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p2 - Guerrero Ch13 PDF Cost of Goods Sold I
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p2 - Guerrero Ch13
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Chapter 13
Candidates should have sound knowledge on the following types of problems involving job order
costing:
Statement of Cost of Goods Manufactured refers to the cost of the jobs completed whether
they were started before or during the current accounting period. In the preparation of the
statement, candidate should know the presentation of the following cost elements:
1. Direct materials. These are materials which become an integral part of the finished
product.
2. Direct labor. This represents the labor which acts directly on the product and
physically transforms the product by machine.
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3. Manufacturing overhead. This consists of all product costs other than direct
materials and direct labor costs.
4. Prime cost. This is the sum of direct materials and direct labor costs.
5. Conversion cost. This is the sum of direct labor cost and manufacturing overhead.
6. Manufacturing cost. This is the sum of direct materials, direct labor and
manufacturing overhead costs.
7. Under-applied or over-applied manufacturing overhead. This is the difference
between the actual overhead incurred and the applied (estimated) overhead.
Service departments benefit the manufacture of products even though they are not directly
involved in converting raw materials into finished goods. For this reason, service department
costs must be reallocated to producing departments, both in computing predetermined
overhead rates and in measuring actual overhead costs of producing deparments.
1. Direct method. Under this method, the cost of each service department is allocated
directly to producing departments.
2. Step-down method. This method involves allocation of service department costs to
both service and producing department. Costs of the most widely used service
department or the department with the highest total cost are first allocated to all
other departments. The costs of the next most widely-used service department are
then allocated. These costs will include those previously allocated from the first
department. These steps continue until all service department costs have been
allocated. Once a service department costs have been allocated, no further
allocation are made to it from other departments.
3. Reciprocal method. This method allocates costs by explicitly including the mutual
services provided among all service departments. For example, the Service
Department 1 maintains all the computer equipment in Service Department 2.
Similarly, Service Department 2 also provides database support for Department 1.
The reciprocal allocation method fully incorporates interdepartmental relationships
into the service department cost allocation.
SPOILAGE
These are units that do not meet production standards. Spoilage may be normal or abnormal.
Costs of abnormal spoilage are not considered to be inventoriable costs and are written off as
costs of the period during which the abnormal spoilage is detected. Normal spoilage costs are
inventoriable costs. When assigning costs, job-costing system generally distinguish normal
spoilage attributable to a specific job from normal spoilage common to all jobs.
To illustrate the accounting for spoilage in job order costing, assume the following example.
In the Iraq Machine Shop, 5 units out of job lot of 50 units are spoiled. Costs assigned prior to
the inspection point are P2,000 per unit. Our presentation here focuses on how the P2,000 cost
per unit is accounted for. When the spoilage is detected, the spoiled goods are inventoried at
P600 per unit, the net disposal value.
Normal spoilage attributable to a specific job. When normal spoilage occurs because of
customer’s specification of a particular job, that job bears the cost of spoilage reduced by the
disposal value of the spoilage. The journal entry to recognize disposal value is:
Note: the Work in Process account has already been debited (charged) P10,000 for the spoiled
units (5 x P2,000). The effect of the P3,000 entry is to make the net cost of normal spoilage,
P7,000 (10,000 – 3,000), an additional cost of the 45 (50 - 5) good units produced. The total
cost of the 45 good units is P97,000, comprising P90,000 (45 units x P2,000) incurred to
produce the good units plus the P7,000 net cost of abnormal spoilage. The cost per good units
is P2,155.56 (P97,000 / 45 good units).
Normal spoilage common to all jobs. In some cases, spoilage may be due to internal failure.
