INTRODUCTION TO COST ACCOUNTING

COST ACCOUNTING – This field of accounting informs management with the cost of rendering a particular service, buying and
selling a product, and producing a product.

COST CONCEPTS AND CLASSIFICATION

I. Cost classified as to relation to a product

A. Manufacturing cost
1. Direct Material
2. Direct Labor
3. Factory Overhead
B. Non – manufacturing cost
1. Marketing or selling expense
2. General or administrative expense
II. Cost classified as to variability
A. Variable cost
B. Fixed cost
C. Mixed cost (semi-variable cost)
Methods of separating Mixed Cost into fixed and variable components:
1. Scatter graph
2. High-low point
3. Method of lease square
III. Cost for planning, controlling, and analytical processes
A. Standard cost – Predetermined cost for direct materials, direct labor, and factory overhead. In essence, it is a budget for the production
of one unit of a product or service
B. Opportunity cost – the benefit given up when one alternative is chosen over another. This cost should be considered when evaluating
alternatives for decision-making
C. Differential cost – cost that is present under one alternative but is absent in whole or in part under another alternative.
- Incremental cost is an increase in cost from one alternative to another.
- Decremental cost is a decrease in cost from one alternative to another.
D. Relevant cost – a future costs that changes across alternatives
E. Sunk cost – cost for which an outlay has already been made and it cannot be changed by present or future decision
F. Controllable cost - a cost is considered to be a controllable cost at a particular level of management if that level has a power to
authorize the cost

PROBLEM 1 (Seatwork Midterm)

Classify the following items as direct or indirect materials PROBLEM 3 (Seatwork Midterm)
1. Gold to make jewelry Classify each of the following costs of Bug Company in two
2. Sandpaper used in furniture making ways:
3. Paper used in printing books (a) as variable (V) or fixed cost (F);
4. Milk to make ice cream (b) as inventoriable cost (I) or period cost (P).
5. Seats to be installed in a car (a) V or F (b) I or P
6. Leather to make gloves Example: Direct Labor V I
7. Tape measure used by tailor Salary of company controller
PROBLEM2 (Seatwork Midterm) Fire insurance on direct materials
Classify the following as manufacturing (M), selling (S), or Direct materials used
administrative (A). Factory rent
1. Factory supplies Sales commissions
2. Advertising Overtime premium of machine
3. Rent on factory building operators
4. Freight – out Straight line depreciation of
5. President’s salary factory equipment
6. Legal expenses Straight line depreciation of trucks
7. Samples used for delivery of sales
8. Bad debts to customers
9. Travel expenses of salesmen Salary of factory supervisor

PROBLEM 4 (Seatwork Midterm)

Johnson Corporation is preparing a flexible budget and desires to separate its electricity expense which is semi-variable and
fluctuates with total machine hours, into its fixed and variable components. Information for the first three months of 2013 is as
follows:
Machine hours Electricity Expense
January 3, 500 P31, 500
February 2, 000 P20, 000
March 4, 000 P35, 600

Requirements: Using the least square method,

1. Compute the variable rate per machine hour
2. Compute the fixed portion of Johnson’s electricity expense
3. Compute the total manufacturing cost if actual machine hours is 6, 000

PROBLEM 5 (Seatwork Midterm)

Mighty Muffler Inc. operated an automobile service facility, which specializes in replacing mufflers on cars. The following table
shows the cost incurred during a month when 750 mufflers were replaced. Fill in the missing amount

Number of Muffler Replacements

500 750 1, 000
Total Fixed cost ? P60, 000 ?
Total Variable cost ? P37, 500 ?
Total cost ? P97, 500 ?
Fixed cost per replacement ? ? ?
Variable cost per replacement ? ? ?
Total cost per replacement ? ? ?

