There are some key differences between component parts and supplies when it comes to accounting and managing inventory. Understanding these differences is important for businesses in manufacturing, distribution, and retail.
Definitions
Component parts are the individual parts that make up a finished product or assembly. For example, nuts, bolts, wires, and transistors are component parts used in making a radio. Component parts have no standalone function – they need to be assembled into a finished product.
Supplies, on the other hand, are products that support manufacturing or operations but are not part of the final product. Examples include lubricants, solvents, gloves, masking tape, and sandpaper. Supplies aid in the manufacturing process but are not part of the finished goods.
Accounting Treatment
One key difference between component parts and supplies is their accounting treatment.
Component parts are treated as inventory assets on a company’s balance sheet. They are not expensed until the finished goods are sold. The component part inventory balances are reduced through relieved inventory costs when the completed products are sold.
Supplies, conversely, are immediately expensed as operating costs. The cost of supplies used in manufacturing are accounted for as an expense in the period they are consumed. Supplies do not sit in inventory – their costs directly hit the income statement.
This difference in accounting treatment affects how component parts and supplies are budgeted, managed, and analyzed on financial statements.
Cost Flow
Related to accounting treatment, component parts and supplies differ in their cost flow patterns.
Component part costs flow through inventory accounts over time. The costs hit the balance sheet when purchased, stay in inventory while waiting to be used, then get relieved out of inventory and expensed when the finished goods are sold. There is a lag between purchasing component parts and recording their costs on the income statement.
Supply costs, on the other hand, immediately flow through to the income statement in the period used. There is no inventory lag. The full costs of supplies used show up on the income statement quickly.
Material Planning
The different cost flow patterns also impact material planning processes.
Component part planning relies heavily on sales forecasts and production schedules. Companies must predict demand for finished goods and schedule production far in advance to ensure component part inventory is available when needed. Reorder points, economic order quantities, and safety stock levels must be planned for component parts.
Supplies can be managed with less forecasting and scheduling. Since supplies are expensed immediately, companies can take a more flexible just-in-time approach to purchasing supplies for production and operations. Excess supplies do not sit on the balance sheet so there is lower inventory risk.
Transferring Costs
Another difference involves transferring costs to finished goods.
Component part costs are directly transferred to the finished product. The exact costs paid for nuts, wires, and transistors get allocated to each radio produced. This accurately assigns costs to specific products.
Supplies, on the other hand, are indirect expenses. Solvents, tape, and sandpaper used in production are not traced to particular products. The supply costs for a period get spread across all units produced during that period.
Material Control
The transfer of costs also impacts material control processes like cost accounting.
Tight material control and accurate cost accounting is crucial for component parts. Since component costs directly affect product costs, any variances in components must be analyzed. More rigourous processes are needed to track components.
Supplies have fewer material control requirements. Because supplies are indirect expenses, small usage variances are not as critical. Tighter control over supplies may not be cost effective given the indirect cost allocation.
Value Adding Activities
An additional difference relates to value adding activities in operations management.
Component parts undergo value adding activities as they are converted from raw inputs into finished goods. Operations processes physically change component parts into products. This represents the value add of manufacturing.
Supplies, on the other hand, do not physically become part of the product. They enable production but do not get converted into finished goods. Supplies support value adding activities but are not themselves value adding inputs.
Inventory Classifications
Component parts and supplies are also categorized differently within inventory systems.
Component parts are classified as raw materials inventory. Raw materials represent inputs that will be converted into finished goods through production. Parts like fabric, wood, fasteners, and electrical components are raw materials.
Supplies represent indirect materials inventory. Indirect materials aid production but do not get physically incorporated into products. Lubricants, jigs, solvents, and masking materials are common indirect materials.
This inventory classification impacts forecasting, planning, purchasing, and other supply chain processes.
Examples
Some examples can illustrate the differences:
– In a furniture factory, lumber is a component part while glue is a supply. The lumber gets physically built into the final product while the glue is merely consumed in production.
– For a baker, flour is a component part while cooking spray is a supply. The flour becomes part of the final baked goods while the spray simply eases the baking process.
– In an electronics plant, integrated circuits are component parts while solder paste is a supply used in circuit board assembly. The ICs become part of the product while the solder paste does not.
– For a mechanic, replacement alternators are component parts to be resold while solvents to clean parts are supplies. The alternators will be installed on customer vehicles while solvents are used and consumed in operations.
Key Differences Summary
Some key differences between component parts and supplies:
| Component Parts | Supplies |
| Treated as inventory assets | Immediately expensed as operating costs |
| Costs flow through inventory over time | Costs immediately hit the income statement |
| Directly incorporated into finished goods | Used in production but not part of finished goods |
| Classified as raw materials inventory | Classified as indirect materials |
| Require demand forecasting and production scheduling | Can be purchased just-in-time as needed |
| Undergo value adding activities in production | Support value adding but not value adding themselves |
Conclusion
In summary, component parts and supplies play interconnected but distinct roles in manufacturing and operations. Key differences exist in terms of accounting treatment, cost flow, material planning, inventory control, and value adding activities. Companies must strategically manage component parts and supplies based on these differences to produce finished goods efficiently while minimizing costs. Keeping a clear understanding of when items are treated as components or supplies allows businesses to optimize their inventory, supply chain, and production processes.
