COLLEGE OF ACCOUNTANCY

C-AE22: Cost Accounting and Control

First Semester AY 2021-2022

A. Course Code – Title : C-AE22: Cost Accounting and Control

B. Module No – Title : M02 – Cost Accounting Cycle
C. Time Frame : 1 week (Week 2) – 6 hrs

D. Overview
This learning material provides a discussion of the basic concepts of cost
accounting cycle in a manufacturing industry. It also includes a discussion on how to
prepare income statement for a service, merchandising and manufacturing entity.

E. Desired Learning Outcomes

At the end of the learning session, you should be able to:
1. Understand the cost accounting cycle
2. Distinguish between and account for direct and indirect materials and
labor as they are used in production process
3. Prepare the different income statement of the three types of entity.

F. Values Integration
In studying this module, it is hoped that you will be able to develop and manifest the
following UA Core Value/s:

✓ Integrity
✓ Service Orientation
✓ Teamwork
✓ Obedience
✓ Open Communication

G. Interaction/Collaboration
You will be engaging in activities that would make use of:

✓ Google Sheets
✓ Google Forms
✓ Quizizz

H. Content/Discussion

Lesson 1 – Cost Accounting Cycle

The flow of the manufacturing costs, namely, direct materials, direct labor and factory overhead,
parallels the flow of products through the manufacturing operations

Following are the steps in a typical cycle of operations of a firm:

1. Procurement – Materials and supplies needed for manufacturing are ordered,
received and stored. Direct and indirect factory labor and services are obtained.
2. Production – Materials are transferred from the storeroom to the factory. Labor
tools, machines, power and other costs are applied to complete the product.
3. Warehousing – Finished goods are moved from the factory to the warehouse
where they are held until they are sold.
4. Selling – Firm looks for and finds customers. Merchandise is shipped from the
warehouse when sales are made. The sales are recorded in the books.

Faculty: Elizabeth B. Boneo 1 | Page

 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

It is the job of the cost accountant to design a system in which all cost elements are
recorded and incurred, and then charged to production as the work flows through the
operating cycle.

The provision for special cost accounts sets the stage for charging costs in accordance with
the flow of work. The process can best be understood if analyzed step by step as follows:
1. Procurement: Purchases of materials are debited to Materials, labor incurred to
Payroll, and actual overhead costs incurred to Manufacturing Overhead Control.
As these costs are used or applied in factory operations, they are credited to
these accounts and transferred to production.
2. Production: Costs of materials used as well as labor and factory overhead
incurred transferred to production are debited to Work in Process. As goods are
finished and moved from the factory, their total cost is removed from the Work
in Process account by a credit entry and a debit to Finished Goods.
3. Warehousing: The cost of finished goods transferred from Work in Process is
recorded as a debit to Finished Goods. The cost of merchandise shipped from
the warehouse to the customers is credited to Finished Goods and debited to
Cost of Goods Sold.
4. Selling: As finished goods are sold and shipped from the warehouse, their cost is
debited to Cost of Goods Sold. At the end of the accounting period, this account is
closed by a credit and a debit to Income Summary. (Guerrero 2018)

Lesson 2. Accounting for Direct and Indirect Materials and Labor .

Illustrative example

Jenjen Printers is using the job order cost accounting system. Assume that on June 1,
the inventory accounts have the following balances:
Materials P 50,000
Work in Process 40,000
Finished Goods 30,000

Following are the transactions during the month:

1. Additional raw materials were purchased during the month at a cost of P86,900. To
record this transaction, the entry is
Materials 86,900
Accounts Payable 86,900

During the month, raw materials costing P90,400 were used as follows:
Direct materials chargeable to Work in Process 84,600
Indirect materials chargeable to Factory Overhead Control 5,800
The entry to record this would be
Work in Process 84,600
Factory Overhead Control 5,800
Materials 90,400

2. Wages and salaries totaling P102,300 were earned by the factory employees during the
month. The entry for this transaction is
Factory Payroll 102,300
Withholding Taxes Payable 1,300
SSS Premiums Payable 200
Pag-IBIG Premiums Payable 300

Faculty: Elizabeth B. Boneo 2 | Page

 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

Salaries and Wages Payable 100,500

3. An analysis of the records indicates that the labor costs should be allocated as follows:
Direct labor P66,500
Indirect labor 35,800
The entry to record this would be
Work in Process 66,500
Factory Overhead Control 35,800
Factory Payroll 102,300

4. In addition to the indirect materials and indirect labor, other factory overhead costs,
such as utilities, insurance and depreciation, totaling P23,500 were incurred during the
month. The entry to record these costs is
Factory Overhead Control 23,500
Accounts Payable & Other Accounts 23,500

5. It is estimated that 80% of the direct labor cost is chargeable to jobs worked on during
the month of June. An estimate of overhead applicable to each job must be made,
because it is impossible to determine the exact amount of factory overhead applicable at
this point of the process. The entry to record the applied overhead is
Work in Process 53,200
Factory Overhead Control 53,200
P66,500 x 80% = P53,200

Applied Factory Overhead may also be credited instead of Factory Overhead Control.
After the above entry, the Factory Overhead Control account will have a debit balance
of P11,900 (65,100-53,200). This is because the actual costs incurred of P65,100 are
greater than the applied overhead of only P53,200. This is called under-applied
overhead. On the other hand, if the applied overhead is greater than the actual costs
incurred, the Factory Overhead Control account will have a credit balance. This is called
over-applied overhead. At the end of the year, the over- or under-applied overhead is
usually adjusted to Cost of Goods Sold, if the amount is nominal, or prorated to Work in
Process, Finished Goods and Cost of Goods Sold, if the amount is substantial or material.

