ACCOUNTING PROCEDURES FOR MATERIALS In manufacturing enterprises, the common practice is to record all materials and supplies in one control account, Materials or Stores. Procedures that affect the materials account involve the: 1. Purchase of materials and supplies. 2. Issuance of materials and supplies. a. Direct materials b. Indirect materials and supplies Recording the purchase of materials. ‘The account DEBITED when materials are purchased is Materials or Stores (Instead of Purchases for Periodic) and the account CREDITED is Accounts Payable or Vouchers Payable. As materials are purchased, the amount is posted on the Material control account and at the same time the purchase is also entered on an individual materials ledger card/stockcard (a separate card is used for each material item) showing quantity received, unit cost, and total amount. ‘The entry to record the purchase of materials is: Materials 00K ‘Accounts Poyable 00% ‘An entry is made on the stock card under the Received section. ‘The entry to record the return of materials to vendor is: ‘Accounts Payable vox Materials 000 Anentry is made on the stock card under the Received section enclosed in parenthesis to indicate reduction in quantity. Wlustration: 1. 80,000 worth of materials (direct and indirect) were purchased on credit. Entry: Materials-controt P80,000 ‘Accounts Payable- +P80,000 controlMaterials- contro ‘Accounts Payable- control Ledger: 17. PO,000 1. P80,000 Recording the issuance of materials. ‘When a job is started, the materials needed for the job are issued based on the materials requisitions prepared by the employees. A copy of the requisition is given to the storekeeper, which will serve as the basis for the materials to be issued. The job order number is shown on the materials requisition together with specifics on type and quantity of materials required by each job. The quantity, unit cost, and total cost of each of the materials are entered on the issued section of the specifics the stock card. The entry to record the issuance of direct materials is: Work in Process 0 Materials soux ‘An entry is made on the stock card under the {Issued section and also on the cost sheet - Materials. ‘The entry to record the issuance of indirect materials is: Factory overhead- control vo0x Materials wx ‘An entry is made on the stock card under the \Issued section and olso on the overhead analysis sheet. Mlustration: . Materials costing P75,000 were sent to the manufacturing plant floor. PS0,000 were issued to Job No. 650 and P10,000 to Job 651. P15,000 of indirect materials were issued. Entry: Job No. 650 50,000 Job No. 651 10,000 ‘Manufacturing P15,000 ‘Overhead- Control ‘Moterials- 75,000 ControlLedger: Materials- contro! Work in Process- control 1.P80,000 | 2. P 75,000 2. P 60,000 Manufacturing Overhead- contro! 2.P 15,000 Ee Job 651 2. P 40,000 ‘The Materials- control account may be summarized as follows: Materials- control 1. Inventory beginning 1. Cost of direct materials issued 2. Purchase of materials 2. Cost of indirect materials issued. 3. Freight-in (using direct Charging) _|3. Cost of materials returned to 4. Cost of excess materials Returned suppliers from factory The balance of the Materials account represents the Materials inventory at the end of the period under consideration. The amount should be equal to the total of the balances of all the material stock cards. ACCOUNTING PROCEDURES FOR LABOR ‘The accounting procedures for labor may be divided into two distinct phases: 1. Collection of payroll data, computation of earnings, calculation of payroll taxes, and payment of wages. 2. Distribution and allocation of labor costs to jobs, departments, and other cost classifications. In most factories, clock cards/time records/time ticket are used to record the days or hours worked by each employee. These clock cards/time records/time ticket are used as the basis in computing the gross‘earnings of employees who are paid hourly wages. In addition to these time tickets are prepared for each worker to determine the time spent for each job as basis in determining the amount to be charged to direct labor cost and indirect labor cost. The time tickets for various jobs are sorted, priced, and summarized, and the time ticket hours should be reconciled with the clock card hours. ‘At regular intervals, usually daily or weekly, the labor time and labor cost for each job are entered on the job order cost sheets. For each payroll period - weekly, every two weeks, or monthly - the summary of ‘employees' earnings and the liability for payment is journalized and posted to the general ledger. The entry to record the payroll 1nd the incurrence of liability is: Payroll 000% Withholding Tax Payable ‘$55 Premium Payable Phil Health Contribution Payable Accrued Factory Payroll RHEE The entry to record the distribution of payroll Work in process 200K Factory Overhead-Control 00K Payroll 00% ‘An entry is made on the cost sheet under the labor section ‘The entry to record the payment of payroll is: ‘Accrued Factory Payroll cd Cash 00 ‘The work in process account is used to charge the jobs with the direct labor cost Factory overhead control is charged for the indirect labor cost incurred. The tax withheld is computed based on the table provided by the Bureau of Internal Revenue. For the SSS Premiums and Phil Health Contributions, the table is provided by the Social Security System. ‘The clearing account for the total wages due to the factory personnel is the payroll account summarized as follows: Payroll 1. Total wages and salaries earned by | 1. Total payroll during the payroll factory personnel during the period at the same time debiting