In this first article of our three-part series on manufacturing in Xero, we dive into the fundamentals and key details of using Xero to streamline and optimise your manufacturing processes. Here, we focus on the first of three manufacturing options: Method 1: The Monthly Stocktake Adjustment. We’ll then look at Method 2: The Monthly Manufacturing Process and Method 3: Manual Manufacture at the time of Assembly.
Before getting started, we recommend looking at Xero’s fixed assets to ensure you’re up to date on the fundamentals.

What is Xero Inventory?
Xero’s inventory system allows you to purchase and sell inventory items using the average cost method.
This means when you buy inventory, Xero keeps track of how much you have and the average price you paid, then shows this total on your balance sheet under inventory.
This method is preferred over counting stock purchases as an expense right away because, once the item is sold, the average cost of that inventory will automatically be moved from the inventory account on the balance sheet to your profit and loss under the cost of sales.
This is important as it improves the reporting on your profit and loss statement and shows you the sales and related costs of sales in the same month.
Sales and cost of sales in the same month are the key points of using an inventory module, and they help you work out your profit margins.

To take a deeper dive into how Xero inventory modules work, we’ve put together some resources for you:
Manufacturing in Xero
In general, Xero has three primary manufacturing options.
Method 1: The Monthly Stocktake Adjustment
The Monthly Stocktake Adjustment method in Xero manages the costs associated with raw materials used in manufacturing. In this method, you would expense all raw materials when you buy them, resulting in a very high cost of sales for the month. At the end of the month, you do a stock take, assign values to all the items on hand using purchase prices or your best average estimate, and reverse some of the cost of sales to an inventory account on your balance sheet. This helps balance out your cost of sales and reflect the value of unused materials.

Manufacturing in Xero Example:
Let’s say you start the month with no stock. If you buy R8,500 of stock, it shows up as an expense of R8,500 in the Cost of Sales section.
You then make some sales, let’s say R17,500 of sales using R4,500 of stock.
At this point, your profit and loss show R17,500 in sales and R8,500 in cost of sales. A cost margin of 48.57% (8,500/17,500)
When you do your stock count at the end of the month you should find you have R4,000 on hand still. You then post a journal to reverse out R4,000 from the Cost of Sales and add it to your balance sheet under Inventory.
Now, your sales show R17,500, and your cost of sales shows R4,500. This cost margin is 25.71%, which is much better than before. Your R4,000 of stock is sitting as inventory on your balance sheet.
This is a very rudimentary method and means that you cannot track individual sales against their cost of sales. It also means that your inventory balance and cost of sales amount are based on the estimated values of your stock count.
It is the simplest to perform; however, it can be done in any accounting system and is best suited when a single person is in charge of the business and stock who already knows the margin and cost of sales for each item they sell.
The Manual Manufacturing Process in Xero
Manufacturing cannot be done in Xero as a standard inventory workflow.
This means:
- No bill of materials functionality allows manufacturing or assembling several raw material inventory items into a single finished good item.
- The cost of sales is not automatically calculated when a finished good, comprising several separate raw materials in inventory, is sold.
What Xero does allow, however, is for you to purchase raw materials into stock and track the quantity and cost of that inventory.
With this function, you can use a manual manufacturing process to align your sales and sales costs in the same month.
There are two ways of doing this after you have bought in the raw materials as tracked inventory items:
- Once a month, and based on what was sold, you expense the raw materials to the cost of sales(method 2a). Finished goods set up as untracked ‘service’ items
- After each manufacturing run, convert the raw materials used in the process into a specific quantity of finished goods. This reduces raw materials on hand, and increases finished goods(method 2b). Finished goods set up as tracked items
Method 2b requires you to follow the process after every assembly you make. You can only sell a tracked inventory item once it’s been assembled and is in stock. Xero will not let you sell the item if the quantity is zero.
If you do not have the financial team members to drive this assembly process in the system, method 2a is preferable. You will always be able to make the sale, as untracked items do not have a quantity on hand.
Now that you understand the first method of managing manufacturing processes with Xero, learn more about Method 2: The Monthly Manufacturing Process in our second part of the series, and then finally, Method 3: Manual Manufacture at the time of Assembly.If you need outsourced finance help, contact our Finance Team today. Let us help you reach your business goals!