COST Accounting Review - notes from yt and book by rante

Accountancy (ACTG01)

CLASSIFICATION OF COSTS 3. Finished Goods Inventory

1. By nature of expense INVENTORY SYSTEMS

1.1. Material costs
1. Perpetual Inventory System
1.2. Labor costs (employee)
1.3. Expenses 2. Periodic Inventory System
2. By nature of traceability to a cost object INVENTORY COSTING/VALUATION METHODS
2.1. Direct costs
2.1.1. Direct materials 1. First-In, First-Out (FIFO)
2.1.2. Direct labor
THE FLOW OF MANUFACTURING COSTS (Cost
2.2. Indirect costs
2.2.1. Indirect materials Accounting Cycle)
2.2.2. Indirect labor A. Purchase of Raw Materials
2.2.3. Indirect expenses B. Issuance of Raw Materials
3. By function C. Return of Excess Materials to Storeroom
3.1. Production/project costs D. Recording to Payroll
3.1.1. Materials E. Distribution of Factory Labor
3.1.1.1. Direct materials F. Manufacturing Overhead Incurred
3.1.1.2. Indirect materials (manufacturing G. Actual Factory Overhead Charged to the Job
overhead) H. Completion of the Job
3.1.2. Labor I. Sale of the Completed Job
3.1.2.1. Direct labor
3.1.2.2. Indirect labor (manufacturing overhead) METHODS OF ACCUMULATIONG PRODUCT COSTS
3.2. General and Administrative costs (period costs)
1. Actual Costing System
3.3. Selling/marketing/distribution costs (period costs)
2. Normal Costing System
4. By nature of production or operation process
4.1. Joint costs
4.2. Contract costs
4.3. Batch costs NEW ACCOUNT TITLES
4.4. Operation costs
4.5. Process costs
5. For decision-making purposes Raw Materials Inventory
5.1. Controllable costs Beginning balance Return of inferior materials to
Purchase of raw materials supplier
5.2. Non-controllable costs
Return of excess raw materials Issuance to Production
5.3. Opportunity costs from production
5.4. Sunk costs or past costs Ending Balance
5.5. Relevant costs
5.6. Incremental costs
5.7. Period cost Factory salaries and wages
Recognition of factory payroll Factory payroll charged to
5.7.1. Marketing and selling costs production
5.7.2. Distribution costs
5.7.3. Administrative costs
5.8. Product cost
5.8.1. Direct materials Manufacturing Overhead
Actual overhead incurred Overhead applied to production
5.8.2. Direct labor Indirect materials Actual costing – all actual OH
5.8.3. Factory overhead Indirect labor Normal costing – predetermined
5.9. Avoidable costs Factory utilities rates
Factory rent
5.10. Unavoidable costs Factory insurance
6. By nature of behavior Factory depreciation
6.1. Fixed costs
6.2. Variable costs
6.3. Mixed costs
Work-In-Progress Inventory
Beginning Balance Return of excess raw materials
Direct materials issued to from production
production Cost of goods completed
INVENTORY ACCOUNTS (Manufacturing Companies) Direct labor issued to production transferred to FGI
Manufacturing Overhead applied to
1. Raw Materials Inventory production
2. Work in Process Inventory Ending Balance

2 0
 Finished Goods Inventory Financial Accounting Managerial
Beginning Balance Cost of Goods Sold Accounting
Cost of goods completed from WIP Definition Accounting is an Accounting system by
Ending Balance information system that which information are
identifies records and presented and supplied to
communicates the management in appropriate
Cost of Goods Sold economic events of an manner to operate business
organization to interested smoothly and efficiently
Cost of goods sold from FGI users
User External persons who Managers who plan for and
makes financial decision control an organization
Time Focus Historical perspective – Future emphasis – we are
Formula: all transactions that planning and organizing
happened are recorded things. What could happen
Raw Materials Inventory, Beginning XX and put into FS, FS’s are to the company in the
+ Purchases XX historical information future?
Raw materials available for use XX Verifiability Emphasis on verifiability Emphasis on relevance for
- Raw materials inventory, ending (XX)
vs. – transactions that planning and control of
- Indirect materials (XX)
Direct materials XX
Relevance happened in the past can future business operations
be verified through FS’s
or vice versa
Precision Vs. Emphasis on precision – Emphasis on timeliness –
Direct Material XX
Timeliness the event/transaction that information that is not
+ Direct Labor XX
happened must be timely is not relevant
+ Overhead XX
Total Manufacturing Cost XX recorded properly anymore.
+ Work In Progress, beginning XX Subject Primary focus is on the Focuses on segments of an
Total cost of work put into process XX whole organization organization
- Work In Progress, ending (XX) GAAP Must follow GAAP and Need not to follow GAAP
Cost of Goods Manufactured XX prescribed formats and prescribed formats –
+ Finished Goods Inventory, beginning XX flexible with the formats
Cost of Goods Available for Sale XX Requiremen Mandatory for external Not mandatory
- Finished Goods Inventory, ending (XX) t reports
Cost of Goods Sold XX

