Hi Traf,

I setup the following inventory items and test it on my system:

• Test inventory (Asset: Drywall, Units: Each)
• Item 1 (Asset: Hardware, Units: Inch)
• Item 2 (Asset: Hardware, Units: cm)
• 1 Test inventory is built by two units of Item 1 and two units of item 2 with additional cost of $10.00

As per the inventory transaction report you see above, for item 1 and item 2, I do inventory adjustment to bring up the quantity and the value.  For item 1 (J490), it is qty: 5 and amount: 50 (each: $10).  For item 2 (J491), it is qty: 5 and amount 25 (each: $5).  Then, I build 1 Test inventory by using Build from Bill of Materials.  The result (J492) is qty: 1 and amount 40 ($20 <item 1> + $10 <item 2> + $10 <additional cost>). 

When you build a product, there should be no cost to the raw materail COGS account because you are not selling the raw material.  You only use it to build another inventory.  Therefore, in my example, you see there is a credit from hardware (item 1 & item 2) and a deibt to drywall (Test Inventory).

Now I am going to sell the Test Inventory. 

As you can see from the sales journal entry report, this is the time when COGS is touched and it is the Test invetory' COGS account that is debited.  Since the value to create 1 test inventory is $40, so the COGS is debited 40.00.

Hope this helps

OMG Keith ! You worked very hard for me ! I really appreciate your time.

You just arrived at the place I have difficulties ;

In your example, your Drywall cost you 40$ and you are selling it 100$.

That’s fine, but...

If you look your inventory value before you sell it, it is probably at 40$,

And this is the problem I'm trying to solve.

I understand that in some case, it is better to be conservative and calculate your inventory value by your cost price (40$) ; but once the product is build and put in inventory for a few days or weeks, people wants to know the actual inventory value if they sell it at a normal price the same day (100$).

So, in my Balance sheet, I would like the Asset “Drywall” to be 100$, not 40$.

It makes a huge difference for the bank manager because it worth 5 time more ! (in our case)

Imagine a 100 000$ inventory value versus 500 000$ !

Trust and loan rate are totally different  ;-)

Hi Traf

Here is a link to the CRA website as to how inventory is to be valued for accounting purposes. www.cra-arc.gc.ca/.../it473r-e.html

I highly recommend you have a conversation with your Accountant as to what would be best practices for your company/industry.

A bit of an excerpt from the page:

Method of Determining Cost

Commonly used methods

¶ 15. Where it is practical to identify costs by reference to specific items, the cost is determined by ascertaining the laid-down cost of the specific items. If it is not practical to determine cost by reference to specific items, it is necessary to use an arbitrary cost selection method which has the effect of making a presumption as to the order in which inventory is sold. Among the methods most commonly used in determining cost are:

specific item

average cost

first in, first out (fifo)

The last in, first out method (lifo) and the base stock method are not accepted for income tax purposes as methods of determining cost.

¶ 16 . The method used in determining cost for income tax purposes should normally be the same as the method used for financial statement purposes. However, if there is more than one acceptable method of determining cost according to generally accepted accounting principles, the method used for income tax purposes should be the one that gives the truer picture of the taxpayer's income. The method used must also be followed consistently from year to year and a change will only be accepted if the new method is more realistic in the circumstances and gives the truer picture of the taxpayer's income.

What Keith has shown here is compliant with CRA. 

Hope this helps clarify things. 

Jo Anne

Hi Traf,

To the best of my knowledge, the price that you sell the item should have nothing to do with cost that you acquire the item.  Since I am not an accountant or bookkeeper, it is better for you to double confirm it with an accountant as per suggestion from The Software Coach.  To find an accountant close to your area, you can follow the link below:

http://na.sage.com/sage-50-accounting-ca/support/find-a-consultant 

In my example, I build the item by spending $40.00 and I can sell it in $100.00 to have a profit of $60.00.  If you purhcase the item from a vendor and it costs $50.00.  Then, the profit is $50.00 when you sell it in $100.00 or $60.00 again when you sell it in $110.00. 

If you think the value should be higher than the cost from raw material together with the assembly cost, you can do Adjust Inventory to bring up the value.  If your inventory costing method is Average Cost, you can adjust the value without adjusting the quantity together.  If your costing method is FIFO (First In First Out), you will have to adjust both the value and the quantity together.  You cannot adjust the value only.   

