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Cost Accounting · Cost Book-Keeping

Journal Entries for Material, Labour and Overheads in Cost Book-Keeping

Updated 10 October 2026 · Fact-checked

Cost book-keeping records each cost as it moves: materials into stores, then into work-in-progress; wages into a wages control account, then into WIP or overheads; overheads into control accounts, then absorbed into WIP. Any difference between actual and absorbed factory overhead goes to Costing Profit and Loss.

Understand Journal Entries for Material, Labour and Overheads

Cost book-keeping is the double-entry record of costs. Instead of one big cost sheet, you post each cost into a control account. Each control account collects costs of one type, then passes them on to the next stage until they reach finished goods and cost of sales.

Material follows a simple path. Purchases are debited to Stores Ledger Control A/c. When material is issued, direct material goes to Work-in-Progress (WIP) Control A/c and indirect material goes to Factory Overhead Control A/c. Returns reverse these entries.

Labour works the same way. Wages paid or payable are first debited to Wages Control A/c. The wages sheet then splits the total: direct wages go to WIP and indirect wages go to Factory Overhead Control. Idle time and overtime premium are normally treated as overhead unless the question says otherwise.

Overheads are collected in three control accounts: factory, administration, and selling and distribution. Factory overhead is absorbed into WIP using a predetermined rate. Administration overhead is usually charged to finished goods, and selling overhead to cost of sales, unless the question gives a different treatment. Actual and absorbed factory overhead rarely match, so the balance left in the control account is under-absorbed (actual more than absorbed) or over-absorbed (absorbed more than actual). It is closed to Costing Profit and Loss A/c.

In a non-integral system, the cost ledger is separate, and the other side of each entry is Cost Ledger Control A/c (also called General Ledger Adjustment A/c). In an integral system, one set of books is kept and the other side is the real account, such as Creditors, Bank or Wages Payable.

Key rules to remember

Purchase of materials
Stores Ledger Control A/c Dr. To Cost Ledger Control A/c (or Creditors in integral system)
Use the actual credit account named in the question.
Issue of material
WIP Control A/c Dr. (direct) and Factory Overhead Control A/c Dr. (indirect) To Stores Ledger Control A/c
Material returned to stores reverses this entry.
Wages paid
Wages Control A/c Dr. To Cost Ledger Control A/c (or Bank in integral system)
Wages Control collects the gross wages before the split.
Allocation of wages
WIP Control A/c Dr. (direct) and Factory Overhead Control A/c Dr. (indirect) To Wages Control A/c
Wages Control should close with nil balance after allocation.
Overheads incurred
Factory / Administration / Selling and Distribution Overhead Control A/c Dr. To Cost Ledger Control A/c (or Bank, Creditors)
Use a separate control account for each group.
Absorption of overheads
WIP Control A/c Dr. To Factory Overhead Control A/c; Finished Goods Control A/c Dr. To Administration Overhead Control A/c; Cost of Sales A/c Dr. To Selling Overhead Control A/c
Administration and selling treatment may differ if the question says so.
Under-absorption
Costing Profit and Loss A/c Dr. To Factory Overhead Control A/c
Actual overhead exceeds absorbed overhead.
Over-absorption
Factory Overhead Control A/c Dr. To Costing Profit and Loss A/c
Absorbed overhead exceeds actual overhead.
Absorbed overhead
Absorbed overhead = Predetermined rate × Actual base (hours, wages, units)
Compare with actual overhead to find the under or over absorption.

How to solve Journal Entries for Material, Labour and Overheads questions

Use this order for any journal entry question on material, labour and overheads. It keeps every cost in the right control account.

  1. 1Read the question and note whether the system is non-integral (Cost Ledger Control A/c) or integral (Creditors, Bank and so on).
  2. 2List every transaction in the order given. Mark each as material, labour or overhead.
  3. 3For each transaction, decide the debit by asking where the cost goes: stores, WIP, or an overhead control account.
  4. 4Decide the credit by asking where the cost came from: cost ledger control, bank, creditors, stores or wages control.
  5. 5Split mixed items. Divide issues into direct and indirect material, and wages into direct and indirect labour.
  6. 6Absorb factory overhead at the given rate on the given base. Then compare absorbed with actual factory overhead.
  7. 7Pass the entry for under or over absorption to Costing Profit and Loss A/c.
  8. 8Write a short narration for each entry and check that every control account balance is what you expect.

