SCOPE

In this module, the learner is able to demonstrate understanding of key concept,

uses and importance of Cost Accounting and Control in real business world.

OVERVIEW AND OBJECTIVES

The course is designed as an introduction to higher cost accounting syllabus. This
will provide the students with clear understanding and appreciation of the concepts,
tools, and techniques of the cost accounting; gives students fundamental knowledge,
both theoretically and practically on cost accounting; examines the procedures
underlying the development of cost accounting system for managerial decision,
control, and performance reporting.

DISCUSSION OF TOPICS:

COST ACCOUNTING AND CONTROL
(COST 1) MODULE
Chapter 1:
COST ACCOUNTING- Basic Concepts and the Job Order
Cost Cycle
Objectives:
The learner should be able to understand and know:
 The basic concepts of cost accounting and its purpose.
 The different classifications of manufacturing costs – its inventories, cost
accumulation system and chart of costs.
 The introduction to the job order cost system under normal costing.

Start of Discussion

 BASIC CONCEPTS

The accounting system is the major quantitative information system in almost

every organization. It provides information for:
 Internal Reporting to managers, for use in planning and controlling
Clariza C. Gamboa operations; for use in formulating plans and policies. (Management
Cost 1 Professor accounting)
  External Reporting to stockholders, government and other outside parties.
(Financial Accounting)
Where does “cost accounting” fit within the framework?
In this broadest sense, cost accounting has the same three major purposes
as those described above. However, the third purpose simultaneously deals with
costing of products for inventory valuation and income determination. It therefore
fulfills the demands of outsiders and those of management for such information.
Cost Accounting is a management accounting, plus a small part of financial
accounting to the extent that its product costing function satisfies the needs of
external reporting.
 COST ACCOUNTING
- A system that records, summarizes, analyzes, and interprets the details of the
costs of materials, labor, and overhead necessary to produce and sell an
article.
- Refers to the gathering and providing information for decision needs of all
sorts, ranging from the management of recurring operations to the making
of strategic decisions and the formulation of major organizational policies.
- Refers to recording, classifying and reporting all costs aspects of company
performance during a particular period of time.
 PURPOSE OF COST ACCOUNTING
 Accounting tools for planning and controlling activities.
 Through modern systems of cost accounting, it is possible to know how much
it costs to construct, manufacture, or sell goods or to render various services.
 The ability to make specific and detailed identification and measurement of
cost elements permits management to reach decisions and evaluate results
with greater intelligence.
 A knowledge of the costs of doing business is needed to estimate a job or to
bid for jobs or contracts.
 Cost accounting is also used in preparing a company’s budget.
 Standard cost procedures are helpful in evaluating the results of operations.
 CLASSIFICATION OF MANUFACTURING COSTS
Manufacturing is the process of converting materials into finished goods by
using labor and incurring other costs, generally called manufacturing overhead.
 DIRECT MATERIALS
- Also called as raw materials, are those materials used in manufacturing
process that become a significant part of the finished goods.
 DIRECT LABOR
- The employees who work directly with the raw materials in converting
them to finished goods represent direct labor.
 MANUFACTURING OR FACTORY OVERHEAD
- All costs incurred in the factory that cannot be considered direct materials
or direct labor.
- It is usually subdivided into three categories: indirect materials, indirect
labor and manufacturing overhead.
 Indirect Materials – are used in small amounts in the manufacturing
process or that cannot easily be traced to specific products. Another type
of indirect material, sometimes called factory supplies or operating
supplies, consists of items that are used in the manufacturing process but
do not become part of the finished goods.
 Indirect Labor – the wages of factory personnel who do not work directly
on raw materials.
 Other Manufacturing Overhead – includes such as payroll taxes on factory
wages, rent, depreciation, taxes and insurance on factory building and
machinery and equipment.
 PRIME AND CONVERSION COSTS
PRIME COSTS= Direct Materials + Direct Labor
CONVERSION COSTS = Direct Labor + Manufacturing Overhead
 INVENTORIES FOR A MANUFACTURING COMPANY
 RAW MATERIALS INVENTORY
- reflects the cost of raw materials inventory and factory supplies that will be
used in the manufacturing process.
 WORK IN PROCESS INVENTORY
 - reflects the cost of raw materials, direct labor and manufacturing overhead  PROCESS COST SYSTEM – accumulates costs without attempting to allocate
of goods on which manufacturing has begun but has not been completed at them during the accounting period to specific units of goods being
the end of the fiscal period. manufactured. It is often referred to as average costing.

 FINISHED GOODS INVENTORY  DUAL SYSTEMS – is often used when a company makes a standard parts or
- reflects the costs of goods that have been completed and are ready for sale. subassemblies continuously and then incorporates them into finished goods
built to customer specifications.
 SYSTEM OF COST ACCUMULATION
The basic objective of cost accounting is the determination or accumulation of a  INTRODUCTION TO JOB ORDER COST CYCLE – NORMAL COSTING
product’s cost for inventory valuation and income determination.  WORK FLOW
The cost accountant’s job is to design a system in which all cost elements are
1. ACTUAL COST SYSTEM (HISTORICAL) recorded as incurred and then charged to production as the work flows through
- An actual cost system collects the actual amounts of direct material, direct the operating cycle.
labor and factory overhead that are incurred for each product. The total
manufacturing costs are known only after the operation has been PROCUREMENT PRODUCTION WAREHOUSING SELLING
completed. Materials Work In Process Finished Goods COGS
Factory Payroll
2. STANDARD COST SYSTEM (Predetermined) MOH Control
- Costs are determined in advance from analysis and forecasts made before
the actual production begins. Sample Problem:
The Journal Entries and Accounts
3. NORMAL COST SYSTEM
- Combination of the actual and standard cost system. This cost system Beginning Balances
accumulates only the actual amounts of direct material and direct labor Freshmen Printers, Inc. is using a job order cost accounting system for some time.
costs. Factory overhead costs are accumulated on the basis of a Assume that on June 1 these balances appear in the following accounts:
predetermined rate.
121 Materials P50,000
Product Costs Actual Costing Standard Costing Normal Costing 122 Work in Process 40,000
Direct Materials Actual Standard Actual 126 Finished Goods 30,000
Direct Labor Actual Standard Actual
Factory Overhead Actual Standard Predetermined Raw Materials Purchased
 TYPES OF COSTS SYSTEMS Additional raw materials were purchased during the month of June at a cost of
P86,900. The purchase is debited to the asset account, Materials.
 JOB ORDER COST SYSTEM – accumulates costs applicable to each specified
job order or lot of similar goods manufactured on a specific order for stock or Materials 86,900
for a customer. When production on a job begins, the job is assigned a Vouchers/Accounts Payable 86,900
number, and a form called a job cost sheet is set up.
Raw Materials Used
During the month, raw materials costing P90,400 were used as follows: Direct
Materials P84,600 and Indirect materials 5,800.
 ***After the transfer, the Manufacturing Overhead Control account will have a
Work in process 84,600 balance. It can be under-applied or over-applied overhead that is usually adjusted to
Manufacturing Overhead Control 5,800 the Cost of Goods Sold account or pro-rated to WIP, Finished Goods and COGS.
Materials 90,400
Transfer of Finished Goods
Factory Wages Earned During the month, some jobs were completed and transferred to the finished goods
During the month, wages and salaries totaling P102,300 were earned by the factory warehouse. These job cost P225,100.
employees and charged from factory payroll register to the Factory Payroll account,
as shown below: Finished goods 225,100
Work in Process 225,100
Factory Payroll 102,300
Withholding taxes payable 1,300 Sale of Finished Goods
SSS Contribution payable 200 During the month, finished goods costing P221,500 were sold to various customers.
Pag-Ibig Contribution Payable 300
Salaries and Wages Payable 100,500 Cost of Goods Sold 221,500
Finished Goods 221,500

