Most manufacturers know exactly how to make their product and roughly what it costs. "Roughly" is the problem. Materials prices change, labour gets more expensive, the energy bill doubles, and the price list stays where it was set three years ago. Without real product costing, the first sign of a margin problem is a bank balance that won't recover.
Here is how we approach the accounting for a manufacturing business, and the tax rules that matter most.
Manufacturing tax and accounting at a glance (2026–27)
| Rule | 2026–27 position | Source |
|---|---|---|
| Instant asset write-off | Assets costing less than $20,000 each, for businesses with aggregated turnover under $10 million | ATO |
| R&D tax incentive (turnover under $20 million) | Refundable offset at your company tax rate plus an 18.5% premium; register within 10 months of year end | business.gov.au |
| Company tax rate | 25% for base rate entities (aggregated turnover under $50 million, no more than 80% passive income); 30% otherwise | ATO |
| Tax loss carry-back | Companies under $1 billion turnover, for losses from income years starting 1 July 2026, limited by the franking account | ATO |
| Super guarantee | 12% of qualifying earnings, paid with each pay run under Payday Super | ATO |
| Simplified trading stock rule | Small businesses can skip the year-end stock adjustment if opening and estimated closing stock differ by $5,000 or less | ATO |
What makes accounting for manufacturers different?
Accounting for manufacturers is built around the cost of making each product: materials, labour, a share of factory overheads and energy flow into stock and work in progress, and only reach the profit and loss when the product is sold. A service business can read its margin straight off the profit and loss. A manufacturer can't, because the cost of what's sitting on the floor, half-made or in the warehouse, changes the profit for the period. That's why a manufacturing accountant needs to understand bills of materials, overhead absorption and stock valuation, not just tax.
What goes wrong in manufacturing finances?
Most manufacturing margin problems come from not knowing the full cost of each product, and from cash locked in stock. These are the patterns we see most.
- Cost of goods sold is a black box. Materials go to purchases, wages to wages, energy to overheads. Gross margin is a single number for the whole business, so no one can say which products or customers make money.
- Stock and WIP that don't match reality. The ledger shows one stock figure, the floor holds another, and WIP is a guess at year end. Profit swings each year by whatever the stocktake says.
- Prices that lag costs. Supplier, wage and energy increases flow through immediately; price increases come once a year, if at all.
- Equipment decisions made on gut feel. A new machine is bought because the old one is tired, not because the numbers say it pays back.
- Cash locked in inventory. Raw materials bought in bulk for a discount, finished goods built ahead of orders, and a bank account that is always tight.
What do we do for manufacturers?
| Area | What we do |
|---|---|
| Product costing | Standard costs built from your bills of materials, labour times and overhead rates; variances reported monthly |
| Inventory | Raw materials, WIP and finished goods tracked in Xero or your inventory/MRP system, counts reconciled, slow stock reviewed |
| Margin reporting | Gross margin by product, product family and customer |
| Capital decisions | Payback and cash impact of new equipment, depreciation planned before you buy |
| Tax concessions | R&D tax incentive, instant asset write-off, depreciation, loss carry-back |
| Payroll | Award-based payroll, Payday Super, payroll tax monitoring |
| Compliance | BAS, fuel tax credits where eligible, company and trust returns |
Our depreciation agent prepares tax and accounting depreciation schedules, including instant asset write-off and pooling. Our award underpayment audit agent checks each employee's pay against the award, which matters in manufacturing where shift, overtime and penalty rates are complex. Every result is reviewed by a qualified accountant before it reaches you.
Which KPIs should a manufacturer track?
