Manufacturing accounts track financial information for individual items needed to produce goods or services. Accounts include raw materials, direct labor, overhead, work in process, finished goods, and cost of goods sold. Each account represents a different step in the production process.
A manufacturing account is an accounting tool that keeps financial information on record. There are multiple accounts in a company’s general ledger. Using each account, manufacturing companies record and report information for the individual items needed to produce goods or services. Common manufacturing accounts include raw materials, direct labor, and overhead; work in process, finished goods and cost of goods sold can also be found. Each manufacturing bead represents a different step in the production process.
Raw material accounts represent the physical items needed to produce a good. A company usually has a different manufacturing account for each item needed to produce goods. For example, one bead reflects aluminum, another plate and yet another titanium. Individual material accounts allow companies to order more accurate replenishment to ensure future production is not delayed.
The direct labor manufacturing account includes all man-hour costs required to turn raw materials into products. Labor charges often vary in the production process. Accountants only record the hours spent on actual production of goods in this account. Companies that use a work order costing system usually have an account for each production project. This helps keep the cost accurate for each item.
Overhead cost accounts represent all items used in production but are not related to any product. Items such as glue, solder or oil represent overhead. Other costs such as rent, utility expenses, insurance, and supervisor wages can also be included in this manufacturing account. Companies allocate all these costs at a specific point in time during the production process.
Work in process includes all items currently in production. Information from the previous three manufacturing accounts goes into this account when the goods enter the production process. This manufacturing account is usually the most active one in a production company. As goods go into production, this account balance increases. After the company completes the goods, the balance decreases as dollar amounts enter the finished goods account.
Finished goods represent all completed products ready for sale. The manufacturing company transfers the allocated dollar amount of work in process to this manufacturing account as the accountants allocate all production costs. The cost of products produced remains here until the company sells the products to distributors or consumers.
The cost of goods sold account includes information about all inventory items sold by the company. This dollar amount is a period cost. Businesses only incur cost of goods sold when they sell inventory. Each company reports the quantity of goods sold for each accounting period, usually on a monthly basis. This manufacturing account is the final step in a company’s production process.