QuickBooks Manufacturing Tutorial

QuickBooks has a “Manufacturing & Wholesale” edition, but there is a

definite lack of documentation on how to actually use QuickBooks in a
manufacturing business. This posting is the first in a series that will give
you some guidelines on how to best use QuickBooks in a manufacturing
environment. I’ll start off with some basics, and work our way up through
some more complicated scenarios.
This is a list of the subjects I will cover – please feel free to comment
about any subjects you would like to see added to the list, or which you
believe are more important. I won’t cover these subjects in the order listed,
although I’ll have to start off with some of the basic subjects before I can
get into the more complicated ones. I’ll be adding other topics as we go
along, based on user feedback. So let me know what you want to see!

QuickBooks Manufacturing Bill of

Materials
In my post on QuickBooks manufacturing basics I discussed the essential nuts and
bolts (sorry for the pun) of building assemblies in QuickBooks. Today I’ll talk about
structuring your bills of material (BOM’s). A BOM is a simple thing, right? You want to
build something, you just enter in the list of all the parts that you use, and there you
are. On some levels that is correct, but if you are looking for inventory accuracy,
accounting accuracy, and want to make your life easy, you need to give this some
more thought.
QuickBooks is only a rudimentary manufacturing system, so I’ll start off by listing
some of its limitations:

• You can only add 100 different items to a BOM if you are using Premier.
Enterprise is more flexible, you can add up to 500 different items.
• Reporting based on BOM’s is very limited
• Although you can create multiple-level assemblies (that is, a part in an assembly
can itself be another assembly), a build will only work with a single level at a time.
• Integrating non material items in a BOM can be tricky when it comes to costing.
In this article we’ll talk about basic structuring of the BOM – we’ll go into how to use
various item types in a future article.

Working with Levels

How do you look at the item you are assembling? There are different ways of listing
the parts in an assembly – either a flat listing that shows all of the parts, or
a nested listing that shows the parts in a tree structure with subassemblies. Each has
its advantages, each has its problems in QuickBooks.
Let’s look at a simple assembly, a computer that I’m putting together from
components. I have a desktop box, two monitors (it’s a dual monitor system, fancy),
and a keyboard. That desktop box itself has a case, motherboard, power supply and
a video card (I’m greatly simplifying this for the sake of discussion).

If I have all these parts and I make the computer all at once, then I can make
a flat BOM, like the following:

This is simple to work with. I can print a listing to give to the assembler, and I can
issue a single build to create the item all at once. For simple assemblies, this works
well and fits within the QuickBooks approach to manufacturing. There are some
drawbacks, though, which become more apparent when the product becomes more
complicated:
• If you have a more complicated product you can run into the limitation of the
number of items that are allowed in a BOM.
• If you build in stages you have no indication of what those stages are. This BOM
doesn’t show you that you need to build the desktop box by first assembling the
case, power supply, motherboard and video card. You also can’t use this if are
building a number of desktop boxes themselves to hold on your shelves, ready
for final assembly into systems.
The alternate approach is to create subassembly items and make a nested BOM. We’ll
create a new inventory assembly item for the desktop box, and alter the desktop
computer assembly appropriately. Here is the BOM for the desktop box
(subassembly):

Here is the changed BOM for the desktop computer – note that we have dropped
some of the components and have added the desktop case as a subassembly:

Now we have two assembly items – one for the desktop box, and one for the final
assembled computer. There are a number of advantages to this approach:

• You get around the limit on the number of lines in a BOM.

• You can build the subassembly by itself so that you can stock it for replacement
parts, or to hold some ready for the final assembly.
• If you have several variations of the final product that use the same common
subassembly you can make changes to that subassembly quite easily. In a simple
example, let’s say that we have a number of variations of final assembled desktop
computer. Some have two monitors, some have one. Some have a 17″ monitor,
some have a 20″ monitor. Some use an ergonomic keyboard, some use an
economy keyboard. All use the same desktop box as a starting point. If you use
a flat BOM then you have to enter all of the components for the desktop box for
each of your final assemblies, rather than just adding the one subassembly
component. If you have to make a change to that desktop box – such as changing
to a different type of video card, you would have to make the change in each final
assembly if you use a flat BOM, where you only have to make one change if you
use the nested BOM.
• Your printed BOM more closely mimics the assembly process – you have one
BOM for the desktop box, you have another BOM for the final assembled
computer.
However, there are tradeoffs. Your manufacturing process in QuickBooks is more
complicated, your QuickBooks reports don’t show you as much information as you
had before.

• If you want to build an assembled computer you now have a two step process
instead of one. You must first issue a build for the desktop box subassembly.
When that is done, you then have to issue a build for the assembled computer.
QuickBooks won’t issue a multiple level build – that is, you can’t issue the build for
the top level assembly and have it take care of all the parts of the subassemblies.
• There is no way in QuickBooks to print a complete BOM of the top level assembly
including the parts of the subassembly. You can only print a single level BOM.
• When you look at the top level assembly in the build assembly window, which tells
you if you can build the required quantity of the assembly, you don’t have a way
of seeing if you have any shortages of the lowest level parts in the subassembly.
You can’t see if you can build this item. You first have to look at the subassembly,
then at the top level assembly.
These limitations make it difficult to work with multiple level BOM’s in QuickBooks. If
you have a simple product, or a limited number of products, you might be better off
working with flat BOM’s. If your products are more complex, though, that might not
be an option. With complicated products you need the ability to print a BOM for a
subassembly, and you may need the ability to manufacture quantities of the
subassembly separate from the final assembly itself. If you often have changes to the
composition of your subassemblies you will find it hard to achieve accuracy if you
have to go through all of your assemblies to make a change, rather than just editing
the common subassembly one time.
Working with nested BOM’s in QuickBooks can be done, you just need to pay close
attention to the order in which you are building assemblies, and keep careful records
of your assembly listings.
BOM Costs
Now that you have an understanding of a BOM in QuickBooks, I recommend that you
also read my article about the Total Bill Of Materials Cost field in the BOM.
rd
Working with 3 Party Programs
If you are working with complicated products and need to maintain multiple level
BOM’s then you may find it worthwhile to work with one of several 3rd party add-on
programs that work with QuickBooks. At this time we won’t go into a detailed
description of those that are available – you can find information on them in
the QuickBooks Solutions Marketplace. These 3rd party programs fall into a few broad
categories (note – I’ll list a few examples, but these are not necessarily endorsements) :
• Inventory replacements: Some programs, like Fishbowl Inventory, maintain a
complete inventory system outside of QuickBooks. This gives the product more
flexibility in how inventory can be managed, but can be more expensive and
means that you have to manage a completely separate program and database.
• Closely integrated: Another approach is to work with the inventory records in
QuickBooks while generating reports and managing data in ways that
QuickBooks doesn’t do, such as CCRQBOM. With this approach you do more of
your work in QuickBooks where things are familiar, and you don’t have to
manage a separate database. Often this approach is less expensive, but you still
have to live with some of the restrictions in QuickBooks.
I’ll admit that I have a bias here – my company produces CCRQBOM. This is a low cost
approach to providing the features that most small manufacturers need. The product
lets you print a multiple level indented BOM that shows all levels of a complicated
product structure, and it provides requirements reports that let you see if you have
any shortages at the lowest level of an assembled product. However, you may find
that you cannot live within the restrictions of the QuickBooks inventory system, and
you may require a more expensive approach.

