Manufacturing businesses are unique as also the manufacturing accounting. The accounting for a manufacturing business deals with inventory valuation and cost of goods sold. In other businesses, these two aspects are handled in a more simplified manner.
Manufacturing businesses use certain raw materials and convert them into finished products through various manufacturing and value-added process stages using appropriate machinery and manpower. At any given point of time, a manufacturing business has raw materials inventory, in-process or semi-finished inventory, and finished goods inventory.
Inventory valuations are done through Direct cost allocation, overhead cost allocation, and impairment testing. Indirect cost allocation, costs are arrived at through standard costs or weighted average or cost layering. In overhead cost allocation, factory overheads are aggregated into cost pools and allocated to the number of goods produced over a reporting period. In impairment testing, inventories are written down to market value.
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