Non-cost System

NATURE AND CHARACTERISTICS OF A MANUFACTURING FIRM

- Manufacturing firms convert raw materials into finished goods using manpower and plant
facilities.
- Plant facilities include machinery, equipment, and furniture housed in a factory building.
- Employees typically include factory workers supervised by a foreman.
- Production divisions may be divided into producing departments (where manufacturing
operations occur) and service departments (which support manufacturing processes).
- Examples of producing departments: machining, assembling, etc.
- Examples of service departments: materials handling, building maintenance, power
departments, etc.

THE NON-COST SYSTEM

- Non-cost accounting system focuses on total production cost and year-end financial
statements.
- Detailed flow of costs is not accounted for.
- Periodic inventory method is used, requiring inventory taking of raw materials, work in
process, and finished goods.
- Product unit cost is determined by dividing cost of goods manufactured by total number of
units produced.
- Ineffective in cost control and decision-making due to delays in determining unit and
inventory costs.
- Risks include undetected pilferages, unnecessary wastages, and inefficiency in manpower.

WORK FLOW AND FLOW OF COST

Procurement – materials and supplies needed for manufacturing are ordered, received and
stored. Direct and indirect factory labor and services are obtained.
Production – Materials are transferred to factory. Labor and other factory cost are applied to
convert the materials and complete the product.
Warehousing – Once the production is complete, goods completed are moved from factory to
the warehouse to be held until sold.
Selling – customers are found. Merchandise is shipped from warehouse to customers and
sales are recorded.
MANUFACTURING COSTS CLASSIFIED
Manufacturing – process of converting materials into finished goods; generally called
manufacturing overhead
The three major manufacturing costs classifications are as follows:
Direct Materials – raw materials; materials used in manufacturing process
Indirect materials – materials that can’t be easily traced; classified as manufacturing
overhead
Factory supplies – items used in the manufacturing process but are not part of the
finished goods; classified as manufacturing overhead
Direct Labor – wages of the factory employees who work directly with raw materials
Indirect labor – wages of the factory employees who do not work with raw materials;
classified as manufacturing overhead
Payroll account –
Factory employee benefits – charged for all cost of benefits; SSS, PHIC, Pag-ibig
Manufacturing Overhead – all cost incurred in the factory that can’t be considered direct
materials or direct labor; more commonly known as factory overhead

INVENTORIES OF A MANUFACTURING FIRM

Raw Materials: Cost of raw materials and factory supplies used in manufacturing; once used
in production, costs are transferred to work in process.
Work in Process: Cost of raw materials, direct labor, and manufacturing overhead for goods
in production but not yet completed.
Finished Goods: Cost of completed goods ready for sale.

STATEMENT OF COST OF GOODS MANUFACTURED AND SOLD\

Manufacturing cost flow: Accounting method for tracking manufacturing costs, treating all
incurred costs as product costs; used to calculate ending inventory and cost of goods sold.
1. **Cost of Raw Materials Used**:
- Calculated by subtracting the ending inventory of raw materials from the total raw
materials available for use.
- This figure represents the cost of raw materials consumed in the manufacturing process
during the period.

2. **Cost of Goods Manufactured (COGM)**:

- Determined by subtracting the accumulated cost of ending work in process from the total
manufacturing costs incurred during the period plus the cost of beginning work in process.
- COGM reflects the total cost of goods that have been completed during the period.

3. **Cost of Goods Sold (COGS)**:

- Refers to the cost associated with the items manufactured and sold during the period.
- For a trading concern, which deals primarily with buying and selling goods rather than
manufacturing them, the equivalent term used is "cost of sales."

In summary, these terms help in understanding the flow of costs within a manufacturing or
trading business, from raw materials to finished goods sold, with specific calculations guiding
the determination of each term.

Let's break down the transactions and prepare the journal entries:

1. Materials purchases:
- Debit: Raw materials inventory (P37,500)
- Credit: Accounts payable (P37,500)

2. Purchase returns and allowances:

- Debit: Accounts payable (P2,500)
- Credit: Raw materials inventory (P2,500)

3. Payroll:
 - Debit: Factory payroll expense (P17,875)
- [P32,500 - (P875 + P415 + P150 + P600 + P4,750)]
- Debit: Sales payroll expense (P8,125)
- [P32,500 * 25%]
- Debit: Office payroll expense (P6,500)
- [P32,500 * 20%]
- Credit: Cash (P32,500)

4. Disbursements made:
- Debit: Factory overhead (P1,250 + P500 + P2,050)
- Debit: Office and sales overhead (P200 + P150)
- Credit: Cash (total disbursements)

5. Sales on account:
- Debit: Accounts receivable (P150,000)
- Credit: Sales revenue (P150,000)

6. Sales returns and allowances:

- Debit: Sales returns and allowances (P3,000)
- Credit: Accounts receivable (P3,000)

7. Payments made:
- Debit: Office supplies expense (P900)
- Debit: Advertising expense (P3,000)
- Debit: Store supplies expense (P1,000)
- Credit: Cash (total payments)

8. Employer’s counterpart contributions:

- Debit: SSS expense (P1,600)
- Debit: PHIC expense (P965)
 - Debit: Pag-ibig expense (P600)
- Credit: Cash (total contributions)

9. Remittance of SSS, PHIC, Pag-ibig, and income taxes:

- Debit: SSS payable, PHIC payable, Pag-ibig payable, Income tax payable
- Credit: Cash (total remittances)

10. Collections from customers:

- Debit: Cash (P90,000)
- Credit: Accounts receivable (P90,000)

Now, let's prepare the statement of cost of goods sold:

Beginning inventory:
- Raw materials: P9,000
- Work in process: P8,500
- Finished goods: P5,000

Ending inventory:
- Raw materials: P10,000
- Work in process: P7,500
- Finished goods: P9,500

Calculate Cost of Goods Manufactured (COGM):

- Beginning raw materials inventory + Purchases - Purchase returns = Total raw materials
available
- Total raw materials available - Ending raw materials inventory = Raw materials used
- Raw materials used + Direct labor + Factory overhead = Total manufacturing costs
- Total manufacturing costs + Beginning work in process inventory - Ending work in process
inventory = Cost of goods manufactured
Then, calculate Cost of Goods Sold (COGS):
- Beginning finished goods inventory + Cost of goods manufactured - Ending finished goods
inventory = COGS

Now, let's calculate and fill in the figures based on the given information:

- Raw materials used: P9,000 + P37,500 - P2,500 - P10,000 = P34,000

- Direct labor: P17,875 + P3,000 + P1,500 = P22,375
- Factory overhead: Depreciation (P7,000 + P3,000) + Insurance premiums + Lubricants, etc.
+ Meralco bill = Total factory overhead
- Total manufacturing costs: P34,000 + P22,375 + Total factory overhead
- COGM: Total manufacturing costs + P8,500 - P7,500 = COGM
- COGS: P5,000 + COGM - P9,500 = COGS

This completes the journal entries and calculation of the cost of goods sold for Durian Mfg.
Co.