The industrial accounting is the accounting management of a manufacturing company, which is mainly related to the valuation of inventory and cost of finished products. These concepts are not common in other types of entities, or are handled at a much more simplified level.
Manufacturing is not like other types of businesses. Retailers sell stock and service companies sell their time, but only manufacturers create new products from scratch. This can lead to unique accounting problems.
Manufacturing companies have to account for their raw materials and processing costs, but they also have to calculate the value of the finished products they make.
Industrial accounting is much more detailed than what is required for a business that does not maintain inventory. It accumulates production costs and is only used by a manufacturing company.
On the other hand, commercial accounting is used to determine gross profit from finished products, and is used by both commercial and manufacturing companies.
-Assessment of inventory
A manufacturing company must use a certain amount of raw materials, work-in-process, and finished products as part of its production processes.
Any ending balance must be properly valued to be recognized on the company’s balance sheet. This assessment requires the following activities.
Direct cost allocation
Costs are assigned to inventory using a standard costing method, weighted average cost, or a cost layering methodology, such as FIFO and LIFO.
Allocation of overhead
Factory overhead needs to be aggregated into different cost groups and then allocated to the number of units produced during an accounting period, increasing the recorded cost of inventory.
The amount of costs that are shared should be minimized, thereby reducing the amount of allocation work the accountant has to perform.
Also known as the least cost or market rule, this activity involves determining whether the amount at which inventory items are posted is higher than their current market value.
If so, the inventory should be recorded at market values. This task can be completed in relatively long intervals, such as at the end of each annual accounting period.
Additionally, a manufacturing company must use a perpetual inventory or periodic inventory system to keep track of the number of inventory units it has on hand.
This information is crucial in determining the inventory valuation. Although the periodic inventory system is easier to maintain, it only produces an accurate value when a physical inventory count is performed, so it is not recommended.
The perpetual system must provide exact inventory unit quantities at all times, although rigorous recording and cycle counting is required to ensure a high level of accuracy is maintained.
-Cost of manufactured merchandise
To account for all the expenses it incurs in making products for sale, a manufacturing company has a cost of manufactured merchandise account.
Direct Material Inventory
Direct material inventory, also known as raw material, reflects all of the materials that the company uses to make a product.
For example, for an automobile manufacturer, this includes the steel to form the body, the leather or fabric for the seats, and all those other gadgets and parts that go under the hood.
In essence, direct material inventory is any material that must be used directly to make the car.
Inventory of products in process
At any point in the manufacturing process, the business is likely to have items that are in the process of being manufactured but not yet completed, which are considered work-in-progress.
With a car manufacturer, you can imagine the car going down the production line. By reaching the last day of the accounting period, cars coming down the line are in various stages of completion.
The company values its work-in-process inventory based on how far each product has been processed.
Inventory of finished products
Finally, finished products inventory is classified as costs that are associated with products that are completely ready for sale to customers, but have not yet been sold.
For the automaker, this category consists of cars that have not yet been sold to dealers.
-Cost of merchandise sold
At its most basic level, the cost of merchandise sold is simply the beginning inventory plus purchases, minus ending inventory.
Therefore, the derivation of the cost of goods sold is actually due to the accuracy of the inventory valuation procedures just described.
Also, abnormally incurred costs, such as excess waste, are not recorded in inventory, but are charged directly to the cost of the merchandise sold.
This requires a detailed waste tracking procedure. Additionally, costs can be assigned to specific jobs, known as work order costs, and then charged to cost of merchandise sold when inventory items from those work orders are sold to customers.
Industrial accounting is used to create a general ledger account. This is used to accumulate all the manufacturing costs of the finished products of a company during an accounting period.
This industrial accounting should be prepared prior to recording the business accounts of the profit and loss statement.
Industrial accounting is generally presented in a particular format. Assuming the figures relate to the month ended December 31, 2018, an example of industrial accounting might appear as follows.
The ledger shows the total cost of manufacturing the finished products during the accounting period for $ 105,000.
Also, the industry accounting format used in this example shows the cost of raw materials consumed and the principal cost of manufacturing the products for the accounting period.
The profit and loss statement of a manufacturing company has a format similar to that of a trading company, except that what is purchased is replaced by the cost of manufacturing the finished products.
- Steven Bragg (2017). Accounting for manufacturing businesses. Accounting Tools. Taken from: accountingtools.com.
- Kenneth Boyd (2019). Accounting For Manufacturing Company Inventory. Dummies. Taken from: dummies.com.
- Michael Brown (209). Manufacturing Account Format. Double Entry Bookkeeping. Taken from: double-entry-bookkeeping.com.
- Xero (2019). Accounting for a manufacturing business. Taken from: xero.com.
- Avneet Narang (2016). How to Manage Accounting for Manufacturing Business? Cogneesol. Taken from: cogneesol.com.