One of the main accounting issues for manufacturing companies concerns inventory. Often, the mere mention of the subject can cause company managers to cringe. However, a basic understanding of the rules—particularly the uniform capitalization (UNICAP) rules—can help foster better management.

Let’s quickly review the basics. In general, your manufacturing company must account for inventory as an income-producing factor. Once inventory accounting is required, specific accounting procedures are triggered. The UNICAP rules are designed to ensure a degree of uniformity in this area.

Specifically, the UNICAP rules apply to a manufacturing company if it produces real or tangible personal property for use in the business or activity; produces real or tangible personal property for sale to customers; or acquires property for resale. This includes the construction, building, installation, manufacturing, development, improvement, creation, raising or growing of the property. Also, property produced for the manufacturing company under a contract is considered to be “produced” by the company if it makes payments or otherwise incurs costs in connection with that property.

Key exception: The UNICAP rules do not apply to tangible or intangible personal property if a manufacturing company has annual gross receipts of $10 million or less.

Under the UNICAP rules, your company must capitalize direct and indirect costs incurred during the preproduction and presale periods as well as the actual production period. Prior to inception of these rules, direct and indirect costs were generally capitalized only for the production period.

The following are the basic steps required under the UNICAP rules.

*Identify the company’s production or resale activities. It must be determined if the company produced any self-constructed assets or property for sale or resale to customers.

*Determine if any special rules or exemptions apply.

*Identify the costs subject to capitalization.

*Make an allocation of any service costs, if needed, between production and resale activities.

*Allocate direct and indirect costs that directly benefit or were incurred by reason of production or resale activities to the property produced or acquired for resale.

*Determine if designated property has been produced. Any necessary computations must be made for the amount of interest to be capitalized.

Note that a simplified accounting method may be available for production activities under the UNICAP rules. Despite the existence of this option, inventory accounting is obviously a complex matter that should generally be handled by experts in the field.

Reminder: This brief overview only provides a glimpse into the UNICAP rules for manufacturers. If you have any specific inquiries, consult with your accounting advisers.