Sometimes the cost of labor needs to be added to the cost of an assembly that you make for resale.

There are basically two kinds of labor costs.

Labor that you pay to an outside source should always be added in as cost. That is a bill you pay. When you pay the bill, book it as an expense. Then use inventory adjust as a value adjustment, set the adjusting account to the expense account you used to pay the bill. Add the total amount of the bill (labor) to the total cost for the item, and enter it in the new total column. Do not change the quantity! That spreads the labor across the items in stock.

Labor that is just a normal part of the business, in my opinion should not be added to the cost of an assembly. But if you want to do it, then the value of that labor has to be taken out of payroll expense. After all, if you do not take it out of payroll expense you will be trying to expense labor twice.

Edit Erica asked me to explain the crossed out statement and in doing so I found I was wrong (see I told you I was not an accountant). What happens is this:

Payroll expense $100 (debit – increases)
checking $100 (credit – decreases)

Inventory Asset debit $100 (increase – result of adding labor to the cost of an item)
Direct Labor expense account credit $100 (decreases expenses since expense is normally a debit)

So the credit in the Direct Labor expense account cancels the debit in the payroll expense account, it is not expensed twice. The cost of the labor though is held as an asset, which will not be seen as an expense until the item is sold.

To do that create an “Other Charge” item, mark it as being used in an assembly, set the expense account to payroll expense, and the income account to sales, then set the amount, or hourly rate. In the assembly include this other charge and enter the quantity.

When you build the assembly the labor charge will be added to the cost of the assembly, and the labor charge will be deducted from payroll expense.

The main draw back I see from including normal labor in an assembly is that the expense sits on the books as an asset (the assembly) and will not be expensed until the item is sold. So if the item is on hand when the end of the year comes around, profit will be higher since the labor expense is being held as an asset rather than being a payroll expense.

Your choice.