The spoilage inherent in production will, of course, occur when a specific job is worked on. But
the spoilage is not attributable to, and hence, is not charged to the specific job. Instead, the
spoilage is costed as manufacturing overhead. The journal entry is:
Abnormal spoilage. If the spoilage is abnormal, the net loss is charged to an abnormal loss
account. Unlike normal spoilage costs, abnormal spoilage costs are not included as part of the
cost of good units produce. The total cost of the 45 units is P90,000 (45 units x P2,000). The
cost per good unit is P2,000 (P90,000 / 45 good units). The entry is:
REWORK
Rework is units of production that are inspected, determined to be unacceptable, repaired, and
sold as acceptable finished goods. We again distinguish (1) normal rework attributable to a
specific job, (2) normal rework common to all jobs, and (3) abnormal rework.
To illustrate, consider the Iraq Machine Shop data. Assume the five spoiled units are reworked.
The journal entry for the P10,000 of total costs (the details of these costs are assumed)
assigned to the five spoiled before considering rework costs is:
Assume the rework costs equal P3,800 (compose of P800 direct materials, P2,000 direct labor,
and P1,000 manufacturing overhead).
Normal rework attributable to a specific job. If the rework is normal but occurs because of
customer’s specification in the specific job, the rework costs are charged to that job. The
journal entry is:
Normal rework common to all jobs. When rework is normal and not attributable to a specific
job, the costs of rework are charged to manufacturing overhead and spread, through overhead
allocation, over all jobs. The journal entry is:
PROBLEMS
1. Maganda Company manufactures pipes and uses a job order costing system. During May,
the following jobs were started (no other jobs were in process) and the following costs were
incurred:
a. Work-in-process P79,500
Material P45,000
Wages payable 11,500
Applied factory overhead 23,000
b. Work-in-process 80,500
Direct materials 45,000
Direct labor 11,500
Factory overhead 24,000
c. Work-in-process 80,500
Direct materials 45,000
Direct labor 11,500
Applied factory overhead 24,000
d. Direct labor 11,500
Direct materials 45,000
Work-in-process 56,500
2. Malakas Company is a manufacturing concern using the perpetual inventory system. The
following materials inventory account data is provided:
Beginning balance P275,000
Other debts to the account 835,000
Excess of ending inventory over beginning inventory 55,000
How much is the cost of materials issued to production?
a. P770,000
b. 1,045,000
c. 1,100,000
d. 1,155,000
3. The books of Chico Manufacturing Co. showed the following data for the month of October
2013:
5. Mangga, Inc. employs a job order cost system, Its manufacturing activities in July, 2013, its
first month of operation, are summarized as follows:
JOB NUMBERS
201 202 203 204
6. The Atis Corporation manufactures one product and accounts for cost by a job order
system. You have obtained the following information for the year ended December 31,
2013 from the corporation's books and records:
What is the cost of direct materials used for year ended December 31, 2013?
a. P370,000
b. 970,000
c. 990,000
d. 970,500
7. The Papaya Company uses a job order cost system. The following data were obtained from
the company's cost records as of June 30. No jobs were in process at the beginning of June,
all costs listed being incurred during the month.
Job Order No. Direct Materials Direct Labor Hours Direct Labor Cost
1001 P4,320 1,300 P1,600
Manufacturing overhead costs are charged to jobs on the basis of P1.50 per direct labor
hour. The actual manufacturing overhead cost for the month totalled P30,350. During June,
Job Order Nos. 1001, 1002, 1004 and 1005 were completed. Jobs 1001 and 1002 were
shipped out and the customers were billed P9,000 for Job 1001 and P20,000 for Job 1002.
On August 1, 2013, its work in process inventory (5 partially completed jobs) had a cost of
P3,000.
During August, no additional orders were put into production and 18 orders were
completed (total cost, P24,000) of which 14 (cost P20,000) were shipped.
Material requisition in August totalled P17,000 and direct labor cost were P8,000 at the
beginning of the year, 2013, a predetermined overhead rate of 150% of expected direct
labor cots was established.
9. Job No, 210 has, at the end of the second week in February, an accumulated total cost of
P4,200. In the third week, P1,000 of direct materials were used on the Job, together with
P10 of indirect materials.
Twenty (20) hours of direct labor services were applied to the job at a cost of P5 per hour.
Manufacturing overhead was applied at the basis of P2.50 per direct labor hour for fixed
overhead and P2 per hour variable overhead.
