• From: USA
  • Registered: 08/19/2013
  • Posts: 12

Topic: Manufacturing by 3rd party

Have a bit of a complicated transaction that I'm not entirely sure how to enter into FA.

I have several hundred units of Item 1 that I have purchased from Company A. Now, I'm going to ship Item 1 to Company B, who are going to use it to manufacture Item 2 and ship it back to me. They will provide me with an invoice billing me for the finished product, which I will then sell.

What's the best way of entering this into FA? I could enter it as a straight manufacturing work order with the manufacturing cost of Item 2 as labor, but I think that means that I wouldn't be able to enter the invoice and track it through Accounts Payable. I could make an invoice "selling" Company B the appropriate amount of Item 1 at cost and then "buy" Item 2 from them at cost billed+cost of Item 1, but that seems like it could get complicated.

Is there a better way of doing this?

  • From: Singapore, India, Chennai
  • Registered: 05/02/2009
  • Posts: 6,160

Re: Manufacturing by 3rd party

Use straight Manufacturing and pay Company B manufacturing charges.

apmuthu's Website

  • From: USA
  • Registered: 08/19/2013
  • Posts: 12

Re: Manufacturing by 3rd party

apmuthu wrote:

Use straight Manufacturing and pay Company B manufacturing charges.

That crossed my mind, but if that was done as a separate invoice, the cost of manufacturing wouldn't be carried as part of Item 2's value for COGS/inventory valuation purposes. This is important for tax compliance, as we are taxed on inventory in my jurisdiction.

  • From: Singapore, India, Chennai
  • Registered: 05/02/2009
  • Posts: 6,160

Re: Manufacturing by 3rd party

Then when the manufacturing charges invoice is raised, put in the cost of goods sold and price of goods received instead so that the net result is what you need to book as manufacturing charges after allowing for tax credits.

Alternatively:
Treat the Company B as a regular Customer and another account for Company B as a Supplier. Keep the Sales and Purchases separate and provide for tax credits on purchase back of manufactured items.

If your tax accountant agrees, make a delivery on consignment for manufacture to Company B so that no billing needs to be done except in escrow and contra-ed when the purchase is made.

apmuthu's Website