I’m familiar with how production orders work for creating inventory items from raw materials. However, I would like to approximately calculate the cost of each production, by mainly including my electricity and wages.
I have an expense account called “Electricity” and “Salaries”.
Is it possible (and correct) to include “Electricity” and “Salaries” as a “Add non-inventory cost into production”?
This worked for giving me a cost for the production of each item, however:
The problems I saw was:
In my expenses summary, the electricity from the production order showed as a credit (as if I was generating electricity).
Is there any way to included the approximate electricity cost of a production, to give me a cost of the product, without affecting or duplicating the Electricity Expense account?
What you’ve done is the correct thing. Subsequent payments to the supplier (billing from the supplier) will result in debits to the expense account, effectively offsetting the credit previously recorded when you assigned electricity costs to production through the production order.
So, if you paid a total of $200 to the electricity supplier and had a $150 credit in the electricity expense account from production, the remaining balance in the account would be $50, which is considered a non-production cost. This implies that $150 has been allocated or absorbed by production from the total $200 payment, making it a direct expense in the production of the inventory item. When you eventually sell the inventory, the cost of the inventory, now including the absorbed electricity expenses, will be reflected in the Profit and Loss statement under ‘Inventory Cost’.
I faced the same problem.
My solution was to create a sub group of accounts called Applied Overhead.
And upon using production orders, instead of choosing the salaries, I chose applied labor expense.
Instead of choosing the main account of electricity, You can create applied electricity.
And after you sell all the produced quantity on hand, you can simply close the applied amounts into cost of good sold (Inventory - Cost)
@AhmedAtia, all that seems unnecessary. Once the non-inventory costs are added to a production order, they are instantly captured in Inventory on hand, in the subsidiary ledger for the finished inventory item produced under the production order. They are also transferred automatically to Inventory - cost when the finished item is sold. So you are just shuffling numbers from pocket to pocket in addition to the shuffling Manager is already doing for you. I would not recommend this approach.
I understand what you are saying.
But for the non-inventory costs to be recorded as negative amounts on the income statement, it is not a good approach for me.
For Example, I paid actual direct labour of 100 USD.
If I used the non-inventory costs of the production orders and recorded it on the same account, it would reflect by a minus amount in the salaries account of the income statment.
Yes. It will be added to inventory on hand, then once it is sold, it would transfer to the Inventory-cost. But still the salaries account on the income statement won’t be correct.
To avoid that, I created the steps mentioned above.
Which is also applied in Microsoft Dynamics Nav.
And Oracle.
And Onyx.
They create a control account to such non-inventory expenses. Then it is closed on the COGS.
They do not record directly on the salaries or other actual expenses.
This is confusing, Over Head (OH) charges should not be part of COGs. The approach outlined by @Tut is correct if labour and similar expenses become part of a production order. The item includes the value of all composing elements and is an Asset, at the same time it therefore reflects as a negative expense in P&L until the inventory item produced by the production order is sold. Then all will be settled as expected as well.
COGS = Direct Materials + Direct Labour + Overhead.
What Tut said was right concerning the moving of expenses from Inventory on Hand to COGS.
Still, I explained above why this approach is not suitable for a production module work.
And how other accounting programs are dealing with it.
This is simply wrong. Overhead is not part of Cost of Goods Sold. Overhead is often referred to as “Fixed Costs" OR as "Indirect Expenses + Indirect Materials + Indirect Labour” i.e., expenses that are not or cannot be included in the Cost of Goods. Another way to think about Overhead is to regard it as all operational costs that cannot or are not able to be billed to a job.
Over Head costs/expenses are necessary incurrences for a business to continue operating, these sorts of costs are not directly associated with the generation of revenue. COGS on the other hand are directly associated with the generation of revenue.
The Salaries account will be correct and anyone who doesn’t understand can go and check the history of transactions in the account. Salary account in the income statement is not sufficient for analysis. You must go to payroll reports where you can find earnings and deductions and contributions intact regardless of absorption or journal entries passed on the wages account.
Yes it will. Furthermore, your approach results in a temporarily incorrect income statement, because it shows an expense of the business that has already been turned into an asset and belongs on the balance sheet.
Saying it another way, applying your own labor costs to a production order is like buying the item from a supplier who includes their costs in the price. You would not post that cost to your salaries account. It is included in your cost of inventory. The same is true when you produce the item yourself.
Usage of production orders is important for calculating customer profits margins.
That’s why I have something called daily production output vouchers.
I receive it from the production Hall.
I use it to know how many workers for each item and for how many hours.
The advantage with Manager is that I can apply such costs.
Check the usage of applied overhead procedures and you’d understand my approach.
I understand your approach. My purpose is to explain how Manager works and why, therefore, you are doing unnecessary work that builds errors into your financial statements. Only after the last item produced this way is sold and all your closeout transactions are entered will your books be correct. Why endure that?
You better do yourself. If anything please provide evidence of you claim that OH is part of COGs. As far as I am aware it is exactly the opposite. Maybey you confuse Net Profit with Cogs? Anyway I am tired of this discussion so wish you well.
