If your needs do not include MRP or time-phased manufacturing processes, you can probably adapt Inventory Bills of Material to your needs. The following article demonstrates a method to include labor and overhead in your Assembly Bills of Material, and provides a straightforward approach to full absorption costing as well.
There will be no WIP material, labor or overhead on hand at any point in time, because we're assembling complete - in effect, backflushing. So at any point in time, inventory consists of raw materials and finished goods only.
The key to this process is setting up Labor and Overhead as inventory items, adding them appropriately to Assembly Bills of Material, and manipulating quantities on hand to provide complete finished goods costs and financial transactions.
First, we need to set up GL accounts for absorption. Recall that absorption, simply put, credits manufacturing spending (production labor and overhead) and puts those costs into inventory, associated with the finished good that used (absorbed) them. I set up the following accounts:
- 000-6950-00 Direct Labor Absorbed
- 000-6970-00 Manufacturing Overhead Absorbed
These are both P & L accounts.
Next to be set up are the Item Masters themselves. Here, I used LBR PEN ASM and OVH PEN ASM, as illustrated.
Note the following:
- The Unit of Measure Schedule ID is HOURS(4), as the unit of measure for time is HOUR, and we need 4 decimal places in order to assign time to a single finished good item.
- The Item Type is Sales Inventory, in order to track quantities.
- The Current Cost is the rate per hour. The rate per hour should be representative of the average rate for the production worker(s) performing the task, in this example, $10.00.
The only GL accounts we need here are as shown:
The Overhead Item Master is set up in a similar manner.
Here, HOURS(4) is also the Unit of Measure Schedule ID, but the Current Cost represents the “standard” overhead rate for the shop.
You can set up as many of these Item Masters as you have different Labor and Overhead rates.
Now that we have all our items, we can set up an Assembly Bill of Material. We are going to set up a Cheap Pen (the Manufacturing Module produces the Expensive Pen). This BOM looks like:
Units of Measure for Labor and Overhead are HOURS, and Each for the inventory items.
Set up the same Design Quantity for both Labor and Overhead. Also known as the runtime hours per piece, the value can be derived in many ways: observation, industry standards, equipment documentation, and the like. For example, if it takes 3 workers 45 minutes to assemble a "standard" batch of 500 pens, the hourly Design Quantity would be 45 * 3 / 500 = 0.27 minutes = 0.0045 hours. Enter this as the Design Quantity in the Assembly BOM.
Now let’s see how this comes together in practice.
As Assembly transactions are processed throughout the month, negative quantities on hand for the LBR- and OVH- items accumulate. At month end, these values represent hours of labor and overhead applied to the month's production of finished goods. The valuation of on-hand finished goods now includes labor and overhead..
Recall that this method does not produce or manage Work In Process, but backflushes finished goods production.
We are going to assemble a standard batch of 500 pens, as shown. You will get a message noting a quantity shortage (for labor and overhead). Override this.
You can save to a batch or post. The distribution accounts for labor and overhead, as set up above, credit the WIP accounts and debit Finished Goods. Coupled with materials, this provides a fully costed finished good in Inventory Control, and a corresponding valuation in the finished goods GL account. At the same time, we are left with credits in the WIP accounts and negative on-hand quantities for labor and overhead, as shown.
And in inventory:
OVH PEN ASM reflects similar results.
By month-end, and many Assembly transactions later, we will have a sizable negative value in the WIP Labor and Overhead accounts, and negative on-hand quantities for labor and overhead. Therefore, we will do an inventory adjustment to zero out the negative labor and overhead; this represents labor and overhead absorbed. The inventory adjustment clears the GL WIP accounts, and credits (absorbs) production labor and manufacturing overhead in the General Ledger
We will use a new feature in GP2013, called Reason Codes, to be sure we get our accounting right! These are:
- ABS-L for labor absorbed, and
- ABS-O for overhead
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This provides a simple way to get the “absorption” accounts entered for these adjustments.
Be sure the transaction quantity offsets the Quantity Available. Enter all the Labor and Overhead items, and post.
At the end of this, we have 500 PEN-NEW Cheap Pens on hand, with a value of $3.21 each, which includes material costs of $3.00 and labor and overhead costs of $0.21. There are no quantities in inventory for labor or overhead, and no GL WIP value either. We have absorbed/credited manufacturing production labor and overhead for $106.88. We can now properly state the value of finished goods in inventory, and reflect those same values in cost of goods when the inventory is sold.
This article provides an overview of a relatively straightforward method to include labor and overhead in inventory valuation and cost of goods sold, and apply full absorption costing techniques.
By Dave Kramer, Cargas Systems