Updated: Nov 8, 2022
The principal keeps ownership of the raw materials, work-in-process, and finished products at all times during the manufacturing process when working with a toll manufacturer.
The raw materials are owned by the related-party manufacturer, who then makes them available to the toll manufacturer so that they can be processed (that is, the toll manufacturer does not take title to raw materials).
The toll manufacturer performs the processing services, and the manufacturing principal rewards the toll manufacturer through a toll manufacturing fee.
This fee is commonly determined as a markup on the processing costs.
The manufacturer is responsible for all risks, including those related to the final demand and price and those involved with storing raw materials and completed goods inventories.