Example: Using a Contract Manufacturer to Assemble a Completed Product


Scenario:

I use a contract manufacturer to assemble a completed product from the raw materials I provide them with. They charge a base fee + a fee per completed unit. 
How can I include (capitalize) this fee in production? The raw materials I supply include cane sugar, citric acid, lime juice, bottles, and labels. The contract packer takes the ingredients and bottles them into a beverage. They charge a $225 flat right plus $0.167 per completed beverage unit.


We assume:

  1. Products hit inventory account when you process invoice from contract packer
  2. You know exactly every time what inventory you sent to contract packer
  3. At the time when you send raw materials to contract packer you know the individual cost of all ingredients


For the assumptions above you can do the following:

  1. Create an expense account in your chart of accounts - Work in Progress
  2. Raw Materials: Use Issue to Production module and write off raw materials to Work in Progress account. E.g. total cost of raw materials was $10K
  3. Contractor Flat Fee and Fee per unit: Upon receiving invoice and goods from contract packer, process them as usual purchase invoice. 
  4. Add manual journal Dr Inventory Cr Work in Progress for the amount of  $10K. This amount will be distributed across finished products.