The following table of cost information is available for the Renaldo Company for the month

of
November:
Goods in Process Goods in Process Finished Goods
Inventory–Mixing Inventory–Molding Inventory

Beginning Inventory P12,000 P15,000 P24,000

Costs incurred:
Direct materials 22,000 14,000
Direct labor 32,000 17,000
Overhead applied 47,000 24,500
Costs transferred out (100,000) (152,000)
Costs transferred in 100,000 152,000
Cost of goods sold (149,000)
Ending inventory 13,000 18,500 27,000
Based on the table of cost information above, prepare the general journal entry required to
record the:
9. Transfer of goods from the molding department to the finished goods inventory.
10. Cost of goods sold for November.
Answer:
a. Finished Goods Inventory 152,000
Work in Process Inventory – Molding…... 152,000
b. Cost of Goods Sold 149,000
Finished Goods Inventory………………….. 149,000

ABC Inc. is employing normal costing for its job orders. The overhead is applied using a predetermined overhead
rate. The following information relates to the ABC Inc. for the year ended December 31, 20x0:
Job No. 101 Job No. 102 Job No.103
Job in process, January 1, 20x0
Direct Materials P40,000 P30,000 0
Labor 60,000 40,000 0
Factory Overhead 30,000 20,000 0
Costs added during 20x0:
Direct Materials 20,000 10,000 100,000
Labor 100,000 200,000 400,000
Factory Overhead ? ? ?
Additional information:
 Actual overhead for the year 20x0 amounted to P350,000.
 Jobs No. 101 and 102 were completed and transferred to finished goods during year 20x0.
 Job No. 101 was sold during year 20x0.
 The gross profit rate is 20% based on cost.
1. What is the total manufacturing cost for 20x0?
A. P1,400,000 B. P1,180,000 C. P480,000 D. P1,200,000
2. What is the cost of goods manufactured for 20x0?
A. P680,000 B. P700,000 C. P580,000 D. P780,000
3. What is the cost of goods sold for 20x0?
A. P1,180,000 B. P300,000 C. P700,000 D. P1,200,000
4. What is the gross profit for 20x0?
A. P236,000 B. P60,000 C. P140,000 D. P240,000
5. What are the cost of work in process on December 31, 20x0 and the cost of finished goods on December 31,
20x0, respectively?
A. P800,000; P500,000 C. P600,000; P300,000
B. P700,000; P400,000 D. P900,000; P200,000
6. What is the total manufacturing cost for 20x0?
A. P1,400,000 B. P1,180,000 C. P480,000 D. P1,200,000
7. What is the cost of goods manufactured for 20x0?
A. P680,000 B. P700,000 C. P580,000 D. P780,000
8. What is the cost of goods sold for 20x0?
A. P1,180,000 B. P300,000 C. P700,000 D. P1,200,000
9. What is the gross profit for 20x0?
A. P236,000 B. P60,000 C. P140,000 D. P240,000
10. What are the cost of work in process on December 31, 20x0 and the cost of finished goods on December 31,
20x0, respectively?
A. P800,000; P500,000 C. P600,000; P300,000
B. P700,000; P400,000 D. P900,000; P200,000

JUST IN TIME AND BACKFLUSH COSTING

Backflush Costing – (also called delayed
costing, endpoint costing, or post-deduct
costing) describes a costing system that delays
recording changes in the status of a product
being produced until good finished units appear;
it then uses budgeted or standard costs to work
backward to flush out manufacturing costs for
the units produced. An extreme form of such
delay is to wait until sale of finished units has
occurred. Typically, no record of work in
process appears in backflush costing.
In companies that adopt backflush costing, the
following occurs:
1. Management wants a simple
accounting system. Detailed tracking
of direct costs through each step of the
production system to the point of
completion is deemed unnecessary.
2. Each product has a set of budgeted or
standard costs.
3. Backflush costing reports
approximately the same financial
results as sequential tracking would
generate.
If inventories are low, managers not believe it
worthwhile to spend resources tracking costs through Work in Process, Finished Goods, and Cost of Goods Sold.
Backflush costing, therefore, is especially attracted in companies that have low inventories resulting from Just in
Time (JIT). Backflush costing and sequential tracking (traditional approach) will also produce approximately the
same results, however, when inventory is present, provided inventories maintain stable values. Constant amount
of costs will be deferred in inventory each period.
Backflush costing
- product costing approach in which costing is delayed until goods are finished
- standard costs are "flushed" backwards to assign costs to products
- journal entries are delayed
- adjusting entries are prepared in order to update the account balances at the end of the period
Page | 2
SAMPLE PROBLEM
Mac Industrial's standard production cost per unit for direct material and conversion cost amounted to P20.25 and
P46.00, respectively. There is a long term contract with supplier of the said material fixing the price. The beginning
inventory for June is assumed to be zero.