Job No. 210 was the only job completed during the third week.
10. Peanuts Corporation uses a job-order cost system and has two production departments, M
and A, budgeted manufacturing costs for 2013 are as follows:
Department Department
M A
Direct materials P700,000 P100,000
Direct labor 200,000 800,000
Manufacturing overhead 600,000 400,000
The actual material and labor costs charged to Job No. 432 during 2013 were as follows:
Direct material P25,000
Direct labor:
Department M P8,000
Department A 12,000 20,000
Peanuts Corporation applies manufacturing overhead to production orders on the basis of
direct-labor cost using departmental rates predetermined at the beginning of the year
based on the annual budget. The total manufacturing cost associated with Job No. 432 for
2013 should be:
a. P50,000
b. 55,000
c. 65,000
d. 75,000
11. Banana Corporation has a job order cost system. The following debits (credits) appeared in
the ledger account work in process for the month of March, 2013:
March 1, Balance P12,000
31, Direct materials 40,000
31, Direct labor 30,000
31, Factory overhead 27,000
31, To finished goods (100,000)
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Banana applied overhead to production at a predetermined rate at 90% based on the direct
labor cost. Job No.232, the only job still in process at the end of March, 2013, has been
charged with factory overhead of P2,250. What was the amount of direct materials charged
to Jon No.232>
a. P2,250
b. P2,500
c. P4,250
d. P9,000
12. The work-in-process account of the Matamis Company which uses a job order cost system
follows:
Work-In-Process
April 1 Balance P25,000 Finished Goods P125,450
Direct Materials 50,000
Direct labor 40,000
Fac. Overhead Applied 30,000
a. P8,700
b. P7,600
c. P4,500
d. P4,200
13. The following data were taken from the records of Sampaloc Company:
08/31/2013 09/30/2013
Inventories:
Raw Materials P ? P50,000
Work in process 80,000 95,000
Finished goods 60,000 78,000
14. Macopa Corporation manufactures rattan furnitures sets for export and uses the job order
cost system in accounting for its costs. You obtained from the corporation’s books and
records the following information for the year ended December 31,2013:
- The work in process inventory on January 1 was 20% less than the work in process
inventory on December 31.
- The total manufacturing cost added during 2013 was P900,000 based on actual direct
materials and direct labor but with manufacturing overhead applied on actual direct
labor pesos.
- The manufacturing overhead applied to process was 72% of the direct labor pesos, and
it was equal to 25% of the total manufacturing costs.
- The cost of goods manufactured, also based on actual direct labor and applied
manufacturing overhead, was P850,000.
The cost of direct materials used and the work in process inventory on December 31, 2011 are:
On September 30,2013, finished goods completed, from work in process cost P160,000.
Job No. 327 was the only job not completed in September, and it has been charged P4,600
for factory overhead.
16. Pears Factory uses a job order cost system. Per company records, the total charges to work-
in-process in March 2013 were as follows:
No jobs were in process at the beginning of the month. During the month, work in process in
the amount of P310,500 was charged to finished goods. On March31,2012, the only job order
remaining was Job No., 100 with a direct labor cost of P10,000.
17. The factory ledger of the Malave Co. contains the following account:
Goods in Process
Materials P40,000 Finished Goods P120,000
Labor 100,000
Overhead 80,000
The amounts of labor and overhead charges for the uncompleted job are:
Labor Overhead
a. P40,000 P32,000
b. P32,000 P40,000
c. P72,000 P40,000
d. P40,000 P72,000
April 1 April 30
Direct materials P36,000 P45,000
Work in process 18,000 26,000
Finished goods 54,000 72,000
The following information were available for April 2013:
a. P81,650
b. P80,000
c. P90,000
d. P96,000
19. Kasoy Company has underapplied overhead of P45,000 for the year ended December
31,2013. Before disposition of the underapplied overhead, selected December 31,2013
balances from Worley’s accounting records are as follows:
Sales P1,200,000
Cost of goods sold 720,000
Inventories:
Direct materials 36,000
Work in process 54,000
Finished goods 90,000
a. P682,500
b. P684,000
c. P756,000
d. P757,500
20. Orange Company uses a job order cost system and applies factory overhead to production
orders on the basis of direct labor cost. The overhead rates for 2013 are 200% of
Department A and 50% for Department B. Job NO.123, started and completed during 2013,
was charged with the following costs:
Department
A B
Direct materials P25,000 P5,000
Direct labor ? 30,000
Factory overhead 40,000 ?
