Accounting & Bookkeeping & Small Business Forum

[jeremy4130]

Hi all. I work at a small manufacturing company who frequently sells R&D prototypes. These items are usually sold before there is a current (if any) BOM available.

Most of the time the items used to build these products are not considered 'inventoried' items and when purchased do not increase our inventory asset accounts. Which means the raw materials used to produce the products have been expensed in a prior period.

Even though the BOM's may not exist if I put enough pressure on the engineering department I can get a rough BOM to reconstruct cost of the item.

Given this process an accurate cost of sale for the product on the income statement has not been an option.

I understand that if an item (raw material or otherwise) has been expensed in a prior period its cost basis is now zero.

My question is, is there a method through tracking the purchases correctly and determining an accurate cost, that you can recognize the true cost of sale in the period of the sale?

Can you make adjusting entries to the GL accounts involved to properly refelect the cost of sale in the period of the sale?

Effectively reducing the expense account it came from and increasing the cost of sales account?

I close the books monthly, for management purposes only. We are not publicly traded.

Thanks

[dp1903]

jeremy4130 wrote: Hi all. I work at a small manufacturing company who frequently sells R&D prototypes. These items are usually sold before there is a current (if any) BOM available.

Most of the time the items used to build these products are not considered 'inventoried' items and when purchased do not increase our inventory asset accounts. Which means the raw materials used to produce the products have been expensed in a prior period.

Even though the BOM's may not exist if I put enough pressure on the engineering department I can get a rough BOM to reconstruct cost of the item.

Given this process an accurate cost of sale for the product on the income statement has not been an option.

I understand that if an item (raw material or otherwise) has been expensed in a prior period its cost basis is now zero.

My question is, is there a method through tracking the purchases correctly and determining an accurate cost, that you can recognize the true cost of sale in the period of the sale?

Can you make adjusting entries to the GL accounts involved to properly refelect the cost of sale in the period of the sale?

Effectively reducing the expense account it came from and increasing the cost of sales account?

I close the books monthly, for management purposes only. We are not publicly traded.

Thanks

As long as your year has not been closed out I would think you could reverse the original expensing and record the cost of sales. But all you are doing here is reporting expenses in a different place on the income statement. Your net income/loss for each period will still be the same.

My question is how "material" are the annual prototype sales to your total annual sales and how "material" are the annual prototype expenses to your annual total expenses? That is what percentage of annual sales are the prototype sales and what percentage of annual expenses are the prototype expenses? If less than 5% then I might consider leaving expenses as they are, it depends. If the percentages are 2% or less I would not worry about matching the expenses with the revenue.

[RobJ]

jeremy4130 wrote: My question is, is there a method through tracking the purchases correctly and determining an accurate cost, that you can recognize the true cost of sale in the period of the sale?
That depends on a number of factors. I don't know enough about your business and the purchases to give you a clear answer, so here's a "muddy" one. Assuming that the raw materials are purchased for specific products, you could track the expenses by job, project, or product. That is certainly made easier with decent software like QuickBooks. If the materials are purchased in Q4 of one year (for a calendar-year business) and used in the following year, you can create an asset account called something like "Work-in-Progress". Then, when the product is completed, you can use an adjusting entry to move the $ out of "Work-in-Progress" and into COGS. This scenario would also work from month to month and doesn't require an overlap from one year to another to work.

jeremy4130 wrote: Can you make adjusting entries to the GL accounts involved to properly refelect the cost of sale in the period of the sale?

Effectively reducing the expense account it came from and increasing the cost of sales account?
I may have already answered these questions. You tell me.

Rob

[jeremy4130]

"But all you are doing here is reporting expenses in a different place on the income statement. Your net income/loss for each period will still be the same"
Yes this is the case, just bringing the cost from the expense section of the P&L to the cost of sales section. I understand this would not effect the net income for a said month, but would result in a more accurate cost of sales. Which is useful for any number of reports.
The issue is not moving expenses that occur and are then sold and recognized as a sale within the same month. The issue i am struggling with is the fact that a lot of the time these costs associated with the production of said R&D unit have been written off as an expense in a previous period.
What ive decided is that (provided this is GAAP acceptable) yes, i can probably reduce my R&D expensed materials GL account in month of sale by the cost of sale associated with the sale of the R&D unit. Addressing the reduction (CR) of the expense account with an (DR) entry to the cost of sales account.
And for those sales that occur say in January when the items were purchased in Decmeber, create the "work in progress" type asset account to place the value of those items promised for said unit.

As for this "Work in Progress" account. Is this an acceptable method of dealing with R&D type 'inventories'. I've been informed through many resources that you cannot hold inventory in your asset accounts unless they are part of an existing product that is held for sale.

Does an open customer purchase order for R&D units allow you to tiptoe around this, by arguing that these items are part of a product, even if its a prototype or one off of an existing unit?

Thanks for your insight, and our R&D sales are signigicant 30% or more of sales per year.

[dp1903]

Quote: As for this "Work in Progress" account. Is this an acceptable method of dealing with R&D type 'inventories'. I've been informed through many resources that you cannot hold inventory in your asset accounts unless they are part of an existing product that is held for sale.

Does an open customer purchase order for R&D units allow you to tiptoe around this, by arguing that these items are part of a product, even if its a prototype or one off of an existing unit?

I'm not an authority on this, so take it for what it's worth or not worth. I've read that R&D expenditures are to be expensed as incurred.

"Two difficulties arise in accounting for these research and development (R & D) expenditures: (1) identifying the costs associated with particular activities, projects, or achievements, and (2) determining the magnitude of the future benefits and length of time over which such benefits may be realized. Because of these latter uncertainties, the accounting practice in this area has been simplified by requiring that all research and development costs be charged to expense when incurred."

However, my intermediate accounting book also states: "Materials, Equipment, and Facilities. Expense the entire costs, unless the items have alternative future uses (in R & D projects or otherwise), in which case, carry as inventory and allocate as consumed; or capitalize and depreciate as used."

These are my arguments for carrying the expensed amounts as inventory. (1) The future benefit of the prototype sold is known in terms of the sales price and, therefore, does not fall under the rationale for expensing it as R & D, (2) the prototype has a use other than R & D if it is developed for sale to a specific customer.

Quote: Does an open customer purchase order for R&D units allow you to tiptoe around this, by arguing that these items are part of a product, even if its a prototype or one off of an existing unit?

As I just stated, that is my opinion. So, since these sales are material, I would carry such costs as inventory, including work in process, and use a job costing approach as Rob suggested to account for cost of sales and to match these costs with the revenues generated from them. I would also present this to management in an effort to make your job easier and require engineering or whoever to provide you with the info you need on a timely basis to properly account for these costs. As I said, 30% of sales is very significant, and therefore, there should be a company policy and procedure established for you to get the info you need.

[Accountant101010]

does anyone know where i can find some good accounting articles?

david

[Ahshucks]

I agree with dp that carrying the accumulation of R&D cost in job cost is an effective method of capturing it by project. Many have an R&D budget and this would be usefull for that comparison, not to mention the question "How much have we got into this project!". This accumulated cost can easily be transfered to R&D expense or fixed asset with a GJE.