Labor Charged to Production

An analysis of the records indicates that labor costs of P102,300 should be allocated  FORMULAS
as follows: Direct labor P66,500 and Indirect labor P35,800.
STATEMENT OF COST OF GOODS SOLD
Work in Process 66,500 Raw Materials, beginning P xx
Manufacturing Overhead Control 35,800 Add: Purchases xx
Factory Payroll 102,300 Total Raw Materials Available P xx
Less: Raw Materials, ending xx
Manufacturing Overhead Costs Total Materials Used P xx
Other overhead costs such as utilities, insurance and depreciation totaling P23,500 Add: Direct Labor xx
were incurred during the month. Manufacturing Overhead Applied xx
Manufacturing Overhead Control 23,500 Total Manufacturing Costs P xx
Vouchers payable and other accounts 23,500 Add: WIP, beginning xx
Manufacturing Overhead Applied to Products Total Costs of Goods Put in Process P xx
It is estimated that 80% of the direct labor cost is chargeable to jobs worked on Less: WIP, ending xx
during the month of June. An estimate of overhead applicable to each job must be Total Costs of Goods Manufactured P xx
made. Add: Finished Goods, beginning xx
Total Goods Available for Sale P xx
Work in Process 53,200 Less: Finished Goods, ending xx
Manufacturing Overhead control 53,200 Total Cost of Goods Sold P xx
INCOME STATEMENT On January 1, the general ledger of Freshmen Company contained the
Sales P xx following accounts and balances:
Less: Cost of Goods Sold xx
Gross Profit P xx Cash P 94,000
Less: Operating Expenses xx Accounts Receivable 100,000
Net Income Before Tax P xx Finished Goods 65,000
Provision for income tax xx Work in Process 15,000
Net income after tax P xx Materials 44,000
Machinery 90,600
Accumulated Depreciation- Machinery 20,000
-End of Discussion- Accounts Payable 118,750
SELF-CHECK TEST: Ordinary Shares 200,000
 Identification: Provide the correct answer for each of the following Retained Earnings 69,850
questions.
1. The glue used in manufacturing armchairs and the thread used in sewing a Details of inventory are:
suit are classified as this type of manufacturing cost. (Be specific) Finished goods inventory: P65,000
2. It is the overall financial plan for future activities. Job 101 Job 102
3. Reflects the primary sources of costs for units in production. WIP inventory:
4. If the applied overhead is greater than the actual costs incurred, the Direct materials: 1,000 units of A @ P5 5,000
manufacturing overhead control account will have a credit balance that will 400 units of B @ P3 1,200
be called as Direct labor: 1,000 hours @ P4 4,000
5. Indicates the costs required to convert the raw materials into finished 400 hours @ P5 2,000
products. Factory overhead applied at the rate of
2,000 800
P2 per direct labor hour
 True or False. Total P 11,000 P 4,000
1. The cost accountant’s job is to design a system in which specific cost elements
are recorded as incurred and then charged to production as the work flows Materials inventory : P44,000
through the operating cycle.
2. Purchases of materials, labor and overhead are recorded as credits to During January, the following transactions were completed:
Materials, Factory Payroll and Manufacturing Overhead control. a. Materials were purchased on account for P229,040.
3. A debit balance in the Manufacturing Overhead Control account means that b. Payroll totaling P220,000 was accrued.
less overhead was applied to jobs than the actual cost incurred. c. Payroll was distributed as follows:: Jobs 101, 5,000 DLH @ P8; Job 102, 8,000
4. Conversion costs are consists of the direct labor and direct materials. hrs. @ P10; Job 103, 6,000 hrs. @ P6. Indirect labor, P24,000 and selling and
5. The work in process inventory reflects the manufacturing costs of goods on admin expense P40,000.
which manufacturing has begun but has not been completed at the end of d. Materials were issued as follows: P103,200 to Job 101; P84,000 to Job 102;
the fiscal year. P29,150 to Job 103. Indirect materials costing P15,040 were issued.
e. Factory overhead was applied to Job 101, 102 1nd 103 at a rate of P4.50 per
 PROBLEM 1-1 direct labor hour.
Journal Entries and Statement of Cost of Goods Sold f. Jobs 101 and 102 were completed and immediately sold on account for P250,000
and P270,000 respectively.
g. After allowing a 5% cash discount, a net amount of P494,000 was collected on 2. Receiving Department
accounts receivable. 3. Storeroom (Stockroom)
h. Marketing and administrative expenses, other than salaries, paid during the 4. Accounting Department
month amounted to P30,000. Other factory overhead paid, P49,720. 5. Cash Department
i. Payments on account, other than payrolls paid, amounted to P170,000.
j. Applied Factory overhead is closed to factory overhead control. The over and  MATERIALS PURCHASING PROCEDURES
under applied overhead is then closed to Cost of goods sold.
Purchasing Agent
- Has the responsibility for purchasing materials.
Required:
1. Journalize the January transactions. - The purchasing agent’s staff is part of the procurement section of the
2. Prepare a cost of goods sold statement. purchasing department.
Purchase Requisition
- Inform the purchasing agent of a need for materials.
- Once the materials reach the reorder point, the storeroom supervisor
Chapter 2:
completes a purchase requisition requesting that materials be ordered.
PURCHASING MATERIALS
Purchase Order
Objectives:
- When purchasing department receives the purchase requisition, source
The learner should be able to understand and know:
 The detailed procedures and documents required to account for purchasing of supply must be selected.
materials. - The purchase order is a written authorization to the supplier to ship the
 The materials purchasing procedures, reorder point and economic order specific material.
quantity. - Effective internal control procedures require that all purchase orders be
pre-numbered.
Start of Discussion
Receiving Report
- Receiving report shows all the details of the shipment, including
 MATERIALS CONTROL
comments on the condition of the materials received.
- Receiving clerk receives the materials purchased. He/She is responsible
Requirements to an effective material internal control system:
for unpacking them, checking quantities and transferring them into
 Materials of the desired quality must be available when needed.
storeroom.
 Correct quantities and types of materials must be on hand at the right time
- Storeroom supervisor signs the final copy to confirm that the materials
for production to proceed on schedule.
have reached the storeroom.
 Materials must be purchased on the most favourable prices.
- Storeroom clerk records the receipt of materials in a subsidiary ledger by
 Materials must be protected from loss or theft.
making an entry.
 Risks of spoilage and obsolescence must be minimized.
 Cost of materials handling and storage must be kept to a minimum.
Comparing Documents
- The purchasing department compares the supplier’s invoice or purchase
 ORGANIZATION FOR CONTROL
invoice with the purchase order and receiving report to make sure that
1. Purchasing Department
 the materials ordered have been received in good condition and those
listed only on the invoice.
- If all documents are in order, a check voucher also called disbursement
voucher, is prepared with supporting documents attached to it.
Recording the Voucher
- The accounting department checks all the documents if they are properly
approved and signed.
- In verifying the account distribution against purchase order, the voucher
clerk enters the purchase in the voucher register. The voucher is send to
the cash department for filing in the unpaid vouchers file.
Paying the Voucher
- Before the due date, the voucher is removed from the unpaid vouchers
file.
- Cash department prepares a check for the amount in the voucher
 INVENTORY MANAGEMENT
Formulation and administration of plans and policies to efficiently and
satisfactorily meet production and merchandising requirements and minimize
costs relative to inventories.
*When the EOQ figure is available, the average inventory is computed as follows:
Average Inventory= EOQ/2
 Reorder Point
When to reorder:
- Lead Time-period between the time order is placed and received
- Normal Time Usage- Normal Lead Time x Average Usage
- Safety Stock- (Maximum LT- Normal LT) x Average Usage
- Reorder Point if there is NO safety stock required
= Normal Lead Time Usage
- Reorder Point if there is Safety stock required
= Safety stock + Normal Lead Time Usage or
= Maximum LT x Average Usage
 COMPUTERIZED MATERIALS PURCHASING SYSTEM
 On-line purchasing system for materials allows companies to have up-to-date
information and improves the organization’s purchasing process.
 A computerized purchases system has an inventory file, a supplier file, and
an open purchase order file in its memory.
 To improve the process of requisitions, a computerized system can provide
information about purchases to the various users of the system.

INVENTORY MODELS  BILL OF MATERIALS

 Economic Order Quantity  Lists all materials needed on the job and the date they will be needed.
The quantity to be ordered, which minimizes the sum of the ordering and carrying  Ensure that sufficient material is available.
costs.
Where: o-cost of placing one order  Debit and Credit Memorandums
√𝟐𝑫𝒐 Debit memorandum is a notice to the vendor of a deduction from the invoice
EOQ= D-annual demand in units for the cost for the returned materials.
𝒄
c- annual costs of carrying one unit in inventory for one Credit Memorandum is prepared by the purchasing agent as a notice for
year additional cost to the supplier.

*When applied to manufacturing operations, the EOQ formula may be used to  CONTROL PROCEDURES
compute the Economic Lot Size (ELS) 1. Order cycling
Where o- set-up cost 2. Min-max method
√𝟐𝑫𝒐 3. Two-bin method
ELS= D-annual production requirement 4. ABC plan
𝒄 5. Automatic order system
c- annual cost of carrying one unit in inventory for
one year
 -End of Discussion- d. Carrying costs less than order costs
7. The materials requisition
SELF-CHECK TEST: a. Authorizes the storeroom to deliver types and quantities of materials to a
 Multiple Choice: given department
1. In a well-controlled material system, the purchasing agent performs the following b. Is the list of material requirements for each step in the production cycle
activities except the c. Informs the purchasing agent of the quantity and type of materials needed
a. Placing of purchase orders with supplies d. Contracts for quantities to be delivered
b. Receiving the purchase requisitions
c. Approving and checking of invoices 8. The purchase requisition may originate from all of the following, except
d. Preparation of purchase order. a. A storeroom clerk
b. A materials record clerk
2. The purchase requisition is a document used to c. A receiving department clerk
a. Initiate the return of merchandise to the vendor d. Other department employee who needs materials f special nature
b. Inform the purchasing agent a need for materials
c. Initiate payment for materials ordered 9. The receiving department does all of the following except
d. Inform the purchasing department of a receipt of materials a. Unloads and unpacks incoming materials
b. Keeps informed concerning sources of supply, prices and delivery schedules
3. The purchase order c. Matches materials received with descriptions on purchase orders
a. Is the list of materials requirements for each step in the production cycle d. Arranges for inspection, when necessary
b. Contracts for quantities to be delivered
c. Informs the purchasing agent of the quantity and kind of materials needed 10. Charr Company has correctly computed its EOQ as 500 units. However,
d. Authorizes the storeroom to deliver materials to a given department management would order in quantities of P600 units. How will Charr’s total
4. The purchasing department performs all of the following functions, except annual purchase order cost and total annual carrying cost for an order quantity
a. Compares quantities received with the suppliers’ packing list of 600 units compare to the respective amounts for an order quantity of 500
b. Receives purchase requisitions for materials units?
c. Keeps informed concerning sources of supply, prices, and delivery schedules a. Lower purchase order cost and higher carrying cost
d. Prepares and places purchase orders. b. Higher purchase order cost and lower carrying cost
c. Higher purchase order cost and higher carrying cost
5. The factor that need not be considered when calculating an inventory economic d. Lower purchase order cost and lower carrying cost
order quantity (EOQ) is
a. Safety stock level  Problem Solving:
b. Annual stock level Problem 2-1
c. Annual sales of a product Pakyawan Company is a wholesaler. It purchases 800,000 units of Product Z each
d. Order-placing costs year for sale to retailers. The cost of placing an order is P40. The cost of holding one
unit of inventory for one year is P4.
6. A company has been ordering more than the economic order quantity. This
would result in REQUIRED:
a. More frequent order points 1. Compute the economic order quantity.
b. Carrying costs greater than order costs 2. How many order would Pakyawan place under the EOQ policy?
3. Compute the annual carrying cost for the EOQ.
c. Equal safety stock costs and carrying costs
4. Compute the annual ordering cost for the EOQ.
 5. Compute the total inventory-related cost at the EOQ.  ISSUANCE OF MATERIALS
6. Previously, Pakyawan had been purchasing 8,000 units of product Z per order.
What is the ordering cost per year under the previous policy? The annual carrying
cost? How much money does using the EOQ policy save the company over the
policy of purchasing 8,000 unit per order?

