Manufacturing Accounting Entries

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Producing products for sale to customers is only part of the company's task. Once the products are made and sold, this activity needs to be recorded in the company's books. The journal entries in manufacturing accounting closely follow the production process flow. Entries are made as the company purchases materials, starts production, finishes products and sells to customers.

Purchasing

The manufacturing process begins with purchases of materials and the acquisition of other production inputs. To record the purchase of materials, debit the raw materials inventory account for the amount of the purchase and credit cash or accounts payable. For overhead costs incurred, debit manufacturing overhead for the purchase amount and credit cash or accounts payable.

Moving to Production

Purchased materials, labor costs and an estimate of overhead costs are transferred into the work in process (WIP) account at the onset of 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. Direct labor costs can be directed traced to products, and indirect labor costs cannot be directly traced to products. Direct labor costs are moved to production with a debit for the amount of labor costs to the WIP account and a credit to salaries payable. Indirect labor costs are treated as manufacturing overhead; when the cost is incurred, a debit is made to the manufacturing overhead account and a credit is made to salaries payable. Overhead costs are assigned to products when the products are moved into production. To complete this entry, a debit is made to WIP and a credit is made to manufacturing overhead. The amount of this entry is based upon a predetermined overhead rate determined by the company at the beginning of the fiscal year.

Finishing Goods

As goods are completed, the costs for the goods are moved from WIP to the company's finished goods account. This requires a debit to finished goods and a credit to WIP. The dollar amount of the journal entry is determined by calculating the total cost of the goods completed.

Sales to Customers

The cost of products sold to customers is recognized at the time of sale in the company's cost of goods sold account. To record a sale of goods, two entries are needed. The first entry records the cost of goods sold, and the second entry recognizes the revenue from the sale. The cost entry consists of a debit to cost of goods sold and a credit to finished goods inventory. The revenue entry is a debit to accounts receivable or cash for the sales price and a credit to sales revenue.

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References

  • "Managerial Accounting: 12th Edition"; Garrison et al.; 2007
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