By Peter G. Budreski
Manufacturing companies know the importance of including the cost of labour in the products they create. QuickBooks, with a work-around, can incorporate the cost of labour into a manufactured product.
This can be demonstrated with the case study of MOJO Services Limited. The principal product of the company is prepackaged cloth diapers. This company has 5 full time employees and the accountant of the company advised them that the employees labour cost should be included into the product to allow for the following -
1) Actual unit cost of a package of 24 cloth diapers
2) Efficiency of the employees
Here is how they assessed the problem -
1) After studying the company's labour costs, they determined that an hour's worth of labour cost them $12.50, including benefits.
2) Each package of cloth diapers required one hour of employees time to produce - that included cutting, finishing, folding and packaging.
And this is what they did in QuickBooks -
1) A new vendor was added to the Vendor List - not an external vendor, but one named "Internal Labor" - no cheques will ever be issued to this vendor.
4) With the lists in QuickBooks updated, the next step in the process was to get the labor cost into inventory. How accomplished? Simple - determine the predicted monthly hours to be worked by the staff and enter a bill. The staff at MOJO Services Limited typically work 880 hours in a month, but to accommodate extra hours, they enter a bill for 1,000 hours @ $12.50 at the beginning of the month.
5) After a productive month, MOJO has produced 950 bags of cloth diapers. They review their Inventory Valuation Summary Report and ascertain that there is still $625 of labour in inventory - time for a change as they say in the business. To continue the process, they need to enter another bill - credit to remove the $625 of labour in inventory.
6) To wrap it up, one last step - the month end AP Aging summary show that MOJO still owes the vendor "Internal Labour" $11,875, which of course, requires a change also.
7) MOJO tracks its production labour separately from its administrative staff - in its Chart of Accounts list, there are two Cost of Goods Sold accounts -
a) Production Labour
b) Production Labour Recovered
8) The final step in the process is to enter a bill - credit for the apparent balance owing to the vendor "Internal Labour".
The month end bill-credit will create a credit balance in the cost of goods sold section of the profit & loss statement for comparison to the actual production labor costs for the month. For the month of April 2007, MOJO recorded actual production labour costs of $12,890 and recovered $11,875 of this into product costs, implying that $1,015 of actual production labour was expended for shop clean-up and equipment maintenance, well within the parameters that owners of MOJO Services Limited had set-up.
The whole process is repeated at the start of the next month.
The approach demonstrated here can also be applied to other aspects of manufacturing and production.
About the author:
Peter Budreski has been a Chartered Accountant for over 25 years based in Halifax, Nova Scotia, is President of TCOB Computer Solutions and a Vice President of Certified Software Labs Inc., based in Toronto, Ontario.