Problem 2-2
Edwin Company sells educational toys. One raw material that it orders is plastic. The
plastic is melted and placed in molds to be used for the production of various toys.
Information pertaining to the plastic raw material is as follows:

Economic Order quantity 120,000 pounds

Average daily usage 8,000 pounds
Maximum daily usage 12,000 pounds
Lead time 3 days

REQUIRED:
1. What is the reorder point assuming no stock is carried?
2. Should the company decide to carry safety stock, how many units should that
be? **Note:
3. What is the reorder point assuming that safety stock is carried? No materials are issued from the storeroom without a materials requisition.

 PRINCIPLES OF INTERNAL CONTROL

The procedures for storing and issuing materials should reflect the following
Chapter 3:
principles of internal control:
Storing and Issuing Materials  Admittance to the storage area must be restricted.
 Materials ledger cards showing all receipts and issuance must be maintained.
Objectives:  Each type of materials must be clearly identified, stored and carefully
The learner should be able to understand and know: protected while on storage.
 The appropriate systems for storing and issuing materials and its internal  Materials must be issued only upon proper written authorization.
control.  The accounting system should include a periodic check of the materials ledger
 The principles of internal control, special issuing procedures and against the balance of the raw materials control account.
computerized system for issuance of materials  Different persons must be involved in the storing and issuing operations.

Start of Discussion  SPECIAL ISSUING PROCEDURES

Materials returned to Storeroom
- When returning materials to storeroom, a return materials report is
 STORING MATERIALS
prepared as a result of requisitioning too many materials, withdrawing wrong
 Storeroom Supervisor – responsible for the protection of the materials in
materials or other reasons.
the storeroom, and for the identification of materials.
 Bin tag – an informal record showing the quantities of the materials received,
Materials Returned to Suppliers
issued and on hand at all times.
 - A return shipping order authorizing the return to supplier is prepared by a. Receiving report
the purchasing agent together with a debit memorandum, both in triplicate. b. Materials issued
c. Materials requisition
 COMPUTERIZED SYSTEM FOR MATERIALS’ ISSUANCE d. Material ledger card
- Uses the quantity and material number to update the inventory file for that
material and to determine whether more units should be ordered. 4. The person who is responsible for the protection of the materials in the
- Facilitates to update inventory records, simplifies processing purchase orders, storeroom, and for identification of the materials is the
and provides effective internal control system for materials issuance. a. Storeroom clerk
b. Receiving clerk
-End of Discussion- c. Storeroom supervisor
d. Purchasing agent
5. Materials return to storeroom are recorded in the following documents,
SELF-CHECK TEST: except
 Questions: a. Bin tag
1. What are the internal control procedures for purchasing accompanied in b. Returned materials report
storing and issuing materials? c. Materials ledger card
2. Where does a material ledger card used for? d. Purchase order
3. Why is it important to have a material requisition before issuing materials
from the storeroom? 6. The bin tag
4. Do principles of internal control need to reflect in the procedures of storing a. is a record showing the vouchers issued
and issuing materials? b. is an informal but carefully maintained record showing the quantities of
5. Give some basic concepts to be followed by manufacturing companies in the materials received, issued, and on hand
storing and issuing raw materials. c. is a name tag used by employees for identification purposes
d. is a record of materials requisitions
 Multiple Choice Questions:
1. Entries made in Materials account in the general ledger are the following, 7. After recording the materials requisition in the materials requisition journal,
except the cost clerk post the data from the requisitions to the material section of
a. Materials purchased the
b. Materials issued a. Departmental overhead analysis sheet
c. Materials returned b. Bin tag
d. Materials reserved and on order c. Job cost sheet
d. Materials ledger card
2. Indirect materials that cannot be charged to a specific job are posted from
the materials requisition to the 8. What is the purpose of using a materials requisition journal?
a. Materials ledger card a. To avoid losses due to thief
b. Departmental overhead analysis sheet b. To avoid writing the many long and repetitious entries in issuing and using
c. Bin tag materials
d. Receiving report c. To avoid mathematical errors
d. To avoid error in journalizing the requisitions
3. No materials may be issued without a written document called the
 9. The person who is responsible of recording the requisition in the materials - The goods first purchased are first sold and consequently the goods
ledger card is the remaining in the inventory at the end of the period are those most recently
a. Storeroom supervisor purchased or produced.
b. Storeroom clerk - The objection to this method is that there is improper matching of cost against
c. Purchasing agent revenue.
d. Accounting clerk

10. A materials requisition journal Illustration – FIFO

a. Is a special journal where the issuance is journalized The following data pertain to an inventory item:
b. Is a general journal where the requisition is journalized
c. Is a special journal where the purchase requisition is recorded Unit Requisition
d. Is a special journal where the purchase orders are recorded Units Total Cost
cost in units
Beginning
Jan.1 800 200 P160,000
Balance
Chapter 4: 8 Requisition 500
Controlling and Costing Materials Inventory 18 Purchase 700 210 147,000
22 Requisition 800
Objectives: 31 Purchase 500 220 110,000
The learner should be able to understand and know:
 How to calculate the cost of materials issued. The ending inventory is 700 units.
 How physical inventories of materials are taken
 The different inventory costing methods and inventory valuation FIFO- Periodic
Units Unit cost Total Cost
From Jan.18 Purchase 200 P210 P 42,000
From Jan.31 Purchase 500 220 110,000
Start of Discussion 700 P152,000

Cost of Goods Sold

 INVENTORY COSTING METHODS Inventory – January 1 P160,000
Purchases (147,000 + 110,000) 257,000
 Specific Identification Goods Available for Requisition P417,000
- Means that specific costs are attributed to identified items of inventory. Inventory – January 31 (152,000)
- This method is appropriate for inventories that are segregated for a specific Cost of Materials used P265,000
project and inventories that are not ordinarily interchangeable.

FIFO – Perpetual
Three Methods to Determine Cost of Ending Inventory This requires the preparation of stock card.
 First In, First Out (FIFO)
 Purchases Requisition Balance  Weighted Average – Perpetual
Unit Total Unit Total Unit Total - When used in conjunction with the perpetual system, the weighted average
Date
Units Cost cost Units cost cost Units Cost Cost
Jan.1 800 200 160,000 method is popularly known as the moving average.
8 500 200 100,000 300 200 60,000 - A new weighted average cost per unit must be computed after every purchase
18 700 210 147,000 300 200 60,000 and purchase return.
700 210 147,000 - The total cost of goods available for requisition after every purchase and
22 300 200 60,000 purchase return is divided by the total units available for requisition to get a
500 210 105,000 200 210 42,000
new weighted average unit cost.
200 210 42,000
31 500 220 110,000 500 220 110,000 Units Unit cost Total cost
Jan 1 Balance 800 200 160,000
8 Requisition (500) 200 (100,000)
 Weighted or Moving Average Method Balance 300 200 60,000
- All the costs are commingled and an average cost is computed with each new 18 Purchase 700 210 147,000
purchase and assigned to materials issued and on hand. Total 1,000 207 207,000
 Weighted Average – Periodic 22 Requisition (800) 207 (165,600)
- Average cost is computed by dividing the total cost of goods available for Balance 200 207 41,400
requisition by the total number of units available for requisition. 31 Purchase 500 220 110,000
Total 700 216 151,400
The preceding illustrative data are used.
Cost of Materials used from the stock card
January 8 Requisition 100,000
Units Unit cost Total cost
22 Requisition 165,600
Jan. 1 Beginning Balance 800 200 160,000
265,600
18 Purchase 700 210 147,000
31 Purchase 500 220 110,000
Total Goods Available for Sale 2,000 417,000  Last in, First out (LIFO)
- The last materials purchased are the first materials to be used. Then the
Weighted Average unit cost (417,000/2,000) P208.50 materials on hand are assumed to be the first one purchased.
Inventory cost (700 x P208.50) 145,950

Cost of Goods Sold  MEASUREMENT OF INVENTORY (PAS 2)

