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Providing a clear picture of the Profitability of Manufacturing Assemblies and Construction

Updated: Feb 4

Raw materials are recorded in the accounting records to accurately reflect the cost of goods produced. The process involves several steps to ensure proper tracking and reporting of raw material expenses. Set up Products and Services Inventory for the type of raw materials you are going to use before beginning the project and include standard (or actual) purchase cost and sales price. Inventory COGS will not calculate without this information. Remember: The truth (Specific identification) for current cost and current sales price is the most recent bill and invoice for the particular item, and should be reflected on the Income Statement, regardless of FIFO Inventory Build. Use caution with Excel spreadsheet sync. Do not overwrite Quantities on Hand and be sure to maintain a bill of materials (BOM) production report.

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Here's how raw materials inventories are typically recorded in progress:

1.) Purchase of Raw Materials (typically tax exempt): (Job Purchase Order) When raw materials are purchased, an accounting entry is made to record the transaction using a Purchase Order (can be created from an accepted Time and Materials Estimate) and when the materials are received a Bill is created to produce the following entry. Do not mark these Bills billable but do enter the clients name, if you will be invoicing from an estimate. Otherwise, if utilizing cost plus billing, mark up from the bill prior to invoicing.

is a Debit: Raw Materials Inventory and Credit: Accounts Payable or Cash Bill Payment

2.) Issuance of Raw Materials for Production (Job Order):

As raw materials are used in the production process, an accounting entry is made to record the transaction using a

Bill (-) QTY/AMT Raw Materials (+) QTY/AMT WIP Issuance Inventory *date

is a Debit: Work-in-Process Inventory Issuance and Credit: Raw Materials Inventory

3.) Conversion of Raw Materials into WIP Conversion (Installation):

As the process progresses, the cost of raw materials is gradually transferred to the Work-in-Process Inventory using a

Bill (-) QTY/AMT WIP Issuance Inventory (+) QTY/AMT WIP Conversion Inventory *date

is a Debit: Work-in-Process Inventory Conversion and Credit: WIP Inventory Issuance

4.) Completion of Production and Transfer to Finished Goods (Job Phase Completion):

When the production of goods is completed, the cost of raw materials, and WIP inventories are fully transferred to the finished goods

Bill (-) QTY/AMT WIP Conversion Inventory (+) QTY/AMT Finished Goods *date

is a Debit: Finished Goods Inventory and Credit: WIP Inventory Conversion

5.) Sale of Finished Goods: (Ready to Invoice)

When finished goods are sold, the cost associated with the production of those goods is transferred to the Cost of Goods Sold (COGM) account.

Invoice + sales tax

is a Debit: Cost of Goods Sold Manufacturing or COGS construction and Credit: Finished Goods Inventory

These accounting entries ensure that the cost of raw materials is accurately reflected in the financial statements at various stages of the process. The goal is to match the cost of producing goods with the revenue generated from their sale, providing a clear picture of the profitability of the business operations. Effective Inventory and Project Management is the key to accurate reporting.

Some notes about bundles:

  • Bundle Item (Multi-Inventory) (income=Sales for Invoices, expense=COGS for Bills/Expenses)

  • Bundles can have up to 50 items.

  • There is no additional markup or change in price for bundles. (Bundles aren’t assemblies.) The price of a bundle = The total price of all its finished goods inventory items. (Inventory Lot)

  • Bundles can be used for estimating common projects (eg: kitchens, bathrooms, et...)

  • Sales Price quoted on an Estimate must be consistent with the Products and Services if the Bundle is a customer specific bundle. (best to try and maintain bundle pricing for all customers or create customer specific bundles)

  • A bill of materials (BOM) production report is generated from the Products and Services List Report when utilizing Bundles.

To check the stage of the inventory run a Balance Sheet, dig into the Inventory Asset account and you will see the Bills and the date progression with inventory quantity and value. This allows you to see when the Finished Goods are ready for sale. *One broken in progress (Inventory QTY ADJ) Details of the inventory in stock are available on other reports such as the Product/Service List Report. This transaction report shows the value and movement of inventory as of the report date, (customize by vendor, customer, product, and more.)


The Invoice formula for calculating COGS in manufacturing and assemblies:

COGM = Direct Materials Used + Direct Labor + Manufacturing Overhead

*Don't forget to add sales tax on the Finished Goods Sale. The invoice will include costs associated with the revenue, thus GAAP matching principle, and ASC 606.


The Invoice, formula for calculating COGS in construction is similar:

COGS= Materials Inventory + Billable Labor + Billable Subcontractor Costs + Billable Equipment Costs + Billable Overhead Costs (*Costs that are not directly tied to a specific project should be excluded) The invoice will include costs associated with the revenue, thus GAAP matching principle, and ASC 606.

Progress tracking of construction inventory is a necessary activity. From Inventory Stock Order to Job Order and Job Completion, through each phase of construction (Preparing the Homesite, Laying the Foundation, Framing the Home, Installing HVAC, Plumbing, and Electrical, Adding the Insulation, Affixing the Drywall, Inserting the Interior and Exterior Finishes) to Completing the Final Inspection and Walkthrough. Tracking inventory can also provide a good measure to AIA, ASC 606 and IFRS 15 Revenue Recognition: For a performance obligation satisfied over time, an entity would select an appropriate measure of progress to determine how much revenue should be recognized as the performance obligation is satisfied.

Construction inventory tracking also provides a good control measure to identify and reduce inventory shrinkage and assist in identifying over spending, ultimately a measure to job cost containment. Conduct a Physical Inventory Count before construction starts and after final walkthrough, or as necessary. Make any adjustments for shrinkage, if required, or identify inventory that can be returned for vendor credit/refund.

You can also utilized standard project progress invoicing against an approved estimate based on the AIA model of % of project complete. In this case, only the amounts actually retained (deferred revenue) + invoice paid (earned revenue) with any cost plus billings, would be recognized on your financial statements. The balance of the estimate remains (non posting) WIP Reports in QuickBooks Online Advanced serve as your guide to job progression.

For further information regarding Time and Materials Billing:

*Set up in Products and Services first and foremost and enable Markup in Accounts and Settings. COGS will not calculate on sales receipts or invoices without this information.