In a prior article I talked about the cost and avg cost fields in the item list. In this article I’ll talk about a related value, the Total Bill of Materials Cost which you will see listed at the end of a QuickBooks bill of material.
Let’s take a look at an inventory assembly sample item. The WHAS wheel assembly has two components, a screw (two of them) and a roller. Note that there are three costs shown in this window.
The Cost field (15.00) has no real bearing on valuation of this item. This figure can be edited directly. QuickBooks will not automatically update this cost to reflect either the Total Bill of Materials Cost or the Avg Cost. As I discussed in my earlier article on costing, the cost value of purchased parts is usually, but not always, the “last purchased cost” of an item.
The Avg Cost field (32.00) is the cost that QuickBooks uses to calculate the value of this item. You can only edit it directly when you add a new item – after that it is updated by inventory adjustments, receipts and builds. If you multiply the on hand value by avg cost, you get the inventory value for this assembly (assuming you don’t have a negative on hand quantity).
The Total Bill of Materials Cost field (32.00) is not directly tied to the cost or avg cost values. This is the sum of the cost values of the components in the BOM. In our starting example it matches the avg cost, but you will see that they are not connected later in this discussion.
What is the Cost of a Build?
Let’s take a look at the two component items.
The SC-12 screw has a cost of 11.00, but the avg cost is 8.86076.
When we start, we have 6 WHAS assemblies at an average cost of 32.00, for a total inventory valuation of 192.00. We will build 4 of WHAS to bring us up to a total of 10. What will we see for the cost, avg cost and total bill of material cost for WHAS when the transaction is done?
- We start with 6 @ 32.00, for a valuation of 192.00
- For each WHAS that is built, we use 2 screws @8.86076 (the avg cost), for $17.72152
- For each WHAS that is built, we use 1 roller @19.44444.
- The cost at this time for one WHAS is 37.16596
- We built four WHAS for a total valuation of 148.66384
- Adding four WHAS with a total cost of 148.66384 to the value of 6 WHAS that were valued at 192.00 gives us a total inventory valuation of 10 WHAS for a value of 340.66384
- Dividing that total cost by the total on hand (10), we should get an avg cost for WHAS of 34.06638
Let’s take a look at the WHAS information:
Note that the cost and total bill of material cost have not changed.
This demonstrates that the avg cost of an assembly item is adjusted by the avg cost of the component parts when you issue a build transaction. This is what I would expect, and it shows that QuickBooks is properly maintaining the value of your inventory. The cost of the component parts is being rolled into the cost of the assembly.
Management Information is Misleading
The problem that I have with this is that from a management (not accounting) standpoint, the figures that are shown here are misleading. As my costs fluctuate, the cost value does not change. It only changes if I manually update it myself. If you have a report that shows the cost of this assembly, you may have an incorrect understanding of the cost of your assembly.
What is worse, the change item prices function in QuickBooks will let you use the cost of the assembly item, but not the avg cost, so price updates will be based on information that is often incorrect and out of date.
To take this further, if the WHAS inventory assembly is used as a sub-assembly in a higher level assembly, the total bill of material cost value in that higher level assembly will reflect the cost of the subassembly, which doesn’t reflect any useful value if you are not diligent.
Why Is This Important?
Most companies will want to base their selling price on the cost of manufacturing their item. It is important that you have accurate information to make these decisions. In my experience it is common to want to update prices based on the current cost of acquisition. That is, I want the BOM cost to reflect the last purchase cost of the components, not necessarily the average cost. If you are updating the cost field when you purchase your parts then you have this information in the database for components.
If you have a simple one-level item structure you have to look at the total bill of materials cost as the basis of your decision. This value is hard to find in QuickBooks – it doesn’t show in reports other than the individual Bill of Material printout, or in the Edit Item screen.
If you have a more complicated product structure, using sub assemblies, getting an accurate cost of the assemblies is much more complicated. The cost shown for the subassembly might not have any relation to the cost of the components.
What Can You Do?
Obviously, if you are going to use the QuickBooks price updating tools, you want to be able to set prices based on accurate information. In QuickBooks by itself you need to periodically review the total bill of material cost of each assembly and then retype that in the cost field. Again, this value is only found in that one report or in the edit item screen for the assembly. There isn’t a simple report that lists the value for you.
This is complicated if you have multiple level product structures – in that case you need to make sure you update the lowest level assembly first, and work your way back up the product structure.
I do have an alternative. My company produces a low cost QuickBooks add-on product called CCRQBOM. I’ve included several features that can assist you with updating assembly costs. The primary feature is a cost rollup function that will take the cost value of the component items and update the cost value of the inventory assembly item. In addition, if you have multiple level assemblies, the program will determine what the lowest level assembly is and start with that, rolling the cost up through all of the levels to the top.
In the future I will have another product that has value, CCRQInventory. This product will include an improved price update feature that will let you set the price of items based on a number of factors, including the avg cost as well as the cost (QuickBooks won’t update based on avg cost). We are field testing this feature now, if you are interested you can contact me directly (see my address in the “about” page in this blog).
About the Author (Author Profile)
Charlie Russell is the founder of CCRSoftware. He’s been involved with the small business software industry since the mid 70’s, focusing on inventory and accounting software for small businesses. Charlie is a Certified Advanced QuickBooks ProAdvisor. Look for Charlie’s articles in the Accountex Report blog, as well as his California Wildflower Hikes blog.