Professional Documents
Culture Documents
Chapter 3 - Accumulating Costs For Products and Services (1-20)
Chapter 3 - Accumulating Costs For Products and Services (1-20)
Explain the flow and accumulation of costs when using job costing
Describe the purpose and content of job cost sheet
Identify appropriate units for accumulation of control costs
Explain the treatment of profit/loss on contracts including uncompleted
contracts
Demonstrate the application and identification of cost units
Explain and determine the equivalent units and cost per equivalent unit
Demonstrate how costs are assigned to equivalent units using process
costing
Demonstrate cost accounting methods used in cost processes, process
losses and work in progress
Explain the difference between joint product and by-product costing
1.1 The job order cost procedure keeps the costs of various jobs or contracts
separate during their manufacture or construction. The method is
applicable to job order work in factories, workshops, and repair shops as
well as to work by builders, construction engineers, shipbuilders, and
printers. The cost unit is the job, the work order, or the contract; and the
records will show the cost of each. The method presupposes the possibility
of physically identifying the jobs produced and of charging each with its
own cost.
1.2 A variation of the job order cost method is that of costing orders by lots. A
lot is the quantity of product that can conveniently and economically be
produced and costed. For example, in the shoe manufacturing industry, a
contract is divided into lots, each lot being from 100 to 250 pairs of one
size and style of shoe. The costs are then accumulated for each lot.
1.3 In job order costing, each job is an accounting unit to which materials,
labor, and factory overhead costs are assigned by means of job order
numbers. The cost of each order produced for a given customer or the
cost of each lot to be placed in stock is recorded on a summary sheet
called a job order cost sheet, or merely a cost sheet. This mater sheet is
designed to collect the costs of materials, labor, and factory overhead
applicable to a specific job.
1.4 Cost sheets differ in form, content, and arrangement in each business.
These cost sheets are designed to provide information needed by
management and therefore will vary according to management's desire
or needs. In each form, the upper section provides space for the job
number, the name of the customer, a description of the items to be
produced, the quantity, the date started, and the date completed. The
main portion shows the cost of materials, labor, and factory overhead
applied in each department or cost center.
2.2.1 These records are the perpetual book inventory costs and
quantities of materials on hand.
2.2.2 The file of materials stock cards for unused materials is the
subsidiary ledger for Materials Control.
2.3 FINISHED GOODS STOCKARD
2.3.1 These records are the perpetual book inventory of costs and
quantities of completed goods held for sale.
2.3.2 The file of finished goods stock cards for unsold goods is the
subsidiary ledger of Finished Goods Control.
2.4 FACTORY OVERHEAD CONTROL COST RECORD
2.4.2 The file of these records for the accounting period is the subsidiary
ledger for Factory Overhead Control.
2.5 MATERIALS REQUISITION, TIME TICKET AND CLOCK CARD
An entry is made on the stock card under the Received section enclosed
in parenthesis to indicate reduction in quantity.
3.3 Recording the issuance of materials
When a job is started, the materials needed for the job are issued based
on the materials requisitions prepared by the employees A copy of the
requisition is given to the storekeeper, which will serve as the basis for e
materials to be issued. The job order number is shown on the materials
requisition together with the specifics on type and quantity of materials
required by each job. The quality, unit cost and total cost of each of the
materials are entered on the issued section of the stock card.
The entry to record the issuance of direct materials is
Work in process xxxx
Materials xxxx
An entry is made on the stock card under the Issued section and also on
the cost sheet - Materials.
The entry to record the issuance of indirect materials is
Factory overhead control xxxx
Materials xxxx
An entry is made on the stock card under the Issued section and also on
the overhead analysis sheet.
Shown below is an illustration of a material stock card.
Shown below is an illustration of a material requisition slip.
3.4 The material control account may be summarized as follows:
MATERIALS
1. Inventory beginning 1. Cost of direct materials issued
2. Purchase of materials 2. Cost of indirect materials issued
3. Freight-in (using direct 3. Costs of materials returned to
charging) suppliers
4. Cost of excess materials
Returned from factory
4.1 The accounting procedures for labor may be divided into two distinct
phases:
4.2 In most factories, clock cards/time records are used to record the days or
hours worked by each employee. These clock cards/time records are
used as the basis in computing the gross earnings of employees who are
paid hourly wages. In addition to these clock cards, time tickets are
prepared for each worker to determine the time spent for each job as
basis in determining the amount to be charged to direct labor cost and
indirect labor cost. The time tickets for various jobs are sorted, priced, and
summarized, and the time ticket hours should be reconciled with the
clock card hours.
