If the factory accounts were kept only on the fac-
tory ledgers and not coupled with and kept in check
by controlling accounts in the general ledger, they would
be little more than memoranda very useful and even
necessary, but falling far short of their full utility. Ac-
cordingly, in every modern cost system, controlling ac-
counts are maintained on the general ledger which sum-
marize the detailed accounts kept in the factory ledgers.
78 GENERAL LEDGER AND COST ACCOUNTS
Artie!
Class
V
ax
mi
mum f
JinNcx
No fc
niim
RECEIVED
ISSUED
BALANCE
\irchase
Order No.
Date
Quantity
Price
Value
Date
Quantity
Value
Date
Quantity
Value
i
Form 10. Stores Ledger Card
Articl*
Stock
Max
Mini
mum
No
num
PRODUCED
SOLD
BALANCE
Job
Order NQ
Date
Quantity
Price
Value
Date
Quantity
Value
Date
Quantity
Value
Form 11. Finished Goods Stock Record
FINANCIAL AND COST ACCOUNTS 79
Both sets of accounts record the transformation of raw
material and supplies into work in process and then
into finished goods.
The controlling accounts in the general ledger which
correspond with and summarize the accounts of a proc-
ess or job order factory are as follows:
1. Stores account (termed also "Raw Material"
or "Material") which summarizes the receipt
and withdrawal of material and supplies
during the period.
2. Work in Process account which records for the
period work coming into process, the charges
accumulated on work in process, and work
going out of process in the shape of finished
goods.
8. Finished Goods account which records for the
period the receipts (from the factory) and
withdrawals (by sale or otherwise) of finished
goods.
These three inventory accounts summarize and con-
trol the accounts of the three factory ledgers mentioned
above. When these general ledger accounts are closed,
their balances give respectively the value of all raw ma-
terial and supplies, of work in process, and of finished
goods on hand at the end of the period. As these bal-
ances represent current assets, their figures are included
in the balance sheet or financial statement of assets and
liabilities under the head of inventories.
Periodically the balances to each of the various stores
accounts must be checked by means of a physical inven-
tory in order to prove the book figures.
80 GENERAL LEDGER AND COST ACCOUNTS
REVIEW QUESTIONS
1 . Distinguish between financial and cost accounts.
2. What relation do the perpetual inventory records bear to the
cost and financial accounting system?
8. Name three subsidiary ledgers in a cost system. How are they
controlled ?
4 . What entries are made when material is used in a factory on the
regular product?
5 . What entries are made when goods are finished in a factory
and delivered to the finished stock clerk?
6. What entries are made when goods are sold?
CHAPTER VII
ENTRIES TO GENERAL LEDGER
CONTROLLING ACCOUNTS
ORDER METHOD
I. Raw Material
Debits: At the beginning of the cost period, the
total value of the inventory of raw material and sup-
plies, which may be obtained by taking the balances of
all the accounts upon the stores ledger, must agree with
the total balance of the controlling Raw Material and
Supplies accounts in the general ledger (comprehen-
sively termed "stores accounts") . This inventory might,
of course, be taken by actual count, weight, and measure,
but unless this physical inventory is desired for the pur-
pose of checking, the inventory used is merely the sum
total of the balances of the stores ledger accounts or the
balance of the controlling stores account or accounts, as
the case may be, in the general ledger.
The method of securing the respective debits to the
stores ledger and general ledger stores accounts is sim-
ple. As invoices of goods purchased are approved for
payment and are entered in the voucher record, or on
the purchase journal,* all that pertain to raw material
and supplies are entered in one or more "Raw Material"
or "Supplies" columns and the monthly totals shown by
For discussion of voucher records see Volume I, Chapter XXII, and Volume
II. Chapter XI of "Business Accounting." For purchase journal, see Volume I,
Chapters XVIII and XXI.
81
$2 GENERAL LEDGER AND COST ACCOUNTS
the footings of these raw material columns are posted
directly to the debit of the controlling stores account or
accounts in the general ledger. Meanwhile the details
which make up these monthly totals for the general
ledger are taken from the invoices covering purchases
as these invoices come in and are entered, item by item,
on the subsidiary stores ledger. If the work is accurate,
the purchase items entered daily on the factory stores
ledger must, of course, when totaled, equal the charges
made in total to the controlling account from the voucher
record or the purchase journal at the end of the account-
ing period.
