Material bought for a job passes through three inventory accounts before its cost reaches cost of goods sold. When you price materials for a bid, you usually work with one number at a time: quantity times unit price, plus whatever allowance you add for waste or breakage. That figure goes into the proposal, and the customer sees a single line. Your accounting system sees something else. Once the material is bought, the amount recorded for it changes accounts as the job moves along.
That gap is where many estimators get confused. A bid is a forecast made before any material is ordered. The books are a record made after each purchase, requisition, and sale. The two rarely line up on the same day, and a job can look over budget or under budget simply because the cost is sitting in a different account than the one you checked.
If you have ever asked why the material figure on a job report does not match your takeoff, the answer is usually in the accounts rather than in the prices. This post explains that connection in plain terms, without accounting jargon piled on top.
This post follows the chain. It covers the three inventory accounts a job's material cost passes through, in the order the cost actually moves. Bookkeeping skill is not required to use it. What you need is a clear picture of where a material's cost is counted at each stage, so you can check a bid against actual spending, explain a variance to a client, and read a job cost report without guessing.
The method that tracks cost job by job is called job order costing, and it fits estimating work well because each job gets its own cost record. OpenStax, in its managerial accounting textbook, puts it this way: "Job order costing can be used for many different industries, and each industry maintains records for one or more inventory accounts." ( OpenStax, section 4.3) For a contractor, fabricator, or custom shop, three of those inventory accounts cover the path that matters most for materials.
The format of those accounts does not change with the cost system. OpenStax notes that "You can see in Figure 4.15 that the general format is the same for maintaining all accounts, whether the company uses a job order, process, or hybrid cost system." ( OpenStax, section 4.3) So the chain you learn here is useful even if your software labels things differently or your bookkeeper uses other names.
The core path is stated plainly in the same section: "The manufacturing industry keeps track of the costs of each inventory account as the product is moved from raw materials inventory into work in process, through work in process, and into the finished goods inventory." ( OpenStax, section 4.3) A job shop or a contractor who buys materials for specific projects can follow the same path, even though the work does not happen on a factory line. The three steps below follow that path in order.
The accounts, with the names most textbooks use, are raw materials inventory, work in process inventory, and finished goods inventory. Cost of goods sold comes after them, and it is where the material finally becomes an expense.
Key takeaways
- Purchased material stays in raw materials inventory until it is issued, so no job carries its cost before then.
- Material moves onto a job only when a requisition records what was pulled, which job received it, and its cost.
- Work in process holds material along with labor and overhead, so compare only the material lines against a bid.
- A completed job's cost may still move, so check for open items like late supplier charges before locking the figure.
- Cost of goods sold records material as an expense only after the finished product is sold.
1. Raw materials inventory: where the cost first lands
When you buy lumber, fasteners, conduit, sheet metal, or anything else that will go into a job, the purchase is recorded in this account. The purchase does not belong to a job yet. Nothing has been used, so no specific project carries the cost. The account is a pool of stock the business can draw from.
Picture a small fabrication shop that buys steel in bulk. The delivery arrives, the supplier invoice is entered, and the amount goes to raw materials. Three jobs are waiting on steel, and none of them has been charged. The steel exists, and the company owns it, but the cost has not yet moved onto the work. That separation is easy to forget when you are reading a bid, because the bid already assumes the steel will be used on a specific project.
OpenStax shows how the pool builds with a simple example: "For example, if the beginning inventory balance were $400, and the company bought an additional $1,000, it would have $1,400 of inventory available for use." ( OpenStax, section 4.3) The $1,400 is what can be sent to jobs. None of it is on a job's cost record until someone issues it.
Timing creates another gap. A bid is usually priced when the quote goes out, but the purchase often comes later, and sometimes at a different price. Knowing that the two numbers are recorded at different times helps you explain a variance without assuming anyone made a mistake.
This matters when you price a bid. Your estimate assumed a material cost for one specific project. When the purchase arrives, the amount lands in a shared account that may hold stock for several jobs at once. A raw materials balance tells you how much stock exists. It says nothing about how much of that stock is committed to which project. That link is made later, when material is issued, which is the next step.
Start with the simplest check. The beginning balance plus purchases should equal what is available for use. In the OpenStax example, that is $400 plus $1,000, which gives $1,400. If your books do not show that relationship for a period, fix that before you compare any job's material figure to the bid. A mismatch at this stage carries into every job that draws from the pool.
Freight, sales tax, and supplier discounts are a separate question. Whether those amounts are added to the recorded cost of a material, and when, depends on your company's accounting policy. This post does not set that policy. Ask whoever keeps your books how those items are handled.
A useful habit at this stage is to keep each purchase tied to its supplier invoice. When you later need to explain a number, you want to trace it from a job back to a purchase without reconstructing it from memory. Good records here save time at every stage that follows.
2. Work in process inventory: where the material moves onto a job
Work in process inventory holds the cost of jobs that have started but are not finished. Material leaves raw materials and enters work in process when it is sent to a specific job. For an estimator, this is the step where the bid's material assumption meets real usage, so it deserves the most attention.
