ANSWER ID:9167 Image Removed
In manufacturing, labour costs associated with the production of an item are usually included in the cost of the finished goods. In your software, payroll expenses can be transferred, and, allocated to individual inventory items. Your inventory and cost of sales will then reflect the associated payroll expenses. Note: To get the most out of your software for managing inventory, learn from an expert in our Inventory Management training course! How is the cost of labour allocated to the cost of my finished goods?When paying employees, the expense associated with production is allocated to a new expense account. Using an Inventory Adjustment, this expense is then allocated to a newly created item called Labour. A Build Items transaction is then recorded to transfer the cost of the Labour item to the inventoried item. The cost of this item is then increased by the value of the Labour item. What do I need to do to set up my company file? Task 1 - Set Up a Direct Wages expense account- Go to the Accounts command centre and click Account List.
- Select the Expenses tab and click New.
- Give the account a unique number that suits your account list.
- Name the account Direct Wages. See our example below.
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Task 2 - Create a new Inventory Item for labourThe direct wages expense is allocated to this item. This item is inventoried only. Go to the Inventory command centre, click Item List and click New.Enter a new item number in the Item Number field, then type 'Labour' in the Name fieldFor example, if you own a car repair shop and and an employee spends 30 hours repairing a car, you'll want to transfer that labour value onto the cost of the finished, saleable car. You can do this in AccountRight by allocating employee labour costs to a "labour" inventory item, then transferring that value to your finished goods. Let's take you through the details. Before you beginThere's a few things you need to set up before transferring labour costs to your item. | UI Expand |
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| title | 1. Create a Direct Wages expense account |
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| This account is needed to track all labour expenses associated with the inventory item. - Create a new expense account (Accounts > Account List > Expenses > New).
- Specify a unique Account Number that suits your account list.
- Enter an Account Name, such as Direct Wages.
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| title | 2. Create a Labour inventory item |
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| Next, create a new item called "labour" (Inventory > Item List > New). This item is needed to allow labour costs to be transferred to your saleable inventory item. - Use an Item Number that suits your item list.
- For the Item Name, enter 'Labour'.
- Select the option I Inventory This Item
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.Click the Asset Account for Item Inventory drop down arrow - and select your inventory asset account
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from the list of accounts. See our example item below.
 Image RemovedClick OK. Task 3 - Set up the Direct Wage CategoryGo to the Payroll command centre and click Payroll Categories.Click the Wages tab.Click New.Enter Direct Wages in the Name field and then select the Hourly option. Check that the Regular Rate Multiplied By option is selected and that 1.0000 is entered in - for the Asset Account for Item Inventory.
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| title | 3. Create a Direct Wage payroll category |
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| The last bit of set up is to create a new payroll wages category (Payroll > Payroll Categories > Wages > New). This category is used on your employees' pays to track the labour costs associated with the finished product. - For the Wages Name, enter 'Direct Wages'.
- For the Type of Salary, select Hourly.
- For the Pay Rate, select the option Regular Rate Multiplied By and enter 1.0000 in the adjacent field.
- Select
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the option - the Optional Account option then select
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the Direct Wages account (as set up in Task 1) in - your new Direct Wages account in the Override Account field.
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 Image Removed to whom this Wage Category applies.How do I transfer the Transferring payroll expenses to the value of my finished goods? Task 1 - Pay your employees using Process PayrollAfter completing the above setup, you're ready to track labour costs for inclusion in your finished goods. This is done by specifying labour costs on an employee's pay, then transferring this value to the finished goods. Let's walk you through the process. | UI Expand |
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| title | 1. Include labour costs in employee pays |
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| When paying your employees, the new Direct Wages payroll category will be available in the relevant employee's pay. Allocate the number of hours |
your employees worked to either Direct Wages or Base Hourly for hours not directly attributable to inventory items.The following example window shows that Mary Jones worked 30 Direct hours and 10 Indirect the employee worked on the finished goods to the Direct Wages category. The employee's Base Hourly or Base Salary details will be automatically adjusted without affecting the Net Pay. Here's an example where the employee worked 30 hours of Direct Wages and 10 indirect (non-production) hours. |
Note that the direct wages are now charged Image Added When the pay is processed, the Direct Wages value will be posted to the Direct Wages expense account you created earlier. |
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Using an Inventory Adjustment, this step allocates You can now record an inventory adjustment (Inventory > Inventory Adjustments) to allocate the balance in the Direct Wages expense account to the value of the Labour item |
. In doing this, the balance (created earlier). Doing this will: - reduce the balance of the Direct Wages expense account
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will be reduced as - , and
- increase the value of
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the Labour is increasedGo to Inventory command centre and click Inventory Adjustments.Check the Inventory Journal # and Date.Select the Labour item created in Task 2. Enter the quantity of hours recorded in the paycheque as Direct Wages in Task 1 in the Quantity field of the Adjust Inventory window.Enter the Adjust Inventory window: - Enter a Memo which explains the transaction.
- In the Item Number field, select the Labour item.
- In the Quantity field, enter the number of Direct Wages hours (from the employee's pay).
- In the Unit Cost field, enter the employee's hourly rate
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as the Unit Cost. The software then - . For our example, Mary Jones makes $24.038 per hour.
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| AccountRight calculates and enters the total value (Quantity x Unit Cost) in the Amount field. Alternatively, enter the amount in the Amount |
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column. The software then calculates field and AccountRight will calculate the Unit Cost which |
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is Task 3 - Add labour to your finished goodsTransferring will be equivalent to the employee's hourly rate. |
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| title | 3. Use Build Items to add labour cost to finished goods |
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| The final step is to transfer the value of the Labour item to your finished goods |
is the last step of the process accomplished done by recording a Build |
Items transactionitems transaction (Inventory > Build Items). |
Go to the Inventory command centre and click .Check the Inventory Journal # and Date.Enter the finished item's number in window: - Enter a Memo which explains the transaction.
- On the first line:
- In the Item Number field, select the finished item.
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In our example we'll use item 100. If the quantity of the item has already been accounted for, enter zero in the - In the Quantity and Unit Cost fields,
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then manually - enter zero.
- In the Amount field, enter the total value
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in the Amount fieldAllocate to the - :
- In the Item Number field, select the Labour item.
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Enter a negative amount in and a positive amount in the Unit Cost field. The software will then enter the - , enter the number of Direct Wages hours (from the employee's pay) as a negative value.
- In the Unit Cost field, enter the employee's hourly rate. AccountRight will calculate and enter the total value in the Amount field
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.The following example window shows that 30 Our example shows 30 hours of labour |
, at $15.00 per hour, has been added to the value of the finished good item (item number 100). Notice that the (worth $721.16) being transferred from the Labour item to the finished goods item. The physical Quantity of the finished good hasn't been increased, just its value. |
If If the quantity of finished goods needs to be increased, |
then enter enter the incremental quantity in the Quantity field. You will then need to enter a |
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Tip: If you use Auto-Build, you may want to include the labour item as part of your Bill of Materials, so when you a build a quantity of finished goods the quantity of labour will be included in the cost of the finished good. Inventory adjustments Inventory Auto-Build Image Added |
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