Correct Flow of Manufacturing Costs

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Manufacturing companies track financial data to determine the cost of producing goods. Managerial accountants review the capital spent on materials and labor as part of this process. The flow of costs through internal accounting processes helps accountants allocate production costs. Job order and process costing are the two basic types of production systems. Costs will typically flow through each system in a similar manner. The end result is calculating the cost of goods manufactured for a specific time period.

  • Review the general ledger and identify the beginning balance for work-in-process. This figure represents the balance of unfinished goods from the previous month.

  • Transfer raw materials into work-in-process for new goods produced by the company. Accountants typically debit work-in-process inventory and credit raw materials inventory.

  • Post labor from the payroll department into the work-in-process account, Timesheets from the payroll department should indicate which employees directly worked in the production department.

  • Compute manufacturing overhead for the production process. All minute materials used on multiple goods, support labor for the production department and taxes or facilities costs go here.

  • Post manufacturing overhead into the work-in-process account. Accountants typically debit work-in-process and credit manufacturing overhead for this entry.

  • Move finished goods from work-in-process to finished goods inventory. Review the job order or process cost report to determine the dollar figure for this transfer. Debit finished goods inventory and credit work-in-process.

Tips & Warnings

  • For paper ledgers and journals, handwritten journal entries will suffice to update financial accounts. Computerized accounting systems will require you to follow specific directions from the software provider to update the general ledger or journal.

References

  • "Managerial Accounting: Tools for Business Decision Making"; Jerry Weygandt et al.; 2010
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