Managerial Accounting: What It Is and Why It Matters

There are three inventory accounts of a manufacturing entity, including raw materials, finished goods, and work in process accounts. The raw material inventory account entails the cost of raw materials that are currently available for production uses by the company. The raw materials vary from one company and one industry to another. The account can show the types of raw materials, including direct and indirect materials. The work-in-process inventory account shows the cost of goods for products that are partially completed (Jiambalvo, 2019) . The account entails the value of the work-in-process stock available at the start of the fiscal period. It also incorporates the manufacturing expenses linked with the work in process, for instance, direct labor, direct materials, and production overheads that have been spent on making the partially finished products. The finished goods inventory account shows the expenses of all items that are finished and ready to be sold. The finished goods entail the expenses of direct material, direct labor, and production overheads incurred to transform the raw materials into their finished state. 

Products costs flow among the three inventory accounts. The direct material expense decreases the raw material inventory account, and the work-in-process account is increased by a similar amount. The cost of indirect material employed in production is not incorporated in the work-in-process account but rather accumulated in the production overhead account. The direct labor utilized increases the work-in-process inventory account with the indirect labor utilized not included in the work-in-process account (Jiambalvo, 2019) . The indirect labor cost is incorporated in the production overhead. The expenses accumulated in the production overhead, for instance, the indirect labor, materials, and other overhead expenses, are also added to the work-in-process account. When items reach the finished state, their cost is shifted from the work-in-process account to the finished goods account. When the finished items are sold, their cost is shifted from the finished goods account to the cost-of-goods-sold account. 

Reference 

Jiambalvo, J. (2019).  Managerial accounting . John Wiley & Sons.