Non Inventroy Cost Laibility

Hi,

We are a Clothing manufacturing company, trying to implement Manager,

I found one issue regarding If we add non inventory cost in Production run, as it effect Inventory costing and expense account

Debit Inventory
Credit Expense

If it is possible to affect liability rather than Expense account directly, otherwise we have to transfer that cost to liability by Journal entries.

For example Stiching cost, we pay our tailor per piece wise but we pay them monthly.

This is a great question, because it brings up several accounting issues at once.

First, the matching principle requires that the expense of stitching be recognized during the period when the finished inventory item is produced. In other words, when the article of clothing is manufactured (via a production order), the stitching cost must be included, because the full production cost of the item will be debited to Inventory on hand and incorporated into average cost of the inventory item.

Second, the definition of double-entry accounting requires the debit to Inventory on hand to be offset by a corresponding credit somewhere. In Manager, production order credits can only be posted to expense accounts, where they end up as contra entries. The reasoning behind that limitation is that non-inventory production costs transfer expenses that would otherwise be reported as expenses (and be debits in the larger scheme of things) to the Inventory on hand asset account. A simple example would be consumable supplies. You purchase needles for sewing machines and post their purchase to an expense account, Sewing supplies. On a production order, you enter a non-inventory cost with your estimate of the value of needles likely to be used up for the order. The resulting credit to Sewing supplies reduces the balance of that account and includes what was originally a debit there in the debit going to Inventory on hand. Labor is more complex, but the concept is the same. You would owe your tailor for the piecework even if you did not enter the production order. So a payslip would debit some expense account for the work, let’s call it Stitching expenses, while crediting Employee clearing account.

Third, as implied by the previous paragraph, paying the tailor is a separate transaction from stitching the clothing. Your liability for that is created by the payslip. And your actual payment is recorded by a payment at the end of the month. On the payslip, you would assign the stitching piecework to a payslip earnings item. When you set up that payslip item, you would designate it as posting to the expense account, Stiching expenses, mentioned above.

Now, from an accounting standpoint, it would also be correct to post the non-inventory cost on the production order to a liability account. After all, the contra entry to an expense account is the equivalent of a credit to a liability account. But that is unnecessary. By posting both the non-inventory cost on the production order and the piecework payslip earnings item to the same expense account, you avoid any need for a journal entry. You should be recording a payslip covering the stitching piecework during the same accounting period as the production order, so both position and performance will be properly reflected at the end of the period. (In fact, if you entered a payslip on the day the stitching was done, everything would be up to date at the end of the day, regardless of when your accounting period closed.)

The only reason you might want a separate liability account for the stitching piecework would be if you were not going to issue a payslip to the tailor until a future accounting period. In that case, the credit to the Stitching expense account would be artificially reducing your real expenses. But doing that would violate the matching principle by itself, as the debit from the tailor’s labor would be delayed from the accounting period during which it was incurred. And that would artificially increase your net income, not a good result either.

As a final note, I admit there are some circumstances where posting non-inventory production costs to a liability account might be appropriate without violating any accounting principles. But I have a hard time thinking what they might be. And production of clothing does not seem to be one, because all operations are going to be completed in short time frames.

We have a team of around 15 tailor on our payroll to whom we are paying monthly of the work done, but we sell in current month.

If we make payslips of 15 employees every day this is hectic work, but we want to know the product average cost to sell in a profit.

If we make payslip monthly it will be difficult to track actual profit and loss, as in the mid of the month this will effect my profitability, and my motive of using this software will not achieve.

Also keep in mind that we are increasing day by day so may be next month we will have 15 more tailor.

I did not mean to suggest you must do this. I only meant that, if you did, your position and performance would be up to date every day instead of only at the end of the month. What you are currently doing only gives you a completely accurate picture at the end of the month. If that is adequate for your needs, keep doing it. Most businesses’ financial statements are only 100% accurate at the end of accounting periods.

This statement is true, but contradicts what you said above. Manager’s current methodology accurately reflects your inventory position. But, if you do not enter payslips until the end of the month, your complete profitability will not be accurate, because both the expenses and liabilities associated with stitching piecework will not be included at mid-month. And that will be true whether you account for stitching piecework as a contra expense or a liability. You cannot have it both ways.

