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Should I list our cost to manufacture our products under cost of goods sold because those costs are materials, labor, etc which will also be listed under expenses

We manufacture and sell a variety of items.  I am just setting up Quick Books and am not sure how to enter information for items that we manufacture ourselves.  For example, we have a product we sell for $10.  It costs us $5.25 to make it. When we are entering that into inventory, should we put $5.25 as the cost of goods sold since that is what it costs us to make it?  Or should i put 0 since we don't actually purchase the finished item and the cost for us to make it is included in our purchase of raw materials and the amount we pay to our workers for labor.  Having our costs will help us do analysis i.e which products are most profitable - but will it double count the expenses if each time we sell a product it lists it as 5.25 expense from the cost of goods sold?

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Best answer 10-19-2018

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Established Community Backer ***

raw materials are inventory by definition if you buy more...

raw materials are inventory by definition if you buy more than you use for that production run and stock the excess

labor is already expensed as payroll expense.  Seems silly to me to move a current expense which lowers taxable income to an asset (inventory) which will only be expensed when sold.

QBO does not do manufacturing, it requires a work around

Create a bank type account called WIP (work in progress)
create a dummy vendor called WIP-purchases

post the cost, either a purchase or inventory adjust, to the wip account
when the item is made and you know the qty produced

Purchase the inventory item from the dummy vendor, Select the WIP dummy bank account as the pay from source,  in item details select the item, enter the actual qty produced that pass QAQC checks and will be available for sale, and enter the full amount in the WIP bank account in the item total block, save

check the WIP account balance it MUST be zero

3 Comments
Established Community Backer ***

raw materials are inventory by definition if you buy more...

raw materials are inventory by definition if you buy more than you use for that production run and stock the excess

labor is already expensed as payroll expense.  Seems silly to me to move a current expense which lowers taxable income to an asset (inventory) which will only be expensed when sold.

QBO does not do manufacturing, it requires a work around

Create a bank type account called WIP (work in progress)
create a dummy vendor called WIP-purchases

post the cost, either a purchase or inventory adjust, to the wip account
when the item is made and you know the qty produced

Purchase the inventory item from the dummy vendor, Select the WIP dummy bank account as the pay from source,  in item details select the item, enter the actual qty produced that pass QAQC checks and will be available for sale, and enter the full amount in the WIP bank account in the item total block, save

check the WIP account balance it MUST be zero

Frequent Contributor *

Re: Should I list our cost to manufacture our products under cost of goods sold because those costs are materials, labor, etc which will also be listed under expenses

As Rustler mentioned QBO is not designed for manufacturing, so if you want to track your product recipes and production costs in more detail then it's best to use an app like Katana.

 

It will automate your material inventory management in real time whilst pushing your invoices and bills directly to your QBO account. Your costs are updated based on your purchasing orders. Basically means you can achieve what you're looking for, which is quickly working out the products that are currently most profitable. 

 

 

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Frequent Contributor *

Re: raw materials are inventory by definition if you buy more...

That idea is a very clever workaround!

 

So in short, 

  1. A bank account type account (Asset) for WIP
  2. Move items to that account, which you will use for manufacturing immediately.
  3. And the "buy" finished goods buy paying from the WIP bank account.

That's an awesome idea :)

 

The only problem is how to correctly calculate the cost at which you purchase the items at. It is easy, if there are no parallel production runs (and even more so, if you do not keep extra stock of materials), then the ending balance on the WIP must become zero.

 

But, if there are safety stock and more production runs in parallel, then this calculation must be done somehow externally, using other tools, or for starters, even Excel:

  1. For every production run, count the materials that will be consumed, and what you paid for that qty. Move that to WIP account.
  2. At the end purchase the finished goods for unit price of total cost of materials/finished units.

And I will also challenge the idea that "Seems silly to me to move a current expense which lowers taxable income to an asset (inventory) which will only be expensed when sold.". The matching principle in accounting does state that expenses should be reported in the same period as revenue (if you make to order, you might get away with expensing the costs immediately, if the products move definitely on the same period). Formally, under GAAP, this is absolutely required. Ie. direct labour is moved to an asset account (counted within the cost of the finished good). Furthermore, in a manufacturing setting, other indirect manufacturing expenses (e.g. maintenance, electricity, supplies, etc.) should be expensed in the same way.

Understandably, this is quite complex done manually, and the costs and benefits absolutely must be considered in small or a micro company. For a serious manufacturing business, that is a must.

All in all, there are special tools to make all this automatically happen, and also available in the QuickBooks App Store, that plug in to your QBO account and help to manage all that in an automated fashion (MRP / manufacturing ERP software, manufacturing inventory,). The central term and historical methodology that solves this is Material Requirements Planning (MRP I, a more basic solution) or even better Manufacturing Resource Planning (MRP II, a more advanced solution).

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