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Chapter 1: concepts and accounting cycle (Summarizes total costs incurred) 2. SCI or Income Statement
2. Statement of Cost of Goods 3. Statement of Changes in Equity
Manufactured and Sold 4. Statement of Cash Flows
What is cost?
• Reflects the amount of resources sacrificed in order for the
company to achieve a certain objective → earn revenues Cost Expense
• Any amount paid or incurred in • Any amount paid or incurred in
What is cost accounting? acquiring goods or services the operation of a business
• It is a discipline that focuses on techniques or methods for • Cost is presented in the SFP as • Necessary to generate revenue
determining a cost of a project, process, or services for the purpose an asset • Recognized proportionately in the
of planning and controlling activities, improving quality and efficiency, • If goods are sold (CGS) = expense period they are incurred t match
and for making decisions in the Income Statement revenue generated during the
period
Cost accounting Financial accounting
As to nature Classification of costs
• Relates to the different costing • Relates to the analyzing, BY NATURE OF EXPENSE
methods and techniques recording, classifying business A. MATERIAL COSTS
• Considers items with no transactions. End product: • Cost of materials used for the use of manufacturing a product or
monetary values: units produced Financial Statements rendering of a service
& hours utilized • Considers only items with • E.g. raw materials, factory supplies, cost of packaging materials,
• Deals with actual facts + monetary values spare parts
estimated figures & standards • Users: Internal and external users
• Users: production managers and B. LABOR COSTS
senior officials: • Compensation and other benefits paid or payable to employees of the
As to objective manufacturing firm
• To determine how much an • To reflect the correct financial
object, project, or service cost picture or information of the C. EXPENSES
entity to the different • Those incurred in the operation of the business
stakeholders
As to reports BY NATURE OF TRACEABILITY
1. Cost of production report 1. SFP or Balance Sheet A. DIRECT COSTS
• Can be obviously and physically traced

a. DIRECT MATERIALS
b. DIRECT LABOR
B. INDIRECT COSTS
• Related but cannot be traced to a cost object in an economically
feasible way
a. INDIRECT MATERIALS
b. INDIRECT LABOR
c. INDIRECT EXPENSES
BY FUNCTION
A. PRODUCTION/PROJECT COSTS
• Costs identified and incurred by an entity to manufacture a product
a. RAW MATERIALS – all raw materials and other supplies used in the
manufacturing process
1. DIRECT MATERIALS – e.g. cost of glass in light bulb
manufacturing (can be obviously and physically traced)
2. INDIRECT MATERIALS – e.g. cost of glue, lubricating oils, nails,
screws, and the like. (cannot be traced or seen directly, but
is necessary)
b. LABOR COSTS – salaries and other benefits provided to all workers
1. DIRECT LABOR – e.g. cost of salaries paid to laborers of
furniture associated in the process
2. INDRECT LABOR – salaries paid to all other factory personnel
necessary in the manufacturing process but not directly
related in the conversion process.
Prime costs = Direct materials + Direct labor
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c. MANUFACTURING OVERHEAD – all indirect costs necessary for
product conversion that are not direct materials and direct labor
Conversion costs = Direct Labor + Manufacturing Overhead
B. GENERAL AND ADMINISTRATIVE COSTS
• Costs associated with the general administration of the organization
• Office Expenses
C. SELLING/MARKETING/DISTRIBUTION COSTS
• Expenses associated with the sale of goods and services
BY NATURE OF PRODUCTION OR OPERATION EXPENSES
A. JOINT COSTS
• Costs incurred in a single process that yields two or more products
B. CONTRACTS COSTS
• Cost of a contract agreed upon by between the contractee and the
contractor
C. BATCH COSTS
• Aggregate cost related to a cost unit which consists of a group of
similar articles or services which maintain its identity throughout one
or more stages of production or operation.
D. OPERATION COSTS
• Cost a specific operation involved in production of goods or rendering
of services
E. PROCESS COSTS
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• Cost of production or operation process where goods are produced b. DISTRIBUTION COSTS – warehousing, transporting, and
or services rendered from a sequence of continuous or repetitive delivering a product or service
operations or processes during a period.
c. ADMINISTRATIVE COSTS – office expenses
FOR DECISION MAKING PURPOSES
A. CONTROLLABLE COSTS Separating mixed costs
• Costs primarily subject to the influence of a given responsibility HIGH LOW METHOD
center manager for a given period of time Formula:
• Able to be influenced on how much shall be spent Cost at highest level - cost at lowest level (within relevant range)
Highest activity - lowest activity
B. NON-CONTROLLABLE COSTS Or:
• E.g. depreciation Change in total costs / Change in activity level = VC per unit
C. OPPORTUNITY COSTS
Procedures:
• Benefits forgone in choosing one action over another 1. Select the highest and lowest levels of activity and costs (within
relevant range)
D. SUNK COSTS 2. Compute the variable cost element (VC per unit) using the high-low
• Costs incurred that will not affect a future decision formula
3. Compute the variable cost at the highest and lowest level of activity
E. RELEVANT COSTS 4. Determine the fixed cost at each level of activity
• Costs that change with each decision that a company makes

