Accounting for manufacturing businesses is closely related to the inventory valuation as well as the cost of goods sold. Keep in mind that in other types of businesses, both of these concepts are not common, and their processes are rather simple.
A lot of manufacturing companies utilize a specific quantity of raw materials in their work-in-progress as well as their finished goods in the manufacturing process. If you own one, keep in mind that you should recognize every element in the production process in your balance sheet using the double entry system (Also see Advantages of double entry accounting). If you want to evaluate the materials efficiently, you need to carry out the followings:
Allocate direct costs: You need to do so to your inventory by using the approaches such as standard costing, weighted average cost method, as well as the cost layering concept.
Allocate overhead costs: You have to group all your factory costs into several cost pools and assign them to the number of products you have produced before that reporting period ends. Keep in mind that this process is going to cause an increase in inventory costs. If you want to simplify the process of assigning the overhead costs, you should reduce the number of costs pools you create.
Impairment testing: This process requires a firm to find out whether the amount of the valuation of inventory is the same or greater than the net realizable value (NRV). If the latter happens, the firm is required to write it down to the NRV of the inventory.
Cost of Goods Sold
Basically, it is the sum of inventory (Also see FRS 2 Inventories) at the beginning of the accounting period add the purchases within that period, then, deduct the sum of inventory when the period has ended. As a result, the accuracy of the method of inventory valuation you use will have an impact on how accurate the figure of your cost of goods sold is (Also see Safety Tips to Safeguard Your Online Data).
Apart from that, you are not supposed to deduct the irregular expenses like excess scrap incurred from the inventory. Rather, you need to charge them to the cost of goods sold directly. This indicates that you possess an in-depth method to scrap tracking. Furthermore, you should also charge the costs allocated to certain jobs to calculate the cost of goods sold.
If you own a manufacturing company, you have to use the perpetual inventory system or the periodic inventory system to monitor how much inventory your business possesses. One has to manage the accounting for manufacturing companies very carefully, and in most cases, the process will include the valuation of inventory. Hence, you may engage an accounting firm in Johor Bahru so that you can pay more attention to other areas of your business.