Net Sales XX
ORGANIZATIONAL STRATEGY AND COST
- Cost of Goods Sold (XX) INFORMATION
Gross Profit XX
+ Other Income XX Organization’s Mission Statement – the reason for the
Revenue XX
- Expenses (Period Costs) (XX) company’s existence
Net Income Before Tax XX
- Income Tax Expense (XX) - The development of the organization’s strategy roots
Net Income XX
from its mission statement.
- Organizational strategy – the plan of action on how
the entity will attain and realize its goals and
objectives with the use of their own resources that
COST ACCOUNTING will be able to contribute to the creation of value to
Magkano? both customers and shareholders.
- Cost information is important to strategic
Cost Accounting is a branch of accounting that deals with the management
process of recording and summarizing (definition of accounting)
the amount of cost that is spent of the company’s activities Two Ways an Entity can attain Competitive Advantage
(what are we accounting for?) . It includes all costs of process, Cost Leadership – the ability of an entity to provide the
product, or service used, provided, and sold. lowest prices in the market through proper management of
Magkano ang ginastos ng company para maproduce costs.
ang isang cute na cute na teddy bear? Product Differentiation – fundamentally a marketing strategy
Lahat-lahat ng gastos. Not just the raw materials, to encourage the consumer to choose one brand or product
also the delivery of these materials. over another in a crowded field of competitors. It identifies the
qualities that set one product apart from other similar products
Labor-Intensive – tao ang gumagawa and uses those differences to drive consumer choice.

Capital-Intensive – machine ang gumagawa, operator lang Cost leadership differs from product differentiation in the
ng machines yung mga tao perspective of providing unique products to be offered to the
market where prices can be allowed to be relatively higher.

 To become a cost leader, costs shall be managed well.

2 0
  In order for costs to be managed well, COST manufacturing process but is not directly
ACCOUNTING information is now of paramount related in the conversion process.
importance – the entity’s cost accountants now play a - Overhead – all indirect costs necessary for product
vital role in the value creation process of the entity. conversion that are not direct materials and direct
 Properly managed costs  Lower costs of production labor
 Lower prices  Cost Leader  More people will o Indirect materials, indirect labor,
buy  Added value to the entity depreciation of equipment in the factory,
insurance of factory plant, maintenance and
Value Chain repairs of equipment, factory utilities
- A set of activities an entity applies to be able to
Components of Product Costs
deliver a valuable product to customers.
- A set of activities or functions that allows the Direct Materials
conversion of inputs into useful products and Prime Cost
Direct Labor
services. Conversion Cost
Manufacturing Overhead

1. Research and Development – analysis, testing, and Direct Materials Direct Labor
studying of different methodologies of cost reduction + Direct Labor + Manufacturing Overhead
= Prime Cost = Conversion Cost
or quality improvement.
2. Design – creation and development of product and
service design fit for the market. Direct Materials
3. Supply – proper management of raw materials + Direct Labor
+ Manufacturing Overhead
inventory coming from suppliers. = Total Manufacturing Cost
4. Production – the process of acquisition and
construction of company resources to create products
Prime Cost Direct Materials
and services. Manufacturing Overhead Conversion Cost
5. Marketing – promotions made by an entity to make = Total Manufacturing Cost = Total Manufacturing Cost
the product or service attractive to the market.
6. Distribution – process of delivery of products and
Manufacturing Cost = Product Cost
services to customers.
7. Customer Service – after-sales support for
customers. Period Costs – the entity’s operating expenses. They are
called as such since they are much more associated with time
periods rather than the manufacturing process. They are all
Cost – reflects the amount of resources sacrificed (you sacrifice other expenses not related to manufacturing.
in order
your supplies to print (law service company), and therefore earn)
“Okay, it’s been a month, we’re going to give
for the company to achieve a certain objective such as creation
salaries to our office employees, how much would
of goods or rendering of services in order to earn revenues.
that be?”
Product costs – are costs identified and incurred by an entity
Product costs – what we see in cost of goods sold
to manufacture a product. It includes all raw materials used,
Period costs – what we see in operating expenses
labor costs incurred, and all other indirect costs.
- Materials – all raw materials and other supplies used - Marketing and Advertising – expenses incurred in
in the manufacturing process promoting the entity’s products and services
o Direct materials – cost of glass in lightbulb - Selling and Distribution – they include salaries of
manufacturing sales personnel and delivery expenses
o Indirect materials – cost of glue, lubricating - Administrative Expenses – expenses in the office,
oils, nails, screws, and the like. not in the factory.
- Labor – salaries and other benefits provided to all
workers
o Direct labor – cost of salaries paid to COST BEHAVIORS
laborers of furniture associated directly in
the process Variable Costs – costs that change as the quantity of the
o Indirect labor – salaries paid to all other goods produced changes. Total amount of variable costs is
factory personnel necessary in the dependent to the level of production.

