Inventory Costing 101

Mar 18, 2021

Financial reporting for inventory might seem like a straightforward matter – just add up all the costs to produce the inventory, right? Not quite – there’s more to it than meets the eye.

The method of inventory costing chosen and the assumptions employed to allocate costs can have substantial impacts on financial statements. These decisions can influence borrowing ability, cash flow, and income taxes. Businesses, regardless of industry, must examine the implications of inventory valuation and effectively manage accounting practices that will best benefit their business.

In a typical manufacturing operation, inventory follows a costing process by adding the cost of direct materials (raw materials or purchased items), labor costs, and indirect overhead costs (rent/lease, electricity, and other utilities) are typically allocated to products equally, or on a share of the inputs required to manufacture each product. Tracking all these costs on an individual level is vital but depends on the availability of data and how costs are tracked within the accounting system.

A critical component to costing inventory is having an accounting system robust enough to capture and categorize input costs. This process is often overlooked by many businesses. While many Manufacturing Resource Planning (MRP) programs exist in the marketplace, many smaller manufactures do not invest in the software having adverse effects on planning production and adequately sourcing materials.

Manufacturers need a system able to track actual costs associated with each plant and with the ability to integrate to accounting and financial records. Since the link is often missed, operators rarely know their actual cost per unit, thus missing the key metric of profit per unit. Businesses have counted on us to bridge the divide and provide forensic accounting services to determine the cost per unit and set the stage for improved costing practices.

Need to know what those products are actually costing you? Opus Consulting has the specialized know-how to evaluate a business and calculate true inventory costs – a vital piece of information for any company hoping to operate at a high level. Businesses count on us to bridge the divide and provide forensic accounting services to set the stage for improved costing practices.

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