Direct Costs

Learning Outcomes

  • Record direct materials and direct labor for a job

In this section, you’ll be assigning direct material and direct labor costs to a job.

Two horizontal flowcharts are shown. The first flow chart is labeled “Physical flow of inventory”. It shows four boxes, from left to right, Materials storeroom, Production departments, Finished goods storeroom, and Delivered to customers. The second flowchart is labeled “Job costing”. It shows four boxes, from left to right, Raw Materials inventory, Work in Process inventory, Finished Goods inventory, and Cost of Goods Sold. Below Work in Process inventory, there are two additional boxes pointing to it, Direct labor and Manufacturing overhead. Three boxes are highlighted--Raw Materials inventory, Direct labor, and Work in Process inventory.

So far, MaBoards has accumulated the following costs:

Checking Account
Debit Credit
150,000
2,500
Double line 147,500 Double line
Owner’s Capital
Debit Credit
150,000
Double line Double line150,000
Factory Overhead
Debit Credit
2,500
Double line 2,500 Double line

 

DIRECT MATERIALS INVENTORY

On July 5th, Jackie purchased enough wood for 60 skateboards from a local supplier who has agreed to let her pay the $3,000 bill within 30 days with no interest. She journalized the entry like this:

Date Account/Explanation Debit Credit
Jul 05 Raw Materials – direct         3,000
      Accounts Payable           3,000
Purchased materials on account, $3,000 (60 units x $50/unit)

 

Accounts Payable is a liability account that represents bills that are due for purchases and other costs of doing business, and the Raw Materials account is an asset that represents materials on hand.

As she posted the transaction to the ledger, she created a new account for Raw Materials that would be used directly to make boards, and a new account to track bills that she had to pay (Accounts Payable).

A journal entry dated July 05 shows a debit of $3,000 to Raw Materials - Direct and a credit of $3,000 to Accounts Payable with the note “Purchased materials on account, $30,000 (300 units x $10/unit)”. Each line item in the journal entry points to the corresponding debit or credit on its respective t-account.

The general ledger now appears as follows:

A t-account for Checking Account shows a debit of $150,000 beginning balance, a credit of $2,500, and a $147,500 ending balance. A t-account for Raw Materials - Direct shows a debit of $3,000 beginning and ending balance. A t-account for Accounts Payable shows a credit of $3,000 beginning and ending balance. A t-account for Owner's Capital shows a credit of $150,000 beginning and ending balance. A t-account for Factory Overhead shows a debit of $2,500 beginning and ending balance.

The accounting equation is still in balance, proving that debits = credits:

147,500 + 3000 = 3000 + 150,000 – 2,500

Another way to show this is called a trial balance:

DR CR
Checking Account     147,500
Raw Materials – direct         3,000
Accounts Payable           3,000
Owner’s Capital       150,000
Factory Overhead         2,500
Single Line    153,000Double line Single Line      153,000Double line

 

INDIRECT MATERIALS INVENTORY (Manufacturing supplies)

On the 10th of July, Jackie purchased supplies, like paint and graphics and lacquer, that would be used during production but can’t be traced directly to any particular job. She agreed to pay $1,000 within 30 days.

Date Account/Explanation Debit Credit
Jul 10 Raw Materials – indirect         1,000
      Accounts Payable           1,000
Purchased materials on account.

 

After posting the transactions to the ledger, her accounts show the following balances:

A journal entry dated July 10 shows a debit of $1,000 to Raw Materials - Indirect and a credit of $1,000 to Accounts Payable with the note “Purchased materials on account”. Each line item in the journal entry points to the corresponding debit or credit on its respective t-account.

A t-account for Checking Account shows a debit of $150,000 beginning balance, a credit of $2,500, and a $147,500 ending balance. A t-account for Raw Materials - Direct shows a debit of $3,000 beginning and ending balance. A t-account for Raw Materials - Indirect shows a debit of $1,000 beginning and ending balance. A t-account for Accounts Payable shows a credit of $3,000 beginning balance, a credit of $1,000, and a $4,000 ending balance. A t-account for Owner's Capital shows a credit of $150,000 beginning and ending balance. A t-account for Factory Overhead shows a debit of $2,500 beginning and ending balance.

From now on, Jackie won’t run a trial balance check every time she posts. She’ll wait until the end of the month.

ESTABLISHING A JOB ORDER

On July 15th, she received an order from Dhanila Parboteeah for a custom skateboard built to her detailed specifications. She has agreed to pay $2,000 for it. Jackie took two units of wood out of storage and placed them on the workbench and started a job card, which is a form that she will use to track direct and indirect costs of the project. She labels Parboteeah’s order as “Job 1” and will track it from now on that way.

Job Sheet Job 1
Subcategory, Direct Materials
      Wood 100
      Wheels and trucks
Direct Labor
Overhead allocation
Total Job Cost Single Line100Double line

 

She also made the following journal entry:

Date Account/Explanation Debit Credit
Jul 15 Work in Process           100
      Raw materials – direct               100
Started job 1 – moved raw materials into production

A journal entry dated July 15 shows a debit of $100 to Work in Process and a credit of $100 to Raw Materials - Direct with the note “Started job 1 - moved raw materials into production”. Each line item in the journal entry points to the corresponding debit or credit on its respective t-account.

A t-account for Checking Account shows a debit of $150,000 beginning balance, a credit of $2,500, and a $147,500 ending balance. A t-account for Raw Materials - Direct shows a debit of $3,000 beginning balance, a credit of $100 dated July 15, and a $2,900 ending balance. A t-account for Work in Process shows a debit of $100 dated July 15 beginning balance, and a debit of $100 ending balance. A t-account for Raw Materials - Indirect shows a debit of $1,000 beginning and ending balance. A t-account for Accounts Payable shows a credit of $3,000 beginning balance, a credit of $1,000, and a credit of $4,000 ending balance. A t-account for Owner's Capital shows a credit of $150,000 beginning and ending balance. A t-account for Factory Overhead shows a debit of $2,500 beginning and ending balance.

