Last month I talked about how to set up and use assembly items in Sage 50’s inventory. This month I’ll expand on that by explaining how to add labor or overhead costs to an assembly.
First, you’ll need to set up at least one inventory item for labor and one for overhead. So go to the Maintain menu and choose Inventory Items.
To set up the labor item:
- Enter a new item ID
- Give it a description such as “Labor allocated to inventory.”
- Set the Item Class to Labor.
- Enter the cost of one hour of labor in the Last Unit Cost field. If you want to keep things simple this could be just the average hourly wage, but ideally it would be the entire cost including employer taxes, benefits, etc. If you have different labor costs in different departments you may need to set up a separate labor item for each department.
- Set the GL Salary / Wages Account. If you are going to add labor costs to the value of your assembly items, those dollars have to come from somewhere. Most people choose to add a new expense account right after their wages/salary expense account, and use that new account here. The result is that the new account will have a negative balance, showing you how much of your wages expense has been reallocated to inventory cost.
- Assuming you will never sell this labor item by itself, the GL Sales Acct and GL Cost of Sales Acct can be left at their default settings.
Setting up the overhead item is nearly the same:
- Enter a new item ID
- Give it a description such as “Overhead Assigned to Inventory.”
- Set the Item Class to Non-stock item (Labor or Service would also work).
- At the Last Unit Cost field I recommend entering 1.00. That way whatever quantity you give this item on the final assembly’s bill of materials will equal the amount of overhead cost applied to that item. But you can use whatever works best for your situation.
- Set the GL Salary / Wages Account. I recommend creating a new expense account numbered at the end of your other overhead accounts, or at the end of your expense accounts. This new account will end up with a negative balance, showing you how much of your overhead has been reallocated to inventory cost.
- Since you would never sell overhead, the GL Sales Acct and GL Cost of Sales Acct can be left at their default settings.
Adding the labor and overhead items to an assembly:
- Bring up your assembly item in Maintain Inventory Items.
- Go to the Bill of Materials tab. If this is a new item, you’ll be able to add the labor and overhead here along with the other components.
- If it’s an existing item, click the Revisions button (Quantum only, Premium will require creating a new assembly.), then click New to start a new BOM revision. Be sure to set the Effective Date to the date you want to start using the new revision.
- On the first available line enter the item ID for the labor or overhead item you just created.
- For labor items – since we set up the labor item with a cost per hour, enter the number of hours needed to build one unit of the assembly item in the Quantity Needed column.
- For overhead items – since we set the cost for each unit of overhead to $1, here the Quantity Needed should be the amount of overhead you want added to each assembled item.
Using this method, the labor and overhead costs added to the bill of materials will reduce the GL accounts specified in the GL Salary / Wages Account of the inventory item maintenance screen and increase the inventory account associated with the assembly item. From there they will flow to cost of goods sold just as they would for any other assembly item.
In the end, your net income will be the same as if you didn’t assign labor and overhead to inventory. But this process gives you a more accurate picture of your inventory cost, and moves the recognition of those costs to match the timing of the revenue generated when the inventory is sold.
