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capitalize_internal_labour

Capitalization of Internal Labour

This document is a method of capitalizing labor to a unit. This requires that a cost is indicated against the labor charge, and in doing so, takes that cost and capitalizes it to the unit. Result is that the cost of labor is going to be recognized as an asset (increased landed cost of the unit) and will sit in 1200 inventory until the unit is sold. The set up takes that cost of labor, posting it to 1200, but it needs to offset expenses as the cost of labor is an expense when paying wages.

There is a trend for customers in Power Sport, or Marine, where they have Units that they want to show a true cost of, and they do their own labor. Consider this…

Taking the cost and treating it as an asset is deferring the expense and inflating the Inventory asset on the balance sheet. These need to be considered as companies, depending on the area, may have to pay taxes on their profit (so if expense is being deferred, they will show a higher profit) or they may have to pay tax based on Asset value (and their asset value is inflated). When the unit is sold, the asset value decreases and the cost is now reported, but these things should be discussed with a customer if we are suggesting this method.

Internal Labour Capitalized to Units before Selling.

  • Units that regular inventory can have other existing inventory attached or included with them. An enhancement or the modification of an existing unit would be examples of this. To account for this the Capitalization feature is used.
  • As labour, is not something regularly valued in inventory, capitalizing labour to a unit by setting up a Sub Category to point the value of the labour?
  • Internal labour is also something that is expensed through paying technician wages, so this also needs to be considered. You do not want double posting of tech time through service invoice and through payroll.

A separate category for internal labour is set up. The Category type is Labour, and the significant difference is to use a Technician Wage offset account to store the values capitalized to Units when the service is provided. This account offsets the Regular technician wage expense account.

As Internal Labour is to be kept out of Income and Cost of Sales (because it is capitalizing to the unit, “not” being sold), what is used in place of these numbers in the category setup, is a ledger account for “technician wages offset”. This account will be used during the service invoice.

The internal labour part is setup with a retail price being the price you want to book for internal labour. (In this example, the amount the unit landed cost was increased $25.00.) .

When the item is sold on the Service invoice, it will show up at the 25.00 per unit of labour. Add the tech information as usual.

The 25.00 has been capitalized to the Unit…

The ledger postings will occur as follows:

  • A Debit or increase to 1200 Inventory (required, as the landed cost is what will eventually decrease 1200 inventory when the unit is sold),
  • A credit or decrease to the Tech Wages offset account. This account can be set up sequentially close the regular wages account. As we are capitalizing some of the tech wages to a Unit, when that unit eventually sells, the value of the tech time is capitalized to the unit landed cost and this ends up in Cost of Sales. If we did not offset the wages, then you would double expense the tech wages.

(Note: posting to the offset account is done to prevent posting directly to the wages account. A cleaner ledger account for payroll is reserved in case of auditing)

Important Financial Note: Verify with your State, Province, and/or Federal Tax agency, that this suggested method is an acceptable accounting practice within your jurisdiction. You must confirm if prepaid internal labour can sit as an asset on your balance sheet, and if so under what conditions.

capitalize_internal_labour.txt · Last modified: 2013/11/14 16:58 by tanya