Accounting for manufacturing businesses is a little trickier than it is for retailers. You’re not just buying products from distributors and selling them on for profit, you’re making products from scratch.
This complicates things from an accounting perspective as it’s necessary to take into account the value of the raw materials used in the manufacturing process as well as the final value of the manufactured product.
To help new manufacturing businesses to get to grips with this tricky process, we’ve prepared this short guide that will show you how to perform basic accounting in 3 steps. Let’s get started!
Choose the Right Software
The days of paper accounting are long gone. All manufacturers these days use digital software to help them to manage their inventory. That’s why the first step is to decide which software you’re going to use. Adding shelf life management software to your business will help with end-to-end tracking, ensuring total quality control throughout your supply chain, therefore reducing the chances of any accounting errors.
Just make sure that you take your time and work with your financial advisor to choose the perfect software for your business needs. Try to choose something that scales with your business – you could be using it for a very long time.
Pick an Accounting Method
There are lots of different accounting methods, and some of them will fit certain businesses better than others. A good accountant/financial advisor will be able to recommend which method you should use, but here are a few of your main options:
- Absorption Costing – This accounting method is used when all fixed manufacturing costs and variables are included in the product cost.
- Job Order Costing – This is a commonly-used method for batch manufacturing in which the cost is calculated by the raw materials and labor hours required.
- Process Costing – This method involves calculating costs by department rather than by job. It’s great for production lines in which you’re constantly manufacturing the same products
There are many more accounting methods besides these, and you’re probably a little confused as to the differences between them. It will make a lot more sense in practice. Speak to an accountant if you’re unsure.
Track All the Important Data & Analyze Your Processes
Now, you’re ready to start accounting. Use your accounting software to track all the important data, such as:
- Transactions (purchases, sales, repayments, and other expenses)
- Cash at hand
- And anything else relevant to your business
Make sure to categorize them correctly within your accounting ledger. You’ll refer back to historical accounting data to evaluate your business later on, such as through cost analysis, variance analysis, or budget refinement. They’ll also need to be accurate for tax purposes.