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Manufacturing · Inventory
Inventory Observation & Product Costing
Counts, costing and reserves your auditor, lender and buyers can rely on.

Inventory & costing

Inventory observation, product costing and inventory valuation for manufacturers

Greywood CPA helps manufacturers and distributors get inventory right: physical counts and observation, product costing, overhead absorption, reserves for slow-moving stock and the tax rules for capitalizing costs. Inventory is usually the largest asset on a manufacturer's balance sheet, and the one auditors, lenders and buyers question most.

When inventory is material, auditors are generally required to attend your physical count. Planning the count with us, with clear instructions, tags and cutoff, prevents most audit adjustments before they happen.

Last reviewed: November 2026

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Planning a physical count that holds up

  • Written count instructions, with teams of two and pre-numbered tags
  • Shipping and receiving cutoff: nothing in or out during the count, or carefully documented
  • Work in process counted with its stage of completion
  • Consigned and customer-owned goods identified and excluded
  • Test counts by the auditor, with differences resolved before the count ends

If you use cycle counts instead of a year-end count, the auditor will test your cycle count program and its accuracy.

Product costing: materials, labor and overhead

Inventory cost includes materials, direct labor and a share of manufacturing overhead. Many manufacturers use standard costs and adjust for variances. Common issues:

  • Standards not updated for current material and labor prices
  • Overhead applied at rates based on outdated capacity
  • Variances left on the balance sheet instead of allocated or expensed
  • Abnormal costs, like idle capacity or excess scrap, capitalized when they should be expensed

Valuation, reserves and obsolescence

Inventory is reported at the lower of cost and net realizable value for most methods (LIFO and the retail method use lower of cost or market). Slow-moving, excess and obsolete items need a reserve based on a documented method, such as months on hand or last sale date. Reserves that change without explanation are a red flag for auditors and lenders.

Inventory for tax: UNICAP and small business options

For tax, larger producers must capitalize certain indirect costs into inventory under the uniform capitalization (UNICAP) rules. Businesses that meet the small business gross receipts test (an inflation-adjusted average, about $31 million for 2025) are generally exempt from UNICAP and may use simpler inventory methods. Your tax method can differ from your book method, and we reconcile both.

How the engagement works

  1. Review callDay 1

    Your costing method, count process and system.

  2. Fixed-fee proposalWithin 1–3 business days

    Scope and one fixed fee.

  3. Count planning and costing reviewBefore year-end

    Instructions, standards and reserve method updated.

  4. Year-endAfter the count

    Reconciled inventory and supporting schedules.

Why manufacturers choose Greywood CPA

  • Fixed fee, agreed first. No hourly billing and no surprise invoices.
  • Senior people on your file. Every engagement is led by a senior professional and signed off by a CPA partner. Meet the team.
  • Licensed and registered. Virginia Board of Accountancy firm license #134961, AICPA member, with out-of-state registrations where required. See our credentials.

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Inventory and costing FAQs

Does my auditor have to attend our inventory count?

When inventory is material to the financial statements, auditors are generally required to attend the physical count, or test your cycle count program, to observe procedures and perform test counts.

What is lower of cost and net realizable value?

Inventory is written down when its expected selling price, less costs to complete and sell, falls below cost. It applies to most inventory methods other than LIFO and the retail method.

How should we reserve for obsolete inventory?

Use a documented, consistent method, such as months of supply on hand or time since last sale, and review it every period. Unexplained swings in the reserve draw auditor and lender questions.

Do we have to follow UNICAP?

Larger producers must capitalize certain indirect costs into inventory for tax under UNICAP. Businesses meeting the small business gross receipts test are generally exempt.

How do your fees work?

We quote one fixed fee in writing before any work starts, based on locations, SKUs and the support you need.

Year-end count coming up?

Tell us your count date. A senior CPA will send a fixed-fee proposal within 1–3 business days.