Companies that produce goods often have extensive managerial accounting processes. The purpose of managerial accounting is to calculate variable, fixed and manufacturing overhead costs and then allocate the costs to produced products. Defining costs is an important step in managerial accounting. Property taxes are just one common cost in manufacturing businesses.
Property taxes represent a fixed cost to businesses. The taxes typically remain the same and only change if the associated property or facility increases in value. In most cases, however, property taxes will remain the same each year. The fixed cost classification does not change because property taxes do not change based on production output.
Accountants place property tax figures into the company’s manufacturing overhead account. They use this classification because numerous products may go through the company’s production process, and accountants cannot attribute property taxes to one type of batch of produced goods. Accountants will allocate manufacturing overhead to all items produced during a certain period.
Companies typically pay property taxes once a year. This will result in a prepaid cost that the company cannot recognize when paid. Accountants can debit a prepaid tax accountant credit cash when paying property taxes. Each month, accountants will recognize a portion of the taxes by way of a second entry. This entry debits manufacturing overhead and credits prepaid tax, moving the current period’s property tax amount into the cost allocation process.
Only property taxes relating to a company’s production facilities have inclusion into manufacturing overhead. Property taxes for office buildings or sales offices are a period expense. Accountants record period expenses on the income statement in which they occur. Companies can use the prepaid tax account and monthly recognition entries previously discussed to post these items in the company’s general ledger.