Quickest way: Debit where the cost goes, credit where it came from

When to use it: Use this when time is short and the question has many small transactions.

  1. Write only three heads on rough paper: Material, Labour, Overheads.
  2. Under each head, note the amount and the two accounts: where it comes from and where it goes.
  3. Memorise the route: Purchase to Stores, Stores to WIP or Factory OH, Wages Control to WIP or Factory OH, Factory OH to WIP.
  4. Always do absorption last, then the under or over difference.
  5. Total the debits and credits of each control account to catch slips before writing the final answer.

Common mistakes in Journal Entries for Material, Labour and Overheads

  • Debiting WIP for indirect material or indirect wages.

    Students treat every issue of material or labour as production cost.

    Fix: Only direct material and direct wages go to WIP. Indirect items go to Factory Overhead Control and reach WIP only through absorption.

  • Posting wages directly to WIP without Wages Control.

    It looks shorter, and the question gives the direct and indirect split.

    Fix: Show Wages Control A/c Dr. on payment, then allocate from it. Examiners give marks for the control step.

  • Reversing the entry for under and over absorption.

    Students forget which side of Factory Overhead Control carries the balance.

    Fix: Under-absorption means the debit side is bigger, so credit Factory Overhead Control and debit Costing P&L. Over-absorption is the opposite.

  • Absorbing overhead on actual cost rather than the predetermined rate.

    Students use the actual total as the amount absorbed.

    Fix: Absorbed overhead = predetermined rate × actual base. The actual total is only compared with this figure.

  • Using Cost Ledger Control A/c in an integral system.

    The non-integral pattern is learned first and used by habit.

    Fix: In an integral system, credit Creditors, Bank or Wages Payable. Cost Ledger Control A/c does not appear.

  • Charging administration and selling overhead to WIP.

    Students assume all overhead is absorbed in production.

    Fix: Unless the question says otherwise, charge administration overhead to finished goods and selling overhead to cost of sales.

Worked examples

Example 1

A manufacturer uses a non-integral cost ledger. For a month: materials purchased ₹5,00,000; direct materials issued ₹3,20,000; indirect materials issued ₹40,000; direct materials returned to stores ₹10,000; wages paid ₹1,80,000 (direct ₹1,20,000, indirect ₹60,000); other factory expenses ₹1,50,000; administration overhead ₹90,000; selling overhead ₹60,000. Factory overhead is absorbed at 200% of direct wages. Administration overhead is charged to finished goods and selling overhead to cost of sales. Pass the journal entries and find the closing balance of WIP (no opening balances).

Show the solution
  1. Purchases: Stores Ledger Control A/c Dr. ₹5,00,000 To Cost Ledger Control A/c ₹5,00,000.
  2. Issues: WIP Control A/c Dr. ₹3,20,000 and Factory Overhead Control A/c Dr. ₹40,000 To Stores Ledger Control A/c ₹3,60,000.
  3. Return: Stores Ledger Control A/c Dr. ₹10,000 To WIP Control A/c ₹10,000.
  4. Wages paid: Wages Control A/c Dr. ₹1,80,000 To Cost Ledger Control A/c ₹1,80,000.
  5. Allocation: WIP Control A/c Dr. ₹1,20,000 and Factory Overhead Control A/c Dr. ₹60,000 To Wages Control A/c ₹1,80,000.
  6. Overheads incurred: Factory Overhead Control A/c Dr. ₹1,50,000, Administration Overhead Control A/c Dr. ₹90,000, Selling Overhead Control A/c Dr. ₹60,000 To Cost Ledger Control A/c ₹3,00,000.
  7. Absorption: 200% × ₹1,20,000 = ₹2,40,000. WIP Control A/c Dr. ₹2,40,000 To Factory Overhead Control A/c ₹2,40,000.
  8. Factory overhead debits: ₹40,000 + ₹60,000 + ₹1,50,000 = ₹2,50,000. Absorbed ₹2,40,000. Under-absorbed ₹10,000. Costing Profit and Loss A/c Dr. ₹10,000 To Factory Overhead Control A/c ₹10,000.
  9. Finished Goods Control A/c Dr. ₹90,000 To Administration Overhead Control A/c ₹90,000. Cost of Sales A/c Dr. ₹60,000 To Selling Overhead Control A/c ₹60,000.
  10. WIP balance: ₹3,20,000 − ₹10,000 + ₹1,20,000 + ₹2,40,000 = ₹6,70,000.

