Accounting Tips for A Manufacturing Business

​Don’t just read the easy stuff. You may be entertained by it, but you will never grow from it. – Jim Rohn

The accounting for a manufacturing business deals with inventory valuation and the cost of goods sold. These concepts are uncommon in other types of entities, or are handled at a more simplified level.

The concepts are expanded below just to name a few:

• Inventory valuation. A manufacturing business must use a certain amount of raw materials, work-in-process, and finished goods as part of its production processes, and any ending balances must be properly valued for recognition on the company balance sheet. This valuation requires the following activities:
  • Direct cost assignment. Costs are assigned to inventory using either a standard costing, weighted-average cost, or cost layering methodology. See the standard costing, weighted-average method, FIFO, and LIFO topics for more information.
  • Overhead cost assignment. Factory overhead costs must be aggregated into cost pools and then allocated to the number of units produced during a reporting period, which increases the recorded cost of inventory. The number of cost pools should be minimized to reduce the amount of allocation work by the accountant.

​As a manufacturing company one of the key goals is to standardize cost or decrease cost.  Below are three tips which should be incorporated into a company’s inventory accounting processes to assist in managing its standard cost:

1. Review the company’s capitalizable costs. When setting standard costs, have all appropriately capitalizable costs been considered, such as incoming freight for procured inventories or overhead for produced inventories? For instance, freight is subject to potentially significant variations due to factors such as the carrier or the quantities being ordered.
2. Update standard costs regularly. Updating standard costs on an annual basis is a good start but is probably not frequent enough to ensure accurate inventory costing (not to mention the potential effects on the company’s income statement every time inventory is expensed inaccurately). If the cost of procuring or producing a product has changed since the standard cost was last modified, inventory will be misstated accordingly.
3. Maintain a “standard-to-actual” reserve in the balance sheet. Every time that any component of inventory is acquired or produced at a cost different than the assigned standard cost, that variance hits the income statement and inventory is misstated. If feasible, at the end of every reporting period an analysis of purchase and production costs for capitalizability should be performed. When complete, capitalizable variances should be recorded in a “standard-to-actual” reserve within inventory on the balance sheet with the remainder being appropriately expensed through the income statement. This reserve has the effect of adjusting the company’s inventory balances to “actual,” which is appropriate under GAAP.

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Source:AccountingTools