Cost Accounting For Dummies. Kenneth W. Boyd

The flow not only lets you see where the inventory money is, but also spot production logjams. Too much in the material control account suggest that you’re overbuying or not producing. Too much in the work-in-process control account suggests that you’re not producing. Too much in the finished goods control account suggests that you’re not selling and you have “dead inventory.”

      Applying the methodology to other control accounts

      Use the same flow process for labor and indirect costs. Labor costs accumulate in the control account until they’re traced to a customer or product line. At that point, the cost moves to work-in-process. When the goods are completed, the costs move to finished goods. When goods are sold, the cost moves to cost of goods sold. The labor cost process mirrors the system for material costs listed above.

      I define cost allocation in the “Budgeting for indirect costs” section. For example, you’re recognizing depreciation expense and repair costs on vehicles. Those costs are in an overhead account. You plan a budgeted rate to apply indirect costs to products. As those costs are incurred, the overhead control account is increased (debited).

      When you allocate indirect costs to a customer or product line, you reduce (credit) the overhead account and increase (debit) the work-in-process control account. After that, the process is the same as with the other control accounts. Costs move from work-in-process to finished goods to cost of sales.