Cae08 - Cost Accountng Complete Module

MODULE CAE08: COST ACCOUNTING AND CONTROL WITH STRATEGIC COST MANAGEMENT
ICCT COLLEGES FOUNDATION INC.
VV. Soliven Avenue, Cainta, Rizal
COLLEGE OF BUSINESS AND ACCOUNTANCY
MODULE ON
COST ACCOUNTING AND COST MANAGEMENT
Contents
Module 1 – Introduction to Cost Accounting
Module 2 – Cost Concept and Classification
Module 3 – Cost Accounting Cycle
Module 4 – Job Order Costing
Module 5 – Just In time and Backflush Accounting
Module 6 – Accounting for Materials
Module 7 – Accounting for Factory Overhead
Module 8 – Accounting for Labor
Module 9 – Process Costing (FIFO and Average)
Module 10 – Joint Products and By-Products
Guia Mae B. Abaja, CPA
Part-time Professor
1
CHAPTER 1 INTRODUCTION TO COST ACCOUNTING
What I Need to Know?

1. Distinguish between financial, managerial, and cost accounting
2. Distinguish between merchandising and manufacturing operations
3. Distinguish between job order costing and process costing
The main and primary objective of accounting is to provide financial information about
an economic entity to different types of users:
Internal users – managers for planning, controlling and decision making.
External users – the government, those who provide funds and those who have various
interests in the operation of the entity.
Cost Accounting is an expanded phase of general or financial accounting which informs

management promptly with the cost of rendering a particular service, buying and selling
a product, and producing a product. It is the field of accounting that measures, records,
and reports information about costs.
Cost Accounting is the intersection between financial and managerial accounting. Cost
Accounting information is needed and used by both financial and managerial
accounting. Cost accounting provides product cost information to external parties such
as stockholders, creditors and various regulatory boards for credit and investment
decisions. Cost Accounting provides product cost information also to internal parties
such as managers for planning and controlling.
Service VS Merchandising VS Manufacturing Operations
2
Cost of Goods Sold - Merchandising Company
Cost of Goods Sold - Manufacturing Company
3
4
Two Basic Product- Costing Systems
Job order costing is a method of assigning costs to a specific unit or product. For
example, a construction project to build a house from beginning to end is a job order.
Another example might be the building of a bulletproof SUV for a popular musician. The
overall concept here is that the product or service is a one-time event. The auto repair
shop that Joey works at will rebuild the engine of Customer A's car. Then it will replace
the spark plugs and serpentine belt on Customer B's truck. As they continue to provide
repairs, each customer's needs are specific to their vehicles. Joey's boss will assign
costs to each of the jobs dependent on the parameters of the job.
Process costing is a method of assigning costs for a mass quantity of a product or

service. For example, a bank provides the same service of receiving deposits to all
customers. Another one would be that a company manufactures computer chips for
thousands of customers. The concept here is that a company makes many numbers of
a product and sells that exactly similar product to everyone.
5
Sample Problem:
1. The following costs were incurred in July:
Direct materials ......................... $35,000

Direct labor ............................... $13,000
Manufacturing overhead ........... $15,000
Selling expenses....................... $14,000
Administrative expenses ........... $30,000
Prime costs during the month totaled:

A) $48,000
B) $28,000
C) $107,000
D) $63,000
Solution:
Direct materials.... $35,000
Direct labor .......... 13,000
Total .................... $48,000
2. Abel Company's manufacturing overhead is 20% of its total conversion costs. If direct
labor is $38,000 and if direct materials are $47,000, the manufacturing overhead
is:
A) $152,000
B) $11,750
C) $21,250
D) $9,500
Solution:
Conversion costs = Direct labor + Manufacturing overhead
Conversion costs = $38,000 + Manufacturing overhead
6
0.20 × Conversion costs = Manufacturing overhead

0.20 × ($38,000 + Manufacturing overhead) = Manufacturing overhead
$7,600 + 0.20 × Manufacturing overhead = Manufacturing overhead
$7,600 = 0.80 × Manufacturing overhead
Manufacturing overhead = $9,500
3. During the month of July, direct labor cost totaled $12,000 and direct labor cost was
30% of prime cost. If total manufacturing costs during July were $86,000, the
manufacturing overhead was:
A) $46,000
B) $40,000
C) $28,000
D) $74,000
Solution:
0.30 × Prime cost = Direct labor
0.30 × Prime cost = $12,000
Prime cost = $40,000
Prime cost = Direct materials + Direct labor
$40,000 = Direct materials + $12,000
Direct materials = $28,000
Total manufacturing Manufacturing

= Direct materials + Direct labor +
costs Overhead
Manufacturing
$86,000 = $28,000 + $12,000 +
Overhead
Manufacturing overhead = $46,000
7
4. In July direct labor was 40% of conversion cost. If the manufacturing overhead cost
for the month was $34,000 and the direct materials cost was $23,000, the direct labor
cost was:
A) $22,667
B) $15,333
C) $51,000
D) $34,500
Solution:
0.40 × Conversion costs = Direct labor
0.60 × Conversion costs = Manufacturing overhead
0.60 × Conversion costs = $34,000
Conversion costs = $56,667
Conversion costs = Direct labor + Manufacturing overhead
$56,667 = Direct labor + $34,000
Direct labor = $22,667
5. Shown below are a number of costs incurred last year at Mecca Publishing Co., a
manufacturer of elementary school textbooks:
Solvents and cleaners used by the custodians to

clean the textbook printing presses ........................ $500
Depreciation on the automobiles used by sales
representatives ..................................................... $4,200
Fire insurance on factory building ........................... $2,000
Shipping costs on textbooks sold............................ $3,700
8
What is the total of the manufacturing overhead costs above?

A) $500
B) $2,500
C) $6,200
D) $6,700
Solution:
clean the textbook printing presses................
Fire insurance on factory building........................
Total ....................................................................
Reference:
Compilation of Lecture Notes of Guia Mae B. Abaja, CPA, Part-time Professor
For further discussion please refer to the link provided:

CHAPTER 1-Introduction to Cost Accounting - https://www.youtube.com/watch?v=hpYBmdeQLpM
CHAPTER 1-Job Order Costing- https://www.youtube.com/watch?v=qPvZMRBgxJQ
CHAPTER 1-Process Costing- https://www.youtube.com/watch?v=iY962ymhV-8
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CHAPTER 2 COST CONCEPTS AND CLASSIFICATION

1. Distinguish between cost, expenses, and losses
2. Distinguish between direct and indirect cost
3. Define variable, fixed, and mixed costs and discuss the effect of changes in
volume on these costs
Costs are associated with all types of organizations – business, non-business, service,
retail and manufacturing. Generally, the kinds of costs that are incurred and the way
these costs are classified will depend on the type of organization involved.
I. Cost classified as to relation to a product
A. Manufacturing Costs
1. Direct Materials – materials that become part of a finished product and can be
conveniently and economically traced to specific product units.
2. Direct Labor – all labor costs for specific work performed on products that can be
conveniently and economically traced to end products.
3. Factory Overhead – a catchall for manufacturing costs that cannot be classified as

direct materials or direct labor costs. It includes indirect material and indirect labor.
B. Non-manufacturing costs
1. Marketing or selling expense – all costs necessary to secure customer orders and get
the finished product or service in to the hands of the customer.
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2. Administrative expense – all executive, organizational, and clerical expenses that

cannot logically be included under either production or marketing.
II. Cost classified as to variability
A. Variable cost – items of cost which vary directly in relation to volume of

production.
B. Fixed cost – items of cost which remain constant in total irrespective of the
volume of production.
C. Mixed cost – items of cost with fixed and variable component.
III. Cost classified as to relation to manufacturing departments
A. Direct department charges - costs charged to the particular manufacturing

department that incurred the costs since the costs can be conveniently identified
or associated with the departments that benefited from said costs.
B. Indirect department charges – cost charged to some other manufacturing

departments or accounts but are later allocated or transferred to another
departments that indirectly benefited from said costs.
IV. Cost classified to their nature as common or joint
A. Common costs – costs of facilities or services employed in two or more

accounting periods, operations, commodities or services.
B. Joint costs – costs of materials, labor, and overhead incurred in the manufacture
of two or more products at the same time.
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V. Cost classified as to relation to an accounting period
A. Capital expenditures – expenditure intended to benefit more than one accounting

periods and is recorded as an asset.
B. Revenue expenditures – expenditure that will benefit current period only and is
recorded as an expense.
VI. Cost classified as to relation to an accounting period
A. Standard costs – predetermined costs for direct materials, direct labor and factory
overhead.
B. Opportunity costs – the benefit given up when one alternative is chosen over
another.
C. Differential costs – cost that is present under one alternative but is absent in
whole or in part under another alternative.
D. Relevant costs – a future cost that change across the alternatives.
E. Out-of-pocket costs – cost that requires the payment of money as a result of their
incurrence.
F. Sunk costs – a cost for which an outlay has already been made and it cannot be
changed by present of future decision.
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Cost Flow – Manufacturing Firms
Sample Problem
1. Shown below are a number of costs incurred last year at Mecca Publishing Co., a
manufacturer of elementary school textbooks:

clean the textbook printing presses ........................ $500
Depreciation on the automobiles used by sales
representatives ..................................................... $4,200
Fire insurance on factory building ........................... $2,000
Shipping costs on textbooks sold............................ $3,700
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What is the total of the manufacturing overhead costs above?

A) $500
B) $2,500
C) $6,200
D) $6,700
Solution:
Solvents and cleaners used by the custodians to clean the textbook
printing presses..............................................
Fire insurance on factory building........................
Total ....................................................................
2. Mammoser Manufacturing Corporation rents a building for $8,000 per month and
uses it for a number of different purposes. The building space is utilized by the various
activities as follows:
Receiving and storing raw materials.... 5%

Production operations.......................... 70%
Sales offices ........................................ 15%
Administrative offices........................... 10%
How much of the $8,000 monthly rent cost should be classified as manufacturing
overhead?
A) $5,600
B) $6,000
C) $6,800
D) $7,200
Solution:
Receiving and storing raw materials (5% × $8,000) $ 400
Production operations (70% × $8,000) ................... 5,600
14
$6,000
3.Consider the following costs:
Direct materials ................................... $33,000

Depreciation on factory equipment ...... $12,000
Factory janitor’s salary......................... $23,000
Direct labor .......................................... $28,000
Utilities for factory ................................ $9,000
Selling expenses ................................. $16,000
Production supervisor’s salary ........ $34,000
Administrative expenses...................... $21,000
What is the total amount of manufacturing overhead included above?