- Constant on a per-unit basis

2 0
 - Varies when presented as a total

Examples:

 Cost of materials
 Cost of direct labor computed per piece
Examples:
Fixed costs – at whatever level of production within the
relevant range, this cost does not change. It is independent of How much is the total cost to manufacture products with a
the level of production. variable manufacturing cost per unit of P25 and total
manufacturing fixed cost of P 40,000 at the following levels:
- Constant when presented as a total
- Varies on a per-unit basis a. 2,000 units
b. 4,000 units
Examples: c. 7,250 units
 Rent of facilities
 Depreciation of equipment

Relevant Range – Usual/Normal capacity of the company to

produce

Assume an entity’s normal manufacturing process with a Mixed Costs – refers to costs that has both variable and fixed
range of 5,000 to 7,000 units of goods with a variable cost per components
unit of P20 and P15,000 fixed costs. Examples:
**in this problem, variable cost per unit is given, so is the
 Utilities, since these are charged with a base amount
fixed cost and (utility cost) goes higher with any usage over the
Variable costs: base amount

VC/unit Total variable costs Step Costs – costs that are constant on a certain level of
At 5,000 units P20 5000*20= P100,000 activity but increases on another certain level of activity
At 6,000 units P20 6000*20= P120,000
Examples:
At 7,000 units P20 7000*20= P140,000
No. of units produced  (increases),  Salaries and commission of agents that goes higher
Total variable cost  (increases), DIRECT with different ranges of activity e.g. people served
RELATIONSHIP.
Variable Cost per Unit stays the same

Fixed Costs: SEPARATING MIXED COSTS (two methods)

(Total) Fixed Costs FC/unit  High-Low Method

At 5,000 units P15,000 15000/5000= P3.00  Least Squares Regression Method
At 6,000 units P15,000 15000/6000= P2.50
At 7,000 units P15,000 15000/7000= P2.14
Mas maraming “kumakain” ng ating fixed cost kaya High-Low Method Example:
mas mababa ang Fixed Cost per Unit pag mas maraming
units produced. Jimin Corporation builds tabletop replicas of some of the most
famous tourist attractions in Seoul. The company is highly
No. of units produced  (increases), automated where maintenance costs show a significant
Fixed Cost per unit  (decreases), INDIRECT expense. The owner decided to use machine hours as the basis
RELATIONSHIP,
of predicting maintenance costs and has gathered the
Total Fixed Cost stays the same
following data for the following eight weekly operations:

COST EQUATION
Week Machine Hours Maintenance cost
1 3,000 P 9,800
2 4,500 12,900

2 0
 3 8,000 18,100
4 6,000 13,500
5 9,000 24,800 How much is the Total maintenance cost at 8,200 machine
6 3,500 10,400 hours?
7 5,500 13,000
8 7,000 16,000

Using the High-Low Method, determine the following:

a. Variable cost per unit
b. Total fixed cost
c. Total expected maintenance cost on 8,200 machine
hours
Answer:
STEP 1: Determine the highest and lowest activity and the
costs associated thereunto.
Week Machine Hours (activity)
1 3,000
2 4,500
3 8,000
4 6,000
5 9,000
6 3,500
7 5,500
8 7,000
STEP 2: Obtain the variable cost per unit by dividing the
change in cost over the change in activity
MANUFACTURING JOURNAL ENTRIES
IAS 2 PAR. 6
Inventories are assets:
a. Held for sale in the ordinary course of business
Maintenance cost
(finished goods inventory);
P 9,800
b. In the process of production for such sale (work in
12,900
process inventory); or
18,100
c. In the form of materials or supplies to be consumed
13,500
in the production process or in the rendering of
24,800
10,400 services (raw materials inventory)
13,000 In a manufacturing perspective…
16,000
 Raw materials inventory – are the materials or
supplies to be consumed in the production process to
be transformed as completed goods.
 Work-in-process inventory – are the items that are
currently in the process of production.
 Finished goods inventory – are the items that
completed the production process and are held for
sale in the ordinary course of business.

