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When you use the Auto-Build function to create finished items, you might want to include labour costs into the price of the finished item.
To do this, you can create a stock item called Labour Cost and include it as a required component of the finished item.
Based on your business, you need to know your labour cost and the minimum time increment for charging labour.
Here's a basic example:
- labour cost is $60 per hour
- labour is charged at 1 minute increments
By setting up a stock item for labour costs means you also need to enter an opening balance for the item. This allows you to consume units of labour the same way you consume units of the other stock items to build a finished item.
- Create a new Cost of Sales account for the labour.
- Go to Accounts > Accounts List > Cost of Sales tab > New.
- Give the account a number that suits your account list and a meaningful name, such as Labour Costs.
- Create a new item to represent the minimum time period for your labour costs, e.g. 1 minute.
- Go to Inventory > Item List > New.
- Name the item Labour Item - 1 minute.
- Select the I Inventory This Item option.
- For the Asset Account for Item Inventory select the Labour Costs account created above. Ignore the warning that it should be an asset account.
- Add the Labour Item to the auto-build information of the finished item.
- Go to Inventory > Item List > open the item > Auto-Build tab.
- Select the Item Number of the Labour Item.
- Enter the Quantity of Labour Item units required to build the finished item. In our example, 1 unit of the labour item = 1 minute. So if it takes 15 minutes to build the finished item, the Quantity entered here would be 15.
In our example, we said labour is charged in 1 minute increments. So if we charge $60 per hour for labour, 1 minute of labour = $1.
Once you've worked out the minimum time increment and cost per unit for your labour item, you can enter an opening balance. In our example, we'll enter an opening balance of $180 (3 hours of labour) against the labour item. This value will be consumed as you auto-build the finished item.
- Go to the Inventory command centre and click Adjust Inventory.
- In the Item Number field, select the labour item created in the previous task.
- In the Quantity field, enter the quantity of the labour item you want to enter as the opening balance. In our example, we'll enter 180.
- In the Unit Cost field, enter the value of 1 unit of Labour Cost. In our example this is $1.00. When you Tab or click out of the field, the Amount automatically calculates. In our example, it calculates to $180 which is 3 hours of labour.
- In the Account field, select the Cost of Sales account you created in the previous task.
- In the Memo field, describe the inventory adjustment, for example, Adding 3 hours of labour.
- Click Record.
When the finished product is made, the labour cost will be taken from the Cost of Sales account and transferred to the Inventory Account for the finished product.
When the finished product is sold, the cost will be incorporated into the Cost of Sales account for the finished product. The labour portion of the finished product's Cost of Sales will be cancelled by the negative balance of the labour item's Cost of Sales account. This is necessary to prevent your Profit & Loss report showing the labour cost twice, as it is actually paid in the Wages or Salary expense accounts instead.