Added "Insufficent Qty" concept to production orders

Production orders and negative inventory has been always problematic. I’ve introduced production stages to address some issues but one issue remained unresolved. The latest version (20.7.45) is addressing this.

Consider the following example:

Let’s start with two inventory items

  • Leather (starting qty zero)
  • Handbag (starting qty zero)
  1. Customer buys a handbag on 24/06/2020 which is made to order for $100. We record the sale on the day.
  2. Before we can deliver handbag to customer, we need to produce it and we need leather. We do not have leather in stock so we order it from our leather supplier. Our leather supplier will deliver required leather the next day on 25/06/2020 but they will invoice us at the end of the month.
  3. Since we already have leather on hand, we can create production order on 25/06/2020 to take 5 units of leather to produce one unit of handbag. image
  4. Finally, on 30/06/2020 our leather supplier gives as purchase invoice for $20 to purchase 5 units of leather.

This sequence of transactions will end up showing $20 value on hand even though quantity on hand is zero.

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This is because when production order has been created on 25/06/2020, it created 1 qty of handbag with the cost of $0 because the cost of leather has become known only at the end of the month by entering purchase invoice from leather supplier. This sequence also messes up inventory profit margin report because no cost is being allocated to the sale (as the cost of the leather got known a week later after the sale) and profit margin for this sale would incorrectly show 100%.

Obviously this is silly example. Real world entries are not as straightforward but the issue is the same.

To solve this problem I realized production orders must not produce output items until all input items are fully costed. For example, if your production order has 5 input items and if even one is of insufficent quantity, output item won’t be added to inventory until there is sufficent quantity of all input items. This means once output item is finally produced, the full cost is known and subsequent sales of this item will correctly deduct the cost.

So here is how the latest version is solving this issue with leather and handbag.

When production order is entered on 25/06/2020, leather is hasn’t been purchased yet. Manager will show status for Production Order to be Insufficent qty.

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Insufficent qty means you have on production order one or more input items which do not have required qty in inventory. In this case, we have insufficent qty because we are using 5 units of leather which we don’t own yet. We will own these 5 units of leather once purchase invoice from leather supplier is entered on 30/06/2020. Once leather is purchased, production order status will automatically switch from Insufficent Qty to Complete.

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Status being Complete means output inventory item is added to inventory on the date production order has been fulfilled. Not on the date production order has been created. This is important because on the date production order has been created (25/06/2020), the cost of leather was not known yet. It became known on 30/06/2020. So output item Handbag is added to inventory on 30/06/2020 with its full cost.

Because there was pending sale entered on 24/06/2020 to remove one handbag, the handbag gets finally removed from inventory on 30/06/2020 as well at the full cost. As a consequence, inventory profit margin end up being correct too.

Now, the example above was trivial because entered production order required 5 units of leather and all 5 were not in inventory.

What happens when production order requires 5 units of leather and we have 2 units of leather in inventory?

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After production order is created. Inventory items screen will end up like this:

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Qty on hand is reduced by 5 and total cost changes from $8.00 to $0.00. In previous versions of Manager would instantly move $8.00 to Handbag total cost but since production order won’t produce handbag until there is sufficent quantity of all input items, there is new control account which now hold accumulated costs for production orders with insufficent quantity.

The account is called Production in progress

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In this control account, the cost of output items is being accumulated and the cost is transferred to Inventory on hand only after production order has collected sufficent quantity for all input items. If you have no production orders with insufficent quantity, the balance of Production in progress will be always 0.00.

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@lubos, thank you for your effort, but I have noticed something.
Let’s suppose we sell an item to a customer, invoice and delivery note issued.
After a while the customer change his mind and return the item, so we issue and credit invoice and a delivery not with negative quantity of the item, in order the item to come back to our inventory. After that we use this item in a Production Order and we face the problem of insufficient quantity, although the iniatial item is in the inventory. Please check it

Another thing that I have noticed is that if you have an item in your starting balance with lets say quantity 1 and value 0, then you face the same problem of “insufficient quantity”, if you use it to a production order

What do you mean by this? Why do you create production order for item which customer has returned? Don’t understand.

You are right. The latest version (20.7.47) is fixing this issue.

The customer may return an item he has bought from use for any reason, it doesn’t matter. He has the right to do so. In this case we issue a credit note and a delivery note, in order the returned item to shown in our warehouse. in this case if you use this returned item in a production order, after of course the return, then you face this problem again of “insufficient quantity”.

Dear @lubos

Can add this feature in software for quantity zero warning while invoicing.?

thanks

Hi Lubos,

The software is getting better and better. Introduced it to a few more business clients. :slight_smile:

Updated the software and understood your example as well.

What about the finished goods. Do they also have the same flow?

For example, I have an invoice #1 from a customer for 500 units. The customer takes 100 units every 10 days due to storage issues from the govt. Accordingly I make the units fresh on the 8th day upon receiving his confirmation that the driver will be coming on the 10th day. So in total there are 5 deliveries/pickups that are to happen.

After the 3rd delivery the customer places a new order (invoice #2) for another 500 units under the same principal. I have all the raw materials for it, its just that I have not produced it. So now I have 700 units to produce.

Will the inventory margin report, take the COGS for the balance 200 units and allocate it to invoice # 1 after the next deliveries respectively or will it be shown as an aggregate in invoice #2?

@pandhm why do you use returned item in production order? What is the purpose of it? Can you demonstrate with a screenshot?

