These costs are then applied to production as direct materials, direct labor and overhead. As costs are applied to production, dollar amounts are transferred from the raw materials, factory labor and overhead accounts to work in process. At the same time, these dollar amounts are posted to the job cost sheets. These costs are an increase to the respective T-account. Indirect materials are a reduction in the RM inventory and an increase to overhead.
Indirect labor is a reduction in factory labor and an increase to overhead.
When a job is sold, the cost of the job is shifted from Finished Goods to Cost of Goods Sold. We need to use a predetermined overhead rate. To calculate this, we estimate what the total overhead costs for the accounting period will be and relate this amount to some activity base. If our production process involves a lot of human labor, that activity base would be direct labor hours. If our production process involves a lot of mechanized labor, that activity base would be machine hours.