ANSWER ID:9167

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

1. Go to the Accounts command centre and click Account List.
2. Select the Expenses tab and click New.
3. Give the account a unique number that suits your account list.
4. Name the account Direct Wages. See our example below.
    
5. Click OK.

Task 2 - Create a new Inventory Item for labour

The direct wages expense is allocated to this item. This item is inventoried only.

1. Go to the Inventory command centre, click Item List and click New.
2. Enter a new item number in the Item Number field, then type 'Labour' in the Name field.
3. Select the option I Inventory This Item.
4. Click the Asset Account for Item Inventory drop down arrow and select your inventory asset account from the list of accounts. See our example item below.
   
5. Click OK.

Task 3 - Set up the Direct Wage Category

1. Go to the Payroll command centre and click Payroll Categories.
2. Click the Wages tab.
3. Click New.
4. 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 the adjacent field.
5. Select the option Optional Account then select the Direct Wages account (as set up in Task 1) in the Override Account field.
   
6. Click Employee and select the employees to whom this Wage Category applies.

How do I transfer the payroll expenses to the value of my finished goods?

Task 1 - Pay your employees using Process Payroll

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 (non-production) hours.

Note that the direct wages are now charged to the Direct Wages account.

Task 2 - Transfer the Payroll expense to inventory

Using an Inventory Adjustment, this step allocates the balance in the Direct Wages expense account to the value of the Labour item. In doing this, the balance of the Direct Wages expense account will be reduced as the value of the Labour item is increased.

1. Go to the Inventory command centre and click Inventory Adjustments.
2. Check the Inventory Journal # and Date.
3. 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.
4. Enter the employee's hourly rate as the Unit Cost. The software then calculates and enters the total value (Quantity x Unit Cost) in the Amount field. Alternatively, enter the amount in the Amount column. The software then calculates the Unit Cost which is equivalent to the employee's hourly rate.
    

Task 3 - Add labour to your finished goods

Transferring the value of the Labour item to your finished goods is the last step of the process. This is accomplished by recording a Build Items transaction.

1. Go to the Inventory command centre and click Build Items.
2. Check the Inventory Journal # and Date.
3. Enter the finished item's number in the Item Number field. In our example we'll use item 100. If the quantity of the item has already been accounted for, enter zero in the Quantity and Unit Cost fields, then manually enter the total value in the Amount field.
4. Allocate the second line to the Labour item. Enter a negative amount in the Quantity field and a positive amount in the Unit Cost field. The software will then enter the total value in the Amount field.

The following example window shows that 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 Quantity of the finished good hasn't been increased. If the quantity of finished goods needs to be increased, then enter the incremental quantity in the Quantity field. You will then need to enter a unit cost in the Unit Cost field.

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.

Related support notes

Inventory adjustments

Inventory Auto-Build