Accounting for Manufacturing Businesses
Accounting for a manufacturing firm deals with cost of goods sold and valuating the inventory. Note that in other businesses, these two concepts are dealt with at a simplified level and aren’t common.
Recognizing the cost of goods sold
The cost of goods sold is basically the amount of inventory at the start of the accounting period add purchases during that period, then, subtract the amount of inventory at the end of the period. Therefore, the accuracy of your cost of goods sold figure depends on the accuracy of your inventory valuation method.
Additionally, the abnormal costs such excessive scrap incurred are not deducted from the inventory. Instead, you should charge them directly to the cost of goods sold. This means you have a detailed approach to scrap tracking. Besides, other costs assigned to particular jobs (job costing) should also be charged to the calculate cost of goods sold.
Inventory valuation
Most manufacturing firms use a particular amount of raw materials, the firm’s work-in-progress, and the finished goods in the process of production. Note that each of these components of the manufacturer’s production process must be recognized in the balance sheet. To value these materials effectively, you must undertake the following activities;
Assign the direct costs: you should assign the direct costs to inventory using the weighted average costing method, standard costing, or the cost layering approach.
Assign overhead costs: you need to aggregate all the factory costs into cost pools and then allocate these cost pools to the number of products produced within that reporting period. Note that this process will increase the cost of inventory. To simply the allocation of the overhead costs, minimize the number of the cost pools.
Impairment testing: the process of impairment testing (Also see Impairment versus Depreciation) involves finding out whether the amount at which the inventory is valued is equal to or higher than the net realisable value. If you find that the value of the inventory is higher than its net realisable value, you must write it down to its net realisable value.
As an owner of a manufacturing firm, you need to use either the periodic inventory or perpetual inventory system to track the amount of inventory in your business. Note that accounting for a manufacturing firm is detailed and in most cases will involve inventory valuation. Therefore, to free up your time and focus on other aspects of your business growth, you may consider engaging an accounting firm in Singapore.