My take on this long discussion is that if you produce an inventory item with physical stock from inventory, you should always ensure that your accounting entries are up to date.
The physical stock status is primordial - either the inputs are available or not.
If they are, then you should ensure your accounting records show this - anything else is just a recipe for errors and misunderstandings or worse
Please @Joe91 
, try putting yourself in my shoes, I’ve been telling people that that’s not always achievable and it’s becoming really annoying at this point.
One of my clients closes warehouses one week at year ends to achieve 50% physical verification proposed by auditors and even that is not a 100% accurate because some items can be dispatched for emergencies during the stock take.
Another case is one of my clients produces high impact machinery. They use locking washers. These come as loose bulk and the supplier doesn’t know the exact quantity they send out so how on earth would we. Also, it’s surprisingly easy to find out that one bag of washers was mistaken for another, they’re small, loose and have no labels. So you think you don’t have any but then it turns out you do.
What you propose is for me to count a bag of 5,000 loose washers everytime Manager refuses a production date. That’s of course if I ever find out that it’s been changed.
Guys, please try to understand other people’s problems before dismissing it based on an assumption of how things are supposed to work ideally. Real life is more complicated than ideals.
Sorry for being preachy but explaining myself again and again is starting to take its toll. 
In a previous life I worked in a production environment so I understand the problems you state. I worked in environments where piece counting was possible and others where it wasn’t practical eg sugar refining where bulk sugar inputs could only be estimated
Obviously the stock of immaterial items like washers don’t really matter but the stock of material inputs do.
Trying to ignore this is not going to get anyone anywhere. Accurate recording of materials received and issued is part of management’s job. If it is not possible, then other methods must be used to keep track of stock.
Other methods like inaccurate recording of production?
Somewhere I gave an example on missed purchase invoice. But that was just one of the examples I’ve used. It was perfect for showing how this behavior ties in processes that should otherwise be separate. That example also shows that it should have been a self correcting process.
Recording an invoice in a later period is a mistake that will happen at some point, and when it does it’s not always possible to go back record it in the previous period for all sorts of reasons especially if it was a trivial amount.
This trivial amount can cause a large production order to be missed by Manager with much larger adverse effects on the Profit & Loss statements than that of the original user error.
This exponential growth of error should never happen in a well behaved process, or anything else for that matter:
A small error shouldn’t escalate that quickly or that far.
So what you are saying translates in my mind to: Manager should only give reasonable results if each and every user input is absolutely perfect. That’s not a good statement to make.
Now that we’ve put this out of the way let’s get back to the meat and potatoes of this:
All of these causes are equally likely to happen so please let’s not focus on a single possible cause and get distracted from the real issue.
Also, somewhere else I mentioned Credit inventory balance and while that is wrong but it’s still proportional to the original error. That’s livable.
On the other hand, missing the entire COGS on a $10k production order because a $100 input has negative quantity is disproportional.
Just another example for the fun of it, what if the input was used by mistake in a sales invoice. That’s very possible and there’s nothing to prevent this from happening in Manager but that could still trigger this domino chain.
This is always complex. My thoughts;
Firstly transaction wise:
Accounting wise - not what happens in manager but rather just an idea:
production should use last known average costs of raw materials. Add that cost to the finished assembly - drive the quantity and value of the raw materials negative using that value. This assumed production value would roll into the average of the finished assembly which means you have something to use for COGs.
Replenishment of the raw material - let’s say we are -2 and -$100 on raw material A as a result and we receive 5 in at a total of $275. The first two bring inventory back to zero and must do so with cost/stock value also so Dr Stock $100 / Dr Purchase Price Variance (really Average cost variance) $10. Since we are now back to zero the receipt of the remaining 3 is a new layer and average so Dr Stock a further $165. AP is a credit of $275.
Using this type of approach all transactions can be accounted when they occur but receipt of goods needs to calculate separate layers for the quantity to restore to zero and the then quantity that goes above.
Some systems might also have a setting as to whether to allow negative or not (prevent transactions).
Lots of options but above is fairly typical accounting for receipts in average cost systems when you’ve gotten yourself negative and receiving back in to either zero or above.
In summary - no real right way I can think of. Either the system does something like the above and accept the concept of a variance to allow accounting at the time of the transactions or it had to hold the accounting / defer it until transactions catch up and the ‘real’ average cost is known. Both are compromises in different ways I suppose.
Apologies for diatribe, just brainstorming aloud.
That seems to trigger a lot of people so let’s just say -2 and Zero. Manager would pass the entire negative stock value (-100) to COGS or as a variance to COGS.
Later when replenishment is made, Manager would take back the -100 from COGS and keep it in inventory to avoid overstatement of inventory value.
Maybe on the sidenote but after skimming through this thread it seems there is no easy way to figure out which raw material is stopping a Production order if there are many raw materials used in the production order.
In the image there are three raw materials in the production order for 3 bicycles and @lubos if Qty of each raw material would be shown in a column rightmost then its easy to pinpoint the culprit, here brakepads. Maybe its acceptable to produce only 2 bicycles as brakepads are missing for the third one if 4 breakpads are needed for each bicycle. Also this gives information to take immediate action to order brakepads. Also the producer has maybe plenty of some other more expensive brakepads which can be used instead etc.
Just pointing out such qty information could be helpful when raw material qty is lacking.
@Ealfardan, come to think of it and in line what I point out above, would it maybe be feasible to split the production order into two, one with raw materials which are available in stock, to have the cost show on P&L against sales and one production order with raw materials which are not adequate if such raw materials are immaterial in cost…
production orders are used for producing one or more finished inventory item. there are no meaningful intermediary items which can be produced with a combination of raw materials based on available stock.
