2.4 Cost Accounting Records and Journals

Cost Accounting Records and Journals

Management accountants must be able to work from both manual records and software packages to record and calculate materials, labour, and overhead costs. This section covers two linked AAT Q2022 requirements: preparing and interpreting inventory records for materials, work-in-progress, and finished goods (topic 2.1), and preparing cost accounting journals for materials, labour, and overheads (topic 2.2).

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Inventory Records for Materials, WIP, and Finished Goods

Every movement of inventory is captured in both quantity and value so that costs can be traced to jobs, batches, or units of output:

• Stores (Materials) Ledger Account: one record per material line, updated for receipts (from the Goods Received Note) and issues (from the Materials Issue/Requisition Note), with the running balance valued under FIFO or AVCO.
• Work-in-Progress (WIP) Records: accumulate the direct materials issued, direct labour booked via time tickets, and absorbed production overheads for each job or unit of production still in progress.
• Finished Goods Records: track completed units transferred out of production at their full production cost, supporting cost of sales and closing inventory calculations.

In accounting software, these records are maintained automatically from scanned documents and postings; in a manual system, they are kept on ledger cards. Either way, the perpetual records are agreed periodically to physical stock counts, with any differences investigated.

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Principles of Cost Accounting Journal Entries

Cost bookkeeping mirrors the flow of costs through the factory using a set of control accounts:

• Materials (Stores) Control — records purchases, receipts, issues, and returns of materials.
• Wages Control — collects gross factory payroll before it is allocated.
• Production Overhead Control — collects actual indirect production costs before absorption.
• Work-in-Progress (WIP) Control — accumulates the production cost of work completed or still in progress.

1. Journal Entries for Materials

2. Journal Entries for Labour

Gross wages are first collected in Wages Control and then allocated to their destination:

3. Journal Entries for Overheads

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Worked Example: Cost Journals for a Month

Apex Manufacturing records the following April transactions:

1. Materials purchased on credit, £12,000.
2. Materials issued to production: £9,500, of which £800 is indirect materials.
3. Gross factory wages: £15,000 — direct labour £11,000, indirect production labour £2,500, administration salaries £1,500.
4. Production overheads incurred: £2,900.
5. Production overheads absorbed into production at the predetermined OAR: £6,500.

Journal entries:

Period-end overhead position: Production Overhead Control has collected actual overheads of £800 + £2,500 + £2,900 = £6,200, while £6,500 has been absorbed into WIP. Overheads are therefore over-absorbed by £300. The clearing entry is: Debit Production Overhead Control £300, Credit Profit and Loss Account £300, which increases reported profit.

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Common AAT Exam Traps

• Exam Trap 1: Charging Indirect Costs Straight to WIP: Only DIRECT materials and DIRECT labour enter WIP Control directly; indirect materials, indirect labour, and idle time must pass through Production Overhead Control first.
• Exam Trap 2: Forgetting the Under/Over-Absorption Transfer: The residual balance on Production Overhead Control is cleared to the Profit and Loss Account every period — under-absorption is a debit to profit, over-absorption is a credit.
• Exam Trap 3: Reversing the Materials Issue Entry: Issuing direct materials debits WIP Control and credits Materials Control; a purchase does the opposite (debit Materials Control, credit Payables).