F. INCREMENTAL COSTS
Inventory accounts
RAW MATERIALS INVENTORY
• Relevant cost is the incremental or differential cost between the
• Shows the raw materials available for use in the manufacturing
various alternatives being considered
process
G. PERIOD COSTS • Controlling account – IF the company maintains only one account for
its direct and indirect materials
• Operating expenses associated with time periods rather than
production.
DIRECT MATERIALS INVENTORY
a. MARKETING AND SELLING COSTS – selling expenses • Meant to include only direct materials
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FACTORY SUPPLIES INVENTORY » Without it, cost of raw materials cannot be determined
• Includes indirect materials such as supplies to be used in the
production Journal Entries:
a. Purchase of raw materials
WORK IN PROCESS INVENTORY Purchases xx
• Represents the costs of partially completed goods Accounts Payable/Cash xx
• Not yet completed for the certain period b. When expenses are paid
Freight In xx
FINISHED GOODS INVENTORY Cash xx
• Summarizes the costs of completed jobs stored in the warehouse c. When goods are returned to the supplier
ready for delivery Accounts Payable/Cash xx
Purchase Returns xx
Inventory SYSTEMS
PERPETUAL INVENTORY SYSTEM Inventory costing/valuation methods
• Purchases and issuance of raw materials are recorded directly in the FIRST-IN, FIRST-OUT (FIFO)
Raw Materials Inventory account • Oldest cost is issued first to production and assigned to cost of raw
• Most manufacturing companies use this system. materials used.
• Provides a running balance of the raw materials available for use • Recent purchases are assigned to units in ending inventory
(reflected in the stock card maintains for each type of materials).
• At the end of the accounting period: Balance of the inventory Flow of manufacturing costs
account shows the cost of raw materials inventory on hand. COST ACCOUNTING CYCLE
• To determine the accuracy of the balance, physical count is A. Purchase of Raw Materials
periodically made usually once a year Entry:
» Difference: corrected by a suitable journal entry Raw Materials (invoice cost + freight) xx
Accounts Payable or cash xx
PERIODIC INVENTORY SYSTEM
• Entity maintains temporary accounts like purchases, purchase B. Issuance of Raw Materials
returns, and freight in. • Basis: material requisition slip properly accomplished and approved
• Will not record inventory additions directly to inventory accounts by the production manager.
• At the end of the accounting period: There is a mandatory Physical • Cost of raw materials issued -> Work in Process and
Inventory Count (Stock taking) Manufacturing Overhead
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• Work in Process (WIP) = Direct Materials issued • Salary of indirect workers -> debit to Manufacturing overhead
• Manufacturing Overhead (MO) = Indirect Materials issued
Entry: Entry:
Work in Process xx Work in Process xx
Manufacturing Overhead xx Manufacturing Overhead xx
Raw Materials xx Factory Payroll xx