@Justin inventory costing and profit margin report is not concerned about your delivery notes. It doesn’t matter whether customer picks it up in 5 different segments or just once. The cost of sales will be the same. So if you issue sales invoice for 500 units and you have 500 units on hand, all 500 units will be allocated to the sales invoice regardless when and how they are going to be delivered. The next sales invoice for 500 more units will have zero cost of goods sold until you manufacture new units. I suggest create test file and play with various scenarios to see how Manager will deal with them. If you simulate a scenario where you think Manager did the wrong thing, we can discuss it further.

@lubos, lets suppose that we sell a RAM to a customer, we issu the invoice and the delivery note. After one day, the customer realise that the RAM, wasn’t right, or he don’t need it anymore and he request a return. Because he is a good customer we cannot ignore him, so we issue a credit note and a delivery note with negative quantity and return the ram to our warehouse. If we try to use this ram in a production order then we have the problem I mention.

Well, normally you request a supplier to offer a purchase price for product x and you receive a quote from the supplier with a validity date of x days, weeks or months. If the price is OK you then place the order for x units. At this moment you enter the x ordered units at the offered price into the system, together with the expected delivery date.

Upon reception the units stated on the (in most cases unvalued) Delivery Note (or Goods receipts note as it’s called in Manager) is compared with the actually received units and those are entered into the system by the reception employee. At that moment of delivery the units can be used in a production order.

Items are not entered into the system when you order them (via a purchase order). Purchase orders have no impact in Manager. Items are entered into inventory when you purchase them (via purchase invoice or payment) and—if you are using them—when received via goods receipt.

Hi Lubos,

Experimented with a test business as you suggested. I found a scenario as below with the same example.

I have an invoice #1 from a customer for 500 units. The customer takes 100 units every 10 days due to storage issues from the govt. Accordingly I make the units fresh on the 8th day upon receiving his confirmation that the driver will be coming on the 10th day. So in total there are 5 deliveries/pickups that are to happen.

After the 3rd delivery the customer places a new order (invoice #2) for another 500 units under the same principal. I have all the raw materials for it, its just that I have not produced it. So now I have 700 units to produce.

Now I receive a new order (#3) from a different customer, for a qty of 100 to be delivered the next day. I produce that and deliver the same. When I check the inventory margin report, this new production is added to invoice 1 as there was still a certain amount of units pending to be made and delivered, with the new invoice (#3) showing as sale with no COGS attached as yet.

Is this the right approach currently? I understand when the order is fulfilled completely i.e, I produce the entire amount required, this will get adjusted, but what happens if raw material prices fluctuates. Then in principal we dont get the right margin for the invoice right?

Why do you refer to units when we were talking about the price?

@Mark, I did not mention “units” anywhere in this thread. You did. I only quoted your post.

But why should I not mention units? The topic is about insufficient quantities (or units) and how production orders handle them.

@lubos My thoughts on this development would be on the side of sales, be it cash or credit. The representation of sold units in the P&L would inflate the gross profit as a result of the cogs being zero. This would reflect a false gross profit in the shot run. You could introduce a control account for sales and maybe name it sales in progress. The sale only to be completed when the production order is complete. Meanwhile the invoice would been issued to client.

No, we were talking about the (purchase) price. Read lubos’ remark and my comment on it again.

I’ve tried to reproduce this issue in my test business and can’t reproduce it. The production order picks up the RAM returned by customer just fine. Do you have a test business where you can reproduce it?

As @Tut has said, for inventory costing calculations, this is irrelevant. You can enter quote or order into Manager but Manager cannot consider it because otherwise it would be manufacturing value out of thin air. You need to actually purchase item which will debit inventory item and credit some other account (usually accounts payable or cash at bank). This is how value of inventory item is introduced into double-entry accounting system. Not through orders or quotes.

This is exactly how it’s meant to work. For inventory cost calculations, when items are delivered is irrelevant. Only sales matter. If you sell 500 units which you need to manufacture, the first 500 units that you manufacture will be allocated to invoice 1. Manager doesn’t track for which invoice you are manufacturing items (this is to keep it simple), there are invoices which are waiting to snap these sold items from inventory as soon as their items are manufactured and it’s first-in, first-out. It means invoice 1 will get all manufactured items before invoice 2 can claim any etc. It doesn’t matter that items from invoice 1 will get delivered over the span of multiple weeks.

This is correct. However if you have 2 types of customers:

  • Customers who make one big purchase with production & deliveries spanned over many weeks or months
  • Customers who make small purchases and expect production & deliveries asap

Then you can have two classes of output inventory items. Instead of having one output inventory item, have two and pretend customer A is buying different inventory item than customer B (even if they buy the same thing). This way invoices of these customers won’t compete for the same inventory item. This will make inventory profit margin report per invoice more accurate in case of raw materials fluctuation.

Hmm, it’s an interesting idea but I’d need to look at how accounting standards view delayed cost of goods sold due to negative inventory.

@Mark, this exchange is a distraction. In my post #10, I corrected your statement about orders entering inventory items. Then you asked why I referred to units. But I had not, and I pointed out that I was only quoting you. Now you are claiming you did not mention units, when you clearly did, in post #9. So I have no idea where you are going with this.

Meanwhile, in post #16, @lubos confirmed what I wrote in post #10. Can we please drop this? It has nothing to do with how Manager processes insufficient quantities for production orders.

ok its all great work and good update but i still need the old way i need the product order go to inventory even if all product items not on hand yet any way can i do that ?>\

@RAGABCO_OFFERS then delete from production order line items which are of insufficent quantity. There is no other way around it.

all my items contain items with insufficent quantity since i started using program 2019 i have to edit many items any way i can back to older version ?