Direct Materials Accounting Help

Direct materials are the raw materials and component parts that become an integral part of finished products and can be traced directly and conveniently to products manufactured Conquest’s direct materials include lightweight alloy tubing for cycle frames, brakes. shifting levers, peddles, sprockets, tires, and soon. Till mountain bikes assembled from these components are Conquest’s finished goods:

The terms direct materials and finished goods are defined from the viewpoint of individual manufacturing companies. For example, Conquest views brake components as a direct material. However, the Company (a brake manufacturer-views the brake components it sells to Conquest as finished goods.

Conquest uses a perpetual inventory system. Accordingly, the costs of direct materials purchased are debited directly to the Materials Inventory account. As these materials are placed into production, their costs are transferred from the Materials Inventory account to the Work in Proceeds Inventory account. by debiting Work in Process Inventory and crediting Materials Inventory. The balance remaining in the Materials Inventory account at year end represents the cost of direct materials on hand and ready for use.

Some materials used in the production process cannot be traced conveniently or directly to the finished goods manufactured. For Conquest, examples include bearing. grease, welding materials, and material used in factory maintenance such as cleaning . compounds. These items are referred to as indirect materials and are classified as part of manufacturing overhead.

Direct Labor

The Direct Labor account is used to record the pay roll cost of direct workers and assign this cost to the goods they help manufacture.” Direct workers are those employees who. work directly on the goods being manufactured, either by hand or ‘with machines. Conquest employs five classifications of direct laborers. Each classification’ and its corresponding job description are as follows:

There are two separate and distinct aspects of accounting for direct labor costs. The first involves the payment of cash made to the direct workers at the end of each pay period. At each payroll date, the Direct Labor account is debited for the total direct labor payroll, and an offsetting credit is made to Cash. The second aspect involves the application of direct labor costs to the goods being produced. As direct labor employees contribute to the production process during the period, the cost of their labor is applied to production by debiting the Work in Process Inventory account. and crediting the Direct Labor account.

our T accounts on the preceding page, the flow of direct labor costs looks similar t to the flow of direct materials costs. There is, however, one significant difference. Materials are purchased before they are used; therefore, the Materials Inventory account has a debit balance equal to the cost of unused materials on hand. The services of employees, however,  used before the employees are paid. Thus the credits to the Direct Label account are recorded throughout the payroll period, but the debits are not recorded.

until the end of the payroll period, If the balance sheet date falls between payroll dates, the Direct Labor account will have a credit balance representing the amount owed to . employees for work already performed. This credit balance should be listed in the balance sheet as wages payable, a current liability.Many employees in a manufacturing plant do not work directly on the goods being
manufactured. Examples at Conquest include factory supervisors, maintenance personnel, forklift drivers, and security guards. These indirect labor costs, which are handled in a fashion similar to that used for indirect materials costs, are considered part of Conquest’s manufacturing overhead.

Manufacturing Overhead

All manufacturing costs other than direct materials and direct labor are classified as many fracturing overhead. The Manufacturing Overhead account is used to record all costs classified as “overhead” and assign these costs to products being manufactured.
“As explained. payroll costs include such factors as payroll taxes and “fringe benefits” as well as the wages earned by employees.

There are many types of overhead costs. Consequently, Manufacturing Overhead is treated as a controlling account for which subsidiary records are typically maintained to .keep track of various overhead classifications. Because of the diverse nature of manufacturing companies, it simply isn’t possible to prepare a complete list of all overhead cost types. However, specific examples at Conquest include the following: Factory supplies that do not become an integral part of finished goods, such as oil used to lubricate the cutting machines and solvents used to clean the painting machines

Materials that become an integral part of finished goods but whose cost would require great effort to actually trace to finished goods. These items include grease used in each bike’s bearing assembly and the nuts and bolts used to attach shift levers and other component parts.

Posted on November 23, 2015 in Management Accounting: A Business Partner

Share the Story

Back to Top
Share This