Manufacturing as third party

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priya goyal

40 Points Posted on 28 May 2020

Hello Sir/Ma'am

our company is pharmaceutical manufacturing company. A company gave order to our company for manufacturing on behalf of them as a third party. Our co. purchased raw material itself. and they paid for it. then how can we account for it in our books.

Replies (7)

Quick Summary

This discussion explains how to account for third-party manufacturing orders where your company purchases raw materials. It suggests tracking batch costing and adding a profit markup. Key ledger accounts like Debtors, Creditors, Inventory, Purchases, Sales, and overheads are identified. The process involves zeroing out entries for COGS, purchases, and inventory when the client pays, while still accounting for expenses and overheads to determine the Cost of Goods Manufactured (COGM) and Cost of Goods Sold (COGS).

yasaswi gomes

My grammar is 💯 good I

5110 Points Posted on 28 May 2020

First identify what kind of costing is used during manufacturing process. For example, if you use absorption costing, all overheads will be absorbed into the cost of unit. The disadvantage here is, if other batches and orders are manufactured perpendicularly, then the costing is not accurate as other products costs will be allocated to this product. So, keep track of batch costing and add a markup for profits. I believe you must be like a wholesaler distributing finished goods to retailers and hence profit margins vary as yours will be lower than the actual selling price.

Next, the ledger accounts needed for production and sales are:

Debtors

Creditors

Inventory

Purchases

Sales

Fixed overheads

Variable overheads

When they have paid for it, COGS, the purchases, closing and opening inventory, direct material entries will be zero. The rest is the same, account for expenses and overhead costs. Eg

Add: Direct Materials Used

Add: Direct Labor Used

Add: Manufacturing Overhead

Add: Beginning Work in Process (WIP) Inventory

Deduct: Ending Work in Process (WIP) Inventory

= COGM

Add this to COGS along with depreciation. It should work out.

priya goyal

40 Points Posted on 28 May 2020

Thanks sir @ yasaswi gomes

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22 Points Posted on 25 December 2025

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Aashok Kumar Sharma

Finance/Compliance Consultant

75651 Points Posted on 07 November 2026

To account for third-party manufacturing where your company purchases raw materials, use batch/job costing to track all direct expenses, material costs, and overheads. Upon billing and payment from the client, clear out the respective inventory and production costs while recognizing your invoiced value (inclusive of the agreed profit margin) against the client receivable.

Yasaswi Gomes new

Finance

3350 Points Posted on 10 November 2026

In revenue recognition, its commission based pay. When you included inventory, modify the contract in the five step model. My opinions change based on peer reviews.