Factory Ledger
A factory ledger is a subsidiary ledger in the accounting system that contains all of the cost accounting information related to the factory operations. The primary purpose of this ledger is to accumulate, classify, and record all factory costs, including direct materials, direct labor, and factory overheads, that are incurred in the manufacturing process.
This ledger serves as a tool for management to monitor and control the costs of manufacturing products. It is used in conjunction with the general ledger, and any totals from the factory ledger are usually transferred to the general ledger to be used in the preparation of financial statements.
Entries in the factory ledger might include:
- Purchase of raw materials
- Payment of wages to factory workers
- Costs associated with machinery maintenance and repair
- Depreciation of factory equipment
- Other factory overheads like utilities, insurance, etc.
By keeping a factory ledger, management can have a detailed understanding of where manufacturing costs are coming from, which can aid in decision making to improve efficiency and profitability.
Example of a Factory Ledger
let’s use a fictional company, “WidgetCo,” as an example. WidgetCo manufactures widgets and maintains a factory ledger to track all their manufacturing costs.
- Direct Material Costs: WidgetCo purchases $10,000 worth of raw materials to produce their widgets. This purchase would be recorded as a debit (increase) to their Raw Materials Inventory account in the factory ledger.
- Direct Labor Costs: WidgetCo pays its factory workers $8,000 in wages for the period. This would be recorded as a debit (increase) to their Direct Labor account in the factory ledger.
- Manufacturing Overhead Costs: WidgetCo incurs $2,000 in various overhead costs for the period, including utilities, equipment maintenance, and depreciation. These costs would be recorded as a debit (increase) to their Manufacturing Overhead account in the factory ledger.
These costs would be accumulated in the factory ledger until the widgets are completed. At that point, the costs would be transferred out of their respective accounts (and thus credited in the factory ledger) and debited to the Work in Process account or Finished Goods account, depending on the stage of production.
The total manufacturing costs from the factory ledger ($10,000 + $8,000 + $2,000 = $20,000) would then be reflected in the cost of goods manufactured on the income statement, after being transferred to the general ledger.
By keeping track of these costs in the factory ledger, WidgetCo management can have a clear understanding of their manufacturing costs and can make informed decisions about pricing, production efficiency, and cost control.