Nothing, but the profits will save the company.
If you are part of a Manufacturing company that gets free funds to meet your expenses, if profit is not a big deal then this article is not for you. But if your company depends only on customer revenues & profits then you are at the right place.
Cost of Goods Sold (COGS) based accounting
In the COGS-based accounting method, along with every Invoice, with its cross-reference the Cost of Goods Sold (COGS) JV is also passed which will determine the profit with real-time value.
For this, Inventories in all forms are to be treated as current assets. Only on the Invoice, the consumption is accounted for.
Stage 1: RM to WIP to Finished Goods, Cost of goods manufactured (COGM) with the stock movement and consumption JVs
Manufacturing Industries have to tightly integrate operation, accounting, and costing to avoid any manual bookings of Sales, purchase, stock movement, and consumption entries.
In a complex manufacturing system, there are many combinations of transactions like Purchase (Domestic and Imports), Subcontracts, Production, production returns, Rejections, excess consumption along with Labour costs. If such bookings are done in disconnected mode, the visibility of profitability gets poor.
At each stage of Inventory movement, the value addition has to be accounted for in the books of accounts. So at any given point in time, the Inventory valuation ( which is Warehouse stock + WIP) and Trial balance inventory will have to match without any need for passing manual JVs for accounting.
Stage 2: Sales and COGS JV – Cost of goods sold (COGS)
Only at the time of booking the revenues, the consumption is charged to expense.
At the time of Sales, there are 2 entries passed automatically into the Finance books of accounts.
1. Sales Voucher based on Invoice
2. Stock to consumption JV on real value.
The difference between 1 & 2 is the profit per Invoice.
The cost and management accountants will confirm that COGS ERP is the best method to know the real profits in real time.
Advantages of COGM & COGS accounting:
- All Inventory movements are reflected in the financial accounting automatically.
- The actual cost of production and actual labour cost is charged off to the Produced Material
- Excess / reduced consumption than the standard BOM is also accounted for.
- Stock valuation is done on actual transactional value.
- The exact value of Profit per Invoice / Profit per customer is possible with no extra entries and specialisation.
- Traceability of materials movement from GRN to Invoice. Many large companies insist on traceability as part of their quality compliance.
- Operational P&L and Balance sheet can be checked on a real-time basis.
Word of caution
- Adoption of COGS ERP requires a level of maturity across the organisation.
- Data discipline is critical. Users need to keep data integrity in mind.
- Management needs to keep spreading the awareness on Digital Readiness with users from time to time.
- The new users have to be given the right orientation before accessing COGS ERP systems.
Fact check
Many of the accounting and ERPs are not geared up to manage this feature. Only smart ERPs can handle this. Smart, knowledgeable, professional, and result-oriented management companies prefer to work with COGS ERP systems.
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