A manufacturing account is an accounting tool that holds recorded financial information. Multiple accounts exist in a company’s general ledger. Through the use of each account, manufacturing firms record and report information for the individual items it takes to produce goods or services. Common manufacturing accounts include raw material, direct labor, and overhead; work in process, finished goods, and cost of goods sold can also be found. Each manufacturing account represents a different step in the production process.
Raw material accounts represent the physical items necessary to produce a good. A company often has a different manufacturing account for each item needed to produce goods. For example, one account reflects aluminum, another sheet metal, and yet another titanium. The individual material accounts allow companies more accurate replenishment orders to ensure future production does not experience delays.
The direct labor manufacturing account includes all costs for man-hours needed to transform raw materials into products. Labor charges often vary in the production process. Accountants record only those hours spent on the actual production of goods in this account. Companies using a job order cost system often have an account for each production project. This helps maintain accurate costing for each item.
Overhead manufacturing accounts represent all items used in production but do not relate to any one product. Items such as glue, weld, or oil represent overhead. Other costs such as rent, utilities expenses, insurance, and supervisor salaries may also go into this manufacturing account. Companies allocate all these costs at a specific time during the production process.
Work in process includes all items currently in production. Information from the previous three manufacturing accounts go into this account as goods enter the production process. This manufacturing account is often the most active within a production company. As goods enter production, this account balance increases. Once the company completes goods, the balance decreases as dollar amounts enter the finished goods account.
Finished goods represent all completed products ready for sale. The production firm moves the allocated dollar amount from work in process to this manufacturing account once accountants allocate all production costs. The cost for produced products remains here until the company sells the goods to distributors or consumers.
The cost of goods sold account includes information on all inventory items sold by the firm. This dollar figure is a period cost. Companies only incur cost of goods sold when they sell inventory. Each company reports the amount of goods sold for each accounting period usually on a monthly basis. This manufacturing account is the final stage of a company’s production process.