C. Return of Excess Materials To Storeroom F. Manufacturing Overhead Incurred

• Unused materials (those in excess of the requirements) are • Actual overhead cost in production is charged to a Manufacturing
returned to the storeroom. Overhead account at the time it is incurred.
• WIP = reduced by the cost of unused materials • Charged only at year end when adjusting entry is prepared
• MO = reduced by the cost of unused factory supplies
Entry: Examples:
Raw Materials xx a. Repairs and maintenance
Work in Process xx b. Depreciation of factory plant and equipment
Manufacturing Overhead xx c. Insurance
d. Property taxes
D. Factory Labor Incurred e. Indirect labor
• Compensation of factory workers and other workers in the f. Indirect materials
factory (supervisors, janitors, maintenance personnel, & g. Factory utilities (light, power, water, & telephone)
inventory clerks) are temporarily accumulated in a Factory Payroll h. Factory rent
account. i. Employers’ share of SSS, Philhealth, and Pag-ibig
Entry:
Factory Payroll (gross) xx Entry:
Accrued wages payable/cash (net) xx Manufacturing Overhead (total) xx
WHT Payable xx Accumulated Depreciation xx
SSS Premium Payable xx Prepaid Insurance xx
Philhealth Payable xx Cash xx
Accounts Payable (if not paid) xx
E. Distribution of Factory Labor
• Segregating the direct and indirect labor costs G. Actual Factory Overhead Charged to the Job
• Salary of direct workers -> debit to Work in Process
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• Actual costing system: Actual overhead is transferred to the 2. Predetermined overhead rates allows uniform costing whatever
Work in Process account season or circumstance the company is into.
Entry: 3. Within the relevant range, there will be no problems on fluctuations
Work in Process xx of activity levels and the costs related thereunto.
Manufacturing Overhead xx
PREDETERMINED OVERHEAD RATE FORMULA
H. Completion of the Job Budgeted overhead cost
Predetermined Overhead Rate =
• Accumulated cost production summarized in a Work in Process Specified volume of activity
account -> Finished Goods account
Entry: Remember that:
Finished Goods xx 1. Overhead and activity levels are budgeted by an entity for the whole
Work in Process xx accounting period
2. The numerator and denominator in determining the POHR is being
I. Sale of the Completed Job studied well based on management estimates, past actual production,
• Cost-Plus Pricing method – not only production costs but also or other bases and targets
includes administrative and selling costs
Entry to record the sale: APPLIED OVERHEAD RATE
Accounts Receivable or Cash xx • Actual overhead incurred > Applied overhead = Under applied
Sales xx • Actual overhead incurred < Applied overhead = Over applied

» Perpetual Inventory method: Another entry is made to remove EASY FORMULAS

the costs of goods sold from the Finished Goods inventory
account.
Another Entry:
Cost of Sales xx
Finished Goods Inventory xx

Normal costing method

Why use normal costing?
1. It allows an entity to get immediate cost information for decision-
making and pricing decisions without the need to wait for the actual
overhead costs which takes time to accumulate.
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Chapter 2: accounting for raw materials Work in Process xx

If scrap materials cannot be traced to a specific job:

