Accounting for a manufacturing business

Key facts

• A manufacturer has three kinds of stock: raw material, work in progress (WIP) and finished goods. Each is valued at cost or net realisable value, whichever is lower.
• The Manufacturing Account works out the cost of goods produced, which then flows into the Trading Account.
• A bill of materials (BOM) lists what goes into one unit of the product. It is the base for costing and stock consumption.

Manufacturing Account format

What goes into stock value

• Included: material, direct labour, freight inward, and a fair share of fixed and variable factory overheads based on normal capacity.
• Excluded: selling expenses, admin overheads, abnormal wastage, interest (except for long-production assets), and storage costs that are not part of production.

GST for manufacturers

• ITC on raw materials, packing, capital goods and most factory services is available.
• Sending goods to a job worker without paying GST is allowed under section 143: inputs must come back within 1 year, capital goods within 3 years. File ITC-04.
• If output GST is lower than input GST (inverted duty), you can claim a refund of accumulated ITC on inputs (not on services or capital goods).
• Scrap sales attract GST at the scrap's own rate.

Income tax points

• Depreciation on plant and machinery is generally 15%; an extra 20% in the first year for new machinery (additional depreciation) is available to manufacturers, under the old regime for companies and firms that have not opted for concessional rates.
• Keep stock records (quantity details) because the tax audit report asks for raw material and finished goods quantities.

Common questions

How do I value WIP?

At cost incurred so far: material issued plus labour and overheads applied up to that stage. Many small units estimate by percentage of completion.

Is normal wastage a loss?

Normal process loss is absorbed in the cost of good units. Only abnormal loss is written off separately.

In Hisab Central

Create raw material, semi-finished and finished goods as stock items, and record production with a stock journal so consumption and output are posted together.

Sources

• Accounting Standards (AS 2 Inventories, AS 7 Construction Contracts, AS 11 Foreign Exchange) and Ind AS 21 / 115
• Central Goods and Services Tax Act, 2017 (as amended)
• Central Goods and Services Tax Rules, 2017
• Income-tax Act, 2025