USA Accounting for Tooling Costs

Feb 21, 2018
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United States
We are currently working on product re-development and have incurred about $130,000 in tooling costs. These are tools that we have paid the vendor to make in order to produce raw materials that will be used in our manufacturing process. We do plan on capitalizing the costs of the tools but want to know how to handle accounting for the tooling cost in the standard cost of each part. For example, should we take the cost and the useful life of the asset and use that to put the tooling cost in each part? Should we include this in the overhead rate?

Any insight/insights suggestions are greatly appreciated!



John Baker

Capitalizing tooling as you described is correct. Now what to do with it.
I assume that this tools is beneficial factory wide for all products and thus is at the beginning of all products.
Here's two considerations:
1) the making of your raw material is in bulk and is a stored item waiting to be consumed based on a factory order.
= or =
2) the making of the raw material and the first phase/part operation is simultaneous.

In 1), the raw material has a part number with an inventory assignment of not only the material cost, by any other costs associated with making it. Hence. usually a Bill of Material goes into making the product, and a Routing Sheet usually specifies the quality and the methods of direct labor to make the raw material. Following up these two costs is a rate of absorption to attach a collection of indirect costs to the OUTPUT. Occupancy, electricity, maintenance, depreciation, and other indirect costs are in that absorption rate.
As the raw material is taken out of inventory and is consumed by making product, any product, that tooling costs, via depreciation being part of the absorption that I described above, is passed along - BUT IS NOT ACCOUNTED FOR TWICE. That cost stays with the raw material only with a part number unique to the raw material. In reality, we no longer have a "raw" material. We have a unique item because it was made, then stocked.
In 2) the raw material was consumed at the point of making the product. Thus the raw material is indistinguishable in kind form the very product, or products, that it is part of now. In this situation, the depreciation is part of the overhead absorption rate of the part, or product, and has nothing to do with the raw material. By the way, in this method of production, product planning is very important. Why? Because we don't want to have 100,000 pounds of raw material product sitting in a hopper, bin, tank, composed of a mixture of items, with no specific identity to it.

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