Accounting for Manufacturing: The Key Things You Need to Know
Do you know the unique factors that affect accounting for manufacturing?
In the U.S. alone, manufacturing accounts for more than $2 trillion worth of GDP. Globally, the manufacturing industry is far bigger than that. Manufacturing is a massive industry.
Companies from different countries often coming together to meet manufacturing needs. This makes accounting especially challenging.
There are a lot of variables in manufacturing accounting that need to be considered. Whether you're in charge of the company or working in the accounting department, here are the thing to know about accounting for a manufacturing business.
What Makes Manufacturing Unique?
At many companies, the accounting focuses on the sale of goods and services to customers. However, manufacturing is a little different, even though the goal is to produce goods to sell.
Manufacturers are building brand-new products. This means that the accounting department has to consider a variety of things.
This includes the cost of materials and equipment, as well as possible research, testing, and even design costs at some companies. Those costs have to get managed alongside the finished products' value. That way, no money gets lost in the production efforts.
Things to Consider in Accounting for Manufacturing
Some of the things an accounting department at a manufacturing company has to think about are the same as at other companies. Others are unique to the industry. Here are the top tasks accountants have to balance in manufacturing.
1. Analyzing the Process
Manufacturing is a process-based world. Without ways to measure and analyze processes from an accounting perspective, valuable information gets lost.
A great accounting team can see if the company is efficient using measurement tools and recommend changes accordingly.
The most basic kind of analysis involves looking at costs the company pays over a set period of time. This helps with tracking spending. It also shows how spending is connected to profits.
But analysis can also go much deeper. The accounting department might perform a variance analysis to see if the spending matches the amount that was budgeted for. Or, they can do a constraint analysis to find points in the process where things are slowing down and figure out how to fix them.
2. Managing Human Resources
Although you may also have a separate HR department, manufacturing accounting should be involved in human resources to keep things working with your employees.
Manufacturing can't happen without labor. However, today's manufacturing is more likely to rely on machines than workers. The people you employee might be in charge of anything from repairing machines to designing computer programs, rather than physically making products.
That makes it more important than ever to have a well-managed team. The accounting department will handle things like processing payroll. They'll keep it systemized so that everyone gets paid correctly and on time.
They can also help see if you're spending too much money on labor.
3. Categorizing Inventory
Manufacturing companies can't just use a single category for all of their inventory. The accounting department is in charge of keeping the inventory organized into the three proper categories.
Materials in process
The inventory can't all be lumped together. If they are, it won't be clear where the company actually stands.
4. Handling Accounts Payable and Receivable
Manufacturing often involves equal or near-equal amounts of handling payments coming in and going out.
The company will need to pay accounts for materials and tools, as well as repairs and other possible incidentals. It will also get paid for the sale of goods. This might involve receiving payment from a long list of companies in other countries.
For that matter, it could be paying for raw materials sourced from many different places, as well.
Depending on the nature of the company, there might also be payments going to research and development, testing, or quality control costs.
This might involve the exchange of currencies, invoicing across time zones, and more complications for a global, modern manufacturing company.
5. Writing Off Loss
Sometimes, manufacturing also involves the loss of inventory. Accounting departments need to be good at tracking when materials, work in progress, or finished goods need to get written off.
Some types of manufacturing are at more risk for losses than others. For example, if a company just put in place new technology in its processes, a bug in the technology could create issues. In fast-paced industries, a slow manufacturing process might make finished goods that become obsolete before they can all get sold.
The accounting department has to keep things organized to reduce losses. In essence, they have to make sure that finished products aren't getting made faster than they can be sold. Otherwise, the products might become obsolete.
6. Assigning Correct Values
The value of a finished product that's ready to ship is higher than the value of the raw materials used to make that product.
Any manufacturing company will have three types of inventory at any given time. Along with properly categorizing those inventory types, accounting for manufacturing also involves giving them the right values.
This valuation is crucial for budgeting and prices, as well as understanding overhead costs. But, it takes an experienced accounting department to know how to value things appropriately.
Looking for Manufacturing Accounting Help?
Accounting for manufacturing isn't easy. In some industries, business owners might be able to handle their accounting needs without hiring help.
But, in manufacturing, it's important to have the best people in the business on your side to manage all the moving parts of this complex industry.
Online accounting can help you get the resources you need, even if they aren't close to home. Check out our guide to choosing an online accounting company.