Todd Lay just began working as a cost accountant for Enteron Industries Inc., wh
ID: 2415571 • Letter: T
Question
Todd Lay just began working as a cost accountant for Enteron Industries Inc., which manufactures gift items. Todd is preparing to record summary journal entries for the month. Todd logins by recording the factory wages as follows: Then the factory depreciation: Todd's supervisor, Jeff Fastow, walks by and notices the entries. The following conversation takes place: Jeff: That's a very unusual way to record our factory wages and depreciation for the month. Todd: What do you mean? This is exactly the way we were taught to record wages and depreciation in school. You know, debit an expense and credit Cash or payables, or in the case of depreciation, credit Accumulated Depreciation. Jeff: Well, it's not the credits I'm concerned about. It's the debits-I don't think you've recorded the debits correctly. I wouldn't mind if you were recording the administrative wages or office equipment depreciation this way, but I've got real questions about recording factory wages and factory machinery depreciation this way. Todd: Now I'm really confused. You mean this is correct for administrative costs, but not for factory costs? Well, what am I supposed to do-and why? Play the role of Jeff and answer Todd's questions. Why would Jeff accept the journal entries if they were for administrative costs?Explanation / Answer
Jeff should record the debits for factory wages as a debit to Work in Process. The factory wages are product costs and will become part of finished goods inventory and cost of goods sold when the items are sold.
The depreciation should be recorded as a debit to Factory Overhead as it is manufacturing overhead in work in process.Thus both wages and depreciation will become part of finished goods inventory and cost of goods sold when the items are sold and both will be recorded in the income statement as cost of goods sold, not as individual expense.
b. Jeff would accept the journal entries if they were recorded as administrative wages and depreciation because the benefits received from these costs are not product costs but these are period costs. Thus, these costs should be expensed for the period.