Question

 A job-order cost accounting system is fully integrated into the general ledger of a company. Identify the major general ledger accounts used in a job-order cost system. Explain how manufacturing costs flow through these accounts so that inventories may be costed and income determined when goods are sold.

Answer 1

Major general ledger accounts used in job-order cost system are:

• Raw Materials Inventory,
• Direct Labor,
• Manufacturing Overhead
• Work in Process Inventory
• Finished Goods Inventory.

When raw materials are purchased, Raw materials inventory is debited

Accounting Entry:

Raw Materials Inventory …Debit

       Accounts Payable …………………..Credit

When raw materials are used for a job, work in process inventory is debited

Accounting Entry:

Work in Process Inventory …Debit

       Raw Materials Inventory …………………..Credit

When Direct labor used for a job, Work in Process Inventory is debited.

Accounting Entry:

Work in Process Inventory …Debit

            Wages Payable …………………..Credit

Based on predetermined rate , Manufacturing Overhead is allocated to the job, generally based on direct labor hours

Accounting entry:

Work in Process Inventory …Debit

       Manufacturing Overhead …………………..Credit

Manufacturing overhead as and when incurred are debited to the Manufacturing Overhead account

Accounting Entry example:

For Indirect material

Manufacturing Overhead …Debit

       Raw Materials Inventory …………………..Credit

For Indirect Labor

Manufacturing Overhead …Debit

          Wages Payable …………………..Credit

For other overhead expenses

Manufacturing Overhead …Debit

          Accounts Payable …………………..Credit

At end of period the difference between manufacturing overhead incurred and the manufacturing overhead absorbed through allocation on predetermined rate is disposed off to cost of goods sold account.

As and when job is completed, work in process inventory account is credited and Finished goods inventory account is debited.

Accounting entry:

Work in process inventory …Debit

          Finished goods Inventory …………………..Credit

As and when the jobs are sold, Cost of goods sold account is debited

              Accounting entry:

Finished goods inventory …Debit

          Cost of goods sold …………………..Credit

The difference between Sales Revenue and Cost of goods sold is the gross profit.

Period costs like Sales and administration costs are deducted from gross profit to arrive at net income