A) $78,000
B) $139,000
C) $44,000
D) $37,000
Solution:
Depreciation on factory equipment ...... $12,000
Factory janitor’s salary......................... 23,000
Utilities for factory ................................ 9,000
Production supervisor’s salary............. 34,000
Total .................................................... $78,000
4.The information below relates to Derby Manufacturing Company's operations for a

recent month. (Assume that all raw materials are direct materials.):
Purchases of raw materials ................. $91,000

Direct labor cost .................................. $122,000
Selling costs (total) .............................. $42,000
15
Administrative costs (total) .................. $56,000

Manufacturing overhead costs (total) .. $340,000
Raw materials inventory, beginning ..... $22,000
Work in process inventory, beginning .. $27,000
Finished goods inventory, beginning ... $42,000
Raw materials inventory, ending ......... $7,000
Work in process inventory, ending ...... $35,000
Finished goods inventory, ending ........ $15,000
What was Derby's cost of goods manufactured for the month?

A) $545,000
B) $560,000
C) $568,000
D) $587,000
Solution:
Derby Manufacturing Company
Schedule of Cost of Goods Manufactured
Direct materials:
Beginning raw materials inventory ........... $ 22,000
Add: Purchases of raw materials ............. 91,000
Raw materials available for use ............... 113,000
Deduct: Ending raw materials inventory .. 7,000
Raw materials used in production ............ $106,000
Direct labor.................................................. 122,000
Manufacturing overhead ............................. 340,000
Total manufacturing costs ........................... 568,000
Add: Beginning work in process inventory .. 27,000
595,000
Deduct: Ending work in process inventory .. 35,000
Cost of goods manufactured ....................... $560,000
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5. Consider the following costs incurred in a recent period:
Direct materials ................................... $33,000

Depreciation on factory equipment ..... $12,000
Factory janitor’s salary ........................ $23,000
Direct labor ......................................... $28,000
Utilities for factory ............................... $9,000
Selling expenses................................. $16,000
Production supervisor’s salary ............ $34,000
Administrative expenses ..................... $21,000
What was the total amount of the period costs listed above for the period?
A) $78,000
B) $71,000
C) $46,000
D) $37,000
Solution:
Selling expenses ................................. $16,000
Administrative expenses...................... 21,000
Total .................................................... $37,000
Reference:

CHAPTER 2-Cost Concept and Classification- https://www.youtube.com/watch?v=lztzRuVRWxE
CHAPTER 2-Cost Concepts- https://www.youtube.com/watch?v=VpHvz7DT3-I
CHAPTER 2-Cost Flow- https://www.youtube.com/watch?v=26mMm9tuvAQ
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CHAPTER 3 COST ACCOUNTING CYCLE

1. Understand the cost accounting cycle
2. Account for direct and indirect materials and labor as they are used in the
production process
3. Prepare the statement of cost of goods manufactured and sold
Elements of Manufacturing Cost
1. Direct Materials
The cost of material which become part of the product being manufactured and
which can be readily identified with a certain product.
Examples: lumber used in making furniture, fabric used in production of gowns,

leather used to make shoes and bags
2. Direct Labor
The cost of labor for those employees who work directly on the product
manufactured. Examples: salaries of machine operators or assembly line
workers
3. Factory Overhead
Includes all cost related to the manufacturing of a product except direct materials
and direct labor.
Examples: indirect materials, indirect labor, depreciation on the factory building,

rent, insurance, taxes.
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Manufacturing Inventory Accounts
1. Raw Materials Inventory

Entry: Work in process inventory xxxx
xxxx
Raw materials inventory x
2. Work in Process Inventory

Entry: Finished goods inventory xxxx
xxxx
Work in process inventory x
3. Finished goods Inventory

Entry: Cost of goods sold xxxx
xxxx
Finished goods inventory x
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Statement of Cost of Goods Manufactured and Sold
Name of Company
Statement of Cost of Goods Manufactured and Sold
For the year ended December 31, 2021
Direct Materials used x

Materials inventory, beginning x
Add: Purchases x
Total Available for Use x
Less: Materials inventory, ending x x
Direct Labor x
Factory Overhead x
Total Manufacturing Costs x
Add: Work in process inventory, beginning x
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Cost of goods put into process x

Less: Work in process inventory, ending x
Cost of goods manufactured x
Add: Finished goods inventory, beginning x
Total goods available for sale x
Less: Finished goods inventory, ending x
Cost of goods sold – normal x
Add/Deduct: Over (under) applied factory overhead x
Cost of goods sold – actual x
From the statement of cost of goods manufactured and sold, the following
different equations are derived:
1. Direct materials used + Direct labor = Prime cost
2. Direct labor + Factory overhead = Conversion cost
3. Direct materials used + Direct labor + Factory overhead = Total

Manufacturing cost
4. Materials inventory, beg. + Purchase = Total materials available for use
5. Materials used + Materials inventory, end = Total materials available for use
6. Finished goods inventory beg + Cost of goods manufactured = Total goods

available for sale
Illustrative Problem
22
A. The following data are for Potras Company:
Beginning Ending
Finished goods inventory ............ P30,000 P40,000
Work in process inventory ........... P20,000 P13,000
Raw materials inventory ............. P21,000 P26,000
Purchases of raw materials .......... P71,000
Factory depreciation ................ P 5,000
Other factory costs ................. P10,000
Direct labor ........................ P27,000
Indirect labor ...................... P 6,000
Selling expense ..................... P12,000
Over- or underapplied overhead ...... -0-
The cost of raw materials used in production was: P66,000.
The cost of goods manufactured was P121,000.
The cost of goods sold was P111,000.
B. The Bus Company uses a job-order cost system. The following

information was recorded for September:
Added During
September
September 1 Direct Direct
Job Labo
Number Inventory Materials r
23
P1,00
1 0 P 300 P200
2 1,400 250 300
3 500 1,500 150
4 750 4,000 400
The direct labor wage rate is P10 per hour. Overhead is applied at the rate of P5 per
direct labor-hour. Jobs 1, 2, and 3 have been completed and transferred to finished
goods. Job 2 has been delivered to the customer.
The ending Work in Process inventory is P5,350.
The Cost of Goods Manufactured for September is P5,925.
The Cost of Goods Sold for September (before disposition of any under- or
overapplied overhead) is P2,100.
Sample Problem:
1. For the year 2011, the gross margin of Jumbo Co. was P96,000; the cost of goods
manufactured was P340,000; the beginning inventories of work in process and
finished goods were P28,000 and P45,000, respectively; and the ending inventories
of work in process and finished goods were P38,000 and P52,000, respectively. The
sales of Jumbo Co. for 2011, must have been
a. 419,000
b. 429,000
c. 434,000
d. 436,000
Answer: B
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Solution:
Cost of Goods Manufactured P 340,000
Finished Goods, Beginning 45,000
Total Goods available for Sale 385,000
Finished Goods, ending (52,000)
Cost of Goods Sold 333,000
Sales (SQUEEZE) P 429,000

COGS 333,000
Gross Profit 96,000
2. The following information was taken from Jeric Comapany’s accounting records for
the year ended December 31, 2011.
Increase in raw materials inventory P 15,000
Decrease in finished goods inventory 35,000
Raw materials purchased 430,000
Direct labor payroll 200,000
Factory overhead 300,000
There was no work-in-process inventory at the beginning or end of the year. Jeric’s
2011 cost of goods sold is
a. P 950,000
b. P 965,000
c. P 975,000
d. P 995,000
Answer: A
Solution:
25
Direct Materials
Purchases 430,000
Less: Increase in raw materials 15,000 415,000
Direct Labor 200,000
Factory Overhead 300,000
Manufacturing Cost 915,000
Add: Decrease in Finished Goods 35,000
Cost of Goods Sold 950,000
Items 3 through 5 are based on the following information pertaining to Glenn

Company’s manufacturing operations.
Inventories 3/1/11 3/31/11

Direct Materials P 36,000 P 30,000
Work-in-process 18,000 12,000
Finished goods 54,000 72,000
Additional Information for the month of March 2011

Direct materials purchased P 84,000
Direct labor payroll 60,000
Direct labor rate per hour 7.50
Factory overhead rate/direct labor hour 10.00
3. For the month of March 2011, prime cost was
a. P 90,000
b. P 120,000
c. P 144,000
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d. P 150,000
Answer: D
Solution:
Direct Materials
Direct Mats. – Beg. 36,000
Add: Purchases 84,000
Less: Direct Mats. – End. (30,000) 90,000
Direct Labor 60,000
Prime Cost 150,000
4. For the month of March 2011, conversion cost was
a. P 90,000
b. P 140,000
c. P 144,000
d. P 170,000
Answer: B
Solution:
Direct Labor 60,000
Factory Overhead (60,000/7.50)=8000*10 80,000
Conversion Cost 140,000
5. For the month of March 2011, cost of goods manufactured was
a. P 218,000
27
b. P 224,000
c. P 230,000
d. P 236,000
Answer: D
Solution:
Direct Materials used
Direct Materials, 3/1/11 36,000
Add: Purchases 84,000
Total available for use 120,000
Less: Direct Materials, 3/31/11 30,000 90,000
Direct Labor 60,000
Total Manufacturing Costs 230,000
Add: Work in process, 3/1/11 18,000
Cost of Goods put into process 248,000
Less: Work in process, 3/31/11 12,000
Cost of Goods manufactured 236,000
Reference:

CHAPTER 3-Cost Accounting Cycle- https://www.youtube.com/watch?v=t74tZSTnTbE
CHAPTER 3-Elements of Manufacturing Cost- https://www.youtube.com/watch?v=VpHvz7DT3-I
CHAPTER 3-Statement of Cost of Goods Sold- https://www.youtube.com/watch?v=yflE8tnJMN4&t=41s
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CHAPTER 4 JOB ORDER COSTING

1. Define job order costing system and identify the types of industries that would be
most to use this system
2. Demonstrate the mechanics of a job order costing system
The job order cost procedure keeps the costs of various jobs or contracts separate
during their manufacture or construction. 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.
Major Source documents for Job Order Costing
1. Job – Order Cost Sheet – accumulate product costs of specific units or small
batches of units for both product costing and control purposes.
2. Material Stockcard – records of the perpetual book inventory of costs and

quantities of materials on hand.
3. Finished Goods Stockcard – records of the perpetual book inventory o costs and
quantities of completed goods held for sale.
4. Factory Overhead Control Cost Record – accumulate detailed manufacturing

overhead costs by department.
Accounting Procedure for Materials
1. Purchase of Materials
Material xxxx
29
xxx
Accounts payable x
2. Return of materials to supplier

