Customer-owned materials: track custody without inflating job cost

A customer can supply components for a job without selling them to the manufacturer. The workshop still needs a complete quantity record, but the receipt should not automatically be treated like a purchase of company-owned inventory. Start with the contract and establish ownership, permitted use, loss responsibility, and how unused materials must be returned.

Give customer-furnished material a distinct owner field or another controlled identifier in the stock records. A separate shelf helps staff, but it does not replace a system record. The same part number may exist in company-owned stock and in several customers' stock. A count that combines all of them can look accurate while the ownership balances are wrong.

Infor's customer-furnished-material documentation describes tracking ownership through both materials and resulting subassemblies. That is a useful operational distinction: the owner relationship can continue after a component changes form. The accounting reviewer should determine balance-sheet treatment from the arrangement rather than from the physical location alone.

Record the customer, job number, component specification, expected quantity, permitted substitute, and delivery deadline before production starts. Clarify whether the customer provides an exact quantity, a quantity with an allowance for normal loss, or enough for several future jobs. A surplus receipt should not silently become available for another customer's order.

Inspect the delivery against that expectation. Record shortages, excess quantities, visible damage, and items that do not match the specification. Ask the production owner whether the job can proceed and identify any additional handling or testing required. Finance needs those facts when explaining delay costs or a later claim about missing material.

Keep the customer's stated value separate from your own purchase-cost records. An insurance or custody value may be needed for operational purposes, but entering it as an ordinary payable can create a liability the company never incurred. Label the value's purpose and supporting source, then let accounting apply the appropriate policy.

Build the job reconciliation from opening customer material, new receipts, issues to production, usable returns from production, scrap, completed units, and final returns to the customer. Where a component is embedded in a finished product, retain the approved bill-of-materials relationship so the quantity consumed can be explained.

Consider a hypothetical customer delivery of 1,000 housings for a production run. Production issues 920, returns 20 unused to storage, records 12 damaged during processing, and completes 888 acceptable assemblies. The 920 issued units are explained by 20 returned, 12 damaged, and 888 incorporated. Storage should contain the original 80 never issued plus the 20 returned, or 100 housings.

If a warehouse report shows 112 remaining, check whether damaged units were returned to stock without a separate status. If it shows 80, investigate whether the 20 usable returns were omitted. These errors affect the customer's property reconciliation even if the company's own material expense is unchanged.

The company still incurs labor, consumables, machine time, outside processing, and other costs to complete the job. Track those costs under the normal job-cost policy while preserving the fact that certain components came from the customer. A low material-cost percentage can be expected in this model and should not be interpreted as unusually efficient purchasing.

In an illustrative job, the company incurs $4,200 of labor, $800 of consumables, and $1,000 of outside processing. Defined direct cost is $6,000. If the agreed manufacturing fee is $8,400, the contribution before other allocated costs is $2,400. Adding a notional $10,000 value for the customer's housings to both revenue and cost would change the presentation without describing a sale that necessarily occurred.

Use the approved accounting basis for financial statements and retain a separate management view if operations needs to see total material value at risk. Label that view clearly. A custody-value report can help plan insurance or handling controls, but it should not be merged casually into a gross-margin report.

A substitute part can change both product specification and ownership. Obtain the required customer approval before using company stock to replace a customer component. Record whether the replacement will be billed, provided without charge, or settled by returning an equivalent item later. Avoid using an inventory adjustment as a substitute for that commercial agreement.

For damage, retain the quantity, stage of discovery, likely cause, photographs or inspection record where appropriate, and agreed disposition. Distinguish material received damaged from material damaged during your processing. The customer may require a return, witnessed disposal, or another specific outcome. Accounting needs the resulting claim or settlement evidence, not an unsupported estimate of responsibility.

Rework should remain linked to the original job and affected assemblies. Count an assembly once in final output even if it passes through the workshop twice. Separate additional company cost from customer-furnished components consumed in rework so the discussion about price or recovery has a clear basis.

At completion, provide the agreed reconciliation of materials received, used, damaged, and returned. Confirm that open quantities at your premises match the customer's expectations, including material reserved for a future order. A job can be financially invoiced while a custody balance remains open, so assign responsibility for both closeout tasks.

Retain proof of return and any customer acceptance of shortages or agreed disposal. If the customer stops responding, keep the remaining material in its proper ownership status while the business resolves the contractual position. Do not assume that an old balance becomes company property because it has been on the shelf for a long time.

IRS guidance describes underlying transaction documents as support for business records. For this arrangement, the useful file also includes the custody terms, receiving evidence, production movements, and settlement decisions. The next reviewer should be able to separate property held for the customer from the company's purchases, work performed, and amounts actually billed.