Thursday, May 30, 2019

Associating labor cost on an Assembly Item through Non-Inventory Item

Assembly Items are built with corresponding Labor Cost. Such cost is recorded through payroll if the builders are employees or Vendor Bills if builds are outsourced to third party builders/manufacturers.

To associate Labor Cost, expenses incurred must be accounted for as part of Assembly Items. To do this, add a Non-Inventory Item as one of the components of the Assembly Items.

Every payment or charges associated with the labor cost are initially debited to expense account. Such amount will be credited to the Expense Account of the Non-inventory Item and to be debited to Inventory Asset upon build.

Purchase price in the Purchasing Tab of the non-inventory item must be set. This amount will be credited against the expense account of the item in the GL Impact of the assembly build. Amount debited to Inventory Asset will be equivalent to the amount entered on this field. If this is left blank, there will be no labor cost to be associated with the builds.

The amount entered on the Purchase Price will be the unit labor cost to be associated with the builds. Any changes on the unit labor cost must be reflected on this field prior to the build.

To illustrate:

ABC Corporation sells widgets with 2 different components, 1A and 2B. Each costs $5/unit and $7/unit, respectively. Widgets are built with estimated $3/unit labor cost.

If ABC Corporation has employees dedicated for the build and debits Salaries Expense for the man hours, then the GL Impact would be:

(1)  Recognition of man hours for the employees

Debit            Salaries Expense      3.00
Credit           Salaries Payable       3.00

(2)   Upon Assembly Build

Debit            Inventory Asset        12.00
Credit           Inventory Asset          7.00  Component 1A
Credit           Inventory Asset          5.00  Component 2B

Debit            Inventory Asset          3.00 
Credit           Salaries Expense        3.00

If ABC Corporation outsourced the build with third party builders/manufacturers and debits Outside Services for the billed amount, then the GL Impact would be:

(1)  Recognition of third party billings

Debit            Outside Services       3.00
Credit           Accounts Payable      3.00

(2)   Upon Assembly Build

Debit            Inventory Asset        12.00
Credit           Inventory Asset          7.00  Component 1A
Credit           Inventory Asset          5.00  Component 2B

           Debit            Inventory Asset          3.00  
           Credit           Outside Services         3.00

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