Labor items can be included in shop orders, and if included, the cost of the labor is added to the cost of the part being built. Labor items can be set up as non-stock items as described in the previous section, or they can be set up as stocking items. You may also have both internal and external labor costs that need to be applied to the items you build in the Shop Floor system.
The primary advantage of using a non-stock item for internal labor is that you do not have to purchase the item – it is available whenever you need to use it. The item is defined in the Inventory Master as non-stock. An estimated cost is added to the item based on your actual labor costs (i.e. $30 hr), and the item is added to the BOM. When a shop order is entered, the item automatically allocates to the shop order (it is always available) and it also prints on the Pull Ticket to notify the shop that they need to do something. The Shop Order is then completed and the system adds the labor cost to the finished good and makes the appropriate accounting adjustments.
The big dis-advantage to using a non-stock labor item is that you do not have the three way matching control in the accounts payable system like you do for purchases of stocking items. In the case of internal labor, this is not usually an issue, but when you are dealing with external labor providers, this issue becomes more important.
External labor can also be set up as a non-stocking item, but if this is done, the item tracking must be done manually as explained previously. Alternatively, you may set up tracking items for external labor. If you set external labor up as tracking items, the system will treat the item just like any other stocking component. This means that the quantity and cost of the labor item is shown on the inventory report. This also means that the labor item needs to be ordered on a purchase order, that the purchase order must be received to put the labor in stock, and that the shop orders that require the labor item must be allocated to. If the external labor is set up in this manner, you will also need to match the labor receipts from the vendor to the vendor invoices. This can require you to modify the purchase order issued by the vendor when the actual total hours for the project are known, or to charge labor variances to a variance account during accounts payable invoice entry (when matching the labor “received” into the system to the vendor invoice for the labor).
Once the correct labor quantity for a shop order is received and allocated and pulled for the order being processed, it is included in the top level component cost at completion. This true for both stocking and non-stock labor items.