Record Indirect Production Costs in OverheadThere are other types of production-related expenses that are allocated to inventory, such as rent, utilities, and supplies for the manufacturing operation. These expenditures typically begin as accounts payable and are allocated to an overhead cost pool, from which they are then allocated to inventory and the cost of goods sold. The allocation to a cost pool may occur later, but we will assume it occurs at the time of initial accounts payable recordation, with this entry: Show
Record Production Labor in OverheadVarious types of production labor, such as production management salaries and materials management wages, are also routed through an overhead cost pool, from which they are later allocated to inventory. The entry for this is usually a shifting of the wages expense into a cost pool, with this entry:
Move Raw Materials to Work in ProcessIf you are operating a production facility, then the warehouse staff will pick raw materials from stock and shift it to the production floor, possibly by job number. This calls for another journal entry to officially shift the goods into the work-in-process account, which is shown below. If the production process is short, it may be easier to shift the cost of raw materials straight into the finished goods account, rather than the work-in-process account.
Record Inventory Scrap and SpoilageThere will inevitably be a certain amount of scrap and spoilage arising from a production process, which is normally recorded in the overhead cost pool and then allocated to inventory. If these amounts are abnormal, then you would instead charge the abnormal amount to the cost of goods sold (so that they are not carried as an asset). The entry for the former situation is:
Record Finished GoodsOnce the production facility has converted the work-in-process into completed goods, you then shift the cost of these materials into the finished goods account with the following entry:
Allocate OverheadAt the end of each reporting period, allocate the full amount of costs in the overhead cost pool to work-in-process inventory, finished goods inventory, and the cost of goods sold, usually based on their relative proportions of cost or some other readily supportable measurement. The journal entry is:
Sale Transaction EntryOnce there is a sale of goods from finished goods, charge the cost of the finished goods sold to the cost of goods sold expense account, thereby transferring the cost of the inventory from the balance sheet (where it was an asset) to the income statement (where it is an expense). The entry is:
That concludes the journal entries for the basic transfer of inventory into the manufacturing process and out to the customer as a sale. There are also two special situations that arise periodically, which are adjustments for obsolete inventory and for the lower of cost or market rule. Obsolete Inventory EntryThere is likely to be some amount of obsolete inventory arising on an ongoing basis, so it is best to continually charge a small amount to the cost of goods sold and set up a reserve account for obsolete inventory, using the following entry:
Lower of Cost or Market EntryYou have to periodically test inventory to see if the market cost of any inventory item is lower than its cost under the lower of cost or market rule. As a result, you may need to reduce the carrying amount of the inventory item to its market value, and charge the loss on inventory valuation expense for the decrease in recorded cost of the inventory. The associated entry is:
Additional entries may be needed besides the ones noted here, depending upon the nature of a company's production system and the goods being produced and sold. What is the correct journal entry to record the direct materials used in production?The journal entry to record the issuance of direct material into production includes: Answer: a) a credit to materials inventory. the issuance of direct material to production is a debit in work in process inventory and credit materials inventory.
What account is debited for the issuance of direct materials?Direct materials. Debit the work-in-process inventory account and credit the raw materials inventory asset account. Or, if the production process is brief, bypass the work-in-process account and debit the finished goods inventory account instead.
How do you record materials into production?To record materials used in production, a debit for the cost of raw materials is made to the WIP inventory account and a credit is made to the raw materials account. Labor costs are spilt between direct and indirect labor.
Where should a manufacturing company record the purchase of materials on account?Raw materials inventory represents the cost of materials not yet used in production. When materials are purchased they are recorded in the Raw materials inventory account.
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