Manufacturing Mismatches: Common Accounting Pitfalls—and How to Fix Them

Inventory accounting is anything but straightforward.  The most sophisticated ERP systems will fail if not properly configured and supported by the right people and processes. Adding automation and tools to a broken process only automates a broken process.

At Blythe Global Advisors (BGA), we frequently uncover the issues that materially impact a manufacturer’s financial statements—issues that, left unaddressed, can lead to compliance problems, misinformed decisions, and lost value in M&A transactions.

Here are some of the most common—and costly—accounting issues we see in manufacturing companies:

1. Misapplied Cost Accounting Methods
Many manufacturers use standard costing but fail to update rates in a timely manner or incorrectly allocate overhead. This leads to distorted product margins and flawed pricing decisions. Others switch between absorption and variable costing without fully understanding the financial implications. 

How BGA Helps: We evaluate whether your costing methodology aligns with your actual operations and recalibrate your process and systems to ensure accurate margins and meaningful management reporting.

2. Inventory Errors and Reconciliation Gaps
Inventory often represents the largest asset on a manufacturer’s balance sheet. Yet inventory records are frequently inaccurate due to poor cycle counts, lack of write-downs for obsolete stock, or ERP systems that don’t integrate seamlessly with the production floor.

How BGA Helps: We identify inventory misstatements, improve reconciliation procedures, and establish policies to keep books clean and audit-ready.

3. Capitalization vs. Expense Errors
Manufacturers often invest in equipment, tooling, or R&D, but draw the line inconsistently between capital expenditures and operating costs. This misclassification can inflate EBITDA and distort tax treatment.

How BGA Helps: We review capitalization policies, assess prior classifications for accuracy, and guide corrective journal entries to align with GAAP and tax requirements.

4. Inconsistent Revenue Recognition
Complex customer contracts, performance obligations, and milestone billing can trigger revenue recognition errors. If not properly analyzed under ASC 606, manufacturers may overstate or defer revenue improperly.

How BGA Helps: We dissect contract terms and advise on proper timing and recognition methods—preventing revenue surprises during audit or diligence.

5. Untracked Scrap and Rework Costs
Failure to properly track and record scrap, rework, or yield loss can mask inefficiencies and artificially inflate gross margin.

 How BGA Helps: We analyze production data, tie cost variances back to operational drivers, and establish reporting practices that reflect the true cost of production.

6. Deferred Costs and WIP Valuation Issues
Work-in-process (WIP) is often based on estimated percentages or arbitrary cutoffs rather than actual progress or consumption. This leads to timing mismatches and misstated cost of goods sold.

How BGA Helps: We review your WIP methodology, compare it to operational data, and implement controls that promote accuracy and auditability.

7. Lack of Segmentation and Cost Center Visibility
Many manufacturers operate across multiple lines of business or product types but fail to segment their accounting data accordingly. This clouds profitability insights and limits strategic decision-making.

How BGA Helps: We help configure systems and reporting structures that deliver clear profitability by product line, facility, or customer. This results in better decisions and cost management.

A weight on your organization or opportunities to improve?

If any of these issues sound familiar, you’re not alone. Even well-run manufacturers often uncover issues only when preparing for an audit, acquisition, or bank financing. We help manufacturing companies get ahead of the curve—with accounting and advisory services that bridge the gap between operations and financial reporting.

Let us help you transform accounting from a reactive process into a strategic advantage.