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Lecture 2D: Journal Entries

Learning objectives: After this session, you
should be able to:

1. Track the flow of manufacturing costs.

2. Prepare a Cost of Goods Manufactured
(COGM) statement under Actual Costing.
3. Distinguish 2 types of income statement
– Contribution Margin vs Functional.
4. Prepare journal entries to track
manufacturing costs.
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LO4: Journal entries for cost flows

a) Accounting for materials
To produce items for sale, a manufacturing firm
generally keeps a supply of materials on hand.
When materials are purchased, the cost of these
materials “flows” into the Materials Inventory
Control (MIC) account. Materials requisitioned &
issued to production are charged to WIP or MOH.
The costs of DM “flows” out of MIC into the WIP
Inventory account whilst costs of indirect materials
“flows” into the MOH Control account.
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Prepare journal entries for manufacturing

costs: materials

Direct materials purchased on 1,600

account

Indirect materials (supplies) 400

purchased on account

Direct materials requisitioned 1,500

Indirect materials issued to 40

production departments

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1. Journal entries documenting the flow of materials through production

Dr Cr
$ $
Materials Inventory Control 1,600
Accounts Payable Control 1,600
To record direct materials purchased on account.

Materials Inventory Control 400

Accounts Payable Control 400

To record
Work indirectInventory
In Process materialsControl
(supplies) purchased on account.
1,500
Materials Inventory Control 1,500
To record the issue of direct materials to production.
Manufacturing Overhead Control 40
Materials Inventory Control 40
To record the issue of indirect materials to production.
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Let’s see how the cost flows using a T-account …

MIC WIP
DR CR DR CR
1. Direct 3. Direct 3. Direct
Material Material Material
$1,600 $1,500 $1,500
2. Indirect 4. Indirect
Material Material
$400 $40

AP MOH
1. Direct 4. Indirect
Material Material
$1,600 $40
2. Indirect
Material
$400

MIC : Material Inventory Control Account 5

AP : Accounts Payable Account
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b) Accounting for labour

Personnel who convert materials into the finished
output are considered DL. Personnel in support
departments providing essential services for
producing depts. are recorded as indirect labour.
Payroll & benefits are tracked through an Accrued
Wages account. Through the time ticket analysis,
DL costs are assigned & “flows” or debited into
the WIP Inventory account whilst costs of indirect
labour “flows” into the MOH Control account.

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Prepare journal entries for manufacturing

costs: labour

Total payroll paid for the period 4,000

Direct labour cost incurred in

production departments 2,600

Indirect labour incurred in 1,400

production departments

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2. Journal entries illustrating the flow of labour through production

WIP Inventory Control 2,600

Accrued Wages 2,600

To record the distribution of payroll cost for direct labour.

Manufacturing Overhead Control 1,400

Accrued Wages 1, 400

To record the distribution of payroll cost for indirect labour.

Accrued Wages 4,000

Cash at Bank 4,000

To record total payroll paid for the month.

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Let’s see how the cost flows using a T-account …

Accrued Wages WIP

7. Bank $4,000 5. Direct Labour 3. Direct
$2,600 Material
$1,500
6. Indirect 5. Direct
Labour Labour
$1,400 $2,600

Bank MOH
7. Bank $4,000 4. Indirect
Material
$40
6. Indirect
Labour
$1,400

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c) Accounting for MOH

MOH - Production costs other than DM or DL.
As indirect costs, these are not traced to cost
objects due to the absence of causal relationship
or because tracing is not economically feasible.
Instead, MOH are aggregated & allocated based
on convenience or some assumed linkage (e.g.,
Direct Labour Hours – discussed next week).
Actual MOH costs “flows” into the MOH Control
account (debited), and “flows” out (i.e., charged)
to the WIP Inventory account.
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Prepare journal entries for manufacturing

costs: MOH

Other MOH for the period:

Depreciation - factory &
machinery 700
Miscellaneous manufacturing 400
overhead

Manufacturing overhead applied/ ?

assigned to production

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3. Journal entries illustrating the flow of overheads thru’ production

