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.
Accounting for changes of Inventory
Answers
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.
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).
Thank makes sense - thanks Wayne.