Including The Cost Of Labor In Items You Build

Background
Setup
Running Payroll and Creating Inventory Adjustments
Final Note

Background

This article contains instruction for a suggested method for associating the cost of labor with an item you build.

Depending on the complexity of your manufacturing process and the way your business works this may or may not work for you.

Setup Process

There are several steps to setting this up inside of AccountEdge. You will need to:

  • Create a Labor Cost of Sales account
  • Create a wage category called Labor linked to that Cost of Sales account
  • Create an item called Labor linked to same Cost of Sales account instead of an inventory account

Step 1: Create an Account for Labor

  1. Go to Lists > Accounts from the menu bar at the top of the screen
  2. Click on the Cost of Sales tab
  3. Click the New button in the bottom left
  4. Enter an account number (one that isn't already used) and hit tab
  5. Enter the name of the account (Labor)
  6. Click OK

Step 2: Create a Wage for Labor

  1. Go to Lists > Payroll Categories > Wages from the menu bar at the top of the screen
  2. Click the New button in the bottom left
  3. Type in the Wage name (Labor)
  4. Type of Wage should be Hourly
  5. Click the box for Override Employee's Wage Expense Account
  6. Choose the Labor account you set up in Step 1
  7. Click on the Employee button at the bottom left
  8. Check off all employees that should have this Wage
  9. Click OK
  10. Click OK to close out of the Wage creation screen

Step 3: Create a Labor Item

  1. Go to Lists > Items from the menu bar at the top of the screen
  2. Click the New button in the bottom left
  3. Enter an item number (Labor) and hit tab
  4. Enter an item name (Labor) and hit tab
  5. At the bottom left place a check mark in the box labeled "I Inventory This Item"
  6. Across from that where it says "Asset Account for Item Inventory" choose the Cost of Sales account we created in Step 1

Running Payroll and Creating Inventory Adjustments

Once everything is set up you can begin to work through the process of running payroll for the employee and putting the value of that payroll into the Labor items.

Running Payroll

When you run payroll for any employees whose labor will be associated with the building of items you need to enter the cost of their labor in the Labor wage we initially set up.

  1. Go to Payroll Module and click the Process Payroll button as normal
  2. Select the employee/set of employees, the date range you want to pay and the pay date
  3. Click next
  4. Click the arrow next to an employee's name to bring up the check details
  5. Below the check in the gridded section enter the number of hours and the dollar value that the Labor cost you
  6. Make any other adjustments as needed and click OK
  7. Repeat this process for any other employees you need to account for and then click Record to finish processing the paychecks

Creating an Inventory Adjustment to Include Cost

  1. Go to the Inventory Module
  2. Click on the Adjust Inventory button
  3. Select the Labor item
  4. Enter the quantity as the total number of hours for employees Labor you included in Payroll
  5. Enter the Unit Cost as the cost of the labor (in my case $20.00 an hour)
  6. Choose the same Cost of Sales account that you linked on the Labor item
  7. Click Record in the bottom left

Building the Finished Good

Once you have added the cost of labor to the Labor item you will just need to use that item in the Auto-build of the finished good.

Final Note

This process is meant to allow you to build in the cost of Labor into your item without double-booking your cost.

How this works is:

  • The original payroll is booked to the Cost of Sales account for Labor
  • The inventory adjustment is a double-sided entry to the Labor Cost of Sales account. This adds value to the item without actually effecting your books
  • When you build the finished good you remove the cost of Labor from the Labor item to the finished good
  • When you actually sell the finished good you book the total cost to the Finished Good's Cost of Sales

This process is not meant as a hard and fast rule but one way you could tackle a fairly complicated process.