We have a packaging company with a large variety of items which are packed to order. As we don’t prepack, virtually all our sales are through kits with the option selected to “always explode”. We do have a bill of materials (BOM) for each kit as items will have a bag, the product, a portion of a box (12 units per case), etc. My question is in regards to how best to add direct labor to the cost of the product. The following is the best method I have found.
- 1. Create a new product line specific for labor inventory items
- 2. Create new inventory items for each type of labor. For example, separate inventory items for labor related to applying the label, packing the product, sealing the bag, etc.
- 3. Add the labor items to the BOM using the applicable amount of labor (in dollars)
Although the labor items are not actual tangible inventoried items, to add them to the BOM, I had to create the inventory items and will need to receive one into inventory to create a “last cost”. Then as the kits are sold and exploded, it creates an “overdistribution” of the labor inventory items. I am planning on a monthly basis to then adjust the inventory back to zero to correct the overdistribution and I will direct the accounts so the inventory adjustment acts as an offset to my actual labor expense.
I appreciate any feedback either confirming this is my best option or ideas on other options which might be more efficient. Thanks.
