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I watched all your lectures but I’m stuck here about this one. I know it is not coming in MA exam but I need to understand this whole concept. I hope you’d help me on this 🙂
1) Could you please explain how each production costs are processed in different inventory accounts such as raw materials, WIP and finished goods?
2) And are they actually general ledger accounts (ie T-accounts) or something else. Pls explain?
3) Please tell me do we have to show each inventory accounts balances seperately in balance sheet or we should show the total value of the inventory like this…
Raw material $10,000
Finished Goods $8000
Total inventory cost $24,000
4) Is it true that raw material account will record the purchase of direct material.
5) WIP account will record all the production costs because it is where the production will take place.
6) Finished goods account will record all the production costs because the product is complete after incurring all the costs.
1. When costs are incurred, they are debited to the relevant accounts – materials, labour or overheads. As production takes place the costs are transferred to the WIP account. As production is completed the cost is transferred from the WIP account to the finished goods account.
2. They are normal ledger accounts.
3. It is whichever the company prefers – normally they will show in total but there is no rule. (And we stopped calling it the balance sheet many years ago – it is the Statement of Financial Position.)
4. Yes it is true.