Toll Manufacturing Accounting: How to Track Customer-Supplied Materials

A processor receives 5,000 kg of someone else’s plastic granules, makes parts from them, and after the shift there is material in the shop that is not in its stock and not in its cost. Toll manufacturing accounting is separate quantity tracking of the customer’s material, from receipt to return as finished goods, waste and leftovers.

The material passes through the shop, and the customer stays its owner. The whole accounting setup follows from that fact.

What is customer-supplied material and who owns it?

Customer-supplied material (also called free-issue or consigned material) is raw material that a customer hands to a processor to make products. The customer owns the material, the finished goods, the waste and the leftovers. The processor earns a fee for the work, which is the toll processing service.

This creates a practical difference in the books. Own material is bought, paid to a supplier, enters the cost price and the tax calculations. Customer material only passes through the processor’s warehouse: the processor is responsible for it, but its value is not in the processor’s costs. In the processor’s documents the material therefore has a quantity and no price.

How should a processor track customer-supplied material?

The tracking has four parts.

The first is receipt. Material is received against a document that states the customer, quantity, unit of measure and batch or certificate. The storekeeper checks the quantity against the delivery and records discrepancies on the spot, before production starts.

The second is separate storage. Customer material is not mixed with own material, either physically or in the records, because with shared records some of the customer’s material sooner or later ends up in own products. Depending on the software, this can be a separate storage location, a separate warehouse or a separate section of the records.

The third is write-off by norm. The contract sets the usage norm per product and the norm for process waste. Actual consumption is compared with the norm, and any overuse is handled under the consequences agreed in the contract.

The fourth is reporting to the customer. For the period the processor prepares a report in which the quantities reconcile: received, used in products, waste, remaining. The difference between the received amount and the sum of products, waste and leftovers must equal zero. Otherwise material has disappeared without a document or the norm is wrong.

Which documents does toll processing need?

The set depends on the contract. The basic one is below.

What does toll manufacturing accounting look like for a plastics processor?

The example is fictional: a processor makes plastic parts from the customer’s granules. The norm is 0.45 kg net per part and the process waste norm is 4% of the parts’ mass. The service price is €0.30 per part. In one month the customer supplied 5,000 kg of granules and the processor made 10,000 parts.

Reconciliation check. 5,000 kg received, 4,500 in parts, 190 waste, 310 remaining. The sum 4,500 + 190 + 310 equals 5,000, so the kilograms reconcile to zero. The waste variance is 190 − 180 = 10 kg, which is 5.6% above the norm (10 / 180). The processor’s report shows these 10 kg on a separate line, and the contract decides whether it is a process loss or a shortage on the processor’s side.

The customer finally gets 10,000 parts, 190 kg of waste if the contract provides for its return, and 310 kg of unused granules. The processor receives €3,000 for the service. The value of the granules appears in none of its documents.

How do you receive customer-supplied material into the warehouse?

Receipt starts before the load enters the warehouse. The contract or the transfer specification lists the item name, quantity, unit of measure, batch and quality requirements. The storekeeper weighs or counts the load, checks it against the delivery note and records any discrepancy in a report signed in the presence of the customer’s representative.

The accepted quantity becomes the opening figure for the whole report. If the document says 5,000 kg but the storekeeper weighed 4,980, the report starts from 4,980 with a note about the discrepancy report. Otherwise 20 kg become the processor’s shortage at the end of the period, although they never reached the warehouse.

How do you tell process waste from a shortage?

The waste norm in the contract sets the boundary. In the example above, 4% of the parts’ mass gives 180 kg and actual waste was 190 kg. The 10 kg above the norm need an explanation: a weighing shortage, a rejected batch, a line restart. Waste within the norm is returned or written off under the contract. Excess waste is handled in a separate report, because the processor is responsible for it.

The waste norm is usually tied to the mass of the parts. Calculating it from the mass of received material is inconvenient, because leftover stock distorts the base. If the 4% norm were calculated from the received 5,000 kg, it would give 200 kg, and the same 190 kg would look normal even though parts show overuse. The contract should therefore state the base of the norm explicitly.

What does a processor’s material usage report look like?

The report covers a period, usually a month. Below is a completed example with the same processor’s figures.

The control is as follows. Opening balance plus receipts equals used, waste and returned. Here 0 + 5,000 = 4,500 + 190 + 310 = 5,000.

How do you return waste and leftovers to the customer?

A return is recorded with a document that states exactly what goes back: finished goods, waste, leftovers. The contract describes waste separately. Waste is either returned to the customer, kept by the processor under an agreed procedure, or written off by the customer as a loss.

The processor needs the closing balance of customer material in the records to match the physical stock. A stock count of customer material is therefore done the same way as for own material, and the result is reconciled with the customer. A discrepancy found after the report takes longer to close.

How are taxes handled in toll processing?

This is only the general scheme. The material does not belong to the processor, so its value stays outside the processor’s inventory, costs and cost price. The processor’s revenue is the service fee. VAT where applicable, income tax and source documents depend on the contract terms, the status of the parties and current law. The accountant determines them case by case, and this article is not tax advice.

What does Bimp support for customer-supplied material?

Bimp is a Ukrainian cloud ERP for manufacturers. Customer-supplied material works in Bimp like this. The customer’s materials are tracked by quantity with zero price and zero cost. Starting with release 122, the “Processing” checkbox in the “Supplier order” and “Goods receipt” documents lifts the ban on a zero price, and batches with a cost price of 0.00 are created automatically for the posted goods. “Return to supplier” based on such a receipt inherits the checkbox and writes off the material at zero cost.

In the “Production order” and the “Assembly”, the “Own processing” type lets you reserve and write off materials from zero-cost batches, and the cost price of the finished product takes this into account. The “Third-party processing” type is informational and does not affect the books. These operations do not change the balance with the counterparty: in settlement reports the amounts are zero or empty. Since release 123, with “Processing” turned on, zero prices are also allowed in the “Customer order” and “Sales of goods and services”, so returning finished parts to the customer needs no artificial prices. The overall production document flow is covered in the production overview, and the warehouse page describes balances and reserves.

What Bimp does not have. There is no separate document for the processor’s material usage report. For the customer report you take the “Stock movement” report for the period, the production documents and the batch view, and the accountant builds the report form. The “Warehouses” directory lets you create a separate warehouse for customer material. Bimp keeps quantity records. Statutory accounting, including off-balance-sheet reporting, remains the job of the accounting software and the chief accountant.

General principles of working with warehouse stock and reserves are in the article on reserving materials, and overuse is controlled with consumption limits, which let you compare specification norms with actual usage at assembly.

What are the risks in toll processing accounting?

The risks have a mechanical explanation. Shared records of own and customer material send the customer’s raw material into own products. A contract without a waste norm turns every kilogram of difference into a dispute. A report that does not reconcile by kilograms shows a shortage only at the end of the period, when it is hard to trace through documents.

With separate records and a monthly reconciliation, the period closes to zero. In the example above that is 5,000 = 4,500 + 190 + 310.

For the same topic, see how to track raw materials in the shop and how material norms and overuse control work.

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