This article is relevant if you are looking for a best NetSuite based practice using the Light Assembly module to capture and capitalize costs that are not directly related to purchasing.

Background

NetSuite offers a Light Assembly module which is often used by organizations in the wholesale and distribution industry. This module is lightweight because the primary feature is to offer a bill of materials (BOM) for the creation of components that can be used to track accounting and inventory as sub assemblies and ultimately as finished goods. NetSuite’s Light Assembly feature differs from NetSuite Manufacturing in that it does not offer Work In Process (from Raw Materials to Finished Goods), capacity planning, and work center management and scheduling.

Many NetSuite based organizations in wholesale and distribution utilize Third Party Logistics (3PL) companies to manage warehouse and inventory versus having their own warehouse. Some 3PL companies offer assembly functions to enhance base products (raw material) into new finished goods. The 3PL organization will often charge a per unit fee for the transformation of base inventory items into a finished good. This fee can generally be called an assembly unit cost.

Per unit assembly cost is associated with work to transform raw inventory into finished goods. Ideally, these costs should be capitalized; which means that the costs associated with bringing inventory into existence should be summarized and held on the balance sheet as an asset as opposed to a period cost recognized on the income statement. Assembly cost then will be recognized as cost of goods sold during a NetSuite item fulfillment when the goods are ultimately shipped.

NetSuite offers common inventory management and cost types including average, FIFO, LIFO, specific, lot, and standard. Yet, all these cost types assume the traditional three-way match practice around the connection of purchase order / item receipt / vendor bill for goods acquisition. In our assembly costs practice, the 3PL company will send a bill for all assembly produced and this costs needs to be associated with finished goods inventory which may have already been sold or may still sit in inventory. Given we want to capitalize assembly costs into finished goods on the balance sheet as inventory, we need a practice to account for these costs as we produce them.

NetSuite Best Practice to Capitalize Assembly Unit Cost

There are three key steps to capitalize assembly unit cost:

1. One Time Setup
2. Ongoing Operation
3. Period End Reconciliation

One Time Setup

In order to setup the practice, we will need the following general ledger chart of accounts assuming we have already defined standard inventory and costs of goods accounts:

1. Inventory : Capitalized Assembly: a zero balance account (ZBA) that is of type inventory.
2. COGS : Capitalized Assembly Variance: a period account that is used to make Inventory: Capitalized Assembly equal to zero.
3. Item : Assembly Unit Cost: a Non-Inventory Item for Purchase item type with “Expense Account” pointers to “”Inventory : Capitalized Assembly”. In the item’s “”purchase price” field, put 1.00 to indicate that each unit of this cost is equivalent to $1.00 (assuming your currency is USD).
4. Bill of Materials: For all finished goods that include the assembly unit costs, include the Assembly Unit Cost item as a component. Depending on the agreed upon cost, enter the quantity. For example, if the agreement to produce an assembly was $2.30 for each unit, enter a quantity of 2.3.

Ongoing Operation

The ongoing operation is to use NetSuite’s Work Order and Assembly Build process to create your finished goods. In a 3PL environment, coordination is required to send instructions to the 3PL inventory team to indicate the desire to create finished goods. NetSuite’s Work Order is a good tool to generate communications as you can include desired finished good quantities and the Bill of Materials to indicate the “recipe” needed to produce the finished good.

When the 3PL warehouse indicates the units were built, record a NetSuite Assembly Build against the work order for the actual quantities built. This Assembly Build will produce the following general ledger entry:

Dr Inventory : Finished Goods
	Cr Inventory : Raw Materials
	Cr Inventory : Capitalized Assembly

Note, at this point in the process, our Inventory : Capitalized Assembly will have a net credit balance assuming not other activity on the account.

Next, we receive a bill from the 3PL company for assembly costs produced through the period. We create a NetSuite vendor bill for the purchase of this Assembly Cost item and the result is as follows.

Dr Inventory : Capitalized Assembly
	Cr Accounts Payable

Period End Reconciliation

At the end of a reporting period, typically monthly, you will have a net debit or credit balance in the Inventory : Capitalized Assembly costs. The first thing to account for is accruals. If the 3PL Vendor Bill has not been presented for payment, then the there should be a credit balance in Inventory : Capitalized Assembly and it represents an accrual. Perform the following automatically reversing journal entry as of the last date of the reporting period:

Dr Inventory : Capitalized Assembly
	Cr Accrued Liabilities
To record accrued 3PL Assembly Unit Costs which will reverse the first day of the new period and make Capitalized Assembly equal to zero.

In contrast, if the accrual has already been accounted for with a vendor bill, then a variance analysis is in order. Here is the accounting entry assuming that there is credit balance:

Dr Inventory : Capitalized Assembly
	Cr COGS : Capitalized Assembly Variance
To record differences between expected assembly costs and actual as a period expense.

If the balances are material, an analysis is in order. Does the Bill of Materials need to be updated due to incorrect assembly cost assumptions? Have assembly build entries been recorded correctly? Are the 3PL actual assembly costs appropriately accounted for? Ultimately, the variance account allows for management to make assessments to understand if all costing matters are in control.

Optimize your NetSuite Accounting Practices

The practice above is a good illustration for driving NetSuite the way you want to run your business. Many times, our team is asked to assist in optimizing business practices and automation centered out the NetSuite business management platform. If you would like to get more out of your NetSuite investment, contact us.

Marty Zigman

Holding all three official certifications, Marty is regarded as the top NetSuite expert and leads a team of senior professionals at Prolecto Resources, Inc. He is a former Deloitte & Touche CPA and has held CTO roles. For over 30 years, Marty has produced leadership in ERP, CRM and eCommerce business systems. Contact Marty to set up a conversation.

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