Q17-9RQ - Horngren'S Financial And Managerial Accounting

Question

Question: How does the use of direct and indirect materials in production affect the accounts?

Step-by-Step Solution

Answer

Answer:

The cost of direct materials is deducted from the Raw Materials Inventory (credit) and is assigned to Work-in-Process Inventory (debit). The cost of indirect materials is deducted from the Raw Materials Inventory account (credit) and is accumulated in the Manufacturing Overhead account (debit)

Step 1: Material cost

Material cost means the cost incurred by an organization on the material used to manufacture the product or provide a service. It is classified as the direct cost incurred by the company.

Step 2: Books of accounts

The books of accounts are maintained by the company to show the transactions of the company. It is referred by the accountant while preparing the financial statements of the company.

While preparing the books of accounts of the company the direct material cost of the production is treated as the work in process inventory and the indirect cost of material is treated as the manufacturing overheads.