Recording Labor Costs Transcript
Costing Methods > Job Costing > Recording Labor Costs
Labor is an expense. The payroll department records this expense when salaries are incurred.
However, manufacturing wages expense should be a product cost whereas other salary expenses are period costs.
When manufacturing labor is incurred, it needs to be moved to inventory accounts so it doesn't end up as a period cost on the income statement.
To do this we credit manufacturing wages and debit WIP for the direct labor.
Manufacturing wages are credited and manufacturing overhead expense is debited for indirect labor.
You recall that direct costs, like direct labor, are those that can be traced directly to the product.
Indirect costs are those that cannot be traced directly to the product so those costs need to be allocated to products.
Some of you probably noticed that moving indirect labor from one expense account to another didn't really move it to the balance sheet.
Just be patient because we'll learn how manufacturing overhead gets moved to the balance sheet.
So the job cost record will contain all of the traced direct materials and direct labor for particular job. Manufacturing overhead will also be allocated to the job.
Finally, let's look at the journal entries for labor.
The incurrence of manufacturing labor is a debit to manufacturing labor expense and a credit to wages payable. Then the dollars are moved to production. This is a debit to WIP for the direct labor, a debit to manufacturing overhead for any indirect labor and a credit to manufacturing wage expense for the balance.