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.
- Products hit the inventory account when you process an invoice from a contract packer.
- You know exactly every time what inventory you sent to the contract packer.
- 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:
- Create an expense account in your chart of accounts – Work in Progress.
- 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.
- Contractor Flat Fee and Fee per unit: Upon receiving an invoice and goods from the contract packer, process them as a usual purchase invoice.
- Add a manual journal Dr Inventory Cr Work in Progress for the amount of $10K. This amount will be distributed across finished products.