Accounting in manufacturing businesses is crucial. Staying on top of your fiscal health through proper accounting and bookkeeping will ascertain that you get the necessary information needed to help you with tracking inventory and your entire manufacturing operations. Here are some concepts you must learn if you want to ensure your manufacturing business stays profitable:
Important Terms
According to tax and accounting services in the Philippines, there are vital terms you must know if you’re into manufacturing. These terms are:
Direct or Raw Materials Inventory
It is the calculation of the raw materials used to make your products. Oftentimes, these are listed in the bill of materials.
Cost of Direct Labor
It is the amount you need to give to the labor that produced your products. It could be a machine or line operator and generally includes the cost of overtime, regular hours, and payroll taxes. If these are too tedious for you to track, seek help from tax services in Manila.
Overheads
Aside from direct cost and labor, it’s important that you include the cost of the manufacturing overheads to make sure that you’ll get the right valuation.
The overheads for manufacturing can include the cost of powering equipment and the cost of the personnel who are not directly involved in the production of goods, such as security guards, janitors, or human resource personnel.
Work-in-Process Products
In manufacturing, it is normal to have items that are not yet completed in the production of goods. However, they signify an accumulation of the money you have spent on direct labor, direct materials, and overheads. They must all be factored into your books even if the items are still considered a work-in-process in your inventory.
Finished Products
It is the cost associated with the products that are ready to be sold to your customers like cost of storing the finished products in a warehouse if you do not have your own. You should have direct materials, work-in-process, and finished goods in your balance sheet when you calculate your inventory.
You can use either a perpetual or periodic inventory system to help you track the number of products in your production line. Even if the periodic inventory system is easier to maintain, it is not recommended because it only yields an accurate value when a physical inventory count is done.
The perpetual system, on the other hand, yields accurate inventory all the time. Although it requires keeping a rigorous record and cycle counting, it makes sure that the accuracy is high and maintained. If these are confusing for your, you can take advantage of professional accounting services in the Philippines.
Methods for Production Costing
You must also be aware of how to properly cost your goods. After all, you want to make sure you’re earning a profit. Here are the most common methods for production costing:
Standard
Standard costing is a system where you create a standard rate for the materials and labor used in your production. It is an accounting system where you establish standard rates for materials or labor used in production.
You should also check where the inefficiencies are taking place so you will know where you can make proper price adjustments. This method is the best to use if the goods you are producing are similar products or in large quantities.
Job/Variable
This method manufactures to order and focuses on small amounts of units like making small batches of products or custom-built machines.
Activity-Based
This method incorporates indirect costs like resource consumption. It helps you hone products that are profitable. With this, you can spot opportunities to get better results for your products. This is best to use when you have a complex mix of products.
Inventory Valuation
Finally, as a manufacturing business, you must also keep track of your inventory. Here’s how it’s done.
Managing Inventory
Managing inventory is crucial for manufacturers because as the year ends, you will want a value associated with the number of goods you have in your inventory. It will help establish the cost of goods sold and identify how much profit your business is making. Note that shortage or excess of inventory will directly affect production and your profits.
Methods to Value Inventory:
- FIFO (first in, first out)
Many manufacturers opt to use this method which is a method where products are sold in a specific order–in the order, they are added to the inventory. This works best for products that have a shelf life.
- LIFO (last in, last out)
This method operates assuming that the final product added to the inventory is the first product sold. Not many use this method.
- Average Cost
It uses a weighted average of all the goods to identify and track the inventory. This works best when difficulty in assigning costs to specific products happens.
- Specific Identification
It tracks the items in the inventory individually. It is best to use this method when the products have an identification system like a serial number or RFID tag. This method allows for greater accuracy and is most useful for items that have a high value.
If you feel like a fish out of water looking at these important terms, it’s time to call our team for tax and accounting services in Pasig. It’s the only way to ascertain that you’re manufacturing business is actually making money.
