General accounting question - CGOS and wages

My apologies if this forum isn’t the right place for this question, but I know there are some bright cookies here who might be able to help.

I manufacture goods which require a two step process before they are sold. I sell herbal medicine in capsule form, purchasing and processing the fresh herbs before they are put into capsules, then into bottles, and then sold. This means that labor costs are a major part of my overall COGS. At the beginning of 2016, I opened up a new Manager account, and included estimated costs of labor in all of my processed materials to better reflect costs. My question is this: the cost of labor is included in Expenses: Inventory-sold because I’ve set the value in opening balances to include how many person hours and how much it costs my company at each step of the process. However, I also pay wages at the end of the month. This means that my P/L statement shows far less profit, as labor is essentially being counted twice, even though my retained earnings look normal. Is this the correct way to do it? Are there any other Manger users that do it this way? Or do I need to revert to my old way of keeping material costs completely separate from labor costs in Manager?
Thanks to anyone who has suggestions/corrections to my method of accounting.

Kind regards,

I think the simple answer is “revert to my old way of keeping material costs completely separate from labour costs in Manager”, because you are doubling up. Also the labour you included in your processed materials is an estimate and not an actual. Unlike materials which can be reviewed by stocktakes etc so the COGS can be adjusted for variations, labour can’t be reviewed and adjusted in the same way.

The alternative (somewhat more complex) would be to run a Work in Progress system where actual costs of production (raw materials and labour) are posted to a Work in Progress account and when the products are completed they are transferred from Work in Progress to Inventory based on your costings as above. This way the Work in Progress account should be zero at the completion of production, if not you can review cost over/under runs. Also production labour costs wouldn’t be duplicated as they aren’t posted to the P&L.

Your retained earning would look normal as it is only adjusted once a year - your current earning as you point out would be understated

Try this method: -

  1. Create stock items for the herbs, bottles (Everything you use to manufacture this capsule)
  2. Create a stock item for Labour
  3. Purchase your Inventory Items on Supplier Invoices.
  4. Create a production order for the for the Final Product (Capsule) using these Inventory Items.
  5. Give the Final Product (Capsule) a name
  6. Create a Sales and a COGS account for the Capsule (Sales – Capsule Name) and COGS – Capsule Name
  7. The stock will be deducted from the Inventory with the cost
  8. When you Invoice, Invoice the Capsule on the Sales – Capsule account. Labour will automatically be included in the invoice.
  9. Do an Inventory Write Off to the COGS – Capsule Account (The Developers are busy with a module to correct this. This is only a work Around)

This works for me.
Hope this works for you.

When you pay wages, they will increase your operating expenses.

The question is, how to include wages in the cost of inventory items so they are added to cost of goods sold only after you sell these inventory items.

This issue is that when you create a production order, it only allows you to select other inventory items. You can’t select an expense account. I’m planning to improve production orders so expense account will be selectable. This way production orders will be able to account for labour costs and other variable costs.

The labour costs I am referring to is actually a labour charge just like a mechanic is charging with a car. This does not mean necessarily the actual wages, but it could be.

What I did was, I set up an Inventory Item for Labour Costs with only a selling price, because it is not an actual item to be purchased and therefore it can be included in the Production order without the cost being reflecting x2

The only problem I am sitting with until you have completed the Custom Control Accounts is that these items because the are not actual stock are reflecting negative amounts.

Never create non-inventory item as an inventory item. Not sure what you are trying to achieve but it will not do what you expect it to do.

Thank you for the advice, but how else is a motor mechanic or any other tradesman going to charge for his labour.

How is a Computer Dealer who is purchasing loose items and sell full assembled computers going to charge for his Items?

How is a Bakery going to charge for bread or meat pies?

I am trying to achieve as per your words the following Bill of Material costing and Invoicing: -

I use various Inventory Items to make up the Item or service I am selling.

Item 1 Cost 1.00 sell for 1.71. I use 2 of these Items on the Final Product.
Item 2 cost 1.50 sell for 2.56. I use 1 of these items on the Final Product.
Total cost = 5.98

I have to invoice 75.00 for this product, because there is a lot of hidden cost which can not be charged.
The difference between the 75.00 and the 5.98 is a Labour Charge, which is not a physical Inventory Item.

What is my solution?

I create the following Inventory Items.
Item 1 Cost 1.00 Sell 1.71
Item 2 Cost 1.50 Sell 2.56
Labour Cost 0.00 Sell 69.02

I do a Production order of the Final Product including all these Items above at the price of 75.00

As soon as I create this Production Order the Inventory Items are being deducted from the Stock.

I invoice the Final product at 75.00.

The Labour above does not affect the wages being paid and is not reflected double, because there is no cost to it.

Although not Ideal, but this works perfectly well as you can see from my example above and it is also perfectly acceptable and legal in any accounting principle.

The only problem here is that the non-inventory items will have a negative quantity, but this can also be recovered by a journal entry with the proper explanation.

@Kobus I own a workshop and in my chart of accounts, i have set up an income account called Labour. I have also created a Sales Invoice Item and linked it to the Labour account.

Thank you for your welcome input.

Most probably you want your labour to be shown separate. I do not want my labour to be shown separate on the Income or on the Invoice.

The Labour is actually part of the Bill of Materials together with the Inventory Items Used.

I Invoice the complete Final Product.

No problem.
I use production order for set services which I can add all inventory items then add the labour on top as an extra line. Has worked perfectly.
I can see your point wanting everything on one production order.

@Kobus if I read your explanation correctly, are you making your inventory cost the same as your selling price - why. Can’t you enter a selling price independent of the inventory cost?

A lot of businesses don’t try to micro manage via detailed inventory systems. Many business who don’t carry a large value in stock would expense all COGS purchases and then do annual stocktakes if warranted.

The purchase price and sale price on inventory items is for autocomplete purposes only. It is not used in CoGS calculations. CoGS calculations are based on how much you actually bought inventory items for.

Adding “Labour” inventory item to production order does nothing. Since “Labour” is never purchased, it always carries zero value on hand. Using such an item on production order does nothing because no value is added to the final product.

Try to remove “Labour” from your production order, you will see, none of your figures will change.

Therefore having “Labour” as an inventory item is pointless. There is absolutely no benefit.

No, Only the labour Cost has only a selling price and not a purchase price as can be seen here: -

Thank you I did not know that. I will try it and see if it works.

The only thing then left to solve my Bill Of Material Problem is the Writing off of the Inventory in order to display it under Direct Costs, and this could probably be solved with Item 1 on the Roadmap.

@Kobus, do you want to show different inventory items affect different CoGS accounts? If yes, then you are correct - #1 item on roadmap will allow for that.

That is correct, but I will send you some Screen Shots

If you can remember, I had a problem with the bill of materials and reflecting it under Direct Expenses in order to show the GP.

A. Bill Of materials
I am manufacturing a final product made out of several Inventory items.

The final product did not show in the COGS and I had to do a work around to do this. Refer to this discussion

I have downloaded the latest version.
I see that the #1 on the roadmap is taken off.

Am I doing something wrong?

I can not see the difference in my software.

Can you please assist?

The order has been rearranged - #1 has gone to #3

Thanx. Was this not important anymore?