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Many of our customers use a contract manufacturer to assemble a completed product from raw materials, provided by the merchant. It is required to capitalise this fee in production. DEAR offers several ways to input this into the system. As DEAR's features have expanded, new ways of capitalising contract manufacturing fees have become available. In this article we will show all available methods, including previous workarounds. 


  • Example 1: Fastest method of capitalising the transaction, however this does not allow for component tracing or finished goods cost analysis.
  • Example 2: Allows component tracing. Allows for leftover components sent to contract manufacturer to remain there for future assemblies. Allows finished goods cost analysis. 
  • Example 3: Uses the production module and automates manual input of transactions. Allows component tracing and finished goods cost analysis. Assumes all components sent to contract manufacturer are used/written off. 


Table of Contents


Example 1: Fast Workaround

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NOTE: This example was provided as a workaround before DEAR added more sophisticated production features. You may wish to look at Example 2 or Example 3 which allows for component tracing. 


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.


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 or Example 3. 


Example 2: Using Assembly BOM

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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 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.


Solution:

This can be handled using the Finished Goods Assembly feature. 


We assume:

  • 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.


In this example, we will assume each batch of raw ingredients sent to the contract manufacturer produces 1500 beverages on average. 

The batch sent consists of:

  • 3kg sugar
  • 1kg citric acid
  • 30L lime juice
  • 1500 bottles
  • 1500 labels.


On average, each batch of raw ingredients sent to the contract manufacturer produces 1500 beverages. 


All costs are examples and not intended to be representative of real-world manufacturing costs. 


Before starting, you will need to:

  • Create stock items for sugar, citric acid, lime juice, bottle and label in DEAR.
  • Create service items for cost per bottle and contract packer fee. 
  • Create a specific location in DEAR for raw ingredients sent to the contract manufacturer.  


The first step is to create an item for the finished beverage which includes a Bill of Materials


  1. Navigate to Inventory → New → Product and fill in the mandatory fields. 
  2. Select Assembly BOM for Bill of Materials. This will enable the Assembly BOM tab below.
  3. In the Bill of Materials tab, fill in the product section with the quantities of raw ingredients that are sent to the manufacturer. In the Quantity to Produce field, specify the average quantity produced. It is not a problem if the quantity varies – quantities of raw ingredients and quantities produced can be manually changed during the assembly process. We have not forgotten the fee per bottle and the contract packer fee - this will be added during the assembly process. 
    • NOTE: Auto-assembly does not support editing assembly quantities. 
  4. Save the item to finish.


When components and raw ingredients are sent to the Contract Manufacturer, perform a Stock Transfer to the contract manufacturer location to take them out of your main inventory. 


When the finished beverages and actual quantities are received, this can be input using the Assembly feature. Following our example, the quantity of the raw ingredients actually made 1480 bottles instead of 1500. 

  1. Navigate to Production → New → Assembly.
  2. Select the beverage finished good and make sure to select the Contract Manufacturer location for the raw materials. 
  3. Specify the planned number of finished beverages (1500) in the Quantity field.
  4. Click Load BOM to load up the components. We will add the contract packer fees in a Manual Journal later.
  5. Authorise the Assembly Order.
  6. On the Pick tab, click Auto-Pick to load the stock items from the previous tab. You can now edit the Total Quantity field to reflect what was actually used. 
  7. Click Allocate to remove the raw ingredients from the stock in the contract manufacturer location.
  8. Enter the Actual Yield into the assembly details.
  9. Click Complete to finish the assembly. 
  10. Using the Manual Journals tab, enter the contract packer fee and bottling fees. Make sure to select the same Inventory account as the Finished Goods account for the costs to be allocated evenly across the bottles.
  11. On the Assemblies list, you can now see the unit cost for this batch of beverages – the costs have been split between all of the units.

NOTE: The finished goods will be assembled at the contract manufacturer location. You can perform a stock transfer to move the finished goods back to your selling location, or leave them at the contract manufacturer location if this represents your processes. 



Example 3: Using Production BOM

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Example 3 is similar to Example 2, however using the production module co-manufacturer feature removes some of the manual steps. This example assumes you have some familiarity with the DEAR production module. You may wish to familiarise yourself with Getting Started with the Production Module, Production BOM, Managing Production Orders and Co-manufacturing (outsourcing parts of the production process) first. 


Production module subscription is required. If you do not have a production module subscription, you can use Example 2 instead for option with component tracing or Example 1 as the fastest workaround.  



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 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.


Solution:

This can be handled using the Production BOM and co-manufacturing feature. 


We assume:

  • 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.


In this example, we will assume each batch of raw ingredients sent to the contract manufacturer produces 1500 beverages on average. 


The batch sent consists of:

  • 3kg sugar
  • 1kg citric acid
  • 30L lime juice
  • 1500 bottles
  • 1500 labels.


On average, each batch of raw ingredients sent to the contract manufacturer produces 1500 beverages. 


All costs are examples and not intended to be representative of real-world manufacturing costs. 


Before starting, you will need to:

  • Create stock items for sugar, citric acid, lime juice, bottle and label in DEAR.
  • Create service items for cost per bottle and contract packer fee. 
  • Add your contract manufacturer as a supplier in DEAR. 
  • Create a co-manufacturing location in DEAR. 
  • Create a work centre for the co-manufacturing location and link it to your contract manufacturer supplier. Both Buy/Sell and Transfer modes are supported. 


The next step is to create an item for the finished beverage which includes a Production BOM.

  1. Navigate to Inventory → New → Product and fill in the mandatory fields. 
  2. Select Bill of Materials: Production BOM. This will enable the Production BOM tab below. Enter the total quantity to produce. It is not a problem if the quantity varies – quantities of raw ingredients and quantities produced can be manually changed during production.
  3. In the Bill of Materials tab, create a co-manufacturing operation, select your co-manufacturing work centre, and add the component lines. Add a finished product line for the manufactured product, and an output line for the contract packer's service fee.
  4. Save the item to finish.


We now create a production order for the juice bottles. 

  1. Navigate to Production → New → Production Order.
  2. Select the beverage finished good, select the production dates and specify the planned number of finished beverages (1500) in the Quantity field.
  3. Click Load BOM to load up the components. Components and quantities can be edited here.
  4. Authorise and Release the Production Order. Components and quantities sent to the co-manufacturer cannot be changed after order release. Go to the Production Run tab. 
  5. Press Start to send the components to the co-manufacturer. This will create a transfer order and a purchase order (for transfer procurement mode).
  6. DEAR creates a transfer order for the components required by the co-man operation, from the Shopfloor (production location) to the co-man location. User presses Complete button for transfer order when components arrive at the co-man location: the components costs are moved to Inventory account and the components are listed in stock at co-man location.
  7. DEAR creates the purchase order. The purchase order contains:
    1. Finished product, where price is contract manufacturer fee/bottle (not the whole product - this purchase order simply pays the contract manufacturers services). The quantity can be edited, for example if the output can vary from the same component input. 
    2. Output service product is an additional costs line, because this is the service provided by the co-manufacturer to complete the finished product.
  8. Complete the purchase order by authorising the invoice and receiving the stock.
  9. This Completes the production order and adds the output. The finished product quantity can no longer be changed. 
  10. You can now use the Production Cost Analysis report to view cost per unit and other production cost information.



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