DATA ABOUT I LOVE COST ACCOUNTING COMPANY’S PRODUCTION AND INVENTORIES FOR THE

MONTH OF JANUARY ARE AS FOLLOWS:

Purchases-RM 143,440
Freight in 5,000
Purchase returns and allowances 2,440
Direct Labor 175,000
Actual factory overhead 120,000

Inventories: January1 January30

Finished goods 68,000 56,000
Work in process 110,000 135,000
Raw materials 52,000 44,000
The company applies factory overhead to production at 80% of direct labor cost. Over-or
underapplied is closed to cost of goods sold at year-end. The company’s accounting period is on the
calendar year basis.

FORMULA:
Prime cost= DM+DL
Conversion cost= DL+FOH
Total Manufacturing Costs= DM+DL+FOH
Total Manufacturing Costs= PC+FOH
Total Manufacturing Costs= CC+DM

1. Prime Cost January was

Direct Materials
Beginning Raw Materials Inventory 52,000
Add: Net Purchases of Raw Materials 146,000
Deduct: Ending Raw Materials Inventory 44,000
Direct Materials Used in production 154,000
Direct Labor 175,000
Prime Cost 329,000

2. Conversion cost for January was

CONVERSION COST (DIRECT LABOR + FACTORY OVERHEAD)

Direct Labor 175,000

Factory Overhead 140,000 (175,000 x 80%)
CONVERSION COST 315,000
3. Manufacturing cost for the month of January

MANUFACTURING COST (DIRECT MATERIALS + DIRECT LABOR + FACTORY OVERHEAD)

Direct Materials 154,000

Direct Labor 175,000
Factory Overhead 140,000
TOTAL MANUFACTURING COST 469,000
 4. The cost of goods transferred to the finished goods inventory account for the
month of January was

COST OF GOODS MANUFACTURED

Beginning work in process 110,000

Ad: Total manufacturing cost 469,000
Total work in process for the period 579,000
Less: Ending work in process (135,000)
COST OF GOODS MANUFACTURED 444,000
5. Cost of goods sold for January

COST OF GOODS SOLD

Beginning Finished Goods 68,000

Add: Cost of goods manufactured 444,000
Cost of goods available for sale 512,000
Less: Ending finished goods (56,000)
COST OF GOODS SOLD 456,000

6. The amount of over/underapplied overhead factory for the month of January was

OVER/UNDERAPPLIED OVERHEAD FACTORY

Actual factory overhead 120,000

Less: Estimated Factory Overhead 140,000 (175,000 x 80%)
Underapplied/(Overapplied) (20,000)

*Pag negative, overapplied.

7. The cost of goods sold for the month of January should be increased (decreased) by the amount of
over/under-applied factory overhead of

Actual FOH<Applied FOH= Overapplied deduction of COS or COGS (20,000)

Direct Materials
Beginning Raw Materials Inventory 52,000
Add: Net Purchases of Raw Materials 146,000
Deduct: Ending Raw Materials Inventory 44,000
Direct Materials Used in production 154,000
Direct Labor 175,000
Manufacturing Overhead
Total Manufacturing costs
Add: Beginning WIP Inventory
Deduct: Ending WIP Inventory
Cost of Goods Manufactured for the year
Add: Beginning Finished Goods Inventory
Deduct: Ending Finished Goods Inventory
Cost of Goods Sold

COST IN RELATION TO VOLUME OF ACTIVITY

TOTAL PER UNIT

1. FIXED COST CONSTANT VARY
2. VARIABLE COST VARY CONSTANT
=COST/UNIT *NUMBER OF UNITS OR VOLUME
3. MIXED COST= Contain both fixed and variable costs.
= FIXED COST + VARIABLE COST

COSTS IN RELATION TO MANUFACTURING DEPARTMENTS

1. PRODUCING DEPARTMENT- one whose costs may be charged to the product (DM, DL &
FOH)
2. SERVICE DEPATMENT- one that is not directly engaged in production but renders a
particular type of service for the benefit of other departments.

COSTS IN RELATION TO ANALYSIS FOR DECISION MAKING

1. RELEVANT COSTS- it can be changed or influenced by a decision.

CHARACTERISTICS: (must possess both)

A. Future costs
B. Different between decision alternatives
2. IRRELEVANT COSTS-it cannot be avoided
 OTHER COSTS FOR DECISION MAKING

 DIFFERENTIAL COST- difference between any two alternative courses of action

The difference in cost is an: >INCREASE>DECREASE
 AVOIDABLE COST-can eliminated by the virtue of an alternative*UNAVOIDABLE
COST
 POSTPONABLE COSTS- may be deferred or shifted to a future date without
adversely affecting current operations.
 OUT-OF-POCKET COST- future outlay of financial resources as a consequence of
a decision.
 OPPORTUNITY COST- income of benefit sacrificed or forgone when an alternative
is selected over another.
 IMPUTED COSTS- are assumed or hypothetical costs
*opportunity cost and imputed costs do not require cash outlay, but both are
relevant cost.
 SUNK COST- cost already been incurred and cannot be changed by any decision.
 HISTOTICAL COST
 QUALITY COST- cost associated with conforming to standards

2 CATEGORIES OF QUALITY COST

A. COST OF COMPLIANCE WITH STANDARDS:
1. PREVENTION COST- preventing product defects
2. APPRAISAL COST- “INSPECTION COST”, incurred to identify defective product
before shipped to customers.
B. COST OF NON-COMPLIANCE WITH STANDARDS
3. FAILURE COST
A. INTERNAL- scrap or rework
B. EXTERNAL- warranty, replacements, legal action and loss in sales due to
reputation of poor quality.

COST IN RELATION TO PERSONS REGULATING THEM

 CONTROLLABLE COSTS- can be regulated by the management
EX.(DM<DL&FOH)
 NONCONTROLLABLE COSTS- cannot be regulated
EX. (DEPPRECIATION, INSURANCE,RENT,SALARIES)

COST IN RELATION TO TIMING OF COST COMPUTATION OR PREPARATION

 HISTORICAL COSTS- determined after the event
 PREDETERMINED COSTS- before the event
1. BUDGETED COSTS-
2. STANDARD COSTS-
COST IN RELATION TO TIMING OF CHARGES AGAINST REVENUES
 PRODUCT COST OR INVENTORIABLE COSTS- attached to the product
1. DM
2. DL
3. FOH
 PERIOD COSTS