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Brent530
December 12, 2023
Question

Accounting for labor on an assembly?

  • December 12, 2023
  • 1 reply
  • 0 views

We're a manufacturing company that builds complex machines.  They're not simple and can take several days to build one with several employees involved. 

 

Our goal: Examine true profitability on a per-machine basis while incorporating labor

 

Let's assume each machine build requires the exact amount of labor.  Now, obviously, our overall employee labor is already included in our Total Payroll Expenses.  However, this significant cost seems difficult to "assign to" any assembly because, while I'm no accountant, it seems if we just arbitrarily add the labor cost to the cost of the assembly, wouldn't we then be "double accounting" for that labor cost and artificially inflating our overall expenses for building these machines when looking at the big picture?

 

So... how is true profitability properly assessed in QB while accounting for labor on each machine?

 

Thank you in advance!

1 reply

Rainflurry
Rainflurry
December 12, 2023

@Brent530 

 

Your thinking is spot on.  Labor costs to build the machine should be capitalized into the cost of the machine, not expensed as a payroll expense.  That expense is incurred when you sell the machine, not when you pay the employees.  To properly capitalize the labor cost into the cost of the machine, see the video below from @hectorgarciacpa.  He covers it in detail.  It is a process that is too involved to be explained in a post on this forum.

 

https://www.youtube.com/watch?v=M7JEAmRkgiE&ab_channel=HectorGarciaCPA   

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Brent530Author
December 13, 2023

Thank you so much for the video link.

 

He seems to somewhat gloss over the intricacies of how he's allocating said wages from the primary payroll expenses, however.  I guess as long as it's a service that is referencing a subaccount under payroll expenses, then it just automatically allocates?  I feel like I'm missing something.

 

The way our company is setup (wrongly or rightly), we have the primary account as Payroll Expenses, then we have subaccounts of Gross Wages, Payroll Fees, and Payroll Taxes.  Would I then just create a sub-subaccount under Gross Wages called something like Assembly Labor (Allocated) ?  (Was actually surprised I could do a 3rd-level subaccount, but it is indeed possible.)

 

Thank you for your help!

Rainflurry
Rainflurry
December 14, 2023

@Brent530 

 

"I guess as long as it's a service that is referencing a subaccount under payroll expenses, then it just automatically allocates? I feel like I'm missing something."

 

It allocates when you build an assembly.  That labor cost will be removed from payroll expenses (with the negative allocation entry) to the inventory item.  It will then expense to COGS when sold.  That's what allows you to more accurately track the profitability of each machine, as I'm sure you're aware.  

 

"Would I then just create a sub-subaccount under Gross Wages called something like Assembly Labor (Allocated) ?"

 

How you want it to appear on your P&L is up to you but, yes, that is how I would do it.

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