A factory can show strong sales but still struggle to understand profit if stock and production costs are not properly recorded. The solution starts with a consistent inventory flow rather than a complicated report.
Follow materials through the production process
Separate raw materials, work in progress (WIP) and finished goods. Keep records of material issues, production completion, wastage and returns. A stock movement should have a matching production or purchase document.
Capture direct and indirect costs
Direct materials and labour may be easier to identify than utilities, depreciation or factory overhead. Agree on a reasonable costing method and apply it consistently instead of moving expenses just to improve margins.
Reconcile physical stock to the ledger
Regular stock counts reveal missing goods, damaged materials, timing differences and data-entry errors. Investigate significant variances before year-end so financial statements reflect a supported inventory value.
Use margins to manage operations
Review gross profit by product family or project together with slow-moving stock and production waste. Accounting data becomes useful to management when it explains why margins change, not only how much tax may be due.
Practical example
A factory buys raw material in March, begins production in April and delivers finished goods in May. Recording every purchase as a March operating expense may distort stock and profit.
Your practical checklist
- Maintain raw-material, WIP and finished-goods records
- Document cost allocation methods
- Schedule counts and investigate variances
- Review product margins and slow-moving stock monthly
Frequently asked question
Is WIP always the same as finished-goods inventory?
No. Work in progress and completed goods represent different stages of production and should be tracked separately where material.
General information only. Requirements depend on your circumstances and may change. Regulated tax-agent, audit, legal or liquidation work is handled by appropriately qualified professionals.