NEW ACCOUNT TITLES

Raw Materials Inventory

STEP 3: Obtain the total fixed costs by removing the variable Beginning balance
component in the total costs. Purchase of raw materials
Return of excess raw materials
from production
Ending Balance
Return of inferior materials to
supplier
Issuance to Production

Factory salaries and wages

Recognition of factory payroll Factory payroll charged to
production
(However, charge indirect labor to
Highest Lowest manufacturing overhead)
Activity Activity
Total Costs P24,800 P9,800
Less: Variable cost component
High: P2.50/mh * 9,000 22,500 Manufacturing Overhead
Actual overhead incurred Overhead applied to production
mh Indirect materials Actual costing – all actual OH
Low: P2.50/mh * 3,000 mh 7,500 Indirect labor Normal costing – predetermined
(Total) Fixed Cost P2,300 P2,300 Factory utilities rates
Factory rent

2 0
 Factory insurance c. Issued all beginning balance of raw materials and
Factory depreciation
1,000 units of newly-purchased materials to
production.

Work-In-Progress Inventory
Beginning Balance Return of excess raw materials
Direct materials issued to from production
production Cost of goods completed
Direct labor issued to production transferred to FGI
Manufacturing Overhead applied to
production (ind. Material and ind. Labor)
Ending Balance

Finished Goods Inventory

Beginning Balance Cost of Goods Sold
Cost of goods completed from WIP
Ending Balance d. 50 units of excess materials were returned to storage

Cost of Goods Sold

Cost of goods sold from FGI

Problem 1

Gidjette Manufacturing Company has the following balances

for the month of April 2020: e. Paid salaries to factory employees, maintenance staff,
and all supervisors, payroll details of which are:
Raw materials inventory, 21,000
Work-in-process inventory, 89,000
Finished goods inventory, 189,000

Using actual costing system and the perpetual inventory

system, for the transactions for April 2020, complete the
following:
1. Journal entries to record all transactions
2. Ledger postings to relevant T-accounts
3. Statement of cost of goods manufactured and sold

a. Purchased 5,000 units of raw materials at P 35.00 per

f. Applied factory payroll to production where 70% are
unit on account.
direct laborers and 30% are maintenance staff and
supervisors.

b. Returned 100 units of raw materials to the supplier

due to inferior quality

g. Paid P6,000 for maintenance of factory machinery

2 0
h. Incurred P4,000 for maintenance of office equipment
on account

i. Paid factory utilities of P 89,000 and office utilities of

P 72,000
m. Sold all beginning finished goods inventory and 40%
of recently completed units at 50% mark-up based on
costs on account.

j. Recognized adjustments for the following:

n. Paid marketing and advertising costs of P12,000 to

promote the firm’s products

T-ACCOUNTS
k. Actual overhead applied to production

STATEMENT OF COST OF GOODS MANUFACTURED

l. All beginning Work-In-Process and 50% of current AND SOLD
production is completed.

2 0
 Not traceable – factory supples, P 92,000; indirect labor, P
470,000; plant maintenance, P 146,000, depreciation of plant
equipment, P 58,000; other factory costs, P 152,000.

The entity budgeted P 640,000 as direct labor costs and P

960,000 as factory overhead costs.
1. How much is the current production’s total
manufacturing cost?

2. The overhead for the period is over or under applied

Formula: by…

Raw Materials Inventory, Beginning XX

+ Purchases XX
Raw materials available for use XX
- Raw materials inventory, ending (XX)
- Indirect materials (XX)
Direct materials XX

Direct Material XX
+ Direct Labor XX
+ Overhead XX
Total Manufacturing Cost XX
+ Work In Progress, beginning XX
Total cost of work put into process XX
- Work In Progress, ending (XX)
Cost of Goods Manufactured XX
+ Finished Goods Inventory, beginning XX
Cost of Goods Available for Sale XX 3. How much is the cost of goods manufactured if the
- Finished Goods Inventory, ending (XX) work-in-process inventory at the end of the period
Cost of Goods Sold XX
carries P 120,000 materials and P 240,000 labor?

Net Sales XX
- Cost of Goods Sold (XX)
Gross Profit XX
+ Other Income XX
Revenue XX
- Expenses (Period Costs) (XX)
Net Income Before Tax XX
- Income Tax Expense (XX)
Net Income XX

NORMAL COSTING METHOD

Twaine Company is a manufacturer and applies overhead to

products on the basis of direct labor cost. At the beginning of
the period, the current production process still unfinished
carries the following costs – direct materials, P 80,000; direct NORMAL COSTING – is a costing system that assigns
labor, P 160,000; overhead P 240,000. actual direct materials and direct labor costs to production, but
is using a predetermined rate to assign overhead costs.
During the period, the following costs were incurred:
Direct Direct Labor Factory
Traceable to production – direct materials, P 356,000; direct Materials Overhead
labor, P 690,000 Actual ACTUAL ACTUAL ACTUAL
Costing
Normal ACTUAL ACTUAL APPLIED
Costing