Groups vs Assemblies in QuickBooks

QuickBooks provides two item “types” that can have a list of component items –
an Inventory Assembly and a Group. How do they differ, and when is it best to use one
instead of the other? Today I’ll list the features of each and how you can use them.
Inventory Assembly Item

If you are a manufacturer you understand the basic concept of an inventory

assembly item. This is the item that you are manufacturing. You pull some parts off
the shelf, assemble or process them, and end up with a new part. Fairly straight
forward. Let me list a few properties of an inventory assembly item in QuickBooks:
• Inventory Assembly items contain a bill of materials (BOM), which is a list of the
component items that you use to create it.
• The BOM can contain other inventory assembly items, inventory parts, non-
inventory parts, service and other charge items. You cannot include a group item.
• You can have up to 100 component parts in the BOM with Premier, and up to 500
component parts with Enterprise.
• QuickBooks Pro does not support this item.
• When you sell an inventory assembly the sale decreases your quantity on hand
of the inventory assembly itself, but has no affect on the component parts of the
inventory assembly.
• When you add an inventory assembly to an invoice (or estimate, sales order, etc.)
QuickBooks will only list the inventory assembly item itself, it will not show the
component parts.
• You cannot change the composition of the inventory assembly item at the time
you sell (or build) it. You can only change it by editing the BOM in the edit
item window.
• There is a special transaction called a “Build” that will consume the component
parts (reduce the quantity on hand) and increase the quantity on hand of the
inventory assembly. I discuss this in my starting with the basics post.
Group Item

On the surface, a Group item seems very similar. There are significant differences,
however. I’ll list properties of a group item in the same order as I did for the inventory
assembly item:
1. Group items contain a list of component parts. It is not called a bill of
materials but it is very similar.
2. The component list can contain more item types – all the ones available to an
inventory assembly item plus subtotal, discount and sales tax items.
3. You can only have 20 component items in a group item.
4. Group items are available in Pro, Premier and Enterprise.
5. When you sell a group item the sale decreases your quantity on hand of the
component items at that time. The group item doesn’t have a quantity of its own,
so there is no effect on the group item itself.
6. When you add a group item to an invoice (etc.) QuickBooks will list each of the
component items on the screen. You have an option to show all of the
components on the printed version of the form, or just show the group item
itself.
7. You can change the composition of the group item at the time you sell it. Once
you add it to the invoice you can add or delete component lines, change
quantities, and so forth. This does not affect the list of components as they are
shown in the edit item window.
8. There is no special transaction for a group item – you don’t “build” it. There isn’t
a quantity on hand for the group item itself.
Understanding the Differences

It’s important to understand the differences between them because they take
different processes to produce, and they show up in different ways in your reports.

An inventory assembly item is a real part – you build some and put them on the shelf,
then you sell them or use them as a subassembly in another inventory assembly
item. You will see the inventory assembly show up in your sales reports, but you
will not see the component items show up as sales.
A group item is really just a shortcut, not a real part. You don’t have a balance on
hand, you don’t see it in sales reports. It doesn’t exist, it is just a convenience to you
to move a number of different parts through the sales process. You’ll never see the
group item in your sales reports – you will see the component items showing up
there.
In the traditional QuickBooks view, the inventory assembly item is what a
manufacturer is working with. A group item is usually used more by distributors that
are putting together standard kits or boxes at the time you are shipping.
However, group items can be used in some interesting ways to resolve certain kinds
of problems for many manufacturers – and I’ll go into that in more detail in my next
post.

Manufacturing WIP in QuickBooks

Manufacturing WIP in QuickBooks
16 years ago

19 Comments

Tracking Work in Progress (WIP) in a manufacturing business can be complicated,

depending on the characteristics of your manufacturing process. For an extremely
oversimplified definition we can say that WIP is where you are taking items out of
your raw material (component) inventory, but haven’t yet put it back into your
finished goods inventory. I’m going to offer a tip on a short method of managing this
in QuickBooks that may work for many manufacturers.

Who This Applies To

If your assembly process is very quick, you don’t need to worry about WIP. If you are
making simple items that take a day or two, you most likely don’t have a lot of
inventory tied up in assemblies that are in the process of being completed.
QuickBooks fits this scenario well – issuing a “build” will remove the components
from inventory and put the value back into inventory as a completed part.

Some businesses have assemblies that can take months to complete. In this case you
could have a considerable amount of inventory tied up in WIP. These businesses will
need to talk to their financial advisor to determine what the best way is to handle
WIP from an accounting standpoint.

A large number of manufacturing businesses that use QuickBooks fall in between.

Assemblies may not take months, but at any given time you can look at the shop floor
and see that there is a significant amount of inventory that is tied up in assemblies
that haven’t been completed. Given that QuickBooks usually works with a single step
assembly process – issue the build to consume component inventory and create
assembly inventory – it can be difficult to determine exactly what you have in WIP,
and what you have either available to use (builds not yet issued) or available to sell
(builds completed). This is the type of situation where this tip will work best.

Intermediate WIP Assembly

What we are going to do is to create a “WIP assembly” for each of your finished
products. Let’s say that you are making a widget that uses a sprocket and a wheel (I’m
oversimplifying to keep this short). Create two assembly items, widget and widget-
WIP.
The widget-WIP assembly will have the true Bill of Materials (BOM) for the item –
the sprocket and the wheel.
When you start your assembly process you issue a build for the widget-WIP. This
removes the appropriate number of sprocket and wheel items from your available
inventory and creates the appropriate number of widget-WIP assemblies. I would
give this assembly a description that says “DO NOT SELL” so it is obvious if you
accidentally add one to an invoice.
With this you have moved your raw material inventory into WIP, where it isn’t
available to be used for other jobs, but it isn’t available to sell. You can easily look at
your inventory reports and see what you have in progress on the shop floor. You can
even put a value on this (but talk to your financial advisor about this concept first).

When you complete the work you issue another build, this time for the widget itself.
This removes the inventory from widget-WIP (reducing WIP inventory) and adds it
to widget (adding it to finished goods inventory).
This approach might not fit everyone, and if you have a very large number of
inventory assemblies it can be a pain to set up. I’ve given a very simple example here,
feel free to play with it and ask questions!
Understanding QuickBooks Reorder and
Build Points
It’s never a good idea to run out of important inventory items that you resell or use
in manufacturing. In simple inventory control systems we often set a minimum
stocking level that is used to generate a warning when an item falls below a particular
on-hand balance, so that you can order (or build) more of the item just before you
run out. In this article I’ll examine how QuickBooks handles this process.
Reorder Point

When you edit an inventory item you can enter a value for a Reorder Point. This is
the QuickBooks equivalent of what I am calling the minimum stocking level.
Essentially, this is the quantity of this item that you want to have on hand at all times
to prevent you from running into shortages. In an upcoming posting I’ll talk about
some strategies for coming up with a good value for this field.

So, it’s obvious how this is used – you enter the value here and QuickBooks will order
the items for you when you fall below that level? Well, not quite. QuickBooks won’t
automatically cut purchase orders for you (a lot of arguments going on whether a
program should do that or not), You do get a report that shows you what items to
reorder, though.
Inventory Stock Status by Item

This is the report to look at when you are checking on your inventory stock levels.
Here is a simple example:

Looking at the columns:

• Reorder Pt is the reorder point we entered in the item record, what I’m referring
to as the minimum stocking level.
• On Hand is the quantity you have on hand as of the ending date of the report.
• On Sales Order shows the demand for this item on open sales orders – the
number that you have promised to people.
• For Assemblies is the demand for this item on pending builds – the number that
you need to be able to build all of the outstanding pending builds.
• Available is a calculated value, the current on hand value minus the demand
(sales order and pending builds).
• Order will have a check mark if QuickBooks is recommending that you place an
order for this item.
• On PO is the potential supply for this item – the number that you have
on outstanding purchase orders. Note that you don’t know when these items
will be received, although the next column gives you a clue.
• Next Deliv is the due date for the next PO. This is only partly helpful if you have
multiple open PO’s for an item. Be careful with this, as the On PO value might not
all be delivered on the Next Deliv date.
• Sales/Week is the number of items you have sold, on the average, per week in
the period that the report covers. This sample report covers this month to
date so only the sales of the item in the current month are included in the
calculation.
When is “Order” Checked?

When does QuickBooks suggest that an item should be ordered? Let’s look at some
samples in this report:
It appears that the check mark appears if On Hand plus On PO meets or falls below
the Reorder Pt value.
The simple example is the Wheel part. Reorder Pt is 10, On Hand is 10, time to order
some more. Looking at Cog you see that the values are the same as Wheel except that
we have a PO coming in for 1, so it is not checked. Doesn’t QuickBooks take
the Available figure into account, which includes your outstanding demand for the
item from sales orders and pending builds? Apparently not. Look at item AB451 – you
have an Available of -2 and an On PO of only 1, so we look to be short, but it isn’t
checked. On Hand plus On PO exceeds the Reorder Pt figure.
If you would like to change this calculation you can easily export the report to Excel
and create your own calculations based on the figures in this report. You might, for
example, change the calculation to use the Available value instead of the On
Hand value, depending on your business situation. Another nice thing you can do in
Excel is to filter the report to show just those items that need to be ordered.
PLEASE KEEP IN MIND that the element of time is not included in these calculations!
You don’t know when the PO’s are arriving (you know when the next PO comes, but
not necessarily all PO’s). You don’t know when those sales orders or pending builds
need to be completed. This report is a very simplistic view of your inventory and you
have to use it with caution when ordering items.
What About Assembly Items?

