![]() ![]() A sale transaction should be recognized in the same reporting period as the related cost of goods sold transaction, so that the full extent of a sale transaction is recognized at once. There is also a separate entry for the sale transaction, in which you record a sale and an offsetting increase in accounts receivable or cash. Once there is a sale of goods from finished goods, charge the cost of the finished goods sold to the cost of goods sold expense account, thereby transferring the cost of the inventory from the balance sheet (where it was an asset) to the income statement (where it is an expense). Once the production facility has converted the work-in-process into completed goods, you then shift the cost of these materials into the finished goods account with the following entry:Īt the end of each reporting period, allocate the full amount of costs in the overhead cost pool to work-in-process inventory, finished goods inventory, and the cost of goods sold, usually based on their relative proportions of cost or some other readily supportable measurement. If these amounts are abnormal, then you would instead charge the abnormal amount to the cost of goods sold (so that they are not carried as an asset). There will inevitably be a certain amount of scrap and spoilage arising from a production process, which is normally recorded in the overhead cost pool and then allocated to inventory. If the production process is short, it may be easier to shift the cost of raw materials straight into the finished goods account, rather than the work-in-process account. This calls for another journal entry to officially shift the goods into the work-in-process account, which is shown below. ![]() If you are operating a production facility, then the warehouse staff will pick raw materials from stock and shift it to the production floor, possibly by job number. The entry for this is usually a shifting of the wages expense into a cost pool, with this entry: Various types of production labor, such as production management salaries and materials management wages, are also routed through an overhead cost pool, from which they are later allocated to inventory. The allocation to a cost pool may occur later, but we will assume it occurs at the time of initial accounts payable recordation, with this entry: These expenditures typically begin as accounts payable and are allocated to an overhead cost pool, from which they are then allocated to inventory and the cost of goods sold. There are other types of production-related expenses that are allocated to inventory, such as rent, utilities, and supplies for the manufacturing operation. Record Indirect Production Costs in Overhead ![]()
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