In addition to the cost of the goods, the accounts with
stores on both the stores records and the general ledger
must be debited with the freight charges on incoming
goods.
Credits: When raw material is requisitioned and
issued for manufacturing purposes, it enters the work
in process stage and on the cost sheet of the factory
ledger is debited against the order, the process, or the
department in which it is to be used. On the stores
ledger it is credited at once to the proper raw material
account. At the end of the month, or other cost account-
ing period, a summary of the withdrawals for manu-
facturing purposes is compiled from the stores requisi-
tions and this total is credited on the general ledger to
Raw Material and debited to Work in Process control-
ling account or accounts.
At the end of the cost period after the postings have
been made, the balance of the general ledger account
with stores represents the value of material and supplies
on hand and must, if the entries have been made accu-
ENTRIES TO CONTROLLING ACCOUNTS
83
rately, equal the total of the detailed balances in the
factory stores ledger.
The following illustrative entries show concisely the
various debits and credits to a general ledger Raw Ma-
terial controlling account.
RAW MATERIAL
Jan. 1
Balance (Inventory at
beginning of period) . . $ 6,000.00
Jan. 81
Purchases 15,600.00
Freight and Express (on
incoming material) . . . 568.64
$22,168.64
Jan. 31
Work in Process $12,968.64
Balance (Inventory at
end of period) 9,200.00
$22,168.64
2. Work in Process Account
Debits: Work in process incurs charges for mate-
rial, labor, and expenses of various kinds. In the job
order method the cost sheets in the cost ledger are
used for the purpose of collecting these charges. The
source of the figures for the material charge is, as
already stated, the stores requisitions for the period
which also furnish the corresponding credit to the con-
trolling stores account. The source of the labor charge
is a summary of the time expended by the factory work-
ers on orders as recorded on individual - workers' time
tickets. Methods of recording time are treated in Chap-
ter XV.
Overhead expense, owing to its general nature, can-
not be debited directly to the cost sheets of work in proc-
ess as can the direct wages paid and the direct materials
used on orders. It is obviously impracticable to charge
84 GENERAL LEDGER AND COST ACCOUNTS
directly such items as taxes, payments for janitor ser-
vice, or the cost of removing ashes from the boiler room.
These must be collected in overhead or expense accounts,
be distributed on some equitable basis over departments,
and then allocated to the work in process by means of
department overhead rates. The methods of doing this
are discussed in Chapter VIII, "Indirect Expense Ac-
counts."
Credits: The credits to the controlling Work in
Process account or accounts consist of the totals of all
completed cost sheets which may represent either fin-
ished goods or manufactured parts. These totals are
computed at the end of the cost period, at which time
all the finished goods cost sheets are transferred from
the cost ledger file to the finished stock ledger file. When
the finished goods are sold or disposed of in some other
way, their cost sheets are withdrawn and permanently
filed away. When manufactured parts are completed
they are usually treated as parts stores pending the time
when they are withdrawn for assembly. The cost sheets
give the cost of manufactured parts. Unless trans-
ferred to a parts stock account, the parts are included
in the work in process inventory. In an automobile
plant, for example, the balance of the Work in Process
account would represent the parts, partial assemblies,
partially erected cars, and partly finished automobiles.
In short, every article which has left the raw material
stores-room and which has not reached the shipping
department is "in process."
The following account illustrates the entries to a
Work in Process controlling account under the job
order method:
ENTRIES TO CONTROLLING ACCOUNTS
85
MANUFACTURING OR WORK IN PROCESS ACCOUNT
Jan. 1
Inventory at beginning of
period $10,000.00
Jan. 31
Materials used during pe-
riod 7,500.00
Manufactured Parts
(used) 5,000.00
Direct Labor 10,000.00
Factory Overhead:
Dept. A 5,000.00
Dept. B 3,000.00
Dept. C 2,500.00
$43,000.00
Jan. 31
Finished Goods Produced $30,000.00
Manufactured Parts Pro-
duced (5,000.00
Balance 7,000.00
(Representing the cost
of all work in process
at the end of the period,
i.e., inventory of work
in process.)
