How to Do Manufacturing Accounting?

If you have a business of manufacturing then you must understand that accounting is different here than traditional types. There are different concepts in accounting for manufacturing than in general business. The core concepts of the manufacturing business involve dealing with the cost of goods sold and inventory valuation. A lot of finished products are produced from the raw materials in the manufacturing company. So, manufacturing accounting needs to be handled with a different approach. Managing the risk and cash flow is very important for the efficient accounting of a manufacturing company. This guide will help you know more about the accounting aspects of the manufacturing business.

What are the processes in accounting for manufacturing companies?

The accounting approach for the manufacturing business is a little different. Here are some of the important aspects of the manufacturing accounting:

Set up a proper accounting system

Choose an accounting software suitable for manufacturing operations or an ERP system. Configure the chart of accounts to include specific accounts for raw materials, finished goods, manufacturing overhead, direct labor, and manufacturing-related expenses.

Record purchased material

When purchasing raw materials, record the transactions in the accounting for manufacturing. Allocate material costs to projects or jobs and if using job costing allocate them to inventory if using process costing.

Tracking direct labor cost

Record direct labor costs, including wages, benefits, and payroll taxes, associated with manufacturing activities. Allocate direct labor costs to specific jobs or departments.

Allocation of overhead in the manufacturing

Calculate and allocate manufacturing overhead costs, such as rent, utilities, depreciation on manufacturing equipment, and indirect labor, to production activities. Use allocation bases like machine hours, direct labor hours, or square footage to distribute overhead costs to products or jobs.

Compute Cost of Goods Manufactured (COGM):

Determine the total manufacturing costs incurred during the accounting period, including materials used, direct labor, and allocated overhead. Calculate the COGM by adding the beginning WIP inventory.

Calculate Cost of Goods Sold (COGS):

Cost of goods determination by adding finished goods costing. COGS represents the cost of inventory items sold during the accounting period.

Financial statement preparation

Financial statements can be generated that are important for the business. Include details on COGS, gross margin, operating expenses, and net income related to manufacturing activities.

Analyze and monitor the performance

Review manufacturing performance metrics like cost variance, efficiency ratios, and profitability by product line or department.
Identify areas for cost reduction, process improvements, and strategic decision-making based on financial analysis.

Fulfill the regulatory requirements

Ensure compliance with accounting standards, such as Generally Accepted Accounting Principles (GAAP), International Financial Reporting Standards (IFRS),  etc. This must be applicable to manufacturing entities. Follow tax regulations related to cost allocation, inventory valuation, and financial disclosures.

Making continuous improvement

Continuously refine manufacturing accounting processes to enhance accuracy, and improve decision-making capabilities. Stay updated with technological advancements, industry trends, and best practices in manufacturing accounting.

These are some important steps to take in manufacturing accounting. Implementing robust accounting practices can improve the business performance of manufacturing companies.

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