2 0
Why use Normal Costing? OVERHEAD VARIANCE

1. It allows an entity to get immediate cost information ACTUAL OVERHEAD > APPLIED OVERHEAD
for decision-making and pricing decisions without
the need to wait for the actual overhead costs which  MOH t-account debit is GREATER than MOH t-
takes time to accumulate. account credit
2. When overhead rates are predetermined, it allows  Overhead at the end of the period (before
adjustments) is UNDERAPPLIED
uniform information whatever season or
circumstance the company is into. APPLIED OVERHEAD > ACTUAL OVERHEAD
3. Within the relevant range, there will be no problems
on fluctuations of activity levels and the costs related  MOH t-account debit is LESSER than MOH t-
thereunto. account credit
 Overhead at the end of the period (before
adjustments) is OVERAPPLIED
PREDETERMINED OVERHEAD RATE (POHR)

PROBLEM 1

Jennie manufacturing incurred the ff. costs of production

Remember that: during the period:

1. Overhead and activity levels are budgeted by an  Direct materials, 4,000 units @ P56 per unit
entity for the whole accounting period  Indirect materials, 1,000 units @ P35 per unit
2. The numerator and denominator in determining the  Direct labor, 96,00 labor hours @ P70 per DLH
POHR is being studied well based on management  Indirect labor, P 96,400
estimates, past actual production, or other bases and  Factory Rent, P 120,000
targets.  Factory depreciation, P42,000
 Factory utilities, P22,000
Jennie applies manufacturing overhead at 50% of direct labor
T-ACCOUNT FOR OVERHEAD cost. How much are the following:
Manufacturing Overhead 1. Total manufacturing cost
Actual overhead incurred Overhead applied to production
Indirect materials Actual costing – all actual OH
Indirect labor Normal costing – predetermined
Factory utilities rates
Factory rent
Factory insurance
Factory depreciation

With the use of actual costing: 2. Overhead variance under- or over-applied

ACTUAL OVERHEAD = APPLIED OVERHEAD

Since actual amount of overhead is being applied to

production

With the use of normal coting:

ACTUAL OVERHEAD differs from APPLIED
OVERHEAD
Since the MOH account is debited for actual overhead and the
MOH account is credited for the amount of OH applied to
production. PROBLEM 2

At the start of the period, Maxwell Company still has

inventories unfinished (WIP, beg) with a total cost of P 89,000.
During the period, direct materials used amounted to P
288,000 and indirect materials amounted to P 34,000. Direct

2 0
labor amounted to P 537 per day of an 8-hour work for all 26 1. Initial cost of goods sold, calculation under normal
days of production to all direct laborers. Meanwhile, indirect costing
labor cost amounted to P 86,700. At the end of the period, the
direct materials component of the unfinished inventories
amounted to P 24,000 and the direct labor component P
18,000. Overhead is applied at 120% of direct labor cost.

Compute for the following using normal costing:

1. Total manufacturing cost during the period

2. Work-in-Process inventory, ending

2. Calculation of overhead variance

3. Cost of goods manufactured

3. Entry to close the overhead variance to cost of goods

sold (assuming variance is immaterial)
PROBLEM 3

The following account balances were made available by

Woodley Manufacturing:
Beginning balances Ending Balances 4. Statement of cost of goods manufactured and sold
Raw Materials Inventory P 164,000 P 147,000 assuming actual costing was used
Work-In-Process Inventory 99,000 156,000
Finished Goods Inventory 237,000 189,000

Activities for the production period were:

 Raw materials net purchases, P386,000

 Direct labor cost incurred, P420,000
 Actual overhead incurred:
o Utilities, P 89,000;
o Rent, P 60,000;
o Depreciation, P 45,000;
o Indirect labor, P 100,000;
o Indirect materials, P78,000
 Overhead application rate: 80% of direct labor cost
for the period
 Cost of goods sold at normal costing before period-
end adjustments, P 1,072,000

Prepare the following:

2 0
 ACCOUNTING FOR MATERIALS 2. The form will be forwarded to the warehouse to
be notified of the materials needed.
Materials – all raw materials and other supplies used in the
manufacturing process. 3. The storage clerk releases the materials
requested by the department concerned.
(Main) Considerations in choosing materials: 4. Cost accounting department gets a copy for
 Type of material needed recording purposes (charging materials to
 Quality of materials production).
 Quantity needed
 Price

Quality decisions

Managers should remember that as material grade rises, so

generally does price (cost).