$43,000.00
3. Finished Goods Account
The general ledger account with finished goods is
simple, its primary purpose being to record the cost
value of the completed goods on hand. It is debited
with an opening inventory, with goods finished during
the period, and also with any goods returned by cus-
tomers. It is credited at cost with all finished goods
sold during the period. Its balance, therefore, is the
cost of the goods on hand and should equal the total bal-
ances of the detailed accounts kept in the finished goods
ledger. The Finished Goods account represents all of
the stock which has left the operating departments and
is ready for shipment. Thus in a straw hat factory the
orders are received several months in advance of the
shipping dates and so the goods have to be prepared
and held as finished stock.
The following outline entries illustrate the operation
of a controlling Finished Goods account :
86 GENERAL LEDGER AND COST ACCOUNTS
FINISHED GOODS
Jan. 1
Inventory at beginning of
period $ 5,000.00
Jan. 81
Goods Manufactured dur-
ing period 30,000.00
Goods Returned by Cus-
tomers 1,000.00
$36,000.00
Jan. 31
Cost of Goods Sold to
Customers $30,000.00
Balance 6,000.00
(Representing the cost
value of finished goods
on hand at end of pe-
riod, i.e., the inventory
of finished goods.)
$36,000.00
4. Finished Parts
Finished parts, when manufactured for assembling
into a multiple-parts product, are, like finished goods,
credited to Work in Process. Instead, however, of
being debited to Finished Goods accounts, they are
charged to a suitable inventory or stores account such
as "Manufactured Parts" and taken into stores. They
are then requisitioned when needed and charged to jobs
at their cost of manufacture in the same manner as any
other kind of material.
PROCESS METHOD
5. Raw Material Costs
In recording on the general ledger the cost of manu-
facture for the period and the values on hand of mate-
rials, work in process, and finished goods, the proce-
dure under the process method is much simpler than
under the job order method. In many process plants
or mills it is unnecessary to requisition each lot of mate-
rial consumed, as its cost per unit of product can be
ENTRIES TO CONTROLLING ACCOUNTS 87
readily ascertained at the end of the cost period without
the requisition data.
In a brick plant, for example, the raw material con-
sists of the clay dug from a pit or bank and the cost of
this clay is collected in a Cost of Clay account on the
general ledger. The number of tons dug during the
cost period divided into the cost of clay for the period
as shown by the Cost of Clay account gives the cost
per ton. The amount of clay required for a given num-
ber of bricks is readily ascertained. If, then, it costs
50 cents to take out a ton of clay, which figure is as-
sumed to include labor, royalties (if these have to be
paid to the owner of the clay bank), and all other ex-
penses, and if 2 tons of clay are used in the production
of 1,000 bricks the unit of measurement in the trade
then $1 should be charged for the cost of the raw
material.
For obvious reasons, to take the clay into "stores"
when dug, and control its issues by means of requisitions
would not be worth the labor involved. A sufficiently
accurate check on the cost of digging can be obtained
by comparing the actual tonnage of bricks produced
with the actual tonnage of clay consumed over a con-
siderable period of time. If at the end of any cost
period the amount of clay reported consumed were in
excess of the proper proportion for the bricks manufac-
tured, the discrepancy would call for investigation.
The procedure for determining material costs in a
brick yard illustrates the general principle of handling
process accounts on the general ledger. The raw ma-
terial cost is worked out "per unit" as a separate com-
putation in a flour mill, for example, the quantity of
88 GENERAL LEDGER AND COST ACCOUNTS
grain used in producing a hundred barrels or sacks of
flour, or in a cement plant the value of the limestone,
clay, and other material used in producing a hundred
barrels or bags of cement, is separately computed. The
cost of the various processes through which the raw
material passes, known as the "conversion cost," is
worked out in the same way.
