Processing on commission refers to a business activity where the entrusting party provides raw materials and main materials, or the production unit procures raw materials itself, while the entrusted party only advances some auxiliary materials, processes goods according to the entrusting party’s requirements, and charges processing fees.

For manufacturing businesses, accurately recording outsourced processing costs is an important part of manufacturing financial planning and production cost management. As enterprises manage increasingly complex production and supply chains, manufacturing planning software and integrated financial planning processes can help connect production costs with broader business and financial planning.

Materials sent to external units for processing: At actual cost, the accounting entry is Debit: Outsourced Processing Materials; Credit: Raw Materials, Merchandise Inventory, etc.; Material Cost Variance (or Debit).

Payment of processing fees, freight, and miscellaneous expenses: For processing fees, freight, and miscellaneous expenses to be borne, the accounting entry is Debit: Outsourced Processing Materials; Taxes Payable—VAT Payable (Input VAT); Credit: Bank Deposits, etc.

Consumption tax for outsourced processing materials used directly for sale: For outsourced processing materials subject to consumption tax, if directly used for sale after recovery, the consumption tax collected and remitted by the entrusted party should be included in the cost of outsourced processing materials. The accounting entry is Debit: Outsourced Processing Materials; Credit: Bank Deposits, etc.

Consumption tax for continuous production: If recovered materials are used for continuous production of taxable consumer goods, when the consumption tax collected and remitted by the entrusted party is allowed for deduction as per regulations, the accounting entry is Debit: Taxes Payable—Consumption Tax Payable; Credit: Bank Deposits, etc.

Receipt of processed materials into inventory: Upon receipt of processed materials accepted into inventory and remaining materials, at actual cost, the accounting entry is Debit: Raw Materials, Merchandise Inventory, etc.; Credit: Outsourced Processing Materials; Material Cost Variance (or Debit).

Accurate recording of processing fees, material costs, taxes, and inventory values can also support production cost planning and financial analysis, providing manufacturing businesses with more reliable information for budgeting and operational planning.

Both Ends In:“Both Ends In” refers to the entrusting party sending raw materials already accepted into inventory to the entrusted party for processing, and then recovering the processed products from the entrusted party and accepting them into inventory.

One End Out:“One End Out” refers to the entrusting party only accepting one of the two goods, raw materials or processed products, into inventory, while the other good is either directly delivered from the seller to the entrusted party for processing, or directly shipped for sale from the entrusted party.

Both Ends Out:“Both Ends Out” refers to the entrusting party not accepting either raw materials or processed products into inventory, only reflecting purchases and sales in the accounts, without physical receipt or dispatch of goods.

Entrusted processing involves raw materials, processing fees, taxes, inventory, and production activities, making accurate financial data important for manufacturing organizations. Production planning software can help manufacturers coordinate production requirements and related resources, while manufacturing reporting software can provide greater visibility into production and financial information.

For businesses managing outsourced production activities, connecting production information with manufacturing financial planning can also help finance and operational teams maintain a clearer understanding of processing costs and their impact on overall business performance.