This article is all about the various facts of manufacturing accounting which you will see further. When it comes to accounting for a manufacturing business, it includes the cost of goods sold recognition and inventory valuation. Besides, many other concepts come under the accounting of a manufacturing business which are as follows:
- Impairment Testing
- Overhead Cost Assignment
- Direct Cost Assignment
Moreover, the details about tracking the current number of inventory units are essential to determine the inventory valuation. However, a manufacturing company should either make use of periodic inventory or a perpetual inventory system for extracting such information. It simply means that the manufacturing accounting is much more comprehensive as compared to businesses with no inventory maintenance.
However, the workload can be reduced by encouraging suppliers to own a few on-site inventories, diminishing the amount of inventory available at present, recruiting supplier drop shipping, and other methods that decrease the entire level of investment in inventory. To account for a manufacturing company is somewhat tedious than other businesses as a high level of accuracy should be maintained in the inventory system of such companies. The accounting task for a manufacturing business involves many other crucial things which you should know. So check out what else is important under the manufacturing accounting of an enterprise. The best solution is to use myBillBook to get things done in one click.
Guidelines to Manufacturing Accounting
When the company makes the manufacturing processes effective, it helps them to streamline their accounting processes, minimize the time between orders and receiving, remove waste, and utilize the accounting processes to collect useful operating data. This way, you will get beneficial feedback on your inventory as well as manufacturing processes. Understanding the level of production cost is very much important to decrease the costs of undertaking business. It will further help you to cut off the costs incurred in all the contributing factors that come under the cost of manufacturing a product. Without collecting accurate costing data, you cannot automate aspects of your business and refine your production process. Gathering accurate costing information of your company assists in identifying wasteful costs within the company and thereby boosting your profit margins.
Understanding of Manufacturing Cost Terms
In the case of a manufacturing business, you have to understand certain crucial terms associated with the calculation of the manufacturing cost of your item and the inventory amount you hold. Check out the important manufacturing cost terms given below.
- Direct Labor Costs
Direct labour is nothing but the value offered to the labour that manufactures goods like an assembly line or machine operators. The cost of overtime, regular hours, and payroll taxes are included under direct labour costs.
- Direct Material Inventory
Direct material inventory is the total value of the materials used by the manufacturing business to make a particular product. It is often mentioned in an invoice of materials along with the cost and quantities of the materials utilized in a product.
The cost of manufacturing overheads is included along with direct labour and direct materials to make sure that you receive an accurate valuation based on selling price and inventory. It might even add the prices for powering a factory’s tools and personnel that are not associated with the production of a product.
- Finished Goods
The cost of finished goods is something related to those products that are fully ready to sell or deliver to your clients. It even includes the cost of finished goods storage and other related expenses.
- Work-in-Process Goods
This accounting system is normally referred to as the costs initiated on the manufacturing of those products that have not been completed yet. It comprises costs spent on direct labour costs, direct materials, and manufacturing overheads on every work-in-process product.
Costing Methods of Production
When it is about manufacturing accounting, you should know the relevant costing method to gain higher profitability in the organization. Below are some of the costing methods which you can check out.
- Standard Costing
Standard costing is nothing but the initiation of standard costs in an accounting system for labour or materials utilized in inventory or production costing. Using this method, you can work out the rates of material and labour to form a single unit of your item.
- Job Costing
The other name of job costing is variable costing in which the individual cost of a product manufacturing is worked out. This costing is usually suitable when it comes to manufacturing a small number of units such as a small batch of goods or a custom-built machine.
- Activity-based Costing
Activity-based costing is one of the manufacturing accounting methods that vary from job costing and it includes more indirect rates like resource consumption. This method helps you to identify valuable products and get opportunities to bring better outcomes for your existing goods.
Inventory Valuation for Manufacturing Business
Inventory valuation is done at the end of the financial year that accumulates the value related to the number of products hold in your inventory. However, four accepted ways can be opted to value inventory which are:
- Average Cost
- FIFO (First in, first-out)
- LIFO (Last in, last out)
- Specific identification
Also read about Accounting Vouchers
FAQs on accounting for manufacturing business
1. What is accounting for a manufacturing business?
The accounting for a manufacturing business involves detailed management of accounts when it is compared to a business that does not hold inventory. A high level of accuracy should be kept while managing accounts for a manufacturing business. Moreover, several uncommon concepts are handled by a manufacturing company during the inventory valuation including:
- Overhead cost assignment
- Direct cost assignment
- Cost of goods sold recognition
- Impairment testing
2. How do manufacturing businesses manage accounts?
Manufacturing companies are those who manufacture valuable goods with the help of chemicals, tools, machinery, labour, and so on. They can manage manufacturing accounts in a streamlined way which are as follows:
- Keep proper track of the expenditures incurred in the business
- Maintain accounts for personal and business purposes separately
- Hire an in-house professional team of accounting
- Maintain separate books of account for money spent on parties
- Make use of advanced manufacturing accounting software
- Approach outsourcing accounting services
3. What is the role of a manufacturing accountant in a manufacturing company?
As a manufacturing accountant, there are certain responsibilities or roles to be accomplished and they are:
- Carry out internal audits and financial administration
- Prepare commentaries, budget reports, and financial statements
- Forecast and manage income and expenses
- Liaise with other colleagues and managerial staff
- Form and organize financial policies or systems
- Supervise a group of accounting technicians
- Arrange and negotiate funds for various projects
4. Why the manufacturing accounts are prepared in the company?
The preparation of manufacturing accounts is undertaken to discover the cost of products sold that even constitutes direct expenditures. Moreover, it usually deals with work in progress goods and raw materials but not the finished goods. While preparing manufacturing accounts, all the manufacturing expenses such as salary to the factory manager, wages, depreciation on plant and machinery, etc are debited from the account.
5. How a manufacturing company can benefit from myBillBook accounting software?
For any company, there are a lot of benefits of using accounting software as it renders a complete insight into the financial position of the business. Furthermore, it helps to maintain a proper record of business transactions and manage all financial aspects of the company. Above all, it comes with the feature to manage accounts receivable, general ledger, accounts payable, financial statement, and tracking of revenue, expenses, and cash flow as well.