Using Xero for Manufacturing Accounting Made Easy

Managing accounting and finances in manufacturing can be incredibly complex. There are so many moving parts - from purchasing raw materials to tracking work in progress to valuing finished goods inventory. It's no wonder manufacturers struggle to keep accurate books.

But it doesn't have to be that way. By leveraging Xero's cloud-based accounting software and integrating it with your manufacturing systems, you can streamline workflows and transform your accounting.

In this post, you'll discover how Xero helps manufacturers tackle common accounting challenges like bill of materials, inventory management, and overhead cost tracking.

First, we'll look at the role Xero plays in simplifying manufacturing accounting. Then we'll dive into specifics - from integrating Xero for real-time BOM updates to analyzing overhead costs for better decision making. By the end, you'll have a clear understanding of how to use Xero to take control of manufacturing finances.

Embracing Cloud-Based Accounting Software in Manufacturing

Cloud-based accounting software like Xero can help manufacturing businesses streamline financial operations and gain better visibility into key metrics. Here's how:

Understanding Manufacturing Accounting Complexities

• Managing raw materials, WIP, and finished goods inventory is complex
• Tracking production and overhead costs can be difficult
• Reconciling applied vs actual overhead is key for accurate costing

The Role of Xero in Streamlining Manufacturing Accounting

Xero provides:

• Real-time visibility into inventory and costs
• Automated tracking of raw materials and WIP
• Tools to allocate and analyze overhead
• Seamless integration with other manufacturing software

This enables better traceability, cost control, and financial management.

Benefits of Integrating Xero with Manufacturing Software

Integrating Xero with solutions like Cin7 and MRPeasy allows:

• Automated syncing of BOMs, inventory, orders, etc.
• Streamlined material planning, purchasing, and shop floor management
• Improved traceability from raw materials to finished goods

Streamlining Workflows with Xero Accounting Software

With Xero, manufacturers can:

• Optimize inventory management and order fulfillment
• Enhance production planning and workforce allocation
• Tighten overhead cost control
• Improve supply chain coordination

This leads to greater efficiency, lower costs, and leaner operations across the business.

Can I use Xero for manufacturing?

Xero Inventory can be made to work for most small manufacturing businesses, even if certain advanced features are not natively supported. While Xero lacks some capabilities like handling back orders or multiple pricing tiers, it can still provide value through its core functionalities.

Here are some tips for using Xero effectively for manufacturing accounting and inventory management:

• Track raw materials and finished goods using Items. Assign costs to monitor material expenses and product profitability.

• Connect Xero to manufacturing apps like Cin7, MRPeasy or Katana for additional production planning and shop floor features. These integrate seamlessly with Xero's cloud data.

• Use purchase orders to manage orders with suppliers. Receive goods against POs to automatically update stock.

• Generate bills for supplier invoices. Link to purchase orders to match received items. This helps track costs.

• Manage manufacturing overhead through tracking accounts. Allocate overhead to products using an automated accounting rule.

• Use standard and committed costs for materials and labor. Compare to actuals to identify variances and optimize efficiency.

• Leverage inventory and job cost reports to analyze profit margins across products, product types, customers and other dimensions.

• Improve supply chain processes by tracking inventory end-to-end. Identify waste through detailed traceability.

While Xero may not offer advanced manufacturing-centric features, it provides robust accounting, cost tracking and inventory management. Pairing it with manufacturing apps enables small producers to cost-effectively streamline most manufacturing accounting needs.

Can Xero handle inventory?

Xero's built-in inventory management features allow you to track stock levels, costs, and valuations directly within the software. This can be useful for basic inventory needs, especially if you manufacture and sell relatively simple products.

With Xero, you can:

• Create inventory items and record details like cost price, selling price, and inventory asset accounts
• Track stock on hand, stock movements, and inventory valuations
• Generate inventory reports showing stock levels, values, and transactions
• Set up inventory alerts to notify you when stock gets low

However, Xero's inventory features have limitations when handling more complex manufacturing scenarios:

• Limited bill of materials (BOM) capabilities for manufactured items
• No production planning, scheduling, or shop floor control features
• Can't handle multiple warehouses or locations

So while Xero provides basic inventory tracking, you may need a specialised manufacturing solution like MRPeasy or Cin7 Core for more robust production management. These systems handle things like:

• Multi-level BOMs
• Production planning and scheduling
• Material requirements planning (MRP)
• Multiple location and bin tracking
• Shop floor data collection
• Lot and serial traceability

The good news is Xero offers integration with many popular manufacturing apps. So you can use Xero for accounting while another system handles inventory, manufacturing, and supply chain processes. This gives you the flexibility to choose the best solutions for your needs.

Can Xero do bill of materials?