Manufacturing Overhead Control 1,100
Sundry Accounts (including A/P Control) 400
Accumulated Depreciation – Fact & Mach 700
To record miscellaneous manufacturing overhead and depreciation
of factory and machinery incurred.
WIP Inventory Control 2,540
Manufacturing Overhead Control 2,540
To record the application of manufacturing overhead to production.
(based on Actual costing)

Actual MOH incurred = $2,540, comprising $40 indirect materials, $1,400

indirect labor and $1,100 misc MOH (see journal entries 1, 2 & 3)

How will the accounting entries above change if there is a

depreciation of $200 for office equipment other than the
depreciation for factory and machinery of $700?
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3. Journal entries illustrating the flow of overheads thru’ production

Manufacturing Overhead Control 1,100
Manufacturing Overhead Control 1,100
Depreciation Expense 200
Sundry Accounts (including A/P Control) 400
Sundry Accounts 400
Accumulated Depreciation – Fact & Mach 700
Accumulated Depreciation – Factory & Machinery 700
To record miscellaneous manufacturing overhead and depreciation
of factory and machinery
Accumulated Depreciation incurred.
– Office Equipment 200
WIP Inventory Control 2,540
Manufacturing Overhead Control 2,540
To record the application of manufacturing overhead to production.
(based on Actual costing)

Actual MOH incurred = $2,540, comprising $40 indirect materials, $1,400

indirect labor and $1,100 misc MOH (see journal entries 1, 2 & 3)

How will the accounting entries above change if there is a

depreciation of $200 for office equipment other than the
depreciation for factory and machinery of $700?
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Let’s see how the cost flows using a T-account …
Acc. Depreciation WIP
9. Depr – Fact & 3. Direct
Mach Material
$700 $1,500
5. Direct
Labour
$2,600
10. Actual MOH
applied to
production
$2,540
Sundry Accounts MOH
8. Misc OH 4. Indirect 10. Actual MOH
$400 Material applied to
$40 production
6. Indirect $2,540
Labour
$1,400
8. Misc OH
$400
9. Depr – Fact &
Mach
$700 14

Total $2,540
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d) Accounting for FG Inventory

When the production process is completed, the

costs of the completed units of production are
transferred from the WIP Inventory account to
the Finished Goods Inventory account.
A Statement of Cost of Goods Manufactured
(COGM – re LO2) is prepared to report the cost
flows of all production activity, and the cost that
is transferred out to Finished Goods.

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Prepare journal entries for units of

production completed

Cost for goods completed 5,000

4. Units of production completed

Finished Goods Inventory Control 5,000
WIP Inventory Control 5,000
To record the transfer from work-in-process to finished goods.

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Let’s see how the cost flows using a T-account …

WIP Finished Goods

3. Direct 11. Cost of goods 11. Cost of goods
Material completed completed
$1,500 $5,000 $5,000
5. Direct
Labour
$2,600
10. Actual MOH
applied to
production
$2,540

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e) Accounting for Cost of Goods Sold

When goods are sold/shipped, the cost of goods
sold is transferred from FG Inventory to COGS.
A Statement of Cost of Goods Sold may be
prepared separately. Under Actual Costing, this
value is referred to simply as “COGS”. Under
Normal Costing, this is termed Normal COGS.
We shall return to the difference between actual
COGS & Normal Cost of Goods Sold in Session 3.

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Prepare journal entries for units shipped

and billed
Sales on account (costing $3,000) 6,000

5. Units sold & billed

Cost of goods sold 3,000
Finished Goods Inventory Control 3,000
To record the cost of goods sold.
Accounts Receivable Control 6,000
Sales 6,000
To record the sales of finished goods on credit.

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Let’s see how the cost flows using a T-account …

WIP Finished Goods COGS

3. Direct 11. Cost of goods 11. Cost of goods 12. Cost of goods 12. $3,000
Material completed completed sold
$1,500 $5,000 $5,000 $3,000
5. Direct
Labour
$2,600
10. Actual MOH
applied to
production
$2,540

Sales AR
13. $6,000 13. $6,000

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1. Manufacturing cost flows

2. Cost of Goods Manufactured Schedule
3. Income Statement – Contribution
Margin vs Functional format
4. Journal entries to record cost flows