Example: Using a Contract Manufacturer to Assemble a Completed Product

Example: Using a Contract Manufacturer to Assemble a Completed Product


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 (capitalise) 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 the inventory account when you process an invoice from a contract packer.
  2. You know exactly every time what inventory you sent to the contract packer.
  3. At the time when you send the raw materials to the 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 the Issue to Production module and write off the raw materials to the Work in Progress account. E.g. the total cost of raw materials was $10K.
  3. Contractor Flat Fee and Fee per unit: Upon receiving an invoice and goods from the contract packer, process them as a usual purchase invoice. 
  4. Add a manual journal Dr Inventory Cr Work in Progress for the amount of $10K. This amount will be distributed across finished products.

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