No, Xero does not have a dedicated bill of materials (BOM) module to track manufacturing inventories. However, it can still be useful for manufacturing accounting when integrated with other software.

Here are some ways Xero can help with manufacturing finances:

• Track income and expenses related to manufacturing operations
• Send invoices and manage accounts receivable
• Pay bills and suppliers and manage accounts payable
• Calculate and apply overhead costs
• Generate financial reports for analysis and planning

To handle manufacturing-specific features like BOMs, inventory management, and production planning, Xero would need to be used alongside manufacturing-focused software like Cin7, MRPeasy, or others. These systems can sync inventory and order data with Xero to centralize financials.

The combination of Xero's accounting and reporting tools with dedicated manufacturing software provides an efficient system to control costs and optimize production. This integrated approach takes advantage of Xero's cloud-based simplicity while still meeting manufacturing's unique needs.

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Does Xero do project accounting?

Xero offers project tracking and accounting features to help manufacturers get better visibility into their projects. Here are some of the key capabilities:

• Project tracking: You can create projects in Xero, assign budgets, track time and expenses, invoice customers, and monitor project performance. This gives you real-time visibility into project costs, revenue, and profitability.

• Project reporting: Xero provides summary reports for all your projects showing budget vs actuals, profitability, percentage complete, and more. You can quickly see which projects are on track or need attention.

• Job costing: Manufacturers can use Xero to allocate raw materials, labor hours, equipment usage, and other costs to specific jobs. This allows you to understand the true cost and profitability of each job.

• Bill of Materials (BOM): Xero connects with inventory software like Cin7 Core and MRPeasy to track material requirements for manufacturing jobs. This helps optimize inventory planning and costing.

So in summary, Xero's project accounting features are extensive enough for most manufacturers' needs. The reporting and job costing capabilities help manufacturers control costs, improve efficiency, and make better decisions around resource allocation and pricing. Integrations with manufacturing software extend Xero's value for producers.

Inventory Management: The Foundation of Manufacturing Accounting

Inventory management is critical for manufacturing businesses to maintain optimal stock levels and cost control. By integrating Xero with inventory management systems like Cin7 Core and MRPeasy, manufacturers can leverage automation to streamline inventory tracking, stock control, traceability, and accurate valuation.

Automating Inventory Tracking for Raw Materials

• Integrating Xero with an MRP system like MRPeasy provides real-time visibility into raw material stock levels
• Automated tracking ensures supply chain efficiency by reducing the risk of materials shortages that can halt production
• Cloud-based tracking gives remote access to inventory data to help optimize reorder points and raw material planning

Optimizing Stock Control with Xero and Cin7 Core

• Cin7 Core syncs with Xero to update stock quantities and valuations in real-time
• This integration helps optimize stock control by minimizing overstocking while avoiding costly stockouts
• Businesses can set reorder points and maintain optimal stock coverage to meet demand

Enhancing Traceability with Cloud-Based Accounting Software

• Xero's cloud-based accounting provides lot and serial number traceability for inventory items
• This helps manufacturers maintain compliance with regulations by tracing raw materials or finished goods
• In case of recalls, integrations enable quick identification of affected batches to isolate and resolve issues

Streamlining Cost Control with Accurate Inventory Valuation

• Xero enables the use of standard costing, FIFO, or weighted average to value inventory
• Up-to-date valuations ensure accurate applied overhead and support data-driven decisions
• With real-time visibility into inventory value and turnover rates, businesses can better control costs

Production Planning and BOM Management with Xero and MRPeasy

Effective production planning and bill of materials (BOM) management are essential for manufacturing businesses to operate efficiently. By integrating Xero accounting software with manufacturing resource planning (MRP) solutions like MRPeasy, manufacturers can optimize these critical processes.

Integrating Xero for Real-Time BOM Updates

Connecting Xero with MRPeasy enables real-time updates of BOM data in both systems. This ensures production teams have access to the most accurate and up-to-date information for planning and costing jobs. As engineering updates BOMs, those changes flow seamlessly into Xero for precise job costing.

Streamlining Production Schedules with MRP Software

Leveraging the materials requirements planning features in MRPeasy gives manufacturers far greater control over production scheduling. By connecting live data from Xero on budgeted costs and inventory levels, MRPeasy can generate optimal build schedules. This allows managers to maximize throughput and meet customer demand based on real constraints.

Optimizing Workforce Utilization with Xero Data

With labor representing a major cost for manufacturers, optimizing workforce allocation is essential. Using historical data and job costing insights from Xero, managers can accurately forecast labor requirements. Cross-referencing with production schedules in MRPeasy enables better planning of staff levels and assignments to avoid under- or over-utilization.

