Accounting for "Manufactured" Inventory

Posted by Carla F. on May 17, 2007, 5:00 pm

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We are cutting cords of wood and then bagging or boxing them for resale.

I have the labor to cut the wood, the bags and boxes, and other expenses to
cut the wood such as employee reimbursed mileage, equipment etc.

At the end of the period I have so many cords of wood.

Do I do a contra expense account and an asset account for the wood in
inventory?

Cost of Production of Inventory 25,000
Inventory - Wood 25,000

My boss is suggesting something different but I want to get this straight.
He is saying we have so many cords and wholesale value is $xxx so that
becomes the basis of his inventory, but it doesn't sound right.

I assume once it is sold, I credit inventory, debit cost of goods sold, and
debit cash & credit sales & tax, etc.

Thanks for looking at this.

Posted by HSalim on May 17, 2007, 11:01 pm

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Carla,
There are two considerations:

a. How material is it? If a significant amount of money is being locked up
in inventory then yes, account for it.
the IRS wants you to back out this labor cost from expenses and load it into
inventory.
Assuming the costs are significant, you only need to make a good faith
estimate and rectify the accounts - which you can do with a simple reversing
journal entry. That bring us to

b. What level of detail do the business owners want to see fromth system?
Some businesses want to ensure that they have their inventory costs to be
precise; others use a rule of thumb for the overheads/incidentals and do not
bother.
I've seen a few owners who know their cost of goods down to withing 2% of
actuals - all the information is in their heads and they can figure their
costs out on a napkin. Many owners and managers do not have that gut
feeling and WOULD use the information if it were collected and made
available. Yet others are so deluded that your efforts may be wasted or
ignored.

In other words, Know thy boss...

HS

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> We are cutting cords of wood and then bagging or boxing them for resale.

> I have the labor to cut the wood, the bags and boxes, and other expenses

> to cut the wood such as employee reimbursed mileage, equipment etc.

> At the end of the period I have so many cords of wood.

> Do I do a contra expense account and an asset account for the wood in

> inventory?

> Cost of Production of Inventory 25,000

> Inventory - Wood 25,000

> My boss is suggesting something different but I want to get this straight.

> He is saying we have so many cords and wholesale value is $xxx so that

> becomes the basis of his inventory, but it doesn't sound right.

> I assume once it is sold, I credit inventory, debit cost of goods sold,

> and debit cash & credit sales & tax, etc.

> Thanks for looking at this.

Posted by Carla F. on May 22, 2007, 1:03 pm

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Thanks, that helps alot. We've always been a service business so inventory
is something I haven't messed with since accounting classes several years
ago. :O

> Carla,

> There are two considerations:

> a. How material is it? If a significant amount of money is being locked

> up in inventory then yes, account for it.

> the IRS wants you to back out this labor cost from expenses and load it

> into inventory.