## 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.

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

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). The general ledger now appears as follows: 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: - ## 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:

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

## 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

-

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)

-

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

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

-

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

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.