Inventory – January 1 P160,000 Inventories shall be measured at the lower of cost and net realizable value
Purchases 257,000 (LCNRV).
Goods Available for Requisition P417,000
Inventory – January 31 (145,950)  Net Realizable Value (NRV)
Cost of Materials used P271,050 - Estimated selling price in the ordinary course of business less the estimated
cost of completion and estimated cost of disposal.
 - When the NRV has declined below the original cost, inventory should be C 600,000 640,000 600,000
valued at NRV instead of cost. Subtotal 1,400,000 1,490,000
Category 2
Determination of Net Realizable Value D 2,000,000 1,900,000 1,900,000
Inventories are usually written down to net realizable value on an item by item E 1,500,000 1,560,000 1,500,000
or individual basis. However, it may be appropriate in some circumstances to Subtotal 3,500,000 3,460,000
group similar or related items. Category 3
F 1,500,000 1,460,000 1,460,000
G 1,600,000 1,690,000 1,600,000
 ACCOUNTING FOR INVENTORY WRITEDOWN
Subtotal 3,100,000 3,150,000
 If the cost is lower than net realizable value, there is no accounting problem
Grand total 8,000,000 8,100,000 7,850,000
because the inventory is measured at cost and the increase in value is not
recognized.
LCNRV Item by item or individual P7,850,000
 If the net realizable value is lower than the cost, the inventory is measured
at net realizable value and the decrease in value is recognized. Cost NRV LCNRV
Category 1 1,400,000 1,490,000 1,400,000
 METHODS OF ACCOUNTING FOR INVENTORY WRITEDOWN Category 2 3,500,000 3,460,000 3,460,000
a. Direct Method or Cost of goods sold method Category 3 3,100,000 3,150,000 3,100,000
- The inventory is recorded at the lower of cost or net realizable value.
- This method is also known as cost of goods sold method because any loss LCNRV by Category 7,960,000
on inventory writedown is not accounted for separately but buried in the
cost of goods sold. Cost NRV LCNRV
LCNRV by Total 8,000,000 8,100,000 8,000,000
b. Allowance method or loss method
- The inventory is at cost and any loss on inventory writedown is accounted The inventory is measured at the lower of cost and net realizable value applied on
for separately. an item by item or individual basis.
- This method is also known as loss method because a loss account, “loss
on inventory writedown” is debited and a valuation account, “allowance Cost - December 31, 2020 8,000,000
for inventory writedown” is credited. Net Realizable Value 7,850,000
Inventory Writedown 150,000
Illustration:
Inventory data at December 31, 2020:
DIRECT METHOD
Cost NRV LCNRV The inventory is recorded at lower of cost and net realizable value at year-end.
Category 1
A 110,000 100,000 100,000 Inventory – December 31, 2020 7,850,000
B 690,000 750,000 690,000 Income Summary 7,850,000
ALLOWANCE METHOD
The inventory is recorded at cost at year-end.  Problem 4-2
Inventory – December 31, 2020 8,000,000 The Mimi Manufacturing Company uses the perpetual inventory system in controlling
Income Summary 8,000,000 its materials. Data relating to Material B-10 during March 2020 are given below:

The inventory writedown is accounted for separately: March 1 Balance 1,000 units at P125 each.
Loss on inventory writedown 150,000 5 Issued 400 units, Requisition 01.
Allowance for Inventory Writedown 150,000 9 Received 600 units at P140 each, Purchase Order 06
13 Issued 850 units units, Requisition 04
22 Received 200 units at P145 each,Purchase Order 023
29 Issued 250 units, Requisition 08.
***Note:
Required:
- Any writedown to NRV should be recognized as an expense in the period in
1. Enter the beginning balance on a materials ledger card for each of the two
which the writedown occurs. Any reversal should be recognized in the income
inventory costing methods; FIFO and weighted average. (Periodic and Perpetual)
statement in the period in which the reversal occurs.
Round unit costs to the nearest centavo under the weighted average costing
method.
2. Give the ending inventory for each inventory costing method.
-End of Discussion-
SELF-CHECK TEST:
 Problem 4-1  Problem 4-3
Assume the inventory records of Marupok Company shows the following data: Goodboy Printers presented the following data for the fiscal year ending January 31,
2020:
Units Unit cost Net Realizable Value
Materials: Sales P729,370
R1 1,000 P110 P100 Sales Returns and allowances 48,211
S2 2,000 250 260 Finished Goods inventory, beginning 47,910
T3 3,000 300 330
Finished Goods inventory, ending 49,620
Goods in Process:
Cost of goods manufactured 422,280
X4 4,000 500 480
Y5 5,000 650 620 Selling expenses 96,357
Finished Goods: Administrative expenses 60,061
A6 2,000 800 790 Loss on inventory writedown 9,682
B7 2,000 730 780 Income tax rate 30%

Required: Required:
Determine the valuation of inventory in accordance with Philippine Accounting Prepare a statement of comprehensive income for the current year.
Standards No. 2 “Inventories”.
 Problem 4-4 Chapter 5:
The following data relates to the materials inventory of LS Manufacturing, Inc. on
Labor Accounting –Control and Costing
July 31,2020:
Materials Inventory at Cost P365,900 Objectives:
Materials Inventory at NRV 379,100 The learner should be able to understand and know:
 One of the major cost elements specifically the Labor cost.
Required:  The accounting system for labor cost: timekeeping and payroll procedures;
1. Journal entry for July 31, 2020. Assuming that the company wants to report and charging labor costs to production.
materials inventory on its statement of financial position using the lower of cost
and net realizable value.
2. Journal entry for July 31,2021 assuming the following Start of Discussion
Materials Inventory P348,105
Net Realizable Value 341,755  TIMEKEEPING PROCEDURES
3. Journal Entry for July 31, 2022, assuming: Involves two major procedures in labor costing:
Materials Inventory P337,740 1. Accumulation of the total number of hours worked by each employee so that
Net Realizable Value 339,675 their earnings can be computed;
4. Compute for the allowance for inventory writedown for year 2020, 2021 and 2. Determination how the labor hours were spent so that distribution can be
2022. made in the cost records.

 Problem 4-5
Zeny Company manufactures and sells four products, the inventories of which are
priced at cost or net realizable value whichever is lower. A normal profit of 30% is
usually maintained on each product. The following data is compiled as of December
31,2020:
 Time Cards
- Sometimes called clock card.
- This is the most common form of employee’s attendance record.
 PAYROLL PROCEDURES
The number of hours worked each day of employees under the hourly rate is
transferred from the time card to the payroll register (payroll sheet).

Original Cost to Estimated Selling Normal  Weekly Factory Payroll Register

Product cost Sell Price Price After computing the gross earnings of each employee, appropriate deductions
A1 P700 P150 P800 P700 are made and entered in the proper columns and the net pay for each employee
B2 475 205 950 950 is determined.
C3 255 50 300 350  Semi-monthly Factory Payroll
D4 450 260 1,000 900 Used to record salaries of some factory supervisors and managers who earned
fixed monthly salaries payable in two installments.
Required:
Determine the unit value for each product applying the lower of cost or net realizable  Deductions from Employee’s Earnings
in valuing inventory.  Income taxes
 SSS Contributions
 Phil. Health Contributions
  PAG-IBIG Fund or Development Mutual Fund Contributions - Employer’s contributions relating to other employees are charged to
 Employer’s Contributions expense.

 Recording Payroll from the Payroll Register  Labor-Related Costs

Factory Payroll xxx Fringe Benefits – are expenditures made by the employer on behalf of the
Withholding tax payable xxx employees. These costs are charged to MOH account. However, few companies
SSS Contributions Payable xxx treat fringe benefits related to direct labor as part of direct labor cost rather than
Phil. Health Contributions Payable xxx MOH.
Pag-ibig Contributions Payable xxx
Payroll Payable xxx  Overtime Premium Computation
Illustration:9,360
 Paying the Payroll An employee is required to work beyond 8 hours on ordinary working days. The
Payroll Payable xxx employee is to be paid an additional for overtime work in an amount equal to his
Vouchers Payable xxx regular rate plus fifty percent thereof. If the employee is paid P30 per hour for regular
working day, his overtime hourly rate is computed as follows:
Vouchers Payable xxx
Cash in Bank xxx Regular hourly rate P30
Overtime premium pay rate 15
 CHARGING LABOR COSTS INTO PRODUCTION Overtime hourly rate P45
Time Tickets
- Sometimes called job time cards, are used to show how time used on If the employee worked for 12 hours in an ordinary day, his gross earnings for the
specific jobs. day would be:
- The format of time tickets varies depending on the organization of the
company and the extent to which the company’s operations are Earnings at regular rate (8 hrs. x P30) P240
computerized. Overtime (4 hrs. x P30) 120
Overtime premium (4 hrs. x P15) 60
Unearned Wages Gross earnings P420
- Labor costs that have been incurred but not yet been paid are to be
accrued. Overtime Premium may be charged to: (Journal entry)
- Production is charged with all labor costs in the period in which they are 1. Specific Job
incurred. Work in Process xxx
Factory Payroll xxx
 Recording Labor Costs
Work in Process xxx 2. Manufacturing Overhead Control
Manufacturing Overhead Control xxx Work in Process xxx
Factory Payroll xxx Manufacturing Overhead Control xxx
Factory Payroll xxx
 EMPLOYER’S CONTRIBUTIONS
- Employer’s contribution relating to factory workers are charged to
Manufacturing Overhead Control account. -End of Discussion-
 Problem 5-3
SELF-CHECK TEST: Alex Morada, a production worker earns P27,600 per month and the company pay
Problem 5-1 the worker a year-end bonus equivalent to one month’s wages. Morada is also
May Company is preparing its monthly payroll for August. The following data entitled to a half-month paid vacation payments be treated as indirect costs and
apply to Jane Dew, the chief accountant: accrued during the 11 ½ months the employee is at work.

a. Year to date, through July: Required: The journal entry to record and distribute the labor cost of the production
Gross payroll P144,000 for the month.
SSS premiums withheld 9,360
Income tax withheld 19,200
Take home pay P115,440

b. Jane’s August earnings were P18,000. Income tax to be withheld is Chapter 6:

