You really don’t need to activate the manufacturing module to be able to do a bunch of manufacturing related stuff.
So, let’s break up COGS into three components:
Direct Manufacturing Overheads (such as power, water, consumables, factory rent etc. etc. directly related to the machines that are used in manufacture - that could also include energy costs to light up the factory - or maybe not - check with your accountant and I am not one BTW)
Direct Material: This is perhaps the least complicated of the lot. Just have a BOM for the manufactured item and ensure that the quantities consumed and the valuation rates of the input materials are appropriate and the Manufactured Item will assume the value of the Input Materials. You don’t even need a BOM. You can do a Stock Entry Purpose: Manufacture and you will accomplish the same outcome. Only trouble is that the quantities of input materials will need to be calculated manually and keyed in by your users, which can be a bit of a drag. But if you have variability in your manufacturing process and you want to track actual consumption as against consumption according to BOM, you are way better off not connecting up the manufacturing stock entries to the BOM.
Direct Labor: You can setup a BOM to attribute a labor cost to each manufactured item. Like you can say $1 direct labor to make ItemA. So, the Stock Entry will look like this:
Raw Materials of Value $2
Cost of Input Items: $2
Direct Labor Markup: $1
Total Valuation of ItemA: $3
Incoming value (Manufactured Item): $3, Outgoing Value (direct materials) $2, so the principles of double entry book keeping that we are all completely familiar with says that this $1 needs to be attributed to an expense account.
Here’s where the complications begin. Use a “Labor Charge to be attributed” account to charge the Labor Mark Up in the Manufacturing Entry. Now as you pay (or pass accounting entries) to book direct labor costs don’t expense it out, but book it to the same “Labor Charge to be attributed”.
So this “Labor Charge to be attributed” account is like piggy bank. As you book your direct labor costs on your accounting system, you are dropping $s into the piggy bank. And as you pass manufacturing entries, you are drawing out of the piggy bank.
Because tracking labor is complicated, you will never get the piggy bank (“Labor Charge to be attributed”) to reconcile perfectly. But just tracking this account will get you a sense as to whether you are over estimating labor in your BOM or underestimating labor. And you can revise the BOM for the next period.
Things are really complicated as the actual time sheets and the actual consumption of those labor hours may not match. Plus you have labor rate variability across skills, across people, across shifts and top of all of that you will need to somehow factor overtime charges into this mix.
I have implemented ERPNext in many manufacturing setups in India. The Indian labor force is not used to the concept of time sheets, consequently, all my implementations do not appropriate the direct labor cost to the valuation of the manufactured item. My clients charge Labor separately on the P&L and as they incur those labor expenses.
There is another way to hack this: Setup as many items as necessary as a Stock Item. Like DL-LatheOperator, DL-CNC_Operator, etc. etc. Do a Stock Entry at the beginning of each shift and inward that many number of hours of these skills based on the number of workers that have reported to work that day. Use the average labor cost per hour as the valuation rate of this item. If you want to get real analytical about this you can even setup separate items like DL-LatheOperator-JohnSmith, DL-LatheOperator-RachelWyman and so on and ensure that the valuation rates are the actual cost of what you pay them per hour. Now your users just pull the appropriate labor item and plug in the quantity in the Manufacturing Entry and boom, you have a much better way of tracking things. At the end of the Shift, you run a stock balance report of the Direct Labor Items and any balances could be because of under utilization of your labor force. Or errors in posting entries. Plus you have to flush out balances at the end of the shift so that you can get the system ready for the next shift.
Of course, doing this is a drag and has a huge overhead in terms of time, energy and bandwidth to do this every shift, but if you have a budget or if there is interest in doing this by other organizations, you all can collaborate, find a service provider that can build this for you. Like as soon as John Smith checks in, 8 hours are inwarded for John Smith’s related labor item.
Direct Overheads: Concept is the same and complexities are similar too.
Though I have not been exposed to a country where tracking and appropriating direct labor is very important from a regulatory perspective and/or being successful perspective, I just think it is way better for most organizations to monitor direct labor and direct overheads and then move it using correction entries.
Maybe there are others that have managed to rein in this part very well for their organizations. I would love to hear their perspectives.
Not sure if this helps. But hey, you guys have to deal with it. If you read it, that is.