Scenario Analysis No. 16 – Re-packaging your supplies that you have purchased for sales? Here’s one way to manage the transactions!

I had had a meeting recently with my prospect, and arising from that meeting, questions began bugging my mind on how a business entity should manage transactions related to re-packaged items for re-sale.

I view this situation similar to a “mini-manufacturing” process. The input cost from the bulk purchase need to be captured. This same cost is to be spread across the output quantity.

The cost per pack from the input will be higher compared to the cost per pack from the output due to the different sizes of the respective packs (e.g. 10-kg pack vs 2-kg pack).

The steps in managing the transactions are set-out as below.

STEP 1: CAPTURE THE INPUT COST

When the supplier delivers the supplies, the effect would be an increase in “Inventory – Raw Materials” and an increase in amount owing; designated as “Creditors – Unbilled”. This is assuming the invoice from supplier is not received yet.

The increase in “inventory of Raw Materials” will trigger an InventoryIn process. The quantity will be updated together with the cost per unit (e.g. cost per 10-kg pack). An illustration of the incoming quantity for product “code-109” after being updated is shown as follows:

16-1

The accounting entries triggered to reflect the total Ringgit amount of this transaction are as follows:

DR    Inventory – Raw Materials           CR    Creditor – Unbilled

16-2

STEP 2: THE RE-PACKAGING PROCESS

The re-packaging process is performed, presumably by the staff of the business entity. In this example, the manpower costs are not captured into the costs of the re-packaged items. If need be, the manpower costs can be added to the cost of the re-packaging process.

Once the re-packaging is completed, the quantity of the re-packaged items is updated into the system. An InventoryOut process is triggered for the Raw Materials which is as follows:

Decrease in Inventory – Raw Materials;          Increase in Sales Expense – Re-packaging

The illustrations related to the decrease in quantity are as shown below:

16-3

16-4

The accounting entries triggered to reflect the total Ringgit amount of this “mini-manufacturing” transaction are as follows:

DR    Sales Expenses – Re-packaging           CR    Inventory – Raw Material

16-5

STEP 3: RECORD THE RE-PACKAGED ITEMS COST

After the re-packaging is completed, the quantity of the re-packaged items is updated into the system. An InventoryIn process is triggered for the re-packaged items. The process and illustration are as follows for product “code-110”:

Increase in Inventory – Re-packaged items;

Decrease in Sales Expense – Re-packaging

16-6

Note: the input cost total value is divided by the number of quantity of the smaller packs to get the cost per unit. In this example:

Originally 200 units of 10-kg pack total amount was RM4,500. After re-packaging, 500 units of 2-kg pack was achieved with total amount RM4,500. Hence, re-pack item cost per unit is RM4.50.

16-7

The accounting entries triggered to reflect the total Ringgit amount of this transaction are as follows:

DR    Inventory – Re-packaged Items           CR    Sales Expenses – Re-packaging

The illustration is as per below:

16-8

Note: Validation needs to be done to ensure that the “mini-manufacturing” account designated as “Sales Expense – Re-packaging” has nil balance after the re-pack items are recorded by the system. This is vital to ensure that the input units and output units are synchronized and reconciled for smooth operations of the system.

16-9

The re-package items are now ready for re-sale.

STEP 4: RE-PACKAGED ITEMS FOR SALES

When a sales is made, the following transactions is recorded:

  1. Accounting Entries:

Increase in Amount owing by Customer (or Cash);           Increase in Sales Revenue

  1. InventoryOut Process:

Decrease in Inventory – Repackaged Items;           Increase in Sales Expense

When the invoice from Supplier is received, reverse the “Creditors – Unbilled” and show Amount owing to Supplier. The effect is shown as below:

Increase in Amount owed to Supplier;           Decrease in Creditors – Unbilled

The process continues until net cash is received in the Bank Account.

Note: Don’t forget that we are organizing another seminar/workshop for SME entrepreneurs on managing their business better through better financial management in January 2017. Watch this space for details.

GNZ.

 

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