It creates a way for the user to override the availability dates which I don’t quite understand what they are solving.
Joking aside, it separates production planning from actual production runs, which may have different dates from what manager suggests.
This would avoid the entire scenario I described at the beginning of this long thread.
Production Order will fully execute once the cost for all input items is known.
You want it to execute earlier and as I explained, I have a problem with it. It would execute with partial cost. How does it make P&L accurate? It doesn’t. Your profit is still inflated.
But if your argument is that it’s “more accurate”. OK. Agreed. I would have no problem with this implementation but then you have customer returns and this is where it gets a lot more complex beyond what I’m comfortable with.
That’s why I’d rather if people would accept that negative inventory will make your P&L less accurate for management purposes and that’s why you should rely on Cash Flow Statement - Indirect Method to monitor health of the business as some expenses could be still stuck on balance sheet in Production in Progress account due to negative inventory.
This is answered here
In the example I provided the COGS is understated by the entire amounts of raw materials X,Y and Z and there’s no way around that. The entire sale has no cost. The inventory on hand is overstated by the consumption of Y and Z.
If the user forces production, COGS would be understated by item X and so does inventory on hand. Which understandable since the users mistake only involve item X. That makes more sense than involving items Y and Z. Doesn’t it?
A later write-on adjustment to item X only would set straight the entire thing.
I know what you mean. You think it’s unfair to hold the value of Y and Z on balance sheet because of X.
Here is the topic which has introduced production in progress control account.
There is a comment by @Mule1 who proposed that if we are holding back COGS entry, we should also hold back Sales entry (e.g. have something like Sales in Progress). This would allow for both COGS and Sale enter profit & loss statement at the same time.
One thing to keep in mind, @Ealfardan, is that the entire situation you describe is created when someone orders production despite Manager showing you have insufficient quantities of input materials. But the fact you were able to produce the finished item contradicts the record and reveals the mistake. So the presence of a balance in Production in progress is an alert that something needs to be fixed. You don’t actually need a comprehensive stock auditing system in place. The very approach you are arguing against tips you off. Unless parts were left out of the finished item you produced, the solution is staring you in the face.
That’s a good way to handle it if in fact production never took place.
My scenario is a bit different. The production took place as well as the sale, but for some reason, the inventory records were lagging behind and I don’t want to understate sales as well. I could go on forever listing all possible causes for why that might be the reason, but going into details would change this into a blame game where the users or the business will be blamed.
My whole business is built around the notion that everything can be handled by separate set and prescheduled processes.
The way Manager is handling things throws everything I got out the window. Now everything needs to be urgently fixed god knows when and how often or else there’s going to be consequences and that’s not an option for me.
Anyway, I gave this my best, but from now on I guess I have these options:
Keep a custom field to track actual production dates and do my adjustments manually at reporting dates in Journals before any of my clients find out about it for themselves.
Tell my manufacturing clients to do stock takes more regularly, which would tick them off, especially if they found out the late about a production date change because then they’d need to work out the variance in retrospect and factor in the effects of any timing differences. I know this will go around full circle and we will be the ones to reconcile their work eventually.
Convince them to use two software one for managing production and then post the end result to Manager using journals.
I’m off to sleep. Good night guys.
Production took place for management purposes but not for accounting purposes. For accounting purposes, it can execute once the cost of all input items is known.
You want it to execute before the cost of all input items is known and I have a problem with this because we already had this implementation before and it created problems elsewhere.
So, if this is to be improved, it cannot be going back to old problems. It needs to be step forward.
@Lubos you quoted @Mule1 “Sales in Progress” together with “Production Order in Progress” as by @Ealfardan could be that concrete step forward.
I understand the issues better now, although @Tut gave a clear explanation about “trapping” a poor combination of operational and accounting practices where basically stuff gets produced and sold from not yet entered inventory.
I retain the view that many business could perform much better if they would improve their inventory management practices as they relate to costs and sales which is the basis for revenue generation and profit.
Dealing with problems as they arise vs handling things in a set self correcting process are process design choices and not something to be forced onto a business. That’s especially true when the process design you force fails to scale well.
I have read through the thread where you quoted @Mule1 and I found this other post:
And this got me thinking that almost every other software allow this either by default or by enabling a certain setting, not to mention large scale operations oriented ERPs. That’s not because they encourage “poor” control like many here seem to think; it’s because they realize that many times in order to scale up you have to ignore petty problems and subject them to a self correcting process. And that’s a process design liberty to be left to the user to decide.
But I see that Manager chooses to pigeonhole itself into small processes when it comes to production and that’s not a good choice if you ask me.
Why not work on those problems instead of working around them?
@Ealfardan let’s forget about production orders for a moment because this issue is not about production orders. It’s about how negative inventory should be handled in general.
Let’s say you create inventory item with starting quantity zero. And you sell it for $1,000 to customer. So now your inventory quantity becomes minus one. Inventory - sales account says $1,000. What amount would you like to see in Inventory - cost account on P&L?
Ok. With regards to treatment of negative quantities I’m agnostic. I know I gave an example of negative cost value but I have no problem with setting the value to Zero – in fact, that’s even better.
But the example you’ve given is kind of tricky. Of course the cost in this case would be Zero, that is assuming no cost have been assigned. But that’s not the case, I already assigned a cost to it but the entire cost have been held back by the system.
Why not look at this differently? What about the raw materials?
OK, let’s try another example. You have 5 qty in inventory at cost of $1 per unit = $5.
But you sell customer 20 qty (15 more than in stock) at sale price $10 per unit = $200.
Inventory - sales will show $200. What amount do you think is correct to show under Inventory - cost in this example? (currently Manager would show $5)
To your example, @lubos, you must also add that when you next acquire more stock, the Inventory - cost account will automatically increase according to the new cost of goods. It is not as though the pending post to Inventory - cost is forgotten.
I agree to that. $5 is a good cost estimate given the circumstances.
But it is not an estimate, @Ealfardan. It is the actual cost of the goods sold for which costs are known. The rest remains pending until you acquire more inventory and costs are known. At the moment the items are sold, you have not yet purchased (or produced) the 15 units that were not in stock, so no cost can be attributed to them.
But I agree to it, so no problems right there.
Yes, but you seem to be agreeing to it on the assumption it is an estimate.
Can’t it be said that it’s wrong to prepare a profit and loss report with negative amounts in stock?
Personally, I check the inventory amounts so they’re always positive before reporting.
That’s just semantics, I struck the word estimate.
Yes, I agree. This wasn’t what the OP was about but somehow this is where we ended. Apparently @lubos has a point to make here but we’ll just have to be a bit patient.
Just to summarize this long long thread: I don’t object to Manager correcting COS to avoid negative quantities, I am objecting of the methods chosen to reach that end. There are some side effects to that.
Just for the sake of argument, I took the risk of giving an example on how negative quantities would be less troublesome than changing production order dates. But that seems to have backfired. 
The issue is
what information can be used to generate the most accurate measure of current position.
information is entered at multiple stages, and some stages are more accurately maintained than others.
when there is conflicting data entered what is the best way to limit the effects of the conflicting data. For example if inputs to an item are not included, then adding profit from sales perhaps is questionable as that is effectively using a value of zero for supplies. Using a better estimates or not including any of that items cost / profit would be more accurate.
conversely any other system needs to be reasonable easily codeable and u understandable by users.