Manufacturing accounting: a unique approach for a unique sector

Welcome to the world of manufacturing accounting — where numbers and production collide. If you’re a manufacturing business, you know that keeping your production line running smoothly is crucial for success. But what about keeping your finances in check? That’s where manufacturing accounting comes in.

In this blog post, we’ll explore essential tips and strategies for effective cost management in manufacturing accounting.

What is manufacturing accounting?

Manufacturing accounting is a specialized form of accounting that focuses on the needs of the manufacturing industry. It is designed to provide a comprehensive and detailed view of the financial performance of a manufacturing business.

Accounting in manufacturing entails inventory management, tracking production values, and generating comprehensive financial statements while monitoring expenses for materials, labor, overhead, and other costs.

What type of accounting is used in manufacturing?

The manufacturing accounting process has its own unique set of requirements, calling for specialized software and processes to monitor and record production costs associated with a product.

A tailored approach is essential for success in this sector, typically done using a double-entry system that tracks all financial transactions and ensures accuracy.

It emphasizes keeping track of and allocating expenditures related to labor, overhead, and other costs while providing an in-depth perspective of the financial performance of the manufacturing process.

What is different about accounting for manufacturing costs?

In contrast, other types of accounting, such as financial and managerial accounting, focus on different aspects of business finance.

Financial accounting is concerned with recording and reporting a company’s financial transactions and preparing financial statements. Managerial accounting is focused on providing financial information to managers to help them make informed decisions about the company’s operations.

While these types of accounting are certainly important, they don’t provide the same level of detail and insight into manufacturing operations as manufacturing accounting does.

Accounting for manufacturers in practice

Now that we better understand the theory behind the manufacturing accounting process flow, let us delve deeper into how it works in practice with some manufacturing accounting examples.

Cost accounting

Cost accounting plays an essential role in manufacturing accounting. It entails monitoring the costs associated with producing a specific item, from raw material expenditures to labor and overhead fees. By carefully applying inventorization to these costs, you can identify areas where you can reduce spending, improve efficiency and increase profitability. Integrated invoicing and billing platforms such as Xero and QuickBooks Online can help streamline costs associated with specific products and batches.

Job costing

With job costing, you can assign costs to each production run or batch of products and monitor expenditures related to that job. This data can then be leveraged to make pricing decisions, optimize production processes, and allocate resources effectively. Accounting platforms such as Xero and QuickBooks offer integrated cost management solutions for manufacturing-specific expenses like labor, materials, and overhead.

Inventory management

Inventory management is also a crucial component of manufacturing accounting. By carefully managing your inventory levels, you can ensure that you have enough raw materials and finished goods to meet demand without tying up too much cash in excess inventory.

Effective inventory management can help you reduce disbursement, improve efficiency, and increase profitability. Manufacturing accounting systems also provide visibility into key aspects of inventory management, such as goods acquisition, stock value, and moving average cost (MAC).

Key differences

So, what sets manufacturing accounting apart from other types of accounting? One key difference is the level of detail and specificity involved. Manufacturing accounting allows you to track outgoing expenditures associated with individual products, individual jobs, and even individual production runs. This level of detail allows you to make data-driven decisions about your production processes and optimize your operations for maximum efficiency and profitability.

Another key difference is the importance of cost reduction and efficiency improvement in manufacturing accounting. In the manufacturing world, small improvements in efficiency or cost reduction can have a big impact on profitability. By carefully tracking your costs and analyzing your operations, you can identify areas where you can make small improvements that add up to big savings over time.

Best practices in manufacturing accounting

Manufacturing accounting is a complex process that requires specialized knowledge and skills. In order to ensure accuracy and efficiency in the process, there are certain best practices that should be followed.

• Automation is key — Automating the process of invoicing, payments, and other financial transactions will help to ensure accuracy and consistency.
• Implement robust inventory control — Keeping track of inventory is crucial in the manufacturing industry, and having a reliable system in place to track and manage inventory is essential.
• Track production costs — Production costs are one of the main expenses associated with the manufacturing process, and they must be tracked and monitored on a regular basis in order to ensure accuracy.
• Utilize data analytics — Data analytics can be used to gain a better understanding of the financial performance of the production methodology and help to make more informed decisions.

