How to Manage Accounting for a Manufacturing Business
Learn how to structure manufacturing accounts, convert raw material inventory into finished stock, and account for scrap and overhead costs accurately.
What is the core workflow of manufacturing accounting?
Manufacturing accounting involves recording raw material purchases as inventory assets, tracking their consumption through a Bill of Materials (BOM) during production, adding labor and overheads, and capitalizing the total into Finished Goods inventory until items are sold as Cost of Goods Sold (COGS).
1. The Three Stages of Manufacturing Inventory
Unlike trading businesses that buy and sell finished goods, a manufacturer manages three distinct inventory classes: Raw Materials, Work-in-Progress (WIP), and Finished Goods.
Purchased materials remain in the Raw Materials inventory account until issued to the production floor. During fabrication, material and labor costs accumulate as Work-in-Progress. Once production completes, the accumulated value transfers into Finished Goods inventory.
2. Setting Up the Bill of Materials (BOM)
A Bill of Materials (BOM) acts as the standard recipe for manufacturing. It specifies every component, chemical, packaging box, and label required to produce one unit of finished product.
Having an accurate BOM prevents material shortages and ensures that your accounting software can calculate the expected raw material cost automatically whenever a manufacturing batch is completed.
3. Accounting for Production Scrap and Waste
Process loss is unavoidable in manufacturing—whether it is off-cuts in sheet metal, trimmings in garment stitching, or evaporation in chemical mixing.
If scrap is ignored, the calculated per-unit cost of finished goods will appear artificially low, leading to underpriced products and unexpected margin erosion. Modern manufacturing software like Likhtam allows you to include scrap percentage in the BOM so the wasted material cost is absorbed into finished goods.
4. Recording the Production Voucher in Double-Entry Books
When a batch is finished, record a Manufacturing Entry. This single voucher credits the Raw Materials Inventory account and debits the Finished Goods Inventory account, keeping your balance sheet perfectly in balance without manual journal entries.
Common Questions
Because the raw materials that turned into scrap were paid for by your business. If scrap is not included in the finished good cost, your calculated margins will be overly optimistic.
Likhtam combines BOM definition, raw material consumption, scrap calculation, and finished goods inventory replenishment into a single tap on your mobile phone or desktop.
Put these workflows into action with Likhtam.
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