Tracking Raw Materials

#1

Hello, I am new to the manager software but it seems pretty great and provides loads of features I would otherwise have to pay a lot of money for. I’m intent on using this piece of software to manage my business.

I run a business making handmade products using raw materials. The raw materials I will usually order in bulk quantities of 5kg or more, or 500ml if its a liquid ingredient. By using the weight per finished item and the amount of items made in one batch, I can fugure out roughly how many grams/mls of each material goes into the finished product.

My question is, should I add these raw materials in inventory and then use Production Orders when making batches of stock? or should I just manually enter stock of the finished products when I have made them and use a ‘materials’ or ‘cost of goods for sale’ expense account to track the cost of the raw materials? If the second option, when manually adding stock, would I need to specify a source?

#2

This would be your best choice if you can reliable calculate the raw material inputs.

#3

If you cannot precisely determine raw material inputs, it is also perfectly acceptable to treat inputs as consumable supplies. For example, suppose you buy a container of paint. While you may estimate from experience that a half liter will paint 20 finished items, it is doubtful you will ever hit that target exactly. Nor would you, in any reasonable way, be able to determine the quantity remaining in inventory once you opened a container. The same would be true of bags of plaster for molded figurines, or screws for assembling wooden projects.

In none of these cases would you sell the individual input materials, or even a complete container’s worth, to a customer. Nor is an individual purchase likely to be of major value compared to your overall revenue. So the effort of creating all the input inventory items, receiving them into inventory, only to immediately parcel them out through production orders would be of dubious value.

The question of how far to go in tracking cost of manufactured goods is one of management efficiency. If input materials are of high value, say gem stones, you would lean towards tracking them in inventory. If knowledge of available materials was important to determining what you could manufacturer, such as exotic hardwoods or specialty metals, you might also lean that way. Or if you hold the input materials for a lengthy period before use, you might want to track your current investment in them as an asset. On the other hand, using only a portion of a unit of purchase for a given finished item might incline you towards treating these items as consumables.

If you have high interest in the exact cost of manufactured goods, you can add costs other than inventory item inputs to your production orders. This could include estimated value of consumables, production labor costs, and so on. Your exact course of action should depend on two things:

  • What information do you need to effectively manage your business, including timely purchase of production supplies? Don’t waste effort keeping records you won’t use.

  • What does it take to accurately represent your position and performance, including to tax authorities and potential sources of investment capital (banks, investors, partners, etc.)? If you are a sole trader and envision no outside sources of financing, just make sure the tax authority is happy.