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3. Tracking Job Cost Within the Corporate Ledger

Thus far, the illustrations of job costing have focused on forms, spreadsheets, databases, and technology to accumulate job cost information. In a sophisticated electronic environment, that information can be seamlessly transferred to a company's general ledger system. In the alternative, one may still need to transcribe the cost flow information via a series of entries. Either way, it is imperative to not only understand how job cost data are measured, but also how they impact a company's general ledger and resulting financial statements.

3.1. Direct Material

Begin by considering how a job cost travels through the accounting system by focusing on direct materials. Below is an illustration for a company that buys unfinished pipe from a steel mill. The manufacturing process entails a specialized heat treating, welding, and polishing process that readies the pipe for intense use by gas pipeline transmission companies.

The flow of direct materials occurs in the following four steps:

o Raw material is purchased from a supplier and placed in the raw materials inventory.

o Raw material is transferred to the production process.

o Upon completion of processing, the material is transferred to finished goods inventory.

o A customer takes delivery of the product, and it is removed from finished goods inventory.

Below is an illustration of the flow of material from supplier, through production, to the customer:

the flow of material from supplier, through production, to the customer

For purposes of this illustration, assume the stack of pipe in the first picture cost $10,000. This expenditure must be captured in inventory and eventually transferred to cost of goods sold when the product is delivered to an end customer.

Raw Materials:

At the time it is acquired, the Raw Materials Inventory needs to be increased by $10,000, as shown in the T-Account below.

Work in Process:

The second step will result in a reduction in the Raw Materials Inventory and a corresponding increase in the Work in Process Inventory.

Finished Goods:

Upon completion, that cost is transferred from Work in Process Inventory to Finished Goods Inventory. Cost of Goods:

When the product is sold, the cost moves out of Finished Goods Inventory.

At this point, only the cost flow of direct materials is being illustrated; shortly, you will see how to weave in the direct labor and overhead costs.

In general journal form, the preceding flow of costs is:

Raw Materials Inventory 10,000

Accounts Payable 10,000

Purchased pipe from steel mill

Work in Process Inventory 10,000

Raw Materials Inventory 10,000

Transferred pipe to production

Finished Goods Inventory 10,000

Work in Process Inventory 10,000

Transferred processed pipe to finished goods

Cost of Goods Sold 10,000

Finished Goods Inventory 10,000

Delivered finished goods to customer

Carefully review the above set of entries, and focus on the fact that $10,000 of cost was incurred when the raw material was purchased in Step 1. And, that cost eventually became a cost of goods sold at the end of the process when the goods were delivered to the customer in Step 4 (remember, only the direct material is being shown here; labor and overhead costs are yet to be considered).

Concurrent with recording the 4th entry, another entry would be made to record the sale (debit. Accounts Receivable and credit Sales). The difference between Sales and Cost of Sales would be the gross profit. These entries assume a perpetual inventory system; the same result could be achieved with a periodic system like that illustrated earlier in the book.

3.2. Direct Labor

Now focus exclusively on the direct labor cost, ignoring materials and overhead. Notice that laborers were present in the middle picture from the pipe plant. This suggests the introduction of direct labor into the costing equation. Like the cost of raw materials, the salaries payable for direct labor are added to Work in Process Inventory (at "stage 2" of the diagram). The following entries assume that the pipe required 200 hours of direct labor at $15 per hour:

Work in Process Inventory 3,000

Salaries Payable 3,000

Incurred direct labor to process pipe (200 hrs @$15)

Finished Goods Inventory 3,000

Work in Process Inventory 3,000

Transferred processed pipe to finished goods

Cost of Goods Sold 3,000

Finished Goods Inventory 3,000

Delivered finished goods to customer

Notice that the accounts used in these entries are identical to those for direct material, except that the credit in the first entry is to Salaries Payable. This reflects that the cost is attributable to an obligation to pay employees for their time.

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