Manufacturing bookkeeping sorts every cost into one of three groups: raw materials, production labor and factory overhead. Materials go to inventory as they are bought, labor is split between the shop floor and the office, and overhead collects the costs of running the plant. A monthly inventory count then turns those groups into an honest cost of goods sold.
Raw material purchases in manufacturing bookkeeping
Raw material purchases are the steel, resin, lumber, fabric, components or packaging a manufacturer turns into products. In the books they usually go to a raw materials inventory account when bought, not straight to expense, because they become cost only when the finished goods are sold. Freight paid to bring materials in belongs with the materials.
On the bank statement a material purchase is a supplier payment: an ACH to a metals distributor, a check to a lumber yard, a card charge to an online parts supplier. The amount often covers several invoices, so the supplier's remittance or statement tells you what was paid for. Keep supplier invoices by month next to the bank statements.
Useful accounts for materials:
- Raw materials inventory, the main account for purchases of inputs.
- Freight in, kept separate if the owner wants to watch shipping costs, then folded into material cost in reports.
- Packaging, if packaging is a meaningful share of product cost.
- Purchase discounts, for early-payment discounts the supplier allows.
Most material suppliers sell on terms such as net 30, so the payment on the statement lags the delivery by a month or more. If the books are kept on accrual, the purchase is recorded from the invoice when the material arrives, and the later bank line clears accounts payable. Coding that payment to inventory again would count the same steel twice. Check the supplier's open invoices before writing a rule for its payee.
Very small manufacturers sometimes code materials straight to cost of goods sold and adjust with a count at year end. That is simpler, but it makes monthly margins swing with buying patterns. A month of heavy purchasing looks unprofitable and the next month looks very profitable, with no change in the business.
Production labor versus office payroll at a manufacturer
Production labor is the pay of the people who make the product: machine operators, assemblers, welders. It is a product cost. Supervisors, maintenance staff and quality inspectors are usually indirect labor, part of overhead. Office, sales and management pay is an operating expense. Splitting payroll this way is what makes product cost meaningful.
The bank statement shows payroll as one or a few withdrawals by the payroll provider. Book each run from the payroll register, using departments or job codes set up in the payroll system. If the payroll system does not yet tag employees by department, setting that up is the single most useful change a small manufacturer can make for its books.
An example of one weekly run, split by department. Values are illustrative.
| Department | Gross wages | Account |
|---|---|---|
| Assembly line | 18,400.00 | Direct labor |
| Machining | 9,750.00 | Direct labor |
| Maintenance and quality | 4,200.00 | Indirect labor, overhead |
| Office and sales | 6,300.00 | Salaries, operating expense |
Employer payroll taxes and benefits follow the same split. A rough but consistent method, such as allocating employer taxes in proportion to gross wages per department, is better than putting all of them in one admin account.
Temporary staff from an agency often work on the line in busy months. The agency invoice is a single bank line, but if those workers are making product, code it to direct labor, not to professional fees.
Manufacturing overhead accounts that support product cost
Manufacturing overhead is every production cost that is neither materials nor direct labor: factory rent, machine repairs, plant utilities, shop supplies, equipment depreciation, indirect labor and factory insurance. Keeping these in their own group, separate from office costs, lets the owner see what it costs to keep the plant running each month.
Many of the payees are the same every month, which suits rules. A short list of overhead accounts:
- Factory rent or mortgage interest on the plant.
- Plant utilities, especially electricity and gas, which can be large for machining or heat-treating work.
- Repairs and maintenance, production equipment.
- Shop supplies and consumables, such as cutting tools, gloves, abrasives and lubricants.
- Indirect labor, from the payroll split above.
- Factory insurance.
Utilities are a common split. A building with offices at the front and a shop at the back pays one electric bill. Agree a fixed split with the owner, for example by floor area, record it in a note, and apply it the same way each month.
