Manufacturing accounting in South Africa: costing, stock and the tax allowance that helps
Manufacturing accounting tracks what it really costs to make a product: materials, labour and overheads. When those numbers are wrong, you can sell a full order book and still lose money on every unit.
In short
- Unit cost is materials plus direct labour plus a fair share of overheads. Leaving out overheads or wastage is the most common reason manufacturers misprice.
- Wastage matters. A 5% loss on materials raises the effective material cost by more than 5%.
- Stock and work in progress must be valued at cost. First-in first-out and weighted average are accepted methods; last-in first-out is not allowed under IFRS.
- New, unused machinery used directly in manufacturing can qualify for the section 12C allowance: 40% in year one and 20% in each of the next three years.
What goes into a unit cost
A manufacturer's cost has three layers.
- Direct materials: everything that ends up in the product, based on the bill of materials (BOM), the list of parts and quantities for one unit.
- Direct labour: the wages of the people who make it.
- Manufacturing overheads: factory rent, power, supervision and machine costs, shared across the units you make.
A simple example: materials R40, direct labour R15 and overheads of R10 per unit (R10,000 of overheads over 1,000 units) give a unit cost of R65. Sell at R70 and you are barely making money. The decision is worth making before the order, not after.
Wastage changes the maths
If you lose 5% of your material to offcuts and rejects, you have to buy R42.11 of material to get R40 into finished product (R40 ÷ 0.95). The unit cost rises to R67.11, not R67.00. Wastage is easy to miss because it sits in the stock room, not on an invoice.
Track it. Compare what the bill of materials says you should use against what you actually used, and investigate every difference that repeats.
Value stock and work in progress properly
You hold three kinds of stock: raw materials, work in progress (WIP, part-finished goods) and finished goods. All three should be valued at cost, and the cost of WIP and finished goods should include a fair share of labour and overheads.
- First-in first-out (FIFO) assumes the oldest stock is used first.
- Weighted average uses the average cost of all stock on hand.
- Last-in first-out (LIFO) is not permitted under IFRS.
Whichever method you choose, use it consistently and count physical stock regularly. A stock count that does not match the books is a profit problem, not just an admin one.
The section 12C allowance
For tax, section 12C of the Income Tax Act gives a faster write-off on plant and machinery used directly in a process of manufacture.
| Asset | Allowance |
|---|---|
| New and unused manufacturing plant and machinery | 40% in year one, then 20% in each of the next three years |
| Used (second-hand) manufacturing plant and machinery | 20% a year over five years |
The allowance is not apportioned for part of a year, so an asset brought into use late in the tax year still gets the full year-one percentage. You must own the asset and use it in the manufacturing process. A building does not qualify. Keep the invoices and proof of the date the asset was brought into use.
VAT on materials
Registered manufacturers can claim input VAT on materials and equipment used to make taxable supplies. That makes correct tax invoices and timely capture worth the effort. If you export, your sales may be zero-rated, so you still claim input VAT but charge none on the sale. Getting the treatment right for each product line matters.
Numbers to watch every month
- Cost per unit against your standard.
- Wastage rate by product and by shift.
- Gross margin by product, not just overall.
- Stock days: how long stock sits before it is sold.
- Capacity use, because overheads are spread over the units you make.
What to do now
- Cost your top five products properly, including overheads and wastage, and compare with your prices.
- Set up a bill of materials for each and update it when suppliers change.
- Choose one stock valuation method and count stock at least quarterly.
- List every asset bought in the last three years and check the correct allowance was claimed.
- Review your monthly numbers against the list above.
Frequently asked questions
What is the difference between costing and bookkeeping?
Bookkeeping records what was spent. Costing works out what each unit really costs to make, so you can set prices and see which products make money.
Does section 12C apply to leased equipment?
No. You must own the asset to claim the allowance.
How often should I count stock?
At least quarterly, and more often for high-value or fast-moving items. Count at year end for the financial statements.
Sources and further reading
- South Africa, Corporate: deductions (wear and tear and section 12C), PwC Worldwide Tax Summaries
- From waste to tax write-off (section 12C), Chartered Accountants Worldwide
- IFRS for SMEs Accounting Standard, IFRS Foundation
This article is general information for South African businesses. It is not tax, legal or financial advice, and it reflects the rules and figures at the date shown above. Tax rules change, so confirm the current position before you act. TBL's practitioners are registered tax practitioners.