You should be able to carry this same concept of a minimum stocking level over to
Inventory Assembly items. These are items that you are going to sell, or possibly use
in building other assemblies. You still have an On Hand value, demand from sales
orders and other assemblies, supply from pending builds (instead of PO’s, unless you
purchase the assembly). Can’t we use the Reorder Point for these items?
Unfortunately, in QuickBooks, the answer is “no”. We have a Build Point value instead
of a Reorder Point, as you can see in the following screen:
Although this could be considered a synonym for Reorder Point, as you can see in this
report the value doesn’t carry through.

It is very unfortunate that QuickBooks limits this report by not allowing us to do the
same sort of calculations. At this time the best I can suggest is a complicated process.
You can create a custom field to hold your own reorder point for both item types,
export the item list to Excel (the Excel export sends the regular reorder point
but not the regular build point, but you can export custom fields), export the
Inventory Stock Status by Item report to Excel, merge the values from the item list
into the report and do your own calculations.
If you like to play with databases you can also use the ODBC driver to extract this
information, but it is very complicated. The reorder and build points are separate
fields and only show in the inventory item type that they are used in. Creating a single
unified column for a minimum stocking level is very difficult to do.
On a side note, this is one area that I am planning on addressing with an integrated
application from CCRSoftware at some point in the future.

How To Set the Reorder Point?

One very critical question is how do I come up with a good value for the reorder point?
This can be a simple process for some businesses, it can be very complicated for
others. In my Calculating QuickBooks Reorder Points article I give you some ideas of
how you might approach this

Calculating QuickBooks Reorder Points

16 years ago

13 Comments

Last week in my posting on Understanding QuickBooks Reorder and Build Points I

talked about how QuickBooks uses the Reorder Point in reports to tell you when to
reorder purchased parts. Today I will discuss some ideas on how to select a reorder
point for your items.
There are many different ways of deciding on a reorder point (which I’ll also refer to
as a minimum stocking level), and each business has its own special requirements.
I’m going to define a few terms and offer a few suggestions on one way to handle
this in QuickBooks. Please feel free to comment on how you use this
in your business!
A Simple Reorder Point

This isn’t a difficult concept to understand. You have items that you are selling and
you can’t sell what you don’t have on hand. You establish a minimum level that you
always want to have on hand and generate a report periodically that tells you if you
have fallen below that minimum level.
The difficult part here is determining WHAT that level should be. You don’t want to
have a lot of money tied up in inventory that you don’t need, or in items that have a
limited shelf life. There are a lot of ways to come up with this value, the best approach
depends on your situation.

The simplest approach is to look at number of items that you have consumed in a
period of time, in relation to how long it takes you to receive the item once you place
an order. If it takes a week to get the item once an order is placed, you want to have
a week’s worth of items on hand so you can fulfill sales while waiting for an order to
arrive. So, a conservative value for a reorder point would be a weeks worth of sales.

Unfortunately, QuickBooks doesn’t provide “lead time” calculations for you. You will
have to determine this value for yourself.

Let’s look at an item, “Widget”, that takes a week to order typically. I’ll look at
the Inventory Stock Status by Item report, and select this month as the period of time
(you should filter this report to show only inventory part items). Look at
the Sales/Week figure on the right, which shows that I’m selling an average of 13.5
Widgets per week. You can pick a longer timeframe if you wish.

How do I get that 13.5 value into the reorder point? You can simply edit the item
record, which works for a single item, but if you have hundreds of items this is
tedious. Instead, let’s use the Excel Export/Import feature of QuickBooks. For more
information on how to work with Excel imports see my article on Importing Inventory
with Excel.
Select the Export button at the top of the report to export this to Excel. In Excel, I’m
going to add a column titled “Type” and enter the value “Inventory Part” for each of
the items. I’ll also add the title “Item” to the item column. Save the spreadsheet and
close it.
Going back to QuickBooks Select the Excel button at the bottom of the item list and
select Import Items. Select the Advanced Import (if you are using QB 2008 or later,
earlier versions give you this import by default). Select the reorder spreadsheet you
just saved and select Add New from the Choose a mapping dropdown.

Give the mapping a name, set the import type to “Item”. Set the Type column to Type,
and the Name column to Item.

Scroll down and set the Reorder Point column to Sales/Week.

Save this and click the Import button. You will see a warning question, select the
option shown below.

This will import the Sales/Week value into the Reorder Point column for inventory
parts.

This is a very simple way to come up with a conservative reorder point. You want to
be careful, having too much inventory on hand can be costly. However, running short
of items can also be costly. There are many ways to come up with a reorder point or
minimum stocking level, you will have to decide on what works for you.
In a future article I’ll talk about some other variations of how to come up with this
value. Leave a comment here if you have any suggestions or comments about how
you determine the value for your business!

QuickBooks Groups for Custom

Manufacturers
16 years ago

21 Comments

Most QuickBooks users think of Group and Inventory Assembly items as an “either-or”
decision – use one or the other. There are times, however, when we can mix the two
items to solve problems in QuickBooks. This is particularly useful for custom
manufacturers – businesses that produce custom variations of their finished product
for each customer.
The Problem with Assemblies

QuickBooks doesn’t make working with custom assemblies a simple task. Typically
there are three approaches for a customized item:

1. Create an inventory assembly item for each variation: If you are selling
widgets, and you have several colors, create an item in the item list for the blue
widget, red widget, and so forth. This may work if you have a small number of
variations and simple assemblies, but it often isn’t practical.
2. Edit the Bill of Materials with each build: Define the assembly item for the
widget, with a common variation. When you have an order, edit the Bill of
Materials (BOM) to include the variable parts that the customer requested, and
build the item. The next time an order comes in, edit the BOM again. I’ve seen
many businesses use this approach, but it can be tedious. It is too simple to make
errors and include the wrong parts.
3. Add the variable parts on the invoice: Just create a BOM for the base widget,
ignoring the variable parts. In the sales order or invoice add the base widget and
then each of the variable component parts that the customer requested. There
are a few advantages here. The customer clearly sees the options that were
chosen. You aren’t editing the BOM of the inventory assembly so you avoid the
possibility of making an error there. This might not fit all businesses, however.
You can easily miss entering an item for a particular variable part, and you might
not wish to see the variables all spelled out in the invoice.
Another Approach

In my posting on Groups vs Assemblies I discussed the differences between the two

item types, and when you would use one instead of the other. I noted that while you
cannot use a group item as a component part in an assembly, you can use
an inventory assembly item as a component in a group. This allows us to create
a group item that represents the highest level of our assembled item, including parts
for each of the variable items, and have a base inventory assembly item to represent
the fixed items that are always included.
Let’s look at a simple assembly – a simple bicycle. This is a very simplistic assembly
set up to make a few points.

Our bicycle has a frame, front wheel, back wheel, and handlebars. We can customize
it by adding fenders, and either a blue or red paint job (or no paint if you want to do
it yourself). If I wanted to make an inventory assembly item for each variation I would
need 6 different assembly items to represent one customizable bike with all the
variations, which isn’t practical.

What we will do is to create an inventory assembly item for the basic bicycle, which
defines the components that every one of my bicycles includes: frame, front and back
wheels, handlebars.
Next, we will create a group item for a prototypical finished bicycle.

I have a basic bicycle assembly, a “fender option” and a “paint option”. These two
items are place holders – they are non-inventory or other charge items that have no
cost and serve as a reminder that we would normally have one of each of these items
in a custom bike.

Now we can add the item to a sales order, and customize it for the customer. Here is
the starting point – adding the bicycle to the sales order:

The customer asks for a red paint job, with fenders. QuickBooks allows you to edit
the group item on the screen without having to edit the item itself in the item list.
These changes only affect the order that you are making the changes in, they won’t
affect any other order.
We can delete items from the group, or add others, if we wish to further customize
the product. I’ve used the “place holder” parts so that it is obvious what options we
have for this assembly.

Things to Think About

This is something for you to play with, perhaps in a test company. It might not fit your
business process – and there are some issues to take into consideration. For
example:
• You won’t see a sales history of the custom bicycle in your sales reports, as sales
of group items don’t show there. You will see sales of the basic bicycle, and you
can look at sales of the optional parts, but you won’t get a sales figure for a “red
bicycle with fenders”.
• You still need to issue a “build” transaction for the basic bicycle, but the optional
parts aren’t consumed until you invoice the product. This isn’t the best approach
if you are making these final items to stock rather than to order.
If I were designing an inventory system for a custom manufacturer this isn’t the way
I would manage the process. However, if you want to stay with QuickBooks and avoid
using more expensive manufacturing systems, this approach might be useful to you.