| KPI | What it shows | How it's worked out | Watch for |
|---|---|---|---|
| Gross margin by product | Which products earn their place | (Price − full standard cost) ÷ price | Products below overhead recovery |
| Material cost variance | Whether materials cost what you planned | Actual material cost − standard material cost | Persistent variances mean your standards are stale |
| Labour efficiency | Whether jobs take as long as planned | Standard hours for output ÷ actual hours | Rework and changeovers hidden in "production" |
| Overhead recovery | Whether overhead rates are recovering real overheads | Overheads absorbed into products ÷ actual overheads | Under-recovery when volumes fall |
| Energy cost per unit | How energy affects product cost | Energy cost ÷ units produced (or per machine hour) | Rising cost per unit at the same volume |
| Stock turn and days on hand | Cash tied up in inventory | Cost of goods sold ÷ average stock | Raw material piles bought for discounts |
| Capacity utilisation | How busy the plant is | Actual machine hours ÷ available machine hours | Low utilisation makes every unit more expensive |
A worked example: why overheads change the answer
Say a fabricated product sells for $200. Materials cost $70 and direct labour $40, so it looks like it earns $90 a unit. But the factory has $600,000 of overheads a year (rent, supervisors, maintenance, energy, insurance) and runs 12,000 machine hours. That's $50 per machine hour. If the product takes 1.2 machine hours, its share of overheads is $60. The real margin is $30 a unit, not $90. If energy costs rise by $72,000 a year, the overhead rate goes to $56, and the margin on this product falls to around $23.
That is the arithmetic that should sit behind every price review. Not sure your overhead rate is right? Ask us to check it against last year's accounts.
Which tax and compliance issues matter in manufacturing?
Valuing trading stock and WIP
For your financial statements, inventory is valued at the lower of cost and net realisable value, where cost includes materials, direct labour and a share of production overheads. For tax, you can value each item of trading stock at cost, market selling value or replacement value at year end, choosing item by item. That means obsolete or damaged stock can be written down if you can support the lower value. Partly manufactured goods are trading stock too, so a realistic WIP count matters for tax as well as for the accounts. Small businesses using the simplified trading stock rules don't have to account for the change in stock value if the difference between opening stock and a reasonable estimate of closing stock is $5,000 or less, but most manufacturers will be well over that and should do a proper count.
Equipment and depreciation
Plant and machinery is usually the biggest capital spend in a factory. The main rules for 2026–27:
- Instant asset write-off. Businesses with aggregated turnover under $10 million can immediately deduct assets costing less than $20,000 each. The Tax Reform No. 2 Act 2026 made the $20,000 threshold ongoing.
- Depreciation over effective life. Larger assets are depreciated over their effective life, using either prime cost or diminishing value. Diminishing value gives bigger deductions in the early years. You can use the ATO's effective life or, in some cases, self-assess a shorter one if you can justify it.
- Small business pool. Small businesses using the simplified rules pool most assets and depreciate them together at set rates.
- Balancing adjustments. When you sell or scrap a machine, the difference between its tax value and what you received is assessable or deductible.
Before buying a large machine near year end, check when it will be installed and ready for use, because that's when depreciation starts, not when you pay. Our guide to the instant asset write-off covers the detail.
The R&D tax incentive
Manufacturers developing new products, materials or processes may qualify for the R&D tax incentive if they operate through a company. Per business.gov.au, companies with aggregated turnover under $20 million receive a refundable offset at their company tax rate plus an 18.5% premium. Activities must be registered within 10 months of the end of the income year. Routine quality control, production trials of a settled design and cosmetic changes don't qualify. Genuine experimentation, such as developing a new process where the outcome wasn't knowable in advance, may, and some trial production costs can be included. Where an asset is used for R&D, depreciation on it can form part of the claim.
Energy costs
Energy is now a major cost for many manufacturers. For tax it's simply deductible, but for management it should be measured against output: per unit, per machine hour or per tonne. That's what reveals whether a new compressor, solar installation or shift change would pay back. Solar panels and energy-efficient equipment are depreciating assets, and smaller items may fall under the instant asset write-off.
Fuel, payroll tax and awards
Fuel used in eligible off-road machinery and some heavy vehicles may qualify for fuel tax credits, claimed on your BAS. Payroll tax applies once wages pass your state's threshold, and contractor payments can count. Since 1 July 2026, super guarantee (12% for 2026–27) must be paid with each pay run under Payday Super, which matters for factories running weekly payroll with shift and overtime pay; see our Payday Super guide. Manufacturing awards have detailed shift, overtime and allowance rules, and underpayments are a common and expensive surprise. Our award compliance service checks pay against the award.
