Control Accounts: Material, Labor and Overhead all use control accounts. When you write checks (spend money) on any of these costs, you debit to increase a control account. Control accounts are assets accounts- they are part of Inventory.
Work in Process: Work in Process (WIP) represents costs for partially completed goods. When costs are "moved into production", that means that the material, labor or overhead has been assigned to a specific product or service. At that point, you debit to increase Work in Process. You credit (reduce) a control account. (Overhead is a little different- you'll see that explanation in a minute).
Finished Goods: These are completed goods that are not yet sold. If you sell jeans, Finished Goods are jeans that are finished and boxed up on the shelf- but not yet sold. Here's the journal entry when goods are completed:
Debit
Credit
Finished Goods $500
Work in Process $500
You have moved costs out of Work in Process- because they're no longer partially completed! WIP and Finished Goods are also part of Inventory.
Cost of Goods Sold: When a client "raises their hand" and buys your product, you credit (reduce) Finished Goods. You also debit an expense account- Cost of Goods sold. In accounting lingo, you have used up your asset. You used the asset by making something and selling it to someone. So, the Finished Goods dollars become part of Cost of Sales. Here's the entry:
Debit Credit
Cost of Sales $300
Finished Goods $300
Once again: the amount sold ($300) is different from the Finished Goods balance ($500). As a result, you might see an ending balance in Finished Goods, just as you might in Work in Process or a Control account.
Overhead Control vs. Overhead Applied: In part 2, you spent money on utility costs- and overhead cost. To account for the spending, you debited Overhead Control for $700. Next, you applied $500 to Work in Process. For that transaction, you debited Work in Process and credited Overhead Applied.
You're now left with these balances:
Debit Credit
Overhead Control $700
Overhead Applied $500
You spent more on overhead ($700) than you applied to production ($500). You apply costs to production based on some level of activity- that's a story for another day. For now, you need to close these accounts- adjust the balance to zero.
The simplest way to close the accounts is to post the difference between the two balances to Cost of Sales. Here's the closing entry:
Debit Credit
Overhead Applied $500
Cost of Goods Sold $200
Overhead Control $700
This entry adjusts both of the overhead accounts to zero. Cost of Sales is increased (debited) by $200. You're increasing Cost of Sales by that extra $200 that didn't get applied to production the first time around. You have a balanced entry: total debits equal total credits ($700).
This video link will also help with this topic:
http://www.youtube.com/watch?v=4t7DU2YGvDk
Your comments are welcome! For live chats on
some of the toughest accounting topics, go to my website listed below.
Thanks!
Ken Boyd
St. Louis Test Preparation
(cell) (314) 913-6529
(you
tube channel) kenboydstl
(blog) http://accountingaccidentally.blogspot.com/
(twitter)
@StLouisTestPrep
Author/ Cost Accounting for Dummies (John Wiley and Sons) March 2013
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