Outsourced or Sub-Contract Work in

QuickBooks
16 years ago

16 Comments

Many manufacturing (and other) businesses send materials out to another firm to
perform some intermediary processing of the item. This can be plating of a
component part, populating a PC board with circuit components, and many other
tasks. I’ll give you some ideas of how you might handle this in QuickBooks.
This kind of work is called by various names, such as “outsourcing” or “sub-
contracting”. The concept is that you have some items in your inventory, you give
those items to another company, they perform some sort of processing and return
a modified part to you. This may be a product that you sell directly, or that you use
in the assembly of another item. It is important to track these materials so that you
know what you have at the outside vendor and can account for the materials in your
balance sheet.

A key point to emphasize – even though you may be sending these items offsite to
another company, unless you have a contract that states otherwise you own these
items and they are a part of your inventory. When you send them out you are not
reducing your inventory valuation, you are just moving the parts to another location.
This is tough to track since QuickBooks doesn’t handle multiple locations, and it is
important that you be able to track where the parts are so you can audit your vendor
and know how many items are in their possession.
Processing with a BOM

One approach is to move the materials through inventory by using assembly items,
BOM’s and builds.
I’ll use a very simplistic example (I’m not that great at building realistic examples,
sorry about that). We have a printed circuit board called “PCB” that contains 3
“AB451” capacitors and 2 “X91.5” resistors. The parts are purchased, and then given
to an outside vendor who takes them and creates the PCB assembly for us. We take
that and include it in a higher level assembly. Here is the assembly item:
How do we deal with the process? If I issue a build for the PCB assembly, my inventory
of components is reduced and the inventory of PCB’s is increased. This doesn’t tell
me how many component parts I’ve given to the vendor, and it doesn’t give me an
accurate count of PCB’s available to be sold or used in other assemblies.
One approach is to issue a build for the assembly, then use the Edit menu to change
the build to Pending. In my sample I created a pending build for 4 PCB’s, and if you
look at an inventory report you see that we have 12 AB451 capacitors set aside (the
“For Assemblies” column).

We can go to the Pending Builds report to see that we have 4 PCB’s outstanding:

When you receive the PCB’s back from the vendor you remove the pending status on
the builds, and the components are consumed while the assemblies are added to
inventory.

This is a fairly simple approach that doesn’t take much work. You can look at the
stock status report and see that some items are reserved for the pending build, you
can see how many processed items you are due by looking at the pending builds
report.

I have two concerns over this approach. If you sell the component items (such as for
replacement or repair parts) – these components are still considered to be on hand,
but not available. So you have to be careful to not sell more than the available
balance. In addition, if you go to issue another build for the assembly, since those
parts are still on hand, it will let you issue that build. You aren’t stopped from using
the parts that are allocated to a pending build.
An Alternate BOM Approach

Another approach can be used to resolve those two issues, which involves a bit more
work and hides some of the information that I would like to see. What we are going
to do is to create an intermediate assembly that represents the outsourced item.
Take the item “PCB” and rename it to be “PCB-Outsourced”. It still has the same BOM.
Now create another inventory assembly item called “PCB”, and give
it one component, the “PCB-Outsourced”.
Issue a build for “PCB-Outsourced”, do not make it pending. The build removes
your components from inventory and adds the intermediate outsourced item. The
components are no longer available to invoices or other builds. You can tell how
many of the outsourced assemblies you have by looking at the stock report for the
assembly (I recommend that you have the phrase “DO NOT SELL” in the item
description, so people know not to sell this item).

You do not see a listing of how many components you have at the vendor – if there
is a problem you would have to go back and delete builds to reconstruct the values,
and that could be a bit complicated.
When you receive the assemblies back from the vendor you would issue a build for
the “PCB” assembly. This would consume the intermediate assembly and replenish
the final assembly.
Another benefit of this approach comes into play if the vendor returns a variable
number of finished products to you each delivery. Let’s say that you ask them for 10
assemblies and give them the parts. They return 4 one day and 6 the next. In the first
approach it is difficult to handle – you can’t partially change the status of the pending
build. In the alternate approach you just issue a build for the number you received
each time.

Neither of these approaches fit the bill perfectly, but in QuickBooks we are often
looking for workarounds in the inventory system. Both approaches mange the total
valuation of our inventory correctly – the cost of the items remains in your inventory
asset account.
In an upcoming posting I’ll an approach to this problem that uses a different kind of
transaction – a sales order.

Why Won’t QuickBooks Let Me Build This

Assembly?
16 years ago

9 Comments

Computer programs can be frustrating when they don’t let you do what you want.
They are supposed to be a tool that helps you run your business! One complaint that
I hear often from QuickBooks manufacturing users is that the program won’t let them
build an assembly when they can see that they have the necessary parts on hand.
Today we’ll look at a common cause for this problem.
Although QuickBooks lets you sell items that you don’t have (letting your on-hand
inventory balance go negative), it won’t let you consume items that you don’t have in
a build. If you want to build an assembly, you must have the parts, or it will mark the
build as pending.
Timing is Everything…

Let’s look at a simple assembly. My Widget requires a Cog and three Wheels.

If I look at the Item List, I see that I have plenty of both on hand, so I should be able
to make at least 33 Widgets.
However, when I go to Build Assemblies to build my Widget, you can see that the
program will not let me build any!

The key here is timing. In QuickBooks we have a great deal of flexibility when working
with transactions. We aren’t forced to use today’s date – you can enter any date you
wish. You can go back in time, you can even go into the future. Even though you have
this flexibility, however, you are still constrained by time. The Item List doesn’t take
the date into account. It shows you the sum of all transactions. Let’s look at
a QuickReport for the Cog item:
Note the date of the bill? Now go back to the Build Assemblies screen shot I included
before. See the build date in the lower left? It is 7/30/2008 – one day before the
receipt. Builds are date sensitive – they see the inventory balance on the build
date and in this case you haven’t received the items that you need to build.
This is a simple scenario, of course. In your business things are likely to be much
more complicated. The principle holds true, though – inventory balances are date
sensitive. It is easy to enter a transaction like a receipt with a wrong date. Perhaps
the purchasing manager was behind on entering receipts and entered the current
date when she caught up with the paperwork, rather than the actual date the items
were received. Possibly the manufacturing foreman was entering several builds at a
time, and the date carried over from the prior transaction that was entered so this
date wasn’t correct. There are many reasons why dates and inventory balances can
get out of synch.

In this particular case we can correct the problem either by changing the date of the
receipt or the date of the build. Do not make an inventory adjustment to correct
the balances, as that will just create more problems than are solved. Once you
change either of the dates, the program will let you issue the build.
Changing Dates can create Pending Builds

You do have to be careful about changing dates of transactions, as you can create
other problems this way. Fortunately, QuickBooks tends to give you warnings about
some of these problems. You need to pay attention to these warnings and
understand what the implications are.
Let’s take my example from above. We’ll correct the date on the receipt to make it
7/30/2008, so that we now can issue the build on that date.

After this, let’s say that someone entered another transaction in error, or went back
and changed another date in a receipt transaction. Something that decreases the on
hand balance on 7/30/2008. For example, that receipt could be deleted or changed
to an older date. Or an inventory adjustment could be entered for an earlier date
that decreases the quantity of inventory on hand on 7/30/2008. Is this a problem?
We have already issued the build, so the parts have been consumed and I have my
3 Widgets in stock…
If I go back and delete that receipt I will get a warning:
By deleting the receipt, I don’t have the items I need to build the assembly on that
date. QuickBooks is telling me that if I want to go ahead, it will mark the build
as Pending. This also means that I won’t have those three Widgets in stock, so they
aren’t available to a higher level assembly or for sale.