Losses
Manufacturing is cyclical. Under the Tax Reform No. 2 Act 2026, which is law, companies with aggregated turnover under $1 billion can carry back revenue losses from income years starting 1 July 2026 against tax paid in the previous two years, limited by the franking account balance.
Which structure suits a manufacturing business?
| Entity | Role | Why |
|---|---|---|
| Trading company | Employs staff, buys materials, sells product | Limited liability; company tax rate on retained profit for reinvestment |
| Family trust holding the company's shares | Owns the business | Flexibility on dividends; can help with small business CGT concessions on sale |
| Separate entity owning the factory | Leases premises to the trading company | Keeps property away from trading and product-liability risk |
| Separate entity owning major plant (sometimes) | Leases equipment to the trading company | Adds protection for valuable equipment; adds complexity, so only where it's worth it |
A manufacturer reinvesting most of its profit benefits from the 25% base rate entity company tax rate (for eligible companies with aggregated turnover under $50 million and no more than 80% passive income). Our business structures team can model the options.
How do we work with manufacturers?
- Free strategy call about your products, systems and where margin feels thin.
- Costing review. We rebuild full cost for your top products from bills of materials, labour times and overheads.
- System set-up. Xero linked to your inventory or MRP system, stock and WIP accounts structured, overhead rates set.
- Monthly. Margin by product and customer, variances, stock levels, energy cost per unit, cash and forecast.
- Year end. Stocktake reconciled, stock valued for tax, depreciation and R&D finalised, returns lodged.
- Strategy. Pricing reviews, equipment purchases, funding, succession and sale.
All our work runs on Nagaris. The AI agents draft; qualified accountants review and sign off, and nothing is lodged without a person approving it.
"We have been working with Ray and the fantastic team at BPAG Accountants for several years, and it has truly been the best decision for our company… Their invaluable support has saved us a great deal of money and time." Susan McKendry, Google review
What does it cost?
Most manufacturers with a team on the floor choose Business Insights (from $249 per week + GST), which includes payroll for up to 10 staff and monthly KPI reporting. Manufacturers planning major equipment purchases, funding or growth usually choose the Fractional CFO plan (from $499 per week + GST). See our pricing page.
What should you send us?
- Last two years' financial statements and tax returns
- Bills of materials and labour times for your main products
- Your last stocktake and the stock report from your system
- Fixed asset register, or a list of major equipment with purchase dates and costs
- Energy bills for the last 12 months
- Payroll reports and the award(s) you pay under
- Any R&D registrations or technical project notes
For improving margins and cash across the whole business, see our cash flow and profit optimisation service.
Frequently asked questions
Should I use absorption or marginal costing?
Use both, for different purposes. Absorption costing, which includes a share of factory overheads in each product, is required for your financial statements and generally for valuing stock for tax. Marginal costing, which looks only at the extra cost of making one more unit, is the better tool for decisions such as whether to accept a low-priced order when the factory has spare capacity.
Can I claim the instant asset write-off on a new machine?
Only for assets that cost less than the threshold, and only if your business is under the turnover limit. For 2026–27 the threshold is $20,000 per asset for businesses with aggregated turnover under $10 million. A larger machine is depreciated over its effective life, usually with the option of diminishing value, so that deductions are higher in the early years.
Are energy costs a cost of goods sold?
In your management reports, energy used directly in production is better treated as a production cost and allocated to products, because it varies with output. In the financial statements, production overheads including factory energy form part of the cost of stock. Either way, it's deductible for tax as you incur it, subject to the trading stock rules at year end.
Do I need to pay payroll tax?
Only if your total Australian wages, including some contractor payments and those of grouped businesses, exceed your state's threshold. Thresholds and rates differ between states. Manufacturers growing their workforce often cross the threshold without noticing, so we monitor it monthly.
What records do I need for an R&D claim?
Records made at the time showing the technical uncertainty, the hypothesis, the experiments or trials, the results and the conclusion, plus time records for each person and the costs linked to each registered activity. Trial production runs, test data and engineering notes all count. Records reconstructed after year end carry much less weight.
Official sources
General information only, current as at 23 October 2026. It is not personal tax, legal or financial product advice and doesn't take your circumstances into account. Talk to us before you act. Where a recommendation needs a licensed financial adviser or a solicitor, we work alongside them.