1.

Raw Materials Inventory The Raw Materials Inventory account, also Materials Inventory Control
account, is made up of the balances of materials and supplies on hand. This account is maintained in
much the same way as the Merchandise Inventory account. The main difference is the way that the
costs of items in inventory are assigned. For the merchandising company, goods taken out of inventory
are items that have been sold. When a sale is made, an entry is needed to debit Cost of Goods Sold and
to credit Merchandise Inventory for the cost of the item. Raw Materials Inventory, on the other hand,
are usually not purchased for resale but for use in manufacturing a product. Therefore, an item taken
out of Materials Inventory and requisitioned into production is transferred to the Work in Process
Inventory account (not Cost of Goods Sold).

2. Work in Process Inventory All manufacturing costs incurred and assigned to products being produced
are classified as Work in Process Inventory costs. The issuance of materials production begins the
production process. These materials must be cut, molded, assembled, or in some other way changed
into a finished product. All of these costs are manufacturing cost elements (product costs), and all of
them enter into accounting for Work in Process Inventory. Direct labor earned by factory employees are
also product costs. Since these people work on specific products, their labor costs are assigned to those
products by including the labor peso earned as part of the Work in Process Inventory account. Overhead
costs are product costs and must be assigned to specific products. Thus, they, too, are included in the
Work in Process Inventory account. As products are completed, they are put into the finished goods
storage area. Therefore, when the completed products are sent to the storage area, their costs are
transferred from the Work in Process Inventory account to the Finished Goods Inventory.

3. Finished Goods Inventory The Finished Goods Inventory account, like Materials Inventory, has same
characteristics of the Merchandise Inventory account. Finished Goods Inventory takes on the
characteristics of Merchandise Inventory. The credit side of both accounts is handled in the same way.
Both show that when goods or products are sold, the costs of those goods are moved from the Finished
Goods Inventory account to the Cost of Goods Sold account.