Shown below is an illustration of a job time ticket.
4.3 At regular intervals, usually daily or weekly, the labor time and labor cost
for each job are entered on the job order cost sheets. For each payroll
period - weekly, every two weeks, or monthly - the summary of employees'
earnings and the liability for payment is journalized and posted to the
general ledger.
The entry to record the payroll and the incurrence of liability is
Payroll xxxx
Withholding Tax Payable xxxx
SSS Premium Payable xxxx
PhilHealth Contribution Payable xxxx
Pag-ibig Funds Contributions Payable xxxx
Accrued Factory Payroll xxxx
The entry to record the distribution of payroll is
4.4 The work in process account is used to charge the jobs with the direct
labor cost. Factory overhead control is charged for the indirect labor cost
incurred. The tax withheld is computed based on the table provided by
the Bureau of Internal Revenue. For the SSS Premiums and Medicare
Contributions, the table is provided by the Social Security System.
4.5 The clearing account for the total wages due to the factory personnel is
the payroll account summarized as follows:
PAYROLL
1. Total wages and salaries 1. Total payroll during the
earned by factory personnel payroll period at the same
during the payroll period time debiting work in
process for direct labor and
overhead for indirect labor
The account used to accumulate the liability for payroll or factory
overhead is the Accrued Factory Payroll summarized as follows:
5.1 There are two accounts used - factory overhead control and factory
overhead applied. Factory overhead control is used to accumulate
actual overhead incurred, while factory overhead applied is used to
accumulate estimated factory overhead applied to production. For
factory overhead applied to production, a predetermined rate is used,
and this is computed using any of the following as a base:
1. Units of production
2. Direct material cost
3. Direct labor hours
4. Direct labor cost
5. Machine hours
5.2 The predetermined factory overhead rate computed may be used for all
departments in the company (blanket rate) or a rate may be computed
for each department to fit the nature of the operations of the department
(departmentalized rate).
5.4 As items in the factory overhead control account are incurred, the
Factory Overhead Control account is debited. The applied factory
overhead entered on the job order cost sheet for each job is the basis for
the following entry:
If the closing is to be done yearly, the entry will be at the end of the year
only. The entry is as follows:
End of the year:
Factory Overhead Applied xxxx
Cost of Goods Sold xxxx
Factory Overhead Control xxxx
When the finished goods are delivered to customers, the sales and the
cost of goods sold are recorded as follows:
Accounts receivable xxxx
Sales xxxx
FINISHED GOODS
1. Cost of inventory at the 1. Cost of finished goods sold
beginning during the period at the
2. Factory cost of job order same time debiting cost of
completed at the same time goods sold.
crediting work in process
3. Cost of goods returned by
the customer at the same
time crediting cost of goods
sold
Materials
Materials A – 600 units at P 5.00 P 3,000
Materials B – 350 units at P 4.00 P 1,400
Indirect materials P 500 P 4,900
1. Materials 8,000
Accounts Payable 8,000
STOCKCARDS
MATERIAL A
Received Issued Balance
600 at P 5.00 = P 3,000
1) 600 at P 5.50 = P 3,300 600 at P 5.00 = P 3,000
600 at P 5.50 = P 3,300
2) 600 at P 5.00 = P 3,000
200 at P 5.50 = P 1,100 400 at P 5.50 = P 2,200
MATERIAL B
Received Issued Balance
350 at P 4.00 = P 1,400
1) 800 at P 5.00 = P 4,000 350 at P 4.00 = P 1,400
800 at P 5.00 = P 4,000
2) 300 at P 4.00 = P 1,400
300 at P 5.00 = P 1,500 500 at P 5.00 = P 2,500
3) (70) at P 5.00 = (350) 430 at P 5.00 = P 2,150
INDIRECT MATERIALS
Received Issued Balance
500
700 1,200
1,000 200
COMMODITY X
Received Issued Balance
2,000 at P 3.00 = P 6,000
6) 3,000 at P 3.20 = P 9,600 2,000 at P 3.00 = P 6,000
3,000 at P 3.20 = P 9,600
7) 2,000 at P 3.00 = P 6,000
2,000 at P 3.20 = P 6,400 1,000 at P 3.20 = P 3,200
COMMODITY Y
Received Issued Balance
6) 5,000 at P 2.40 = P 12,000 5,000 at P 2.40 = P 12,000
7) 4,000 at P 2.40 = P 9,600
COST SHEETS
Job 101
Materials Labor Overhead
1/1 A – 200 at P 5.00 = P 1,000 1/1 P 450 1/1 P 1,450
B – 175 at P 4.00 = P 700
2) A – 200 at P 5.00 = P 1,000 4) P 2,000 5) P 2,000
P 2,700 P 3.450 P 3,450
Job 102
Materials Labor Overhead
2) A – 400 at P 5.00 = P 2,000 4) P 4,000 5) P 4,000
A – 200 at P 5.50 = P 1,100
B – 225 at P 4.00 = P 900
P 4,000 P 4,000 P 4,000
Job 103
Materials Labor Overhead