Tracking QuickBooks BOM Revisions

16 years ago

5 Comments

In most manufacturing businesses you will find that the structure of the Bill of
Materials for items will change over time. Today I’ll discuss how QuickBooks deals
with these changes.
Changes happen. A component part may become obsolete and be replaced by a
newer one, there may be engineering changes to improve the product, you may have
new government requirements that add or change the configuration. In major
manufacturing software products you often will find a revision control feature, or a
way to track changes in your products. QuickBooks doesn’t truly provide this feature
unfortunately, but it does handle changes relatively gracefully.
One of the concerns I often hear is “if I change my BOM will it affect my existing
builds?”. That is a good question – because there are times when you can make a
change to QuickBooks that will have an effect on actions that you’ve taken in the past.
Sometimes this is good, often it isn’t. To understand how changing your BOM affects
QuickBooks we have to understand the difference between a list record and
a transaction record.
• List records tend to be descriptive in nature. The item list, the customer list, the
vendor list for example. You have descriptions of the record, information about
accounts that are to be used, and so forth. This generally is information that
is not date sensitive.
• Transaction records relate to changes in information. Assembly builds, invoices,
purchase orders for example. There is a date that the transaction relates to, and
there are changes in information such as the consumption or supply of a quantity
of items in the item list.
When you create your bill of material for an Inventory Assembly item, you are
creating a list record. It is a description of the component parts for that item, and it
doesn’t relate to time. What you see now is what you get. When you issue a “build”
transaction to build the assembly item you are creating a transaction record. You
enter a date that the build occurs on, a quantity, and the item to build.
How Changes in a BOM Affect Builds
When you issue a “build” transaction the program looks at the current state of the
BOM for the inventory assembly item. It will copy the list of component parts into the
transaction. If at a later date you make a change to the BOM in the inventory
assembly item, that change has no effect on existing builds. If you issue a new build
then the changed BOM is used.
This is what we normally would hope for – and in a small way it gives us revision
control. You can see a history of the changes to the BOM for the item by looking at
the part list in build transactions over time.
The downside is that it also means that you can’t easily correct mistakes after the
fact. If you find that you have issued a build for a BOM that has an error, and you
want to correct it, you can’t just change the current BOM. You also have no way to
directly change the existing build transactions. Your only options are to make a
manual inventory adjustment or to delete the build transaction and issue it again
(keeping in mind that the new build, regardless of what date you use, will use the
current BOM structure).

As a side note – be careful about deleting a build. If the item you are building is a
subassembly that will be used as a component in another build you may create a
cascading series of problems. Since build transactions are date sensitive, and your
inventory balances are date sensitive, if you delete a build of a subassembly you may
find that this creates a shortage for the build of a higher level assembly. If you
decrease the supply of a part so that there aren’t enough to support an existing build,
QuickBooks will change that existing build to a pending build. That subsequently
affects the balance of that other assembled part, and you can have a series of
problems.
Shortcomings
There are a number of shortcomings in this system – including some bugs (as of the
date that this is being written).

• QuickBooks doesn’t have a way of printing a manufacturing work order – you

can’t print the expanded BOM for an assembly you are building (with the
quantities of parts being used). All you can do is print a simple BOM report for a
single assembly. You can find a way to print this with third party products
like CCRQBOM or the ODBC driver and a report program.
• Once you have changed the BOM in the item list you have no way of printing a
report that shows what the component list was at the time the build was issued.
• Although you can see the historical BOM when looking at a build transaction,
third party programs that access the QuickBooks database cannot. There is a bug
in the QuickBooks programming interface (which all third party products must
use, including the ODBC driver) where an inquiry to a build transaction will show
you the current BOM, not the part list that was used in the build transaction itself.

Understanding QuickBooks Inventory

Cost
15 years ago

92 Comments

If you are using QuickBooks to manage your inventory, you need to understand how
QuickBooks deals with the cost of inventory items. I’ve been answering a lot of
questions about this in the Intuit Community Forums lately, so here is a quick
rundown of how things work.
Cost Fields in QuickBooks

If you look at an Inventory Part item, you will see that there are two cost fields.

The cost field, on the left, is a “reference” field. That is, it doesn’t have any direct
bearing on the valuation of your inventory, the cost of your inventory in your
inventory asset account. I wish they had another name, because it is confusing to talk
about it. I refer to this as the “last purchased cost”, although that isn’t always exactly
right. If you purchase an item and receive a bill for it, the cost that you receive the
item at will usually be stored here (but not always, that depends on how
your company file is set up). You can edit this cost directly in this window, it doesn’t
have a direct effect on your inventory valuation.
The avg costfield, bottom center, is the field that is used in the calculation of the
value of your inventory. This is calculated by QuickBooks based on the cost of receipt
(and adjustment) transactions. You cannot directly edit this in the window here.
Inventory Valuation

QuickBooks values your inventory using an average costing calculation, as opposed

to other types you may be familiar with, such as LIFO, FIFO, or specific costing. If you
need another costing method, you will have to use a third party addon program that
manages inventory outside of QuickBooks.
This can be a complicated subject – I am only going to go into this lightly. Let’s look
at a simple example.

• If start with an item with no quantity, no value, and receive a quantity of 10 at

$1.00 each, you will see that the cost is $1.00, and the avg cost is also $1.00. You
have $10.00 of inventory in your inventory asset account.
• If I then receive another 10 items, but at a unit cost of $2.00, you will usually see
the cost value set to be $2.00. However, the avg cost of your inventory will show
as $1.50. We started with 10 items and a value of $10.00, we added another 10
items at a value of $20.00, so we have 20 items with a value of $30.00. That gives
us an average cost of $1.50.
If you sell one of these items in an invoice, the COGS account is incremented by the
average cost of the item at the time of the sale.

This is a simple example. There are long arguments about the costing calculation that
QuickBooks uses – relating to the more complicated situations when you have many
added transactions, and other complicated situations.

One thing that I will note, briefly – if you sell all your inventory, and then continue to
sell the item so that you go to a negative quantity, the costing calculation runs into
problems. It can’t accurately account for a negative balance, and you can see some
very odd figures show up in the average cost field, and your inventory valuation
reports. Once you bring the balances back to positive these figures should resolve
themselves, but it is always a good idea to not allow inventory balances to go
negative.
Manufacturing Cost

When you are working with an Inventory Assembly item you have an additional cost
field – the Total Bill of Materials Cost. See my article on Understanding the Total
Bill Of Materials Cost.
Let me know if this is clear, and if you need more information!

Understanding QuickBooks Total Bill of

Materials Cost
14 years ago

14 Comments

In a prior article I talked about the cost and avg cost fields in the item list. In this
article I’ll talk about a related value, the Total Bill of Materials Cost which you will
see listed at the end of a QuickBooks bill of material.
Let’s take a look at an inventory assembly sample item. The WHAS wheel assembly has
two components, a screw (two of them) and a roller. Note that there are three
costs shown in this window.
The Cost field (15.00) has no real bearing on valuation of this item. This figure can be
edited directly. QuickBooks will not automatically update this cost to reflect either
the Total Bill of Materials Cost or the Avg Cost. As I discussed in my earlier article on
costing, the cost value of purchased parts is usually, but not always, the “last
purchased cost” of an item.
The Avg Cost field (32.00) is the cost that QuickBooks uses to calculate the value of
this item. You can only edit it directly when you add a new item – after that it is
updated by inventory adjustments, receipts and builds. If you multiply the on
hand value by avg cost, you get the inventory value for this assembly (assuming you
don’t have a negative on hand quantity).
The Total Bill of Materials Cost field (32.00) is not directly tied to the cost or avg
cost values. This is the sum of the cost values of the components in the BOM. In our
starting example it matches the avg cost, but you will see that they are not connected
later in this discussion.
What is the Cost of a Build?
Let’s take a look at the two component items.

The SC-12 screw has a cost of 11.00, but the avg cost is 8.86076.

The
RORO-4 roller has a cost of 10.00 and an avg cost of 19.44444.
When we
start, we have 6 WHAS assemblies at an average cost of 32.00, for a total inventory
valuation of 192.00. We will build 4 of WHAS to bring us up to a total of 10. What will
we see for the cost, avg cost and total bill of material cost for WHAS when the
transaction is done?
• We start with 6 @ 32.00, for a valuation of 192.00
• For each WHAS that is built, we use 2 screws @8.86076 (the avg cost), for
$17.72152
• For each WHAS that is built, we use 1 roller @19.44444.
• The cost at this time for one WHAS is 37.16596
• We built four WHAS for a total valuation of 148.66384
• Adding four WHAS with a total cost of 148.66384 to the value of 6 WHAS that were
valued at 192.00 gives us a total inventory valuation of 10 WHAS for a value of
340.66384
• Dividing that total cost by the total on hand (10), we should get an avg cost for
WHAS of 34.06638
Let’s take a look at the WHAS information:
As you
can see, the avg cost comes out to be what I predicted (although QuickBooks did
some rounding at some point in the process).
Note that the cost and total bill of material cost have not changed.
This demonstrates that the avg cost of an assembly item is adjusted by the avg
cost of the component parts when you issue a build transaction. This is what I
would expect, and it shows that QuickBooks is properly maintaining the value of your
inventory. The cost of the component parts is being rolled into the cost of the
assembly.
Management Information is Misleading
The problem that I have with this is that from a management (not accounting)
standpoint, the figures that are shown here are misleading. As my costs fluctuate,
the cost value does not change. It only changes if I manually update it myself. If you
have a report that shows the cost of this assembly, you may have an incorrect
understanding of the cost of your assembly.

