COST BOOKKEEPING
At this stage, we only need to understand the method of bringing all the costs (Material, Labour and Overheads) in to double entry bookkeeping. So we can get overall cost to pass to finished goods.
We will focus only four accounts:
1. Stock control account (Inventory Account / Raw material account)
2. Wages control account
3. Work in progress account
4. Production overhead control account
Control account = Total account
1. Stock control account (Inventory Account / Raw material account)
In stock control account, we record all material that comes into the business whether on credit or through bank payment. We issue material for production therefore send to WIP account. We also issue indirect material for overheads therefore send to Production overhead account.
Stock at the start of the period is called balance brought forward ‘bd’ (opening stock) and stock at the end of the period is called balance carried down ‘cd’ (closing stock).
2. Wages control account
All payments made to labour and government (deduction as taxes) is recorded in this account. We transferred direct labour cost to WIP account and indirect labour cost to Production overhead account.
There will be no balance in this account.
3. Work in progress account WIP (Cost unit)
In WIP account, we build up the cost of a cost unit. So we receive cost form Stock control account as direct material, from Wages control account as direct labour, and indirect expenses form Production control account. Amount of completed goods transferred to Finished goods account.
Goods in production process at the start of the period is called balance brought forward ‘bd’ (opening WIP) and Goods in production process at the end of the period is called balance carried down ‘cd’ (closing WIP).
4. Production overhead control account (Cost centre)
Production overhead control account is treated as cost centre because we charge indirect cost firstly to the cost centre and then to the cost unit by using absorption costing.
In this account, we receive indirect material from Stock control account, indirect labour from Wages control account. We also inure some other indirect costs directly. We transfer all absorbed cost to the WIP account.
If we have charged more estimated overhead to production (WIP), we will debit this account with over absorbed amount but if we have charged less estimated overhead to production (WIP), we will credit this account with over absorbed amount
| Stock Control A/C | | Wages Control A/C | ||||||||
| Balance bd | xxx | WIP | xxx | | Bank | xxx | WIP | xxx | ||
| Purchases | xxx | Production OH | xxx | | Deductions | xxx | Production OH | xxx | ||
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| | | | | | | | | | ||
| | | | | | | | | | ||
| | | Balance cd | xxx | | | | | | ||
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| Work in Progress A/C (Cost unit) | | Production overhead A/C (Cost centre) | ||||||||
| Balance bd | xxx | Finished Goods | xxx | | Stock Control | xxx | WIP | xxx | ||
| Stock control | xxx | | | | Wages | xxx | Under Absorption | xxx | ||
| Wages | xxx | | | | Bank | xxx | | | ||
| Production OH | xxx | | | | Over Absorption | xxx | | | ||
| | | | | | | | | | ||
| | | Balance cd | xxx | | | | | | ||
| | | | | | | | | | ||
| Under Absorption Account | | Over absorption Account | ||||||||
| Production OH | xxx | Profit & loss A/C | xxx | | Profit & loss A/C | xxx | Production OH | xxx | ||
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In examination point of view, in any account the examiner may give all items of an account except any one of them. We will have to find the missing one.