Also, if you are using average cost method, the cost of good sold when you sell the inventory item will be the total value divided by total quantity multipled by the number of item you sell.  For example, if the total value is $100 and total quantity is 5,  when you sell 2 items, the COGS will be $40 (20 X 2). 

If you are using FIFO, the cost of good sold is based on the cost at the time you acquire the item.  For example, if you purchase or build the 1st item in $10.00,  the 2nd item in $20.00 and the 3rd item in $30.00, when you sell only 1 item, the COGS is $10.  When you sell 2 items, the COGS is $30 (10 + 20). 

Again, please have a conversation with your Accountant as to what would be best practices for your company/industry as suggested by The Software Coach. 

Hope this helps.

Obviously, my accountant knows that our inventory evaluation is CRA compliant.

Raw material inventory isn’t a problem.

We pay 120$ for a 12 feet Aluminum bar and put it in inventory for a 120$ value.

The system is « eating » this material according to the Finish Goods nomenclature at his right value

(If we used 1 foot of material, the cost of material is 10$) PERFECT.

Again, this is the Finish Goods inventory that makes no sense.

If I continue with the same example above, the Finish Good we just create will be store in Finish Goods Inventory for a 10$ value (because it is just considering the raw material cost)

But my employees spend a few hours working on it using million dollars equipments and electricity and... ; the real cost is about 80$.

So, Product A =

Raw Material  10 $

Labor    50 $

Others    20 $

Total cost    80 $

Profit 20 $

Sale price 100 $

My wish would be to store Product A in inventory with a 80$ value.

I can manage it by using “Additional cost” in the product nomenclature, by adding 70$ but, because the labor, electricity... are already calculate as a “general” cost elsewhere, I double the real cost in my Income statement.

So I’m defeated either way.

The only way I see I could manage it now is :  I live with an under value Finish Goods Inventory all year long and my accountant make a writing to adjust it at the end of the year to reflect the real assets.

I use DacEasy so the terminology may differ, but the accounting principle would be the same, if you wish to inculcate the input labour value into the product (inventory) value. What you can do, is in product assembly (building a product) enter not only the aluminum material quantity, but also the calculated labour time involved per unit, as a service or labour code which would have to be offset against wages payable, (since you cannot expense it more than once).

Likewise if say if the production is heavy on energy, you can add a code for calculated energy consumption per product produced and offset it against the energy (electricity or whatever) payable. When you pay wages you offset against wages payable, etc. In that way your cost is transferred to inventory from your operating expenses.

The negative aspect is that you are converting an otherwise immediate expense as per CRA to an asset (inventory). So that at tax reporting time you would not have the expenses for the amount of inventory on hand, while the inventory sold would have been expensed through COGS. You would have to adjust your inventory by writing down the inventory on hand and expensing the appropriate amount to wages, energy payable, etc.

So either way you would have to make an adjustment, either for the bank, or for CRA, unless you are happy to forego expensing those aspects for the amount of inventory on hand.

The writing down would then have to be reversed immediately in the next year, which would then credit your expenses, (as it will be expensed through COGS). As you can see, the tax benefit is delayed only once. The ritual will need to be repeated every year.

Thanks JSB for your answer.

The way you manage it makes more sense to me.

But considering all the potential headache relate to it, I think I will live with the undervalue inventory  ;-)

Hi Traf

You stated the following in an above post

"I can manage it by using “Additional cost” in the product nomenclature, by adding 70$ but, because the labor, electricity... are already calculate as a “general” cost elsewhere, I double the real cost in my Income statement."

When you use the "Additional Cost" feature of Sage 50 in the assembly/build of your Finished Goods, the credit (the reduction of your expenses) will occur. You will not double the real cost in my income statement. The purpose of the "Additional Cost" field in the build is to add the labour etc to the inventory item (debits the inventory) and offset the labour etc (credits an Expense Account designated for item assembly).

Jo Anne

Hi Traf

You stated the following in an above post

"I can manage it by using “Additional cost” in the product nomenclature, by adding 70$ but, because the labor, electricity... are already calculate as a “general” cost elsewhere, I double the real cost in my Income statement."

When you use the "Additional Cost" feature of Sage 50 in the assembly/build of your Finished Goods, the credit (the reduction of your expenses) will occur. You will not double the real cost in my income statement. The purpose of the "Additional Cost" field in the build is to add the labour etc to the inventory item (debits the inventory) and offset the labour etc (credits an Expense Account designated for item assembly).

Jo Anne