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.

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.

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.

Chapter 2: Job Order Costing