Flow of Materials, Labor, & Overhead – Process Cost System

Process cost system will track the costs that go into the production of inventory. Those costs include direct materials, direct labor, and manufacturing overhead.

Inventory will first be purchased with a debit to material asset and credit to accounts payable or cash. The materials will then flow through to finished goods.

The materials will go into work in process WIP or overhead depending on whether it can be applied to a job. The materials going to WIP will debit work in process WIP and credit materials.

The materials going into overhead will debit overhead and credit materials.

Work in process will be increased by overhead applied to it and direct labor. Direct labor will debit work in process WIP and credit wages payable or cash.

Overhead will go into work in process with a debit to work in process and a credit to overhead.

Work in process will then move to finished goods with a debit to finished goods and a credit to work in process.

When sold the finished goods will move to cost of goods sold with a debit to cost of goods sold and a credit to finished goods inventory.