In a trading business, stock is bought and sold. In a manufacturing business, stock is made, and its value includes materials, labour and part of the factory’s overheads. A wrong stock valuation moves profit directly, so manufacturers need a costing method that is consistent, documented and simple enough to run every month.
Three kinds of stock
| Stage | Includes | Typical evidence |
|---|---|---|
| Raw materials and components | purchase price, import duty, carriage in | stock count, supplier invoices |
| Work in progress | materials issued plus labour and production overheads so far | job cards, production records |
| Finished goods | full production cost | count and costing sheets |
FRS 102 values each at the lower of cost and estimated selling price less costs to complete and sell. Cost includes production overheads (factory rent, machine depreciation, supervisors, power) absorbed on the basis of normal production capacity. Selling costs, general administration and abnormal waste are excluded.
Building a product cost
A furniture workshop makes a dining table:
| Element | Cost |
|---|---|
| Timber and fittings | £180 |
| Direct labour (6 hours at £16) | £96 |
| Production overhead absorbed (6 hours at £20 per labour hour) | £120 |
| Cost of one table | £396 |
The overhead rate comes from budgeted production overheads divided by normal labour hours for the year. Review it annually; if the workshop runs well below normal capacity, unabsorbed overhead is an expense, not extra stock value.
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Month-end stock without a full count
Few small manufacturers count everything monthly. A practical approach:
- Keep perpetual stock for high-value materials and finished goods.
- Value WIP from open job cards.
- Do a full count at the year end, and rolling counts of key lines during the year.
- Post differences to a stock adjustment account, not back into purchases, so losses stay visible.
Machinery and capital allowances
Plant and machinery is capitalised and depreciated over its useful life. For tax, most qualifying plant gets immediate relief through the Annual Investment Allowance, and companies can claim full expensing on new and unused main-rate plant. Recording each machine in a fixed asset register with its cost, date and finance arrangement makes the capital allowance claim straightforward.
Research and development relief
Developing new products or processes, solving technical uncertainties in tooling or materials, can qualify for R&D tax relief for companies. Keep project records, staff time and materials used on qualifying work as you go; reconstructing them after the year end is the main reason claims are weak.
Imports and supply chain
Materials bought from abroad carry import VAT (recoverable, often through postponed VAT accounting) and customs duty (a cost that belongs in stock). Supplier rebates and early payment discounts reduce the cost of materials and should be reflected in stock costing.
VAT on sales
Most manufactured goods are standard-rated. Exports of goods can be zero-rated with evidence of export. Sales to VAT-registered customers in the construction sector may fall under the domestic reverse charge only when the supply is of construction services, not goods alone.
Year-end checklist
- Stock count sheets signed and reconciled to the ledger.
- Overhead absorption rate recalculated and applied consistently.
- Slow-moving and obsolete stock reviewed and written down.
- Goods received before the year end but not invoiced accrued.
- Fixed asset register agreed to the ledger, with additions documented for capital allowances.
For the stock accounts themselves, see inventory accounts in the chart of accounts; for R&D, R&D tax credits.
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