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Guide · Transactions · 8 min
Contract manufacturing
Analyse production functions, capacity, inventory, quality risk, cost base and the reliability of a cost-based return.
01
Define the manufacturing model
Distinguish contract manufacturing from toll manufacturing and full-risk manufacturing. Confirm who owns raw materials, controls capacity, bears inventory risk and makes material production decisions.
02
Cost-base controls
- Define included operating costs and excluded pass-through items.
- Address idle capacity, start-up costs and exceptional production losses.
- Test whether the selected base reflects the value of the routine activity.
- Reconcile the calculation to entity and segmented financial records.
03
Review point
A routine return is not automatic. Material process intangibles, risk control or unique know-how can require a different analytical approach.