How to do Costing in ERPNext of inderect Expenses

ERPNext
1

Hello Everyone,

I am implementing an ERP solution for Signage manufacturing company. I am not an accountant and having some doubts regarding the requirement, hope this community can help out.

For the manufacturing process of a sign board, we wont be using BOMs as each time different type and quantity of raw materials will be used so we will be creating stock entries manually.

Now they want to include all the costs related to the sign board (direct or indirect) with that item manufactured.

I have two ways to do it:

  • Either I include as additional costs in stock entry.
  • or Pass journal entries and purchase invoices and combine everything under one project.

Both the methods I tried I am facing some issues

But the main issue is how to charge the indirect expenses to the product:

suppose they are charged 1000 rs for electricity and allocated 200 rs to this particular item, if I write it in additional cost then it comes as credit amount under an expense account. I know the amount will be reflected in the cost of goods sold once DN is created but still one more entry or something else is missing as accounting wise it doesnt seem correct.

What I want to achieve is that they could write the expense during stock entry if it is known and later via journal entries if occured at a later stage and every record will be having the project mentioned.

So in Profit and Loss and other reports when I apply the filter it should get the correct income and expense.

Currently in P&L, it shows the credit amount also so the expense gets deducted as total.

2

Hi @moizsami,

yes, accounting could be quite a challenge at times. Well, allocation of indirect manufacturing cost is always a struggle. You need to come up with an approach that reflects what could be true, never knowing if it is true.

Therefore, make it easy for yourself. From my point of view, you could open a project for every item produced. The project will get all direct expenses as well as hourly rates from the people working on the project.

Now, to get the indirect expenses into the project, you could post the actual total expenses to the projects as soon as you receive the invoice. In this scenario, you need to split the purchase invoice item into as many pieces as you had projects in the related period. I assume this shouldn’t be rocket science to get it done.

Any other approach might be more complicated. Remember, you will never know exactly what the indirect expense percentage is per project or item manufactured. Though, there is always a bit of guess work in there. Most importantly, with the approach outlined above, you get a sense of the Gross Margin the manufactured products are generating. That’s all you need.

In case the number of projects would get too big, it might only be possible to allocate the indirect expenses in a Profit Center Report of the overall business later. There, you might allocate these expenses according to their revenue percentage.

From my experience, it is not worth driving yourself crazy about this allocation. In the past, I had been with businesses which had $1 million+ in annual indirect manufacturing expenses. The business just needs to know, that it is earning money.

Though, the above two approaches are relative simple and easily implemented.

All the Best!
[a former Finance & Accounting Manager]

1 Like
3

Thank you for your reply.

I agree writing the indirect expenses as invoices will solve my issue and I can use the same item in multiple line for different projects, that also works fine.

Now my only issue or part which is unclear to me is how to handle the additional costs which are written in the manufacturing stock entry.

There is a table where we can write additional expenses which get added to the Item valuation. Whatever expense account we select, gets credited in P&L report, so how to handle that?

4

The credit amount included in additional cost of the stock entry is cleared by the debit expense amount in corresponding purchase invoice or journal entry. the ultimate logic is that money paid to supplier eventually goes to the produced item stock.

The problem is that additional cost in stock entry and purchase invoice/journal entry not always booked in the same period or in same period, the amount not match exactly, so instead of using P&L expense account, using GR/IR like balance sheet account is preferred.

5

Remember, that you are using double-entry accounting in ERPNext. When ever you post something to your inventory (Balance Sheet) it needs to be reflected in the P&L (removed from it). The moment your inventory is released when the product is sold, this expense will get back into the P&L again and the balance sheet is corrected accordingly. Only this way, you will have the corresponding Cost of Goods Sold to the Revenue you generated.

Of course, there could always be a delay in posting supplier invoices, but the question is how critical is it to know the exact amount of your profit rather knowing you are making a good profit. In case you know about significant expenses coming from suppliers, you could ask them to bill you faster. Alternatively, you could accrue for the cost until you have the final supplier invoice. Most manufacturing business I know used to build provisions for their monthly closings to record for supplier invoices not received yet. As soon as the invoice comes in, the provision is released.

It might be a good idea to not only look at the topic from a programming perspective, but also from an accounting one. Maybe you should talk with your accounting head about how to handle things in detail. The above should help you with this.

All the Best!