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Accounting for changes of Inventory

We are a manufacturing company that freeze dries frozen foods, packages it and sells it to consumers. The problem this poses on doing an inventory valuation, is the action of taking a raw material from frozen to freeze dried. Using a simplified example:

We'll purchase 3,000 lbs of frozen strawberries at $1/lb and freeze dry it, outputting only 300 lbs of freeze dried strawberries (most of the weight is lost from removing the water). Because of this, we cannot keep the $1/lb cost, but have to use a $10.50/lb cost ($10/lb and $0.50/lb of L/OH for freeze drying) to correctly valuate this raw material.

What would the journal entry look like to emulate this kind of change? I feel like this has a simplistic answer, that we can't see because we are lost in the weeds.

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

If you are using an accounting system that has Bills of Material (BOM) you would show 10 units of strawberries going into a FG of 1 unit.

So you would relieve $10 (and units) of raw goods and create $10 + L/OH of FG, but only 1 unit.

If you were doing it by hand. (follow the numbers between the G/L and the Perpetual Inventory . i.e. 1,2 and 3):

Purchase Frozen

1. RG Inventory $3000
A/P $3000

2. WIP Inventory $3000
RG Inventory $3000

3. FG Inventory $3150
WIP Inventory $3000
Other accts (L+OH) $150

From your perpetual stock standpoint:

RG
1. +3000 units
2. - 3000 units

WIP
2. +3000 units
3. -3000 units

FG
3. +300 units.

Actually pretty straight forward.

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

Are you using a process ERP system? That should help you set this up so that you can measure actual process yield v standard (which seems to be 1:10).

Anonymous
(Accountant) |

Thank makes sense - thanks Wayne.

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