Accounting for manufacturing companies becomes significantly more efficient and beneficial when these best practices are followed.

What to look for in manufacturing accounting software

Your manufacturing business is as creative and unique as you are, so it goes without saying your accounting software should be too. Manufacturers will often seek out a modularized all-in-one solution, where every facet of the business,s such as inventory, tracking, production, and planning, are combined into one system. These types of highly extensible systems are known as Enterprise Resource Planning (ERP) platforms.

With so many options out there, it can be tough to know exactly what to look for in a manufacturing accounting software package. The cost of accounting manufacturing software can also be quite substantial — so you want to be sure you’ve selected the right one to invest in.

Let’s look at the features all great accounting software should include.

Inventory control

Every factory accounting software solution worth its salt should include powerful inventory management capabilities.

This involves keeping track of inventory levels, bills of materials, and the expenses related to making particular products or batches of products.

You can guarantee that you always have the supplies you need to make your products while keeping expenses in check with the appropriate inventory management capabilities.

Production cost tracking

Job costing is an additional crucial feature to look for in manufacturing accounting software. Using job costing, you can track the direct and indirect costs related to creating each unique product or batch. This covers a wide range of expenses, including those for overhead, labor, and raw supplies.

Software with advanced job costing provides the ability to find areas where you can cut costs, boost productivity, and boost profitability

Reporting capabilities

The software should be able to generate detailed financial reports and provide insights into the performance of the production approach.

This includes financial reports, production reports, and more. With the right reporting features, you can gain valuable insights into your operations and identify areas for improvement

Data analytics

Data analytics is essential for gaining a deeper understanding of manufacturing costs and making informed decisions. To that end, the software should be equipped with data analytics capabilities, allowing you to analyze data and gain insights into the overall financial position of your business processes.

Systems integration

Finally, it is wise to select accounting software that can be integrated with other programs, such as inventory management, production scheduling, and invoice/remittance generation.

Make sure the software will be compatible with existing management tools and databases, minimizing any potential risks of data loss or disruption to ongoing processes.

With integration, you can streamline your operations and automate tasks such as inventory management, production scheduling, and order fulfillment.

Katana’s cloud manufacturing platform offers all that and a great deal more. Sign up for a free 14-day trial and find out why thousands of manufacturers use Katana daily to manage their entire business.

Glossary of manufacturing terminology

Finally, Manufacturing accounting terminology can be complex, so it’s essential to understand key terms and definitions. Here are some common terms used in the manufacturing industry:

• Material requirements planning (MRP) — A production planning and scheduling system that determines the materials and quantities required to produce a product based on its production schedule and inventory levels.
• Bill of materials (BOM) — A list of all the materials required to produce a product, including raw materials, components, and subassemblies.
• Work-in-progress (WIP) — Inventory that is in the process of being produced but has not yet been completed.
• Cost of goods sold (COGS) — The total cost of producing and selling a product, including direct materials, labor, and overhead costs.
• Job costing — A cost accounting system that tracks the costs associated with producing a specific product or batch of products.
• Moving average cost (MAC) — A cost accounting method that calculates the average cost of inventory over a period of time, which is used to determine the cost of goods sold.
• FIFO and LIFO — First-in-first-out and last-in-first-out are cost accounting methods assuming the first items purchased are the first items sold and the last items purchased are the first items sold, respectively.
• Backflush costing — A cost accounting system that records the cost of producing a product at the time it is completed rather than at each step of the production process.
• Activity-based costing (ABC) — A cost accounting system that assigns costs to specific activities or processes based on their use of resources.
• Enterprise resource planning (ERP) — An integrated software system that manages all aspects of a business, including accounting, inventory management, and production scheduling.
• Just-in-time (JIT) — A production strategy that emphasizes the delivery of products and materials just in time for production in order to minimize inventory costs.
• Total quality management (TQM) — A management philosophy that emphasizes the importance of quality in all aspects of the production process in order to reduce costs and increase customer satisfaction.