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Fixed and Variable Costs in Bills of Material

Problem Details:

What are the Fixed and Variable costs in bills of material and where do they get posted?  

 

Solution:

Fixed Cost is a one-time cost that is the same regardless of how many units you assemble of the master item. Variable Cost is dependent upon the build quantity. The Variable Cost amount specified in the Bills of Material screen is the cost for one build of the master item.  If more than one build is assembled, the variable cost amount is multiplied by the number of builds. 

When assembling the bills of material, the fixed and variable cost amounts are added to the cost of the master item in inventory.  The costs of the individual component items is credited to inventory, the cost of the items plus the variable and fixed costs is debited to inventory (as the cost of the newly assembled master item) and the variable & fixed costs are credited to the Assembly Cost Credit account as specified in IC Setup / Account Sets.  For example, if the MASTER item has 2 component items, A with a cost of $10, and B with a cost of $15, plus a fixed cost of $8, the assembly journal entry will be the following:

Credit Inventory ($25) - cost of A & B

Debit Inventory   $33 - cost of A & B & fixed cost, cost of MASTER

Credit Assembly Cost Credit  ($8) - fixed cost

One of the most common reasons for assigning fixed and variable costs is labour to do the assembly.  This labour cost, originally recorded through payroll (or an AP invoice) will then be duplicated as it is added to the cost of the item.  Therefore, a journal entry is needed to debit the assembly cost credit account and credit the wages expense account.  This avoids duplication and leaves the cost of goods for the item to include the labour cost and removes it from the wages expense. In this respect, the assembly cost credit account can be used as a clearing account.

 

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