The following are transactions for the month:
a. Purchased direct material amounting to P311,250
b. Incurred wages payable for direct and indirect labor amounting to P350,000 and P150,000,while
accumulated depreciation and other overhead costs totaled P621,750.
c. 15,000 units were completed during the period
d. Sold 14,800 units for P100 each on account
Required balance (based on 3 trigger points which is the most complete)
3 trigger points (purchase, completion
and sale)
2 trigger points (purchase and sale) 2 trigger points
(completion and sale)
A Dr. RIP P311,250
Cr. AP P311,250
DR. RIP P311,250
CR. AP P311,250
No entry
B DR. CCC P621,750
CR. Various P621,750
DR. CCC P621,750
CR. Various P621,750
DR. CCC P621,750
CR. Various P621,750
C DR. FG (66.25x15,000) P993,750
CR. RIP (20.25 x 15,000) P303,750
CR. CCA (46x15,000) P690,000
No entry DR. FG P933,750
CR. AP P303,750
CR. CCA P690,000
D DR. AR (14,800x100) P1,480,000
CR. Sales P1,480,000
DR. COGS (14,800 x66.25) P980,500
CR. FG P980,500
DR. AR P1,480,000
CR. Sales P1,480,000
DR. COGS P980,500
CR. RIP (14,800 x20.25) P299,700
CR. CCA (14,800 x 46) P680,800
DR. AR P1,480,000
CR. Sales P1,480,000
DR. COGS P980,500
CR. FG P980,500
AJE No entry DR. FG P13,250
CR. RIP P4,050
CR. CCA P9,200
DR. RIP P7,500
CR. AP P7,500
Purchase P311,250
Materials used (303,750)
RIP, end P7,500
Completed FG P993,750
COGS (980,500)
FG, end P13,250
Adjusting entry is making the other variations (2 trigger points) be the same as 3 trigger points
Page | 3
Part I: Theory of Accounts
1. Which of the following costs shall be considered as period cost instead of product cost?
A. Finance cost on inventory loan and foreign exchange differences arising from purchases.
B. Freight-in and insurance while in transit of the raw materials.
C. Non-creditable import duties and irrecoverable value added tax.
D. Cost of indirect materials used and indirect labor incurred.
2. It is an inventory strategy a company employs to increase efficiency and decrease waste by
receiving and producing goods as they are needed in the production process, thereby reducing
inventory costs.
A. Just In Time Inventory System
B. Min-max Inventory System
C. Pareto/80-20 Inventory Rule
D. ABC Inventory System
3. It is a product costing system generally used in just-in-time inventory environment. This costing
system delays the costing process until the production of goods is completed by eliminating the
detailed tracking of cost throughout the production system and preparing journal entries only at
trigger points.
A. Backflush costing
B. Standard costing
C. Normal costing
D. Traditional costing
4. Which of the following statements of service department costs allocation pertains to direct
method?
A. This method allocates each service department’s total cost directly to the production
departments, and ignores the fact that service departments may also provide services to other
service departments.
B. This method is also called sequential method that allocates the costs of some service
departments to other service departments, but once a service department’s costs have been
allocated, no subsequent costs are allocated back to it.
C. This method is the most accurate of the three methods for allocating service department
costs, because it recognizes reciprocal services among service departments. It is also the
most complicated method, because it requires solving a set of simultaneous linear equation.
D. None of the above
5. Under Just-in-Time Inventory System and Backflush Costing, what costing method is ideally
employed?
A. Normal costing
B. Actual costing
C. Standard costing
D. Budgeted costing
Ideally → not required but recommended
Page | 4
Part II: Problem Solving
1. Datu Inc. is employing a sophisticated just-in-time manufacturing system. The company uses
backflush costing for recording its production. The following transactions occurred for the year
ended December 31, 20x0:
a. Purchased P170,000 of raw materials on account.
b. All materials purchased were requisitioned for production.
c. Incurred direct labor cost of P80,000.
d. Actual factory overhead costs amounted to P122,000.
e. Applied conversion costs totaled P202,000 including direct labor costs of P80,000.
f. All telephones were completed and sold.
What is the cost of goods sold for the year ended December 31, 20x0?
