Accounting for Manufacturers and Machine Shops

A service business knows what it earned when the invoice is paid. A manufacturer does not, because value is sitting on the floor in three different states at once: raw material, work in progress, and finished goods waiting to ship.

Cost of goods sold is what makes the difference between those and reported profit. Material, direct labour and the overhead attributable to production have to be tracked into the product rather than expensed as they are paid, and rules on capitalising indirect costs into inventory apply on top of that.

A shop that expenses steel when it buys it and books revenue when it ships is reporting numbers that swing wildly month to month and describe nothing. The fix is not more effort at year end; it is a chart of accounts and a job costing method built for the way the shop actually runs, which is a setup exercise done once.

That matters commercially as well as for the return. A quote priced off a profit figure that ignores work in progress is a quote priced off a guess.

The research credit is thought of as something for laboratories. It is not. Developing a new process, designing tooling, improving a production method, solving a manufacturability problem for a customer — that work can qualify, and small shops do it constantly without ever considering that it counts.

The claim requires contemporaneous records of the work and the time spent on it, which is the real barrier: the activity qualifies, the documentation usually does not exist. That is fixable prospectively and very hard to fix retrospectively, so it is worth deciding whether to pursue it before the year rather than after it.

We will tell you plainly if the activity does not support a claim. A credit that cannot be substantiated is worse than no credit.