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Adding Labor/Overhead to Inventory part 1

QuickBooks uses a special type of item called an Inventory Assembly to allow light manufacturing companies to use the software. An Assembly item is an item that is made up of several other ‘component’ items.

The sample company we will use today is a manufacturer of certain veterinary medicines. They buy the bulk medicine from a pharmaceutical plant. They buy bottles, inserts, labels and related items.

All these are set up as inventory items in QuickBooks. But they don’t sell any of these items, what they sell is the bottled medicine.

An assembly item then, creates one finished product and deletes from inventory as much medicine, as many bottles, inserts, etc., necessary to make that finished item.

It is also possible to add labor costs and overhead costs to the assembled item. Some companies want to do this to incorporate direct and indirect costs of the manufacturing process into the cost of the product they sell.

Today, we’ll look at a simple example of how we might add the labor cost of creating a finished assembly item.

The first thing we do is create the item that will add labor costs to the assembly item.

Above we have created the non-inventory item we will use. We named it Direct Labor.

The checkbox labeled “This item is used in assemblies…” must be checked. This allows an expense account to be specified.

In this case, we’ve created a special account called Less Manufacturing Labor. This is created as a subaccount of our normal wage expense account. It may be an Expense or COGS type of account. That will depend on where your payroll items for direct labor expense post as the subaccount will have to be the same type as its parent account.

It’s necessary to do a bit of calculating to come up with the cost amount. For our example, we have employees paid on average $15 per hour. They routinely create 60 of these bottles of medicine in an hour. That computes out to .25 per bottle.

Above is a graphic showing our new labor item added to the assembly item setup. It is the last line in the bill of materials for this item.

We have to specify a quantity. We instructed QuickBooks to use one ‘unit’ since one ‘unit’ of labor is .25, the amount we need to create one of the finished products.

When we create one of the finished goods, QuickBooks will add .25 to the cost of the product to account for labor. It will do that by subtracting the amount from normal wage expense.

More on that next time as we look at how reports and costs are affected by this strategy.

Hector Garcia, CPA
Certified Advanced QuickBooks ProAdvisor
12401 Orange Drive #136
Davie, FL 33330

Hector Garcia

Hector Garcia

Hector Garcia is a CPA and QuickBooks Consultant.

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2 Responses

  1. Hello

    One question when you create the non inventory part the income account should not be Sales? I see you leave the same account for expenses/income is that correct or no not matter.

  2. If I sell the service to the customer and pay the expert (contractor) for providing the service, how can I record the payment to the expert? Is it the labor cost?
    Thank you!

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