UNIVERSITY OF SAINT LOUIS

Tuguegarao City

SCHOOL OF ACCOUNTANCY, BUSINESS and HOSPITALITY

Second Semester
A.Y. 2021-2021

ONLINE LEARNING MODULE

ACCT 1033- Cost Accounting and Control

Lesson 4: Accounting For Cost Flow

For this week, the following shall be your guide for the different lessons and tasks that you need to accomplish.
Be patient, read them carefully before proceeding to the tasks expected of you.
HAVE A FRUITFUL LEARNING EXPERIENCE 😊

Date Topics Activities or Tasks

Organizational Cost Flow:
a. The Conversion Process
b. Stages of Production
c. Valuing raw material used
Read Lessons from books and handouts
Online discussion
Accomplish the drills and exercises
Submission of Assessments
Participate in the scheduled Quiz

d. Applied Overhead

Learning After completing this lesson, you should be able to answer the following questions:
Outcomes: 1. How does conversion process occur in manufacturing companies
2. Why and how overhead costs allocated to products and services
3. What causes underapplied or overapplied overhead and how is it treated at the end of
a period

LEARNING CONTENT

Flow of Cost

Flow of costs refers to the manner or path in which costs move through a firm. Typically, the flow of costs is
relevant with manufacturing companies whereby accountants must quantify what costs are in raw materials,
work in process, finished goods inventory, and cost of goods sold.

The Conversion Process

In general, product costs are incurred in the production or conversion area and period costs are incurred in all
nonproduction or nonconversion areas. To some extent, all organizations convert inputs into outputs.

Input- typically consist of material, labor and overhead.

Output-- usually either product or service

Conversion Process
Input Output

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Low Degree of Conversion
- adding only the convenience of having merchandise when, where, and in the assortment
needed by costumers.

Moderate Degree of Conversion

- washing, testing, packaging, labeling, etc.

High Degree of Conversion

-causing major transformation from input to output

Stages of Production

The production or conversion of process of raw material can be viewed in three stages:

Work not Started (raw materials)

Work in Process Costs are associated with
Finished Work each processing stage

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Note: For the incurrence of overhead, costs are pooled to Factory Overhead account then Factory overhead
account will be subsequently closed to Work in Process account. The pooling of cost into Factory overhead
account is for allocation purposes. For example product A and product B uses electricity during the production,
the electricity bill for the month amounted to 100,000. The cost of electricity is entered in the factory overhead
account and subsequently allocated to product A and B. Let’s say the entity uses 60:40 ratio (60% for A and
40% for B) to allocate the cost. The entry would be as follows:

Valuing the Raw Materials Used

The process of the flow of costs begins with valuing the raw materials used in manufacturing.

For example a company acquired 5 units of raw material for 5 pesos each. 3 units of raw material were issued
to manufacturing department. The cost of material issued for manufacturing is 15 pesos (5 pesos x 3 units).

The example is very simple, what if there are 100, 000 units of raw material, purchased by batch with different
cost (selling price of raw material) per batch. Imagine if this thousands of raw material units were mixed up in a
warehouse. How can we value the raw material issued for manufacturing? How do we account for the flow of
cost?

The cost of raw materials issued for manufacturing are easy to determine if purchase prices and other costs
never change, but price fluctuations may force a company to make certain assumptions about which items
have been issued to the manufacturing department.

There are several methods for accounting for the flow of costs:
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1. Specific Identification
2. FIFO (First in, first out)
3. LIFO (Last in, first out)
4. Weighted-average cost

Specific Identification

Companies can use the specific identification method only when the purchase date and cost of each unit in
inventory is identifiable. For the most part, companies that use this method sell a small number of expensive
items, such as automobiles or appliances.

First-in, First-out

The first‐in, first‐out (FIFO) method assumes the first units purchased are the first to be issued

Example:

Last-in, First out

The last‐in, first‐out (LIFO) method assumes the last units purchased are the first to be issued

Weighted Average cost

When using the weighted average method, you divide the cost of raw material available for production by
the number of units available for production, which yields the weighted-average cost per unit.

Example:

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Accumulation and Allocation of Overhead

Direct material and Direct labor are easily traced to a product or services. Overhead on the other hand, must
be accumulated over a period and allocated to the products manufactured or services rendered during that
time.

Cost allocation- refers to the assignment of an indirect cost to one or more cost objects using some reasonable
basis.

Why Overhead cost are allocated?

1. To determine a full cost of the cost object

2. To motivate manager in charge of the cost object to manage efficiently
3. To compare alternative courses of action for management planning, controlling and decision making

Predetermined Overhead Rates

In an actual cost system, actual direct material and direct labor costs are accumulated in Work in Process
Inventory as the cost are incurred. Actual production overhead costs are accumulated separately in an
Overhead Control account and assigned to Work in Process Inventory at the end of a period or at completion
of production.

The use of an actual cost system is generally considered to be less desirable because all production overhead
information must be available before any cost allocation can be made to product or services. For example, the
cost of products and services produced in May could not be calculated until the May electricity bill is received
in June.

