Manufacturing accounting is a complex field involving much bookkeeping and tracking. Whether you are a start-up or an established business, ensuring that your financial records are accurate and organized is critical to your success.
A few methods for producing cost accounting records organize your company’s financial information. Among them are standard costs, job costing, and variance analysis.
Cost of Goods Sold (COGS)
If you run a manufacturing business, COGS is one of the most important numbers to understand. The cost of producing products can significantly affect your overall profitability.
It includes all the direct costs that go into the production of a product, including the materials you use and the labor you hire to make it. It excludes indirect costs, such as marketing expenses and distribution fees.
The most common way to calculate COGS is based on a company’s inventory-valuation method. Generally, companies use the first in, first out (FIFO) or last in, first out (LIFO) methods to determine the value of their inventory sold during an accounting period.
FIFO inventory is the preferred method of many companies because it tends to result in lower COGS. It is because the earliest manufactured or purchased goods are sold first.
LIFO inventory is also the most popular method, as it allows for a more accurate valuation of inventory because it takes the average price of all the goods in stock into account. This method is usually used for higher-dollar products to ensure the actual costs are adequately reflected in the COGS calculations.
Using the correct accounting for manufacturing is crucial in maintaining your business’s profitability. When you are not careful, you may report a high COGS figure that negatively impacts your gross profit.
Cost of Goods Sold Variance (COGSV)
The Cost of Goods Sold Variance (COGSV) method of accounting is used to determine the actual cost of goods sold. It uses standard costs for materials and labor. It compares these costs with the budgeted cost of products sold to identify areas where actual results are better or worse than expected.
The COGS to Sales ratio is a crucial metric in manufacturing accounting. It indicates whether a company can produce products and services at a lower cost than its competitors.
A lower COGS to Sales ratio suggests that a company can produce products at a low cost, which can help it build its profits. It also allows investors to decide which companies to invest in when making a stock portfolio.
Several factors can affect the COGS to Sales ratio, including changes in input prices and efficiency. However, the leading causes are often system or human error.
For example, if a company discovers that it is paying more than it should for labor, it may need to increase its efficiency or negotiate with a supplier for a better price.
In addition to the COGS to Sales ratio, variances can be analyzed for other vital indicators of a company’s performance. For instance, a negative variance could indicate that a company is overspending or unable to cover its expenses.
To profit, a company has to sell its products for more money than it spent on the raw resources used to manufacture them. It is called gross profit. It can be calculated by determining the inventory value and the sales price of goods sold during an accounting period.
A company must also account for the direct labor in producing a product. It includes wages for assembly workers, payroll taxes, insurance coverage, and pension contributions.
The company may also need to pay duty on imported materials and supplies used in manufacturing. It is not included in the inventory valuation but must be considered when calculating the overall costs associated with a product.
Another item that must be valued is the material needed to create packaging for a product. For instance, if a firm produces greeting card packages that require glue and unassembled printed cardboard, it must include these components in its inventory valuation.
Choosing the best method for valuing inventory is essential in ensuring that your inventory levels are accurate and comply with tax laws and financial analysis. The most common methods for valuing inventory are FIFO, LIFO and WAC (weighted average cost).
Using the correct method for your specific business can be critical, especially if you intend to apply for financing in the future. In addition, the choice of a valuation method can influence how much income taxes you have to pay, so it’s essential to choose one that fits your current plans and will be helpful in the future.
Profit & Loss Statement (P&L)
A company’s sales, costs, and net income are displayed on a specific period’s profit and loss statement (P&L). They’re essential to understanding because they can help you track and monitor your business’s financial status and set goals for the future.
A P&L is usually prepared monthly or quarterly, depending on your needs. Some businesses require a P&L statement to be filed with the Securities and Exchange Commission. Still, it can also be used as a tool to assess the profitability of your business or as a way to prepare tax documents.
The most basic P&L includes a line for gross sales, which is the total amount of products and services sold during the accounting period. It then subtracts sales returns and allowances, resulting in a net sales figure.
In the following line, expenses are recorded. These can include selling expenses, such as employee salaries and office costs, as well as general and administrative costs, like advertising and warehousing.
These expenses are then subtracted from the net sales figure to produce a net income or profit. The net income or profit is then compared with the costs to calculate a gross margin. Using this information, executives can perform a granular analysis of specific revenue streams or complete a more comprehensive analysis of overall sales for a company.