Answer: Factory overhead is under-absorbed by ₹10,000 and written off to Costing Profit and Loss A/c. Closing WIP is ₹6,70,000 and closing stores are ₹1,50,000 (₹5,00,000 − ₹3,60,000 + ₹10,000).

Example 2

A company keeps integral accounts. During a month: materials bought on credit ₹2,00,000; direct materials issued ₹1,50,000; indirect materials issued ₹20,000; wages paid by bank ₹90,000 (direct ₹60,000, indirect ₹30,000); factory expenses paid by bank ₹1,10,000. Factory overhead is absorbed at ₹40 per machine hour and 4,300 machine hours were worked. Pass the entries and treat the overhead difference.

Show the solution
  1. Purchases: Stores Ledger Control A/c Dr. ₹2,00,000 To Creditors A/c ₹2,00,000.
  2. Issues: WIP Control A/c Dr. ₹1,50,000 and Factory Overhead Control A/c Dr. ₹20,000 To Stores Ledger Control A/c ₹1,70,000.
  3. Wages paid: Wages Control A/c Dr. ₹90,000 To Bank A/c ₹90,000.
  4. Allocation: WIP Control A/c Dr. ₹60,000 and Factory Overhead Control A/c Dr. ₹30,000 To Wages Control A/c ₹90,000.
  5. Factory expenses: Factory Overhead Control A/c Dr. ₹1,10,000 To Bank A/c ₹1,10,000.
  6. Actual factory overhead: ₹20,000 + ₹30,000 + ₹1,10,000 = ₹1,60,000.
  7. Absorbed: 4,300 × ₹40 = ₹1,72,000. WIP Control A/c Dr. ₹1,72,000 To Factory Overhead Control A/c ₹1,72,000.
  8. Absorbed ₹1,72,000 is more than actual ₹1,60,000, so overhead is over-absorbed by ₹12,000.
  9. Factory Overhead Control A/c Dr. ₹12,000 To Costing Profit and Loss A/c ₹12,000.

Answer: Factory overhead is over-absorbed by ₹12,000, which is credited to Costing Profit and Loss A/c. Closing stores are ₹30,000 (₹2,00,000 − ₹1,70,000). WIP carries ₹1,50,000 + ₹60,000 + ₹1,72,000 = ₹3,82,000.

Exam tips

  • Check the system first. If the question says integral or integrated, do not use Cost Ledger Control A/c.
  • In MCQs, look for the account named in the entry. Most MCQs test whether you pick WIP or Factory Overhead Control as the debit.
  • In written answers, number every entry and add a one-line narration. Each correct entry earns step marks even if a later figure goes wrong.
  • Always show the Factory Overhead Control calculation: actual debits, absorbed credit, and the difference. Then state whether it is under or over absorbed.
  • Check if the question gives a different treatment for administration or selling overhead, and follow that instead of the default.

Practice questions from Cost Book-Keeping

Journal Entries for Material, Labour and Overheads in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Journal Entries for Material, Labour and Overheads: frequently asked questions

How do I pass journal entries in cost book-keeping?

Debit the account where the cost is going and credit the account it came from. For material, that is Stores to WIP or Factory Overhead Control. For labour, it is Wages Control to WIP or Factory Overhead Control. For overheads, it is the overhead control account, then absorption into WIP.

What is the entry for under-absorbed overhead?

Debit Costing Profit and Loss A/c and credit Factory Overhead Control A/c. Under-absorption means actual overhead is more than absorbed, so the balance on the control account is a debit that must be cleared.

What is the entry for over-absorbed overhead?

Debit Factory Overhead Control A/c and credit Costing Profit and Loss A/c. Over-absorption means more overhead was charged to production than was actually incurred.

Why do we use Cost Ledger Control A/c?

In a non-integral system the cost ledger is kept apart from the financial books. Cost Ledger Control A/c is the other side of every entry, so the cost ledger balances on its own. It is also called General Ledger Adjustment A/c.

Where does indirect material go?

Indirect material is debited to Factory Overhead Control A/c when issued from stores. It reaches WIP only through the absorption entry.