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32.5 Craft and Artisan Businesses

Overview​

Craft and artisan businesses (like Artisan Boulangerie) have unique accounting needs: material cost accounting, labor cost allocation, custom order accounting, and inventory management for raw materials and finished goods. Understanding these practices helps artisan businesses manage costs and profitability effectively.

Material Cost Accounting​

Direct Materials​

Direct Materials Include:

  • Raw materials (flour, sugar, butter for bakery)
  • Ingredients
  • Components
  • Supplies directly used in production

Material Cost Tracking​

Tracking Methods:

  • Purchase tracking: Record all material purchases
  • Usage tracking: Track materials used in production
  • Inventory management: Maintain material inventory
  • Cost allocation: Allocate costs to products/orders

PCN Accounting​

PCN Accounts:

  • 31: Raw materials inventory
  • 601: Purchases of raw materials
  • 603: Cost of goods sold
  • 37: Finished goods inventory

Labor Cost Allocation​

Direct Labor​

Direct Labor:

  • Time spent on production
  • Artisan/craftsperson time
  • Production staff time
  • Time directly related to products

Labor Cost Calculation​

Calculation:

  • Track hours worked on production
  • Apply labor rates
  • Allocate to products/orders
  • Include social charges
  • Calculate total labor cost

Labor Allocation Methods​

Allocation Methods:

  • Direct allocation: Directly to specific orders
  • Time-based allocation: Based on hours worked
  • Activity-based allocation: Based on activities
  • Standard rates: Use standard labor rates

Custom Order Accounting​

Custom Orders​

Custom Orders:

  • Unique products for specific customers
  • Special requirements
  • Custom pricing
  • Specific delivery dates
  • May require deposits

Order Tracking​

Order Management:

  • Track order from receipt to delivery
  • Monitor order progress
  • Track costs by order
  • Calculate order profitability
  • Invoice upon completion

Revenue Recognition​

Custom Order Revenue:

  • Recognize when order completed and delivered
  • Account for advance payments (deposits)
  • Track work-in-progress
  • Calculate order profitability
  • Handle order modifications

Job Costing​

Job Costing System​

Job Costing Tracks:

  • Direct materials: Materials used for specific job
  • Direct labor: Labor for specific job
  • Overhead: Allocated overhead to job
  • Total job cost: Sum of all job costs

Job Profitability​

Job Profitability Analysis:

  • Compare job revenue to job costs
  • Calculate job profit margin
  • Identify profitable vs. unprofitable jobs
  • Improve pricing and cost control
  • Make better business decisions

Inventory Management​

Raw Materials Inventory​

Raw Materials:

  • Track material purchases
  • Monitor material usage
  • Maintain material inventory levels
  • Value materials (FIFO, weighted average)
  • Account for material waste

Finished Goods Inventory​

Finished Goods:

  • Track completed products
  • Value finished goods
  • Monitor inventory levels
  • Account for spoilage (if applicable)
  • Manage stock rotation

Luxembourg Compliance Note​

Important Requirements:

  • Material tracking: Must track material costs accurately
  • Labor allocation: Must allocate labor costs properly
  • Order accounting: Must track custom orders
  • Inventory records: Must maintain accurate inventory records
  • Cost accounting: Must track costs for profitability analysis

Common Issues:

  • Material cost errors: Incorrect material cost tracking
  • Labor allocation: Incorrect labor cost allocation
  • Order profitability: Unable to track order profitability
  • Inventory discrepancies: Physical inventory not matching records
  • Cost control: Lack of cost control and analysis

Think It Through​

Artisan Boulangerie receives a custom order for 100 special pastries. The order requires 10kg of flour (€5/kg), 5kg of sugar (€3/kg), and 8 hours of labor (€20/hour). How should costs be tracked? How is profitability calculated?

Concepts in Practice​

Craft Business Accounting Example

Artisan Boulangerie custom order:

Order Details:

  • Custom pastries: 100 units
  • Price: €200
  • Customer: Business customer

Material Costs:

  • Flour: 10kg × €5 = €50
  • Sugar: 5kg × €3 = €15
  • Other ingredients: €25
  • Total materials: €90

Labor Costs:

  • Labor hours: 8 hours
  • Labor rate: €20/hour
  • Social charges (employer): 15.7% = €25.12
  • Total labor: €185.12

Total Job Cost: €90 + €185.12 = €275.12

Revenue: €200 Job Profit: €200 - €275.12 = -€75.12 (loss)

Analysis: Order is unprofitable. Need to:

  • Increase price
  • Reduce costs
  • Improve efficiency
  • Reject similar orders

Accounting:

  • Debit: Account 31 (Raw materials) - €90
  • Debit: Account 641 (Salaries) - €160
  • Debit: Account 642 (Social charges) - €25.12
  • Credit: Account 512 (Bank) or 401 (Suppliers) - €90
  • Credit: Account 512 (Bank) - €185.12

Upon Delivery:

  • Debit: Account 411 (Customers) - €200
  • Credit: Account 707 (Sales) - €200

Result: Job costs tracked, profitability analyzed, business decisions informed.