The total manufacturing cost associated with Job 123 should be:
a. P135,000
b. P180,000
c. P195,000
d. P240,000
21. Sampaguita Company uses a job order cost system. The following debits(credits) appeared
in Sampaguita’s work in process account for the month of April 2013:
a. P3,000
b. P5,200
c. P8,800
d. P24,000
22. Narra Marketing Corp. uses a job order cost system. It has three production departments, X,
Y and Z. the manufacturing budget cost for 2013 is a sfollows:
a. P235,000
b. P310,000
c. P280,000
d. P150,000
23. Accacia Crafts manufactures to customer order using the job order cost system. For the
month just ended, it registered the following data:
24. The accounting records for 2013 of Yamaha Music Co. showed the following:
Increase in raw materials inventory P45,000
Decrease in finished goods inventory 150,000
Raw materials purchased 1,290,000
Direct labor payroll 600,000
Factory overhead 900,000
Freight-out 135,000
The cost of raw materials used for the period amounted to:
a. P1,245,000
b. P1,290,000
c. P1,335,000
d. P1,380,000
25. The following information relates to Job No. 2468, which is being carried out by Matibay
Company to meet customer’s order.
Department A Department B
Direct materials consumed P5,000 P3,000
Direct labor hours employed 400 200
Direct labor rate per hour 4 5
Production overhead per direct labor hours 4 4
Administrative and other overhead 20% of full production cost
Profit mark up 25% of selling price
What is the selling price to the customer of Job 2468?
a. P16,250
b. P20,800
c. P17,333
d. P19,810
26. The Handyman Corp. manufactures specialized precision tools for the electronics industry. It
receives various job orders. For the month of April, it started work in two orders, East and
West. The total materials cost for both orders were estimated at P80,000 of which 60%
applies to East and 40% to West. Direct labor hours were estimated at 700 for East and 400
for West. The labor rate amounted to P18 per hour. Variable overhead varies at the rate of
P10 per hour.
By the end of April, 75% of the required materials were issued to production amounting to
P90,000. Also, the two orders were all 50% completed with respect to labor and overhead.
Labor hours for the month were charged at 360 to East and 180 to West. Variable overhead
equated to the hourly rate given.
The total actual cost for East order for the month of April is:
a. P64,080
b. P45,800
c. P52,350
d. P67,600
27. Last month, Sago Company placed P60,000 of materials into production. The Printing
Department used 8,000 labor hours at P5.60 per hour and the Binding Department used
4,600 hours at P6.00 per hour. Factory overhead is applied at a rate of P6.00 per labor hour
in the Printing Department and P8.00 per labor hour in the Printing Department. Sago’s
inventory accounts show the following balances:
Beginning Ending
Finished goods P22,000 P17,000
Work in process 15,000 17,600
Materials 20,000 18,000
What is the cost of goods sold at normal costing?
a. P219,600
b. P214,600
c. P108,000
d. P217,200
28. Banaba Company provided the inventory balances and manufacturing cost data for the
month of January.
Under the Banaba’s cost system, any over or underapplied overhead is closed to the cost of
goods sold account at the end of the calendar year.