The split between overhead and operating expense is the same idea a franchise uses when it separates its royalty and brand costs from its store costs, which bookkeeping for franchises works through. Service businesses with crews in the field have a lighter version too; cleaning business bookkeeping shows labor and supplies tracked per job without any inventory.
How does inventory change a manufacturer's cost of goods sold?
Inventory turns a manufacturer's purchases and production costs into cost of goods sold. Cost of goods sold equals opening inventory plus materials bought plus production labor and overhead, minus closing inventory. Without a closing count, the books cannot tell what was used and what is still on the shelves.
A worked monthly calculation
Here is an example for one month at a small manufacturer. All figures are illustrative and treat the business as using a periodic count.
| Line | Amount |
|---|---|
| Opening inventory (materials, work in progress, finished goods) | 142,000.00 |
| Plus raw materials purchased | 61,300.00 |
| Plus freight in | 2,450.00 |
| Plus direct labor | 112,600.00 |
| Plus manufacturing overhead | 48,900.00 |
| Goods available | 367,250.00 |
| Less closing inventory from the month-end count | -151,250.00 |
| Cost of goods sold | 216,000.00 |
If sales for the month were 320,000.00, gross profit is 104,000.00, a gross margin of 32.5%. The figure is only as good as the count. A count that misses one rack of finished parts overstates cost of goods sold by the value of that rack, and the month looks worse than it was.
Full monthly counts are a lot of work. Many small manufacturers count key materials and finished goods monthly and do a full count at year end. Whatever the method, the bookkeeper should get the count summary in writing and keep it with that month's records.
How labor and overhead are attached to inventory on the balance sheet, rather than all expensed, is a costing and tax decision for the manufacturer's accountant. The bookkeeper's part is to keep the three cost groups clean so any method has accurate inputs.
Supplier deposits, tooling and scrap sales on a manufacturer's statements
Some manufacturing transactions look like normal purchases or sales on the bank statement but need different treatment. Deposits paid to a supplier before delivery are prepayments, not materials yet. Custom tooling and molds are often assets. Sales of scrap metal or offcuts are other income, not product sales. Each needs a rule or a note.
Lines worth flagging
- Supplier deposits. A 30% deposit on a large order of components goes to a prepaid or supplier deposit account. When the goods arrive, it moves into raw materials inventory.
- Customer deposits. A customer who pays half upfront on a custom order has paid for something not yet delivered. That deposit is a liability until the order ships.
- Tooling and dies. A mold that will run thousands of parts over several years is usually an asset. A tooling charge billed by the customer's own supplier may belong to the customer. Ask before coding.
- Scrap sales. A check from a scrap metal dealer is real money, but it belongs in other income so it does not inflate product revenue.
- Returns to suppliers. A credit from a supplier for rejected material reduces raw materials, not an expense account.
Card statements matter here too. Plant managers often buy parts and supplies on a company card, and those lines carry the same coding questions as the checking account. Converting checking and credit card statements in one batch keeps card payments from checking from being counted twice.
Which manufacturing costs should not be coded from the bank statement alone?
A bank statement line is enough for repeat overhead payees such as utilities, rent and insurance. It is not enough for supplier payments covering several invoices, payroll runs that need a department split, equipment purchases, and deposits for custom orders. For those, the invoice, register or contract decides the account, and the statement only confirms the cash moved.
A practical rule set for a manufacturer:
- Code from the statement: recurring overhead vendors, bank fees, software, utilities with a fixed split.
- Code from the supporting document: supplier payments, payroll, agency labor, equipment, tooling, customer deposits.
- Ask the owner: anything above a size threshold you agree together, such as 10,000.00, that has no document attached.
AutoBankConvert handles the first group with client rules and sends uncertain lines to a review queue with a suggested account, where an approval teaches the rule for next month. The second and third groups stay with you. If a manufacturer is one of several clients in your monthly batch, you can see how a batch moves from upload to export and decide whether it fits your close.