Material xxxx
xxx
Accounts payable x
Issuance of Direct
3. Materials
Work in process xxxx
xxx
Materials x
Issuance of Indirect
4. Materials
Factory overhead control xxxx
30
Materials xxxx
Accounting Procedure for Labor
1. Recording of payroll
Payroll xxxx
xxx
Withholding tax payable x
xxx
SSS Premium payable x
xxx
Philhealth contribution payable x
xxx
Accrued Payroll x
2. Distribution of payroll
Factory overhead control xxxx
xxx
Payroll x
3. Payment of payroll
Accrued payroll xxxx
xxx
Cash x
Accounting Procedure for Factory
Overhead
1. Recording of factory overhead applied

xxx
Applied factory overhead x
2. Month end closing entry

Factory overhead applied xxxx
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Under/over-applied overhead xxxx

xxx
Factory overhead control x
3. Year-end closing entry
Cost of Goods Sold xxxx
xxx
Under/over – applied overhead x
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 base:
1. Units of Production
2. Direct Material Cost
3. Direct Labor Hours
4. Direct Labor Cost
5. Machine Hours
If actual is bigger than applied, the variance is called under-applied factory overhead
(unfavorable) and this is taken as an addition to the Cost of Goods Sold in the
statement. If applied is bigger than actual, the variance is called over-applied factory
overhead (favorable) and this is taken as deduction from the Cost of Goods Sold in the
statement.
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The journal entry to record the cost of the jobs completed is:
Finished goods 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
Cost of goods sold xxxx
Finished goods xxxx
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Allenton Company is a manufacturing firm that uses job-order costing. At the beginning
of the year, the company's inventory balances were as follows:
Raw materials P
........ 26,000
Work in process
...... 47,000
Finished goods
....... 133,000
The company applies overhead to jobs using a predetermined overhead rate based on
machine-hours. At the beginning of the year, the company estimated that it would work
31,000 machine-hours and incur P248,000 in manufacturing overhead cost. The
following transactions were recorded for the year:
a. Raw materials were purchased, P411,000.
b. Raw materials were requisitioned for used in production, P409,000 (P388,000 direct
and P21,000 indirect).
c. The following employee costs were incurred: direct labor, P145,000; indirect labor,
P61,000; and administrative salaries, P190,000.
d. Selling costs, P148,000.
e. Factory utility costs, P12,000.
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f. Depreciation for the year was P121,000 of which P114,000 is and P7,000 is related to
selling and administrative activities.
related to factory operations
g. Manufacturing overhead was applied to jobs. The actual level 29,000 machine-hours.
of activity for the year was
h. The cost of goods manufactured for the year was P783,000.
i. Sales for the year totaled P1,107,000 and the costs on the that were sold totaled
P768,000 job cost sheets of the goods
j. The balance in the Manufacturing Overhead account was closed out to Cost of Goods
Sold.
Required:
Prepare the appropriate journal entry for each of the items above (a. through j.). You
can assume that all transactions with employees, customers, and suppliers were
conducted in cash.
Answer:
a. Raw Materials Inventory ........ 411,000
Cash ...................... 411,000
b. Work in Process Inventory ...... 388,000
Manufacturing Overhead ......... 21,000
Raw Materials Inventory ... 409,000
c. Work in Process Inventory ...... 145,000
Manufacturing Overhead ......... 61,000
Administrative Salary Expense .. 190,000
Cash ...................... 396,000
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d. Selling Expenses ............... 148,000

Cash ...................... 148,000
e. Manufacturing Overhead ......... 12,000
Cash ...................... 12,000
f. Manufacturing Overhead ......... 114,000
Depreciation Expense ........... 7,000
Accumulated Depreciation .. 121,000
g. Work in Process ................ 232,000
Manufacturing Overhead .... 232,000
h. Finished Goods ................. 783,000

Work in Process ........... 783,000
i. Cash ........................... 1,107,000
Sales ..................... 1,107,000
Cost of Goods Sold ............. 768,000
Finished Goods ............ 768,000
j. Manufacturing Overhead ......... 24,000
.......
Cost of Goods Sold . 24,000
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Reference:

CHAPTER 4-Job Order Cost Accounting- https://www.youtube.com/watch?v=o6lQLjtqKkM
CHAPTER 4-Job Order Costing Part 2- https://www.youtube.com/watch?v=_4Asy-G3RZ8
CHAPTER 4-Job Costing Flow of Costs- https://www.youtube.com/watch?v=OdUlcAwczRc
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CHAPTER 5 JUST IN TIME AND BACKFLUSH ACCOUNTING

1. Understand the JIT philosophy
2. Differentiate the JIT system from the traditional costing system
Just-in-time means that raw materials are received just in time to go into production,
manufactured parts are completed just in time to be assembled into products, and
products are completed just in time to be shipped to customers. The JIT requires raw
materials to be delivered at exactly the points they are needed, and just when they are
needed to initiate production, thus eliminating the need for the warehouse space that
has been considered an expensive part of any manufacturing operation. It also reduces
the cost of handling, from the point of delivery of raw materials to the point where the
finished product is shipped to the customer.
The distinguishing characteristic of JIT costing is that production costs are accumulated
with inventory at later stages of the production process. The rationale for this difference
is that JIT assumes that small quantities of direct materials, work-in-process, and
finished goods inventories will be maintained.
JIT costing differs from traditional costing with regards to the accounts used and the
timing of cost recording. There are basically three major differences:
1. Instead of using separate accounts for Material and Work In Process as in

traditional costing JIT costing combines these into a Raw and in Process
account.
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2. Direct labor is usually considered a minor cost time in a JIT setting so no

separate account for direct labor is created. Direct labor and factory overhead
are usually charged to a Conversion Cost account or sometimes direct to COGS
account.
3. In traditional costing overhead is applied to products as they are being produced

and is recorded into WIP account. In JIT costing, overhead is not applied to
production until they are completed. When products are completed under JIT
costing, labor and overhead is added to COGS, since the goods are sold soon
after production is completed.
KEY TAKEAWAYS
The just-in-time (JIT) inventory system is a management strategy that minimizes

inventory and increases efficiency.
Just-in-time (JIT) manufacturing is also known as the Toyota Production System (TPS)
because the car manufacturer Toyota adopted the system in the 1970s.
Kanban is a scheduling system often used in conjunction with JIT to avoid overcapacity
of work in process.
The success of the JIT production process relies on steady production, high-quality
workmanship, no machine breakdowns, and reliable suppliers.
39
Backflushing
Backflushing is also known as backflush costing/accounting. It is shortened version of

the traditional method o accounting for cost. Under job order costing and process
costing numerous subsidiary records of the cost of the work in process are maintained
and these records are updated by many accounting entries. Under JIT system, where
the time from the receipt of the materials to the completion of the product is reduced to
a few hours, the usefulness of tracking the cost of the WIP becomes impractical.
40
Sample problem:
1. Cost Savings From Smaller Inventory. Automated Assembly Company maintains a
WIP inventory at each of 15 work stations, and the average size of the inventory is 200
units per station. The physical flow of units into and out of each WIP location is first-in,
first-out. The total number of instances in which some work station goes out of its
control limits is expected to be 100 during the coming year. In 80% of these instances,
the out-of-control condition is expected to be discovered immediately by the operator at
that station; in the other 20% of these instances, a defect will enter 10% of the units
produced. These defective units enter WIP between stations, where they will be
discovered by the next station's operator. Every out-of-control condition is corrected as
soon as it is discovered. The average cost of a unit in WIP is $40, and the average loss
from an out-of-control condition is $20 per defective unit produced. The annual cost of
carrying WIP is 33% of the cost of the inventory.
Management plans to reduce the number of units held at every work station by
50%. The rate of final output will be unchanged, and no other changes will be made in
the system.
41
Required:
(1) Calculate the expected carrying cost savings from the change planned by the
management.
(2) Calculate the expected savings in cost of defects if the changes are implemented.
SOLUTION
(1) Carrying cost savings = 33% x reduction in average cost of WIP
= 33% x 50% x past average cost of WIP
= .33 x .5 x (15 x 200 x $40)
= $19,800
(2) Savings in cost of defects = $20 x reduction in the number of defective units
= $20 x (50% x 200 x 10%) x (.20 x 100)
= $20 x 10 x 20
= $4,000
2. Inventory Size, Velocity, and Lead Time. Probtype Incorporated requires an average
lead time of 45 days on customer orders that require parts not kept in stock. When
such a customer order is received, the parts order is placed with a vendor immediately
by telephone, and the parts are received in an average of 21 days. The parts are
inspected and put into production an average of three days after receipt. The average
time spent in production is 16 days. After production is completed, the order goes
through final inspection in two days and arrives at the customer's site after an additional
three days, on average.
Management plans to leave the rate of final output unchanged, induce vendors to
reduce their total lead time by one-third, and reduce the average size of WIP to one-
fourth of its present level.
Required: Assuming management's plans are implemented successfully, calculate the

average lead time on customer orders that require parts not kept in stock.
42
SOLUTION
The average lead time will be 26 days, calculated as follows:
Reduction of vendor lead time = 1/3 x 21 days = 7 days
Reduction of time in WIP = 3/4 of present time in WIP

= 3/4 x 16 days
= 12 days
New lead time = present lead time - reductions

= 45 days - (7 days + 12 days)
= 26 days
3. Comparison of Process Costing and Backflushing; Unit Cost Calculations. BF

Company had 35 units in process, 50% converted, at the beginning of a recent, typical
month; the conversion cost component of this beginning inventory was $525. There
were 40 units in process, 50% converted, at the end of the month. During the month,
5,000 units were completed and transferred to finished goods, and conversion costs of
$250,000 were incurred.
Required:
(1) Carrying calculations to three decimal places, find the conversion cost per unit for
the month:
(a) by the average cost method as used in process costing.
43
(b) by dividing the total conversion cost incurred during the month by the number
of units completed during the month (do not calculate equivalent units).
(c) by dividing the total conversion cost incurred during the month by the number
of units started during the month.
(2) Using the three unit costs from Requirement (1), calculate three amounts for the
total conversion cost of the ending inventory of work in process to the nearest
dollar.
(3) In light of the results of Requirement (2), which of the three methods of calculating
unit conversion cost would you recommend for the purpose of inventory costing,
1(a), 1(b), or 1(c)? Why?
SOLUTION
(1) (a) Equivalent production = 5,000 + (.50 x 40) = 5,020 units
$250,525
= $49.905 per unit
5,020
$250,000
(b) = $50 per unit
5,000
(c) Units started = 5,000 + 40 - 35 = 5,005
$250,000
= $49.950 per unit
5,005
(2) 40 x .50 x 49.905 = 998

40 x .50 x 50.000 = 1,000
40 x .50 x 49.950 = 999
44
(3) Considering that the results of Requirement (2) were within two dollars of each
other, then method 1(b) would be recommended because of its ease and
simplicity.
4. Backflush Costing With a Finished Goods Account. The LanFat Manufacturing

Company uses a Raw and In Process (RIP) inventory account and expenses all
conversion costs to the cost of goods sold account. At the end of each month, all
inventories are counted, their conversion cost components are estimated, and inventory
account balances are adjusted accordingly. Raw material cost is backflushed from RIP
to Finished Goods. The following information is for the month of August:
Beginning balance for RIP account, including $4,800 of conversion cost ...... $ 43,500
Raw materials received on credit ................................................................... 680,000
Ending RIP inventory per physical count, including $5,300 conversion
cost estimate ............................................................................................. 47,200
Required: Prepare all journal entries involving the RIP account.
SOLUTION
Journal entries involving the RIP account are:
Raw and In Process ................................................................... 680,000

