Product Costing

How are labor and overhead costs reflected in inventory value?

In light manufacturing systems accountants typically make period end adjustments to Inventory value to add labor and overhead and net out materials in WIP. If labor and overhead are expensed instead of added back to inventory, you get erratic swings in income from period to period because revenues do not properly align with expenses.

By contrast, the Inventory account in DBA is self-adjusting and is never subject to journal entry. Its value already reflects each item's absorbed labor and manufacturing overhead cost and nets out materials in WIP, which is tracked separately in the self-adjusting Work in Process account.

← Back