A. P372,000 B. P202,000 C. P250,000 D. P292,000
Beg End
RIP 170,000 CGS 372,000
CC-applied 202,000
372,000 372,000
FG
2. Puti Inc. is using Just-in-Time Production System and Backflush Cost Accounting System for the
year ended December 31, 20x0. The following information was provided for the year 20x0:
a. Raw materials purchased for year 20x0 totaled P1,000,000.
b. Direct labor for the year 20x0 totaled P500,000.
c. Actual overhead for the year 20x0 totaled P300,000 and the standard overhead rate is
50% of direct labor cost.
d. The production report for year 20x0 showed that the Finished Goods Inventory at
December 31 was P200,000 consisting of:
Direct Materials P110,000
Direct Labor 60,000
Factory Overhead 30,000
What is the Cost of Goods Sold for the year ended December 31, 20x0?
A. P1,600,000 B. P1,550,000 C. P1,800,000 D. P1,750,000
Beg End 200,000
RIP 1,000,000 CGS 1,550,000
CC-applied 750,000
1,750,000 1,750,000
FG
Page | 5
Use the following information for the next three (3) questions:
Toyo Company has a cycle of 3 days, uses a Raw and In Process Account (RIP) and charges all
conversion costs to cost of goods sold. At the end of each month, all inventories are counted,
conversion costs components are estimated end inventory account balances are adjusted. Raw
material cost is backflushed from Raw and in Process (RIP) Account to finished goods. The following
information is provided for the month of June:
Beginning Balance of RIP account, including P1,000 conversion cost P5,000
Beginning Balance of finished goods account including P6,000 conversion cost 10,000
Raw materials received on credit 400,000
Direct labor cost 300,000
Factory overhead applied 500,000
Ending RIP inventory per physical count, including P7,000 conversion cost 20,000
Ending finished goods inventory per physical count, including P4,000 conversion cost 6,000
3. What is the amount of conversion cost included cost of goods sold in June?
A. P802,000 B. P796,000 C. P794,000 D. P800,000
Beg 1,000 End 7,000
CGM (CC) 794,000
CC-applied 800,000
801,000 801,000
Beg 6,000 End 4,000
CGS 796,000
CGM (CC) 794,000
800,000 800,000
RIP (CC)
FG(CC)
4. What is the amount of direct materials backflushed from RIP to finished goods?
A. P391,000 B. P404,000 C. P387,000 D. P395,000
Beg 4,000 End 13,000
CGM (DM) 391,000
Purchases 400,000
404,000 404,000
RIP (DM)
5. What is the amount of direct materials backflushed from finished goods to cost of goods sold?
A. P395,000 B. P400,000 C. P393,000 D. P389,000
Beg 4,000 End 2,000
CGS 393,000
CGM (DM) 391,000
395,000 395,000

ABC COSTING
1. TRADITIONAL, VOLUME-BASED PRODUCT-COSTING SYSTEMS
• Many companies still use traditional volume-based (sometimes called throughput-based) costing systems. These
systems
generally group overhead into one cost pool and apply overhead to products based on direct labor, with labor being a
measure
of volume.
• In the past, accountants felt there was a high correlation between overhead and labor. However, with increasing
factory
computerization and automation (and the reduction of hands-on labor), this is not always the case today.
2. ACTIVITY-BASED COSTING SYSTEMS
Activity – Based Costing (ABC) – is a cost allocation technique that uses multiple cost drivers to allocate mainly
indirect cost to products. It
identifies the casual relationship between the incurrence of costs and related activities. It is based on the premise that
products requires
activities, activities consume resources, and resources incur costs.
Step in implementing Activity - Based Costing
1. Identify value adding vs non value adding activities (process value analysis)
Value-adding activity is an activity that increases the worth of the product or service to the customer and hence
causes more cost to the
product or service. (e.g., engineering designs modifications)
2. Identify activity centers.
Activity center – is a unit of the organization that performs a set of tasks. It is part of the production process for which
management
wants a separate reporting of the cost of the activity involved. Level of activity centers can be classified into four
general categories as follows:
▪ Unit level—activities that must be done for each unit of production (e.g., machining).
▪ Batch level—activities that are performed for each batch of product (e.g., setup, quality-assurance, and
receiving).
▪ Product-sustaining level—activities that are performed to support an entire product line (e.g., engineering).
▪ Facility (or general operations) level—activities that are required for the entire manufacturing process to
occur (e.g., plant management, plant maintenance, and depreciation).
