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Cost accountants use ledgers to track materials, labor, and overhead costs in manufacturing. A materials ledger records transactions related to the purchase and use of materials, while subsidiary ledgers provide more detailed information. Direct materials are recorded in the materials ledger, and all accounts flow to the work in process account. The purpose of ledgers is to control the cost of materials and assess production efficiency.
A manufacturing company has three main components to track during production processes: materials, labor, and overhead. Cost accountants use different ledgers (journals or ledgers) to track costs associated with any production activity. A materials ledger holds all transactions related to the purchase and use of materials to produce goods. Any use or movement of materials has an entry in this ledger, whether the company uses a work order or costing system. A material book is of great importance to a manufacturing business.
A materials ledger can have multiple subledgers or journals. This provides a more in-depth approach to recording and reporting financial figures related to production activities. Some common subsidiary ledgers may be accounts payable, different journals for the types of materials used in production, and similar ledgers. The general ledger contains only the aggregated information for various transactions, which makes the ledger more concise when reviewing numbers. Cost accountants are responsible for maintaining all ledgers and subledgers in this accounting process.
Direct materials are the only items or transactions recorded in a materials ledger. Items are classified as direct materials when the resource is absolutely necessary to produce a product. For example, steel gadgets require steel as the main production material. Any purchase or use of steel from the company’s materials inventory is represented in the materials ledger. Once again, subsidiary ledgers may be necessary if a business requires multiple types of direct materials to produce a good.
Various ledgers and financial accounts make up a company’s cost accounting system. Along with a direct materials ledger, accountants can use ledgers to record direct labor for the production of goods and overhead—indirect costs that cannot be traced to a single good. All of these individual accounts flow to the work in process (WIP) account in the cost accounting system. The WIP account indicates the cost of each resource currently used in the production of goods. Therefore, an entry will have representation in at least two ledgers, such as the materials ledger and the WIP ledger, for example.
The purpose of ledgers is to control the cost of materials used in producing goods. All batching or processing of goods incurs some types of costs. Cost accountants need this information to assign production costs to all goods in the manufacturing process. This allows a company to assess how efficiently it uses materials to produce items.
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