Similar to a financial accountant entering transactions for bookkeeping purposes, costs also have to be accounted for.
Cost and expenses are debited into relevant accounts, whilst income is credited. Following which a costing profit and loss account is produced.
The main ledgers required in order to deal with cost of product are:
- Material cost accounts
- Labour cost accounts
- Work in progress account
- Finished goods accounts
- Production overhead control accounts
Material cost accounts
In this account, the initial purchases of materials are recorded as a debit, whilst any issues occurred in production are recorded as a credit.
Labour cost accounts
In this account the total labour cost is recorded as a debit, whilst the different parts of the labour cost such as production, non-production and indirect labour are credited.
Note this account is sometimes also known as wages account.
Work in progress account
This account record the cost involved in producing cost units. The cost of materials issued for production, direct labour and production overheads is debited in the accounts, whilst completed products are credited and are transferred to the finished goods account.
Finished goods accounts
This account debits the cost of the completed goods which is transferred from the work in progress account. Whilst products actually sold during a period are recorded as credit entries and transferred to the costing profit and loss account.
Production overhead control accounts
This account debits production overheads incurred by the business, whilst production overhead absorbed are credited.