Accounting for outsourced processing costs: Accounts, journal entries, and invoices.

At the outsourcing party, the value of the materials or goods shipped, direct transportation costs, and the outsourcing fee are typically aggregated. Account 154 – Cost of production and business in progress. When processing is complete, the accountant transfers the funds from account 154 to accounts 152, 153, 155, 156, 157, or 632, depending on the nature of the asset and how it is used.

Note regarding the 2026 update: Circular 99/2025/TT-BTC replaces Circular 200/2014/TT-BTC and applies to fiscal years beginning on or after January 1, 2026. Businesses whose fiscal year begins before this date need to determine the transition point according to their accounting period.

What are processing costs and which accounts should they be recorded in?

In practice, the term "processing cost" is often used in two different senses:

• Processing costs in manufacturing businesses: This includes direct labor costs and the portion of manufacturing overhead allocated to transforming raw materials into finished products. This item is not identical to direct material cost.
• Fees or costs for outsourcing: This is the amount a business must pay to a supplier for performing one or more tasks under a contract. The service fee may include labor, fuel, auxiliary materials, packaging, or other costs as agreed upon.

Distinguishing between these two meanings helps businesses avoid including all in-house production costs in "outsourcing fees," while also accurately determining the actual cost of raw materials, goods, or products after outsourcing.

The specific accounting method depends on the business. outsourcing party good processing party. This is a crucial point to determine before selecting accounts and creating documents.

Accounting principles at the outsourcing party's end.

The outsourcing party retains ownership of the raw materials, semi-finished products, or goods shipped unless the contract stipulates the transfer of ownership. Therefore, the business does not record the delivery of assets to the outsourcing party as a sales transaction, nor does it transfer that value to accounts receivable or payable simply because the assets are located in the partner's warehouse.

To use account 154 for cost calculation and reconciliation, businesses should break it down in detail as follows:

• The supplier accepts subcontracting work;
• contract, purchase order, or processing order;
• material code, semi-finished product code, or finished product code;
• processing stage;
• Quantity delivered, quantity received, losses, scrap, and defective products;
• Transportation costs, loading and unloading fees, insurance, and other direct expenses.

For businesses with multiple outsourced units, standardizing object codes from the outset helps with control. outsourcing costs and avoid mistakenly adding the costs of one order to another.

Accounting for outsourced processing costs at the outsourcing party.

1. Purchase raw materials or goods and have them delivered directly to the processing site.

When raw materials or goods purchased are delivered directly to the processing unit, without being stored in the company's warehouse:

• Debit Account 154 – Work-in-progress production and business costs;
• Debit account 1331 – Deductible VAT, if the conditions are met;
• Accounts 111, 112, and 331 represent the total payment amount.

Businesses need to separately track the quantity and value of assets located at each processing unit, even if the goods do not pass through the internal warehouse.

2. Issuing raw materials, tools, or goods from inventory for processing.

• Debit Account 154 – Value of goods exported for processing;
• There is account 152 – Raw materials and supplies; or
• There is account 153 – Tools and equipment; or
• Account 156 – Goods.

The accounting entry is recorded at the value of the goods issued from inventory, determined according to the company's accounting policy. The goods issue slip must clearly state the purpose ("outsourcing for processing"), the receiving unit, the contract number, and the delivery location.

3. Record processing fees and related direct costs.

When receiving invoices for processing, transportation, loading and unloading services, or other direct expenses that qualify to be included in the actual price:

• Debit Account 154 – Price excluding deductible tax;
• Debit account 1331 – Input VAT that is deductible, if eligible;
• Accounts 111, 112, and 331 represent amounts paid or payable.

Not all expenses incurred during the processing period should be added to account 154. Selling expenses, general administrative expenses not directly related to the cost, penalties for violations, or unusual losses must be assessed according to their nature and applicable regulations, rather than being automatically added to the cost of goods sold.

4. Receive back the raw materials or tools after processing.

If the object of outsourcing remains the raw material or tool after completion:

• Debit account 152 or account 153 – Actual cost after processing;
• Account 154 – Total accumulated expenses.

Accountant warehouse receipt, A record of delivery and verification of the actual quantity received, losses, scrap, or excess materials as per the contract.

5. Receive the finished product or goods.

Depending on the nature of the product and its intended use:

• Product inventory entry: Debit Account 155/Credit Account 154;
• Goods received into inventory: Debit Account 156 / Credit Account 154;
• Transfer for sale: Debit Account 157/Credit Account 154;
• Direct transfer to the buyer and eligible for cost recognition: Debit Account 632/Credit Account 154;
• Use immediately for other activities: record in the appropriate account according to the purpose of use and credit account 154.

