Accounting for manufacturing businesses is a large undertaking and the manufacturing accounting process is detailed and complex, with a lot of information to track and sort through. Whether it’s tracking bills, payroll, taxes, bookkeeping or expense reports, cost accounting in the manufacturing industry isn’t for the faint of heart and you want to make sure whomever does it for your business is up to the task. With the right service, you can save time and money while minimizing waste. This will also allow you to maximize productivity and streamline your manufacturing processes, which will drive revenue and increase profit.
With the manufacturing accounting basics presented below, you’ll gain a high-level understanding of what goes into the manufacturing accounting process, and what’s required to get accurate, detailed results.
Manufacturing Accounting Basics
The easiest way to understand the basics of manufacturing accounting is to break processes down by cost terms known across the industry. Familiarize yourself with some of the most common terms below, and you’ll have an idea of the complexity that goes into cost accounting for the manufacturing industry,
Inventory Valuation
One of the most critical parts of identifying and controlling costs in manufacturing is inventory management. At the end of your accounting periods, inventory valuation allows you to establish the cost of making the goods you sell versus how much profit you’re making.
There are four ways to value inventory for cost accounting in the manufacturing industry:
- Average cost: A method for using a weighted average of all products to track inventory.
- First In, first out: Products are sold in the order they are added to inventory.
- Last in, last out: Final products added to an inventory are the first ones sold.
- Specific identification: An accounting method to track individual items of inventory.
Direct Labor Costs
Direct labor is the value given to the workers who manufacture your products. This includes assembly line workers, machine operators, etc. Direct labor costs typically include wages paid for regular hours, overtime and payroll tax information.
Manufacturing Overhead Costs
Manufacturing overhead costs for accounting in the manufacturing industry can include the price of powering your manufacturing equipment and paying employees who are not directly linked to the making of products (such as HR employees and management personnel who aren’t involved in the production of products). Finished items and your company’s items-in-progress should also contribute to manufacturing overhead costs.
Cost Accounting in the Manufacturing Industry Benefits
Inventory valuation, direct labor and manufacturing overhead costs are just part of the recipe that is cost accounting in the manufacturing industry.
Overall, the manufacturing accounting process is much more complex than accounting for most companies that produce no inventory. Having the right manufacturing accounting process can efficiently break down all of the operational costs within your company. This will result in you having better insights into what everything costs to manufacture and how much you should charge for the items you’re making. This will help to identify opportunities to improve efficiencies companywide, drive revenue and increase profit.
Leverage Expert Help for Manufacturing Accounting in Minnesota
Professional accounting services can completely transform the manufacturing process and save you money on production costs while increasing profit. Further, for smaller manufacturers that aren’t equipped to have full-time accounting staff in-house, partnering with the right accounting service will make a world of difference.
With Corneliuson & Associates, cost accounting for companies in the manufacturing industry in Minnesota and western Wisconsin has never been easier. Our experts have been serving businesses like yours since 1998. Reach out today for a free consultation.