Under Production Orders

Under production orders , when we create non inventory item in to production cost it will appear minus balance (credit balance in relevant expense account) under expenses.That means ,only single entry taken. Please explain

To understand production order accounting, begin with the idea that the total production cost of the finished inventory item will be debited to the Inventory on hand asset account, specifically to the subaccount for the finished item. Therefore, all production costs must be credited somewhere to balance the transaction.

The costs of inventory items in the bill of materials are credited to their individual subaccounts of Inventory on hand. In other words, their value is transferred directly to the finished goods. Any non-inventory costs are credited to whichever account you specify on the production order. So total debits balance against total credits.

How do you think of that in relation to other transactions that might involve non-inventory items? Let’s look at two examples:

  • Consider the case of manufacturing labor, as described in this Guide: https://www.manager.io/guides/7767. Payroll costs for the labor would normally be debited to an expense account, such as Wages. That expense would be subtracted from income to determine net profit. But if we apply two hours of labor to the production order, we want the cost of that labor to be transferred to the finished goods. The credit does that, moving the balance of the Wages account in a negative direction. But the deduction from income is not lost. It will be recovered when the finished inventory item is sold. It’s cost will be transferred to Inventory - cost, where it will still be deducted from income. The deduction just happens later, because the cost to acquire or produce inventory cannot be deducted until the inventory is sold and income is recognized from it.

  • Consider another example where consumable supplies are used in production. These supplies are not counted as inventory because they are never sold and they are not easily counted or tracked. Let’s use varnish and screws for the production of furniture as our examples. We buy both in bulk quantities and post the purchase to a Consumable supplies account, as a debit. When we build a table on a production order, we add an estimate for our use of a few screws from the box and some varnish from the bucket as non-inventory costs. The production order credits the Consumable supplies account, reducing it. The balance reduction is reflected in the cost of the table in Inventory on hand. When we sell the table, those non-inventory costs are credited to Inventory on hand and debited to Inventory - cost. Once again, they are ultimately deducted from income, but not until the finished good is sold.