Perpetual inventory system Scrap Materials (market value) xx
• Requires the need to maintain stock cards for each type of materials Miscellaneous Revenue xx
» To show the inflow, outflow, and balance of raw materials in
quantity and peso amount
• Movement of raw materials – Raw Materials Inventory
Inventory valuation methods
A. FIFO (FIRST IN, FIRST OUT)
• Necessitates the physical counting of raw materials at least once a
• Raw materials inventory = reported at latest cost
year
• Cost of raw materials used = earliest cost
Periodic inventory system B. AVERAGE COST
• No need to maintain stock cards 1. SIMPLE AVERAGE
• Physical count is made periodically Total units costs
• Latest purchases normally left in the warehouse Simple average unit cost =
Total number of items
• Raw materials issued are the residual amount after deducting the
physical inventory counted from goods available for sale 2. WEIGHTED AVERAGE
Cost of RM available for use
Weighted average unit cost =
Basic transactions RM available in units
A. PURCHASE OF RAW MATERIALS
» Allocation of freight costs can be based on: 3. MOVING AVERAGE
a. INVOICE COSTS
b. UNITS PURCHASED
c. WEIGHTED UNITS ECONOMIC ORDER QUANTITY (EOQ)
B. INVENTORY STOCK CARD INVENTORY
• Used to record the movement of the inventory. • One of the largest resource investments of an entity.
C. ISSUANCE OF RAW MATERIALS • They are either sold as merchandise or manufactured and then sold
D. SCRAP MATERIALS to earn revenue.
• Defective or leftover materials in production • Until inventory is sold, inventory itself is not profitable.
• An entity should consider that:
If scrap materials can be traced to a specific job: » There are enough inventory stocks to meet customer
Scrap Materials xx demands.
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» There should not be too much inventories where there would 2 × 𝑎𝑛𝑛𝑢𝑎𝑙 𝑑𝑒𝑚𝑎𝑛𝑑 × 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑜𝑟𝑑𝑒𝑟
be higher costs of storage and handling. 𝐸𝑂𝑄 = √
𝑎𝑛𝑛𝑢𝑎𝑙 𝑐𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝑐𝑜𝑠𝑡 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

WHAT IS THE ECONOMIC ORDER QUANTITY (EOQ) MODEL?

• Designed to minimize inventory costs EOQ can provide information about:
• Assumption: demand, ordering, and holding costs all remain constant • How many units shall be ordered in each order?
• Economic Order Quantity is the order size for an inventory item that • When should these units be ordered?
results in the lowest total inventory costs for a period (Heitger)
QUESTIONS:
• Lowest total cost for an inventory occurs WHEN the size of an
1. How many orders are made each year?
inventory is large enough SO that the cost of ordering that quantity
of inventory = cost of carrying it
Annual units required
No. of orders per year =
COSTS ASSOCIATED IF RM ARE PURCHASED FROM OUTSIDE SUPPLIERS EOQ
1. CARRYING COSTS – costs of storage, insurance, inventory taxes,
obsolescence, spoilage and pilferage, opportunity cost of funds tied up 2. What is the frequency of placing an order?
w/ the inventory and handling costs. These costs are larger for large
amount of inventory 360 days
Time to order =
2. ORDERING COSTS – costs of placing and receiving orders – cost of No. of orders per year
processing documents, insurance for shipments, unloading costs.
These costs are the same whether small or big quantity of inventory 3. The cost of ordering
is ordered
Total ordering cost = No. of orders per year x cost per order
COSTS ASSOCIATED IF RM ARE INTERNALLY GENERATED
1. SET UP COSTS – costs of preparing equipment and facilities. E.g. (1) 4. The cost of carrying the inventory
wages of idled production workers, (2) costs of idled production
facilities (loss of income), (3) costs of test runs like labor, materials, EOQ
Average inventory =
and overhead 2
2. CARRYING COSTS
Carrying cost = Average inventory x carrying cost per unit
SOLVING FOR EOQ
5. Total inventory costs
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Total inventory costs = Carrying costs + ordering costs (Average daily usage x lead time) xx
Reorder point xx units
THE REORDER POINT
• This is the point in time a new order should be placed Just in time (jit) inventory system
• Assumption that raw materials all arrive at once is not true (there • Principle: requires no inventory on hand because materials are
are possible delays) assumed to arrive just in time
» Timing of purchase = very critical element of material planning • No materials inventory maintained, because materials are issued
• LEAD TIME – time span from the date an order is placed to date of directly to production upon receipt.
actual receipt • Conforms to: “the lower the level of inventory, the more efficient
the production system is”
Formula: • “The inventory arrives JUST IN TIME when the entity needs it.”
Reorder point = daily usage x lead time + safety stocks • Supplier dependent
• The company will order once the stock on hand has reached the Advantages:
reorder point. 1. Less space needed
2. Waste reduction
STOCK OUTS AND SAFETY STOCKS 3. Smaller investments
• This is maintained as protection for possible stock-outs Disadvantages:
• Safety stock is determined by considering: 1. Risk of running out of stock (masisira/delay production process) –
1. Maximum daily usage you need to have a good relationship with your suppliers
2. Average daily usage 2. Lack of control over time frame
3. More planning required
Formula for Safety Stocks:
Maximum Daily Usage xx RESULTS:
Less: Average Daily Usage xx 1. Lower investment in inventory
Difference xx 2. Reduced inventory and carrying costs
Multiply by: Lead Time (days) xx 3. Reduce costs of obsolescence
Safety Stock xx units 4. Lower investment in space for inventories
5. Reduced total manufacturing costs
Computation for reorder point:
Safety stock xx Backflush accounting
Add: Usage during lead time
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• No Work in Process or Materials Inventory accounts Additional Compensation = Regular wage + at least 30% of RW
• Conversion costs incurred (labor and overhead) are summarized in the
Conversion Costs Control account. • If made to work during a special holiday that falls on a scheduled rest
• Conversion cost is then charged immediately to cost of sales. day:

