Production Order Outsourced

I have read the production order guide but it didn’t answer my question since the production was done in-house in the guide.

My question is, how to accurately record in production order if I’m purchasing raw material from a supplier & then sending it to a vendor to convert it into finished goods?

Here’s a scenario.

I purchased rolls on cash at 100 and sent them to a printer who will print logos & cut the rolls into small pieces & charged me 30 for the whole work. I now have 5000 printed pieces which now will be shipped to the customer. The transportation cost was 10, therefore, the total cost is 140 of making 5000 printed pieces.

Cycle: Rolls Purchased > Conversion > Finished Pieces (goods)

Purchase the outside services as you normally would. Then enter a production order, with a bill of materials including the rolls of whatever they are. Add non inventory costs for the outside service, allocating that to whatever expense account you allocated the outside service to. So the same with transportation costs.

You’re saying that I should create a Purchase order for raw material buying and then create another Purchase order for the conversion since it’s done on credit.

How to allocate conversion cost to that order? If I add conversion cost as a non-inventory cost then it won’t be tied to the vendor account. It will only stay there in the expense account.

Also, if I create a Purchase Order for conversion cost then the conversion cost will be recorded twice, once in the production order as non-inventory & other through PO.

No, I said neither. I said you should purchase the outside service as you normally would. Purchase orders are entirely optional. If you purchase on credit, use a purchase invoice, followed by a payment when you pay the supplier. If you pay immediately, you can just use a payment form.

I don’t understand what you are asking. What order, a purchase order or a production order?

The supplier’s cost (please use terminology of the program; Manager does not have vendors) is associated with their history when you enter the purchase invoice for the conversion service. It is removed from the expense account by inclusion on the production order as a non-inventory cost. Have you tried this in a test business?

No, it will not. And you seem to misunderstand what purchase orders do. They have no financial impact. Again, I recommend that you create a test business and try all this.

I meant Purchase invoice

I meant Production order.

I created an inventory item for the supplier’s cost & used a custom expense account (conversion overhead).
I used this inventory item in supplier’s purchase invoice to create supplier account payable. Then I used this inventory item as BOM to allocate supplier’s cost to production order.

I think as @Tut that you are overthinking this, just follow the steps in a test business that he explained and off you go. I am not sure what more you try to achieve.

That is incorrect accounting. Inventory is a physical asset, and you have nothing physical to represent conversion services. You don’t stock them, count them, or offer them for sale. You have purchased a service, which you can add to the cost of a finished good. Your approach certainly violates common accounting standards. Depending on laws in your jurisdiction, it may be illegal.

My approach would also create an account payable, in addition to adding to an expense account. That expense account is then reduced when you include its non-inventory costs on a production order.

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Thank you for your patience. You have solved my problem.