CIMA BA2 Syllabus C. PLANNING AND CONTROL - Cost Book Keeping - Notes ^{1 / 3}

T accounts

A T account looks like a T.

Below are a direct materials, direct labour and production overhead T account. 

These 3 items went into our cost per unit (this is called work in progress, as it has not been finished yet).

So, how do these T accounts actually look?

Direct Materials T account

Direct Labour T account

Production Overhead T account

Work in Progress T account

Paying For Direct Materials / Direct Labour / Production Overhead

Let's take this a step back now, every debit must have a credit, so far we have only seen one side of the accounts, so let's see the others.

Let us assume that we have purchased our materials, labour and production overhead for Cash. 

Therefore, when we purchase the direct materials, direct labour and production overheads, the double entry will be:

Debit D.M. / D.L. / P.O. (100 + 100+ 50 = 250)
Credit Cash 250

If cash was not paid for these and we bought them on credit, then the double entry would be:

Debit D.M. / D.L. / P.O. (100 + 100+ 50 = 250)
Credit Payable 250

Going further from this, when we are making our item, the double entry will be:

Debit WIP 250
Credit D.M. / D.L. / P.O. (100 + 100+ 50 = 250)

WIP - Finished Goods

Now we have $250 in WIP, well it won't stay here for long, it will only stay here until it is finished, so let us say that we have finished $200 and $50 is still remaining in WIP, the double entry will look like this:

Debit Finished Goods 200
Credit WIP 200 (Which means that 50 is still remaining here

Finished Goods - Cost of Sales

Now, we want to sell our finished goods, let us say that out of our $200 finished goods, we have sold $180 of them, the double entry will look like this:

Debit Cost Of Sales (In the income statement) 180
Credit Finished Goods 180 (Which leaves 20 remaining in F.G.)

Raw Materials

When Direct Materials are used to produce the goods, the double entry is:

Debit WIP
Credit D.M. 

However, now let us turn this direct materials account, into raw materials, so now it will not be direct materials just going to work in progress

Let us say that we have spent $100 on direct materials for the goods and $40 on materials for maintenance, now we need to move them out, the double entries will look like this:

Debit WIP 100 (because this is directly used to produce the unit)
Debit Production Overhead 40 (as these are indirect materials used in the factory)
Credit Raw materials 140

Wages Control Account

When Direct Labour is used to produce the goods, the double entry is:

Debit WIP
Credit D.L.

 However, now let us turn this direct labour account, into the wages control account, so now it will not be direct labour just going to work in progress

Let us say that we have spent $100 on direct labour for the goods and $40 on indirect labour, now we need to move them out, the double entries will look like this:

Debit WIP 100 (because this is directly used to produce the unit)
Debit Production Overhead 40 (as this is indirect labour used in the factory)
Credit Wages Control Account 140

PAYE and NI

What happens with wages is:

Gross pay $,1000
PAYE ($200)
NI ($100)
Net Pay $700

So in our wages control account, it will look like this:

Debit Wages Control A/c PAYE $200
Debit NI A/c PAYE $100
Debit Wages Control A/c Net pay $700
Credit Cash $700 (As we have paid the employer the cash)
Credit PAYE Payable $200 (As we still owe the PAYE)
Credit NI Payable $100 (As we still owe the NI)

When the PAYE and NI eventually get paid, it will look like this:

Debit PAYE Payable $200 (As it is paid)
Debit NI Payable $100 (As it is paid)
Credit Cash $300

Illustration - Wages Control Allocation

On the Debit side of the wages control account we have:

Basic pay (Direct labour) $1,000
Basic pay (Indirect labour) $400
Bonus for getting the job done on time $200
Idle time $100 

What will the double entries for these be?

Debit WIP $1,200 (For direct labour and bonus for getting a specific job done)
Credit production overhead $500 (For indirect labour, bonus and idle time)

Prepayment / Accruals for Wages

A prepayment of wages is where we have paid for work that has not been done yet, therefore we have made a prepayment, this will remain on the credit sit of the wages account.

An accrual of wages is where we have had work done but not paid for it yet, therefore we have an accrual, this remains on the debit side of the wages account.

Illustration - Stores Ledger Control Account (Also known as a Raw Materials account)

Opening inventory $1,000
Closing inventory $800
Supplies Delivered $10,000
Supplies Returned $400
Indirect materials issued to production overheads $1,000

What will the stores ledger control account look like?