and Revenue-COGS recognition automatically.

As Rustler mentioned, QBO does not have a dedicated manufacturing module. In which case I would suggest picking up an app like Katana which will manage your materials and finished goods inventory automatically, alongside your production.

Invoice and bills will be pushed directly to your QBO account.