What is
worse, the change item prices function in QuickBooks will let you use the cost of the
assembly item, but not the avg cost, so price updates will be based on information
that is often incorrect and out of date.
To take
this further, if the WHAS inventory assembly is used as a sub-assembly in a higher
level assembly, the total bill of material cost value in that higher level assembly will
reflect the cost of the subassembly, which doesn’t reflect any useful value if you are
not diligent.

Why Is This Important?

Most companies will want to base their selling price on the cost of manufacturing
their item. It is important that you have accurate information to make these
decisions. In my experience it is common to want to update prices based on
the current cost of acquisition. That is, I want the BOM cost to reflect the last
purchase cost of the components, not necessarily the average cost. If you are updating
the cost field when you purchase your parts then you have this information in the
database for components.
If you have a simple one-level item structure you have to look at the total bill of
materials cost as the basis of your decision. This value is hard to find in QuickBooks –
it doesn’t show in reports other than the individual Bill of Material printout, or in the
Edit Item screen.
If you have a more complicated product structure, using sub assemblies, getting an
accurate cost of the assemblies is much more complicated. The cost shown for the
subassembly might not have any relation to the cost of the components.
What Can You Do?
Obviously, if you are going to use the QuickBooks price updating tools, you want to
be able to set prices based on accurate information. In QuickBooks by itself you need
to periodically review the total bill of material cost of each assembly and then retype
that in the cost field. Again, this value is only found in that one report or in the edit
item screen for the assembly. There isn’t a simple report that lists the value for you.
This is complicated if you have multiple level product structures – in that case you
need to make sure you update the lowest level assembly first, and work your way
back up the product structure.
I do have an alternative. My company produces a low cost QuickBooks add-on
product called CCRQBOM. I’ve included several features that can assist you with
updating assembly costs. The primary feature is a cost rollup function that will take
the cost value of the component items and update the cost value of the inventory
assembly item. In addition, if you have multiple level assemblies, the program will
determine what the lowest level assembly is and start with that, rolling the cost up
through all of the levels to the top.

Shipping Costs and QuickBooks

Inventory
15 years ago

115 Comments
What is the “cost” of an inventory item that you purchase? For many businesses we
talk about the “landed cost” of the item, which can include not only the purchase cost
of the item, but also the shipping cost of the item. In this article I’ll talk about a few
ways to handle this in QuickBooks.

The landed cost of an item is usually considered to be the cost of the product plus
any relevant logistics costs, such as transportation, warehousing, handling and so
forth. The can also be called the total landed cost or net landed cost.
For my example we will receive an item called sprocket. We’ll receive 10 of them, with
a unit cost of $10.00, plus a shipping fee of $10.00 (sorry about the unoriginal values
here). If we were to just receive the items our item cost would be $10.00 each, but
what we want for a landed cost is actually $11.00 each.
Shipping Billed with Item

If you receive a bill for an item and the shipping is included in the same bill, you can
do a little math in your head to include shipping in the item cost. Let’s look at a
receipt of an item, with the bill:

I received 10 at $10 each, plus a shipping fee of $10, so I simply enter a total cost of
$110.00. If you have several items in the receipt but one shipping cost you have to
allocate the shipping cost to each of the received items yourself.
Shipping Billed Separately

What happens if you get the shipping bill later? Perhaps you are paying a separate
company for the shipping fee so it doesn’t come in the bill for the items themselves.
There are two ways to handle this.

1. Go back to the original item receipt and adjust the amount to reflect the shipping
charge. This works if the shipping charge comes from the same company, and
you don’t mind adjusting the original bill to include these charges. This is a simple
approach, but generally not the best way to handle things.
2. Create a special shipping clearing expense account to use when entering the
bill, and then doing an inventory adjustment. This will deal with most situations
properly, but it does take extra work.
A clearing account is one that you set up in your chart of accounts to help with the
process of moving a value from one place to another. Generally the idea is you create
a place to hold the value, and then you adjust it away so that the clearing account
doesn’t have any value left behind.
In your chart of accounts create a new expense account and call it Shipping Cost
Clearing Expense.
You will receive the item as before, but since we either don’t know the shipping cost
or the shipping charge is from another vendor, you will only enter the actual
purchase cost of the items. In this case, we enter $100.00.
As you can see below, we have an average cost of $10.00 per item (in this case,
because we didn’t have any on hand prior to this transaction).
Later we receive the shipping bill, and we will enter the cost of the shipping ($10.00
in our example). They key here is to use the clearing expense account, rather than
your normal shipping expense account. If you stop now, you have expensed your
shipping, you have not allocated the cost to your inventory.

Now you are going to enter an inventory value adjustment to move the shipping
cost out of the holding account and into inventory. Do not change the quantity. Make
sure that you:
• Select the shipping cost clearing account for the adjustment account.
• Check the value adjustment box.
• Enter a new value amount that is the total of the current value plus the shipping
charge.
This moves the cost from the holding account into your inventory asset account. If
we look at your item you will see that the average cost is now $11.00, which was our
target. PLEASE NOTE that if you have existing items, or multiple receipts, you won’t
see this as clearly. BUT the process will still work correctly if you follow the steps
above.
If we look at a QuickReport for the clearing account we see that the net balance is zero
– which is a good check to see that all of our inventory adjustments have been
entered for these kinds of situations.
Hope that helps!

QuickBooks Manufacturing Forecasts:

Component Demand
15 years ago

9 Comments

Having an adequate supply of component parts is critical to a manufacturer. If you

run out of something, you can’t build your assembly. If you can’t build your assembly,
you can’t fulfill customer orders. So let’s talk about how to avoid this if you are using
QuickBooks.

Projecting the “demand” for component parts can be a very complicated process.
What assemblies do you need, and when do you need them? If you have
subassemblies, those have to be built before the final product can be built. How long
does it take to build them? How long does it take for purchased parts to arrive? The
problem is complex – and there are programs available that can help you with this
complicated process – generally referred to as “MRP” or “ERP” systems
(Material or Enterprise Requirements Planning). Unfortunately, these kinds of
programs are very expensive to purchase, and even more expensive to implement.
Within the framework of QuickBooks we have limited options. There isn’t a
formal forecasting system that lets us project future sales or other needs. There isn’t
a time phasing feature that lets us specify the time it takes to build an assembly or
subassembly, or what the typical time is to acquire a particular part. However, there
are a few things that you can do.
One of the ways to do some analysis is to use the Inventory Stock Status by Item report
and pending builds. This does NOT involve any “time phasing”, but it can give you
some help.
Setting Up
To start with, let’s make sure that we have enabled the quantity available calculations
in your Inventory preferences.
This is a
helpful setting that will let us use the quantity available calculations in our simple
forecasting system. Note that both boxes are checked.
Here is a Bill of Material for an assembly I’ll use as an example:

Sales Orders as Forecasts

If I want to project future demand for component parts, I have to forecast future
demand for the assemblies that I’m going to sell. One of the very useful features in
QuickBooks is the sales order system You can enter sales orders, either for actual
orders that are being placed or for “forecasted” orders that you anticipate in the
future. These won’t reduce the on hand inventory balance, which is your accounting
balance, but if we have set up the preferences as shown above they will affect
the quantity available calculation, which is a planning number, not
a financial number.
Looking at the Open Sales Orders by Item report for my 0050-MC pool assembly, you
can see that I’ve added two sales orders.
The first is an
actual sales order that a customer has placed, for June 10th (the current date is May
19th). I’ve also decided to add a “forecast” order – I’ve created a dummy customer
named “Forecast” and I added a sale of 6 pool covers for July.
Pending Builds
Taking the information in the sales report, I’ll create pending builds for the items on
the dates that are shown in the report. Note that I’ve stated that it is a “forecast” in
the memo field. In this case it is automatically set to pending because I have a parts
shortage. If it isn’t marked pending automatically then you can use the Edit menu to
change it to pending status.
I’ll add a
second pending build for July 1st.
Looking at the Pending Builds report we can see the forecasted builds.

Inventory Stock Status by Item

Now let’s look at the Inventory Stock Status by Item report. It is very important that you
set the time range of the report to all, or it might not include your forecasts.
For
the main assembly 0050.MC you can see that we have 11 on sales order.
For the component part TUCA-4X2 you can see that we have a demand for 22, and a
projected shortage of 14.
For the subassembly WHAS you can see that we have a demand for 22 and a
projected shortage of 16.