- Entities should achieve the perfect balance between

choosing the high quality materials at the lowest
possible cost.
When all quantity and price information is available,
component quantities are multiplied by unit prices to obtain
each component’s total cost.

SYSTEMS OF INVENTORY
Periodic Inventory System – facilitates the physical counting
of materials at the end of an accounting or production period,
whereby the updated balances of materials is based on this
physical count.

Perpetual Inventory System – facilitates recording of

movement of materials in every purchase and issuance to
production through the use of stock cards. Inventory records
are updated in every internal manufacturing transaction.

Inventory Stock Card – a form that is used in production that

records the movement of inventory between all material
purchases (receipt to storage), usage in production (issuances),
and balance after each activity.

WHAT ABOUT FREIGHT-IN?

Remember that freight charges form part of product costs (cost

of bringing inventories to their present location)

 Perpetual inventory system > debited directly to raw

materials
 Periodic inventory system > debited as freight–in
Materials Requisition Form – a form that is used as a
Freight can be allocated either through:
basis for the recording of raw materials issuance.
1. Invoice cost
This form facilitates the transfer of materials from 2. Units purchased
storage to production. 3. Any other basis such as weights

1. Someone in production fill out the form to INVENTORY COST FLOW METHODS
request for materials, approved by the
production manager.

2 0
Entities can use the following cost flow methods in assigning
raw materials cost:

 First-in, first-out method

 Moving average method

Problem 1 - FIFO

Chimson Manufacturing provided you the following

WHAT ABOUT PERIODIC?
information:

 October 1, beginning inventory, 2,000 units @ 50

 October 3, purchased 3, 000 units @ 55
 October 9, issued 1,5000 units to production
 October 13, purchased 2,000 units @ 60
 October 23, issued 3,600 units to production
 October 29, purchased 1,000 units @ 65
 October 30, issued 1,500 units to production
INVENTORY – THE HEART OF BUSINESS
Prepare the inventory stock card for Chimson
OPERATIONS
Manufacturing for the month of October
One of the largest resource investment of an entity is their
inventory. These inventories are sold (merchandising) or
transformed into stable products (manufacturing) in order for
an entity to earn revenue. With that given, until inventory is
sold, inventory itself is not profitable.

An entity shall consider that:

 There are enough inventory stocks to meet customer

demands
 There should not be too much inventories where
there would be higher cost of storage and handling.

ECONOMIC ORDER QUANTITY (EOQ)

**Assuming all issued material is direct material
According to Investopedia, Economic order quantity (EOQ) is
the ideal order quantity a company should purchase to
minimize inventory costs such as holding costs, shortage
costs, and order costs. This production-scheduling model was
developed in 1913 by Ford W. Harris and has been refined
over time. The formula assumes that demand, ordering, and
holding costs all remain constant.

According to Heitger, EOQ is the order size of an inventory

Problem 2 – MOVING AVERAGE
item that results in the lowest total inventory costs for the
period. The lowest total cost for an inventory occurs when the
size of inventory is large enough so that the cost of ordering
that quantity is equal to the cost of carrying it.

2 0
EOQ FORMULA
Costs related when raw materials are purchased from
suppliers:
 Ordering cost
 Carrying cost
Costs related when raw materials are produced by the entity
itself:
 Set-up cost (costs of preparing equipment and facilities)
 Carrying cost
EOQ can provide information about:
 How many units shall be ordered in each order?
 At what point in time shall the inventory be ordered?
EXAMPLE:
The annual required units of an entity is 10,000 units. It was
ascertained that ordering costs amounted to P62.50 per order
and that carrying costs per unit amounted to P5. From the
given information, answer the following questions:
1. What is the economic order quantity?
2. How many orders shall be made annually?
If the EOQ is 500 units and the annual requirement is 10,000
units…
3. How many days is the interval in each order?
The entity shall order 500 units every 18 days
4. How much is the total annual cost of ordering?
2 0
5. How much is the cost of carrying the inventory
assuming the inventory is used evenly throughout the
year?
6. How much is the total inventory cost?
JUST-IN-TIME INVENTORY SYSTEM
According to Investopedia, the just-in-time (JIT) inventory
system is a management strategy that aligns raw-material
orders from suppliers directly with production schedules.
Companies employ this inventory strategy to increase
efficiency and decrease waste by receiving goods only as they
need them for the production process, which reduces inventory
costs. This method requires producers to forecast demand
accurately.
“The inventory arrives JUST IN TIME when the entity needs
it.”
It is also known as the Toyota production system
Advantages of JIT
LESS SPACE NEEDED – With a faster turnaround of stock,
you don’t need as much warehouse or storage space to store
goods. This reduces the amount of storage an organization
needs to rent or buy, freeing up funds for other parts of the
business.
WASTE REDUCTION – a faster turnaround of stock
prevents goods from becoming damaged or obsolete while
sitting in storage, reducing waste. This again saves money by
preventing investment in unnecessary stock, and reducing the
need to replace old stock.
SMALLER INVESTMENTS – JIT inventory management is
ideal for smaller companies that don’t have the funds available
to purchase huge amounts of stock at once. Ordering stock as
and when it’s needed helps to maintain a healthy cash flow.
Disadvantages of JIT
RISK OF RUNNING OUT OF STOCK – by not carrying
much stock, it is imperative you have the correct procedures in
place to ensure stock can become readily available, and
quickly. To do this, you need to have a good relationship with
your supplier(s). JIT means that you become extremely reliant
on the consistency of your supply chain.