 

DIRECT MATERIALS ADDED TO JOB

Between the 15th and the 20th, Jackie paid a college student $400 to shape and finish the board. The final touch was installing the trucks and wheels that Jackie purchased online for $50. Since she uses a just-in-time system for the hardware, she doesn’t keep a raw materials inventory account for them. She adds the direct labor and additional materials to both the Work In Process ledger account and the job card.

Date Account/Explanation Debit Credit
Jul 20 Work in Process           450
      Checking Account               400
      Checking Account                 50
Labor for skateboard #1 ($400) and wheels/trucks ($50)

 

Job Sheet Job 1
Subcategory, Direct Materials
      Wood 100
      Wheels/trucks 50
Direct Labor 400
Overhead allocation
Total Job Cost Single Line550Double line

A journal entry dated July 20 shows a debit of $450 to Work in Process and two credits of $400 and $50 both to Checking Account with the note “Labor for skateboard #1 ($400) and wheels/trucks ($50)”. Each line item in the journal entry points to the corresponding debit or credit on its respective t-account.

The general ledger for MaBoards now looks like this:

A t-account for Checking Account shows a debit of $150,000 beginning balance, credits of $2,500, $400, and $50, and a debit of $147,050 ending balance. A t-account for Raw Materials - Direct shows a debit of $3,000 beginning balance, a credit of $100, and a debit of $2,900 ending balance. A t-account for Work in Process shows a debit of $100 beginning balance, a debit of $450, and a debit of $550 ending balance. A t-account for Raw Materials - Indirect shows a debit of $1,000 beginning and ending balance. A t-account for Accounts Payable shows a credit of $3,000 beginning balance, a credit of $1,000, and a credit of $4,000 ending balance. A t-account for Owner's Capital shows a credit of $150,000 beginning and ending balance. A t-account for Factory Overhead shows a debit of $2,500 beginning and ending balance.

Notice the job card shows $550 and is the detail that supports the ledger account called Work in Process.

NEW JOB STARTED

On July 21, Jackie decided to make a custom board to her own specifications to sell online. She put it into production with two units of wood from the supply room. She made a journal entry and started a new job card (#2).

Date Account/Explanation Debit Credit
Jul 21 Work in Process           100
      Raw Materials – direct               100
Job #2 started

 

Job Sheet Job 1 Job 2 Total WIP
Subcategory, Direct Materials
      Wood 100 100 200
      Wheels/trucks 50 50
Direct Labor 400 400
Overhead allocation 0
Total Job Cost Single Line550Double line Single Line100Double line Single Line650Double line

A journal entry dated July 21 shows a debit of $100 to Work in Process and a credit of $100 to Raw Materials - direct with the note “Job #2 Started”. Each line item in the journal entry points to the corresponding debit or credit on its respective t-account.

Notice again that the total of the job cards matches the ledger account called Work in Process. This will always be true. Work in Process is a “control” account that accumulates costs chronologically. The Job Cards serve as a “subsidiary” ledger that sorts those same costs by project.

On July 25th, Jackie purchased deluxe trucks and wheels for $100 for Job 2 and paid her worker $600 for completing the job. She made the journal entry, posted it to the ledger, and updated the job card.

Date Account/Explanation Debit Credit
Jul 25 Work in Process           700
      Checking Account               600
      Checking Account               100
Labor for skateboard #2 ($600) and wheels/trucks ($100)

 

Job Sheet Job 1 Job 2 Total WIP
Subcategory, Direct Materials
      Wood 100 100 200
      Wheels/trucks 50 100 150
Direct Labor 400 600 1000
Overhead allocation 0
Total Job Cost Single Line550Double line Single Line800Double line Single Line1350Double line

 

After posting, the relevant part of the general ledger looks like this (just the Checking Account and Work in Process are shown):

A t-account for Checking Account shows a debit of $150,000 beginning balance, credits of $2,500, $400, $50, $600 for July 25, and $100 for July 25, and a debit of $146,350 ending balance. A t-account for Work in Process shows a debit of $100 beginning balance, debits of $450, $100, and $700 for July 25, and a debit of $1,350 ending balance.

Do the job cards match the Work in Process account?

NEW JOB ORDER

On July 26, Jackie received an order from Xia Zang for a skateboard so she put it into production as Job 3:

Date Account/Explanation Debit Credit
Jul 26 Work in Process           100
      Raw materials – direct               100
Job #3 started

 

Job Sheet Job 1 Job 2 Job 3 Total WIP
Subcategory, Direct Materials
      Wood 100 100 100 300
      Wheels/trucks 50 100 150
Direct Labor 400 600 1000
Overhead allocation 0
Total Job Cost Single Line550Double line Single Line800Double line Single Line100Double line Single Line1450Double line

 

After posting, the relevant part of the general ledger looks like this (just the direct Raw Materials and Work in Process accounts are shown):

A t-account for Raw Materials - Direct shows a debit of $3,000 beginning balance, credits of $100, $100, and $100 for July 26, and a debit of $2,700 ending balance. A t-account for Work in Process shows a debit of $100 beginning balance, debits of $450, $100, $700, and $100 for July 26, and a debit of $1,450 ending balance.

What you may have noticed on the job cards so far is that we haven’t allocated any indirect factory overhead yet. Before we do that, let’s check your understanding of allocating direct costs to jobs.

Practice Question