Q. 10RQ - Horngren'S Financial And Managerial Accounting

Question

Give the journal entry for direct and indirect labor costs incurred. Explain how this transaction affects the accounting equation.

Step-by-Step Solution

Answer

Date	Particulars	Debit ($)	Credit ($)
	Work-in-process (direct labor)	XXX
	Manufacturing overheads (indirect labor)	XXX
	Wages payable		XXX

 

 This transaction increases the assets i.e the work in process inventory and the current liability i.e. the wages payable of the company, and the manufacturing overhead is treated as an expense in the income statement.

Step 1: Direct labor

The direct labor cost refers to the salary or wages paid to the workers that are directly attributable to the products and services. It is incurred while manufacturing the product hence, treated as the work in process expenditure and added to the work in process inventory.

Step 2: Indirect labor

Indirect labor refers to the employees who are not directly related to the manufacturing process. Indirect labor cost is treated as the manufacturing overhead (expense) in the income statement. 

Whie recording the labor cost in the books of account, direct labor is treated asset, indirect labor is treated as the expense and the wages payable which is credited against the direct and indirect labor is treated as the current liability.