LACK OF CONTROL OVER TIME FRAME – having to

rely on the timeliness of suppliers for each order puts you at
risk of delaying your customers’ receipt of goods. PAYSLIP
MORE PLANNING REQUIRED – with JIT inventory
A payslip is a document that explains the components of an
management, it’s imperative that companies understand their
individual’s pay for a certain time period. It is a personal
sales trend and variances in close detail.
“version” of a payroll register.

ACCOUNTING FOR LABOR

INCLUSIONS TO LABOR

 Basic salaries of workers

 Overtime pay
SPECIAL CONSIDERATIONS
 Bonuses for exemplary performance
 A standard minimum wage can be paid to an employee,
 SSS, PHIC, HDMF dues (employer share)
but can increase if a worker an produce more units
 Medical benefits and the like
 When jobs are rush, overtime pay is normally
encountered to cover extra hours the worker has
recorded. Normally, overtime premium is charged to
KINDS OF LABOR overhead. However, if because of a rush job, it is
inevitable to work overtime, the whole overtime pay is
Direct labor - cost of traceable work done to transform the raw
charged to production.
materials to finished goods
 Workers in a shift different from the normal 8:00AM -
 Cutters, painters, assemblers, machinists
5:00PM shift is paid a special premium rate charged to
Indirect labor - cost of work not directly traceable to the overhead factory (e. g. 10% night shift differential for
production of the product but is still related to the production work done between 10:00 PM - 6:00 AM).
process.
 Workers are also paid during idle time. Idle time refers to
 Factory supervisor, inventory clerks, timekeepers, the time workers has no work to perform due to
janitors temporary changes in production setup. This is charged
to factory overhead. However, a loss account is to be
PROPER COSTING FOR LABOR established when the charges in production is due to
negligence or inefficiency.

FUNDAMENTALS OF PAYROLL

Step 1. Compute for the gross pay by getting the total of all
earnings.

SUMMARY OF PAY INFORMATION

A payroll is a calculation of employee’s compensation,
statutory contributions, taxes, deductions, and net payment for
a certain time period. The formal document to present payroll
is called a payroll register. Step 2. Compute for the taxable income (basis for withholding
tax)

2 0
Step 3. Compute the total deductions

WHAT ABOUT NIGHT DIFFERENTIAL?

Assume that an employee receives a daily wage rate of P 537.

How much is the hourly might differential if…
Step 4. Compute for the net pay using all earnings deducted
by all deductions.

(UPDATED TABLES - SSS contribution table, PhilHealth

WHAT ABOUT WORK DONE ON SPECIAL DAYS?
Circular, PAG-IBIG contribution table, Withholding Tax
Assume that an employee receives a daily wage rate of P 537. Table)
How much is the pay for the day of an employee if he/she
works on …

PAYROLL JOURNAL ENTRIES

WHAT ABOUT OVERTIME?

Assume that an employee receives a daily wage rate of P 537.

How much is the hourly rate if overtime is done…

2 0
  Factory rent

 Factory utilities

PREDETERMINED OVERHEAD RATE

1. It allows an entity to get immediate cost information for

decision-making an pricing decisions without the need to
wait for the actual overhead costs which takes time to
accumulate
2. When overhead rates are predetermined, it allows
uniform costing whatever season or circumstance the
company is into.

3. Within the relevant range, there will be no problems on

fluctuations of activity levels and the costs related
thereunto.

PREDETERMINED OVERHEAD RATE (POHR)

Remember that:

3. Overhead and activity levels are budgeted by an

entity for the whole accounting period
4. The numerator and denominator in determining the
POHR is being studied well based on management
estimates, past actual production, or other bases and
targets.

