Recording Material Costs Transcript
Costing Methods > Job Costing > Recording Material Costs
One important thing we need to understand in determining product costs is the flow of costs through the manufacturing process. The cost flows move from the raw materials account to the work in process account and finally to the finished goods inventory account.
That might seem like abstract accounting to some of you. You might find it easier to picture the physical flow of costs.
When I think of these three inventory accounts, I tend to visualize them as three different rooms or buildings.
The raw material account is basically a raw material warehouse. When costs move from raw materials to WIP, materials physically move from the raw materials warehouse to the production floor, often a separate building. When costs move from WIP to finished goods inventory, completed products physically move from the production floor to a finished goods warehouse or storeroom which is a separate location.
So I hope that visualization will help you with the concept of how costs move through the production process.
Now let's look at materials specifically. When raw materials are purchased by a manufacturer, they are recorded as a debit in the raw material inventory account and physically stored in a raw materials warehouse. When materials are requisitioned for production, they physically moved from the raw material warehouse to the production floor.
In accounting, we credit raw material inventory and debit work in process for the direct materials. Raw materials are credited and manufacturing overhead expense is debited for the indirect materials.
You recall that direct costs, like direct materials, are those that can be traced directly to a product.
Indirect costs are those that can't be traced to a product, so those costs need to be allocated to the products.
So even though the indirect materials physically go to WIP, the costs are indirect and therefore will be allocated to the job.
A job cost record is used to accumulate all of the direct material and direct labor used on a job as well as the manufacturing overhead allocated to the job.
Each job will have its own job cost record for keeping track of the job's cost. Each time production needs some raw materials it will fill out a material requisition.
This is the paper trail that tracks the physical movement of raw materials to production.
Finally, let's look at the journal entries for raw materials.
The purchase of raw materials is a debit to raw materials and credit to accounts payable usually. When materials are requisitioned to production, this is a debit to WIP for the direct materials, a debit to manufacturing overhead for any indirect materials, and a credit to raw materials inventory account.