P2,400. Manufacturing Overhead Accounting – Actual and Applied
The following rates are available for payroll distribution:
Objectives:
Withholding tax 1% The learner should be able to understand and know:
SSS Contributions 10% (40% employee; 60% employer)  The procedures in applying manufacturing overhead using a single
Employee’s Compensation predetermined overhead rate.
2% (employer only)
Contributions  The procedures in recording manufacturing overhead.
Phil. Health Contribution 2% (50% employee; 50% employer)  To analyze the under or over-applied overhead.
PAG-IBIG Contributions 3% (50% employee; 50% employer)

Required: Start of Discussion

1. The journal entry to record labor incurrence for August.
2. The journal entry to record labor distribution and the related employer’s
contribution.
Problem 5-2
Boruto, an employee of the Naruto Company is paid P300 per hour for a regular week
for 40 hours. During the week ended November 14, the employee worked for 48
hours and earned time and a half for overtime hours.
Required:
1. Journal entry to record the labor cost if the overtime premium is charged to the
jobs worked on during the overtime hours.
2. Journal entry to record the labor cost if the overtime premium is not charged to
specific jobs.
 NATURE OF MANUFACTURING OVERHEAD
- Manufacturing overhead costs are generally defined as costs that are not
conveniently identified with particular orders or units of products.
- Other names used for MOH are manufacturing expenses, factory burden,
factory overhead, factory expenses and indirect manufacturing costs.
 PURPOSE OF OVERHEAD RATES
- The primary purpose of using a predetermined overhead rate is to charge a
fair share of overhead costs to each job.
- Predetermined overhead rate are used to estimate the manufacturing
overhead costs.
 DETERMINATION OF OVERHEAD RATE
 - This rate is computed by the preparation of a manufacturing overhead budget 3. Direct Material Cost Basis
based on a certain activity level. To use materials costs as a base, each product manufactured must require
- The ratio is usually called the overhead application rate. approximately the same amount of materials or materials usage must be
distributed uniformly throughout the manufacturing process.
Types of Overhead Rate Bases
1. Direct labor costs 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑖𝑛𝑔 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝐶𝑜𝑠𝑡𝑠
= Percentage of Materials
2. Direct labor hours 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝐷𝑖𝑟𝑒𝑐𝑡 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 𝐶𝑜𝑠𝑡𝑠
3. Direct material costs Costs
4. Machine hours
5. Units of production 𝑃 96,000
= 20% of materials costs
𝑃480,000
Illustration:
Assume the following budgeted data for the year: 4. Machine Hours Basis
Manufacturing overhead costs P 96,000 This basis is usually used in automated factory where machine perform most of
Number of units of production 24,000 units the work and each item goes through similar sequence of machines.
Direct material costs P480,000
Machine hours 12,000 hours 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑖𝑛𝑔 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝐶𝑜𝑠𝑡𝑠
= Rate per Machine Hour
Direct labor hours 40,000 hours 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑀𝑎𝑐ℎ𝑖𝑛𝑒 𝐻𝑜𝑢𝑟𝑠
Direct labor costs P200,000
𝑃 96,000
= P8 per machine hour
1. Direct Labor Costs Basis 12,000
The direct labor costs basis is usually used in cases where the manufacturing
overhead costs vary with direct labor costs. 5. Units of Production Basis
The units of production basis have limited uses. This rate is used only if the
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑖𝑛𝑔 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝐶𝑜𝑠𝑡𝑠 manufacturing process is a simple one and only if one type, or a few similar types,
= Percentage of Direct Labor
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝐷𝑖𝑟𝑒𝑐𝑡 𝐿𝑎𝑏𝑜𝑟 𝐶𝑜𝑠𝑡𝑠 of products are produced.
Costs
𝑃 96,000 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑖𝑛𝑔 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝐶𝑜𝑠𝑡𝑠
= 48% of direct labor costs = Overhead Cost per Unit of
𝑃200,000 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑈𝑛𝑖𝑡𝑠 𝑜𝑓 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛
Production
2. Direct Labor Hours Basis 𝑃 96,000
= P4 per unit
This method assumes that overhead costs tend to vary with the number of hours 𝑃24,000
of direct labor used.
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑖𝑛𝑔 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝐶𝑜𝑠𝑡𝑠  RECORDING MANUFACTURING OVERHEAD COSTS
= Rate per Direct Labor Hour
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝐷𝑖𝑟𝑒𝑐𝑡 𝐿𝑎𝑏𝑜𝑟 𝐻𝑜𝑢𝑟𝑠  Recording Applied Manufacturing Overhead costs
It should be noted that the Work in Process is not to be debited for any of
the actual manufacturing overhead costs.
𝑃 96,000
= P2.40 per direct labor hour
40,000 𝐻𝑟𝑠. Work in Process xxx
Manufacturing Overhead Control xxx
 SELF- CHECK TEST:
 Recording Actual Manufacturing Overhead costs  Problem 6-1
This is recorded by a debit to manufacturing overhead control account. The Pearl Company assembles and sells one product. The costs per unit are:
materials, P15; labor P17. Production for year 2020 is estimated to be 20,000 units.
 OVERAPPLIED OR UNDERAPPLIED OVERHEAD Estimated manufacturing overhead is:
 Overapplied Overhead (credit balance in MOH Control)
- Actual overhead costs < Applied overhead costs Indirect labor P22,000
Indirect materials 16,000
 Underapplied Overhead (debit balance in MOH Control) ` Depreciation 7,000
- Actual overhead costs > Applied overhead costs Light and power 5,000
Others 10,000
***Note:
At the end of the period, the balance of the Manufacturing Overhead Control Completed production for 2020 was 18,000 units and actual manufacturing overhead
account is closed to Overapplied or Underapplied Manufacturing Overhead cost was P56,500. There are no beginning or ending work in process inventories.
account in the general ledger.
Required:
Underapplied Manufacturing Overhead xxx a) The journal entries for materials, labor and overhead.
Manufacturing Overhead Control xxx b) The entry to close the over or underaplied manufacturing overhead.

Manufacturing Overhead Control xxx  Problem 6-2

Overapplied Manufacturing Overhead xxx The following data are available for the Bhelat Company on December 31,2020:

 DISPOSITION OF OVERAPPLIED OR UNDERAPPLIED MNUFACTURING Work in Process Finished Goods Cost of Goods Sold
OVERHEAD Direct materials P 4,000 P12,000 P 24,000
Direct labor 4,000 32,000 64,000
 If the amount is material or significant, the over or underapplied overhead Applied overhead 4,000 32,000 64,000
should be allocated proportionately among Work in Process, Finished goods, Total P12,000 P76,000 P152,000
and Cost of Goods Sold.
The balance of the Manufacturing Overhead Control account has been closed to Over
 If the amount is immaterial or insignificant, the over or underapplied or Underapplied Overhead account. Beginning inventories were immaterial.
overhead should be allocated directly to the Cost of Goods Sold.
Required:
 Statement of Financial Position Presentation Prepare journal entry to close the Over and Underapplied Manufacturing Overhead,
 Statement of Comprehensive Income Presentation assuming:
1. Underapplied overhead of P8,000 is to be allocated to inventories and cost of
goods sold.
2. Overapplied overhead of P8,000 is to be allocated to inventories and cost of
-End of Discussion- goods sold in proportion to the balances in those accounts.
3. Underapplied manufacturing overhead of P10,000 is allocated to cost of goods
sold.
4. Underapplied overhead of P1,000 is to be allocated to inventories and cost of
goods sold in proportion to the amounts of applied overhead contained in those
accounts.
Chapter 7:
Manufacturing Overhead – Departmentalization

 Problem 6-3 Objectives:

The normal operating capacity of Regina, Inc. is 150,000 machine hours per month,
the level used to compute the predetermined overhead application rate. At this level
of activity, fixed manufacturing overhead is estimated to be P900,000 and variable
manufacturing overhead is estimated to be P450,000. During April, actual production
required 140,000 machine hours, and actual manufacturing overhead totalled
P1,305,000.
Required:
1. Compute the manufacturing overhead application rate.
2. Is manufacturing overhead for April over-or underapplied and by how much?
3. How much is the controllable variance?
4. How much is the volume variance?
 Problem 6-4
Following are eight sets of partial manufacturing overhead data, with favourable
variances shown in parenthesis.
The learner should be able to understand and know:
 The need for departmentalization and its procedures.
 The different classifications of department and calculation of departmental
overhead application rates.
Start of Discussion
 NEED FOR DEPARTMENTALIZATION
- In large businesses, factory operations are divided into departments which is
called the departmentalization.
- Departmentalization requires the use of different overhead rates for applying
manufacturing overhead. Various amounts of manufacturing overhead are
charged to jobs or products as they pass through the different departments.

