Inventory In A Different Light

Post date: Jul 21, 2011 5:55:40 PM

Inventory/Order Entry systems offer a relatively structured way to handle point-of-sale transactions, but specialty contracting businesses (like overhead door companies) face two extra challenges: 1) they need to process labor, and 2) they need to accommodate configured, one-time, 'custom' items, especially for commercial installation work.  The typical solution is to set up and maintain a separate 'job costing' module, but SMCP Inventory is uniquely designed to deal with both of these issues, while at the same time leveraging the benefits of a conventional Order Entry/Inventory system.  Job cost information is provided in detail, but without the normal required maintenance.

Labor is treated as an inventory item that carries no cost: labor can be billed as a per-hour 'item' (for service work), OR billed as a labor 'unit' associated with an installed item (for example, an invoice for ten doors may also include ten labor 'units' billed for the installation itself.

Configured items (for example a particular item configuration for a particular contract) can be generated automatically for each order, and from that point on, the system treats it like any other 'master' item, recording cost, decrementing quantities when shipped, and generating revenue when billed.

The various inventory item concepts used in the SMCP design are explained below:

Normal Items:

A normal inventory item is built into the inventory as a 'master' item: it can then be ordered, received, and shipped.  Each receipt of the item generates a cost 'bucket', adding that received cost to the inventory asset account in the GL.  When the item is shipped, the specified costing method (LIFO, FIFO, or Average cost) is used to determine which of the current buckets are tapped for the shipment, and the designated revenue account is debited to offset a corresponding credit to the Inventory GL account.

Expensed Items:

Expensed items get built in inventory, and can be used time after time, but they are NOT received or shipped, or counted and maintained as 'on hand' items.  They carry no cost and when they are billed, they do not create an inventory transaction.  An item can be set to 'Expensed' in the 'Edit items' function.  Expensed items are typically used for things like labor, or for lower cost items that would be impractical to count, like fasteners.  On a sales invoice, they look no different than a normal inventory item, but there is no processing for them in the actual inventory module.

Non-inventory items:

A non-inventory item isn't built in inventory at all - it makes its only appearance on Purchase Orders.  When creating a Purchase Order to a vendor, the user can add a 'non-inventory' item on the fly.  It never appears in the inventory, and the user must choose an expense account when it is placed on the Purchase Order.  The resulting transaction is a credit to Accounts Payable and a debit to the selected expense account.  'Non-inventory' items are usually used for things like office supplies, which are not represented in the company's inventory, and which are not shipped to customers on invoices.

Dedicated items:

A 'dedicated' or 'custom' item is a normal inventory item that was ordered specifically for a particular sales order and is then 'dedicated' to that order.  These items are normally ordered one time, and never used again.  An item can be 'dedicated' by entering the associated order number in the 'Dedicated to order number' field on the 'Edit items' screen.  (SMCP creates 'dedicated' items automatically from OHDirect estimates, and flags them with the order number to which they are dedicated.)  Processing for 'dedicated' items is the same as it is for any other 'normal' item.

Miscellaneous Contract Items ('MCI'):

An 'MCI' is a type of normal item, but it's used in a special way.  There are certain items that are hard to quantify at the time of shipment: one example might be angle iron or wood framing material that could be used in variable lengths on different jobs.  Normally it's not possible to know precisely the lengths needed ahead of time, and because pieces are often used, it's hard to record the exact amount used on each project.  At the same time, it's bought infrequently in large enough quantities that you may not want to actually 'expense' the item.  For these kinds of items an 'MCI' is used.

An 'MCI' simply represents one dollar of unspecified cost.  When setting up an order, you can 'estimate' the COST of the angle iron that might be used, and 'ship' a corresponding quantity of the 'MCI' item.  If, say, you anticipate using $20.00 of angle iron, you would ship a quantity of 20 MCI 'items'.  (On the invoice you can suppress the printing of the 'MCI' item so the customer isn't confused by it.)  That will relieve twenty dollars of cost from the inventory, which will be (correctly) associated as a cost with that order.  Over time, the 'MCI' item 'count' will decrease as MCI items are shipped.  But because they represent (in this example) angle iron, you need to periodically count the angle iron on hand.  Since it's been used but not actually shipped on invoices as an 'angle iron' item, the actual quantity on hand will be less than the quantity shown in the SMCP system.  The quantity in the system then needs to be updated to match the quantity actually on hand, which will be an inventory 'write down'; and the quantity of the MCI items (a pure dollar of cost each) should then be 'written up', which should offset the 'lost' angle iron.

NOTE: the 'MCI' item should represent a limited number of defined items, and anyone determining the quantity of 'MCI' items on orders needs to understand exactly which items they are intended to represent.  They should NOT be used casually as general 'extra' costs, for example.