Inventories January 1 January 31
Direct materials P30,000 P40,000
Work in process 15,000 20,000
Finished goods 65,000 50,000
Month of January
Factory overhead applied P150,000
Cost of goods manufactured 515,000
Direct materials used 190,900
Actual factory overhead 144,.000
What is the cost of goods sold at actual costing?
a. P509,000
b. P524,000
c. P530,000
d. P536,000
29. Polo Company’s Job 501 for the manufacture of P2,200 shoes was completed during August
2013 at the following unit costs:
Direct materials P20
Direct labor 18
Factory overhead (includes an allowance of P1 for spoiled work) 18
Final inspection of Job 501 disclosed 200 spoiled shoes which were sold to a department
store for P6,000.
What would be the unit cost of the goods shoes produced on Job 501 if spoiled loss is
charged to:
All Production Specific Job 501
a. P56.00 P57.50
b. P53.00 P57.50
c. P56.00 P56.00
d. P53.00 P55.00
During March Trinity Company incurred the following costs on Job Order 111 for manufacturing
of 200 units:
30. The rework costs were attributable to the exacting specifications of Job Order 111 and the
full rework costs were charged to the specific job. What is the cost per finished unit of Job
Order 111?
a. P15.80
b. P14.60
c. P14.00
d. P13.30
31. Assuming the rework costs were attributable to internal failure, what is the cost per
finished unit of Job 109?
a. P15.80
b. P14.60
c. P14.00
d. P13.30
32. True Value Company manufactures electric drills to the exact specifications of various
customers. During April 2013, Job 403 for the production of 1,100 units was completed at
the following costs per unit:
Direct materials P10
Direct labor 8
Applied factory overhead 12
Total P30
Final inspection of Job 403 disclosed 50 defective units and 100 spoiled units. The defective
units were reworked at a total cost of P500, and the spoiled units were sold to an employee
for P1,500. What should be the unit cost of the good units produced on Job 403?
a. P33
b. P32
c. P30
d. P29
33. Some units of output failed to pass final inspection at he end of the manufacturing process.
The production and inspection supervisors determined that the incremental revenue from
reworking the units exceeded the cost of rework. The rework of the defective units was
authorized, and the following costs were incurred in working the units:
Materials requisitioned from stores:
Direct materials P5,000
Indirect materials 300
Direct labor 14,000
The manufacturing overhead budget includes an allowance for rework. The predetermined
manufacturing overhead rate is 150% of direct labor cost. The account(s) to be charged and
the appropriate charges for the rework cost would be:
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What is the total allocated service departmental costs to PP2 if the company uses the
reciprocal method of allocating the service department costs? (Round computations to the
nearest whole number).
a. P19,800
b. P21,949
c. P22,500
d. P23,051
Question 42-44 are based on the following data:
Baby Company’s beginning and ending inventories for the month of November are:
November 1 November 30
Direct materials P67,000 P62,000
Work in process 145,000 171,000
Finished goods 85,000 78,000
Production data for the month of November follows:
Direct labor P200,000
Actual factory overhead 132,000
Direct materials purchased 163,000
Transportation in 4,000
Purchase returns and allowances 2,000
Baby uses one of the factory overhead control account and charges factory overhead to
production at 70% of direct labor cost. The company does not formally recognize
over/under applies overhead until year-end.
42. Baby Company’s prime cost for November is:
a. P370,000
b. P168,000
c. P363,000
d. P170,000
43. Baby Company’s cost of goods sold for November is:
a. P484,000
b. P491,000
c. P502,000
d. P476,000
44. Baby Company’s net charge to factory overhead control for the month of November is:
a. P8,000 debit, overapplied
b. P8,000 debit, underapplied
c. P8,000 credit, overapplied
d. P8,000 credit, underapplied
J & P tool Inc. has three service departments that support the production area. Outlined
below is the estimated overhead by department for the upcoming year.
Estimated Number of
Service Departments Overhead Employees
Receiving P25,000 2
Repair 35,000 2
Tool 10,000 1
Production Departments
Assembly 25
Boiling 12
The Repair Department supports the greatest of departments, followed by the Tool
Department. Overhead cost is allocated to departments based upon the number of
employees.