2) B – 125 at P 4.00 = P 500 4) P 2,000 5) P 2,000
B – 300 at P 5.00 = P 1,500
P 2,000 P 2,000 P 2,000
5.11 The closing of the Factory Overhead Control account and the Factory
Overhead Applied account maybe done on a monthly basis or an annual
basis. Whatever method is used, the statement is always adjusted for the
under-applied (unfavorable) or the over-applied (favorable) factory
overhead. Under-applied factory overhead is considered unfavorable
because the effect is an increase in the cost of goods sold, thereby
decreasing the gross profit. On the other hand, the over-applied
overhead is considered favorable because the effect is a decrease of the
cost of goods sold thereby increasing the gross profit.
PROCESS COSTING
1.0 Introduction
1.1 The basic purpose of cost accounting is the accumulation of data
designed to provide management with accurate information on the cost
of manufacturing a product. The appropriate cost accounting system for
a particular entity depends on the nature of manufacturing operations.
4.2 Under a job order cost accumulation system, the three elements of a
product's cost (direct materials, direct labor, and factory overhead) are
accumulated according to identifiable jobs. Individual work in process
inventory subsidiary cost sheets are set up for each and are charged with
the cost incurred in the production of the specifically ordered units. Upon
completion of each job, its cost is transferred from work in process to
finished goods inventory.
4.3 Under a process cost system, the three basic elements of a product's cost
are accumulated according to department or cost center. Individual
work in process inventory accounts are set up for each department and
are charged with the costs incurred in the processing of the units that pass
through them. Upon completion of the process, the cost of work in
process inventory in the last department is transferred to finished goods
inventory.
5.1 In a process cost system, when units are completed in one department,
they are transferred to the next processing department accompanied by
their corresponding costs. A complete unit of one department becomes
the raw materials of the next department until the units reach finished
goods. Thus, the output of Department 1 becomes the input of
Department 2. Department 2 receives both the units produced by
Department 1 and the costs carried by such units. When Department 2
completes its processing, it transfers out the units and the costs it received
from Department 1 plus any cost it incurred while working on the units. The
costs of a unit grow larger as it progresses along the assembly line from
one department to the next. For example, Sunbloc manufactures chairs
and uses three departments to produce one chair. Department 1 cuts
and cleans the wood at an average cost of P 45.00 per unit. The woods
are then moved to Department 2, where they are assembled and put
together at an average cost of P 15.00. The next stop is Department 3,
where they are painted at an average cost of P 25.00 per unit. The
completed chairs are transferred from Department 3 to finished goods
inventory. The total unit cost of one finished chair is P 85.00, computed as
follows:
Department 1 P 45.00
Department 2 P 15.00
Department 3 P 25.00
Total unit cost added P 85.00
5.2 Generally, the cost per unit increases as units flow through each
department. The unit cost can decrease when units pass through a
department if volume is added to the product.
8.2 Direct materials are always added in the first processing department, but
they are also usually added in other departments. The journal entry would
be the same for adding direct material cost in later processing
departments. The accumulation of direct material cost is much simpler in
a process cost system than in a job order cost system. Fewer journal entries
are generally required under process cost system. The number of
departments using direct materials is usually less than the number of jobs
requiring direct materials in a job order cost accumulation system
11.2 Total and unit costs are determined and summarized on a cost of
production report. Either each cost center or department makes such a
report, or the individual reports of several departments are summarized.
There are a number of useful formats in preparing the cost of production
report. However, only one format is illustrated in this book. Regardless of
the format used, the important thing to emphasize is that process costing
requires an orderly approach to assigning costs to products. The following
steps provide a uniform approach in preparing the cost of production
report.