Question

Why is direct labor and indirect labor not expensed immediately when incurred (Wages Expense or Salary Expense)?

Answer 1

Generally accepted accounting principles require that all product costs are included as part of the company's inventory balance until the products are sold. Direct labor costs, because they are easily traceable to products, are recorded as a debit to the work-in-process inventory account and a credit to wages payable. Indirect labor, such as the salaries of factory management, cannot be easily traced to products. Therefore, these expenses are debited to the manufacturing overhead account and credited to the wages payable account. As jobs are completed, these overhead costs will be applied to products through an allocation process.