Normal Cost Sytem- uses actual direct material and direct labor costs and predetermined overhead rates

Predetermined overhead rates- overhead application rate

- is a budgeted and constant charge price per unit of activity that is used
to assign overhead cost from an Overhead Control Account to Work
in Process inventory for the period’s production or services

Formula:

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Applying overhead to production

Applied Overhead- is the amount of overhead assigned to Work in Process Inventory as a result of incurring
the activity that was used to develop the application rate.

For 5,000 units of completed units, the applied overhead is Php 25,000 ( 5,000 units X Php 5 predetermined
rate)

Actual overhead- the true cost incurred for overhead

Accounting for Applied and Actual overhead

1. Separated accounts for Applied and Actual and for Variable and Fixed

2. Combined Accounts for Applied and Actual, Separated Accounts for Variable and Fixed

3. Combined Account for Applied and Actual and for Variable and Fixed

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Proforma Entries:

Underapplied and Overapplied Overhead

Under and over application of overhead arise when the applied overhead is not equal to the actual overhead.

For example, you have a 5,000 units order of your product in May. You were not able to compute the full cost
of the product because electricity bill for May has not been received. Should you wait for the electricity bill
before billing your customer and deliver the goods to him? What if he needs it before the end of May. He might
cancel the order if you cannot deliver it on time. So, you decided to use predetermined rate of 5 peso per unit.
The applied overhead is 25,000 (5,000 units X 5). Assuming you received the electricity bill in June 8, and you
found out that the actual electricity expense is P 27,000. How are you going to account for the difference
(27,000 - 25, 000 = 2,000)?

You should account for the under or over application.

Underapplied overhead - Actual overhead > Applied overhead

- Unfavorable (because you paid more than the budget)
-Debit balance

Overapplied overhead -Actual overhead < Applied overhead

-Favorable (you paid less than the budgeted; you saved)
-Credit balance

So in our example, 27,000 actual overhead is greater than the 25,000 applied. The difference of 2,000 is
underapplied overhead.

Disposition of Underapplied and Overapplied Overhead

Disposition of underapplied and overapplied overhead depends on the significance of the amount involved:
-if immaterial, it is closed to Cost of Goods Sold.
-if material or significant, it should be allocated among the accounts containing applied overhead: Work in
Process Inventory, Finished Goods Inventory, Cost of Goods sold
Example:

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Proforma Entries

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 *** END of LESSON 1***

REFERENCES

Textbooks

1. Barfield, J., Raiborn, C., & Kinney, M. (2003). Cost Accounting: Traditions and Innovations. South-Western.
2. Agamata, F. (2012). Management Advisory Services.GIC Enterprises & Co. Inc.

Online Reference
1. https://www.cliffsnotes.com/study-guides/accounting/accounting-principles-i/inventory/cost-flow-
methods
2. https://www.unleashedsoftware.com/blog/weighted-average-cost-method-inventory-
valuation#:~:text=When%20using%20the%20weighted%20average,beginning%20inventory%20and%20
net%20purchases.

ASSESSMENTS

PARTICIPATION (for recitation purposes)

DRILLS/ ACTIVITIES/ APPLICATION

Practice Problems:

Problem 1

Raiborn Company had the following account balances as of March 1, 2021:

Raw Material (direct and indirect) Inventory P 9,300

Work in Process Inventory 14,000
Finished Goods Inventory 18,000

During March, the company incurred the following factory costs:

⚫ Purchased P 82,000 of raw materials on account.

⚫ Issued P 90,000 of raw materials, of which P 67,000 were direct to the product
⚫ Factory payroll of P 44,000 was accrued; P 31,000 was for direct labor and the rest was for supervisors.
⚫ Utility Costs were accrued at P 3,500; of these costs, P 800 were fixed.
⚫ Property taxes on the factory were accrued in the amount of P 1,000
⚫ Prepaid insurance of P 800 on factory equipment expired in March.
⚫ Staright-line depreciation on factory equipment was P 20,000.
⚫ Predetermined overhead of P 62,500 (P 28,000 variable and 34,500 fixed) was applied to Work in Process Inventory.
⚫ Goods costing P 170,000 were transfered to Finished Goods Inventory.
⚫ Sales on account totaled 350,000.
⚫ Cost of goods sold was 175,000.
⚫ Selling and administrative cost were P 140,000 (credit “Various Accounts”)
⚫ Ending Work in Process Inventory is P 3,300.

Required:
A. Journalized the transaction for March.

Problem 2
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Kinney and Associates applies overhead at a combined rate for fixed and variable overhead of 175 percent of professional labor costs.
During the second quarter of 2020, the following professional labor cost and actual overhead costs were incurred

Required:
a. How much overhead was applied to the services provided each month by the firm?
b. What was underapplied or overapplied overhead for each of the three months and for the quarter?

EVALUATION / QUIZ

ASSIGNMENT

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