Achieving Cost-Efficiency in Production with Xero Insights

Connecting Xero and MRPeasy creates end-to-end visibility across the production process - from raw material procurement to finished goods delivery. With real-time data on expenses and budgets, managers can pinpoint opportunities for greater efficiency. This allows organizations to maximize profit margins through lean production planning techniques.

Mastering Cost Management: Applied and Actual Overhead in Xero

Cost management is critical for manufacturing businesses to maintain profitability. Xero provides powerful tools to track both estimated (applied) and actual overhead expenses, enabling precise budgeting, performance insights, and cost control.

Tracking Applied Overhead with Xero for Precise Budgeting

Xero enables businesses to set up detailed overhead budgets tied to production volumes. By tracking applied overhead rates, manufacturers can:

• Build accurate financial plans and production budgets
• Set realistic targets for profitability
• Identify the full cost of production

For example, businesses can define overhead rates for materials, labor, equipment usage, facilities, and more. As production levels change, applied overhead is adjusted automatically based on predefined formulas.

This helps businesses anticipate expenses more precisely during budgeting. When used alongside Xero's other manufacturing features like bill of materials (BOM), applied overhead leads to better production planning and workforce optimization.

Analyzing Actual Overhead to Identify Cost-Saving Opportunities

With real-time tracking of overhead costs in Xero, manufacturers can analyze actual expenses versus applied/budgeted expenses. This offers insights into:

• Cost overruns in specific overhead categories
• Changes in cost structure over time
• Opportunities to reduce overhead spend

For example, businesses might discover that equipment maintenance or facilities costs are higher than budgeted. This data can drive initiatives to implement lean manufacturing methods, reduce energy usage, or negotiate vendor contracts.

Tight integration with inventory management tools like Cin7 and MRPeasy enables granular traceability between overhead costs and inventory items/batches. This supports detailed analysis for expense reduction.

Comparing Applied vs Actual Overhead for Performance Insights

Using Xero's reporting and analytics, manufacturers can compare budgeted overhead rates with actual rates incurred. This reveals insights into:

• Overall manufacturing efficiency
• Accuracy of cost accounting methods
• Fluctuations in overhead costs over time

Significant variances between applied and actual overhead may indicate a need to recalibrate cost allocation formulas. Common reasons include changes to production workflows, technology upgrades, macroeconomic shifts, and more.

By tuning overhead application rates, manufacturers can achieve better alignment of budgeted costs with reality. This allows more strategic decisions based on expected profit margins.

Implementing Cost Control Measures with Xero Analytics

With detailed reporting on overhead expenses in Xero, businesses can swiftly implement tactical and strategic cost control initiatives, including:

Tactical measures:

• Renegotiate supplier and vendor contracts
• Adjust production schedules to minimize equipment downtime
• Analyze energy usage for conservation opportunities

Strategic measures:

• Upgrade technology infrastructure for long-term reductions
• Redesign manufacturing workflows based on data
• Explore alternative materials and suppliers

This combination of short-term and long-term cost management enables manufacturers to sustainably reduce overhead expenses.

By unifying financial data with production metrics in Xero, manufacturers gain end-to-end visibility for overhead cost control. This is vital for preserving quality while protecting profit margins.

Conclusion: Transforming Manufacturing Accounting with Xero

Recap of Xero's Impact on Streamlining Manufacturing Accounting

Xero provides a cloud-based accounting solution that can help manufacturers streamline their financial processes in several key ways:

• Integration with inventory management software like Cin7 Core enables real-time tracking of raw materials, WIP, and finished goods. This improves visibility into inventory costs and valuations.

• Connecting Xero with MRP systems like MRPeasy facilitates more accurate job and batch costing by tracing actual production costs. This tightens up applied overhead cost allocation.

• Automated syncing of manufacturing data with Xero ledgers increases accounting efficiency. Less time is spent on manual data entry and reconciliation.

• Real-time reporting and analytics in Xero give manufacturers greater insight into cost drivers. This supports data-driven decisions to optimize supply chain and production planning.

• Overall, Xero reduces the accounting workload for manufacturing firms. Its cloud-based platform eliminates bottlenecks in financial processes.

Next Steps for Manufacturers to Implement Xero

Manufacturers looking to transform their accounting should take these steps to effectively implement Xero:

• Assess current manufacturing software and identify needs for inventory, production planning, and costing functionality.

• Research integrations between Xero and manufacturing-focused solutions like MRPeasy, Cin7, or others.

• Consult with IT staff and Xero partners to map out data flow and integration touchpoints.

• Develop a rollout schedule and training program for employees adjusting to new systems.

• Leverage Xero's real-time reporting to gain visibility into manufacturing costs and make informed business decisions.

With the right planning and software ecosystem, Xero can significantly streamline accounting processes for manufacturers seeking to unlock efficiency gains and cost savings. The path forward begins with a needs assessment and research into manufacturing-focused integrations available on the Xero platform.

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