Expense Accounts for the Manufacturing Industry
For the novice accounting individual the use of the term expense account is a brand new toy, and the further refining of the expense accounts needs by industry has not yet been approached, but now is the perfect opportunity to examine expense accounts needs by industry, and provide some further definition to the methods used for establishing and using certain expense accounts.
Manufacturing expense accounts will include the types of accounts that know no industry bounds, such as wage expense, insurance expense, rent expense, salary expense, and interest expense. These types of expense accounts are generally used by every industry and business form in existence. But there are some expense accounts that you will only see in a manufacturing or merchandising environment. Cost of goods sold is a really big expense account for companies that produce an actual good or product. The many facets of input that create the cost of goods can range from raw materials, to the labor costs directly associated with the production of goods. Depreciation expense is another large expense account for the manufacturing industry, as most manufacturing requires machinery to assemble a product. All commercial machinery must be depreciated over its useful life.
Operating supplies expense, selling expense, inventory expense, transportation expense, and scrap expense are expense accounts that are generally unique to manufacturing. The operating supplies expense account would include supplies that are a necessary part of producing a good, but not directly tied to the cost of goods sold. The selling expense account would include expenses incurred by a sales department in supplying samples, rework, and sometimes advertising for the end purpose of selling the product. Inventory and scrap expense are expense accounts that are monitored through the internal production departments, and are responsible for reporting excess usage, incorrectly listed usage quantities on a bill of materials, and scrap generated from the use of faulty information or equipment. Transportation expense has to do with the cost associated in shipping the product to a customer. Depending upon the purchasing power of the customer, the company will sometimes pay for transportation costs entirely.
As you can see, there are many areas that feed the information that will be compiled in a manufacturing environment and listed under many different expense accounts. Does this make manufacturing a more complicated industry in terms of record keeping? Yes, you can rest assured the policy and procedure in assuring that accurate and timely information reaches the accounting department is quite extensive. It must be, if it weren't a highly regulated process, much of the needed information would never be reported.
Do all the differences in expense accounts affect the Balance sheet, the Statement of Cash Flows, and the Income Statement? Yes and no. Yes, it affects these reports in that expense information may take longer to compile and actually put in report form, and no, because all of the information is still listed under "expenses", and really does not change the reporting methods, the report layout, or single-handedly decide a businesses profit and loss.
Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.