# Subcontracting Priced on Raw Material Quantity
Some subcontract jobs are billed on the quantity of raw material given to the subcontractor, not on the finished goods received. This page explains that case and shows how to handle it with a Production Voucher plus an Expense, so the subcontractor charge is added to the finished goods cost and recorded as a payable to the vendor.
Overview
In a normal subcontract job, you agree a rate for the finished goods the subcontractor delivers. Freespace handles that directly through a Purchase Order with order type Subcontracted, then Issue For Subcontracting and Receipt From Subcontracting.
But in some trades the subcontractor is paid on the raw material you hand over, regardless of how much finished good comes back. The classic example is oil milling:
- You give the mill 100 kg copra.
- The mill returns oil (the yield varies and is not what you pay for).
- The milling charge is ₹10 per kg of copra → 100 kg × ₹10 = ₹1,000.
Here the charge follows the input quantity, so it cannot be entered as a simple per-finished-good rate. This page shows a practical way to record it using existing documents.
Two pricing models compared
| **Question** | **Charge per finished good** | **Charge per raw material** |
|--------------|------------------------------|-----------------------------|
| What is billed? | Finished goods received | Raw material issued/consumed |
| Example | ₹15 per litre of oil delivered | ₹10 per kg of copra given |
| Best handled by | Subcontracted Purchase Order → Issue/Receipt from Subcontracting | Production Voucher + Expense (this page) |
| Charge added to finished goods cost | Yes, automatically | Yes, via an overhead line |
| Vendor payable created | Automatically via Purchase Invoice | Manually via an Expense to the subcontractor |
How the workaround works
The idea is to route the subcontractor charge through a single clearing expense account so it lands in two places at once — inside the finished goods cost, and as a payable to the vendor — without being double-counted as an expense.
- On the Production Voucher, you record the raw material consumed and add the subcontractor charge as an Overhead Charge pointing at a clearing account (for example, Subcontracting Charges). This folds the charge into the finished goods cost. The voucher credits the clearing account.
- You then create an Expense against the subcontractor for the same amount, using the same clearing account. This debits the clearing account and credits the subcontractor as a payable.
- The two entries cancel out on the clearing account (net zero), the finished goods keep the added cost, and you now owe the subcontractor.
The flow, end to end:
| **Step** | **Document** | **Effect on finished goods** | **Effect on clearing account** | **Effect on vendor** |
|----------|--------------|------------------------------|--------------------------------|----------------------|
| 1 | Production Voucher | Raw material cost + charge folded into cost | Credited by the charge | — |
| 2 | Expense (Credit, subcontractor) | — | Debited by the charge (nets to zero) | Payable created |
| 3 | Payment Voucher | — | — | Payable settled |
When both amounts match, the clearing account balance returns to zero. Any leftover balance means production was booked but the vendor was not yet billed (or vice versa) — a useful reconciliation signal.
One-time setup
1. Create a clearing expense account
In Expense Account, create a dedicated account such as Subcontracting Charges. Use this only for this purpose so its balance stays meaningful (ideally near zero).
2. (Optional) Set up the finished item and BOM
If you produce against a Production Order, define the finished item and a Bill Of Materials for the raw material. This lets raw material lines and overheads pre-fill on the voucher. For ad-hoc jobs you can enter the voucher directly without an order.
3. (Optional) Track stock at the subcontractor
If you want to see material physically held at the subcontractor, create a Supplier Center and either produce the voucher at that center or move material there first. If location tracking is not important, consume from your own production center.
Step-by-step
- Work out the charge: raw material quantity × agreed rate (for example, 100 kg × ₹10 = ₹1,000).
- Go to Production → Production Voucher and create a new voucher.
- Enter the Date, Center, finished Item (for example, oil), and the Gross Quantity / Net Quantity actually received.
- In Raw Materials Consumed, add the raw material and the quantity used (for example, 100 kg copra). This drives the material cost from stock.
- In Overhead Charges, add a line: Expense account = Subcontracting Charges, charge type Fixed Charge, and enter the computed amount in Rate (₹1,000) so the Total becomes ₹1,000.
- Save And Approve the voucher. The oil now carries copra cost plus ₹1,000, and the clearing account is credited ₹1,000.
- Go to Account → Expense and create a new Expense.
- Set Supplier = the subcontractor, Pay Mode = Credit, Expense account = Subcontracting Charges, and Amount = ₹1,000 (pre-tax, see FAQ for tax).
