Production orders can be used to record internal consumption of inventory items for repairs, maintenance, or improvement of other inventory items.
To do this, follow the same procedure as when using production orders for manufacturing, but enter zero as the quantity of the Finished item. Non-inventory costs, such as labor, can also be added to a production order used this way.
This will decrease the quantity in stock of inventory items included in the Bill of materials without increasing the quantity of the Finished item. All inventory and non-inventory costs will be added to the average cost of the Finished item.
Example
A car dealer uses inventory items to track cars available for sale. It also uses inventory items to track spare parts required by the service department. Spare parts are not used to manufacture new vehicles. They are used to repair, maintain, or improve existing vehicles, including those held for sale. The car dealer, of course, wants to track consumption of parts when they are installed in a car already in inventory, but does not purchase or sell them in the process. No money changes hands.
So, when repairs are made to a used vehicle or optional accessories are installed on a new one, a production order is prepared. The vehicle being repaired or improved is selected as the Finished item. All parts consumed from inventory are listed on the Bill of materials. Labor for installation is added as a Non-inventory cost, posting to an appropriate labor expense Account. Costs of parts and labor are transferred to the vehicle’s cost.