Best Practice on Using Ingredient Method of Accounting on Inventory

Ingredient Method of Accounting is supposed to be used with the following Product Categories: chicken, deli, food service, fresh baked pizza, convection oven products, fountain drink – cold, hot drinks, and so on.

With this method merchandise additions are made at cost value and no retail value. They are extended to a retail value as the other store products. Retail value is added to the retail book inventory via price change after the item is sold. The retail value is determined by the related department sales from the closing register tape.

The purpose of Ingredient Method of Accounting on Inventory is to identify the income for the items that are included in departments and categories set up as ingredient method of accounting, and to calculate the profit margin by department and category they are included into.

To have a correct reflection on your income and profit margin for the items set up in departments with matched categories that use the ingredient method of accounting option, follow these steps:

1. Create a new category and select the ingredient method of accounting option for it at Price Book > Categories > Add New > Enter the Name > Select the Ingredient Method of Accounting Option > Save.
2. Create a department with the same name and as the matched category at Price Book > Departments > Add New > enter the name > select the Matched Category > Check the Ingredient Method of Accounting option > Save and Close.
3. Add items to the category and department by adding the category and department for the items on the invoice they are coming in the system through or at Price Book > Item setup page.
   Note: All items included in this category and department have to comply with the ingredient method of accounting option to be calculated properly in the inventory report, in other words, all the items that have a cost mustn't have any retail price, and all the items with retail mustn't have cost set.
4. Create items with parent-child relationships using the following example. If you receive the parent by cost through your invoices you have to divide the quantity by UPC or PLU when you create for those items.
   Example: If you purchased a box of sugar and you inventory it by pound, the box will be the parent and the pounds will be the child which will be inventoried by PLU. So the cost will be displayed on the parent and all the sales will be made by the lower nominator- the child.

Once you've created a parent-child relationship, you have to do two inventories two weeks apart so that you can see if the ingredient method of accounting worked. You can do a cycle count ticket inventory by ingredient method of accounting where you will be able to track and inventory only the items included in categories and departments that were set up with the ingredient method of accounting option.

To do a cycle count ticket inventory by ingredient method of accounting go to: Inventory > Counts > Itemized Inventory > Conduct Inventory > Ingredient Method of Accounting > select the category > Generate.
You can see the way the ingredient method of accounting by category works the next day after your second day of the second inventory is done.