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    obaremc's Avatar
    obaremc Posts: 1, Reputation: 1
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    #1

    Oct 19, 2009, 04:56 AM
    Posting WIP expense to the General Ledger
    How can I post an expense incurred in a job (Work In Progress) to the General Ledger. Does this expense constitute part of the company expense or is a job expense which should not part of the General Ledger?An example is transport expense incurred in the job.
    hamzashakaa's Avatar
    hamzashakaa Posts: 161, Reputation: 8
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    #2

    Oct 19, 2009, 05:51 AM

    If this transportation expense is related to manufacturing a product and converting direct materials to the final product it should be recorded in an account called factory overhead control. All factory overhead actually incurred should be recorded to this account as follows:
    Dr. Factory overhead control
    Cr. Cash or payable
    This account collects all the actual factory overhead incurred during the year. It is from this account that overhead will be allocated to work in process and finished goods inventory. As each unit is produced , some of this cost (using the predetermined overhead rate)is transferred to WIP account as follows:
    Dr. WIP Inventory
    Cr. Factory overhead control

    If the transportation expense is related to the transfer of finished goods to customers it should be recorded as selling expenses and should not be inventoried.
    morgaine300's Avatar
    morgaine300 Posts: 6,561, Reputation: 276
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    #3

    Oct 19, 2009, 08:53 PM

    I'd like to straight up calling the stuff going into WIP "expenses." They aren't expenses - they are costs. WIP is an inventory account and therefore everything you put into it is an asset. It's a funny idea at first... but it's not an expense until such time that you sell the thing you made.

    Think about merchandising. You have a cost to purchase something, just called Inventory (or Stock depending on where you are.) It's an asset. It remains an asset until you sell it. When you sell it, it's no longer an asset because you don't have it anymore. So then you charge it off to Cost of Goods Sold, which is an expense account. What you put into inventory is the COST of inventory, not the "expense" of inventory.

    This is the same sort of concept, except that instead of having the cost of purchasing an item to sell, you have the costs of manufacturing the item that you will sell. Until those items are sold, they are not expenses. When they sell, the costs incurred to manufacture them will then be moved into the Cost of Goods Sold account, just like in merchandising. Until then, all those costs are in inventory accounts, which are assets.

    The WIP account collects up the costs that go into a job. ALL ACCOUNTS are part of the ledger. WIP is an inventory account made up of partially made items, but not finished yet. It's a ledger account like any other account. But it's an asset, not an expense. The fact that it's not an expense doesn't mean it's not a ledger account, so that question is a bit of a contradiction. (That is like saying that since receivables isn't an expense, it's not in the ledger. Are only expenses in a ledger? )

    The costs that are collected up in WIP consist of three things: direct materials, direct labor and overhead. These are ALL "costs" and not "expenses."

    Overhead consists on any production-related, or factory building related, costs that are not direct material or direct labor. That includes indirect material, indirect labor, and anything else related to production or the building, such as depreciation on machines, factory tools, factory supplies used, insurance and taxes on the factory building, utilities used in production, etc. Notice that these are things that under other circumstances would be expensed, if they were for selling or general use and not used in production. (i.e. depreciation on office equipment or insurance on the sales showroom are still expenses, because they aren't related to production.)

    As hamzashakaa stated, overhead costs are actually collected up in an Overhead account first, and then they are applied to the WIP account at the end of the period based on a rate. But they still end up (indirectly) in the WIP account and are one of the 3 costs that go into WIP.

    But otherwise your example is not really that relevant to the question you were asking. The main points are that what is going in there are costs and not expenses, that it's not expensed until finished and sold, that it's an asset and not an expense, but that all those costs still end up in the ledger, because WIP is a ledger account.

    I'm not sure where you got the idea that these costs don't go into the ledger. Unless you are referring to a job cost card. Since you can have many jobs going at once, you will keep track of individual jobs elsewhere and those are subsidiaries. But the totals of those go into the controlling WIP account and are still part of the ledger.

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