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