Cost Accounting and Control

Introduction to Cost System

Exercises

TRUE OR FALSE
1. Lumber can be both a finished product and a material. True
2. Marketing, Selling and Administrative Costs are the three broad classifications of costs incurred by a manufacturing
company. False
3. Google would be an example of a merchandising company. False
4. Indirect materials/ factory supplies are classified as administrative expense. False
5. The salary paid to a factory foreman is classified as factory overhead. True
6. Conversion costs include all direct manufacturing costs. False
MULTIPLE CHOICE - THEORIES
7. Manufacturing-sector companies report
a. Only merchandise inventory
b. Only finished goods inventory
c. Raw materials inventory, work in process inventory and finished goods inventory accounts
d. No inventory accounts
8. The distinction between direct and indirect costs depends on whether a costs
a. Is controllable or non-controllable
b. Is variable or fixed
c. Can be conveniently and physically traced to a cost object under consideration
d. Will increase with changes in levels of activity
9. For a manufacturing company, direct labor costs may be included in
a. Direct materials inventory only
b. Merchandise inventory only
c. Both work in process inventory and finished goods inventory
d. Direct materials inventory, work in process inventory and finished goods inventory accounts
10. Manufacturing/factory overhead costs in an automobile manufacturing plant most likely include:
a. Labor cost of the painting department c. Sales commissions
b. Indirect material cost such as lubricants d. Steering wheel costs
MULTIPLE CHOICE – PROBLEM SOLVING

11. The Childers Company manufactures widgets. During the fiscal year just ended, the company incurred prime costs of
P 1,500,000 and conversion costs of P 1,800,000. Overhead is applied at the rate of 200% of direct labor cost. How much
of the above costs represent material cost?

Answer: P 900,000

Solution:
We need to use the formula for prime cost and conversion cost in this problem.
Prime cost = Direct material + Direct labor
Conversion cost = Direct labor + Factory overhead
It is stated in the problem that factory overhead is applied at the rate of 200% of direct labor cost. That means that our
factory overhead is twice the amount of our direct labor. Putting it in equation form, to arrive at our conversion cost:
1,800,000 = DL + 2DL ( represents factory overhead which is twice direct labor)
1,800,000 = 3DL
1,800,000 = 3DL
3 3
600,000= DL
Requirement is to compute for material cost:
Using the formula in computing prime cost, we can arrive at the value of material cost:
Prime cost = direct materials + direct labor
1,500,000 = direct materials + 600,000
1,500,000 – 600,000 = direct materials
900,000 = direct matearials
12. The following selected information pertains to Ajax Processing Co.: direct materials, P 62,500; indirect materials, P
12,500; factory payroll, P 75,000 of direct labor and 11,250 of indirect labor; and other factory overhead incurred, P
37,500.
The total conversion cost was:

Answer: 136,250
Solution:
In computing for conversion cost, keep in mind that factory overhead includes indirect materials and indirect labor, in
addition to other factory overhead incurred as stated in the given.
Conversion cost = Direct labor + Factory overhead
Conversion cost = 75,000 + 12,500+11,250+37,500
Conversion cost = 136,250.00

13. The following is a partial list of costs incurred last month by the Fontana Company:
Product advertising P 20,000 Assembly line workers’ wages 46,000
Fire insurance premium for factory 5,000 Rent, factory building 10,000
Electricity, sales offices 2,000 Freight-out 6,000
Lubricating oil for sewing machines 4,000 Salary, company president 25,000
Foam cushions used in production 32,000 Property taxes, corporate headquarters 3,000
What amount of these costs would be considered manufacturing/factory overhead?

Answer: P 19,000

14. Cajun Company uses a job order costing system. During April 2015, the following costs appeared in the
Work in Process Inventory account:
Beginning balance P 24,000
Direct material used 70,000
Direct labor incurred 60,000
Applied overhead 48,000
Cost of goods manufactured 185,000
Cajun Company applies overhead on the basis of direct labor cost. There was only one job left in Work in Process at the
end of April which contained P 5,600 of overhead. What amount of direct material was included in this job?