This is a very simple means of trying to project component shortages. It tells you that
to be able to complete the products that you want to sell in the period of time that
you are working with, you have some shortages. It shows which items, and how many
you are short. Be careful with this, however. There is information that you do NOT
see here. Without any “time phasing”, you don’t have a good picture of WHEN you
need these items, or when you should purchase them. You don’t want to purchase
too soon, but you also don’t want to purchase too late.
A good MRP or ERP system would tell you the WHEN in addition to the HOW MANY
you need to purchase. The problem is, these kinds of systems are expensive and
involve a lot of work to implement.
Subassembly Demand
In our example we have several subassembly items as components to the higher
level item we are selling. QuickBooks allows you to include assemblies as
components in a higher level assembly, but it doesn’t do any processing of
subassemblies. In our sample, for instance, you see that you need 22 of the WHAS
wheel assembly. That in turn requires additional parts, but the demand for these
parts doesn’t show in these reports.

You can, if you can identify the subassemblies, add pending builds for these items.
Look in the Inventory Stock Status by Item report and create a pending build for each
inventory assembly that has a for assemblies value. The WHAS item requires 22
subassemblies (and you are short by 16), so issue a pending build for these as well.
Third Party Help
As I mentioned, there are several MRP and ERP programs that you can find in
the Intuit Marketplace that can help with these projections. Costs vary, and you will
find that most of the advanced solutions will manage inventory outside of
QuickBooks.
Another useful product is CCRQBOM. For the sake of full disclosure please note that
my company produces this product. CCRQBOM is not an MRP/ERP product, and it
will not “time phase” your component demand. However, it does provide you with
several useful tools, the price is much lower than the MRP/ERP products, and
it works entirely with your QuickBooks inventory data rather than setting up a
completely separate inventory system.

Dealing with Scrap in QuickBooks

Manufacturing
14 years ago

6 Comments

Many manufacturers have to deal with scrap in their manufacturing process. That is,
the consumption of component materials beyond what is defined in the bill of
materials due to waste, trimmings, left over sections or other variable consumptions.
QuickBooks doesn’t deal with this directly. Let’s talk about some ways to handle it.
Scrap is a term that I’m using loosely to refer to consumption beyond what you
normally define as going into the assembly. If you are cutting shapes out of some
sheet metal, or a piece of cloth, you may have extra material from around that shape
that is wasted. If you are using electronic components you may find that when you
test the parts some have to be tossed out because they don’t meet specifications.
Things of that sort.

There are many different ways of dealing with this. Some are more accurate than
others, but take more work. You have to decide how important tracking these costs
are for your business, versus the effort it takes to do the tracking. I’ll throw out a few
suggestions – there are probably many others than what I offer here.

This article was updatd on 2/10/2010

Ignore It
This is the simplest way – just ignore the issue! I don’t usually recommend this, but
sometimes it makes sense. If you have small washers that you are using, and the
washers are fractions of a penny each, it probably isn’t cost effective to keep track of
how many you drop when you are building your assembly. This option applies if you
have an inexpensive item that you may be expensing already (a non-inventory
item), and the waste/scrap amounts are very small.
Physical Inventory Counts
Another simple approach that may work for you, depending on how you manage
inventory. Don’t worry about actually tracking what you are scrapping as you go
along, count your items periodically and make adjustments. If you are
using inventory part items, you know how many you should have used in a period of
time. Count how many you have at the end of that time and compare it to what
QuickBooks says you have. If you have less, then use an inventory quantity
adjustment to bring your quantity to the proper level. You need to select an account
to post the value to, and you should talk to your financial advisor as to the best
account to use in your situation. I like to use a separate scrap expense account to
receive this cost, specifically for counts of items where I expect variations to be due
to waste or scrap.
Estimating Scrap in the Bill of Material
In some higher level systems that I’ve worked with (and written) we would have
a scrap factor built into the bill of material. In some situations you can make a pretty
good estimate (or at least a guess) as to the amount of scrap that you are going to
generate with each assembly you build. In these higher level systems you would say,
for example, that although I should be using 22 inches of an item to build this
assembly, from experience (or measurement over time) I know that it actually will
take 24 inches due to various factors. Or, perhaps, from statistical measurements, I
know that 15% of my component parts are going to fail a QC check and can’t be used.
These kinds of systems will handle this information in different ways. Some will
automatically post that to the scrap expense account. Some will include it in the cost
of the finished item, but have it listed as a separate item in manufacturing costing
reports.

In QuickBooks there are a couple of ways of doing this.

1. Just build it in: Enter the full amount plus the estimated scrap into the BOM.
Using my example above, tell QuickBooks that you want to use 24 inches, not 22
inches.
2. Add a separate line: You can add an item to a BOM more than once. Using the
example above, I would have one line for 22 inches of the material, and another
line for 2 inches of scrap. Due to the way that QuickBooks works there isn’t a lot
of value here (it all ends up in the same place) other than having it listed
separately in the Bill of Material.
3. Create a “Scrap” item: I’ve seen this done, I don’t usually like it. Create a
special item in the item list for generic scrap (or, specifically scrap for different
kinds of parts). This lets you assign a different account to the item. Don’t use this
for inventory part items, because it creates a mess (in my opinion) in your
quantity on hand. If you use it for a non-inventory item it will let you post to a
separate scrap account AND it shows up in the Bill of Material as a separate scrap
line that is easier to identify.
The values you are taking into account for scrap here are estimates, and that might
be acceptable in some situations. You may couple this with the physical inventory
count method. This approach will let you keep a better eye on what you expect scrap
to be on an ongoing basis, rather than just when you take a physical count.

Adjust Scrap to Expense

The approaches listed so far work if you have low cost items and tracking your scrap
amounts is not a major issue for you. You are going to see scrap numbers
periodically, and the figures may just be estimates. This won’t always work for you,
particularly if you have a high and variable rate of scrap and there is a lot of cost
involved.
If you need better control and reporting of scrap (and you either have a low number
of builds or you have expensive materials) then you may want to make the extra
effort to make an adjustment after each build.
In this sample,
I’m adjusting my Cog part down from 10 to 8 parts – I’m scrapping two of them. I’ve
selected my manufacturing scrap expense account, just pushing the cost of this item
into expense out of inventory assets. Note that this is not a value adjustment.
Again, this might not be the way your financial advisor wants you to handle this. It
fits for some situations, but not others.

Adjust Scrap to Asset

This is a variation of the prior method, but this time we are going to move the cost of
scrap into the cost of the assembly, rather than expensing it. It has the benefits of
moving the cost of your scrap into the value of the assembly, which for expensive
items and components may be the right thing to do from an accounting standpoint.
Unfortunately, QuickBooks doesn’t make the chore easy.
This time we are
making a value adjustment (see my article on value vs quantity adjustments for an
explanation). I’m scrapping two Cog parts as before, and as you can see I’m changing
the total value of Cog from $106.70 down to $80.53.
Next, I adjust the value of the assembly item, Z-Gear, to be higher by that same
amount. I’m adding $26.17 to its value.
If you are entering one scrap adjustment per adjustment transaction, when you
enter the new quantity for Cog then you will see the value of that adjustment in the
“Total Value of Adjustment” field at the bottom. This tells you how much you need to
add to the Z-Gear value (in this case it is $26.17). If you are entering multiple
adjustments to multiple assemblies you have to manuall calculate this value. My
thanks to my friend Rustler who pointed out that the value of the adjustment shows in
that field when you enter the new quantity for the component item. See his Rustler’s
Quickbooks Tips blog, another source of info.
In the screen above I’ve already entered that second adjustment. As you can see at
the bottom, the total value of adjustment is zero. That is, I’m transferring the cost
out of Cog and into Z-Gear. You need to have an account for any adjustment, and I’ve
picked my manufacturing scrap account, but the net change in value is to move the
cost from the inventory asset of the scrapped part into the inventory asset of the
assembly. No change to that expense account. This will recalculate the average
cost of the assembly to add the value of the scrap.
Accurate, and probably the way that the accountants would like (some may argue
with me, we’ll see how that goes in comments), but it is a very tedious approach.

I hope to write an add-on program that will make this kind of adjustment much
easier, with the computer handling the value calculations for you.

So, there are some ideas. Let me know if you agree, or if you have some alternate
methods. There isn’t one way that is right for everyone.

Item Types in a QuickBooks Bill of

Materials
14 years ago

6 Comments

QuickBooks Premier and Enterprise provides us with 11 different item types, of which
5 can be used as component items in an inventory assembly. Which should you use,
and why? Each of the item types have their own characteristics and uses.
If you are a manufacturer, odds are you are going to use an Inventory Assembly item
to manage your inventory. You will create a Bill of Materials (or “BOM”), which lets
you issue a build transaction. The basics of working with a BOM is discussed in
my Manufacturing Bill of Materials article.
Here is a sample inventory assembly, a “computer base system” that is composed of
several components: A “Case”, a “Motherboard” and 10 screws.
Let’s talk about the kinds of “items” that we can add to the BOM.

