How to Account for a Manufacturing Business

The accounting for a manufacturing business deals with inventory valuation and the cost of
goods sold. These concepts are uncommon in other types of entities, or are handled at a
more simplified level. The concepts are expanded upon below.

Inventory Valuation

A manufacturing business must use a certain amount of raw materials, work-in-process,

and finished goods as part of its production processes, and any ending balances must be
properly valued for recognition on the company balance sheet. This valuation requires the
following activities:

Direct Cost Assignment

Costs are assigned to inventory using either a standard costing, weighted-average cost, or
cost layering methodology. See the standard costing, weighted-average method, FIFO, and
LIFO topics for more information.

Overhead Cost Assignment

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. The number of cost pools should be minimized to reduce the amount of allocation
work by the accountant.