Question Status

Clodagh asked a question on 10 Dec 2009 1:31 AM

Hi there,

 I would be interested to hear from any manufacturing organisation who uses standard costing & average perpetual valuation method.

I have been having considerable difficulty setting up bills of material to absorb labour.

We do not use manufacturing bom's.

I have now set up my labour item as a service item -

Do I direct this to credit my direct labour general ledger account?

If I do this, I am left with the balance of unused labour - which is great, this shows my variance, but my inventory account is not updated.

 Any help would be greatly appreciated!

Frank Hamelly responded on 10 Dec 2009 4:44 AM


If you're using standard costing in GP, by definition, you're using either FIFO or LIFO Perpetual valuation, not Average.

Have a look at my recent blog post on labor in the Inventory BOM here -  You may find it helpful.

Clodagh responded on 10 Dec 2009 6:21 AM

Hi Frank,

 Thanks so much for your reply, your blog entry is the perfect item I was looking for!

However, I'm still a little confused, if I do as you suggest - at the end of the month my cost of sales will not balance to my inventory. How do I update this side? Normally my P&L Cost Closing stock & Balance Sheet stock should match?

Again, thanks so much for your time, Clodagh

Richard L. Whaley responded on 10 Dec 2009 6:30 AM

Cost of sales should not balance with inventory.....  Inventory is the result of adds and deletes through the month.  Deletes come from sales (cost of sales) AND production absorption of components.

You have several disconnected things connected in this thread.  You start talking about Standard Cost and not using MFG BOMs.  This must mean you are manually calculating the standard cost since GP's standard cost tools use the MFG BOM for parts and routers for labor.  Correct?

Using a service item to get labor into your Inventory BOM and item cost is correct, assuming you have a cost (not a selling price) for the service.  You should credit a labor absorbed account, an offset to your labor expense account.  The net of these two accounts is the remaining overhead labor or unabsorbed labor.  Keeping the accounts separate will provide you with a total amount spent on labor and a total amount absorbed and the net of the two, the un-absorbed labor. 


Clodagh responded on 10 Dec 2009 6:45 AM

Thank you for your reply Richard. I am using inventory BOM's, not manufacturing BOM's

 Perhaps I am not being clear about my question.

After a sale, my cost of goods sold & my inventory are updated, similarly with a receipt, therefore during the month my cost of goods sold & inventory are always running side by side.

When I process a BOM, my inventory is reduced by cost of raw materials in the BOM and increased by the new product, the difference being the labour and overheads - which are directed to the labour account etc, so the value of my inventory has increased by the value of the labour, but my cost of goods sold has not changed.

I'm not sure how to reconcile this at the end of the month. At the end of the month, my cost of goods sold throughout the month together with my opening stock should equal my balance sheet inventory. Or am I way off on this altogether?

 Many thanks for your time, we have had alot of frustration getting help from a consultant but unfortunately there don't seem to be many manufacturing companies in Ireland using great plains.



Frank Hamelly responded on 10 Dec 2009 7:27 AM


You say that your COGS hasn't changed.  But when you create the item using the assembly transaction, assuming you've incorporated your labor and/or overhead items in the BOM, the resulting product should include those labor and overhead costs.  Then, when you sell the item, the total cost, including labor and overhead, should be deducted from inventory and charged to COGS.  Note that the cost derived from the assembly transaction will be reflected in the 'Current Cost' field, not the 'Standard Cost' field in the Item card, once the assembly transaction has posted the receipt of the finished product.

Clodagh responded on 10 Dec 2009 8:12 AM

Hi Frank,

 Below is a journal map of what I have so far, we just use one inventory account (closing Stock) - no WIP, all sales, purchases and BOMS go through closing Stock. Should I include labour as part of stock now?

 Also you mentioned earlier that I should not be using average perpetual for anything of standard cost, should I use FIFO/LIFO instead yes?

 Thanks again for your help, Clodagh

 BS Inventory    PL Inventory
DR     CR DR     CR
Update purch 600 Update Sales 200 Update Sales 200 Update Purch  600
New Item Made 60 Raw Materials 40    
Bal C/F 420   Bal C/F 400
  2920 - Purchases   2900 - Sales
DR     CR DR     CR
Purchases 600   Sales 200
Bal C/F 600   Bal C/F 200
2601 - Creditors 2301 - Debtors
DR     CR DR     CR
    Purchases 600 Sales 200  
    Bal C/F 600 Bal C/F 200  
2010 - Wages 2501 - Bank
DR     CR DR     CR
Wkly Wages 1000 BOM Labour 20   Wkly wages 1000
Bal C/F 980   Bal C/F 1000

Richard L. Whaley responded on 10 Dec 2009 9:38 AM

You are using a new system with an old accounting method!  Closing Stock?  GP maintains a Perpetual Stock.

When you assemble an item, components are credited out of inventory, labor is credited out of the Labor Absorption account (you are using labor, a mistake in my opinion but not related to this issue) and then inventory is debited for the cost of the finished good, maybe.  What valuation method are you using?

If you are using standard cost (FIFO/LIFO Periodic) the inventory value is NOT increased by any difference in the production cost and the established standard.  Inventory is debited by the standard cost and any difference debits assembly variance.

When the item is sold, a transaction NOT related to the assembly as far as GP is concerned, the inventory value is taken to COGS.

Now, if you want to use the standard cost valuation method (LIFO/FIFO Periodic) you should establish a standard cost that includes labor and materials.  For inventory BOM and Assembly, you have to do this manually.

If you want the inventory value to follow the costs of production (material and labor) you need to use Perpetual or Average valuation methods.

Ireland??  Never been there.  Would love to come, maybe in the spring?


Frank Hamelly responded on 10 Dec 2009 10:22 AM

That's an interesting accounting flow Clodagh.  Here's the way GP is designed to handle the transactions, assuming you have your accounts setup properly -

1.  Purchase Inventory - Dr. Inventory, Cr. Creditors

2.  Apply labor to inventory via Assembly Transaction - Dr. Inventory, Cr. Labor Applied

3.  Sell the finished good - Dr. Debtors, Cr. Sales, Dr. COGS, Cr. Inventory

I intentionally omitted the cash flow accounts as they aren't relevant to the discussion.

I don't understand the entry debiting Purchases and crediting PL Inventory for $600 nor the one crediting Sales and debiting PL Inventory for $200.

As Richard stated, it looks like you're using a paper-based acccounting method with a state of the art accounting system.  The first thing I would review is your chart of accounts to make sure your accounting flows are consistent with the way the software works.

The valuation method you select is rather irrelevant to this discussion also, except that if you want to use FIFO or LIFO Periodic (Standard) you really need to be using GP Manufacturing to get all the benefit from that method.  Average, FIFO, or LIFO Perpetual works with the Inventory BOM.  Your accounting firm should advise on which valuation method you use.

You might also want to find a consultant who is more versed on manufacturing cost accounting.

Clodagh responded on 11 Dec 2009 1:06 AM

Thank you so much Frank & Richard for all your assistance with this. Seems I need to dig a little deeper on our set up, but you have given me a great start to what I need to be looking for.

 Thanks a mil! Clodagh