Verifying Factory Gate Pricing in Overseas Procurement Contracts
Verifying factory gate pricing requires auditing raw material weights, sub-tier invoices, export VAT rebates, and verified cycle times against open-book models.
Tooling Amortisation
Meaning
Asset depreciation accounting methods distribute the cost of specialized manufacturing equipment over the total volume of goods produced using that equipment. In contract manufacturing and supply agreements, tooling amortisation allocates the expenses of designing and building customized molds, dies, and fixtures across each unit of the finished product. The State Administration of Taxation establishes the rules for how these costs can be deducted from corporate income taxes over the useful life of the assets.
This structured cost allocation allows factories to recover their capital investments while providing buyers with predictable unit pricing.
Cost Allocation
Financial managers use different formulas to divide the high cost of manufacturing tooling among the products made. Under the standard method of tooling amortisation, the total cost of the molds is divided by the expected production run, and this amount is added to the unit price of each shipped item. If the production run is cut short, the buyer must pay the remaining balance of the tooling cost to the factory.
This financial arrangement reduces the upfront cost for the buyer while ensuring that the factory recovers its investment in the custom tooling.
Tax Treatment
Tax regulations dictate how businesses must record and deduct the costs of industrial tooling on their tax returns. The Corporate Income Tax Law requires factories to treat custom molds as long-term assets that must be depreciated over several years, rather than as a single-year business expense. However, tax authorities allow specific accelerated depreciation methods for high-technology industries to encourage manufacturing innovation and investment in modern equipment.
When audit teams review a factory’s tax filings, they verify that the tooling amortisation schedules match the physical assets and the reported production volumes.
Supplier Negotiation
Commercial agreements must clearly define who owns the manufacturing molds and how the tooling costs will be paid. In supply negotiations, foreign buyers often choose between paying for the tooling upfront or including it in the unit cost through tooling amortisation. While amortisation reduces initial capital requirements, it requires the buyer to commit to a minimum order volume to avoid additional charges.
This commitment is documented in the manufacturing contract, which specifies the ownership of the molds once the amortisation period is complete and the tooling is fully paid for. This legal clarity prevents ownership disputes and ensures that the buyer can transfer the tooling to a different supplier if the current factory fails to meet quality standards.