Example of accounting and pricing for goods processed under contract.

Company A supplies raw materials with a book value of VND 200 million to Company B for processing. The processing fee, excluding tax, is VND 40 million; direct transportation costs, excluding tax, are VND 5 million. Input VAT meets the deduction requirements and is tracked separately.

Actual cost of the finished product after processing:

200 million + 40 million + 5 million = 245 million VND.

If 1,000 satisfactory products are received and there are no unfinished products, recovered scrap, or other deductions, the average actual price is 245,000 VND/product.

Main journal entries:

1. Material issuance: Debit Account 154/Credit Account 152: 200 million VND.
2. Processing fee: Debit Account 154: 40 million VND; Debit Account 1331 if deductible; Credit Account 331 based on total payment amount.
3. Shipping costs: Debit Account 154: 5 million VND; Debit Account 1331 if deductible; Credit Account 111, 112 or 331.
4. Entering completed products: Debit Account 155/Credit Account 154: 245 million VND.

If there are losses, defective products, scrap, or costs exceeding normal levels, the accountant must base their actions on the contract, standards, causes, and liability for compensation; the entire amount should not be mechanically allocated to products that meet requirements.

Accounting principles at the outsourcing party.

Raw materials supplied by customers for processing do not belong to the receiving party. Therefore, the receiving party does not record an increase in accounts 152, 155, or 156 as its own assets. However, the business must still closely monitor and manage the quantity, specifications, quality, storage location, loss rate, and responsibilities for safekeeping.

The tracking records should be comprehensive and verifiable from the time materials are received until the product is delivered, including:

• Warehouse receipt or document acknowledging receipt of goods for processing;
• Delivery and receipt record, list of specifications and condition of materials;
• Production orders, quotas, and delivery notes are used according to each stage of the production process.;
• A table for tracking finished, unfinished, defective, lost, and scrap products.;
• Delivery note and acceptance report.

Accounting for the subcontractor

1. Accumulate the cost of raw materials supplied by the recipient.

If the recipient uses auxiliary materials, packaging, or supplies owned by itself to perform the contract:

• Debit Account 621 – Direct raw material and supplies costs;
• Account 152 – Raw materials and supplies.

Materials delivered by the customer should not be included in this accounting entry.

2. Accumulate direct labor costs

• Debit Account 622 – Direct labor costs;
• Account 334 – Payable to employees;
• There is account 338 and related accounts for deductions from salaries, if any.

3. Accumulation of general manufacturing costs

Depreciation costs for machinery, factory utilities (electricity and water), production tools, repairs, factory manager salaries, and related expenses are recorded in account 627 based on actual supporting documents.

• Debit Account 627 – General Production Costs;
• There are accounts 111, 112, 152, 153, 214, 331, 334, 338…

4. Transfer costs to calculate the cost of outsourcing services.

At the end of the period or when calculating cost per order:

• Debit Account 154 – Work-in-progress production and business costs;
• Account 621 – Direct material costs;
• Account 622 exists – Direct labor costs;
• Account 627 – Allocated general production costs.

Any excess costs or fixed overhead costs that are not allocated must be handled according to regulations and not included entirely in the cost of products or services.

5. Recording revenue from outsourcing services.

When the service is completed or the time for invoicing is reached:

• Debit account 111, 112 or 131 – Total payment amount;
• Account 511 – Revenue from sales and provision of services;
• Account 3331 – Value Added Tax payable, if subject to taxation.

6. Transfer of cost of completed services.

• Debit Account 632 – Cost of Goods Sold;
• Account 154 exists – Work-in-progress production and business costs.

This is a missing piece in many guides that only detail revenue accounting. Without aggregating and transferring costs incurred by the subcontractor, businesses cannot accurately determine the profit for each contract or stage of the process.

Do I need to issue an invoice when exporting goods for processing?

If a business only delivers raw materials, semi-finished products, or goods to a processing party without selling or transferring ownership, the delivery of assets does not constitute a sales transaction. Businesses need to prepare appropriate inventory, delivery, and transportation documents to prove the origin, ownership, and purpose of the goods being transported.

The party receiving the processing order issues electronic invoices for:

• processing fees;
• Fuel, auxiliary materials, packaging, or other items are provided by the recipient and collected from the customer;
• Other service items as per the contract and acceptance report.

