What is Manufacturing Accounting?
Manufacturing accounting is a branch of accounting that records and reports the flow of costs through a production process: raw materials become work in progress, then finished goods, and finally cost of goods sold. It combines cost accounting principles with financial reporting under IAS 2.
How It Works
- Track raw materials issued to production from inventory records.
- Add direct labour and allocated manufacturing overheads to work in progress.
- Transfer completed units to finished goods inventory at full production cost.
- On sale, transfer the cost to cost of goods sold and recognise the related revenue.
Saudi Context
Saudi manufacturers in industrial cities such as Riyadh, Jeddah, Dammam, Jubail, and Yanbu apply IAS 2 for inventory and report under IFRS as adopted by SOCPA. The Industrial Development Fund (SIDF) requires audited financial statements for loan support, and ZATCA may examine cost allocation methods in transfer pricing reviews.
Example
A Dammam factory issues SAR 200,000 in raw materials, SAR 80,000 labour, and SAR 120,000 overheads to a production run. Finished goods inventory increases by SAR 400,000; when half is sold, SAR 200,000 moves to cost of goods sold.