Sign up to receive accounting tips, videos, news and webinar info before anyone else
Mailing Address
21750 Hardy Oak Blvd
Ste 104 PMB 63328
San Antonio, TX 78258-4946
(760) 697-1033
It takes more than machines and materials for manufacturing companies to stay profitable. It also requires a well-structured accounting system that tracks costs, manages resources, and enables leaders to make informed financial decisions. When you establish solid accounting for manufacturing, your chances of success and reaching your business objectives become significantly greater. This blog will guide you through the fundamentals of accounting for manufacturing firms, covering key roles and essential systems.
Understanding the Basics of Manufacturing Accounting
Manufacturers manage physical inventory, complex production processes, and various types of costs. It’s a unique industry, and it demands equally flexible and innovative financial strategies to stay ahead. Specialized accounting for a manufacturing business enables companies to understand the true cost of producing their products and how that cost impacts profitability.
At its core, accounting for manufacturing companies focuses on three main elements:
- Raw materials – the supplies used to make a product.
- Work in progress (WIP) – goods that are in production but not yet finished.
- Finished goods – products that are ready to sell.
Accounting systems must be able to track all three categories and link them to financial performance.
Key Accounting Roles in a Manufacturing Business
Accounting for a manufacturing company isn’t linear, and it’s not always straightforward. There are numerous moving parts, and your financial team needs to be current and adaptable to quickly implement effective solutions. Here are a few roles accounting staff contribute to secure business success:
Cost Accountant
Cost accountants play a critical role in any manufacturing business. They track, analyze, and report on all the costs involved in producing a product. This includes materials, labor, overhead, and any waste or inefficiencies associated with the project. Their reports help management decide where to cut costs or improve processes.
Controller
The controller oversees the company’s entire accounting department. They ensure that financial records are accurate, systems are running properly, and the business complies with regulations. In manufacturing firms, the controller also helps develop budgets and forecasts based on production schedules and historical data.
Chief Financial Officer (CFO)
A CFO provides strategic financial leadership. They review reports from the controller and cost accountant, interpret the numbers, and provide guidance on long-term decisions, such as pricing strategies, investments, and risk management. For growing manufacturing firms, the CFO plays a crucial role in scaling responsibly.
Inventory Accountant
Inventory is especially crucial for accounting in manufacturing firms. These professionals track inventory levels, cost of goods sold (COGS), and shrinkage. Their work helps ensure that inventory records match what’s actually on hand, which is vital for maintaining healthy margins.
Essential Accounting Systems for Manufacturing Firms
Enterprise Resource Planning (ERP) Software
ERP systems bring all aspects of a manufacturing business under one digital roof. They track materials, production timelines, orders, inventory, and accounting. A well-integrated ERP helps businesses avoid bottlenecks, manage costs, and stay on schedule. Popular options include NetSuite, Microsoft Dynamics, and Acumatica.
Cost Accounting System
This system specifically tracks and records the costs tied to the production process. It supports techniques such as job order costing and process costing, which help companies understand the cost of producing each item or batch.
- Job order costing is used when products are made in small quantities or customized orders.
- Process costing is used when the same product is manufactured repeatedly in a continuous production process.
Choosing the right accountant for manufacturing methods depends on your product and production setup.
Inventory Management Software
Accurate inventory tracking is a crucial factor in manufacturing accounting, and can make or break any business. Inventory software tracks raw materials, work-in-progress, and finished goods. It also integrates with the accounting system to update financial records in real-time. Features like barcode scanning and automatic reordering help reduce waste and improve efficiency.
Budgeting and Forecasting Tools
Manufacturing firms need to plan ahead. Budgeting and forecasting systems enable teams to accurately predict material costs, labor requirements, and sales revenue. These tools are essential for managing cash flow, securing funding, and adjusting to market demand.
Cost of Goods Manufactured (COGM) and Cost of Goods Sold (COGS)
Manufacturers must pay close attention to two related metrics: COGM and COGS.
- COGM refers to the total cost of producing goods during a certain period, including raw materials, labor, and overhead.
- COGS is the cost of the goods that were actually sold during that same period.
Tracking both helps businesses understand how efficiently they’re producing and selling their products. It also supports better pricing and inventory decisions.
Internal Controls to Prevent Loss and Waste
Good accounting for manufacturing is not just about tracking dollars. It’s also about protecting the business from fraud, theft, and inefficiency. Manufacturing companies benefit from internal controls such as:
- Separation of duties between purchasing, receiving, and accounting.
- Regular inventory audits and cycle counts.
- Approval systems for expenses and purchases.
- Clear documentation and process checklists.
These controls reduce errors and support compliance with financial regulations.
How Accounting Supports Lean Manufacturing
Many manufacturers follow lean principles to eliminate waste and improve productivity. Accounting for manufacturing plays a big role in this. By highlighting areas of unnecessary spending or inefficiencies, accountants help teams make data-driven decisions that align with lean goals. For example, tracking overtime hours or scrap material can point to training needs or process issues.
When to Outsource Accounting for Manufacturing Businesses
Small to mid-size manufacturers often reach a point where their in-house team can’t keep up with growing accounting needs. Outsourced accounting for manufacturing companies can offer benefits such as:
- Access to experienced financial professionals without hiring full-time staff
- Scalable support that grows with your company
- More accurate, timely, and useful financial reports
- Strategic insights into cost management and forecasting
By procuring part-time, on-demand, or fractional CFO services for manufacturing companies, business owners can save time and money while gaining access to a qualified financial expert who understands the industry and can suggest innovations that benefit the company overall.
FAQs About Accounting for Manufacturing Businesses & Firms
What is the difference between standard costing and actual costing in manufacturing?
Standard costing uses estimated costs for materials, labor, and overhead, which are compared to actual expenses to identify variances. Actual costing records the real costs as they happen. Many firms use standard costing for planning and control, then adjust based on actual results.
How does depreciation factor into manufacturing accounting?
Depreciation accounts for the wear and tear of equipment and facilities over time. In manufacturing, this is a significant component of overhead costs and is included in the cost of goods manufactured. It helps reflect the true cost of using machinery to produce goods.
Why is overhead allocation important in accounting for manufacturing businesses?
Overhead costs, such as rent, utilities, and equipment maintenance, must be spread across all products. Proper allocation helps ensure each item reflects a fair share of these indirect costs, supporting more accurate pricing and profitability analysis.
Can accounting help improve production scheduling?
Yes. Financial data, such as inventory levels and labor costs, can inform better production planning. When accounting systems are integrated with operations, they provide the visibility necessary to optimize scheduling, minimize delays, and reduce costs.
How often should a manufacturing firm close its books?
Most firms close their books monthly to maintain accurate financial records. This regular cadence helps management track performance, monitor cash flow, and make timely adjustments based on production and sales trends.
Read More >>>
Matt Garrett is the Founder and Chief Executive Officer of TGG. He is a regular speaker across the country on behalf of Vistage educating business owners on the need for sound financial practices, and is Vice President of the Board of Directors of FINACA. Under Matt’s leadership, TGG has received the following recognition: INC. 5000 top companies in the U.S. five years in a row; one of “San Diego’s Fastest Growing Companies” the past four years; and is among San Diego’s “Best Places to Work.”
