What Is a Manufacturing Account?
The Manufacturing account can be used by businesses that produce products or goods. It is a tool that companies can use to help manage the finances and inventory of a manufacturing company.
This account can track production costs, materials used, and inventory levels. Manufacturing accounts can also help businesses manage their cash flow and budget for future production.
Manufacturing Business Defined
A manufacturing business is an enterprise that produces physical goods, either through machines or labor, to sell to customers.
Moreover, it is dubbed a complete business because it buys the raw materials used to create a product before selling it.
It can be small businesses, large businesses, or even global corporations. Manufacturing businesses must prepare a manufacturing account as part of their internal financial statements.
Types of Manufacturing Account
Businesses use several manufacturing accounts, but the most common are raw material, direct labor, overhead, work in process, finished goods, and cost of goods sold.
Each of these accounts represents a different step in the production process.
The raw material account is the first stage in the manufacturing process. This account tracks all of the raw materials or physical items necessary to create a product.
This includes any items used in the production process but is not yet part of the finished product.
Direct Labor Manufacturing Account
The direct labor Manufacturing account tracks all of the wages paid to workers directly involved in the production process. The actual hours spent on producing goods are the only thing recorded in this account.
This includes wages paid for workers who operate machines, assemble products or package goods.
Overhead Manufacturing Account
The overhead Manufacturing account tracks all of the costs associated with running a manufacturing business. It represents all production items not solely used for any one product.
This includes glue, oil, rent, utilities, insurance, and property taxes.
Work in Process Manufacturing Account
The work-in-process Manufacturing account tracks all of the costs associated with producing a product.
As items enter the production, this account balance increases. The balance decreases once the company completes goods as dollar amounts enter the finished goods account.
Finished Goods Manufacturing Account
The finished goods Manufacturing account represents all finished products ready for sale.
The cost for produced products remains here until the company sells the goods to distributors or consumers.
Cost of Goods Sold Manufacturing Account
The cost of goods sold Manufacturing account tracks information on all inventory items sold by the firm.
This dollar figure is a period cost. Companies only incur the cost of goods sold when they sell inventory. This manufacturing account is the final stage of a company’s production process.
The Benefits of Having a Manufacturing Account
There are many benefits of having a Manufacturing account. It helps businesses manage their finances, inventory, and cash flow and prepare for future production costs.
Some of the other benefits of having a Manufacturing account include:
A Manufacturing account can help businesses become more efficient by tracking production costs and inventory levels. This information can help companies plan for future production runs and optimize their manufacturing processes.
Better Cash Flow Management
Manufacturing accounts can help businesses manage their cash flow by tracking invoices and payments. This information can help companies budget for future production runs and make informed financial decisions.
Informed Decision Making
Manufacturing accounts can provide businesses with valuable information about their production costs, inventory levels, and sales. This information can help companies make informed decisions about their manufacturing processes and future production runs.
Improved Financial Planning
Manufacturing accounts can help businesses plan for future production costs by tracking current and historical data.
Manufacturing Account vs. Trading Account vs. Balance Sheets
A manufacturing account is one of the three accounts in the accounting system, the other two being a trading account and balance sheets. All three types of accounts are important in their ways and used for different purposes.
A manufacturing account tracks a manufacturing business’s production costs, materials used, and inventory levels. This information helps companies arrive at better decisions about when to buy materials and sell products.
A trading account is used to track sales and purchases. This information can help businesses make better decisions about their pricing and inventory levels.
Balance sheets are used to track the assets, liabilities, and equity. This information can help businesses.
The Bottom Line
Manufacturing businesses must prepare a manufacturing account as part of their internal financial statements. It can help businesses manage their finances, inventory, and cash flow and prepare for future production costs.
There are six most common types of Manufacturing accounts: raw materials, direct labor, overhead, work-in-process, finished goods, and cost of goods sold.
Having a manufacturing account includes increased efficiency, better cash flow management, informed decision-making, and improved financial planning.
Manufacturing businesses must prepare a manufacturing account as part of their internal financial statements.