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Understanding QuickBooks Total Bill of Materials Cost

February 6, 2011 | By | 22 Replies More

In a prior article I talked about the cost and avg cost fields in the item list. In this article I’ll talk about a related value, the Total Bill of Materials Cost which you will see listed at the end of a QuickBooks bill of material.

Let’s take a look at an inventory assembly sample item. The WHAS wheel assembly has two components, a screw (two of them) and a roller. Note that there are three costs shown in this window.

QuickBooks Inventory Assembly

The Cost field (15.00) has no real bearing on valuation of this item. This figure can be edited directly. QuickBooks will not automatically update this cost to reflect either the Total Bill of Materials Cost or the Avg Cost. As I discussed in my earlier article on costing, the cost value of purchased parts is usually, but not always, the “last purchased cost” of an item.

The Avg Cost field (32.00) is the cost that QuickBooks uses to calculate the value of this item. You can only edit it directly when you add a new item – after that it is updated by inventory adjustments, receipts and builds. If you multiply the on hand value by avg cost, you get the inventory value for this assembly (assuming you don’t have a negative on hand quantity).

The Total Bill of Materials Cost field (32.00) is not directly tied to the cost or avg cost values. This is the sum of the cost values of the components in the BOM. In our starting example it matches the avg cost, but you will see that they are not connected later in this discussion.

What is the Cost of a Build?

Let’s take a look at the two component items.

 The SC-12 screw has a cost of 11.00, but the avg cost is 8.86076.

QuickBooks item cost

The RORO-4 roller has a cost of 10.00 and an avg cost of 19.44444.

QuickBooks item cost

When we start, we have 6 WHAS assemblies at an average cost of 32.00, for a total inventory valuation of 192.00. We will build 4 of WHAS to bring us up to a total of 10. What will we see for the cost, avg cost and total bill of material cost for WHAS when the transaction is done?

  • We start with 6 @ 32.00, for a valuation of 192.00
  • For each WHAS that is built, we use 2 screws @8.86076 (the avg cost), for $17.72152
  • For each WHAS that is built, we use 1 roller @19.44444.
  • The cost at this time for one WHAS is 37.16596
  • We built four WHAS for a total valuation of 148.66384
  • Adding four WHAS with a total cost of 148.66384 to the value of 6 WHAS that were valued at 192.00 gives us a total inventory valuation of 10 WHAS for a value of 340.66384
  • Dividing that total cost by the total on hand (10), we should get an avg cost for WHAS of 34.06638

Let’s take a look at the WHAS information:

QuickBooks item cost

As you can see, the avg cost comes out to be what I predicted (although QuickBooks did some rounding at some point in the process).

Note that the cost and total bill of material cost have not changed.

This demonstrates that the avg cost of an assembly item is adjusted by the avg cost of the component parts when you issue a build transaction. This is what I would expect, and it shows that QuickBooks is properly maintaining the value of your inventory. The cost of the component parts is being rolled into the cost of the assembly.

Management Information is Misleading

The problem that I have with this is that from a management (not accounting) standpoint, the figures that are shown here are misleading. As my costs fluctuate, the cost value does not change. It only changes if I manually update it myself. If you have a report that shows the cost of this assembly, you may have an incorrect understanding of the cost of your assembly.

QuickBooks item cost in BOM

What is worse, the change item prices function in QuickBooks will let you use the cost of the assembly item, but not the avg cost, so price updates will be based on information that is often incorrect and out of date.

QuickBooks Change Item Prices

To take this further, if the WHAS inventory assembly is used as a sub-assembly in a higher level assembly, the total bill of material cost value in that higher level assembly will reflect the cost of the subassembly, which doesn’t reflect any useful value if you are not diligent.

QuickBooks subassembly cost

Why Is This Important?

Most companies will want to base their selling price on the cost of manufacturing their item. It is important that you have accurate information to make these decisions. In my experience it is common to want to update prices based on the current cost of acquisition. That is, I want the BOM cost to reflect the last purchase cost of the components, not necessarily the average cost. If you are updating the cost field when you purchase your parts then you have this information in the database for components.

If you have a simple one-level item structure you have to look at the total bill of materials cost as the basis of your decision. This value is hard to find in QuickBooks – it doesn’t show in reports other than the individual Bill of Material printout, or in the Edit Item screen.

If you have a more complicated product structure, using sub assemblies, getting an accurate cost of the assemblies is much more complicated. The cost shown for the subassembly might not have any relation to the cost of the components.

What Can You Do?

Obviously, if you are going to use the QuickBooks price updating tools, you want to be able to set prices based on accurate information. In QuickBooks by itself you need to periodically review the total bill of material cost of each assembly and then retype that in the cost field. Again, this value is only found in that one report or in the edit item screen for the assembly. There isn’t a simple report that lists the value for you.

This is complicated if you have multiple level product structures – in that case you need to make sure you update the lowest level assembly first, and work your way back up the product structure.

