10 Accounting Best Practices for Manufacturing Business Success

For FICA tax (as well as federal income tax), you must complete and file Form 941, Employer’s Quarterly Federal Tax Return. This form is due by the last day of the month following the end of each quarter, although some employers might be considered annual filers. Your employees could lose future Social Security, Medicare, or unemployment benefits if those funds aren’t paid. So take care of your manufacturing accounting obligations—and your employees—by making complete payroll tax payments on time. If you’re self-employed, however, you’ll need to pay the full 15.3% of FICA taxes due on your salary. FUTA taxes are paid entirely by the employer; there is no employee payment.

How can Taxfyle help?

Knowing how to allocate indirect and direct expenses can help you price services or products competitively and profitably. But you can dig deeper to see the actual labor per product using an activity-based costing system to allocate indirect overhead expenses. The key is moving beyond traditional manufacturing accounting to use financial data as a tool for better decision-making. This means developing forward-looking metrics and ensuring financial insights drive operational decisions.

Activity-based costing (ABC)

Calculating TMC is imperative for gaining insights into the financial health of a manufacturing business and making the operation more cost-effective. This KPI determines the difference between the cost of production of a finished product and its market value. If the cost of production is lower than a product’s market value, a markup is added which makes up the factory profit. If cost of production is higher, the value will be negative, culminating in factory loss. Manufacturers use this to decide whether to manufacture a product or sub-assembly, or to virtual accountant procure it. In financial accounting and taxes, attributing expenses to the correct category isn’t just a tip or guideline; it’s a requirement when filing IRS forms, requesting grant funds, or reporting to investors.

• The most successful manufacturers create rolling three-to-five-year plans that get updated regularly based on market conditions and organizational learning.
• Factory overhead costs must be aggregated into cost pools and then allocated to the number of units produced during a reporting period, which increases the recorded cost of inventory.
• However, there’s an exception for small businesses with less than $26 million in average annual revenues.
• Advanced manufacturing accounting software is a must-have for modern manufacturers and the manufacturing accounting teams responsible for tracking business financials.
• It involves calculating a standard rate for groups of costs that go into each unit, including direct materials, direct labor, and manufacturing overhead.

WIP inventory

Very often, this is listed in a bill of materials, which itemizes quantities and costs the materials used recording transactions in your product. If that’s feasible for your business, the Internal Revenue Service (IRS) requires you to use this method. Apply for financing, track your business cashflow, and more with a single lendio account.

Ensuring Compliance

In this guide we’ll look at the methods available to you, and some potential problems and useful benefits once you’re up and running. Contract manufacturing is the outsourcing of certain manufacturing jobs to another (third-party) company. For example, a smartphone manufacturer might outsource the audio components to a speaker manufacturing specialist. Manufacturing accountants also keep an eye on other important areas of expenditure to ensure the budget is followed throughout the financial year.

• Cost accounting processes might miss the different units of measure, resulting in inaccurate reports, cost analyses, and forecasts.
• Eventually, it will be decommissioned after it has lived its useful life and have a value of zero or a minimal salvage value.
• Calculate your cash conversion cycle (the time it takes to convert inventory investments into cash flows from sales).
• As a manufacturing business, you understand the crucial link between a seamless production line and achieving lasting success.
• Start by ensuring your business is accounting for the true cost of inventory.
• This accounting method tracks individual items of inventory, which is useful if you can identify each item with, for example, a serial number or RFID tag.