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Dealing With Inventory Assemblies In Quick BooksDealing With Inventory Assemblies In Quick Books
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Subjects > Computers > Software > Accounting Software > QuickBooks
Article commissioned by http://www.sfnut.com San Francisco Nut Company, your source for nuts and dried fruits, including macadamias, pecans, walnuts, cashews, almonds, raisins, apricots, shredded coconut, and more. With shipments daily to the San Francisco Bay Area, and exports to various Asian markets, SFNUTCO supplies many bakeries, produce stores, and restaurants with fresh foods at a competitive price. Give them a chance to give you excellent service, and a competitive quote, on your next order of wholesale food items.
Copyright (C) 2005 By Garnet R. Chaney , Chief Scientist, [Web Mill, Inc.]. All Rights Reserved
Inventory tracking is an issue that many small business owners struggle with. Small business owners are often comfortable to track their inventory levels by just looking at what is available in the warehouse. They often have a surprisingly accurate gut feel for their inventory tracking. But sometimes banks, investors, creditors, and tax authorities, demand more detailed accounting of the numbers. While it seems like a bother to setup up an inventory tracking system, small business owners often discover that the time spent pays itself back by improving their ability to forecast demand, order products, and manage their business.
QuickBooks provides some very rudimentary tools for dealing with inventory tracking for small wholesaling and manufacturing businesses. Given the several thousand dollar cost of enterprise level inventory management systems, and the lack of day to day resources to run a more complex system, many small business owners are forced to make due with the capabilities provided by QuickBooks . This article addresses issues with one of the more advanced features, known as "Inventory Assemblies".
Inventory assemblies in QuickBooks are items that are constructed from other inventory parts. According to QuickBooks help, 'Note that inventory assembly items in QuickBooks are appropriate for indicating "light" assembled items on sales forms and in reports. QuickBooks does not track inventory throughout a manufacturing process. You must have QuickBooks Premier Editions or QuickBooks Enterprise Solutions to create and build inventory assembly items.'
A business might construct a given item from multiple separately purchased pieces. Or it might repackage some items in smaller quantities, while combining with other items to complete the assembly. Either of these situations would be a good use for Inventory Assemblies.
For example, 5lb jugs of ZNUTS (Item #ZNUTSJUG) might be composed from two items, ZJUGS and ZNUTS. Each jug of ZNUTS might require 1 jug and a 1/6th of a box of ZNUTS. When you sell the ZNUTSJUG items, deductions should be made from the inventory count of ZJUGS and ZNUTS. Unfortunately QuickBooks does not do this for you.
QuickBooks does not impose any requirement that the items you sell are actually in stock before you sell them. It may give you warnings, but it is possible to turn the warnings off. So it is possible to continue selling items that appear to not be inventory, thus driving your inventory counts negative. If these are assembled items, then the proper deductions are not being made from the inventory of the component items.
Hence, the inventory count of the assemblies continues to go more negative, and the inventory of the component items continues to climb.
The solution is to periodically "Build Items". QuickBooks does not automatically build items, you must do this manually.
Go to the items list and click on Item -> New menu. For the type of the item, select "Inventory Assembly".
Enter all the usual item attributes such as item name/number, COGS account, descriptions, sales price, tax codes, and the list of sub-items. It is possible to build items from non-integer quantities of other items. For example, individual ZJUGS are built from a quantity of 1/384 of a ZJUGSPALLET, since there are 384 jugs on a pallet.
After creating a list of the components needed, you can save the item.
Initially the new Inventory Assembly item will have no inventory. To put that inventory assembly item in stock, you must build the assembly item.
To create Inventory Assembly items, they will need to be "built".
Go to the Item List of all your inventory items. Each inventory item has a type. For a manufacturing, or wholesaling business, most of the items are probably of type "Inventory Part", and some will be "Inventory Assembly".
If you right click an Inventory Assembly, there is an extra menu item, "Build Assemblies". This lets you convert component inventory items into inventory assembly items. This will deduct items from the count maintained for the inventory components, and add to the count of the inventory of the final manufactured item.
Right click on ZNUTSJUG, and select Build Assemblies. A dialog box is shown that shows you how much inventory you have of all the components needed, in this case ZJUGS and ZNUTS30. You will also be shown the quantity of ZNUTSJUG you have, which might be negative.
QuickBooks also calculates for you the maximum number of assemblies you can build for this item. In this case, our limiting factor is only having 6 jugs. Even though we also have a pallet of handleware (384 jugs), QuickBooks does not make you aware of this.
At the bottom right of the dialog, enter the number of Assemblies you want to build. For example, you might try building 100.
In this case, QuickBooks will complain that it doesn't have enough components to build 100 jugs of ZNUTS. It allows for pending builds, but pending builds must be later approved, and this is not recommended since QuickBooks won't automatically deal with them. Click Cancel.
Go ahead and enter 6. You can now build and close.
You should no have 6 jugs of ZNUTSJUG, and no ZJUGS.
If you right click to edit ZJUGS, you'll see that QuickBooks knows you have 6 on hand, and that the average cost of them is $21.20 each. Since the ZNUTS were 3.99 a pound, and the jugs cost $1.25, 3.99*5 + 1.25 = 21.20. QuickBooks will automatically do a running calculation of the Average Cost of inventory assemblies based on the Average Cost of the components when they are assembled.
It's actually quite simple to do this on a regular basis. The best way to do this is when inventory assemblies are made, the count of items being made should be immediately entered into QuickBooks . If this is too much, weekly use of the Build Assemblies function will keep the inventory reasonably accurate.
QuickBooks does not provide a lot of the automation one might expect for dealing with assemblies. This is probably to keep it's activities simple, and auditable. Here are some of the issues you may have to deal with.