Accounts Payable ................................................................. 680,000
This is a summary entry for all receipts of raw materials during the period. As direct
materials are used, no entry is needed, because they remain a part of RIP.
Finished Goods .......................................................................... 676,800

Raw and In Process .............................................................. 676,800
45
This entry backflushes material cost from RIP to Finished Goods. This is a
postdeduction. The calculation is:
Material in August 1 RIP balance ............................................... $ 38,700

Material received during August ................................................. 680,000
$718,700
Material in August 31 RIP, per physical count ............................ 41,900
Amount to be backflushed .......................................................... $676,800
Raw and In Process ................................................................... 500

Cost of Goods Sold ............................................................... 500
Conversion cost in RIP is adjusted from the $4,800 of August 1 to the $5,300 estimate
at August 31. The offsetting entry is made to Cost of Goods Sold, where all conversion
costs were charged during August.
5. Backflush Costing With No Finished Goods Account. The ATM Manufacturing

Company produces only for customer order, and most work is shipped within twenty-
four hours of the receipt of an order. ATM uses a Raw and In Process (RIP) inventory
account and expenses all conversion costs to the cost of goods sold account. At the
end of each month, inventory is counted, its conversion cost component is estimated,
and the RIP account balance is adjusted accordingly. Raw material cost is backflushed
from RIP to Cost of Goods Sold. The following information is for the month of June:
Beginning balance of RIP account, including $900 of conversion cost........... $ 8,500

Raw materials received on credit ................................................................... 187,000
Ending RIP inventory per physical count, including $1,100 conversion
cost estimate ............................................................................................. 7,900
Required: Prepare all journal entries involving the RIP account.
46
SOLUTION
Journal entries involving the RIP account are:
Raw and In Process ................................................................... 187,000

Accounts Payable ................................................................. 187,000
This is a summary entry for all receipts of raw materials during the period. As direct
materials are used, no entry is needed because they remain a part of RIP.
Cost of Goods Sold .................................................................... 187,800

Raw and In Process .............................................................. 187,800
This entry backflushes material cost from RIP to Cost of Goods Sold. This is a
postdeduction. The calculation is:
Material in June 1 RIP balance .................................................. $ 7,600

Material received during June .................................................... 187,000
$194,600
Material in June 30 RIP, per physical count ............................... 6,800
Amount to be backflushed .......................................................... $187,800
Raw and In Process ................................................................... 200

Cost of Goods Sold ............................................................... 200
Conversion cost in RIP is adjusted from the $900 of June 1 to the $1,100 estimate at
June 30. The offsetting entry is made to Cost of Goods Sold, where all conversion
costs were charged during June.
47
Reference:

CHAPTER 5-Just In time and Backflush Accounting- https://www.youtube.com/watch?v=gh2Y3UhSIB4
CHAPTER 5-Just in time Inventory Method- https://www.youtube.com/watch?v=oIGbbtN14qI
CHAPTER 5-Traditional Costing System- https://www.youtube.com/watch?v=M-uGibLcQ-g
48
CHAPTER 6 ACCOUNTING FOR MATERIALS

1. Distinguish between and account for direct and indirect materials as they are
used in the production process.
2. Distinguish between the periodic and perpetual cost accumulation systems used
to account for materials issued to production and for ending materials inventory.
3. Distinguish among the five common control procedures used to assist
management in keeping inventory costs to a minimum.
Systems of Accounting for Materials
1. Periodic Inventory System
Under this system, the purchase of direct and indirect materials is recorded in an
account entitled “Purchases”. The cost of materials issued is not directly
determined; it is indirectly computed by deducting the remaining inventory on
hand from the total available for use.
2. Perpetual Inventory System
The purchase of direct and indirect materials is recorded in an account

entitled
“materials inventory”. Both the cost of materials issued and the ending materials
inventory can be directly ascertained after each transaction.
49
The Economic Order Quantity
The economic order quantity (EOQ) refers to the ideal order quantity a company should
purchase in order to minimize its inventory costs, such as holding costs, shortage costs,
and order costs. EOQ is necessarily used in inventory management, which is the
oversight of the ordering, storing, and use of a company's inventory. Inventory
management is tasked with calculating the number of units a company should add to its
inventory with each batch order to reduce the total costs of its inventory.
The EOQ model seeks to ensure that the right amount of inventory is ordered per batch
so a company does not have to make orders too frequently and there is not an excess
of inventory sitting on hand. It assumes that there is a trade-off between inventory
holding costs and inventory setup costs, and total inventory costs are minimized when
both setup costs and holding costs are minimized.
Formula:
EOQ = √2CN/K
Where:
EOQ = economic order quantity
C = cost of placing an order
N = number of units required annually
K = carrying cost per unit of inventory
Illustrative Problem:
50
Let’s assume the following:

Number of units of materials required
annually 10,000
P10.0
Cost of placing an order 0
Annual carrying cost per unit of inventory P0.80
EOQ = √2CN/K
= √2 (P10) (10,000) / P0.80
= √2 (P200,000 / P0.80
=√250,000
=500 units
Other Formulas:
Order size = number of units per order
No. of orders – 10,000/ order size
Total order cost = No. of orders x P10 per order
Average inventory – order size / 2
Total carrying cost = average inventory x P0.80
Total order and carrying cost = total order cost + total carrying cost
51
Business Papers used to Support Material Transactions
1. Purchase requisition – a written request, usually sent to inform the purchasing

department of a need for materials or supplies.
2. Purchase order – a written request to a supplier for specified goods at an agreed

upon price. It stipulates terms of delivery and terms of payment.
3. Receiving report – forms which includes the supplier’s name, purchase order
number, date delivery was received, quantity received, description of goods,
discrepancies from the purchase order.
4. Material requisition slip – a written order to the storekeeper to deliver materials or

supplies to the place designated or to issue the materials to the person
presenting a property executed requisition.
Methods of Costing Materials
FIFO Method
FIFO stands for “First-In, First-Out”. It is a method used for cost flow assumption
purposes in the cost of goods sold calculation. The FIFO method assumes that the
oldest products in a company’s inventory have been sold first. The costs paid for
those oldest products are the ones used in the calculation.
Under the FIFO method, the first items purchased by a business will be considered
the first to be sold, regardless of the order in which the items are actually sold.
For example, say a business has 150 units of a product in its inventory. Fifty of those
150 units were bought earlier than the rest and cost P1 each. The remaining 100
units were purchased later by the business and cost P2 each. During a particular
52
period, the business sold 100 units of the product. How much should you consider to
be the cost of sale?
Under the FIFO method, the answer is P150, computed as 50 units x P1 (first
purchase) and 50 units x P2 (second purchase). The cost of your remaining
inventory is then P100 (50 units at P2 each).
Average Method
A. Weighted average method
When using the weighted average method, divide the cost of goods available for
sale by the number of units available for sale, which yields the weighted-average
cost per unit. In this calculation, the cost of goods available for sale is the sum of
beginning inventory and net purchases. You then use this weighted-average figure
to assign a cost to both ending inventory and the cost of goods sold.
The net result of using weighted average costing is that the recorded amount of
inventory on hand represents a value somewhere between the oldest and newest
units purchased into stock. Similarly, the cost of goods sold will reflect a cost
somewhere between that of the oldest and newest units that were sold during the
period.
B. Moving average method
When a perpetual inventory system is used, a new weighted average unit cost is
calculated after each new purchase and this amount is used to cost each
subsequent issuance until another purchase is made.
Accounting for Freight-In
53
1. Direct charging – the freight incurred on the purchase of raw materials is added
to the invoice price.
2. Indirect charging – the freight incurred on the purchase of raw materials is

charger to factory overhead control account.
Spoiled Units, Defective Units, Scrap Material, and Waste Material in a Job
Order Cost System
1. Spoiled Units – units that do not meet production standards and are either sold
for their savage value or discarded.
2. Defective Units – units that do not meet productions standards and must be
processed further in order to be salable as good units or as irregulars.
3. Scrap Material – left over from the production process that cannot be put back
into production for the same purpose, but maybe usable for a different purpose or
production processor which maybe sold to outsiders for a nominal amount.
4. Waste Material- left over from the production process that has no further use or
resale value and may require cost for their disposal.
Sample Exercises with Solutions
1. According to the net method, which of the following items should be included in the
cost of inventory?
Freight-cost Purchase discounts not taken
Yes No
Explanation
:
The cost of inventory should include all expenditures (direct and indirect)
incurred to
54
bring an item to its existing condition and location. Freight charges are thus
appropriately included in inventory costs. Under the net purchase method,
purchase discounts not taken are recorded in a Purchase Discount Lost Account.
When this method is used, purchase discounts lost are considered a financial
expense and are thus excluded from the cost of inventory.
2. The weighted average for the year inventory cost flow method is applicable to which
of the following inventory system?
Periodi Perpetu
c al
Yes No
Explanation:
Weighted average for the year inventory cost flow method is applicable only to
periodic inventory system because in perpetual inventory system, moving
average
method is the one being used.
3. During June, Delta Co. experienced scrap, normal spoilage, and abnormal spoilage
in its manufacturing process. The cost of units produced includes
Scrap and normal spoilage, but not abnormal spoilage
Explanation:
The cost of units produced includes scrap and normal spoilage but does not
include abnormal spoilage. Abnormal spoilage is recognized as a loss when it is
discovered, therefore it is not included in the cost of units produced.
55
4. Marsh Company had 150 units of product on hand at January 1, costing P21.00
each. Purchases of product A during the month of January were as follows:
Unit Unit
s Cost
January 10 200 22.00
18 250 23.00
28 100 24.00
Physical count on January 31 shows 250 units of product A on hand. The cost of
inventory at January 31, under the FIFO method is:
P 5, 850
Solution:
150 units x 23 (Unit Cost) = 3,450
100
units x 24 (Unit Cost) = 2,400
250
units 5,850
Explanation:
Under the Fifo method, remaining units are those purchased at the later date.
Thus the units on hand on January 31 are those remaining from January 18 and
28.
5. Harper Company’s Job 301 for the manufacture of 2,200 coats was completed
during
August 2009 at the following unit costs:
56
Direct Materials P 20.00

Direct Labor 18.00
Factory Overhead (includes an allowance of P1.00 spoiled 18.0
work) 0
56.00
Final inspection of Job 301 discloses 200 spoiled costs which were sold to a jobber
for P 6000. Assume that spoilage loss is charged to all production during August.
What would be the unit cost of the good units produced on Job 301?
P 56.00
Explanation:
Under the method, loss charged to all production, the unit cost of the
completed units remains unchanged.
Solution/Entries:
Work in Process (56 x 2200) 123,200

Materials 44,000
Payroll 39,600
Spoiled Goods 6,000

Work in Process 11,200
Work in Process, Ending = 123,200-11,200 =

112,000 Unit Cost = 112,000/2,000 = P 56.00
6. Assume instead, that the spoilage loss is attributable to exacting specification of Job
301 and is charged to this specific job. What would be the unit cost of the good coats
produced on Job 301?
57
P 57.50
Solution/Entries:
Work in Process (55 x 2,200) 121,000

44,00
Materials 0
39,60
Payroll 0
37,40
Factory Overhead 0
Spoiled Goods 6,000

Work in Process= 121,000-6,000= 115,000

Unit Cost = 115,000/2,000 = P 57.50
Palmer Corporation is a manufacturing concern that uses a perpetual inventory system.

