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Keeping the numbers straight

The explanation is kept (relatively) simple by omitting choices that may be made in some steps.  It is too simple to be representative of most businesses. Specific situations will require some different choices.

Price of materials, when sold to Mfg, must be the same as the average-based value removed from inventory.  The sale document may be prepared with the ValuationSummary report in view.  Alternatively, the Inventory Part item entry may be edited, to insert the current average cost as the selling price.  This requires discipline.  After each purchase into inventory, the selling price must checked and adjusted if the average price has changed.

With all your care, the Mfg income and expense accounts may show a balance of a few cents.  The valuation report shows average prices rounded to the nearest cent, and these will be multiplied by the count on the sale document.  The inventory value reductions are calculated using prices including fractions of a cent.  The actual expensed amount is based on this price, and is visible in the Inventory Asset account register.  Knowing that the income account balance is merely a rounding error, an adjusting journal entry can be made, bringing it to zero.

Memorized transactions would be used for continued manufacturing of the same (or similar) products.  For instance, the materials for a product could be called out on a memorized cash sale. The memorized form will probably be for one unit, and the numbers multiplied when the transaction is recorded.  That is fine, as long as each unit requirement is multiplied by the same lot count.  If you have a stockroom, parts could be issued based on the quantities shown on the sales form.

The above procedure implies that sales documents are written when material comes out of the stockroom, labor is added later as it is accumulated.  Product valuation depends on use of a special extract of the SalesbyCustomer report.

Back flush is an industry term referring to recording material and labor usage only when the build process of a product is completed.  It applies best when production is repetitive and well defined, build times are short, and control of material is not a significant problem.  Materials can be stored on the manufacturing floor and used as needed.  Cash sale forms can be generated from m emorized transactions, which would serve as a standard material list for each product, and include the necessary labor entries.   Where standards are not applicable, labor and material usage can be recorded outside of QuickBooks and entered manually. 

As products are completed, a single CashSale processes all material and labor.  The total cost on this document represents the value of the finished product. Using this total, the product is immediately put into inventory using WriteChecks, bringing the WIP Bank balance back to zero.  Any non-zero balance in the WIPBank account will indicate an error in matching material costs.

Back flush does not give visibility of work-in-process. The taking of physical inventory counts will be complicated by the fact that on-hand quantities may include material already built into unfinished products.  The relative simplicity of this approach can, however, compensate for the relaxed inventory control.

WIP Bank will generally show a balance, if back flush is not used.  Manufacturing will usually be continuous.  Work will always be in process, on several products, with a value showing in that account.  When a balance sheet is generated, this amount would appear in a somewhat strange location, with the bank accounts.  Using a check or a journal entry, you can move this value into an Other Asset account called Work in Process.  After printing the balance sheet this entry can be deleted. Either location on the balance sheet shows the correct net assets for the company, but the Other Asset location is more customary. 

Laborexpense is described as being transferred from payroll to manufacturing at the time each lot is finished.  This action can be deferred.  At the end of an accounting period, a Transaction Detail by Account report can be run to compare the Mfg Labor accounts.  Any excess of Income over Cost represents the amount of labor that has moved into Inventory since the last Journal Entry adjustment. This cost should be transferred prior to running the P&L.  If amounts for each lot are desired, the Sales by Customer report filtered on Customer:Job name will identify manufacturing work.

 

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Last modified: May 21, 2004