Depreciation Expenses in Production orders

Please how do I charge depreciation expenses to manufactured items in production orders? Depreciation of machines is a major component of the manufacturing cost. In fact I subscribed to Manager partly because of the flexibility of charging different nonproduction costs in production orders. But I realize that the depreciation expenses account created by the fixed assets module is not available for selection in production orders and journal entries. So how can I allocate depreciation expenses to the cost of manufacturing items while still using the fixed assets module

2 Likes

You don’t. Cost of goods is recognized as an expense that reduces income from goods sold. When the costs are recognized, they are a current expense. They may be temporarily “stored” in the value of inventory held as an asset until the inventory is sold, but when it is sold, both the income and offsetting cost of goods are current items and post to the profit and loss statement.

Depreciation is a method for recovering the cost of capital property over time periods longer than an accounting cycle, generally years. Only current period depreciation is a current expense, and this expense will be recognized whether or not the manufactured items are ever sold. So you would not want to include depreciation in cost of goods, or you might never recover it.

The cost of items in inventory should reflect all expenses incurred in bringing the items to it’s current location and condition. If a manufacturing setup, this must include an appropriate portion of production overheads and currently year depreciation expense is a major component of production. Even though long term profit will be the same, cost per unit of inventory item would be understated if you fail to capture depreciation of machinery as part of product cost. I suggest it would be good to allow this for proper product costing. In theory cost per unit should include a portion of production overheads.

@bayeboafo - for expenses which have control accounts (restricted access) you need to re-create a separate recovery account - another P&L example is the Wages & Salaries account.- see below

For Depreciation, you would do your normal Fixed Asset - Depreciation entries as if there was no Production.
Then to recover / transfer some of that expense from the P&L Depreciation account to the manufactured items create a “Production Depreciation - Recovered” account and use that in the Production Orders.

That’s what i have been doing. But that means the recovery account will always have a negative balance and has no link to the depreciation expense account generated from the fixed asset module. Currently you can’t select the depreciation expense as part of nonproduction cost in production orders. I think It would be better if we could in future charge it directly like we do for other expenses like electricity, wages etc, in production orders.

Yes it can do, by using the COA coding and having them list together - in the example above note the 10 & 11, this enables the wages recover account to sit directly under the wages account itself. Furthermore you can design your COA to show a nett depreciation position.

If this is the case then you aren’t using the control account Wages & Salaries for production / manufacturing wages, which is ok.

In addition, it would better not to nett them off into the one account as then your year end Depreciation Schedule will directly reconcile with your P&L FA Depreciation account which would also greatly assist with the preparation of the tax return.

That is intuitive. Thanks a lot for your time.