Unit level costs
• Direct material
• Direct labor
• Machine energy
/ allocate over number of units produced = cost per unit
+
Batch level costs
• Machine setup
• Purchasing/ordering
• Material handling
/ allocate over number of units in batch = cost per unit in batch
+
Product/Process level costs
• Engineering changes
• Product development
• Product setup
/ allocate over number of units expected to be
produced in related product line
= cost per unit in product line
+
= Total product cost per unit
Internal Financial Statement Presentation
Total product revenue (Product unit selling price x product unit volume) xxx
Less: Total product cost (Total product cost per unit x Product unit volume) (xxx)
Net product Margin xxx
Less: Organizational or Facility - Level Costs (Corporate/Divisional administration) (Facility depreciation) (xxx)
Company profit or (loss) xxx/(xxx)
Classification Levels Type of Costs Necessity of Cost
Unit level costs • Direct Material
• Direct Labor
• Some machine costs, if traceable
Incurrence for each unit produced
Batch level costs • Purchase orders
• Setup
• Inspection
• Movement
• Scrap, if related to the batch
Incur once for each batch produced
Product/Process level costs • Engineering change orders
• Equipment maintenance
• Product development
• Scrap, if related to product design
Support a product type on a process
Organizational/Facility level costs • Building deprecation
• Plant or division manager’s salary
• Organization advertising
Support the overall production or service
process
Page 2 of 4
Tracing Costs in an Activity-Based Costing System
1. Assign cost to activity centers.
2. Select appropriate cost drivers.
3. Assign costs from activity center to the product using selected cost drivers.
CRITERIA IN CHOOSING COST DRIVERS
1. Causal Relation – choose a driver that causes the cost. Though ideal, this is not always possible because indirect
costs are generally not
linked to cost objects.
2. Benefits Received – choose a driver so costs are assigned in proportion to benefits received.
3. Reasonableness – costs are assigned based on fairness or reasonableness if costs cannot be linked based on
causality or benefits received.
TRADITIONAL COSTING VS ACTIVITY – BASED COSTING
Traditional ABC
1. Cost pools One or a limited number Many, to reflect different activities
2. Applied rate Volume-based, financial Activity-based, non-financial
3. Suited for Labor-intensive, low overhead companies Capital-intensive, diverse product, high
overhead companies
4. Benefits Simple, inexpensive Accurate product costing, eliminate non
value added activities
Page 3 of 4
ACTIVITY – BASED COSTING
The budgeted manufacturing overhead costs of JRLD DZON Company for 2011 are as follows:
Type of Cost Cost Amount
Electric Power P1,000,000
Work Cells 6,000,000
Material Handling 2,000,000
Quality Control Inspections 2,000,000
Product Runs (machine setups) 500,000
Total Budgeted Overhead Costs P11,500,000
For the last five years, the cost accounting department has been charging overhead production costs based on
machine hours. The estimated
budgeted capacity for 2011 is 2,000,000 machine hours.
The president of Jerald D Company recently attended a seminar on activity-based costing. He now believes that ABC
results in more reliable
cost data that, in turn, will give the company an edge in pricing over its competitors. At the president’s request, the
production manager provided
the following data regarding expected 2011 activity for the cost drivers of the preceding budgeted overhead costs.
Type of Costs Activity Drivers
Electric Power 200,000 kilowatt hours
Work Cells 1,200,000 square feet
Material Handling 500,000 material moves
Quality Control Inspections 400,000 inspections
Product Runs (machine setups) 50,000 product runs
The Vice President of Marketing received an offer to sell 5,000 doors to a local construction company. The VP asked
the head of the cost
accounting to prepare cost estimates for producing the 5,000 doors. The head of cost accounting accumulated the
following data concerning
production of 5,000 doors:
Direct Material cost P200,000
Direct Labor cost 400,000
Machine hours 10,000
Direct Labor hours 20,000
Electric power – kilowatt hours 2,000
Work Cells – square feet 12,000
Number of material handling moves 120
Number of quality control inspections 60
Number of product runs (setups) 30
Requirements:
1. What is the predetermined overhead rate if the traditional measure of machine hours is used?
2. What is the manufacturing cost per door as presently accounted for?
3. What is the manufacturing cost per door under the proposed ABC method?
SOLUTION:
1. Traditional Predetermined Overhead Rate
P11,500,000 = P5.75/machine hour
2,000,000 MH
2. DM P200,000
DL 400,000
FOH 57,500(5.75 X 10,000MH)
TMC 657,500 / 5000doors = P131.5/door
3. Activity-Based Costing
Electric Power = P1000000 = P5 per kw hr
200000
Work Cells = P6000000 = P5 per sq. ft.