Budget  CLASSIFICATION OF DEPARTMENTS

Allowance
 Producing departments
Actual Applied Based on
- Are those departments that are directly engaged in the manufacturing
Manufacturing Manufacturing Capacity Controllable Volume
activities.
Overhead Overhead Utilized Variance Variance
a P60,000 P58,000 P64,000 ? ?  Service Departments
b ? 30,000 ? 2,000 14,000 - Are those departments that assist indirectly by rendering services to
c 48,000 48,000 ? (12,000) ? producing departments.
d ? ? 36,000 2,000 4,000
e 36,000 40,000 ? 6,000 ?
f 54,000 ? ? (12,000) (4,000)  PROCEDURES OF DEPARTMENTALIZATION
g 32,000 32,000 ? 0 ? 1. Calculate departmental predetermined overhead application rates.
2. Apply the predetermined overhead rates to production on a department basis.
Required: Complete the missing figures. 3. Record actual manufacturing overhead costs by departments in the
Departmental Overhead Analysis Sheet.
 Number of Floor Kilowatt
 METHODS OF ALLOCATING SERVICE DEPARTMENT COSTS TO Department Costs Employees Space Hours
PRODUCING DEPARTMENT Service Department
Personnel P 3,600 5 1,500 -
 Direct Method Building Maintenance 2,000 4 2,500 -
- The costs of each service department are allocated ONLY to producing Power Plant 1,000 2 4,000 -
departments.
Producing Department
Machining 11,800 10 10,000 7,000
 Step Method
Assembly 8,600 20 10,000 3,000
- Allocates service department costs to all service departments as well as
producing departments. This method allocates service costs to the Suggested Solutions:
operating departments and other service departments in a sequential  Direct Method
process.
Department Costs Machining Assembly
- The sequence of allocation generally starts with the service department
Personnel P 3,600 P 1,200 P 2,400
that has incurred the greatest costs. After this department’s costs have
Bldg. Maintenance 2,000 1,000 1,000
been allocated, the service department with the next highest costs has its
costs allocated, and so forth until the service department with the lowest
Power Plant 1,000 700 300
costs has had its costs allocated.
P 6,600 P 2,900 P 3,700
- Costs are not allocated back to a department that has already had all of
its costs allocated.
 Step Method
Allocated Costs
 Reciprocal Method Building Power
- Provides a way to adjust for the reciprocal services provided among the Department Cost Personnel Maintenance Plant Machining Assembly
service departments. Personnel P3,600 P (3,600) P 400 P 200 P1,000 P2,000
- Service department costs and service department reciprocal service Building
relationships are described by an algebraic equation. Maintenance 2,000 (2,400) 400 1,000 1,000
1,000
Illustration 1: Power Plant (1,600) 1,120 480
Assume the following data for August 2020: P6,600 P3,120 P3,480
Service Department Allocation Bases
Personnel Number of employees in each
producing department Illustration 2:
Building maintenance Floor space occupied by each Assume the following data for Departments A, B and C which provides services
producing department to each other and to producing departments X and Y.
Power plant Kilowatt hours of power usage in
Percentage of Services
producing department
Total Cost A B C X Y
A – P200,000 - 15% 5% 55% 25%
The following data for each department during August 2020 are obtained:
B – 140,000 10% - 9% 18% 63%
C – 100,000 - - - 20% 80% SELF-CHECK TEST:
 Problem 7-1
 Reciprocal Method The Vico Company has two service departments and two producing departments.
The following equations may be developed: The following are the overhead of each department:
A (costs) = P200,000 + .10B
B (costs) = P140,000 + .15A Service Department:
C (costs) = P100,000 + .05A + .09B Factory Administration P129,000
Building and Grounds 105,000
The equations may be solved algebraically as follows: Producing Department:
We can use substitution method: Machinery 416,000
1. A = P200,000 + .10B Assembly 380,000
A = P200,000 + .10 (P140,000 + .15A)
A = P200,000 + 14,000 + 0.015A Additional Information:
A - .015A = P214,000 Estimated Total Labor
Department Square Footage
.985A = P214,000 Hours
A = P214,000/ .985 Factory Administration 2,900 1,200
A = P217,259 Building and Grounds 1,100 1,500
Machinery 2,000 1,900
2. B = P140,000 + .15(P217,259) Assembly 1,600 3,200
B = P140,000 + 32,589
B = P172,589 The costs of factory administration are allocated based on estimated labor hours;
building and grounds costs are allocated based on square footage. The producing
3. C = P100,000 + .05A + .09B department uses machine hours, with 30,000 for machinery and 22,800 for assembly.
C = P100,000 + .05(P217,259) + .09(P172,589)
C = P100,000 + P10,863 + P15,533 Required:
C = P126,396 Allocate the cost of the service departments to the producing departments by using
the following methods:
a. Direct method
The allocation of costs of Service Departments A, B and C according to
b. Step method
percentage of services:
c. Reciprocal method
A B C X Y
Cost prior to allocation P200,000 P140,000 P100,000 P- P-
Allocation of A (217,259) 32,589 10,863 119,492 54,325  Problem 7-2
Allocation of B 17,259 (172,589) 15,533 31,066 108,731 The estimated departmental manufacturing for producing departments A and B and
Allocation of C ________ ________ (126,396) 25,279 101.117 the estimated costs of service departments C, D and E before any service department
Total P -0- P -0- P -0- P175,837 P264,163 allocations are:

-End of Discussion- Producing Department Service Department

 A P120,000 C P40,000 d. A company can maximize or minimize total company income by selecting
B 180,000 D 40,000 different bases in which to allocate indirect costs.
E 20,000
3. In determining the right method for allocating depreciation of equipment to
The interdependence of the departments is as follows: departments, the best recommendation is to
Service Provided by a. Use the cost of equipment in the department as a basis for allocation
Department C D E b. Allocate on the basis of square footage used in a given department
A - 30% 40% c. Charge the amounts to General Plant
B 50% 40% 30% d. Use algebraic techniques
C - 20% -
D 20% - - 4. A department that would be classified as a producing department is
E 30% 10% - a. Production control
Marketing - - 20% b. Utilities
General Office ___-___ ___-___ 10% c. Finishing
100% 100% 100% d. Shipping

5. A department that would be classifies as a service department is

Required:
a. Refining
1. Compute the final amount of estimated overhead of each service department
b. Receiving
after reciprocal transfer costs have been calculated algebraically. c. Mixing
2. Compute the total factory overhead of each producing department and the d. Assembly
amount of Department E cost assigned to Marketing Department and to General
Office. 6. The method that recognizes service department to another but does not allow
for two-way allocation costs between service department is the
a. Direct method
 Multiple Choice Question:
b. Linear method
1. The most accurate method for allocating service department costs is the c. Reciprocal method
a. Step method
d. Step method
b. Direct method
c. Reciprocal method 7. In which of the following overhead allocation methods may no other service
d. Algebraic method
department costs be charged back to a particular service department after the
first service department cost has been allocated?
2. The following statement that best describe cost allocation is
a. The reciprocal and direct method
a. A company, as a general rule, should allocate indirect costs randomly or based
b. The step and reciprocal method
on an ability to bear” criterion c. The direct and step method
b. A company’s total income will remain unchanged no matter how indirect costs
d. The step and algebraic method
are allocated
c. A company can affect total income the most strongly by using the algebraic
8. The method of overhead allocation that usually starts with the service department
method of allocating indirect costs
rendering the greatest amount of service to the greatest number of other service
 departments and the progresses in descending order to the service department
rendering services to the least number of other service department is the
a. Step method
b. Direct method
c. Step and direct method
d. Reciprocal method
9. If two service departments served the same number of other service
departments when using the step method, which service department’s costs are
allocated first?
a. The service department with the most employees.
b. The service department with the most direct costs.
c. The service department most crucial to the operation of the production
department.
10. Which one of the following characteristics does not relate to departmentalization?
a. It’s a way more than one way to divide
b. There is more than one way to divide an organization into departments
c. It’s a method of organization that does not work well with public organizations
d. Part of the advantage of departmentalization involves developing
departmental personnel expertise.
Chapter 8:
Activity Based Costing (ABC) System Method
Objectives:
The learner should be able to understand and know:
 The difference between traditional and activity-based costing.
 The benefits and limitations of ABC Systems.
 The factors that indicate the need to switch to activity based costing system.
 The hierarchy of activity levels and steps for implementing ABC.
Start of Discussion
 BROAD AVERAGING OR PEANUT-BUTTER COSTING
- Describes a costing approach that uses broad averages for assigning (or
spreading, as in spreading peanut-butter) the cost of resources uniformly to
cost objects when the individual products or services, in fact, use those
resources in non-uniform ways.
 Product undercosting
- A product consumes a high level of resources but is reported to have a low
cost per unit.
 Product overcosting
- A product consumes a low level of resources but is reported to have a high
cost per unit.
 Product cost cross-subsidization
- If a company undercosts one of its products, it will overcost at least one of
its other products.
 COSTING SYSTEM REFINEMENT
- Making changes to a simple costing system that reduces the use of broad
averages for assigning the cost of resources to cost objects and provides
better measurement of the costs of overhead resources used by different cost
objects.
- An activity-based approach refines a costing system by focusing on individual
activities as the fundamental cost objects. It uses the cost of these activities
as the basis for assigning costs to other cost objects such as products or
services.
 ACTIVITY BASED COSTING (ABC) SYSTEM
- Allocates overhead to multiple activity cost pools and assigns the activity cost
pools to products by means of cost drivers.
 Benefits of ABC:
1. ABC leads to more cost pools
2. ABC leads to enhanced control over overhead costs
3. ABC leads to better management decisions
 FOUR DECISIONS TO WHICH ABC INFORMATION IS USEFUL:
1. Pricing and product mix decisions.
 2. Cost reduction and process improvement decisions. 3. Calculate activity rates.
3. Product design decisions 4. Assign overhead costs to cost objects using the activity rates and activity
4. Decisions for planning and managing activities measures.
5. Prepare management reports.
 LIMITATIONS OF ABC:
1. ABC can be expensive  Formula:
2. Some arbitrary allocations continue 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑝𝑒𝑟 𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑦
= Activity Based Overhead Rate
𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑈𝑠𝑒 𝑜𝑓 𝐶𝑜𝑠𝑡 𝐷𝑟𝑖𝑣𝑒𝑟𝑠 𝑝𝑒𝑟 𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑦
 WHEN TO SWITCH TO ABC
The presence of one or more of the following factors indicates ABC as the superior Cost Driver is the activity that causes the incurrence of certain costs. It may be
costing system: volume-based or non-volume based.
1. Product line differ greatly in volume and manufacturing complexity.
2. Product lines are numerous, diverse and require differing degrees of support
services. Illustration 1:
3. Overhead costs constitute a significant portion of total costs.
4. The manufacturing process or the number of products has changed Traditional Costing VS. Activity Based Costing
significantly. King Company produces two products, Product XX and Product YY. Product XX is a
5. Production or marketing managers are ignoring data provided by the existing high-volume item totaling 50,000 units annually while Product YY is a low-volume
system. item totaling only 10,000 units per year. Both products require one hour of direct
labor to complete.
 HIERARCHY OF ACTIVITY LEVELS:
1. Unit-level activities The direct materials cost per unit is P80 for Product XX and P60 for Product YY with
- Are performed each time a unit is produced. direct labor cost for both products at P24 per unit. Estimated annual manufacturing
2. Batch-level activities overhead costs is P3,600,000.
- Performed each time a batch is handled or processes, regardless of Estimated overhead costs of P3,600,000 are allocated directly to each activity centers
how many units are in the batch. as shown below:
3. Product-level activities
- Relate to specific products and typically must be carried out regardless Activity Centers Estimated Overhead
of how many batches are run or units of product are run or unit of Setting up Machines P 1,200,000
product are produced and sold. Machining 2,000,000
4. Customer-level activities Inspecting 400,000
- Relate to specific customers. Total P 3,600,000
5. Organization-sustaining activities
- Carried out regardless of which customers are served, which products The cost drivers identified by King and their total expected use per activity center are
are produced, how many batches are run, or how many units are shown below:
made. Expected Use
Expected Use of
of Cost Driver
Activity Centers Cost Drivers Cost Drivers per
per Product
 STEPS FOR IMPLEMENTING ABC Activity
XX YY
1. Define activities, activity cost pools, and activity measures.
Setting up Machines Number of setups 3,000 set ups 1,000 2,000
2. Assign overhead costs to activity cost pools.
 ***Note:
Machining Machine hours 100,000 machine 60,000 40,000 In activity-based costing, activities consume resources and products consume
hours activities. We allocate the cost first to each activity then compute overhead (pool)
Inspecting Number of rates for each activity then allocate the costs of the resources to each product based
inspections 4,000 inspections 1,000 3,000 on the activities consumed.