Payroll period work in process for direct labor and ‘overhead for indirect labor‘The account used to accumulate the liability for payroll or factory overhead is the Accrued Factory Payroll summarized as follows: ‘Accrued Factory Payroll 1. Total amount of wages paid to 1. Balancing beginning factory personnel at the time 2. Total amount of wages and salaries, crediting accounts payable or cash due to factory personnel at the same time debiting payroll. Mlustration: 3. Total manufacturing payroll for the period was P27,000. Job No. 650 incurred direct labor costs of 19,000 and Job No. 651 incurred direct labor costs of P3,000. P5,000 of indirect labor was also Entry: incurred. Job No. 650 19,000 Job No. 651 3,000 ‘Manufacturing 5,000 Overhead- Control Wages Payable- 27,000 Work in Process- control 2. P.60,000 3.P22,000 Manufacturing Overhead- ___!0b 650 control 2.P 15,000 2.P15,000 3.29.00 3.P5,000 Job 651 2.P 10,000 3.P.3,000Entry: Wages Payable- 27,000 Control Cash- Control 27,000 Ledger: We ble- control Cash- control 3.P 27,000 4.P 27,000 ‘Accounting for Factory Overhead All costs incurred in the factory other than direct materials and direct labor are classified as factory ‘overhead costs. These costs are entered in the factory overhead account. There are two accounts used — factory overhead control and factory overhead applied. Factory Overhead Control — itis used to accumulate actual overhead incurred. Factory Overhead Applied — is used to accumulate the estimated (predetermined) amount of factory ‘overhead applied to production. ‘As the overhead costs are actually incurred, the Factory Overhead Control account is debited, and logically offsetting accounts are credited. Indirect Labor Factory Overhead Salaries Payable Indirect Material Factory Overhead Inventory or Supplies Factory Insurance Factory Overhead Prepaid Insurance Factory Depreciation Factory Overhead ‘Accumulated Depreciation Taxes/Utilities Factory Overhead Taxes or Utilities Payable* For factory overhead apf any of the following as a base: 1, Units of Production POR = Estimated Factory Overhead Cost / Estimated Unit of Production 2. Direct Material Cost POR = Estimated Factory Overhead Cost / Total estimated direct material costs 3. Direct Labor Hours POR = Estimated Factory Overhead Cost / Total estimated direct labor hours. 4, Direct Labor Cost POR = Estimated Factory Overhead Cost / Estimated direct labor costs 5.Machine Hours POR = Estimated Factory Overhead Cost / Total estimated machine hours Mustration: to production, a predetermined rat used and this is computed using ‘Assume that the company incurred the following factory costs; insurance P10, 000; property taxes P15, 000. The company applies factory overhead on the basis of 150% of direct labor costs of P18,000. Incurrence of Other Factory Costs Factory overhead control 25,000 Prepaid insurance 10,000 Property tox payable 15,000 ‘The actual cost of factory insurance and property tax are debited to factory overhead account when incurred and various accounts are credited. Application of the Factory Overhead to Production Work in process Inventory 27,000 Factory overhead applied 27, 000 The work in process account is debited while the factory overhead account is credited for the predetermined amount of factory overhead of P27,000 [P18,000 direct labor costs x 150% POR]. Disposition of Over or Under Applied Factory Overhead The factory overhead (FOH) account serves as a clearing account. The actual FOH cost is debited to the FOH account as they are incurred during a period. When a job is completed, FOH costs are applied to the job using the predetermined factory overhead rate that was established before the year started, ‘and the FOH applied account is credited and work in process account is debited. FACTORY OVERHEAD Actual Applied 1. Costof indirect materials 1 Applied FOH using the predetermined rate. Cost of indirect labor 3. Other indirect expenses incurred by the factoryBased on the same illustration given above, assume that the actual factory overhead totaled P30, 500. The applied factory overhead Is P27,000, resulting to P2,500 debit balance of the factory overhead account. The difference between the actual and the applied at the end of the period is known as variance, The debit balance at the end of the period in the factory overhead is known as under-apolied factory ‘overhead (actual FOH is greater that applied FOH), while if the result is a credit balance in the FOH, itis known as overhead factory overhead. This occurrence is normal in the job order system because factory overhead is applied to work in process account using the predetermined rate. The simplest or the most convenient way to close the overhead or under applied FOH is to close it to the cost of goods sold account. Factory Overhead OK coGs On cOGS XXX Factory overhead OK it li iHunder applied Accounting for Finished Goods: When the jobs is completed, the finished jobs are transferred from production to the finished ‘g00d warehouse. The accounting department will now record the cost of transferred out units from the ‘work in process account to finished goods account. The total amount of costs transferred is known as cost ‘of good manufactured. Mlustration: Assume that the company completed job for the month, The entry to record the transfer of cost from work in process to finished goods would be: Finished goods 20%, Work in process OK Accounting for units sold {As finished goods are sold to customers, the cost of finished goods are transferred from finished goods account to cost of goods sold account. The entry would be: Accounts Receivable/Cash 2x Sales 2K Cost of Goods sold 2X Finished Goods 100