The journal entry to record direct labor used in process costing is a(n):
A. increase in assets and an increase in equity.
B. increase in assets and an increase in liabilities.
C. decrease in assets and a decrease in equity.
D. decrease in assets and a decrease in liabilities.
Answer (1)
The journal entry for direct labor in process costing involves an increase in assets (Work-in-Process inventory) and an increase in liabilities (Wages Payable). Therefore, the correct answer is:
Direct labor increases Work-in-Process (WIP), which is an asset.
Direct labor increases Wages Payable, which is a liability.
The journal entry reflects an increase in both assets and liabilities.
The correct answer is an increase in assets and an increase in liabilities: $\boxed{O increase in assets and an increase in liabilities.}
Explanation
Understanding the Problem The question asks about the journal entry to record direct labor used in process costing and its effect on assets, liabilities, and equity.
Identifying the Accounts Affected In process costing, direct labor costs are initially added to the work-in-process (WIP) inventory account. This account is an asset. When direct labor is used, it increases the WIP account. The corresponding entry is either an increase in wages payable (a liability) if the labor has not yet been paid, or a decrease in cash (an asset) if the labor has been paid.
Analyzing the Options Let's analyze the options:
Option 1: increase in assets and an increase in equity. This is incorrect because direct labor increases WIP (an asset), but the corresponding entry is either an increase in liabilities (wages payable) or a decrease in assets (cash).
Option 2: increase in assets and an increase in liabilities. This aligns with direct labor increasing WIP (an asset) and increasing wages payable (a liability) before payment.
Option 3: decrease in assets and a decrease in equity. This is incorrect because direct labor increases WIP (an asset).
Option 4: decrease in assets and a decrease in liabilities. This is incorrect because direct labor increases WIP (an asset) and either increases liabilities (wages payable) or decreases assets (cash).
Conclusion Therefore, the correct answer is an increase in assets and an increase in liabilities.
Examples
In a manufacturing company, when workers assemble products, their wages are considered direct labor. Recording this labor involves increasing the value of the partially completed goods (an asset called Work-in-Process inventory) and recognizing the company's obligation to pay the workers (an increase in liabilities called Wages Payable). This accounting practice accurately reflects the cost of production and the company's financial obligations.