-End of Discussion-
Suggested Solutions:
 Traditional Costing
The predetermined overhead rate is P60 per direct labor hour. SELF-CHECK TEST:
(P3,600,000/60,000 DLH)  Problem 8-1
Freshmen Corporation produces flat-screen computer monitors. Consider the following
Total Unit Cost per Product: selected costs that arose during the current year:
 Product XX - 80 + 24 + 60 = 164
 Product YY – 60 + 24 + 60 = 144 Direct materials used P 3,640,000
Plant rent, utilities and taxes 1,229,000
New technology design engineering 2,040,000
 Activity Based Costing Materials receiving 318,000
Manufacturing run/ set-up charges 115,000
Estimated Propo ABC Allocation per Product Equipment depreciation 92,000
Activity Centers General management salaries 1,564,000
Overhead rtion XX YY
Setting up Machines P1,200,000 1/3 P 400,000
2/3 P 800,000 Required: Determine the cost of the firm’s
Machining 2,000,000 6/10 1,200,000 1. Unit-level activities
4/10 800,000 2. Batch-level activities
Inspecting 400,000 1/4 3. Product-sustaining activities
100,000
3/4 4. Facility-level activities
300,000
Total Allocated OH Costs P3,600,000 P 1,700,000 P 1,900,000
Divided by Units Produced 50,000 10,000
Overhead Cost per Unit P 34.00 P 190.00  Problem 8-2
Owel Spray Paints, Inc. has used a traditional cost accounting system to apply
Total Unit Cost per Product: quality-control costs uniformly to all products at a rate of 16 percent of direct-labor
 Product XX - 80 + 24 + 34 = 138 cost. Monthly direct labor cost for the enamel paint line is P98,000. In an attempt to
 Product YY – 60 + 24 + 190 = 274 more equitably distribute quality control cost, Owel is considering activity based
costing. The monthly data shown in the following chart have been gathered for the
 Comparison of Traditional and ABC System enamel paint line.
The units under traditional costing are significantly distorted. The cost of
producing Product XX is overstated by P26 per unit (P164-138) and the cost of
producing Product YY is understated by P130 (P274-144).
 Job 215 Job 325 Quantity of Driver for
Number of purchase orders 25 8 Activity Cost Pool Cost Driver Pool Rates
Enamel Paint
Number of material moves 10 4 Incoming material
Type of material P23 per type 24 types
Machine-hours 40 60 inspection
Required:
Number of inspections 9 3 In-process inspection Number of units 0.28 per unit 35,000 units
1. Calculate
Units produced 15 6 Product certification Number of orders 144 per order 50 orders
the monthly
quality-control cost to be assigned to the enamel point line under each of the
following product-costing system.
a. Traditional system which assigns overhead on the basis of direct-labor cost. REQUIRED:
b. Activity-based costing a. Compute the total overhead allocated to each job under a simple costing
system, where overhead is allocated based on machine-hours.
2. Does the traditional product-costing system overcost or undercost the enamel b. Compute the total overhead allocated to each job under an activity based
paint line with respect to quality-control costs? By what amount? costing system using the appropriate activity drivers.
c. Explain why Smith’s Custom Framing might favor the ABC job costing
system over the simple job costing system, especially in its bidding process.
 Problem 8-3
The job costing system at Fel’s Custom Framing has five indirect cost pools  Problem 8-4
(purchasing, materil handling, machine maintenance, product inspection, and Hazelnut Company uses activity-based costing. The company produces two
packaging). The company is in the process of bidding on two jobs; Job 215, an order products: coats and hats. The annual production and sales volume of coats is
of 15 intricate personalized frames and Job 325, an order of 6 standard personalized 8,000 units and of hats is 6,000 units. There are three activity cost pools with the
frames. The controller wants to compare overhead allocated under the current following expected activities and estimated total costs:
simple job-costing system and a newly-designed activity-based job costing system.
Expected Expected
Activity Estimated
Activity Activity Total
Cost Pool Cost
Total budgeted costs in each indirect cost pool and the budgeted quantity of activity Coats Hats
driver are as follows:
Budgeted Quantity of Activity 1 P20,000 100 400 500
Budgeted Overhead Activity Driver Activity driver
Activity 2 P37,000 800 200 1,000
Purchasing P 70,000 Purchase orders processed 2,000
Material Handling 87,500 Material moves 5,000 Activity 3 P91,200 800 3,000 3,800
Machine maintenance 237,500 Machine hours 10,500
Product inspection 18,900 Inspections 1,200
Packaging 39,900 Units produced 3,800 Required:
P453,600 Using ABC, the cost per unit of coats and hats are approximately?

Information related to Job 215 and Job 325 follows. Job 215 incurs more batch-
level costs because it uses more types of materials that need to be purchased,
moved, and inspected relative to Job 325.
Chapter 9: - In most cases, these losses originated from lack of quality control and should
be prevented if not estimated at all.
Completing the Cost Cycle and Accounting for Production
Losses  ACCOUNTING FOR SCRAP
Scrap – is the residue of manufacturing process. These are materials left over
Objectives:
when making a product. Scrap materials often has a value.
The learner should be able to understand and know:
 The last two steps in the job order cost accounting cycle: accounting for the
completion of goods and accounting for the sale of goods.  Recognizing Scrap at the Time of Sale
 How to account for the production losses such as scrap, spoiled goods and  If the value of scrap is low or immaterial:
defective goods. Cash/Accounts Receivable xxx
Scrap Revenues xxx

Start of Discussion  If the value of scrap is material and the scrap is sold quickly after it is
produced, the accounting depends on whether:

 COMPLETING THE COST CYCLE a) Scrap is Attributable to a Specific Job

- When jobs are completed, the finished goods are moved from the factory to Cash/ Accounts Receivable xxx
the warehouse. This chapter will describe how warehousing and selling Work in Process Inventory xxx
operations are controlled thru costs records and reports.
b) Scrap is Common to All Jobs
 Recording Jobs Completed Cash/ Accounts Receivable xxx
The cost of the jobs completed is recorded by the following entry: Manufacturing Overhead Control xxx
Finished Goods Inventory xxx
Work in Process xxx  Recognizing Scrap at the Time of its Production
 At the time of its production, scrap materials returned to storeroom is
 Recording Sales of Finished Goods recorded as follows:
Accounts Receivable/Cash xxx
Sales xxx a) Scrap is Attributable to a Specific Job
Scrap Inventory xxx
Cost of Goods Sold xxx Work in Process Inventory xxx
Finished Goods Inventory xxx
b) Scrap is Common to All Jobs
 ACCOUNTING FOR PRODUCTION LOSSES IN A JOB ORDER COSTING Scrap Inventory xxx
SYSTEM Manufacturing Overhead Control xxx
- Production losses that happens in the manufacturing process includes cost of
scrap materials, spoiled goods, and reworking defective goods.
 When the scrap is sold, the journal entry is:
 Cash/ Accounts Receivable xxx 1) To removed estimated disposal value of spoiled goods from Work in
Scrap Inventory xxx Process:
Spoiled Goods Inventory 30,000
***Note: When the scrap is sold for more or less than the value at which it Work in Process Inventory 30,000
is recorded. Any difference is treated as an adjustment to the account that
was originally credited (Work in Process Inventory or Manufacturing 2) To record the cost of the completed inventory.
Overhead Control). Finished Goods Inventory 1.026,000
Work in Process Inventory 1,026,000
 If the scrap is reused as direct materials rather than sold as scrap:
Materials xxx  Spoilage Common to All Jobs (Due to Internal Failure)
Manufacturing Overhead Control xxx 1) To record estimated sales value of spoiled goods and charged loss to MOH
control:
Work in Process Inventory xxx Spoiled Goods Inventory 30,000
Materials xxx Manufacturing Overhead Control 22,800
Work in Process Inventory 52,800
 ACCOUNTING FOR SPOILED GOODS
Spoiled goods are goods that have been damaged through imperfect machining 2) To record the cost of the completed good inventory.
or processing. Spoiled goods cannot be corrected because it is not technically Finished Goods Inventory 1.003,200
possible or economical to correct them. Work in Process Inventory 1,003,200
Illustration:
Assume that Job 911 calls for the production of 200 painted office tables. These  Comparison of the Accounting Treatment:
tables were put into production and costs accumulated to date are as follows: Spoiled Cost Charged to
Particular Job All Production
Materials P 456,000
Total Cost of 200 tables P 1,056,000 P 1,056,000
Direct labor 240,000
Applied overhead (150% of DL cost) 360,000 Less: Scrap Value of Job 911 30,000 -
Total cost charged to Job 911 P1,056,000 All Production _____-____ 52,800
Cost of Good Tables 1,026,000 1,003,200
Unit cost (P1,056,000/200) P 5,280.00 Divided by Good Tables 190 190
Unit Cost of good tables P 5,400 P 5,280
Suppose that the ten tables are spoiled because the lumber used was improperly
cured. These spoiled tables may be sold as seconds at its net disposal value of
P3,000 each.
 ACCOUNTING FOR DEFECTIVE GOODS (Rework Costs)
Defective goods are units of production that fail to meet production standards
 Spoilage Attributable to a Specific Job ( Due to Customer Specifications)
but that can be brought up to standard by adding more materials, labor and
overhead.
Rework costs are the additional costs required to bring defective goods to Reworked Cost Charged to
standard. Specific Job All Jobs
Total Cost of 200 tables P 1,056,000 P 1,056,000
Illustration:
Assume the ten spoiled tables from the previous illustration are reworked. The Add: Rework Costs _____9,500 _________
journal entry to record the total costs of the ten spoiled goods before considering Cost of Good Tables P 1,065,500 P1,056,000
rework costs is: Divided by Good Tables _______200 ______200
Unit Cost of good tables P 5,327.50 P 5,280
Work in Process Inventory 52,800
Materials 22,800
Payroll 12,000
-End of Discussion-
Applied Mfg. Overhead 18,000
SELF-CHECK TEST:
Assume that the ten spoiled tables are reworked. The additional costs of
 Multiple Choice Questions:
reworking the tables equal P9,500 of which P2,000 direct materials, P3,000 direct
1. In a job-order costing, the disposal value of spoilage that is common to all jobs
labor and P4,500 manufacturing overhead.
should be credited to
a. Materials
 Rework Cost charged to Specific Job
b. Work in Process
1) To record rework costs of 10 tables:
c. Manufacturing Overhead
Work in Process Inventory 9,500
d. Applied Manufacturing Overhead
Materials 2,000
Payroll 3,000
2. In a job-order costing, the cost incurred to rework unit that are common to all
Applied Mfg. Overhead 4,500
jobs should be debited to:
a. Materials
2) To record cost of ten tables transferred to Finished goods after reworked
b. Work in Process
is done.
c. Manufacturing Overhead
Finished Goods Inventory 62,300
d. Applied Manufacturing Overhead
Work in Process Inventory 62,300
3. In a job-order costing, the recovery value of scrap that is significant in economic
 Rework Cost Charged to All Jobs
value, abnormal, and due to the nature of particular jobs should be credited to
Manufacturing Overhead Control 9,500
a. Materials
Materials 2,000
b. Work in Process
Payroll 3,000
c. Manufacturing overhead
Applied Mfg. Overhead 4,500
d. Loss from Abnormal Spoilage

 Comparison of the Accounting Treatment

4. In a job-order cost system, the cost incurred to rework units that are normal and
due to the nature of particular jobs should be debited to:
 a. Materials b. Finished goods that do not meet quality control standards and cannot be
b. Work in Process reworked
c. Manufacturing Overhead c. Defective units that may be used or sold.
d. Applied Manufacturing Overhead d. Raw materials remaining from the production cycle but usable for purposes
other than the original purpose.
5. In a job-order costing system, the disposal value of spoilage that is normal and
due to the nature of particular jobs should be debited to 10. A product that does not meet quality control standards and needs to be reworked
a. Materials to be saleable as either an irregular or a good product is classified as
b. Work in Process a. Spoiled goods
c. Manufacturing Overhead b. Defective units
d. Applied Manufacturing Overhead c. Scrap materials
d. Waste material
6. Scrap materials consists of
a. Defective units that may be used or sold
b. Raw materials remaining from the production cycle but usable for purposes
other than the original purpose
c. Raw materials remaining from the production cycle but not usable for any  Problem 9-1
purpose. The Freshy Now Metal Fabricators, Inc. accumulates fairly large quantities of metal
d. Finished goods that do not meet quality control standards and cannot be shavings and trimmings from the products it manufactures. At least once a month,
reworked. the scrap metal is sold to a local producer for further processing. This month’s scrap
sales on account total P2,500.
7. The sale of scrap from a manufacturing process is recorded as a/an
a. Decrease in manufacturing overhead control Required:
b. Increase in manufacturing overhead control Give the appropriate journal entry to record the sale of the scrap for each of the
c. Decrease in finished goods control following alternatives:
d. Increase in finished goods control 1. The scrap sales are viewed as additional revenue.
2. The scrap sales are viewed as a reduction of the cost of goods sold during the
8. Assuming the value of scrap sales is material, when it is not necessary to record month.
the value of scrap in inventory as it is produced? 3. The scrap sales are viewed as a reduction of manufacturing overhead control.
a. When it is sold regularly 4. The scrap sales are traceable to individual jobs and are viewed as a reduction in
b. When the unit value fluctuates the cost of materials used on the jobs.
c. If it is recognized as miscellaneous revenue
d. If it is recognized as an offset to overhead
 Problem 9-2
9. Waste materials consist of Haggard Later Company uses a job-order cost system to account for its production
a. Raw materials remaining from the production cycle but not usable for any costs. During the current period, 2,000 plastic tables were molded and assembled on
purpose. Job 209. The total cost incurred on the job is:
 Materials P24,000
Labor (1,000 hours hrs. x P10 per hr.) 10,000
 Problem 9-4
Manufacturing overhead (P20 per labor hour) 20,000
MG Housing, Inc. manufactures tiles for housing companies. During the current
Total Cost charged to Job 209 P54,000
period, an order for 2,000 tiles was begun on Job 777 for Lumilla Homes. Jobs are
marked up 150 percent of cost. Total costs charged to Job 777 are:
Before being transferred to Finished Goods Inventory, the plastic tables were
inspected and 100 were found to be spoiled. The spoiled plastic tables cannot be
Materials P184,000
reworked because the defects are embedded in the plastics; however, they can be
Labor (6,000 hours @ P12 per hour) 72,000
sold at P10 each. The company maintains a separate Spoiled Goods Inventory
Manufacturing overhead (P24 per labor hour) 144,000
account for defective products and charges the unrecoverable cost of spoilage to
Factory Overhead Control.
On inspection, 200 units of the tiles were found to have defects. Materials costing P4
and 30 minutes are required to correct each defective unit. Manufacturing overhead
Required:
is charged is charged to production on the basis of direct labor hours.
1. Give the appropriate journal entries to record the total cost of Job 209, the
spoilage cost and the transfer of goods to an inventory account.
Required:
2. Determine the unit cost for each plastic table.
1. Assuming that the defective units are the result of an internal failure:
a. Give the journal entries to record the total costs of Job 777, the rework costs
and the transfer of goods to inventory account.
 Problem 9-3
b. Determine the unit cost for each unit manufactured.
BGC Melting and Repair Shop, is a special order manufacturer of metal products.
2. Assuming that the defective units are the result of a change in specifications after
Each period the company accumulates fairly large quantities of metal shavings and
the units are completed:
trimmings from the products it manufactures. At least once a month, the scrap metal
a. Give the journal entries to record the total costs of Job 777, the rework costs
will be melted and sold at a local dealer. This month scrap sales total P1,100, during
and the transfer of goods to an inventory account.
the current period 400 door facings were cut to an incorrect size on Job 345 and had
b. Determine the unit cost for each unit manufactured.
to be replaced. Although, the defective facings cannot be used on Job 345, they can
be sold as seconds for P4.50 each. The cost of cutting the 400 defective facings is:
LEARNING RESOURCES:
Materials P2,400
Labor (20hours @ P15 per hour) 300 1. Principles and Procedural Applications
Manufacturing overhead (20 hours @ P45 per hour) 900 Cost Accounting
Required: Pedro P. Guerrero
1. Prepare the journal entry to credit Job 345 for the cost of the spoiled door
facings and to record the transfer of the spoiled door facings to Spoiled Goods 2. Cost Accounting
Inventory at their salvage value. Guillermo M. De Leon Jr.
2. Prepare the journal entry to record the sale on account of all the scrap
accumulated during the period and the spoiled goods in inventory. Norma D. De Leon