The minimal system
If only a few items of
materials or piece parts are required, a very
simple system can be used. One or two
transient accounts are needed, which can be
expense accounts. The piece parts are
removed from inventory by using
Activities|Inventory|Adjust Qty/Value on Hand.
The Adjustment Account
will be the temporary expense account. Note the decrease in the account balance due to this. Add the item for the finished product, crediting the same account, and with the total value of parts used. The account balance will be back where it was.
To show the entire COGS of
the product, labor must be included. An
amount can be estimated. For better
visibility, a general journal entry might be
made, moving the labor value to another
transient expense account. (Debit the
temporary expense account, and credit payroll
expense.) Then make another inventory
adjustment, choosing Value Adjustment.
Increase the value of the product by the cost of the labor.
If your operation is small enough for this to work, it is much less complicated than the system described next.