1200000
Materials Handling = P2000000 = P4 per mat. Handling
500000
Quality Control Inspections = P2000000 = P5 per QC Inspection
400000
Product Runs = P5000000 = P10 per run
50000
Direct Material P200,000
Direct Labor 400,000
FOH – Electric Power = 5 X 2000 = 10,000
Work Cells = 5 X 12000 = 60,000
Materials Handling = 4 X 120 = 480
Quality Control Inspections = 5 X 60 = 300
Product Runs = 10 X 30 = 300 71,080
Total Manufacturing Cost/Total Cost P671,50

Expected Actual Capacity vs. Normal Capacity

Joyful Company’s normal operating capacity is at 160,000 direct labor hours. The expected operating level for the
period just completed was 150,000 hours. At this expected actual capacity level, the variable overhead was
estimated to be P300,000 and the fixed overhead, P120,000. Actual results showed 148,000 hours were worked
during the period.
Compute the applied factory overhead if the company used the:
1. Expected actual capacity
2. Normal capacity
EAC NC
Actual hours 148,000.00 1 48,000.00
Predetermined rate
(300 + 120) / 150 2.80
(320 + 120) / 160 2 .75
4 14,400.00 407,000.00
Variable (300 / 150) 2.00 320.00 (2 x 160) 2 .00
Fixed (120 / 150) 0.80 120.00 (.75 x 160) 0 .75
2.80 440.00 2 .75
Manufacturing Cost
Problem 1: (Manufacturing Costs) The work in process account of Meyers Company showed:
Work in Process
Materials P22,000 | Finished goods P68,000
Direct labor 37,000 |
Factory overhead 55,500 |
Materials charged to the one job still in process amounted to P5,000. Factory overhead is applied as a predetermined
percentage of direct labor cost.
Required: Compute the following:
(1) The amount of direct labor cost in finished goods.
(2) The amount of factory overhead in finished goods.
SOLUTION
(1) The amount of direct labor in finished goods:
Finished goods ............................................................................................................. P68,000
Materials included in finished goods ................................................................................ 17,000
Direct labor and factory overhead in finished goods .......................................................... P51,000
Let x = direct labor in finished goods
2.5x = P51,000 direct labor and factory overhead in finished goods
x = P20,400 direct labor in finished goods
(2) The amount of factory overhead in finished goods:
x = P20,400
1.5x = 1.5(P20,400)
1.5x = P30,600 factory overhead in finished goods
= 1.5
$37,000
$55,500
=
Direct labor charged to work in process
Factory overhead charged to work in process
Problem 2: (Product cost classification) Forhan Inc. manufactures stainless steel knives. Following are factory
costs incurred during 2013:
Material costs
Stainless steel P800,000
Equipment oil and grease 6,000
Plastic for handles 5,600
Wood blocks for knife storage 24,800
Labor costs
Equipment operators P500,000
Equipment mechanics 82,000
Factory supervisors 272,000
Required:
a. What is the direct material cost for 2013?
b. What is the direct labor cost for 2013?
c. What is the total indirect material cost and the indirect labor cost for 2013?
Problem 3: (Product cost classification) Barbieri Co. makes aluminum canoes. The company’s June 2013 costs
for material and labor were as follows:
Material costs
Janitorial supplies P1,800
Chrome rivets to assemble canoes 12,510
Sealant 1,230
Aluminum 1,683,000
Labor costs
Janitorial wages P9,300
Aluminum cutters 56,160
Salespeople’s salaries 43,050
Welders 156,000
Factory supervisor’s salaries 101,250
a. What is the direct material cost for June?
b. What is the direct labor cost for June?
Problem 4: (Labor Cost Classification) Tidy house produces a variety of household products. The firm operates
24 hours per day with three daily work shifts. The first shift workers receive “regular pay”. The second shift receives
an 8 percent pay premium, and the third shift receives a 12 percent pay premium. In addition, when production is
schedule on weekends, the firm pays an overtime premium of 50 percent (based on the pay rate for first shift
employees). Labor premiums are included in overhead. The October 2013 factory payroll is as follows:
Total Wages for October for 32,000 hours P435,600
Normal hourly wage for first-shift employees P12
Total regular hours worked, split evenly among the three shifts 27,000
a. How many overtime hours were worked in October?
b. How much of the total labor cost should be charged to direct labor? To overhead?
c. What amount of overhead was for second and third shift premiums? For overtime premiums?
Problem 5: (Labor cost classification) Woodlands Restaurant Supply operates in two shifts, paying a late-shift
premium of 10 percent and an overtime premium of 75 percent.
The May 2013 payroll follows:
Total wages for 6,000 hours P54,000
Normal hourly employee wage P9
Total regular hours worked, split evenly between the shifts 5,000
All overtime was worked by the early shift during May. Shift and overtime premiums are considered part of overhead
rather than direct labor.
a. How many overtime hours were worked in May?
b. How much of the total labor cost should be charged to direct labor? To overhead?
c. What amount of overhead was for second-shift premiums? For overtime premiums?
