Manufacturing bookkeeping: WIP, standard costs, and honest variances

Three inventory accounts, not one

Raw materials, work in process, and finished goods are different assets in different states, and a single lump called inventory makes monthly gross margin fiction. The flow is mechanical once it is set up: purchases land in raw materials at landed cost; a production order issues materials into WIP and adds labour and an overhead charge; completion moves the finished unit into finished goods at its built-up cost; shipment releases that cost to COGS in the same month as the revenue. Shops that expense materials on purchase see profits swing with the buying cycle instead of the selling cycle — great months when no steel was ordered, terrible ones when it was.

Standard costs built from the BOM make the month closeable

Costing every unit at actual is not realistic for a small plant, and it is not necessary. A standard cost per product does the work: material content priced from the bill of materials, labour minutes from the routing at a burdened rate — wages plus employer CPP, EI, vacation pay, and WSIB — and an overhead rate that spreads budgeted plant costs (rent, utilities, supervision, depreciation) over expected labour or machine hours. Production then posts at standard all month, actuals diverge into variance accounts, and the close stops depending on anyone reconstructing what each unit cost.

This makes BOM accuracy a bookkeeping issue, not just an engineering one: a stale BOM prices every unit wrong, every time. Tools like Katana or Cin7 Core run the BOMs, production orders, and inventory movements, and post summarized journals into QuickBooks Online as the ledger — a stack sized for a small or mid-size plant, not an ERP project. Overhead rates get a sanity check twice a year: if the plant added a shift or a second machine, the denominator moved, and with it every standard cost in the catalogue.

Variances are the management report, not a nuisance

Once production posts at standard, the variance accounts tell you where the plant diverged from plan — usually before anyone on the floor has said so. We report them monthly and small; a variance worth ignoring is rare, because each one has a short list of causes:

Scrap deserves its own line in that discipline. A normal scrap allowance belongs inside the standard, so expected loss is priced into every quote; abnormal scrap gets expensed and flagged the month it happens, because it is a process problem wearing a cost disguise.

Counts that do not shut the plant

Cycle counting beats the annual shutdown count: A-items monthly, B-items quarterly, the long tail on rotation, with blind counts reconciled to the perpetual records and adjustments investigated rather than absorbed. The hard part is always WIP cut-off — jobs mid-stream need a consistent stage-of-completion convention so the count is comparable month to month. Negative on-hand balances get treated as alarms rather than quirks, because they mean a transaction posted out of order or a BOM consumed the wrong part. Lenders margining inventory on your operating line, and any auditor, will ask for exactly this trail; it is much cheaper to have than to build retroactively.

Where disciplined costing pays: quotes, SR&ED, the border

Quotes priced from a current BOM cost with real overhead stop the slow leak of winning work at yesterday's input prices. The same time-capture that feeds labour standards supports an SR&ED claim when your team does qualifying development work — hours by project are the evidence CRA asks for first. And for plants selling into the US, the BOM records double as USMCA origin support, while US warehouse stock and state nexus raise questions we cover in our cross-border tax guide for manufacturers. All of it sits on the fixed-fee monthly close described on our bookkeeping services page.