(COMPENSATION INCOME) EXAMPLE:

Salonga Company has made the following budgeted

information available applicable for net production year:
ACCOUNTING FOR MANUFACTURING OVERHEAD

Manufacturing overhead includes all costs incurred in the

production process which are not direct materials or direct
labor, not directly traceable to the products completed but are Calculate for the POHR based on different bases available:
still necessary to be incurred to convert raw materials to
finished goods.

Examples:

 Indirect materials (glue, tape, fasteners, cleaning

supplies, oils)

 Indirect labor (salary of factory supervisor and factory

janitor)

 Factory insurance

 Factory depreciation of equipment and machineries

 Repairs and maintenance of factory assets

2 0
  Sequential method (step method) - the cost of the
initially-ranked service department affects the cost of the
secondarily-ranked service department before allocation
costs to the production department.

 Algebraic method - the use of mathematical cost

functions to allocate service cots.

EXAMPLE:
Solace manufacturing has four departments. Assembly
department and finishing department make up the production
departments while cafeteria and maintenance department
make up the service departments.

The overhead cost of the cafeteria is allocated based on the

number of employees while the overhead cost of the
maintenance department is based on the estimated overhead of
the period.

In determining the predetermined overhead rates, the assembly

department uses direct labor hours and the finishing
PLANT - WIDE RATE department uses machine hours. The following information is
made available:
According to De Leon, De Leon, and De Leon, the rates that
are computed are called plant - wide rates. All departments in
the company will use the same application rate for
manufacturing overhead and the same base. Single plant-wide
rates are applicable when an entity manufactures only a single
product or different products being manufactured by goes
through the same series of productive departments. Allocate the service department costs using the direct method,
sequential method, and algebraic method.
DEPARTMERNTAL RATE

An entity shall use a departmental rate when different products

are manufactured. Also, departmental rates are applicable DIRECT METHOD
when products do not pass through the same series of steps of
conversion or there is a need for a dissimilar application of
overhead depending on company circumstances and attention
given to the products.

SERVICE DEPARTMENT COSTS

Service or support department is a unit in an organization that
contributes in a very indirect way to the conversion of raw
materials to finished goods. They are, however and still,
involved in producing goods.

These departments are the purchasing department, personnel

department, warehousing department, and maintenance
department. Since these departments support the production
process, the costs incurred in these departments should be
allocated to the production departments to determine the cost
of a product.

Methods of allocation service department costs:

 Direct method - direct allocation of service costs to the

production department

2 0
SEQUENTIAL METHOD

COMPARISON OF THE THREE

ALGEBRAIC METHOD

T-ACCOUNT FOR OVERHEAD

Manufacturing Overhead
Actual overhead incurred Overhead applied to production
Indirect materials Actual costing – all actual OH
Indirect labor Normal costing – predetermined
Factory utilities rates
Factory rent
Factory insurance
Factory depreciation

With the use of actual costing:

ACTUAL OVERHEAD = APPLIED OVERHEAD

Since actual amount of overhead is being applied to

production

With the use of normal coting:

ACTUAL OVERHEAD differs from APPLIED
OVERHEAD

Since the MOH account is debited for actual overhead and the
MOH account is credited for the amount of OH applied to
production.

OVERHEAD VARIANCE

ACTUAL OVERHEAD > APPLIED OVERHEAD

 MOH t-account debit is GREATER than MOH t-
account credit
 Overhead at the end of the period (before
adjustments) is UNDERAPPLIED

2 0
APPLIED OVERHEAD > ACTUAL OVERHEAD

 MOH t-account debit is LESSER than MOH t-

account credit
 Overhead at the end of the period (before
adjustments) is OVERAPPLIED

Overhead variance is immaterial

 The amount of variance is closed against cost of goods

sold

 If variance is underapplied, cost of goods sold increases

 If variance is overapplied, cost of goods sold decreases

Overhead variance is material

 The amount of variance is closed and prorated against the
accounts in which applied overhead resides:

 Work-in-process inventory
 Finished goods inventory, and

 Cost of goods sold

EXAMPLE:

2 0
 Labor Code of the Philippines: Provisions of PD 442

SOCIAL SECURITY SYSTEM

Shouldered by employer

Shouldered by member-employee

COMPENSATION

 All remuneration for services performed

o Services performed
o Overtime pay
o Holiday pay
o Profit sharing
o Hazard pay
o 13th month pay, and
o Other fringe benefits
 Paid or payable in cash or in kind

2 0
MANUFACTURING – almost always use PERPETUAL

First-In, First-Out – Flow of cost, ano yung cost na

gagamiting natin, first cost

FIFO periodic and perpetual has the same answer in terms of

computations

During exams, stock cards are not needed to be prepared. It is

too long to prepare
EQT

JIT philosophy

2021 Withholding tax table

2021 SSS contribution table – no longer use the one in the

book

2 0