I do have an alternative. My company produces a low cost QuickBooks add-on product called CCRQBOM. I’ve included several features that can assist you with updating assembly costs. The primary feature is a cost rollup function that will take the cost value of the component items and update the cost value of the inventory assembly item. In addition, if you have multiple level assemblies, the program will determine what the lowest level assembly is and start with that, rolling the cost up through all of the levels to the top.

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Category: Manufacturing and Inventory, Working with QuickBooks

About the Author ()

Charlie Russell is the founder of CCRSoftware. He's been involved with the small business software industry since the mid 70's, and remembers releasing his first commercial accounting software product when you had a one-floppy disk drive system, loading the program from one floppy and then replacing that with the other floppy to hold the data. He has a special interest in inventory and manufacturing software for small businesses. Charlie is a Certified Advanced QuickBooks ProAdvisor with additional certifications for QuickBooks Online and QuickBooks Enterprise. He also is a Xero Certified Partner. Visit his CCRSoftware web site for information about his QuickBooks add-on products. Charlie can be reached at [email protected] He is also the author of the California Wildflower Hikes blog Connect with Charlie at Google

Comments (22)

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  1. Olga Sadkova says:

    Hello, Thank you for your article. It is very helful. But i am still confused in one step:

    Adding four WHAS with a total cost of 148.66384 to the value of 6 WHAS that were valued at 192.00 gives us a total inventory valuation of 10 WHAS for a value of 340.66384

    So basicly here, we take total cost of 148.66 , calcilated based on avarage cost and adding 192.00, calculated based on BOL cost. So combination of two different costs give you an avarage cost for 10 eaches on hand. How is that posible?

    Thanks

    Olga

    • Olga: Look at the top screen, for WHAS. The avg cost is $32.00, and there are 6 on hand. 6X32 = $192.00 for the total value on hand for WHAS to start with.

      The build calculates a current cost of the components for WHAS to be $37.16596 each. And you are building four of them at that cost. 4X37.16596 = $148.66384 of total value that we are adding to inventory.

      $192 + $148.66384 = $340.66384 – that is the total amount of inventory valuation after the build. 6+4 = 10 is the total number of items that you have on hand after the build.

      So, after the build, you have $340.66384 of total cost, and 10 items. So, $340.66384 / 10 = $34.06638 as the new avg cost for the WHAS item

  2. Mike Zee says:

    Hello and thank you for your article. It is very helful.

    My problem is accounting for labor and overhead in QB (QuickBooks). We have a small manufacturing operation, less then 30 people.
    Do you use the average hourly cost of labor based on the total cost of labor for the last 6 months or do you use the actual hourly rate of the person performing the direct labor? Do you calculate the overhead for the factory and add that onto the hourly labor rate?
    How do you do this in QB?
    Is there a good reference article on Basics of Labor and Overhead Manufacturing Accounting?
    Or a Labor and Overhead Manufacturing accounting for dummies

    Thank you in advance for your help

  3. Mike, take a look at this article: http://www.sleeter.com/blog/2011/02/item-types-in-a-quickbooks-bill-of-materials/

    You can use items to add “burden” to your assembly – labor costs, overhead, whatever you want. It can be a bit tricky to set up, you need to talk to your financial advisor on how best to do it in your particular situation.

  4. RYAN says:

    Charlie I have an issue with QB along the same lines and wondering if you have an add on program.

    I have over 6000 Inventory parts in QB, with various costs depending when purchased, so i know all about QB using a bogus “cost” number entered at one time rather then average cost which would be more true, which is what id like to use to then markup my cost.

    I have actually gone through all parts and raised my pricing to a specific margin based on the average cost but its only accurate until the next time purchased, which could be the next day.

    We are a outdoor power equipment dealership so selling part over counter and in the backshop daily.

    • Ryan, I’m not sure that I would want to have my price markup based on average cost instead of the last cost purchased. Personally, marking up on my most current cost makes more sense. However, everyone has their own way to deal with this issue.

      Depending on what QB product and year of product you have, there are different solutions. Enterprise 12 has an automatice price update feature (make sure you have the most current release, as older releases have bugs!) that is the only way to automatically update when a cost changes that I am aware of – but it works on “cost” not average cost.

      I have a utility that will do updates of price based on the average cost, in addition to “cost”, but you have to manually run this when you want to update things. It works for some business situations, but not all. You can contact me directly if you would like more information on this utility (it is not a Sleeter Group product).

  5. Hale says:

    Charlie:
    1. In QB for contractors,what is the type of all the direct materials used in construction (Inventory Part or Assembly)?
    2. How can you monitor these direct materials (units on hand)?
    thanks!

    • Hale, that all depends on how you want to manage things. Materials can be non-inventory parts, inventory parts or assemblies, depending on how you want to manage things.

      In a typical construction environment I wouldn’t expect that you would use an assembly part. However, there are situations where you might. Also, you can use an assembly item just like an inventory part if you wish.

  6. Mohammad says:

    I am doing a manufacturing client that is engaged die casting business.

    For every order to manufacturing shapes first they have to get moulds which are manufactured by them internally.

    This mould preparation/manufacturing process has costs like labor, materials, overheads et c and once it is completed, it is used to produce a certain thousand number of units so ultimately it becomes a fixed assets having certain useful life.