Problem 6: (Missing amounts) The following information is available for the Blizzard Corporation for 20X3:
* Materials inventory decreased P4,000 during 20X3.
* Materials inventory on December 31, 20X3, was 50% of materials inventory on January 1, 20X3.
* Beginning work in process inventory was P140,000.
* Ending finished goods inventory was P65,000.
* Purchases of direct materials were P150,000.
* Direct materials used were 2.5 times the cost of direct labor.
* Manufacturing overhead was 50% of the cost of direct labor.
* Total manufacturing costs incurred were P246,400, 80% of cost of goods manufactured and P150,000
less than cost of goods sold.
Compute:
a) finished goods inventory on January 1, 20X3
b) work in process inventory on December 31, 20X3
c) direct labor incurred
d) manufacturing overhead incurred
e) direct materials used
f) materials inventory on January 1, 20X3
g) materials inventory on December 31, 20X3
a) cost of goods sold = P246,400 + P150,000 = P396,400
P396,400 + P65,000 – P308,000 = P153,400
b) cost of goods manufactured = P246,400/.80 = P308,000
P246,400 + P140,000 – P308,000 = P78,400
c) P154,000/2.5 = P61,600
d) P61,600 X .5 = P30,800
e) P8,000 + P150,000 – P4,000 = P154,000
f) X = January 1, 20X3 materials inventory
P4,000 = .5X
X = P8,000
g) P8,000 – P4,000 = P4,000

Spoilage – loss due to spoilage is treated as:

 Expense for the period – if loss is abnormal
 Charges to Factory Overhead Account – if due to company inefficiencies
 Charges to the Particular Job Order – if due to customer’s strict requirements
Spoiled materials charged to total production (all
job):
Spoiled materials charged to a particular job
(specific job):
 Dr WIP CR Manufacturing cost include allowance-
FOH)
Spoiled goods (*sales value) xxxx
Factory overhead control xxxx
Work in process (*mnfg. Cost) xxxx
 Dr WIP CR Manufacturing cost exclude
allowance-FOH)
Spoiled goods xxxx
Work inprocess xxxx
(# of units spoiled x estd sales value per unit)
Defective units – cost of rework is treated as:
 Charges to Factory Overhead Account – if due to company inefficiencies
 Charges to the particular job order – if due to customer’s strict requirements.
Defective materials charged to total production (all
job):
Defective materials charged to a particular
job (specific job):
 Dr WIP CR Manufacturing cost include allowance-
FOH)
Factory overhead control xxxx
Materials xxxx
Payroll xxxx
Factory overhead control applied xxxx
 Dr WIP CR Manufacturing cost exclude
allowance-FOH)
Work in process xxxx
Materials xxxx
Payroll xxxx
Factory overhead control applied xxxx
Spoilage
All production Specific
Original product cost xxx xxx
Spoilage (Cost) (SP)
xxx xxx
/ remaining goods / remaining goods
Px Px
Rework
All production Specific
Original product cost xxx xxx
Rework Zero xxx
xxx xxx
/ original goods* / original goods*
Px Px
Produced units xxx
Spoiled units (xxx)
Defective but reworkable (xxx)
Reworked units xxx
Good units* xxx
Page | 2
Scrap in a job-order costing–
If insignificant
a. If attributable to specific job order – reduction from the cost of that specific job order
b. If common to all production – credited to FOH Manufacturing Account
Note: At the time of sale, realizable value of scrap is recognized as revenue of the period.
If significant
a. NRV shall be capitalized as scrap and credited to Specific Job Order if traceable or to FOH Manufacturing if
common.
Scrap inventory xxx
Job Order No. OR xxx
FOH Manufacturing xxx
Note:
 If the scrap is insignificant, the realizable value of scrap is recognized as revenue at the time it is sold.
 If the scrap is insignificant, but traceable to the job that yielded the scrap, the net realizable value of
scrap shall be recorded as a deduction from cost of that specific product.
 If the scrap is insignificant but common to all jobs, the net realizable value of scrap shall be to
manufacturing overhead control.
 If the scrap is significant , the net realizable value shall be capitalized as inventory of scrap with the
credit going to specific job if traceable to a particular job or manufacturing overhead.
Accounting for Spoilage and Defective Units
 Spoiled units – are units that do not meet production standards and are either sold for their salvage value or
discarded. When spoiled units are discovered, they are taken out of production and no further work is
performed on them.
 Defective units – are units that do not meet production standards and must be processed further in order
to be saleable as good units or as irregulars.
Spoilage – Cannot be reworked
Charged To All Production Specific Job
Allowance for spoiled work Include Exclude
Spoilage charged to Spoiled goods (at SP) xxx
Factory Overhead control Balancing Fig.