6. Supplies Account
Under manufacturing conditions where no control-
ling account with materials appears on the general
ledger, there is usually a controlling stores account which
checks the consumption of the supplies used in the dif-
ferent departments for manufacturing purposes. The
operation of a mine, a mill, or an open air plant of any
size entails the consumption of tools, lumber, coal, and
stores of many different kinds, the cost of which con-
stitutes a large item of expense. This expense is
checked by keeping an account on the stores ledger with
each item of supplies. The stores ledger, in turn, is
controlled on the general ledger in the way already de-
scribed.
7. Labor
The recording on the general ledger of the labor
cost chargeable to the process accounts of a continuous
process factory merely requires that employees be classi-
fied on the pay-roll so far as possible by departments.
This is usually practicable because of the way in which
the work is carried on. Team-work is essential to the
smooth operation of a process plant, and a gang of
workmen under its own foreman will do the same kind
ENTRIES TO CONTROLLING ACCOUNTS 89
of work regularly day by day. Therefore, the division of
the pay-roll into gangs or departments is all that is
required to collect the labor cost of each process day by
day. At the end of each week the Labor Pay-Roll or
Wages account is debited and Cash credited with the
check drawn for wages. At the end of the month the
Labor or Wages account is credited with the charges
to departments as shown by an analysis of the pay-roll.
If the cost period coincides with the pay-roll period and
therefore no wages have accrued, the departmental
debits should exactly equal the total wages and salaries
of the period.
v
8. Overhead Expense
The recording on the general ledger of the general
overhead chargeable to the process accounts is covered
by the departmental distribution of the administrative
and general expenses that is, items such as taxes, in-
surance, office salaries and stationery, general repairs,
and the like which are a charge to the factory as a
whole and not to a particular department. The distri-
bution is made upon the "Expense Analysis Sheet" dis-
cussed in Chapter XXI.
If the sum of the amounts charged to departments
equals the total current overhead, this equality estab-
lishes the fact that the current overhead has been ab-
sorbed in the manufacturing cost of the period.
9. Department Process Account
The following account illustrates in condensed form
the entries to a controlling department process account
kept on the general ledger:
90 GENERAL LEDGER AND COST ACCOUNTS
WORK IN PROCESS DEPARTMENT A
Jan. 1
Inventory at beginning of
period $1,000.00
Purchases 1,500.00
Labor 2,000.00
Overhead 5,000.00
$9,500.00
Jan. 31
Finished Goods $8,000.00
(Found by deducting
"inventory" from the
costs for the period plus
the opening inventory.)
Inventory at end of period 1,500.00
(Estimated cost of work
still in the departmental
process.)
$9,500.00
The details of the entries shown in the foregoing
Work in Process account would appear in the cost ledger
under as many accounts as are required to furnish a
detailed analysis of costs. Thus the general ledger ac-
counts of a paper mill might show the total costs of oper-
ating the machine, coating, plate finishing, calendering,
sorting, and trimming departments ; while the cost ledger
would contain detailed accounts showing the cost of
power, chemicals, felts, repairs, mill expense, etc., and
the distribution of these costs to the material, labor, and
expense accounts kept with each department.
10. Closing the Work in Process Account
In a job order system the total cost of the current
completed orders, i.e., the total cost of finished goods for
the period, is credited to the Work in Process account,
the balance of the account then representing the cost
value of the work still in process.
In a process system, in each department the cost of
the work still in process at the end of the period is esti-
mated and this estimated cost is deducted from the costs
ENTRIES TO CONTROLLING ACCOUNTS 91
of the period plus any beginning inventory to deter-
mine the cost value of the goods finished during the
period.
The cost of the finished work for the period might,
of course, be estimated, and if this were entered as a
credit the balance would give the cost of unfinished
work or the inventory of work in process, as in the job
order method. In practice, however, the work in proc-
ess is usually much the smaller in quantity and it is
therefore much simpler to reverse the job order plan
and appraise the cost of the work still in process.