- Save And Approve the Expense. The clearing account nets to zero and the subcontractor payable is created.
- Later, pay the subcontractor with a Payment Voucher to settle the payable.
Worked example — copra to oil
Assumptions:
- Copra issued and consumed: 100 kg, valued in stock at ₹50/kg → raw material cost ₹5,000.
- Milling charge: ₹10/kg of copra → 100 × 10 = ₹1,000.
- Oil received: 40 kg.
On the Production Voucher:
| **Line** | **Entry** | **Value** |
|----------|-----------|-----------|
| Raw Materials Consumed | Copra 100 kg | ₹5,000 (from stock) |
| Overhead Charges | Subcontracting Charges, Fixed Charge | ₹1,000 |
| Product Obtained | Oil 40 kg | — |
Finished goods cost:
Total cost = raw material ₹5,000 + overhead ₹1,000 = ₹6,000
Oil unit cost = ₹6,000 ÷ 40 kg = ₹150 / kg
Then the Expense to the milling subcontractor for ₹1,000 (Pay Mode Credit, Expense account = Subcontracting Charges) records the payable.
Accounting effect
Following the example, the combined entries are:
Production Voucher (on approve)
| **Account** | **Debit** | **Credit** |
|-------------|-----------|------------|
| Inventory — Oil (finished) | ₹6,000 | |
| Inventory — Copra (raw) | | ₹5,000 |
| Subcontracting Charges (clearing) | | ₹1,000 |
Expense to subcontractor (on approve)
| **Account** | **Debit** | **Credit** |
|-------------|-----------|------------|
| Subcontracting Charges (clearing) | ₹1,000 | |
| Subcontractor (payable) | | ₹1,000 |
Net result
- Subcontracting Charges account: ₹1,000 credit + ₹1,000 debit = ₹0 (clears).
- Oil inventory carries the full ₹6,000, so the milling charge is reflected in the product cost and flows to cost of goods sold when the oil is sold.
- Subcontractor is now owed ₹1,000, settled later by a Payment Voucher.
Best Practices
- Use a dedicated clearing account (Subcontracting Charges) only for this purpose, and review its balance regularly — it should sit near zero.
- Always record the raw material actually consumed on the voucher so material cost and stock stay accurate.
- Keep the overhead amount and the Expense amount equal (pre-tax) so the clearing account nets to zero.
- Create the Expense promptly after approving the voucher so accruals and payables stay in step.
- For repeat vendors, capture the agreed per-kg rate in your job notes so anyone can recompute the charge.
Limitations
- The charge is entered manually. The Production Voucher does not auto-calculate rate × raw material quantity — you compute the amount and enter it as a Fixed Charge overhead.
- Two documents, no automatic link. The voucher and the Expense are separate; you must remember to create both and keep the amounts matched.
- Use the right expense document. The Expense (or a Purchase Expense set to To Expense) must debit the clearing account. A Purchase Expense left as To Inventory debits stock instead and will not clear the account.
- Material-at-subcontractor tracking is optional. Unless you produce at a Supplier Center or move stock there first, consumption comes from your own center.
If this pricing model is frequent and high-volume, consider it a candidate for a dedicated subcontracting enhancement rather than this manual workaround.
FAQ
Why not just use a Subcontracted Purchase Order?
That flow prices the charge per finished good delivered. When the charge depends on the raw material given (like ₹/kg of copra), the Production Voucher plus Expense approach fits better.
Which overhead charge type should I use?
Use Fixed Charge and enter the computed total (raw quantity × rate). Unit Charge scales to finished output, which is not what you want here.
How does the milling charge reach the oil cost?
Overhead charges are added to total production cost, which is divided across the finished goods. So the oil unit cost includes the milling charge.
What about GST / input tax on the subcontractor bill?
Enter the Expense so the pre-tax amount equals the overhead amount; the tax posts separately as input tax credit. The clearing account still nets to zero on the pre-tax value.
Do I record the copra I gave the mill?
Yes — enter it under Raw Materials Consumed so stock and material cost are correct. If you want to show it sitting at the mill, use a Supplier Center.
The clearing account is not zero — why?
Either a voucher was approved without a matching Expense, or an Expense exists without a matching voucher. Investigate the difference and post the missing document.
Which document creates the amount I owe the subcontractor?
The Expense with Pay Mode Credit and the subcontractor selected as Supplier. Settle it later with a Payment Voucher.