PROBLEM 6 (Seatwork Midterm)

The financial statements of Mother Goose Company include these items:
Marketing Cost P160, 000
Direct Labor Cost P245, 000
Administrative Cost P145, 000
Direct Materials used P285, 000
Fixed Factory overhead costs P175, 000
Variable Factory Overhead Costs P155, 000
Compute:
1. Prime Cost
2. Conversion Cost
3. Total inventoriable/ product cost
4. Total period cost

PROBLEM 7 (Seatwork Midterm)

Valdez Motors Co. makes motorcycles. Management wants to estimate overhead costs to plan its operations. A recent trade
publication revealed that overhead costs tend to vary with machine hours. To check this, they collected the following data for the
past 12 months.
Month no. Machine Hours Overhead costs
1 175 P4, 500
2 170 P4, 225
3 160 P4, 321
4 190 P5, 250
5 175 P4, 800
6 200 P5, 100
7 160 P4, 450
8 150 P4, 200
9 210 P5, 475
10 180 P4, 760
11 170 P4, 325
12 145 P3, 975

Required:
1. Using the high-low method to estimate the fixed and variable portion of overhead costs based on machine hours
2. If the plant is planning to operate at a level of 450 machine hours next period, what would be the estimated overhead
cost?
COST ACCOUNTING CYCLE
Merchandising Companies

beginning
beginning balance
balance of
of inventory
inventory Purchase
Purchase raw
raw materials
materials

Purchase (add inventory) Used materials for production

Sold
Sold inventory
inventory (COGS)
(COGS)
Incurred
Incurred Labor
Labor and
and Overhead
Overhead for
for production
production

Computation of COGS:
Beg WIP + DM, DL, OH

Beginning inventory
Plus: Net Purchases cost
cost of
of completed
completed units
units be
be transferred
transferred from
from WIP
WIP to
to FG
FG
Total goods available for sale
Less: Ending Inventory
Cost of Goods Sold cost
cost of
of sold
sold units
units be
be transferred
transferred from
from FG
FG to
to COGS
COGS

Manufacturing Company Computation of COGS:

Direct Materials Used

Add: Direct Labor used
Add: Factory Overhead
Total Manufacturing Cost
Add: WIP, Beginning
Cost of Goods put into process
Less: WIP, Ending
Cost of goods manufactured
Add: FG, Beginning
Total goods available for sale
Less: FG, Ending
Cost of Goods Sold

QUIZ 1 MIDTERM
Provide solution and final answer.

PROBLEM 8 (Quiz 1 Midterm)

The Ram Manufacturing Company produced P100, 000 units during the year ended December 31, 2009. It incurred the following
costs for the year
Materials P75, 000 (10% is indirect materials)
Labor P97, 000 (7% is indirect labor)
Factory Overhead 125% of direct labor cost
WIP – January 1 P25, 500
WIP – December 31 P27, 000
Required: How much is the Company’s cost of goods manufactured?

Problem 9 (Quiz 1 Midterm)

Donna Company submits the following data for May 2013
Direct labor cost P80, 000
Purchases P100, 000
Factory overhead Applied at 150% of direct labor cost
Inventories May 1 May 31
 Finished goods P45, 000 P24, 000
Work in Process P25, 800 P18, 000
Materials P22, 000 P25, 000
Required: How much is the Company’s Cost of goods sold?

Problem 10 (Quiz 1 Midterm)

Kyle Manufacturing Company produces various types of fertilizers. No beginning work in process or finished goods were on hand
on January 1, 2012. The following are data provided by the company:

30, 000 finished goods were on hand on December 31, 2012.

95, 000 units were sold during the year
No units in work in process inventories on December 31, 2012.
Materials put into production amounts to P300, 000, 75% were direct materials
(No beginning or ending materials inventory)
Labor costs were P350, 000, 40% was for indirect labor
Factory overhead costs other than indirect material and indirect labor were the following:
Heat, light, water P120, 000
Depreciation P75, 000
Property Taxes P65, 000
Repairs and maintenance P40, 000
Selling Expenses were P80, 000 and general and administrative expenses were P50, 000.

Required: Compute the following:

1. Cost of goods manufactured
2. Unit Cost (cost per unit of goods manufactured)
3. Prime Cost
4. Conversion cost
5. Period cost
6. Cost of Goods Sold
7. Net Income