NonStock Items

Nonstock items are items that are not tracked by the inventory control system.  Nonstock items can be physical (like small parts that you do not wish to track), or non-physical, like services, or other labor items, special handling charges, etc.

The on hand quantity of a nonstock item is always maintained at 0 by the system and this on hand quantity is never adjusted when the item is purchased, sold, or consumed by assembly operations.  Nonstock items are considered to be available at all times and in unlimited quantity.  Nonstock items can be entered on purchase orders, sales orders, and in shop orders (as components) and any sales or shop order lines for a non-stock item are fully allocated to as the lines are saved.  Nonstock items can have a cost assigned to them, and this cost can be used to increase the cost of the finished goods that are produced using the item (in the shop floor system) or to update cost of sales (if the item is sold to a customer on an invoice).   

The system will never prompt you to re-order a non stock item automatically as it will for stocking items.  This means that non stock items must be manually re-ordered or directly purchased as required.

Since a nonstock item never causes an adjustment to the inventory valuation report, the cost of a nonstock item should never be posted to the inventory account in the accounting system (it is not treated as inventory and should therefore not cause activity in the inventory account in the general ledger). Nonstock costs come from a source that is not inventory – such as

•      Expense items – like workshop consumables that are expensed when purchased.

•      From inside labor costs – like your payroll expenses for warehouse or assembly personnel. 

•      From outside labor costs – like consultants, engineering firms, outside companies that perform cleaning, testing, etc.

The cost of a nonstock item is normally expensed (directly charged to an account like production consumables expense when the accounts payable invoice for the consumables are received), or posted when payroll expenses are recognized (for items like internal labor).

If a nonstock item is received on a purchase order, the system does not increase the quantity of the item in the Inventory Location it is received into, and the system does not post any entry to the general ledger.  The receiving process merely closes the purchase order line.  Three way matching (discussed in the documentation for the Accounts Payable system) is also not used when processing non stock items.  This behavior is substantially different from stocking items which are automatically posted during receiving.

Since non stock item costs are directly posted to expense (i.e. consumables) or payroll accounts (production labor expense or costs), as they are incurred, these costs should not be deducted from inventory when a non stock item is used during assembly or sold to a customer.  For this reason, non stock items must be assigned to product lines that are specifically set up to properly post the items to the general ledger.

The system uses the product lines in each item to determine how item activity should be posted to the general ledger when an item is received, sold, or used during production.  The product line is used to determine the sales, cost of sales, and the inventory control account that should be used for posting the activity for each item when the item is processed.  

Since the cost source used by the system is determined by the product line, separate product lines must be used for stocking and non-stock items.   This issue is discussed in detail in the section on General Ledger Posting information that is presented later in this document.  In general, non stock product lines are set up so that they post the cost of the item to a non-inventory account such as “Production Consumables”, “Internal Labor Billed out to Customers”, “Internal Labor used for Assembly” or similar accounts. 

This setup allows the cost of each non stock item to be posted as a credit (reduction) to the same expense or payroll account used to record the cost of the nonstock item when it was “received” when the item is either sold or converted into a stocking finished goods item using the shop floor or assembly system.

For example: If you set up an item for a production consumable such as labels with a cost of .10 each.

If you purchase 10000 of the labels (manually since the system will not prompt you to purchase non stock items), and receive them, the system does not make any entries to the accounting system.

When the vendor invoice for the labels is processed in the accounts payable system, the cost of the labels (10000 X .10) or 1000.00 would be charged to a production consumables account.

If the product line for the item is set up to point to the same production consumables account and one label is used to build a finished good in the shop floor system, the system will add .10 to the cost of the finished good and reduce the production consumables account by the same amount.  This entry is made automatically by the shop floor software.  The net effect is that the system converts the non stock item into finished goods inventory and makes the appropriate adjustment in the general ledger automatically.

If the same item were directly sold to a customer, and the product line is correctly set up, the system would post the price of the non stock item to the sales account pointed to by the product line, the cost of the item would be posted to the cost of sales account (as a debit) pointed to by the product line, and the cost of the item would be posted (as a credit or reduction) to the production consumables account defined in the inventory or cost source account pointed to by the product line.

Workshop consumables – These are items (usually with a low cost) that you do not wish to track in inventory.  The items are expensed when purchased.  Examples are small screws, nuts, plastic caps, labels, etc.  These items can be set up as nonstock items and assigned to a Workshop Consumables product line.  The Workshop consumables product line would be used only for nonstock items and the inventory account for this product line would be pointed to a workshop consumables account in the expense or cost of sales section of the income statement.  If the items in this product line are set up with a cost, this cost is removed from the workshop consumables account if the item is sold or used to build something.  Purchases of the items would cause a debit to the workshop consumables account (when the vendor invoice is processed), and sales of the items would cause the system to credit the workshop consumables account.

Labor/Services – These are Items that represent inside or outside services performed.  If all labor and service items are nonstock, a minimum of one product line would be required for all of the labor items.  If some services are tracked (as if they were inventory items) and some are not, then two (or more) product lines would be required. This allows stocking items to be set up with an inventory cost source and nonstock items to be set up with a non-inventory cost source.

More:

General Ledger Posting Information