Work in process (M, L, OH) xxx
Spoiled goods (at SP) xxx
Work in process (M, L, OH) xxx
Unit cost Do not change since loss is already
charged to all production through the
inclusion of allowance
Changes (increases) since the specific
job absorbs the cost of the spoiled units
Defective – Can be reworked  additional cost will be incurred
Charged To All Production Specific Job
Allowance for defective units Include Exclude
Additional cost charged to Factory Overhead control xxx
M, L, OH xxx
Work in process xxx
M, L, OH xxx
Unit cost Do not change Changes (increases)
Charged To Abnormal loss Normal loss
Abnormal vs Normal Loss Spoiled goods(at SP) xxx
Abnormal Loss xxx
WIP xxx
Spoiled goods(at SP) xxx
WIP xxx
Page | 3
PROBLEMS
Problem 1: (Accounting for SPOILED Materials). Job No. 12345 called for the making of 4,000 units with
these unit costs:
Direct materials P15 Factory overhead (includes a P1.00 allowance
Direct labor 13 for spoiled works) P12
When the order was completed, 200 rejected units, a normal number, were sold for P18 each.
Required:
1. Entries if the loss is charged to all production. 2. Entries if the loss is charged to the specific job.
1. Loss is charged to all production
a. Work in process 160,000
Materials 60,000
Payroll 52,000
Factory overhead applied 48,000
Materials 4,000 15 60,000
Labor 4,000 13 52,000
Overhead 4,000 12 48,000
b. Spoiled goods 3,600
Factory overehad control 4,400
Work in process 8,000
Spoiled 200 18 3,600
WP 200 40 8,000
c Finished goods 152,000
Work in process 152,000
2. Loss is charged to the specific job
a. Work in process 156,000
Materials 60,000
Payroll 52,000
Factory overhead applied 44,000
Materials 4,000 15 60,000
Labor 4,000 13 52,000
Overhead 4,000 11 44,000
b. Spoiled goods 3,600
Work in process 3,600
c Finished goods 152,400
Work in process 152,400
Under the method, loss charged to all production, the unit cost of the completed units remains at P40. In spite of
the spoiled units, the unit cost remained the same because the increase was made at the start (when P1.00 was
added to the factor remained the same because the increase was made at the start (when P1.00 was added to the
factory overhead rate as allowance for spoiled work). All units processed during the period, even those jobs
without spoiled units, will absorb the additional P1.00. Upon completion of the job even if there were spoiled units,
the unit cost will be the same as the amount originally charged to the job.
On the other hand under the method, loss charged to the specific job, it will be noted that the factory overhead
raet was recorded at the original amount P11 (allowance of P1.00 for spoiled work was not added). The remaining
perfect units in the job will absorb the loss on the spoiled, resulting in an increase in the unit cost.
P152,400 ÷ 3,800 units = P40.105/unit. The increase in the unit cost (P40.105 – P39 = {1.105) may be
computed as follows:
Cost of spoiled (200 x P39) 7,800
Less: Amount recovered from sale (200 x 18) 3,600
Loss on spoiled goods 4,200
The loss on spoiled good will be absorbed by the remaining good units (4,200 divided by 3,800 units =
P1.105/unit)
Page | 4
Problem 2: (Accounting for Defective Materials). Job No. 12345 called for the making of 4,000 units with
these unit costs:
Direct materials P15 Factory overhead (includes a P1.00 allowance
Direct labor 13 for defectives units)
P12
During processing 300 units were found to be defective and required the following total additional costs: Materials
P2,000; Labor P4,000 and overhead P2,000.
Required:
1. Entries if additional cost is charged to all production.
2. Entries if the additional cost is charged to the specific job.
1. Additional cost is charged to all production
a. Work in process 160,000
Materials 60,000
Payroll 52,000
Factory overhead applied 48,000
b. Factory overhead control 8,000
Materials 2,000
Payroll 4,000
Factory overhead applied 2,000
c. Finished goods 160,000
Work in process 160,000
The cost of the finished goods will remain at the original amount charged to the job (160,000 divided by 4,000
units = P40)
2. Additional cost is charged to the specific job
a. Work in process 156,000
Materials 60,000
Payroll 52,000
Factory overhead applied 44,000
b. Work in process 8,000
Materials 2,000
Payroll 4,000
Factory overhead applied 2,000
c. Finished goods 164,000
Work in process 164,000
The unit cost of the completed units increased from the original P39 to P41 (164,000 divided by 4,000 units). All
units in the job will share in the cost incurred to re-process the defective units.
