The accounting systems used by manufacturing companies are more complex than those used by service or marketing companies. An income statement for a manufacturing company is required if you wantT to know a manufacturer’s performance.
There are steps to complete before making an income statement. It goes from tracking manufacturing costs throughout the production process to the sale of goods. The most important thing in this type of report is to know the reality of a company.
Manufacturing companies have several inventory accounts because, unlike service companies, they work based on different production stages and acquire raw materials to produce a product for sale.
What is involved in an income statement for a manufacturing company?
The income statement for a manufacturing company is the most important financial statement. It reports the company’s revenues, expenses, and net profit or loss for the accounting period.
It turns out to be the most complicated than the other income statements. A manufacturing company has its inventory in various stages of production. Several steps must be made in three inventory accounts to calculate the cost of goods sold.
Manufacturers have three inventories to do individually: raw materials, work in process, and finished goods. This is the only way to comply with the income tax return.
- Raw materials: materials and parts to be used in production.
- Work in process: all materials, labor, and manufacturing costs accrued to date for products that have not been completed.
- Finished goods: cost of products ready to be sold.
However, there are also several long-term asset accounts. In this section, you would expect to find factory equipment, buildings, and perhaps a small tooling account. If the company has patents for its products, the costs capitalized on them are reflected in intangible assets on the balance sheet.
The value of each inventory is shown in the company’s financial statements. This can be done individually on the face of the balance sheet or shown in footnotes.
An income statement for a manufacturing company can be similar to that of a marketing company. The finished goods inventory account is used in calculating the cost of goods sold.
Income statement format for manufacturing company
A manufacturing company must use a proper income statement format to appreciate gross profit and net income reports properly. The same design also helps to determine the cost of goods sold.
Generally, this type of statement contains a wealth of information on the cost of goods sold. An important section is the opening section, where the gross profit in the manufacturing processes is shown.
There must be a precise preparation of the costs of all goods sold, separating with a line the types of income in the income statement and the expense of all non-production expenses in the time the company manufactures goods.
It is the most important part of the first section regarding the cost of goods sold. The basic formula for displaying this data is to add current product costs, materials, labor, and overhead, start work in the process and subtract final work.
The result of the formula is the costs associated with the cost of goods manufactured, which then go into the company’s finished goods accounting. The cost of goods sold in a given period then goes to the income statement, reducing the gross income.
It should be noted that the manufacturer may have different revenues depending on the types of goods sold. Aggregating the other revenue lines in the income statement for the manufacturing company makes it possible to determine which items are the best sellers.
A more detailed report may show multiple revenue and cost of goods sold lines that match the revenue lines in some companies.
Expenses should only include items that are costs, but not production costs. That is anything that the manufacturer does not need to use to produce goods. Including too many production-related costs in expenses could artificially reduce the net income for a period.
Such additional costs should remain in the company’s inventory account, located on the balance sheet. Therefore, it more accurately describes the activities through financial statements.
Advantages of the income statement for a manufacturing company
Although it is a complex report, unlike others, such as a marketing company. A manufacturing company cannot overlook making its income statement under the three inventories because it leaves some advantages:
- It provides information on the cost of goods sold, employee expenses, and operating expenses.
- It provides detailed information regarding the income of a manufacturing company.
- In this type of report, the taxes applied to labor income are considered.
- The income statement for a manufacturing company can be for internal and external use.
For companies of this type, the value of inventories always varies according to income, especially the kinds of income. It takes time to make a detailed report of all your products in most cases.
What differentiates an income statement for manufacturing and marketing companies?
The manufacturing company uses raw materials and goods to produce finished products. The marketing company acquires finished products to sell them to end-users. Therefore, the income statement of each differs in the following:
Manufacturing companies purchase raw materials to convert them into finished products. They are then sold in the market to obtain profits. On the other hand, trading companies buy goods and resell them in the market to make a profit.
Cost of goods sold
The cost of goods sold refers to the cost incurred to manufacture or acquire a product. This cost can be calculated by deducting the value of ending inventory from purchases in manufacturing companies.
On the other hand, the marketing company highlights the variation between gross revenues and the cost of goods sold. Here, the cost of goods sold is the value paid by the seller for the inventory sold.
In the manufacturing company, the manufacturer also takes into account goods in process, which are the goods manufactured but unfinished before the end of the current accounting period. In addition, they count finished goods ready for sale.
Manufacturers must consider labor and factory expenses when determining the costs related to the cost of goods. Quite the contrary is the marketing company that does not adopt the same method because it does not have labor to add to the cost of goods.
For years I have studied American finance regulations. All the information in this blog is sourced from official or contrasted sources from reliable sites.
Salesforce Certified SALES & SERVICE Cloud Consultant in February 2020, Salesforce Certified Administrator (ADM-201), and Master degree in “Business Analytics & Big Data Strategy” with more than 13 years of experience in IT consulting.