THE COST ACCOUNTING CYCLE

PROF. ROCINANTE D. CERVANTES, CPA, MBA

Learning Objectives
▪ Understand the cost accounting cycle
▪ Differentiate service, merchandising and
manufacturing entities.
▪ Distinguish between and account for direct
and indirect materials and labor as they are
used in the production process.
▪ Prepare the different financial statements
for a service entity, merchandising entity
and manufacturing entity.
Inventory Accounting System for
Manufacturing
 Materials Inventory
The Materials Inventory
account, also Material
Inventory Control account, is
made up of balances of
materials and supplies on
hand.

Materials are not purchased

for resale but for use in
manufacturing a product.
Therefore an item taken out of
Materials Inventory and
requisitioned into production is
transferred to the Work in
Process Inventory Account.
 Work in Process Inventory

All manufacturing costs incurred and assigned to products being produced

are classified as Work in Process Inventory Costs.

The issuance of materials begins the production process. These materials

must be cut, molded, assembled, or in some other way changed into a
finished product.

Direct labor earned by factory people are also product costs since these
people work on specific product.

Overhead cost are product cost and must be assigned to specific

products. For overhead cost, these are accumulated using Factory
Overhead Control Account. These costs are assigned using a
predetermined overhead rate which will be charged against Work in
Process.
 Work in Process Inventory

As products are completed,

they are put into the finished
goods area. When products
are completed, the costs are
now transferred from the work
in process inventory account
to finished goods inventory.
 Finished Goods Inventory

The Finished Goods Inventory

account represents the salable
product as it is completely
manufactured.

At the end of the accounting period,

the balance in the Finished Goods
Inventory account is made up of the
cost of products completed but
unsold as of that date.
Statement of Cost of Goods Manufactured
and Sold
ILLUSTRATION OF COST ACCOUNTING
CYCLE
 ILLUSTRATION OF COST ACCOUNTING
CYCLE
1. Materials (lumber, paint, screws, lubricants, and solvents) are
purchased on account at a cost of P50,000.

Materials 50,000
Accounts Payable 50,000

2. During the month, direct materials (lumber and paint) costing

P40,000 and indirect materials (screws, lubricants for machine, and
solvents for cleaning) costing P1,900 are issued to the factory.

Work in Process 40,000

Factory Overhead Control 1,900
Materials 41,900
 ILLUSTRATION OF COST ACCOUNTING
CYCLE
3. Total payroll for the month amounted to P36,000, consisting of P20,000 earned by
laborers working on the product; P7,000 for factory supervisor; P9,000 for sales and
administrative employees. The entry to record the payroll and the payment to
employees (ignoring payroll deductions) would be:

Payroll 36,000
Accrued Payroll 36,000

Accrued Payroll 36,000

Cash 36,000

4. Entry to record allocation of labor:

Work in Process 20,000
Factory Overhead Control 7,000
Selling and Admin Expense 9,000
Payroll 36,000
 ILLUSTRATION OF COST ACCOUNTING
CYCLE
5. Depreciation expense for the building is 6% per year. The office occupies one-tenth
of the total building, and the factory operation is in the other nine-tenth. The
depreciation expense for one month is recorded as follows:

Factory Overhead Control 3,375

Selling and Administrative Expense 375
Accumulated Depreciation – Bldg 3,750
(750,000 X 6% X 1/2mosX 9/10)
(750,000 X 6% 1/2mos X 9/10)
6. Depreciation expense for machinery and equipment is 20% per year. All machinery
are used in factory for production.

Factory Overhead Control 2,500

Accumulated Depr – Mach 2,500
 ILLUSTRATION OF COST ACCOUNTING
CYCLE
7. The cost of heat, light, and power for the month was P3,000

Factory Overhead Control 2,700

Selling and Administrative Expense 300
Accumulated Depreciation – Bldg 3,000
9/10 – FOC, 1/10 Selling and Admin

8. Miscellaneous expenses for telephone, office supplies, travel and rental of office
furniture and equipment totaled P1,500.

Selling and Admin Expense 1,500

Accounts Payable 1,500
 ILLUSTRATION OF COST ACCOUNTING
CYCLE
9. Factory Overhead is charged to production at 85% of direct labor cost:

Work in process 17,000

Factory Overhead Applied 17,000
(20,000 X 85%)

Total Manufacturing Cost

Transaction Transaction Amount
(2) Direct Materials P40,000
(4) Direct Labor 20,000
(9) Factory Overhead 17,000
Total P77,000
 ILLUSTRATION OF COST ACCOUNTING
CYCLE
10. Assuming that all goods started in process have been finished, the following entry
is recorded:

Finished Goods 77,000

Work In Process 77,000

Assuming that 1,000 tables were produced during the month, the unit cost is P77.00.
The breakdown of unit cost is as follows:
 ILLUSTRATION OF COST ACCOUNTING
CYCLE
The management policy is to provide 40% mark-up

Manufacturing cost P77.00

Gross profit (40%) 30.80
Selling Price P107.80

11. Costs of materials, utilities, and selling and administrative expenses paid
amounted to P34,000
Accounts Payable 34,000
Cash 34,000

12. 800 tables are sold to jobber at a net price of P86,240

Accounts Receivable 86,240
Sales 86,240
(800 X 107.80)
Cost of Goods Sold 61,600
Finished Goods 61,600
(800 X 77)
 ILLUSTRATION OF COST ACCOUNTING
CYCLE
13. Cash totaling P55,000 is collected on accounts receivable

Cash 55,000
Accounts Receivable 55,000
 ILLUSTRATION OF COST ACCOUNTING
CYCLE
At the end of the period, we compare the total of the Factory Overhead Control
account and the Factory Overhead Applied account.

Actual Factory Overhead P17,475

Applied Factory Overhead 17,000
Underapplied (unfavorable) 475

At the end of period, the under or overapplied is closed to the Cost of Goods Sold.

If underapplied/unfavorable – additional Cost of goods sold

If overapplied/favorable – deduction to cost of goods sold

* If the amount of the under/overapplied is significant, the amount is prorated to the

Cost of Goods Sold account, Finished goods and Work in process account.
ILLUSTRATION OF COST ACCOUNTING
CYCLE
Assignment
Please answer the following:

Chapter 3 Problems 2, 3, 5 and 6

Study in advance in preparation for our 1st quiz

- Coverage: Chapters 1 to 3
- The quiz will open on September 24 – 1 pm and ends on
September 30 (11:59 pm). I will provide the instruction
next meeting.
LIVE JESUS IN OUR HEARTS FOREVER

SEE YOU ALL NEXT WEEK!