Answer: P 4,400

Solution:
You may use the T-account format to solve the missing element.

Work in Process
Beginning balance 24,000 Cost of goods manufactured 185,000
Direct material used 70,000 Ending balance 17,000
Direct labor incurred 60,000
Applied overhead 48,000

Components of Work in process – Ending

Direct materials 4,400
Direct labor 7,000 (5,600 of FOH/ 80%)
Factory overhead 5,600 (80% of direct labor)
Work in process, ending 17,000

15. Quest Co. is a print shop that produces jobs to customer specifications. During January 2015, Job #3051 was worked
on and the following information is available:

Direct material used P 2,500

Direct labor hours worked 15
Machine time used 6
Direct labor rate per hour P7
Overhead application rate per hour of machine time P 18

Answer: P 2,713

Solution:

Direct material used P 2,500

Direct labor cost (15 x 7) 105
Applied FOH (6 x 18) 108
Total cost of Job 3051 P 2,713

16. Products at Redd Manufacturing are sent through two production departments: Fabricating and Finishing. Overhead is
applied to products in the Fabricating Department based on 150 percent of direct labor cost and P 18 per machine hour in
Finishing. The following information is available about Job #297:

Fabricating Finishing
Direct material P 1,590 P 580
Direct labor cost      ?   48
Direct labor hours     22    6
Machine hours      5   15
Overhead applied    429    ?

What is the total cost of Job #297?

a. P 2,647 c. P 3,093
b. P 3,005 d. P 3,203

Answer: P 3,203

Solution:
Fabricating Finishing
Direct material P 1,590 P 580
Direct labor cost 286 ((429/150%) 48
Factory overhead 429 270 (18 x 15)
Total cost P 2,305 + P 898 = P 3,203

Comprehensive Examination

1. Jackson Company uses a job order costing system and the following information is available from its records. The
company has three jobs in process: #6, #9, and #13.

Raw material used P 120,000

Direct labor per hour P 8.50
Overhead applied based on direct labor cost 120%

Direct material was requisitioned as follows for each job respectively: 30 percent, 25 percent, and 25 percent; the balance
of the requisitions was considered indirect. Direct labor hours per job are 2,500; 3,100; and 4,200; respectively. Indirect
labor is P 33,000. Other actual overhead costs totaled P 36,000.

Refer to Jackson Company. What is the prime cost of Job #6?

Answer: P 57,250

Solution:
Prime cost = DM + DL
= P 36,000 + (2,500 x 8.50)
= P 36,000 + 21,250
= P 57,250

a. P 42,250 c. P 73,250
b. P 57,250 d. P 82,750

2. Refer to Jackson Company. What is the total amount of overhead applied to Job #9?

Answer: P 31,620

Solution:
Direct labor cost for Job # 9 = (3,100 x 8.50)
= P 26,350
Overhead applied to Job # 9 = P 31,620

3. Refer to Jackson Company. What is the total amount of actual overhead?

Answer: P 93,000
Solution
Raw material used P 120,000
Less: Direct material 96,000
Indirect material P 24,000
Add: Indirect labor 33,000
Add: other actual FOH 36,000
Total actual overhead P 93,000

4. Refer to Jackson Company. How much overhead is applied to Work in Process?

Answer: 99.960

Solution:
Total direct labor hours 9,800
Direct labor rate 8.50
Total direct labor cost P 83,300
FOH base 120%
Applied FOH P 99,960

5. Refer to Jackson Company. If Job #13 is completed and transferred, what is the balance in Work in Process Inventory
at the end of the period if overhead is applied at the end of the period?

Answer: P 170,720

Solution:
Job # 13
Direct materials (120,000 x 25%) P 30,000
Direct labor cost (4,200 x 8.50) 35,700
Applied FOH (35,700 x 120%) 42,840
Total cost of completed job P 108,540

Direct materials (120,000 x 80%) P 96,000

Direct labor cost (9,800 X 8.50) 83,300
Foh Applied (83,300 x 120%) 99,960
Total debit to work in process P 279,260
Less: total cost of completed job 108,540
Work in process, ending balance P 170,720