6. Some jobs with a total cost of P225,100 were completed and transferred to the finished
goods warehouse. To record the cost of jobs completed, the entry is
Finished Goods 225,100
Work in Process 225,100

7. During the month, finished goods costing P221,500 were sold to various customers. The
entry to record the cost of the goods sold is
Cost of Goods Sold 221,500
Finished Goods 221,500

At the end of the month, the balances in the inventory accounts are as follows:
Materials P46,500
Work in Process 19,200
Finished Goods 33,600
(Guerrero 2018)

Lesson 3 – Income Statement of Different Industry

Faculty: Elizabeth B. Boneo 3 | Page

 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

The results of operations of a manufacturing firm are reported in the conventional

financial statements – the statement of cost of goods manufactured (with schedule of
manufacturing overhead, showing the details of individual overhead items), the statement
of comprehensive income, and the statement of financial position.

Jenjen Printers
Statement of Cost of Goods Manufactured
Month ended June 30,2020
Direct Materials Used:
Materials Inventory, June 1 P 50,000
Add Materials Purchases 86,900
Total Materials Available for Use P136,900
Less Materials Inventory, June 30 46,500
Total Materials Used P 90,400
Less Indirect Materials Used 5,800
Direct Materials Used P 84,600
Direct Labor 66,500
Factory Overhead Applied 53,200
Total Manufacturing Cost P204,300
Add Work in Process Inventory, June 1 40,000
Total Cost of Goods Placed in Process P244,300
Less Work in Process Inventory, June 30 19,200
Cost of Goods Manufactured P225,100

Jenjen Printers
Statement of Comprehensive Income
Month ended June 30, 2020
Sales P305,000
Cost of Goods Sold:
Finished Goods Inventory, June 1 P 30,000
Add Cost of Goods Manufactured 225,100
Total Cost of Goods Available for Sale P255,100
Less Finished Goods Inventory, June 30 33,600 221,500
Gross Profit on Sales P 83,500
Operating Expenses:
Selling Expenses P 20,000
General Expenses 15,000 35,000
Income before Income Taxes P 48,500
Less Provision for Income Taxes 14,550
Comprehensive Income P 33,950

Jenjen Products Company

Statement of Cost of Goods Sold
Month ended June 30,2020

Inventory, June 1 P 50,000

Add : Net Purchases
Purchases P188,000
Less Purchase Ret and Allowances 3,000
Less: Purchase Discount 700
Add: Freight In 10,000 194,300
Total Good Available for Sale P244,300
Less Inventory Inventory, June 30 22,800

Faculty: Elizabeth B. Boneo 4 | Page

 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

Cost of Goods Sold P221,500

Jenjen Products Company

Statement of Comprehensive Income
Month ended June 30, 2020
Sales P305,000
Cost of Goods Sold: 221,500
Gross Profit on Sales P 83,500
Operating Expenses:
Selling Expenses P 20,000
General Expenses 15,000 35,000
Income before Income Taxes P 48,500
Less Provision for Income Taxes 14,550
Comprehensive Income P 33,950

Jenjen Services Company

Statement of Comprehensive Income
Month ended June 30, 2020
Revenues P305,000
Cost of Providing Services:
Materials 11,500
Labor 180,000
Service Overhead 20,000
Gasoline 10,000 221,500
Gross Profit on Sales P 83,500
Operating Expenses: 35,000
Income before Income Taxes P 48,500
Less Provision for Income Taxes 14,550
Comprehensive Income P 33,950

I. Assessment of Learning/ Progress Check

1. Maria Company has developed the following information for the year ended
December 31, 2020

Raw materials inventory, Jan 1 P175,000

Raw materials inventory, Dec 31 125,000
Purchases 250.000
Purchase Discount 3,000
Freight In 5,000
Direct Labor 270,000
Factory Overhead (120% of direct labor cost)
Work In Process inventory, Jan 1 90,000
Work In Process inventory, Dec 31 120,000
Finished Goods inventory, Jan 1 100,000
Finished Goods inventory, Dec 31 80,000

Prepare Statement of Cost of Goods Manufactured and Statement of Cost of

Goods Sold

J. References

Faculty: Elizabeth B. Boneo 5 | Page

 COLLEGE OF ACCOUNTANCY
C-AE22: Cost Accounting and Control
First Semester AY 2021-2022

Guerrero, Pedro P., (2018) Cost Accounting: Principles and Procedural Application,
2018 Edition, Manila, Philippines: GIC Enterprises & Co., Inc.

De Leon, Norma D., De Leon, Ellery D., & De Leon, Guillermo M, Jr., (2019) Cost
Accounting and Control 2019 Edition, Manila, Philippines: GIC Enterprises & Co., Inc.

Vanderbeck, Edward J. & Mitchell, Maria R., Principles of Cost Accounting 17 th Edition,
Taguig City, Philippines: Cengage Learning Asia Pte Ltd (Philippine Branch).

Modules prepared by : Sisina T. Quizon

Reviewed/updated by : Elizabeth B. Boneo

Faculty: Elizabeth B. Boneo 6 | Page