Inventory Part
This is the most obvious, and basic kind of item you can add. An Inventory Part is an
item that you are buying and stocking, where you want to track the quantity you have
on hand. These will be parts that have significant value, that you want to track to
make sure that you have enough on hand. Items that may stay around for awhile on
the shelf, and so should be “capitalized” when you buy them instead of “expensed”.
When you purchase these items, the cost of the item is saved in an inventory
asset account, which should exist on your balance sheet. The cost doesn’t go to your
profit/loss statement immediately as an expense.
Using Inventory Part items provides you with some advantages and some
disadvantages in QuickBooks. An advantage – you can track how many you have on
hand, and see them in a variety of QuickBooks management reports. A disadvantage
– you must have a positive inventory balance of the inventory part components
before you can build an inventory assembly – if you don’t have the component parts,
you can’t build the assembly.

When you build the assembly, the value of the Inventory Part items will be moved out
of the component inventory asset account and moved into the assembly inventory
asset account. For a better understanding of inventory costs, read my articles
on Understanding QuickBooks Inventory Cost and Understanding QuickBooks Total
Bill of Materials Cost.
Inventory Assembly
QuickBooks allows you to use “sub assemblies” when working with your Inventory
Assembly items. That is, your assembly can in turn have another assembly as a
component. For example, here is a higher level computer system which uses our
“Computer Base System” as a component:

An Inventory Assembly component item is treated the same as an Inventory Part – you
must have an adequate supply of the assembly component to be able to build the
higher level assembly. Costs are handled the same way here as they are with
the Inventory Part components.
Using “sub assemblies” this way provides you with the ability to break down your
complicated products into simpler, more manageable groupings. I think it is best if
you can keep a list of components down to one printed page (or less), so that you
can easily see what is included in the assembly. In addition, QuickBooks
Premier limits you to 100 component items in a Bill of Material, so for
complicated assemblies you must use sub assemblies (or, move to Enterprise, which
has a limit of 500 component items).
Using sub assemblies does create more work in some cases, since QuickBooks won’t
print or process a “multiple level” assembly item all at once. I’ll discuss this a bit more
later in this article.

Non-Inventory Part
Sometimes there are parts that you use in your building process that don’t represent
a large portion of the value of your inventory, or of the assembly itself. These are
parts that you don’t worry about tracking quantity – you buy them in bulk and just
order more when you see that the “bin” is getting low. They could be things like small
washers, screws, and so forth. These are often good candidates to be Non-Inventory
Parts.
When you buy a non-inventory part it is “expensed” right away, rather than
capitalized. It is important that you set these items up in the correct way. Make sure
that you check the box titled “This item is used in assemblies…”.
When you check this box you make this a “two-sided” item, with a separate expense
and sales account.

When you build an assembly the “cost” of the Non-inventory Part item is removed
from the expense account and included in the inventory asset account of the
assembly.
I use these kinds of parts when the cost of an individual item is very small, so that I
don’t worry about tracking the balance on hand of the parts. If you lose some during
processing (drop them on the floor, etc.) the loss has already been expensed.
However, if the items are hard to come by and take a long time to acquire, you may
still consider using them as an Inventory Part item.
Service and Other Charge Items
You can add both Service and Other Charge items. I’ll have to admit that at this point,
I don’t see a large difference between the two, other than being able to specify a unit
of measure for Service items but not for Other Charge items. If there is a reason to use
one or the other, please let me know! With either item, make it a “two sided” item by
clicking the “used in assemblies” box.
I use these items to add non-material costs to an assembly. I tend to use Service items
outside processing charges, labor and the like. I’ll use Other Charge items for setup
costs, sometimes.
If you have some work done on an assembly by an outside processor, such as
deburring or coating, add this cost to the assembly item using one of these items.
When you pay the vendor for the outside processing the cost goes to your expense
account. When you build the item, the cost is “capitalized”, removed from the
expense account and added to the inventory asset for the assembly. This can be
handled in several ways, as I discuss in my article on Outsourced or Sub-Contract
Work in QuickBooks.
You can also use this to “burden” your assembly with your own payroll costs in the
same way, using a Service item that points to your payroll expense account. Please
check with your financial advisors before doing this to make sure that you are using
this feature the way that they want.

Types You CANNOT Use

QuickBooks won’t allow you to use a Subtotal, Discount, Payment, Sales Tax, Sales Tax
Group or Group item as a component. For the most part, this is understandable.
I do run into people who would like to use the Group item as a component, similar to
how you would use an Inventory Assembly. QuickBooks doesn’t support this.
Note that you CAN use an Inventory Assembly item as a part of a Group. See my article
on Groups for Custom Manufacturers.
Working with Multiple Level Assemblies
As I discussed above, there are good reasons to work with “sub assemblies”, splitting
your complicated assembly item into more manageable sections. However, this can
create more work. Consider my sample “Elite Computer System”, which had a
“Computer Base System” assembly as a component.

If I want to “build” the “Elite Computer System”, I must first build a “Computer Base
System”. If I don’t have the base system in stock, I have to do two builds, in the proper
order. QuickBooks won’t do this for me.

In addition, QuickBooks won’t let me print a Bill of Materials report that shows ALL
of the components in the “Elite Computer System” – it will only show me a single level.

You can
go to the Intuit Marketplace and find a number of add-in programs that can help.
One program that you may find useful is CCRQBOM, which allows you to issue
“multiple level builds” as well as print a multiple level BOM report. Please note that
CCRQBOM is a product that my company produces.
That is a quick run-through on item types – let me know if you have further questions,
or suggestions on other ways of dealing with these item types.

Create the Inventory Parts

The first step you need to take is to enable inventory management in your company
file. This is not set up by default – and it can be confusing to new users because you
will see the item list even if it is not enabled. Select Edit from the main menu,
then Preferences. Select the Items & Inventory option, the Company Preferences tab,
and put a check mark in the box by Inventory and purchase orders are active.

Now you can add your inventory parts to the item list. While in the item list
press cntrl-N to add a new item. Note that you have several different kinds of items
– we’ll work just with inventory part items now (discussions on how to use other item
types will be in future articles).

For each material item that you use as a component in your assembly, add
an inventory part. You can also create non-inventory parts for items that you don’t
keep track of by count. Please note that we do not recommend that you enter an on
hand value at the bottom of the screen at this time, unless you are starting up
QuickBooks for the first time and you have taken a physical count of your inventory.
Create the Inventory Assemblies
After you have created all of your inventory part items, you can add an inventory
assembly item for each manufactured item. The primary difference from an inventory
part is that you can assign a component list, a bill of materials (or “BOM”). This is a list
of all of the parts
In this example, to make one “WHAS” wheel assembly we need two SC-12 screws and
one RORO-4 roller.

Build the Assemblies

Now that we have defined the parts and assemblies, we can build the assembly. From
the Activities button at the bottom of the item list, click Build Assemblies. In the Build
Assemblies dialog you will select the assembly to build and enter the number of this
assembly that you want to build.
When you click either of the build buttons, the program will save this build (if
possible, as discussed below). Two things happen now:
1. QuickBooks will remove the qty needed amount of each of the component
items (I refer to this as consuming the items in a build).
2. QuickBooks will increase the quantity of the inventory assembly item by
the Quantity to Build.
Essentially we are moving the cost of the inventory part assets into the inventory
assembly asset.

A few comments on what happens here:

• Note the maximum number you can build… value. QuickBooks won’t let you
build an assembly if you don’t have enough parts on hand to build it, This
value shows you how many you can build with the parts that you have.
• If you enter a quantity to build that is higher than that maximum,
QuickBooks will mark the “build” as Pending. This means that it hasn’t
been built, it is waiting to be built. There are reports that list
the pending builds.
• When you enter the quantity to build much of the information in this dialog
will not be updated until you move the cursor to another field, such as the
date or memo. This can be confusing at first. When you move the cursor
off that field the qty needed is updated, and the pending stamp could be
displayed.
• The Date field is very important. This is the date that the build transaction
takes place. This has two important effects:
• The quantity on hand for the component parts is based on your
inventory status as of this date. Sometimes people get frustrated
– they look at an inventory report and it says you have enough,
but this dialog says you don’t! The issue is usually the dates – if
the report is dated after a PO is received, but your build is dated
earlier, you might not have had those parts on this date. Adjust
the date in either your report, or the build.
As you might expect, the same issue relates to the assemblies you build – they are
only available on or after the build date, not before.

This has been a quick overview of how to work with an assembly item and to issue
a build. We’ll go into more detail about how to structure the BOM, and use other item
types, in the future.