Manufacturing Accounting

July 14, 2023

The Ultimate Guide to Manufacturing Accounting for Success in Your Business

manufacturing accounting

Manufacturing accounting helps to manage financial operations, track costs, optimize inventory, and make informed decisions to increase profitability and growth. At The Count, we have the expertise and knowledge to assist manufacturing businesses in understanding the complexities of financial management in the industry.

So, in this guide, we will explore various aspects of manufacturing accounting, including its importance, best practices, and how it can benefit your business. 

What is Manufacturing Accounting?

  • Definition of manufacturing accounting

Manufacturing accounting is a branch of accounting based on the financial management and control of manufacturing operations in an organization. It includes systematically recording, analyzing, and reporting financial data and transactions. 

  • The Role of Manufacturing Accounting In Businesses

The part of manufacturing accounting lies in cost control because this can help to track and optimize all the costs associated with the production process. Secondly, it helps inventory management. Thirdly, manufacturers can decide on the optimal price and profitability levels. Also, manufacturing accounting can make financial reporting by applicable accounting standards and regulations. 

  • Comparison with Financial Accounting

The main difference between manufacturing and financial accounting is that financial accounting works on the overall finances of a company. In contrast, manufacturing accounts deal with just the financial management of the manufacturing sector of a business. 

Manufacturing Costs Explained

Following are the explanations of the various costs involved in a manufacturing process: 

  • Total Manufacturing Cost

Total manufacturing cost is the sum of all the costs incurred during the production process:

  • Direct costs

  • Indirect costs

  • Raw material

  • Direct labor

  • Direct expenses

  • Indirect costs (factory overheads, utilities, maintenance)

  • Factory Profit/Loss

Factory profit/loss is the financial outcome of the manufacturing process, whether the activities led to a loss or a profit. We calculate it by subtracting the total manufacturing cost from the total revenue generated by the manufacturing accounting process from the sale of the manufactured good. A negative answer indicates a loss, while a positive one indicates a profit.

  • COGM and COGS

The cost of goods manufactured (COGM) is the sum of all the costs incurred during the production process (costs of raw materials, direct and indirect costs of labor, and factory overhead allocated).

The cost of goods sold (COGS) is the total cost to produce and sell the goods during a specific period. The formula to calculate this is: 

(Costs of opening inventory of finished goods + COGM) – (closing cost accounting inventory of finished goods)

  • Variable and Fixed Costs

Variable costs incurred vary according to the number of units produced, directly proportional to the production or sales volume. Examples include the cost of raw materials, direct labor wages, and variable overheads. 

Fixed costs remain unchanged regardless of the level of production or sales volume. Examples include factory rent, management salary, insurance, depreciation, and property taxes. 

Inventory Valuation

Inventory is the collection of short-term assets a business owns to sell in the market to generate a profit.

  • Types of Inventories

Raw Materials Inventory includes all the materials that will go through the production process and convert into finished goods.

Work in progress Inventory includes all the partially completed goods that still need to be finished and ready to be sold.  

Finished goods inventory fully completed products that are ready for sale.

  • Calculating Inventory Values

Businesses can calculate inventory using various methods based on their own accounting system and policies. The three most common ways are:

First-In, First-Out (FIFO): This method states that the first units of inventory purchased or produced are the first ones sold, so the cost of finished goods is based on the latest purchases.

Weighted Average Cost: This method calculates the average cost of all units available for sale during a period, and this average cost is used to value the closing inventory.

Last-In, First-Out (LIFO): LIFO assumes that the last units of inventory purchased or produced are the first ones sold. The cost of the oldest units is given to the closing stock. 

  • Inventory Counting

Inventory counting means physically counting the number of items in each inventory type, also known as stocktaking or physical inventory. 

Production Costing Methods

  • Standard Costing

It is the method by which businesses set predetermined standards for labor, material, and overhead costs per unit. Then these standards act as the benchmark while comparing actual expenses. 

  • Process Costing

Process costing is mainly employed when units are mass-produced continuously using one or more manufacturing processes.

  • Activity-Based Costing (ABC)

Activity-based costing (ABC) is a method that focuses on assigning costs to specific activities that consume resources in an organization. It shows that products or services consume different activities and resources in different proportions. 

Manufacturing Accounting Best Practices

  1. Increase Financial Know-How

We have a deep understanding of financial concepts and practices; they should know how to read financial statements and then analyze them to interpret financial data. 

  1. Deciding Between Cash Basis or Accrual Accounting

Cash basis involves recording transactions when the cash is received or paid. Accrual basis records transactions when earned or incurred, regardless of cash inflow or outflow.

  1. Budgeting and Investing Realistically

It’s also essential to make informed investment decisions by understanding potential investments’ returns, risks, and payback periods. 

  1. Keeping Funds On Hand

Manufacturing businesses should have sufficient funds for working capital and unforeseen expenses, also known as maintaining liquidity. 

  1. Utilizing Competent Manufacturing Accounting Software

Reliable manufacturing accounting software can streamline financial processes, improve accuracy, and provide insights into the company’s financial state. 

How the Count Can Help Your Business

At The Count, we offer customized services to meet your specific requirements. We will ensure that your financial practices and reporting follow the applicable guidelines. We will work closely with your team to understand how your systems and processes already work, so we can make our accounting services fit in smoothly.

Conclusion

We cannot emphasize the importance of manufacturing accounting in streamlining earning a profit, and working in compliance with the relevant laws. We strongly encourage you to implement the best practices while accounting for a manufacturing business. 

We welcome you to explore our services at The Count so that we can help you optimize your financial management and drive the success of your manufacturing business.

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