We need to enter all of this information into our accounting system. Most of the newer accounting software allows for the direct entry of the expenses, thus tying them to a certain job. But what does it look like behind the scenes?

Journal entries need to be prepared for each step of the process. As each cost is incurred, we will record it into our accounting system. Imagine you are the accountant for a small manufacturing company. Every day raw materials are purchased, people work and provide you with time sheets, and products move from work-in-process to finished goods inventory. Every single time product moves or people work, there will be a journal entry to create. Let’s watch as the entries are created!

Step 1

The first purchase is a purchase of raw materials. Both of these accounts sit on the balance sheet. The raw materials account is like an inventory account. As the materials come in, they are recorded here. Then, as you will see shortly, when they are moved to the production line, they are taken out of raw materials and moved to work-in-process (WIP).

Step 2

Here is what we were talking about above: When the production floor requests raw materials, we need to move them to the WIP account. Here some of the materials were direct materials, which go into WIP. Some of the materials were indirect materials, which will be classified as manufacturing overhead. Raw materials were requisitioned for use in production. Both direct and indirect materials were requisitioned:

Step 3

The timesheets from the employees are all in, so it is time to post the labor costs. Some of the payroll costs were direct, and recorded into the work in process, while the indirect costs were recorded to manufacturing overhead.

Step 4

Manufacturing overhead costs have been incurred. The general costs incurred in the factory this month included $5,000 of utilities, $3,000 building rent and $2,000 of misc overhead costs. So the month totaled $10,000 in overhead costs that need to be paid. We will be putting the costs into manufacturing overhead as they happen, which is a clearing account. We will talk a bit more about that shortly, but for now, know that is a place where we “hold” the amounts as they are incurred. Remember that we estimated manufacturing overhead so that we could cost it to the jobs. When the period is over, we will reconcile these accounts.

Step 5

Depreciation, property taxes and prepaid insurance all need to be recorded as well. These are all manufacturing overhead costs and will be recorded to that account:

Each step in the process from the Flow of Costs (Job Order Costing) page is recorded into the accounting records through a journal entry. We will then need to apply the manufacturing overhead, since we have put it all into an account called “Manufacturing Overhead.” This is considered a clearing account. All of the costs have been placed there, but if you recall, we calculated a per hour manufacturing overhead rate from estimates. Due to this, the actual costs that go into the manufacturing overhead account might be different from what we estimated them to be. This is why we use a clearing account.

We put all of the actual expenses there when they are incurred, then we will apply it to production, and the jobs, at the predetermined rate. We will talk more about this later, and what to do with what is left in the account, but for now, just remember, we use an estimated manufacturing overhead rate that we apply to each job, but the costs do need to be recorded when incurred.