During the current month, a company that uses job order costing incurred a monthly factory payroll of $180,000. Of this amount, $40,000 is classified as indirect labor and the remainder as direct. Prepare journal entries to record these transactions.

Work in Process (Dr.)                     $140,000

Manufacturing overhead (Dr.)           40,000

                     Payroll / Salaries Payable                $180,000

Explanation:

Job order costing is a costing method used by the managerial accountants when the company produces different products and these products are not identical in-nature. An alternative to this method is Process costing which is used when a company produces homogenous products. In this case, the company has adopted job order costing because its products can be hetrogenous in-nature. Moreover, the company has incurred a Payroll cost of $180,000. $40,000 out of this amount is classified as indirect labor because the company is not able to trace it to a particular job and it will be treated as manufacturing overhead. This amount could have been paid to supervisors of factory or maintenance workers. The remaining amount of $140,000 is classified as direct labor because the management is in a better position to trace it to a particular job. This amount directly goes to Work-in-Process account.

You might have noticed that the indirect cost is kept in Manufacturing overhead account, whereas the direct labor cost is charged to Work-in-process account. This is because that at the start of a period, the management estimates the amount of manufacturing overhead (Indirect costs) and charge it to the work-in-process account. As the period goes on, the indirect costs are recorded in manufacturing overhead account when incurred, and at the end of period we compare the Actual manufacturing overhead with the expected (charged to Work-in-process) and make adjustments.

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The necessary journal entries are:

Dr Factory work-in progress     $140,000

Dr Factory Overhead account   $40,000

Cr Factory wages payable                        $180,000

Explanation:

The $40,000 is an cost of labor, hence it is debited to factory overhead which is the account for indirect labor cost. Indirect labor in this sense refers to labor cost not directly traceable to the finished goods produced,the remaining balance of $140,000($180,000-$40,000) is debited to factory work in progress.

For every debit, there is corresponding credit,hence the entire $180,000 is credit to factory wages payable account pending when payment is made. Upon payment the account debited and a credit posted to cash account to indicate cash outflow.