45. Using the direct method of allocation, how much of the Repair Department overhead will
be allocated to the Tool Department?
a. Zero
b. P875
c. P7,000
d. P11,667
46. Using the step-down method of allocation, the allocation from the Repair Department to
the Tool Department would be:
a. Zero
b. P875
c. P7,000
d. P11,667
Roque Metal Shop Inc., manufactures metal products that require casting, such as engine
blocks, pistons, and engine housings. During the current year, an order of 30,000 custom
housing was begun on job number 202 for Mr. German. After the job was completed, the
housing was inspected and 4% of the units were determined to be defective. Mr.German
agreed to accept the goods units only at 140% of cost. The spoilerd units can be sold as seconds
for P15 each. Spoiled goods are kept in an inventory account separate from finished goods.
Materials P276,000
Labor (6,000 hours x P14 per hour) 84,000
Factory overhead (P30 per labor hour) 180,000
47. If the spoilage units are the result of an internal failure, what is the unit cost of good units?
a. P18.00
b. P19.50
c. P18.50
d. P19.00’
48. If the spoilage is attributable to Job 202 only, what is the unit selling price of the good units?
a. P25.375
b. P20.50
c. P25.00
d. P20.375
Use the following data for Question 49 and 50.
Muscle Machine Shop manufactures lifting equipment. One order from Simmer’s World for 200
lifting equipment showed the following costs per unit:
Materials P400
Labor 175
Factory overhead, 160% of direct labor cost (150% in
Cases in which any defective unit costs are to
Charged to a specific order).
Final inspection revealed that 15 of the units were not properly produced. Correction of each
defective unit requires P50 for materials, P80 for labor, and factory overhead at the appropriate
rate.
49. Assuming cost of defective units is charged to all the jobs, what is the unitr cost of finished
goods?
a. P650
b. P640
c. P655
d. P550
50. Assuming cost of defective units is charged to the job order, what is the unit cost of each
unit manufactured?
a. P674.85
b. P475.50
c. P656.25
d. P690.50
ANSWERS
1. Under normal costing, the Work in Process account is debited for the total manufacturing
costs of P79,500. The corresponding credit are: the Material account at actual costs of material
used of P45,000, Wages Payable account at actual cost of direct labor P11,500, and Applied
Manufacturing Overhead at estimated amount of P23,000 (P11,500 x 2). Therefore entry (a) is
correct.
3. Computed as follows:
5. Computed as follows:
Therefore:
P1,000,000 + .80x - x = P970,000
x = P150,000 (WIP - End)
.80x = P120,000 (WIP - Beg.)
7. The cost of finished Job order Nos. 1001, 1002, 1004 and 1005 is computed below:
10. The problems indicates that manufacturing overhead is applied to jobs on the basis of direct
labor cost. Department M’s predetermined overhead rate is 300% (600,000/200,000) of direct
labor cost. Department A’s predetermined overhead rate is 50% (400,000/800,000). The total
manufacturing costs for Job Order No. 432 is:
Direct labor
Department M P8,000
Department A 12,000 20,000
Manufacturing overhead
Department M (8,000 x 300%) P24,000
Department A (12,000 x 50%) 16,000 30,000
Total manufacturing costs P75,000
11.
The first step in the solutions approach is to determined the ending work-in process
inventory, which consists of total costs charged to Job No. 232 to date. The T-account analysis
below indicates an ending work-in process balance of P9,000.
work-in process
3/1 P12,000 P100,000 finished goods
DM 40,000
DL 30,000
OH 27,000
P109,000 P100,000
3/31 balance P9,000
The P9,000 work-in process balance shows that the total cost of Job No. 232 to date is P9,000.
This P9,000 amount consists of direct materials, direct labor and overhead (given, P2,250). The
overhead has been applied at a rate of 90% of direct labor cost, resulting in the equation below:
90% x DL = P2,250
DL = P2,250 ÷ 90%
DL = P2,250
Knowing both direct labor and manufacturing overhead the amount of direct materials can now
be computed as follows:
The cost of raw materials inventory on August 31, 2013 can now be derived as follows:
15. The costs of material charged to Job No. 327 is computed below:
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