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.
This can be handled using the Finished Goods Assembly feature.
NOTE: For goods where it is not required to trace the raw ingredient batches, there is a faster method. See Example 1: Using a Contract Manufacturer to Assemble a Completed Product.
- 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.
- 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.
- Navigate to Inventory → New → Product and fill in the mandatory fields.
- Check Bill of Materials. This will enable the Bill of Materials tab below.
- 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.
- 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.
- Navigate to Production → New → Assembly.
- Select the beverage finished good and make sure to select the Contract Manufacturer location for the raw materials.
- Specify the planned number of finished beverages (1500) in the Quantity field.
- Click Load BOM to load up the components. We will add the contract packer fees in a Manual Journal later.
- Authorise the Assembly Order.
- 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.
- Click Allocate to remove the raw ingredients from the stock in the contract manufacturer location.
- Enter the Actual Yield into the assembly details.
- Click Complete to finish the assembly.
- 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.
- 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.