The following data on the material inventory account is provided for 2009.
Material balance P 275,000

Other debits to the materials account during the
year 825,000
Increase of ending over beginning inventory 55,000
58
7. How much is the cost of materials issued to production?
P 770.000
Solution:
275,00
Beginning Inventory P 0
825,00
Add: Purchases 0
1,100,00
Total materials available for production P 0
Less: Ending Inventory 330,000*
Cost of Materials issued to production P 770,000
* Ending Inventory
Material Balance P 275,000
Add: Increase of ending over beginning
inventory 55,000
Ending Inventory P 330,000
Job 75 incurred the following costs for the manufacture of 200 units of motors:
Original cost accumulation
P
Direct materials 13,200
Direct labor 16,000
Factory overhead (150% of direct labor) 24,000
59
Direct costs of reworked 10 units
Direct materials 2,000

Direct labor 3,200
The total rework costs were attributable to exacting specifications of Job 75 and the full
rework costs were charged to the specific job.
8. The cost of Job 75 was
P 316
Explanation:
If the reason for the defect is the job itself, the additional costs incurred of the
reworked 10 units will be charged to all units in the job
Solution:

13,20
Materials 0
16,00
Payroll 0
24,00
Factory Overhead 0

Materials 2,000
60
Payroll 3,200
Finished Goods 63,200

Unit Cost = 63,200/200 = P 316
The following data on materials purchases and issues during the month of April were
reported:
400 units at
April 1 Beginning balance P6
100 units at
5 Received P7
100 units at
11 Received P8
13 Issued 400 units
200 units at
15 Received P6
22 Issued 250 units
27 Returned from factory 50 units
300 units at
30 Received P9
9. Assuming that the company used a perpetual inventory system, the total quantity
and cost of materials purchased for the month of April should be:
700 units at P 5,400
Solution:
No. of unitsCost per unit Total Cost
61
100
April 5 Received units x P7 700
100
11 Received units x 8 800
200
15 Received units x 6 1,200
300 2,70
30 Received units x 9 0
Cost of materials 5,40
purchases 700 units 0
The Curacha Company uses 20,000 units of Material A in making a finished product.
The cost to place one order for Material A is P8.00 and the annual cost to carry one
Material A is P2.00
10. The economic order quantity for Material

A is 400 units
Solution:
2(cost of placing an order)(number of units required

EOQ = annually)
carrying cost per unit of inventory
= 2(8)(20,000)/2
= 160,000
62
= 400 units
Reference:

CHAPTER 6-Accounting for Materials 1-
https://www.youtube.com/watch?v=AysQwiC0aAk&list=RDCMUCENCNqlczDPfs4jJPJczT9A&index=6
CHAPTER 6-Accounting for Materials 2-
https://www.youtube.com/watch?v=dFRcfZ_F6wA&list=RDCMUCENCNqlczDPfs4jJPJczT9A&start_radio=1&t=15
CHAPTER 6-Economic Order Quantity- https://www.youtube.com/watch?v=OzKBBH9tiBI
63
CHAPTER 7 ACCOUNTING FOR FACTORY OVERHEAD

1. Compute a factory overhead rate using the different bases
2. Apply the concept of ABC
3. Allocation of service department cost to producing department
Base to be Used
Factory overhead rate = Estimated FOH / Estimated Direct Labor Hours
Factory overhead rate = Estimated FOH / Estimated Direct Labor Cost x 100
3. Machine Hours
Factory overhead rate = Estimated FOH / Estimated Machine Hours
Factory overhead rate = Estimated FOH / Estimated Direct Material Cost x 100
5. Unit of Production
Factory overhead rate = Estimated FOH / Estimated Unit of Production
64
The Chubs Company estimates factory overhead at P450,000 for the next fiscal year. It
is estimated that 90,000 units will be produced at a material cost of P600,000.
Conversion will require an estimated 100,000 direct labor hours at a cost of P3.00 per
hour, with 45,000 machine hours.
Factory overhead rate = Estimated FOH / Estimated Direct Material

Cost x 100 450,000/600,000 x 100
75% of direct material cost
2. Unit of Production
Factory overhead rate = Estimated FOH / Estimated Unit of

Production 450,000 / 90,000 units
P5.00 per unit
3. Machine Hours
Factory overhead rate = Estimated FOH / Estimated Machine

Hours 450,000/45,000 machine hours
P10.00/machine hour
Factory overhead rate = Estimated FOH / Estimated Direct Labor

Cost x 100 450,000/300,000 x 100
65
150% of direct labor cost
Factory overhead rate = Estimated FOH / Estimated Direct Labor

Hours 450,000/100,000 direct labor hours
P4.50 / direct labor hour
What is the point of ABC ?
It can provide an organization with a different way of allocating some or all of its
overhead costs (cost pools) across its various product lines or services (cost
objectives).
Basic Steps
1. Identify the cost driver (what is causing the cost?
2. Calculate the cost per driver (pool the cost and divide by the cost driver)
3. Calculate cost to the cost objective.
Allocation of Service Department Cost to Producing Department
66
67
Sample problem:
1. Factory Overhead Application. St. Louis Sounds Inc. manufactures audio
equipment. The company estimates the following costs at normal capacity and other
items for the coming period:
Direct materials .................................................................... $300,000

Direct labor ........................................................................... 520,000
Factory overhead (fixed) ...................................................... 300,000
Factory overhead (variable) ................................................. 240,000
Normal capacity.................................................................... 100,000 direct labor

hours
Expected production............................................................. 80,000 direct labor
hours
Required: Compute the overhead application rate for fixed, variable, and total
overhead per direct labor hour, using both the normal capacity and the expected
actual capacity activity levels.
SOLUTION
Overhead per Direct Labor Hour
At Expected
Overhead Actual Capacity At Normal Capacity
$300,000 $300,000
Fixed ................................ ----------------- = $3.75 ------------------ = $3.00
80,000 DLH 100,000 DLH
68
$240,000 $240,000
Variable ............................ ----------------- = 3.00 ------------------ = 2.40
80,000 DLH 100,000 DLH
Total ................................. $6.75 $5.40
2. Overhead Analysis. Data for the past two years for J&J Corp. are:
19A 19B
Units produced ............................................................................ 10,000 11,000
Overhead applied per unit ........................................................... $ 15 $ 18
Actual overhead:
Fixed....................................................................................... 50,000 55,000
Variable .................................................................................. 95,000 150,000
Estimated overhead:
Fixed....................................................................................... 50,000 56,000
Variable .................................................................................. 130,000 142,000
The company determines overhead rates based on estimated units to be produced.
Required:
(1) Determine the estimated units of production used to obtain the overhead
allocation rates in 19A and 19B.
(2) Determine the over- or underapplied factory overhead for each of the two years.
SOLUTION
69
Estimated overhead
(1) = Overhead per unit
Estimated units of production
$50,000 + $130,000
19A: = $15
x
$15 x = $180,000
x = 12,000 Estimated units of production
$56,000 + $142,000
19 B: = $18
x
$18 x = $198,000
x = 11,000 Estimated units of production
(2)
19A: Applied Factory Overhead (10,000 x $15) ......................................... $150,000

Actual Factory Overhead ................................................................... 145,000
Overapplied Factory Overhead .......................................................... $ 5,000
19B: Actual Factory Overhead ................................................................... $205,000

Applied Factory Overhead (11,000 x $18) ......................................... 198,000
Underapplied Factory Overhead ........................................................ $ 7,000
3. Entries for Factory Overhead. Blend Rite Inc. assembles and sells electric mixers.
All parts are purchased and labor is paid on the basis of $22 per mixer assembled. The
cost of the parts per mixer totals $20. As the company handles only this one product,
70
the unit cost basis for applying factory overhead is used. Estimated factory overhead
for the coming period, based on a production of 40,000 mixers, is as follows:
Indirect materials .......................................................................................... $ 60,000

Indirect labor ................................................................................................ 180,000
Light and power ............................................................................................ 45,000
Depreciation ................................................................................................. 35,000
Miscellaneous .............................................................................................. 16,000
During the period, 42,000 mixers were assembled and actual factory overhead was
$355,000. These units were completed but not yet transferred to the finished goods
storeroom.
Required:
(1) Prepare journal entries to record the above information, including the entry to
close the balance in the applied overhead account to the actual overhead
account.
(2) Determine the amount of over- or underapplied factory overhead.
SOLUTION
(1) Work in Process ............................................................... 840,000

Materials ..................................................................... 840,000
Work in Process ............................................................... 924,000

Payroll ........................................................................ 924,000
Factory Overhead Control ................................................ 355,000

Materials, Payroll, Accruals, and Various Credits ....... 355,000
71
Work in Process ............................................................... 352,800

Factory Overhead Applied .......................................... 352,800
Factory Overhead Applied ............................................... 352,800

Factory Overhead Control .......................................... 352,800
Estimated factory overhead $336,000

Overhead rate : = = $8.40 factory overhead rate per mixer
Estimated production 40,000
(2) Underapplied factory overhead: $355,000 - $352,800 = $2,200
4. Disposition of Over- or Underapplied Overhead. The following information is

available concerning the inventory and cost of goods sold accounts of PGA Company at
the end of the most recent year:
Work in Finished Cost of Goods

Process Goods Sold
Direct material ................................................... $ 5,000 $ 8,000 $11,000
Direct labor ........................................................ 6,000 15,000 15,000
Applied overhead .............................................. 4,000 12,000 24,000
Year-end balance .............................................. $15,000 $35,000 $50,000
Applied overhead has already been closed to Factory Overhead Control.
Required:
Give the journal entry required to close Factory Overhead Control, assuming:
72
(1) Overapplied overhead of $10,000 is to be allocated to inventories and Cost of

Goods Sold in proportion to the balances in those accounts.
(2) Underapplied overhead of $10,000 is to be allocated to inventories and Cost of
Goods Sold in proportion to the amounts of applied overhead contained in those
accounts.
SOLUTION
Requirement (1) Requirement (2)