1. Which of the following statements concerning spoilage in a job-order is correct?
A. The cost of abnormal spoilage is recorded as period cost or expense.
B. When normal spoilage occurs because of the specification of a particular job, cost of normal loss shall be
capitalized to that specific job reduced by the current disposal value / net realizable value of the spoiled
units.
C. When normal spoilage is a characteristic of a given production cycle, the cost of normal loss is not
chargeable to a specific job but will be closed to manufacturing overhead control account.
D. All of the above.
2. Which of the following statements concerning rework costs in a job-order costing is correct?
A. If the normal rework cost is attributable to a specific job, it shall be capitalized to that particular job.
Page | 5
B. It the normal rework cost is common to all jobs, it shall be debited to manufacturing overhead control
account.
C. If the rework cost is abnormal, it shall be recorded as period cost or expense.
D. All of the above.
3. Which of the following statements concerning scrap in a job-order costing is correct?
A. If the scrap is insignificant, the realizable value of scrap is recognized as revenue at the time it is sold.
B. If the scrap is insignificant, but traceable to the job that yielded the scrap, the net realizable value of
scrap shall be recorded as a deduction from cost of that specific product.
C. If the scrap is insignificant but common to all jobs, the net realizable value of scrap shall be to
manufacturing overhead control.
D. If the scrap is significant , the net realizable value shall be capitalized as inventory of scrap with the credit
going to specific job if traceable to a particular job or manufacturing overhead.
E. All of the above.
Part II: Problem Solving
Use the following information for the next two (2) questions:
ABC Company has completed the Job 101, containing 1,100 shoes, during 20x0 at the following unit costs:
Direct materials P2,000
Direct labor 1,000
Factory overhead (including allowance of P300 for spoiled work) 1,300
Final inspection of Job 101 disclosed 100 spoiled shoes which were sold to a department for P200,000.
7. What is the unit cost of the good shoes produced on Job 101 if spoilage loss is charged to all productions?
A. P4,000 B. P4,100 C. P4,400 D. P4,300
Debit Credit
Work in process 4,730,000
Materials 2,000 1,100 2,200,000
Payroll 1,000 1,100 1,100,000
Fatory overhead 1,300 1,100 1,430,000
4,300
Spoiled goods 200,000
FOH Control 230,000
Work in process 430,000
Materials 2,000 100 200,000
Payroll 1,000 100 100,000
Fatory overhead 1,300 100 130,000
Work in process 4,730,000 (430,000) 4,300,000
1,100 (100) 1,000
4,300
8. What is the unit cost of the good shoes produced on Job 101 if spoilage loss is charged to specific job 101?
A. P4,300 B. P4,000 C. P4,500 D. P4,200
Page | 6
Debit Credit
Work in process 4,400,000
Materials 2,000 1,100 2,200,000
Payroll 1,000 1,100 1,100,000
Fatory overhead 1,000 1,100 1,100,000
4,000
Spoiled goods 200,000
Work in process 200,000
Work in process 4,400,000 (200,000) 4,200,000
1,100 (100) 1,000
4,200
Spoilage
All production Specific
Original product cost xxx xxx
Spoilage (Cost) (SP)
xxx xxx
/ remaining goods / remaining goods
Px Px
Rework
All production Specific
Original product cost xxx xxx
Rework Zero xxx
xxx xxx
/ original goods* / original goods*
Px Px
Produced units xxx
Spoiled units (xxx)
Defective but reworkable (xxx)
Reworked units xxx
Good units* xxx
Use the following information for the next two (2) questions:
For the year ended December 31, 20x0, ABC Inc. incurred the following cost on Job Order 201 for manufacturing of
500 units:
Original cost accumulation:
Direct materials P500,000
Direct labor 400,000
Factory overhead 100,000
Direct costs of reworking 100 units
Direct materials 100,000
Direct labor 200,000
9. What is the cost per unit of Job Order 201 if the rework costs were attributable to the exacting specification of
Job Order 201?
A. P2,600 B. P2,500 C. P2,700 D. P2,200
Page | 7
Debit Credit
Work in process 1,000,000
Materials 500,000
Payroll 400,000
Fatory overhead 100,000
Work in process 350,000
Materials 100,000
Payroll 200,000
Fatory overhead 1/4 50,000
Work in process 1,000,000 350,000 1,350,000
500 500
2,700
10. What is the cost per unit of Job Order 201 if the rework costs were attributable to internal failure?
A. P2,500 B. P2,400 C. P2,000 D. P2,300
Debit Credit
Work in process 1,000,000
Materials 500,000
Payroll 400,000
Fatory overhead 100,000
Factory overhead control 350,000
Materials 100,000
Payroll 200,000
Fatory overhead 1/4 50,000
Work in process 1,000,000 1,000,000
500 500
2,000