    After mould is ready for use, it is then used to process the shapes manufacturing order received from customers.

    What is the best practice in QB to capture all mould manufacturing costs then move those costs as fixed assets to be depreciated over systematic basis.

    I was thinking of:

    1. Setting up a Bills of Material (BOM) in QB to be used to build assemblies for moulds produced/manufactured but the problem here is every mould is unique in terms of design, shape, size et c so there is no uniformity thus we will have to define an assemble for each mould manufactured.

    2. Once above said BOM is ran, it will put all the costs of mould into inventory as finished goods but my question is, how to transfer it to fixed assets (other than a journal) for being depreciated over its useful life.

    Please suggest best practice to handle this situation, we want to use QB to systemize the costing process as far as possible.

    PS: Client is using QB Premier 2012

    Thanks!

    • Mohammad, some things just aren’t simple to do in QuickBooks.

      With Premier, I wouldn’t bother with a BOM. You aren’t going to save effort.

      In a very general sense this is more of a “job costing” scenario, if you aren’t sure of what the labor units will be.

    • Gilbert says:

      Did you get an answer to this question ? I have the same problem that I am trying to fox. Regards

  7. Kathleen Stephens says:

    Charlie, I am interested in the CCRQBOM add-on you mentioned as I need to at least report on the actual costs of the items in my inventory assemblies. Right now my report shows prices with no costs. I don’t want to manually update a cost field with information that will be changing on a regular basis. What’s the solution?

    • Which report are you talking about?

      The “Cost” values in your purchased components should change as you buy new items (if not, there are preferences that you have set to prevent that). As for the “cost” of assembly items, your only options are to manually update them or to use a product like CCRQBOM. Generally you don’t need to do the updates frequently, since this is not a financial figure, it is just a “management” figure, and you’ll usually only pay attention to is periodically.

  8. wasidar says:

    Hi Charlie Russell:

    I have a question regarding quick books assembly item .How can we add fixed overhead cost + Labour cost in inventory assembly item. I add these cost in other charge item and link the expense account to (Cost of Goods Sold) but when i built the assembly and check the profit & Loss Report it shows the negative balance in (cost of goods sold).Sir it is a request to you to give me easy solution.

    i am looking forward your response

    Thanks in advance

    Wasidar

    • Wasidar, take a look at this article: http://www.sleeter.com/blog/2011/02/item-types-in-a-quickbooks-bill-of-materials/

      I wouldn’t link the other kinds of parts to a COGS account myself. COGS should be updated when you sell the item, and when you use a non-inventory, service, or other charge item you are moving the value out of the cost account into the inventory asset for the assembly.

      If you have labor, for example, you are moving the labor cost out of that account into the asset. One thought is that this should be a payroll expense – so that when you pay the employee, the value of that expense increases, then when you build the item it decreases and moves to the asset. So you shouldn’t see a negative value in that account.

      • wasidar says:

        Thank you sir for your reply.Now i take labor and overhead expense as other charge items and link the labor to (labor expense account) and overhead cost to (overhead expense a/c).At the end of the month when we actually paid these expenses it is going to positive number.Am i right sir?

  9. Erik says:

    So I have an Inventory assembly (A) that consist of other assemblies (B)(C) which also have 2 assemblies to each part. Say I want to build 10 of (A). How can I print a report that shows the break down of sub assemblies that need to be built as well? Or do I need to run a report for each assembly?

    • Erik, there is no way to see a full level explosion of the higher level BOM in QuickBooks. That is, QB only prints a single level BOM, it won’t expand the subassemblies.

      You can handle this with a third party addon. Most of the higher end addons should be able to handle this, but they are expensive. One lower cost alternative is CCRQBOM (http://www.ccrsoftware.com/CCRQBOM/CCRQBOM.htm ) will easily print multiple level BOM’s like this. Full disclosure – my company (CCRSoftware, not The Sleeter Group) produces CCRQBOM.

  10. Eric says:

    Hi Charlie,

    Thanks so much for helping out us QB newbies! I really appreciate it and I bet there are lots of other lurkers that do as well.

    I’m trying to understand the relationship between my supply chain, my item assemblies, and the inventory valuation that QB provides me.

    Imagine the following supply chain. I have a finished good that consists of a circuit board (PCB), a battery, and a casing. I purchase PCBs from vendor A at $10 each. I purchase batteries from vendor B at $5 each. I ship the PCBs and the batteries to vendor C, who manufactures the casing and assembles all the parts together into the finished good and ships it back to me. I pay vendor C $8/unit for this; $2 is the cost of the casing, and $6 is for the assembly.

    In my “item assembly” for the finished good, I can see that the total BOM cost is $23, which is what I expect. I reflect this in the “Cost” block in the “Edit item” dialog. But in my inventory report (and more importantly in the COGS section of the P&L) the finished goods are valued at $8/unit. I think this is because the cost is being picked up from the PO I produced for vendor C. (I only pay vendor C $8/unit because the components are in my inventory).

    Have I set this supply chain up correctly in QB? Any guidance you can provide?

    Thanks!!

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