Journal entry for materials used in production
Overview
In the job order costing, the manufacturing company needs to allocate costs from one stage to another, e.g. from purchasing the materials from the suppliers to using the materials in the production before turning them from work in process into the finished goods. Likewise, the company needs to make a proper journal entry for materials used in production especially as the materials used in the production usually include both direct materials and indirect materials.
Direct materials used in production are the materials that the company directly uses in the individual job or individual unit of product in which it can be directly traced to each job or each product. On the other hand, indirect materials are materials that cannot be traced to a single job or single unit of product during the period. Examples of indirect materials may include disposable tools, tape, glues, oils, fasteners, and protective equipment such as helmets, gloves, etc.
Likewise, while the cost of direct materials can be allocated directly to the work in process, the cost of indirect materials needs to be transferred to the cost pool of manufacturing overhead first before it can be further allocated to the work in process. That is why the journal entry for materials used in production usually includes both work in process account and manufacturing overhead account.
Journal entry for materials used in production
In the job order costing, the company can make the journal entry for materials used in production by debiting the working in process account and the manufacturing overhead account and crediting the raw materials inventory account.
| Account | Debit | Credit |
|---|---|---|
| Work in process | 000 | |
| Manufacturing overhead | 000 | |
| Raw materials inventory | 000 |
In this journal entry, the debit amount in the work in process account represents the cost of direct materials used in production while the debit amount in the manufacturing overhead represents the allocation cost of indirect materials. In this case, we can also make the journal entry for raw materials used in production for direct materials and indirect materials separately as below:
Direct raw materials used in production
| Account | Debit | Credit |
|---|---|---|
| Work in process | 000 | |
| Raw materials inventory (direct) | 000 |
In this journal entry, the raw materials inventory is directly allocated to the work in process of the production. As the name suggested, the direct material is directly assigned to the job or unit of product while the indirect material will be assigned to the cost pool of manufacturing overhead before assigning to the work in process using the predetermined overhead rates.
Indirect raw materials used in production
| Account | Debit | Credit |
|---|---|---|
| Manufacturing overhead | 000 | |
| Raw materials inventory (indirect) | 000 |
In this journal entry, the raw materials that are requested and used in the production are assigned to the manufacturing overhead instead of the work in process. This is due to the raw materials used here are the indirect materials which cannot be assigned directly to a single job or a single unit of product in the production process.
In this case, they need to be transferred to the cost pool of manufacturing overhead which contains all the manufacturing overhead costs including indirect labor, indirect materials, and other overhead costs. Then the manufacturing overhead costs are transferred further to the work in process account using the predetermined overhead rates.
Materials used in production example
For example, in October, the company ABC which is a manufacturing company has used $10,000 of raw materials in the production process for the month. This $10,000 of raw materials includes $8,000 of direct raw materials and $2,000 of indirect raw materials.
What is the journal entry for materials used in production on October 31?
Solution:
With the information in the example, the company ABC can make the journal entry for the $10,000 of the materials used in production on October 31 as below:
| Account | Debit | Credit |
|---|---|---|
| Work in process | 8,000 | |
| Manufacturing overhead | 2,000 | |
| Raw materials inventory | 10,000 |
In this journal entry, the $8,000 of work in process is the direct material while the $2,000 is the indirect material. This $2,000 of indirect material will be transferred further to the work in process together with other manufacturing overhead costs using the predetermined overhead rates.
It is useful to note that the predetermined overhead rates are the estimation that the company determines based on past experiences. Likewise, the manufacturing overhead costs that are applied to the production process using the predetermined overhead rates may not equal the actual costs resulting in overapplied or underapplied overhead.
So, this indirect material together with other overhead costs may be underapplied or underapplied when using predetermined rates. Likewise, the amount of this indirect material that is transferred later to work in process may be more than $2,000 or less than $2,000. Hence, the adjusting entry for overapplied or underapplied overhead is usually required.
It may be also useful to note that the amount of raw materials inventory used in the production in the journal entry above can be determined differently from one company to another company, based on which inventory costing methods the company uses, such as FIFO, LIFO, or average cost. Also, the LIFO inventory costing method is not allowed under IFRS, even though it is allowed under the US GAAP.