Chapter 3: accounting for factory labor Additional Compensation = Regular wage + at least 50% of RW

RIGHT TO HOLIDAY PAY

What is factory labor? • Every worker should be paid his regular daily wage during regular
• It represents the wages of direct and indirect laborers in the factory holidays
• Includes: • If an employee is made to work during the ff. regular holidays
1. Regular basic pay 1. New Year’s Day
2. Cost of living allowances 2. Maundy Thursday
3. 13th month 3. Good Friday
4. Overtime pay excluding premium 4. 9th of April
• Overtime premium – paid to direct and indirect laborers in excess of 5. 1st of May
their regular wage rate (usually considered part of indirect labor 6. 12th of June
costs) 7. 4th of July
8. 30th of November
Labor code of the Philippines: prov. Pd 442 9. 25th and 30th of December
NORMAL HOURS OF WORK 10. Day of general election
• Normal hours – shall not exceed 8 hours a day
• Includes: Compensation = Regular Rate x 2
a. All time during which an employee is required to be on duty
b. All time during which an employee is permitted to work NIGHT SHIFT DIFFERENTIAL
• Rest periods of short duration – counted • Every employee shall be paid a night shift differential of not less than
• Not less than 60 minutes time-off for regular meals 10% of his regular wage for each hour of work performed between
10pm-6am
COMPENSATION FOR REST DAY, SUNDAY, OR HOLIDAY WORK
• Employees have right to a weekly rest day OVERTIME WORK
• If made to work during rest day or any special holiday: • Employee may work beyond 8 hours a day provided that he is paid for
the overtime work:
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Additional compensation = Regular Wage + at least 25% of RW

• Work performed beyond 8 hours during a holiday/rest day:

AC = Rate of the 1st 8 hours on a holiday + at least 30% of RW

• Undertime – not offset by overtime

WITHHOLDING TAX ON COMPENSATION

• A reasonable estimate of employee’s income tax liability
• Deducted from employees’ income arising from employer-employee
relationship
• COMPENSATION – refers to all remuneration for services performed
by an employee for his employer. Includes:
1. Basic salary and allowances
2. Overtime pay
3. Holiday pay
4. Profit sharing
5. Hazard pay
6. 13th month pay
7. Other fringe benefits