@sharpdrivetek, but it seems Managers approves of a production order with zero qty for finished items where the underlying are the raw materials which dont have enough quantity - which sits there until replenished.
@Tor my argument was only based on your suggestion to split production orders based on raw materials available and not available.
in the bicycle example above using your suggestion, suppose you have tyres and brakepads in stock while you do not have frame in stock, what finished product would you be producing with just the tyres and brakepads available in stock?
@sharpdrivetek, this is very understandable question but lets say your are in 31st of December and you sold 3 bicycles in ecommerce so the sale has materialized. Maybe be frame order for replenishment will show up in first days of January so by splitting the production order you can have most of the cost against sales in the financial statement. I am not saying this is perfect but atleast gets you somewhere when raw materials are lacking, unless you have a better solution as this scenario is not easy to deal with when it comes up as @Ealfardan has pointed out.
If you used a Purchase Invoice then the frames would be added to stock irrespective of it being physically in stock. In essence you could trick the whole system by issuing Purchase Invoices for below 0 inventory items even to a phantom company that you then later settle. So, as before there are simple tricks to cheat the system but what is important to realize that it perpetuates poor management practices, provides false financial reports because accounting is biased and worse it does not take advantage of the accounting restrictions to improve management practices.
@eko, would journal entries not be sufficient to “finish off” such raw materials, which maybe happens not very often, as Journal entries are maybe more visible ?
I am not sure why you think that journal entries are more visible. It is much easier to track purchase invoices, especially if you give them sortable phantom supplier names or descriptions. The design of Manager is something you need to get used to in the sense that as soon as you customize it and activate bank, payments, receipts, etc. you have to use these tabs instead of journal entries as it no longer makes these available for journal entries. It protects users from confusing debits and credits and thus ensures that the journal is much more accurate. Hence my advise to activate and use Purchase Invoice because it is much more consistent in the way Manager deals with journal entries and the Purchase Invoice tab gives a good overview of all therein.
I thought I would join the discussion after better understanding few things related to production orders. Our production orders are always made after the purchase invoices are recorded so I never had the chance to check properly how insufficient quantities affect accounting in Manager. And I would like to point out some issues to @lubos which are not desirable from a business point of view.
The issues I found are below.
a known purchase amount 60 is not accounted as Inventory - cost just because purchases of few raw materials are not recorded. this is not ideal. a business could miss a record or receive a purchase invoice later. but the accounts should not ignore what is already known. this is similar to ignoring a partial payment towards an invoice just because the full amount was not paid. a missed record can be entered with its actual date thereby adding the balance to the Inventory - cost and even if the purchase invoice arrives with a later tax period date, Manager should not be showing incorrect P&L until then for the prior tax periods.
the Production in progress is no longer an asset when the produced goods have already left the business with a recorded sales and delivery note. it is an asset only until a sales or delivery note is recorded. after a sales and delivery note (if enabled) are recorded, the said account should be a liability with Manager temporarily using the average cost of items that were partially not available in stock at the time of production. if the average cost is not known due to zero stock (purchase cost to be precise because stock can be added by goods receipts), then Manager could utilize a user input in the production order to enter a value to be considered for average cost.
the production order shows insufficient quantity of 6 even though the quantity part is fulfilled by two goods receipts of 4 and 6 numbers each. there is no real world compulsion that a quantity can be produced only if the purchase cost is known. I think Manager needs to reconsider by separating quantity and cost in production orders.
why is the Qty on hand and Qty owned for Salad still showing -10 when it has been sold and delivered? just because Manager does not know the production cost of the item? this would be poor inventory management which is simply a chain reaction to the issue explained in the above point.
the Qty to receive for both Fresh Fruits and Fresh Veggies should be 0 since the quantities are fulfilled by goods receipts.
the present approach in Manager would be justified if you consider only the user negligence of missing to enter a purchase invoice. in this case an incorrect P&L is acceptable.
for genuine scenarios where a business receive goods on a schedule but purchase invoices at a later date, say at the completion of a project which may be after few months from the date of goods receipt, Manager would be reporting incorrect P&L and balance sheet throughout the period.
That is the point. Something may be known to you, but not to the program if your accounting is out of date or includes previous, uncorrected mistakes.
Why? The prior average cost could be years out of date. Suppose the raw materials are purchased infrequently and there have been large cost increases. The prior average cost would be incorrect and misleading.
That would be guessing, a very poor accounting practice and possibly illegal, potentially fraud.
None of this affects the ability actually produce anything. Only the accounting is delayed until costs are known.
Yes, it would. But you cannot fix poor inventory management with poor accounting.
@Tut as long as you keep separating a phrase from the context, everything would simply seem nonsense. i really do not understand how better to illustrate the problem than I already did.
so you are saying Manager knows best that COG of 60 should be in assets rather than expense even after the sale has occurred?
how is it more incorrect or misleading than showing it as an asset for the business when you do not have any records of a purchase? what is the source of the asset?
no, in most cases. in scenarios where goods are delivered and invoices received at a later date, there is usually a contractual obligation. the goods are procured against purchase orders with the cost of items already known. so the user knows the price in most cases even if Manager does not.
have you checked the screenshot for list of inventory which shows the finished goods quantity as a negative? just because Manager let the user create a production order does not mean the inventory management is correct.
please explain how it is poor accounting when you have received the items by entering proper goods receipts. accounting for the quantity and accounting for the value are not the same.
No, I am not saying that. When there are insufficient quantities, there is no cost of goods, because nothing is in stock for that item. The cost of goods can be determined only after more items are acquired.
There is no asset value assigned to the insufficient quantity while the purchase is pending. That is the whole point.
True. And Manager allows you to separate them by enabling the Goods Receipts tab. But the responsibility is on you to fully understand the implications of doing that.
