Example 1: 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 (capitalise) this fee in production? The contract packer takes the ingredients and packages them. They charge a $225 flat right plus $0.167 per completed packed 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.


NOTE: This method is the fastest way of handling this situation, however lacks traceability of ingredients used in production. For processes where traceability of the raw ingredients is required, see Example 2: Using a Contract Manufacturer to Assemble a Completed Product (Food)


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