Stock, WIP & Product Costing for Manufacturers

Stock valuation, work in progress, product costing and margin analysis for UK manufacturers. Most manufacturing businesses know their turnover to the penny and their unit cost to the nearest guess. This is the work that closes that gap — and it is where the profit usually is.

Valuing stock and work in progress properly

Stock is carried at the lower of cost and net realisable value, and "cost" for a manufacturer means more than the raw material invoice. It includes direct labour and an appropriate share of production overheads based on normal capacity. Get the absorption wrong and every reported margin is wrong with it.

• Raw materials, WIP and finished goods valued on a consistent, defensible basis
• Overhead absorption at normal levels of activity, so that a quiet month does not capitalise idle capacity into stock
• Slow-moving and obsolete stock — a written policy and a provision that stands up rather than a year-end adjustment
• Stock counts — count instructions, cut-off procedures and reconciliation of the count to the system, ready for audit
• Consignment, customer-owned and in-transit stock, and who actually bears the risk

Costing: standard, absorption and marginal

Different decisions need different costs. Absorption costing is what the accounts require. Marginal costing is what tells you whether to accept a marginal order. Standard costing with variance analysis is what tells you whether the factory is performing.

• Setting standards for material, labour and overhead that are achievable rather than aspirational
• Variance analysis — price, usage, rate, efficiency and volume variances explained in terms the production manager recognises
• Overhead recovery rates by machine, cell or department rather than one factory-wide rate that flatters some products and punishes others
• Scrap, rework and yield tracked as cost, not absorbed silently into the overhead
• Bill of materials and routing accuracy — the single most common cause of a costing system nobody trusts

The numbers that change decisions

• Gross margin by product, customer and line, not just in total
• Contribution per bottleneck hour — when a machine is the constraint, this is the only ranking that matters
• Make or buy analysis using the costs that actually change
• Minimum order quantities and pricing floors that reflect setup and changeover cost
• Inventory turns and days of stock, and the working capital tied up in each
• Break-even and operational gearing, so you know what a 10% volume fall really does

Systems that produce the numbers

We work with the systems manufacturers actually run — Xero, Sage and QuickBooks alongside ERP and MRP systems and stock modules — and we care more about clean data than about which badge is on the software. Where a system is producing numbers nobody believes, the fix is usually the bill of materials, the routings and the goods-received discipline, not another module.

Management accounts a manufacturer can use

Monthly management accounts with real stock movement, margin by line, variance analysis and a rolling cash flow forecast — delivered fast enough to act on. We also prepare the statutory accounts, corporation tax and the year-end file, so the management numbers and the statutory numbers reconcile instead of contradicting each other. See management accounting and budget and variance analysis.

Part of our manufacturing accountants service, alongside R&D tax credits and capital allowances.

Frequently asked questions

What should be included in the cost of manufactured stock?

Direct materials, direct labour and an appropriate share of production overheads based on normal levels of activity, carried at the lower of that cost and net realisable value. Selling and general administration costs are excluded, and abnormal waste is expensed rather than capitalised.

What is the difference between absorption and marginal costing?

Absorption costing charges a share of fixed production overhead to each unit and is the basis required for financial statements and stock valuation. Marginal costing counts only the costs that vary with output and is the right tool for a one-off order, a make-or-buy decision or a pricing floor. Using the wrong one for a decision is how businesses accept work that loses money.

Our standard costs are out of date. Does it matter?

Yes. Stale standards produce large, uninformative variances that get ignored, and they distort stock valuation. Standards should be reviewed at least annually and whenever material prices, pay rates or routings change materially. We rebuild them with production rather than in a spreadsheet.

How do we know which products actually make money?

By costing them properly — accurate bills of material and routings, overhead recovery at the cell or machine level rather than one blanket rate, and scrap and rework charged where they occur. The result is usually uncomfortable: a small number of products and customers generate most of the profit, and some long-standing lines lose money.

How much stock should we be holding?

It depends on lead times, batch sizes and demand variability, but the useful measure is inventory turns and days of stock by category, tracked over time against the working capital tied up. We build that into monthly reporting so the trend is visible rather than discovered at the year end.

Can you prepare our management accounts as well as the year end?

Yes — monthly or quarterly management accounts with stock movement, margin by product and customer, variance analysis and cash flow forecasting, prepared so they reconcile to the statutory accounts we also prepare.