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Accounting for "Manufactured" Inventory

We are cutting cords of wood and then bagging or boxing them for resale.

I have the labor to cut the wood, the bags and boxes, and other expenses to cut the wood such as employee reimbursed mileage, equipment etc.

At the end of the period I have so many cords of wood.

Do I do a contra expense account and an asset account for the wood in inventory?

Cost of Production of Inventory 25,000 Inventory - Wood 25,000

My boss is suggesting something different but I want to get this straight. He is saying we have so many cords and wholesale value is $xxx so that becomes the basis of his inventory, but it doesn't sound right.

I assume once it is sold, I credit inventory, debit cost of goods sold, and debit cash & credit sales & tax, etc.

Thanks for looking at this.

Reply to
Carla F.
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Carla, There are two considerations:

a. How material is it? If a significant amount of money is being locked up in inventory then yes, account for it. the IRS wants you to back out this labor cost from expenses and load it into inventory. Assuming the costs are significant, you only need to make a good faith estimate and rectify the accounts - which you can do with a simple reversing journal entry. That bring us to

b. What level of detail do the business owners want to see fromth system? Some businesses want to ensure that they have their inventory costs to be precise; others use a rule of thumb for the overheads/incidentals and do not bother. I've seen a few owners who know their cost of goods down to withing 2% of actuals - all the information is in their heads and they can figure their costs out on a napkin. Many owners and managers do not have that gut feeling and WOULD use the information if it were collected and made available. Yet others are so deluded that your efforts may be wasted or ignored.

In other words, Know thy boss...

HS

Reply to
HSalim

Thanks, that helps alot. We've always been a service business so inventory is something I haven't messed with since accounting classes several years ago. :O

Reply to
Carla F.

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