Take a simple remodel. The estimate lists drywall, framing lumber, paint, and trim. As the crew works, they pull what they need from the stock room, and each pull is recorded against the remodel's job number. The drywall that went up on Tuesday is now part of the remodel's cost, even though the remodel is far from done. The unused drywall is still in raw materials, and that is the only place it can be, until someone issues it.
The record that makes this traceable is the materials requisition. OpenStax explains the benefit: "It is easy to reconcile the amount of ending inventory and the cost of direct materials used in production, since the materials requisition form (Figure 4.7) keeps track of the inventory requested and sent into each specific job." ( OpenStax, section 4.3) In plain terms, a requisition records what was pulled from stock, which job it went to, and what it cost. Without that record, raw materials can show that stock went down by some amount, but nothing says which job used it.
Reconciliation is the payoff. Start with the raw materials balance at the beginning of a period, add purchases, and subtract the materials issued to jobs. The result should match the ending raw materials balance. A gap in this reconciliation distorts the material cost of at least one bid, so catching it at this step matters.
A requisition is only useful if it is complete. At a minimum, it should identify the job, the material, the quantity, and the cost. Ask that no material leave the stock room without a job reference, and make sure the people who prepare requisitions use the same job numbers your estimate uses. If the numbers do not match, your bid and your cost record describe two different projects.
Work in process is also where other costs collect for the same job. Labor and overhead for unfinished work sit in this account next to materials. That is why a job's material cost is never the whole number in work in process. When you compare a job cost report to your bid, separate the material lines first. Otherwise the comparison mixes in labor and overhead and suggests a materials problem that is really a labor problem.
A useful way to read a work in process report is to ask three questions of each open job: how much material has been issued so far, how much of the estimate that represents, and whether the remaining material is still ahead of the schedule. The answers tell you whether the job is on track before it closes, which is the point of tracking the account in the first place.
Practical checks at this stage:
- Match each requisition to a job number, and look for entries with no job or the wrong one.
- Look at returns. Material sent back to stock should move out of the job. If it stays on the job record, the job carries cost it did not use.
- Compare the quantities issued with the quantities in your takeoff. Differences show where the estimate and the actual work diverged, which is the most useful feedback you can get for the next bid.
Each of these checks is about the trail, not about any legal or tax rule. The goal is to be able to say, for any dollar of material on a job, when it was issued and who issued it. That answer is what turns a bid from an estimate into a record you can learn from.
3. Finished goods inventory and cost of goods sold: where the cost waits for the sale
When a job is complete, its accumulated cost moves out of work in process and into finished goods inventory. Finished goods holds completed work that has not yet been sold or delivered. The material cost on that work is still part of an inventory asset. It has not yet become an expense, even though the work itself is done.
The last leg is shown in OpenStax's figure for this stage, which the text describes in one line: "Figure 4.16 shows the flow to cost of goods sold." ( OpenStax, section 4.3) When the product is sold, its cost leaves finished goods and is recorded as cost of goods sold. That is the point where material cost finally shows up as an expense against revenue.
Once a job's cost is in finished goods, it is easy to treat that number as final. Look at whether the job still has open items, such as a late supplier charge or a stock adjustment that has not been posted, before you lock the figure. A number that looks final may still move if a late entry lands in the books.
Timing is why this matters for estimating. A bid compares a forecast cost with a future result. If you check a job early, the material cost may still be sitting in work in process. If you check a finished job, it may be in finished goods. If you check after the sale, it has moved again. Before you conclude that a job lost money on materials, confirm which account holds the cost you are reading.
Valuation adds one more layer. OpenStax says: "The primary difference in the four methods is the valuation of the cost of goods sold and the remaining ending inventory valuation, assuming that the company did not sell 100% of the inventory that they had available for sale during a given period." ( OpenStax, section 4.3) In practice, the inventory cost method your company uses decides how much of the material cost goes into cost of goods sold and how much stays in ending inventory. For one example of how a weighted average changes a unit cost, see weighted average material unit cost. When you compare a sold job's margin with the bid, find out which method the books use before you draw conclusions about material pricing.
Leftover material at completion needs a plan too. Stock left over from a finished job may go back to raw materials, stay with the job's cost, or be handled another way depending on company practice. Ask how that is handled, because it changes the job's final material figure. A bid that ignores leftovers can make a job look worse or better than it really was.
At this stage, check three things. First, confirm that a completed job's material cost has left work in process. Second, when you compare the final figure with the bid's material line, make sure both cover materials only. Third, know which valuation method sits behind any margin you are reporting. Each check takes a few minutes when the records are kept well, and each one prevents a conclusion built on the wrong account.
Put the whole chain together, and the path looks like this: purchase into raw materials, requisition into work in process, completion into finished goods, and sale into cost of goods sold. Each handoff is a point where your estimate and your books can drift apart. Check at each handoff rather than waiting for the final number, because a small gap found early is much easier to explain than a large one found at the end of the job. Your bid is a forecast. The three inventory accounts are the record that shows how close that forecast came, and where it went off course.