In process cost-finding, the charge to Finished
Goods account with offsetting credits to the depart-
mental process accounts would include the sum of
all the departmental charges, provided the end of
the cost period conveniently coincided with the comple-
tion of all work in all process departments. In mining
and other extractive industries, and in plants where the
product is produced in separate batches or runs which
are completed within the cost period, as in the manu-
facture of prepared cocoanut, all the costs accumulated
on the debit side of the process accounts would be
charged against the output for the period. Where the
output is continuous or covers more than one cost
period, however, as in the manufacture of binder twine,
cotton cloth, etc., some work may remain in a partly
finished state in some of the process departments; this
partly processed material has obviously incurred some
of the labor and expense charges debited to the depart-
ment at the close of the period. Under these circum-
stances, to charge the total costs of the department to
finished goods would burden the current completed
92 GENERAL LEDGER AND COST ACCOUNTS
product with the cost of the partly processed and un-
finished product and thus vitiate the cost figures.
The difficulty is overcome as a study of the illus-
trative account will show, and as stated above by tak-
ing up each process department in turn and estimating
the cost value of any unfinished product remaining
therein; i.e., the inventory value of work in process.
This value is credited to the process account and the
balance in each case then represents the cost of that
process for the period which is to be charged against the
cost of the finished goods.
11. Finished Goods Account
The Finished Goods account differs in no way under
the process method from the similar account kept under
the job order method. At the beginning of the cost
period the controlling account on the general ledger is
debited with the inventory of goods on hand. At the
close of the period it is debited with the cost value of
goods finished during the period and with the cost value
of any goods returned by customers ; it is also credited
with the total cost value of all goods sold during the
period, the balance showing cost value of goods on hand.
12. Direct Distribution of Manufacturing Costs
If the product turned out by a process plant is a
simple one, involving only one important factory process,
as in the case of cement making or flour milling, there is
of course no necessity for distributing the expenditures
to departments. In such a case, labor and expense may
be distributed over production direct, as in the state-
ment of conversion cost which follows:
ENTRIES TO CONTROLLING ACCOUNTS
STATEMENT OF CONVERSION COST
(Production for Period, 100,000 Barrels of Flour)
Total
Cost
Grain Handling:
Elevator Men $ 822.00
Depreciation 775.00
^
Manuf actu ring :
Foreman and Second Man 1,575.00
Oilers and Sweepers 500.00
Packers 1,700.00
Warehouse and Loading Labor 1,500.00
Incidentals, Paper, Brooms, etc.... 610.00
Depreciation 2,700.00
Power:
Engineer, Fireman, and Watchman. 1,275.00
Coal 5,827.00
Lubricants, Boiler Compounds, etc.. 464.00
Depreciation 1,500.00
Administration and General Expense:
Manager's Salary 2,400.00
Office Force 3,000.00
Stationery and Office Supplies 307.00
Postage, Telegraph, and Telephone. 1,775.00
Unclassified Expenses, Dues, Man-
ager's Expense, Legal, Charity, etc. 1,593.00
Taxes 1,560.00
Insurance 1,800.00
Interest on Borrowed Money 3,000.00
Total $34,683.00
Conversion cost per 100 barrels: $34.68.
Dept. or
Operation Process
cost per cost per
100 Barrels 100 Barrels
$ 0.82
.77
1.57
.50
1.70
1.50
.61
2.70
1.28
5.83
.46
1.50
2.40
3.00
.31
1.78
1.58
1.56
1.80
3.00
$34.68
$ 1.09
8.58
9.07
15.44
$34.68
The headings in the above statement represent the
four process accounts opened on the general ledger to
94 GENERAL LEDGER AND COST ACCOUNTS
collect the conversion cost for the period. "Grain Hand-
ling" represents the cost of receiving and warehousing
the grain and delivering it to the mill as required;
"Manufacturing" is the cost of milling the grain;
"Power" and "Administration" expenses are self-ex-
planatory.
13. Control of Labor Costs
In both the job order and process methods of cost-
finding, labor costs are summarized on the general ledger
in an account which is variously termed "Labor," "Pay-
Roll," or "Wages." The Pay-Roll account is debited
with the amount of the current pay-roll and it is cred-
ited with the amounts of direct labor charged to jobs
(or process departments) and the amounts of indirect
labor charged to the various factory departments. An
analysis of the pay-roll as a means for distributing the
labor to different departments and thus controlling
labor costs is an important part of the routine of every
cost system.
An illustrative labor account is shown below as it