If some of the component items for an inventory assembly are themselves assembly items, QuickBooks will not automatically adjust the inventory for the sub-components.
An example of this is when ZJUGS are ordered by the pallet. Jugs could be ordered by the pallet of 384 jugs, as item number ZJUGSPALLET. When building ZNUTSJUG, QuickBooks will not automatically create ZJUGS from ZJUGSPALLET.
So before building items, make sure that there is enough of the component items in stock.
In our case, lets build 100 jugs from the ZJUGSPALLET. Right click on ZJUGS, select "Build Assemblies". QuickBooks tells us that, since we have a whole pallet of Jugs in stock, we can build 384 jugs. Enter 100, and select Build & Close.
In our example, sometimes the cases of nuts arrive in 30 lb boxes, (ZNUTS30), and sometimes in 25 lb boxes (ZNUTS25). The ZNUTSJUG could be built from either size box of nuts.
Unfortunately, QuickBooks does not remember anything about alternatives used to build an item. It does however let you edit the list of components used to build an item.
For our example, we need to build 100 more assemblies of ZNUTSJUG. However right now it is built from the 30 lb boxes of ZNUTS, and there is only 1 box in stock. But we have over 20 boxes of ZNUTS in the 25 lb. size. Obviously, the factory will soon be using 25 lb boxes.
QuickBooks Premier 2005 and beyond allow Inventory Assemblies to be edited. QuickBooks 2004 and before do not.
Right click on ZNUTSJUG. Change the component from ZNUTS30 to ZNUTS25. Change the quantity used to 5/25 (because we are using 5 pounds of a 25 pound box). Now save the item. You can now build 100 jugs from the inventory of 25 lb boxes, and the 100 jugs built from pallets in the last step.
For versions prior to QuickBooks 2005, you will need to account for changes in sizes of boxes by converting one item to another via an inventory adjustment. For example, in this case, instead of editing the components used in building the assembly, you could instead create 16.6666 boxes of 30 pound nuts from 20 boxes of 25 pound nuts. You can do this by right clicking on the items and selecting Adjust Quantity/Value?Create on Hand. This method might not properly transfer changes in item cost, so you may have to properly calculate value adjustments, since the total net value adjustment should be zero.
1. Build sub-items before higher level items. For example, build jugs from handleware, before building jugs of nuts.
2. If you need to build an inventory component from a different item, you need to use edit item on the inventory assembly before selected build assembly. (Note this is only available in QuickBooks 2005 and later.)
2a. It might be possible with previous versions of QuickBooks to deal with the issue of building from components that are the same in type, but different in size, to use an inventory adjustment to move inventory items from one size item to another.
3. When sufficient quantities of components are available, right click on the inventory assemblies, and build the required numbers of inventory assembly items
The best time to build assembly items is when they are manufactured. A daily or weekly entry of items built will help keep the inventory tracking more realistic for all the associated items.
Some business owners might be tempted to not bother with periodically building inventory assemblies. They might wait until tax time to bother with the task, allowing some inventory items to run very negative, while the inventory levels of components runs very positive. They know their inventory levels in their head, and even if the software is telling them the wrong numbers, they have a good gut feeling for where their business is at.
While this might seem to work, it is probably a mistake for many reasons. Here are some of the reasons why inventory assemblies should be built on a regular basis.
QuickBooks uses an average cost method to maintain an item cost for each item. For inventory items that are directory purchased, this is a rolling average of the purchase prices for the item. Since it is a rolling average, it's dependent on existing inventory counts. For example, if 100 items are in stock at $10 each, and 10 more items are bought for $5 each, the effect on the average price maintained by QuickBooks is less than if there were only 10 items in stock at $10 when 10 more were purchased at $5 each.
When inventory assemblies are built, QuickBooks recalculates the cost of the inventory assembly based on the then current cost of the component items. If the Build Assembly feature is being used regularly, not only are the inventory and item costs more accurate for the built inventory assemblies, the average item cost for the component items will be more accurate.
One of the features that QuickBooks provides is an inventory report that tells which items should be ordered. It does this based on build points established for the items. It also will tell you historically how many of each item is being sold each week. If Build Assemblies is used on a regular basis, the deductions from the inventory of the component items will be regularly made. These deductions, combined with sales of the component items themselves, will give a more accurate picture of the demand for the item. If Build Assemblies is not done on a regular basis, then only the weekly sales figures will be used for figuring demand, and the demand will be much lower than if the reality of the use of the item for assembled items was included.
Additionally, if "Build Assemblies" is not being used, the component items are not being properly reduced and
If Build Assemblies is done at the end of several months, more accurate tracking might be obtained by doing several smaller build assembly operations for an item, and back dating them to space them out realistic during the back time period.
Nothing is more embarrassing than having a customer placing an order on the phone, and telling them that you have an item in inventory for immediate rush shipping, and then going to your warehouse and discovering the item isn't really in stock because it was used up building some other item. Regularly using the Build Assemblies feature will avoid this kind of problem.
If an inventory adjustment of component items is done before build assemblies, the inventory adjustment may make it difficult to later build a sufficient number of inventory assemblies. If Build Assemblies is done first, then many of the items no longer in inventory will be properly accounted for as being used for assemblies, and the actual inventory adjustment entry needed should be much smaller.
While the inventory tracking tools provided by QuickBooks are rudimentary, they are powerful enough for most small businesses. The Inventory assembly feature is flexible enough to deal with the needs of most wholesale, repackaging and light manufacturing needs. If QuickBooks is regularly informed of the builds of assembled items, its tracking and reporting tools will provide accurate information to assist the small business owner in the management of their business.
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