According to the regulations on electronic invoices effective from July 1, 2026, the time of issuing a service invoice is, in principle, upon completion of the service. If the provider collects payment in advance or during the service delivery, the time of invoice issuance is the time of payment, excluding any deposit to guarantee contract performance. If delivery is in installments or stages, an invoice must be issued for the corresponding value of each delivery.

Do not apply mechanically: The documentation and types of circulation records may vary between domestic processing, export processing, deliveries through multiple locations, or industries with specific regulations. Accountants need to compare the contract and regulations in effect at the time the transaction occurs.

What documents are needed for a outsourcing contract?

A credible set of documentation should link transactions, goods, and cash flows, and should include at a minimum:

1. The subcontracting agreement and its appendices clearly define the ownership of materials, quotas, losses, scrap, quality, schedule, and compensation responsibilities.
2. A purchase order or processing order.
3. The delivery note and shipping documents are appropriate.
4. Receipt and delivery record for raw materials, semi-finished products, or goods.
5. This table tracks materials in progress, broken down by partner and order.
6. Minutes of acceptance of the quantity, quality, and number of completed products.
7. A warehouse receipt or delivery note for the customer.
8. Electronic invoice from the processing party.
9. Payment documents and records that meet the relevant tax requirements.
10. Record of handling excess materials, shortages, scrap, and defective products, if any arise.

Businesses should standardize coding and record-keeping rules under contract to improve traceability. See further guidance on accounting document management and check valid electronic invoice.

How to calculate the cost of outsourced work.

For the outsourcing party

Actual cost of goods received back = Value of assets exported + Processing fee + Related direct costs − Appropriate deductions and recoverable value.

Direct costs may include transportation to the processing site, loading and unloading, insurance, or expenses necessary to bring the asset to a ready-to-use condition and location. Input VAT is deductible and not added to the actual price.

For the outsourcing party

Cost of outsourcing services = Materials used by the client + Direct labor + Allocated manufacturing overhead + Other direct costs.

Do not include the value of raw materials owned by the customer in the service cost of the service provider. Businesses should calculate costs based on contracts, product codes, stages, or production orders to accurately assess profit margins.

How should businesses account for transactions when applying Circular 133?

Small and medium-sized enterprises (SMEs) applying Circular 133/2016/TT-BTC need to use the chosen accounting system, ledgers, and policies consistently. The core principle remains:

• The lessee tracks the value of materials, processing fees, and direct costs for each item;
• The receiving party did not recognize the customer's materials as its own property;
• Actual costs must be aggregated to determine the cost of goods sold and the cost of goods sold.;
• Revenue, invoices, and taxes are recorded according to the nature of the transaction.

SMEs may choose to apply Circular 99 to suit their operational characteristics and management requirements, but when making the transition, they must comply with the conditions, present the impacts, and apply it consistently as prescribed.

Common errors when accounting for processed goods.

• Record the shipped materials as sold: This results in revenue, liabilities, or invoices that are not in accordance with the true nature of the transaction when ownership has not yet been transferred.
• The receiving party records an increase in their inventory: This results in assets and cost of goods sold being recorded at higher prices than they actually are.
• Do not open details for account 154: It is difficult to determine costs by supplier, order, and process.
• Missing cost of goods sold entry on the receiving side: Revenue was recorded, but expenses were not transferred, resulting in an incorrect profit figure for the period.
• Add all costs to the price: This includes unusual expenses, sales, or administrative costs that are not directly related.
• No reconciliation of excess, lost, and scrap materials: Creating discrepancies between accounting records, inventory records, and acceptance reports.
• Invoices do not match the contract or acceptance: Incorrect quantity, unit price, process, tax rate, or date of preparation.
• Continuing to cite Circular 200 for the period in which Circular 99 is being applied: The content of accounting policies and accounts is no longer up-to-date.

Conclude

Accurate accounting of outsourcing costs begins with correctly identifying the role of the business. The outsourcing party aggregates the value of assets sent, processing fees, and direct costs in account 154 before transferring them to the appropriate account. The outsourcing party does not record the client's materials as inventory, but must fully aggregate the costs incurred, record revenue, and transfer the cost of services.

Businesses also need to synchronize contracts, delivery documents, invoices, inventory data, and accounting records. For the accounting period starting from 2026, accounting content needs to be updated according to Circular 99/2025/TT-BTC and the currently effective regulations on electronic invoices, instead of continuing to use the old guidelines under Circular 200 as currently stipulated.