Account Percentage of Applied Percentage of
Balance Total Overhead Total
Work in Process .......................... $ 15,000 15% $ 4,000 10%
Finished Goods ........................... 35,000 35% 12,000 30%
Cost of Goods Sold ..................... 50,000 50% 24,000 60%
Total ....................................... $100,000 100% $ 40,000 100%
(1) Factory Overhead Control ................................................. 10,000

Work in Process .......................................................... 1,500
Finished Goods ........................................................... 3,500
Cost of Goods Sold ..................................................... 5,000
(2) Work in Process ................................................................ 1,000

Finished Goods ................................................................. 3,000
Cost of Goods Sold ........................................................... 6,000
Factory Overhead Control ........................................... 10,000
73
Reference:

CHAPTER 7-Accounting for Factory Overhead- https://www.youtube.com/watch?v=YhhaU8b4czc
CHAPTER 7-Manufacturing Overhead- https://www.youtube.com/watch?v=3kOiTUBs8Mk
CHAPTER 7-Activity Based Costing- https://www.youtube.com/watch?v=NXwq2oVOovU
74
CHAPTER 8 ACCOUNTING FOR LABOR

1. Distinguish between and account for direct and indirect labor as they are used in
the production process
2. Identify the three activities involved in accounting labor.
Labor is the physical or mental effort expended in manufacturing a product. Labor is the
cost of the price paid using human resources.
The accounting system of a manufacturer must include the following procedures for
recording payroll costs.
1. Recording the numbers of hours used in total and by job.
2. Recording the quantity produced by the workers.
3. Analyzing the hours used by employees to determined how time is to be

charged.
4. Allocation of payroll costs to jobs and factory overhead accounts.
5. Preparation of the payroll, including computation and recording of the employees

gross earnings, deductions, and net earnings
To illustrate how a patrol is calculated where premium is a factor, assume an employee

regularly earns a P30 per hour for an 8-hour day. If called upon to work more than 8
hours in a working day, the company will have to pay overtime premium for hours
worked in excess of 8 hours. Assuming the employee works 12 hours on Monday, is
paid 50% overtime premium (time and half) the earnings would be calculated as follows:
Direct labor – 8 hours at P30 240
75
Direct labor – 4 hours at P30 120

Factory overhead (overtime premium –
4x15) 60 180
Total earnings 420
The regular rate (240 +120) will be charged to work in process while the overtime
premium (60) will be charged to factory overhead. By charging the overtime premium to
the factory overhead account, all jobs worked on during the period share the cost of
overtime premiums paid. If the job contract stipulated that tit was a rush contract; it
would be appropriate to charge the premium pat to the job (work in process) instead of
a factory overhead account.
The Chubs Company pays employees every two week. Monday, May 1, is the
beginning of a new payroll period. The following payroll summary is prepared by the
payroll department and forwarded to accounting for recording.
Payroll Summary
For the period May 1 -14
Sales and
Factory Adm.
Worker Employee Total
Gross earnings 10,000.00 20,000.00 30,000.00

Withholding and
deductions
Income tax 1,979.25 2,833.33 4,812.58
SSS Premium 33.30 500.00 833.30
76
Philhealth contributions 125.00 250.00 375.00
Pag-ibig contributions 100.00 100.00 100.00
Total deductions 2,237.55 3,683.33 6,120.88
Net earnings 7,762.45 16,316.67 23,879.12
Journal entries
May 14 Payroll 30,000
Withholding tax payable 4,812.58
SSS premium payable 833.30
Philhealth contributions payable 375.00

Pag-ibig funds contribution
payable 200.00
23,779.1
Vouchers payable 2
May 14 Vouchers payable 23,779.12
77
Cash 23,779.12
Assuming that the total factory payroll of P10,000- P3,000 is indirect labor.
Work in process 7,000
Factory overhead control 3,000
Selling and Adm. Expense control 20,000
Payroll 30,000
Classification for Labor
1. Direct labor – labor identified with particular products which is considered

feasible to be measured and charges to specific production order cost sheet.
2. Indirect labor – labor identified with particular products buy which is not
considered feasible to measure and charge to a specific production order.
Gross Earnings of Employees
1. Wages –gross earnings of an employee who is paid by the hour for only the
actual hours worked.
2. Salaries – gross earnings of an employee who is paid a flat amount per week or
month regardless of the hours worked in a period.
3. Gross earnings – the compensation of an employee and includes regular pay

and overtime premiums
Payroll Deductions
1. Employee’s income tax – amount of tax to be withheld each period.
78
2. SSS Contribution – levied against both the employer and the employee
3. Philhealth Contribution – levied against both the employer and the employee in
equal amounts
4. PAG- IBIG Funds Contribution - levied against both the employer and the
employee in equal amounts.
Sample problem:
1. Labor Costs Under Straight Piecework Plan. The following labor data for the past
week were prepared for B. Masterson, an employee of Boot Hill Corp.:
Day Units Produced Hours Worked

Monday .................................................................. 110 8
Tuesday ................................................................. 125 8
Wednesday ............................................................ 120 8
Thursday ................................................................ 135 8
Friday ..................................................................... 130 8
Masterson's wage rate is $15 per hour, and the standard production rate is 15 units per
hour.
Required: Determine the daily wages for Masterson and the labor cost per unit for units
produced during each day of the week, assuming that the company is on a straight
piecework incentive wage plan and that a worker is guaranteed a wage of $15 per hour.
(Round the unit labor cost to two decimal places.)
SOLUTION
Excess Units Unit Labor
79
Day Produced Bonus Regular Pay Total Pay Cost

Monday ................. -- -- $120 $120 $1.09
Tuesday ................ 5 $ 5 120 125 1.00
Wednesday ........... -- -- 120 120 1.00
Thursday ............... 15 15 120 135 1.00
Friday .................... 10 10 120 130 1.00
Base wage rate/standard production rate

= $15 per hour/15 units per hour
= $1 labor cost per unit for units produced each day
2. Labor Cost Under 100-Percent Bonus Plan. B. Parker, an employee of B. Robber

and Company, submitted the following data for work performed last week:
Units Produced
Day Each Day
Monday .......................................................................................... 22
Tuesday ......................................................................................... 24
Wednesday .................................................................................... 30
Thursday ........................................................................................ 21
Friday ............................................................................................. 27
During the week, Parker worked 8 hours each day and was paid a flat hourly wage of
$10, plus a bonus based on the 100% bonus plan. Standard production is 3 units per
hour. The bonus is computed on a daily basis.
Required: Prepare a report for Parker, showing daily earnings, the daily efficiency ratio,
and the labor cost per unit produced each day. (Round labor cost per unit to two
decimal places.)
SOLUTION
Daily Daily Labor Cost per Unit
80
Day Earnings Efficiency Ratio Produced Each Day

Monday ......................................... $ 80 .9167 $3.64
Tuesday ........................................ 80 1.0000 3.33
Wednesday ................................... 100 1.2500 3.33
Thursday ....................................... 80 .8750 3.81
Friday ............................................ 90 1.1250 3.33
3. Effect of Wage Increase on Higher Productivity; Pricing a Unit of Output. Walo

Widget Inc. is in the process of completing labor negotiations for the coming year. Part
of these negotiations call for an increase in the base wage rate for direct labor from $10
to $12 per hour, with a corresponding increase in fringe benefits. At present, fringe
benefits amount to 35% of total wages, and this percentage will remain unchanged with
the new contract. The present labor standards call for 8 direct labor hours per unit of
output. Other conversion costs amount to $40 per unit, of which 75% is for variable
costs. Materials costs amount to $8 per unit. Administrative costs are fixed and amount
to $10 per unit at the present production level. Products are sold with a gross margin of
30% on sales.
Required:
(1) Compute the current selling price of a unit of output.

(2) Compute the new selling price to be charged if there is no increase in productivity
as a result of the new labor contract.
(3) Compute the selling price to be charged if the new labor contract were
accompanied by a 20% increase in productivity.
(Round all computations to the nearest whole cent.)
SOLUTION
(1) (2) (3)
With Wage With Wage and 20%
81
Present Increase Productivity Increase

Production costs:
Direct labor cost................................... $ 80.001 $ 96.002 $ 80.043
Fringe benefits ..................................... 28.004 33.605 28.016
Variable cost ........................................ 30.007 30.00 30.00
Fixed cost ............................................ 10.008 10.00 8.339
Materials cost ...................................... 8.00 8.00 8.00
Total .................................................... $ 156.00 $ 177.60 $ 154.38
Selling price10 .......................................... $ 222.86 $ 253.71 $ 220.54
1
$10 per hour x 8 hours = $80 per unit
2
$12 per hour x 8 hours = $96 per unit
3
$12 per hour x (8 hours/1.20 units) = $12 per hour x 6.67 hours = $80.04 per unit
4
35% x $80 unit direct labor cost = $28 per unit
5
35% x $96 unit direct labor cost = $33.60 per unit
6
35% x $80.04 unit direct labor cost = $28.01 per unit
7
75% x $40 = $30 per unit
8
25% x $40 = $10 per unit
9
$10/1.20 units = $8.33 per unit
10
Production costs/(1 - .30 gross profit ratio) = Selling price
Present: $156/.70 = $222.86
With wage increase: $177.60/.70 = $253.71
With wage and 20% productivity increase: $154.38/.70 = $220.54
4. Learning Curve Effect on Total Cost. Armstrong-Glenn (A-G) Inc. is preparing to bid
on the construction of seven additional rocket carrier frames for launching
communication satellites. Under a special contract, the company has already built one
frame with the following costs:
Materials...................................................................................................... $ 800,000
82
Labor (60,000 hrs.) ...................................................................................... 750,000

Variable overhead:
50% of direct labor cost .......................................................................... 375,000
On the basis of materials used ............................................................... 150,000
Total ............................................................................................................ $2,075,000
Variable overhead based on materials used represents materials storage cost. For
seven frames, this cost would be $1,050,000. The company was informed that the
maximum acceptable bid is $2,000,000 per unit. However, A-G will not place a bid
unless it can recover its costs plus a $600,000 gross profit per frame. An 80% learning
curve is in effect.
Required:
(1) Determine the total direct labor hours required for all eight frames.
(2) Determine the total cost for the seven frames covered by the new bid.
(3) Determine the profit (or loss) per unit if a bid of $2,000,000 per frame is offered.
(Round all amounts to the nearest whole dollar.)
(4) Should A-G accept the contract at a bid price of $2,000,000 per frame?
SOLUTION
(1) Accumulated Number of Accumulated Average Time

Times Task Is Performed per Task Unit (in Hours)
1 60,000
2 48,000 (60,000 x .8)
4 38,400 (48,000 x .8)
8 30,720 (38,400 x .8)
8 units x 30,720 average hours per unit

= 245,760 total direct labor hours required
83
(2) Cost for 7 frames covered by bid:

Materials (7 units @ $800,000) ..................................................... $ 5,600,000
Labor (245,760 total hours - 60,000 hours for first unit)
x (12.50 per hr.) ....................................................................... 2,322,000
Variable overhead: 50% of $2,322,000 ......................................... 1,161,000
Materials storage as given ............................................................ 1,050,000
Total .............................................................................................. $10,133,000
(3) Bid price per unit ........................................................................... $ 2,000,000

Per-unit cost ($10,133,000/7)........................................................ 1,447,571
Gross profit per unit ...................................................................... $ 552,429
(4) No. The profit per unit will be less than the required profit per unit by $47,571
($552,429 - $600,000 required profit).
5. 100-Percent Group Bonus Plan. The Assembly Department of the Gladdon

Company employs 10 workers on an 8-hour shift at $15 per hour. Production for the
second week of May shows: Monday, 350 units; Tuesday, 400 units; Wednesday, 425
units; Thursday, 440 units; Friday, 390 units. The company has recently installed a
group 100-percent bonus system with standard production for the group of 50 units per
hour. The bonus is computed each day. The controller asks that an analysis of the
week's production costs be made.
Required: Prepare a schedule showing the daily earnings in the department and the
unit labor cost. (Round unit costs to three decimal places.)
SOLUTION
Standard Hours Regular )
Units for Units Actual Group Bonus (Hrs. )
Day ........... Produced Produced Hours Wage Saved @ $15) ) Monday
........................... 350 70 80 $1,200 $ 0 )
84
Tuesday ................... 400 80 80 1,200 0 )

Wednesday .............. 425 85 80 1,200 75 )
Thursday .................. 440 88 80 1,200 120 )
Friday ....................... 390 78 80 1,200 0 )
( Total Labor
( Group Cost per
( Earnings Unit
( $1,200 $3.429
( 1,200 3.000
( 1,275 3.000
( 1,320 3.000
( 1,200 3.077
Reference:

CHAPTER 8-Accounting for Labor 1-
https://www.youtube.com/watch?v=sh1krgnnrDA&list=RDCMUCENCNqlczDPfs4jJPJczT9A&index=8
CHAPTER 8-Accounting for Labor 2- https://www.youtube.com/watch?v=sh1krgnnrDA
CHAPTER 8-Accounting for Labor 3- https://www.youtube.com/watch?v=JEnHFHZrZ30
85
CHAPTER 9 PROCESS COSTING (FIFO AND AVERAGE)

1. Define the characteristics of a process cost system
2. Discuss and prepare a cost of production report
3. Differentiate accounting for FIFO and Average Costing Method
A process cost system determines how manufacturing costs incurred during each
period will be allocated. Process costing methods are used by the following:
1. Industries producing chemicals, petroleum, textiles, steel, rubber, cement, flour,

pharmaceuticals, shoes, plastics, sugar and coal.
2. Firms manufacturing items such as rivets, screws, bolts, and small electrical
parts
3. Assembly-type industry which manufactures typewriters, automobiles, airplanes,

and household electric appliances.
4. Service industries such as gas, water, and heat.
Characteristics of a Process Cost System
1. Costs are accumulated by department or cost center
2. Each department has its own general ledger Work In Process Inventory account.
This account is debited with the processing costs incurred by the department an
credited with the cost of completed units transferred to another department or to
finished goods inventory.
86
3. Equivalent units are used to restate – work in process inventory to terms of

completed units at the end of a period.
4. Completed units and their corresponding cost are transferred to the last
department or to finished goods inventory. By the time units leave the last
processing department, total cost for the period have been accumulated and can
be used to determine the unit cost of each and total finished goods.
5. Total cost and unit costs for each department are periodically calculated and
analyzed with the use of department cost of production report.
Methods of Costing Under Process Costing
1. FIFO Method – under this method there is an assumed flow of manufacturing

operations and as such it is considered that those units which are first placed in
process are presumed to be the first ones completed and those that are first
completed are the ones transferred out.
2. Weighted Average Method – under this method, there is no assumed flow of

manufacturing operations. It involves the merging of the department costs, by
elements, of the initial work in process inventory with the costs incurred in the
current month and securing a representative average unit costs by dividing the
total element of costs by the equivalent production based upon the sum of the
units in the initial work in process inventory and the unit placed into production
during the period.
Differences Between FIFO and Average
1. Computation of equivalent production
87
FIFO – work done last month on the units in process, beginning is considered.
The work done needed to make to make the work in process 100% is the work
done assigned for the current month. (100% - work done last month)
AVERAGE – work done last month on the units in process, beginning is ignored
and not considered in the computation of the equivalent production.
2. Computation of unit cost
FIFO = Current period costs / Equivalent units of current work done
AVERAGE = Cost in beginning inventory + Current period cost / Equivalent units

in beginning inventory + Equivalent units of current work done
3. Computation of the cost of goods transferred out and the cost of ending inventory
Using FIFO, the cost of goods transferred out equals the sum of the following
three items:
a. The costs already in the beginning inventory at the beginning of the period
b. The current period costs to complete beginning inventory, which equals the
equivalent units to complete beginning inventory times the current period unit
cost computed for FIFO.
c. The cost to start and complete units, calculated by multiplying the number
times th current unit cost computed.
Using FIFO, the cost of goods in the ending inventory equals the equivalent units
in ending inventory times the unit current cost.
88
Using weighted average, the cost of goods transferred out equals the total units
transferred out times the weighted average unit cost.
Using weighted average, the cost of goods in ending inventory equals the
equivalent units in ending inventory times the weighted average unit cost.
Units in process, beg (40% complete) 5000

Units started 20000
Units completed 18000
Units in process, end (80% complete) 7000
Materials in this department are added 100% at the beginning of the process.
a. Average Method
Materials Labor and Overhead

Actual Work Done EP Work Done EP
Units
completed 18000 100% 18000 100% 18000
Units in
process 7000 100% 7000 80% 5600
25000 25000 23600
Under average method, the work done on the work in process, beginning is not
considered in the computation of the equivalent production.
b. FIFO Method
89

Units completed
IP, beg 5000 - - 60% 3000
Started and
completed 13000 100% 13000 100% 13000
Units IP, end 7000 100% 7000 80% 5600
25000 20000 21600
No material was added to the units in process, beginning during the month because
as of the end of last month, the units were already 100% complete as to materials.
Methods of Application of Elements of Cost to Production
1. Even application – under this method, it is considered that at any stage during
the process of production, the introduction of the three elements of cost is equal
with one another. Only one computation of equivalent production should be
made.
2. Uneven application – under this method, the introduction of the elements of cost
to production varies at any stage of the process, hence, there should be as many
computations o equivalents as the elements of cost that are unevenly applied.
Computation of Equivalent Production
1. Units received from preceding 10,000 units

department Unit completed and
transferred 8,000 units
90
Units in process, end (60% completed) 2,000 units

Materials are added 100% at the beginning of the
process

Work
Actual Done EP Work Done EP
Units received 10000
Units
completed 8000 100% 8000 100% 8000
Units in
process 2000 100% 2000 60% 1200
10000 10000 9200
2. Same data as in No. 1 except this time materials are added 100% at the end of
the process in the department.

Units
completed 8000 100% 8000 100% 8000
Units in
process 2000 - 60% 1200
10000 8000 9200
91
3. Same as data in No. 1, except this time, materials are added 50% at the
beginning of the process and the remaining 50% when the units are 40%
completed.

Work
Actual Done EP Work Done EP
Units
completed 8000 100% 8000 100% 8000
Units in
process 2000 100% 2000 60% 1200
10000 10000 9200
4. Same data as in no. 1, except this time, materials are added as follows: 50% at
the beginning of the process, 30% when the units are 20% complete, 20% at the
end of the process.

Units
completed 8000 100% 8000 100% 8000
Units in
process 2000 80% 1600 60% 1200
92
10000 9600 9200
The following data were taken from the books of Chubs Company for the month of
June:
Dept 1 Dept 2
Units
Started 25000
Completed and
transferred 20000 18000
In process, end 5000 2000
Stage of completion 40% 50%
Costs
Materials 100,000.00 54,000.00
Labor 66,000.00 38,000.00
Overhead 44,000.00 19,000.00
In department 1, materials are added at the beginning of the process while in

Department 2, materials are added at the end of the process.
93
CHUBS COMPANY
COST OF PRODUCTION
REPORT
For the month of June, 2020
(Department 1)

Work Work
Actual Done EP Done EP
Units
completed 20000 100% 20000 100% 20000
Units in
process 5000 100% 5000 40% 2000
25000 25000 22000
Cost Charged to the Department

Cost added in the
department
Materials 100,000.00 4.00
Labor 66,000.00 3.00
Overhead 44,000.00 2.00
Total added 210,000.00 9.00

Total cost to be accounted
94
for 210,000.00 9.00
Cost accounted for as

follows:
Completed and transferred (20,000 x 9) 180,000.00

In process,
end
Materials (5000x4) 20,000.00

Labor
(2000x3) 6,000.00
Overhead (2000x2) 4,000.00 30,000.00

Total costs as accounted
for 210,000.00
(Department
2)
Labor and
Materials Overhead
Work Work
Units
completed 18000 100% 18000 100% 18000
Units in
process 2000 - 40% 1000
20000 18000 19000
95
Cost Charged to the

Department
Cost from preceding
department 180,000.00 9.00
Cost added in the department
Materials 54,000.00 3.00
Labor 38,000.00 2.00
Overhead 19,000.00 1.00
Total added 111,000.00 6.00

Total cost to be accounted
for 291,000.00 15.00
Cost accounted for as

follows:
Completed and transferred (18,000 x 15) 270,000.00

In process, end
Cost from preceding (2,000 x
9) 18,000.00
Materials -
Labor (1000x2) 2,000.00
Overhead (1000x1) 1,000.00 21,000.00
Total cost as accounted for 291,000.00
96
CHUBS COMPANY
COST OF GOODS MANUFACTURED STATEMENT
For the month of June, 2020
154,00
Direct materials 0
104,00
Direct labor 0
Factory overhead 63,000
321,00
Total Manufacturing Cost 0
Less: Work in process, June 30 51,000
270,00
Cost of goods manufactured 0
Illustrative Problem on Lost Units
Woodrose Corporation produces a product in two departments – A and B. Data for the
month of August 2020 are given as follows for Department B.
Units
Received from Department A 50000
Completed and transferred to
warehouse 40000
In process, Aug 31 (60%
completed) 5000
97
Lost during the month 5000
Costs
From Department A 225,000.00

Added in Department B during the
month
Materials 135,000.00
Labor 103,200.00
Overhead 103,200.00
In this department, materials are added 100% at the beginning of the process. Loss
units are classified as normal, discovered at the beginning of the process.
WOODROSE CORPORATION
COST OF PRODUCTION REPORT
For the Month Ended August 31, 2020

Work Work
Units
completed 40000 100% 40000 100% 40000
Units in
98
process 5000 100% 5000 60% 3000

Units lost 5000 - -
50000 45000 43000
Cost Charged to the

Department
Cost from preceding
department 225,000.00 4.50
Materials 135,000.00 3.00
Labor 103,200.00 2.40
Overhead 103,200.00 2.40
Total added 341,400.00 7.80
Adjustment for lost units 0.50
Total cost to be accounted for 566,400.00 12.80
99
Cost accounted for as follows: 512,000.00

Completed and transferred (20,000 x 9)
In process,
end
Cost from preceding
department 25,000.00
Materials 15,000.00
Labor 7,200.00
Overhead 7,200.00 54,400.00
Total costs as accounted for 566,400.00
Illustrative Problem on Increase in Units
Seashore Company produces a product which requires processing in the departments.