Decide how frequently your financial statements need to be complete and accurate. Then enter all transactions before the accounting periods close.

Thanks Alot Tut.

I will continue doing Journal Entries every day.

but if this can add, this will be good for us, but you guys know it better how to make manager usable for all.

Thank Again

Of course, you can do as you wish. But I do not see where a journal entry accomplishes anything, except to possibly distort your records. Can you provide an example? What journal entry would you make?

This will make stiching cost ledger “0”

Production order will do,

Inventory Debit
Stiching Cost Credit

All this journal entry does is substitute for a payslip. Assuming the payslip earnings item for stitching was set up to post to Stitching cost, the payslip would have debited Stitching cost and credited Employee clearing account for Tailor. If you are making these journal entries daily, you might as well enter payslips instead and keep everything within the payroll/employees tabs. You would be able to access more complete reports that way, too.

@Mubeen_Hussain1 - there maybe an alternate process which doesn’t require daily Journal.
But first can you advise is the stitching cost the same per piece, or do you have different stitching cost depending on the type of piece.

With this information I could model you an alternate solution to doing the daily Journal.

It depends on the type of product they are stitching for Eg Dress shirt is 400 per Shirt, For Suits it is 2500.

Okay @Mubeen_Hussain1, this “process” requires the creation of a bank of stitch inventory items which are drawn down via the production orders and re-stocked by the payment to the stitchers.

First, let us make this assumption, you manufacture on average 12 shirts and 6 suits per month.
So as not to have negative inventory items, we will create a bank of 20 shirt and 10 suit stitches.
The Journal is:

The Balance Sheet is:
0000000%20Bug%201a

The Inventory Items are:

Now as each piece is manufactured you create the Production Order and select the stitching inventory item instead of the current “non inventory” cost. As you are no longer creating the negative expense, therefore you don’t need the daily journal.

At the end of the month you have several options to re-stock the Inventory items.

  1. You create one Journal to take up the stitchers month’s work. This would be an accumulation of all the previous daily Journals. Debit Inventory Item - Credit Employee Clearing.
  2. If you are paying them at this time (end of month), then a New Payment, with the account allocation being the Inventory Items or Employee Clearing if you have created the Journal.
  3. If they are contractors rather then employees, then enter either a Purchase Invoice or a New Payment with the account allocation being the Inventory Items.

If they are employees and you have other obligations, (taxes), then the month end Journal plus a payslip.

If your production increases, causing possible negative inventory then you need to increase the bank of inventory items…

At year end, you could either ignore the Inventory Item bank Journal, or reverse it on the last day and then create a new one on the first day of the new year.

The Unpaid Invoice account is in effect your requested liability account, but in bulk instead of individual units as manufactured.

This is the most different and hard alternative even for me Brucanna, may be the user of this software will not qualified accountant.

Thanks alot.

If we can select liability account in production order it will be much more simple.

or other wise daily JE is a good option.

A post was split to a new topic: Inventory features

Also with asset,

There are some inventory with low price for example buttons, it is very high in units but less in amount.
We were thinking to classify it as an Current asset and transfer amount to inventory with production Order as we know price of using button at the time of production.

Some things are hard to justify treating as inventory items. You do not sell them. You probably do not individually count them. Instead, they can be treated as consumable supplies. Buttons might be like that. Another example I often cite is nails for a carpenter. Items like this can simply be recorded as expenses when purchased. Allowance for their cost can be added to production orders as non-inventory costs.

You would not consider such consumable supplies as assets, because they will not produce identifiable revenue on their own. They are just things that are used up during production.

5 posts were split to a new topic: Understanding costs for auto repairs

Many thanks Tut.
It is done.

However, I noticed that in the chart of account, I could not merged billable expense (invoice) and billable time (invoice) to any other line item in the chart already.
Example:
The miscellaneous income already created in the chart of account, I would have love to see the transportation ( billable expense - invoice) and the hotel bill or overtime (billable time - invoice), use the same miscellaneous income.
is this possible?