In the second department, materials are added at the beginning, increasing the units
received by 20%. The following data pertain to the operations of Dept 2 for June.
Units received from Dept 1 50000

Units completed & transferred to Dept
3 45000
Units in process, end 15000
Stage of completion 80%
Cost from Department 1 600,000.00

Cost added in the Department
Materials 240,000.00
Labor 171,000.00
100
Overhead 114,000.00
SEASHORE COMPANY
COST OF PRODUCTION REPORT
For the Month Ended June 30, 2016

Work
Actual Work Done EP Done EP
Increase in
units 10000
60000
Units
completed 45000 100% 45000 100% 45000
Units lost 15000 100% 15000 80% 12000
60000 60000 57000
Cost Charged to the

Department
Cost from preceding 600,000.00 12.00
101
department
Materials 240,000.00 4.00
Labor 171,000.00 3.00
Overhead 114,000.00 2.00
Total added 525,000.00 9.00
Adjustment for lost units 10.00
Total cost to be accounted for 1,125,000.00 19.00
Cost accounted for as follows: 855,000.00

Completed and transferred
In process, end
Cost from preceding
department 150,000.00
Materials 60,000.00
102
Labor 36,000.00
Overhead 24,000.00 270,000.00
Total costs as accounted for 1,125,000.00
Reference:

CHAPTER 9-Process Costing (FIFO and Average) 1-
https://www.youtube.com/watch?v=iY962ymhV-8
CHAPTER 9-Process Costing (FIFO and Average) 2-
https://www.youtube.com/watch?v=sUs7OEkB_Fc
CHAPTER 9-Weighted Average Method- https://www.youtube.com/watch?v=zFytbCm_NIQ
103
CHAPTER 10 JOINT PRODUCTS AND BY-PRODUCTS

1. Define joint costs and distinguish them from common costs.
2. Discuss the appropriate methods for the allocation of joint costs to joint products
Joint products are individual products each with significant sales values, which are
produced simultaneously from the same raw materials and same manufacturing
process. These are the primary outputs of a joint process and are also called main
products. By product or scrap are those that come out incidental to the joint process.
Accounting Methods for Main Products
1. Physical output / Average unit cost method
2. Market value at split-off method
3. Net realizable method
The following information is available for the Guiller Company. Joint costs amounted to
P164,000.00
Fina
Units Disposal MV at Split - Additional l
Processing
Products Produced Costs off Costs MV
11.5
A 28,000 4,000.00 8.00 50,000.00 0
B 34,000 1,000.00 7.00 30,000.00 10.0
104
14.0
C 20,000 5,000.00 9.50 35,000.00 0
1. Physical Output
Additional Total
Share in
Units Cost per Joint Processing Production
Products Produced Unit Cost Costs Costs
A 28,000 2 56,000.00 50,000.00 106,000.00
B 34,000 68,000.00 30,000.00 98,000.00
C 20,000 40,000.00 35,000.00 75,000.00
82,000 164,000.00 115,000.00 279,000.00
105
2. Market Value at split-off

Method
Additional Total
Total MV Productio
Units MV at Split at Share in Processing n
Product
s Produced -off SO Joint Cost Costs Costs
106,344.0
A 28,000 8.00 224,000.00 56,344.00 50,000.00 0
B 34,000 7.00 238,000.00 59,865.00 30,000.00 89,865.00
C 20,000 9.50 190,000.00 47,791.00 35,000.00 82,791.00

279,000.0
82,000 652,000.00 164,000.00 115,000.00 0
3. Net realizable value Method

Additio
nal Total
Fin Processi Dispos
Units al ng al Share in Production
Product Produc Total Joint
s ed MV MV Costs Cost NRV Cost Costs
28,00 11.5 322,000. 4,000.0 268,000. 103,797.
A 0 0 00 50,000.00 0 00 53,797.00 00
34,00 10.0 340,000. 1,000.0 309,000. 92,027.0
B 0 0 00 30,000.00 0 00 62,027.00 0
20,00 14.0 280,000. 5,000.0 240,000. 83,176.0
C 0 0 00 35,000.00 0 00 48,176.00 0
82,00 942,000. 115,000.0 10,000. 817,000. 164,000.0 279,000.
0 00 0 00 00 0 00
106
Sample problem:
Ratcliff Company
1. Ratcliff Company produces two products from a joint process: X and Z. Joint processing
costs for this production cycle are $8,000.
Disposal
Sales price cost per Further Final sale
per yard at yard at processing price per
Yards split-off split-off per yard yard
X 1,500 $6.00 $3.50 $1.00 $ 7.50
Z 2,200 9.00 5.00 3.00 11.25
If X and Z are processed further, no disposal costs will be incurred or such costs will be
borne by the buyer.
2. Refer to Ratcliff Company. Using a physical measure, what amount of joint processing cost
is allocated to X (round to the nearest dollar)?
a. $4,000
b. $4,757
c. $5,500
d. $3,243
ANS: D
1,500/3,700 * $8,000 =
$3,243
3. Refer to Ratcliff Company. Using a physical measure, what amount of joint processing cost
is allocated to Z (round to the nearest dollar)?
a. $4,000
b. $3,243
c. $5,500
d. $4,757
107
ANS: D
2,200/3,700 * $8,000 =
$4,757
4.Refer to Ratcliff Company. Using sales value at split-off, what amount of joint processing cost is
allocated to X (round to the nearest dollar)?
a. $5,500
b. $2,500
c. $4,000
d. $3,243
ANS: B
Sales
Yards price Total
at Split-
off
X 1,500 $6.00 $ 9,000
Y 2,200 $9.00 $19,800
$28,800
$(9,000/28,800) * $8,000 = $2,500
5. Refer to Ratcliff Company. Using sales value at split-off, what amount of joint processing
cost is allocated to Z (round to the nearest dollar)?
a. $5,500
b. $4,000
c. $2,500
d. $4,757
ANS: A
Sales
Yards price Total
108
at Split-
off
X 1,500 $6.00 $ 9,000
Y 2,200 $9.00 $19,800
$28,800
$(19,800/28,800) * $8,000 =
$5,500
DIF: Moderate OBJ: 11-4
6. Refer to Ratcliff Company. Using net realizable value at split-off, what amount of joint
processing cost is allocated to X (round to the nearest dollar)?
a. $4,000
b. $5,610
c. $2,390
d. $5,500
ANS: C
Sales Disposal NRV/
Yards price Cost/Yar Splitoff Total NRV
at Split- d
off
X 1,500 $6.00 $3.50 $2.50 $ 3,750
Y 2,200 $9.00 $5.00 $4.00 $ 8,800
$12,550
$(3,750/12,550) * $8,000 = $2,390
109
Reference:

CHAPTER 10-Joint Products and By-Products- https://www.youtube.com/watch?v=cv-FrDUNmD0
CHAPTER 10-Joint Costing- https://www.youtube.com/watch?v=yQoO4y1vLdU
CHAPTER 10-Accounting Methods- https://www.youtube.com/watch?v=Auh1omWFP6A
110

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MODULE CAE08: COST ACCOUNTING AND CONTROL WITH STRATEGIC COST MANAGEMENT

ICCT COLLEGES FOUNDATION INC.

VV. Soliven Avenue, Cainta, Rizal

COLLEGE OF BUSINESS AND ACCOUNTANCY

COST ACCOUNTING AND COST MANAGEMENT

Module 1 – Introduction to Cost Accounting

Module 2 – Cost Concept and Classification

Module 3 – Cost Accounting Cycle

Module 4 – Job Order Costing

Module 5 – Just In time and Backflush Accounting

Module 6 – Accounting for Materials

Module 7 – Accounting for Factory Overhead

Module 8 – Accounting for Labor

Module 9 – Process Costing (FIFO and Average)

Module 10 – Joint Products and By-Products

Guia Mae B. Abaja, CPA

CHAPTER 1 INTRODUCTION TO COST ACCOUNTING

What I Need to Know?

Internal users – managers for planning, controlling and decision making.

Cost Accounting is an expanded phase of general or financial accounting which informs

Cost of Goods Sold - Merchandising Company

Cost of Goods Sold - Manufacturing Company

Two Basic Product- Costing Systems

Process costing is a method of assigning costs for a mass quantity of a product or

Direct materials ......................... $35,000

Prime costs during the month totaled:

0.20 × Conversion costs = Manufacturing overhead

Total manufacturing Manufacturing

Solvents and cleaners used by the custodians to

What is the total of the manufacturing overhead costs above?

For further discussion please refer to the link provided:

CHAPTER 2 COST CONCEPTS AND CLASSIFICATION

What I Need to Know?

I. Cost classified as to relation to a product

3. Factory Overhead – a catchall for manufacturing costs that cannot be classified as

2. Administrative expense – all executive, organizational, and clerical expenses that

II. Cost classified as to variability

A. Variable cost – items of cost which vary directly in relation to volume of

C. Mixed cost – items of cost with fixed and variable component.

III. Cost classified as to relation to manufacturing departments

A. Direct department charges - costs charged to the particular manufacturing

B. Indirect department charges – cost charged to some other manufacturing

IV. Cost classified to their nature as common or joint

A. Common costs – costs of facilities or services employed in two or more

V. Cost classified as to relation to an accounting period

A. Capital expenditures – expenditure intended to benefit more than one accounting

VI. Cost classified as to relation to an accounting period

D. Relevant costs – a future cost that change across the alternatives.

Cost Flow – Manufacturing Firms

Solvents and cleaners used by the custodians to

What is the total of the manufacturing overhead costs above?

Receiving and storing raw materials.... 5%

Direct materials ................................... $33,000

What is the total amount of manufacturing overhead included above?

4.The information below relates to Derby Manufacturing Company's operations for a

Purchases of raw materials ................. $91,000

Administrative costs (total) .................. $56,000

What was Derby's cost of goods manufactured for the month?

5. Consider the following costs incurred in a recent period:

Direct materials ................................... $33,000

For further discussion please refer to the link provided:

CHAPTER 3 COST ACCOUNTING CYCLE