COST ACCOUNTING

 Involves the measuring, recording, and reporting of product costs.

Total
Goal: to determine the product cost Unit
Unit Cost  basis of SP = Unit Cost + Markup
↑ SP, ↓ Demand
Selling Price (SP)  influences the demand of the product Costing
↓ SP, not profitable

Cost Accounting Systems

Small volume
1. Job Order Unique / distinct products Ex. buildings, aircrafts, personalized jewelries
Heterogenous

Large volume
2. Process Costing Similar / identical products Mass Production (Ex. markers, paper, calculator, automobile)
Homogenous

RM/DM
RM/DM 𝑊𝐼𝑃
Inventory WIP UNIT COST =
DL # 𝑜𝑓 𝐺𝑜𝑜𝑑 𝑈𝑛𝑖𝑡𝑠
FG
OH

JOB ORDER COSTING

1. RM Inventory FORMULA: COGM / COGS

Upon purchase
Accounts Payable
DM Used
RM
2. Work-in-Process + DL
usage + OH
RM Inventory
TMC
3. Salaries Expense + WIP, beg
DL (AR x AH)
Salaries Payable - WIP, end
DL COGM
4. Work-in-Process + FG, beg
Salaries Expense - FG, end
COGS
5. Depreciation Expense
Utilities Expense
Rent Expense
Accumulated Depreciation Actual OH OH-A < OH-C  Underapplied (+)
Utilities Payable
Rent Payable OH-A > OH-C  Overapplied (-)
OH
6. OH Control
Depreciation Expense
Utilities Expense Actual OH
Rent Expense

7. Work-in-Process Standard Cost

OH Applied (SR x SH)
Normal Costing
8. Dec. 31
OH Applied
OH Control Immaterial / Insignificant  COGS
Difference
WIP
Material / Significant FG
COGS
Actual
Costing Normal (if silent)

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

Spoiled Units

 Cannot be sold at original price

 No longer good units Unit Cost

Specific  WIP ↑
 due to exacting specification from customer
Normal  charged to customer
 w/n expectations
Common  OH-C No effect
Spoilage  internal failure
 charged to all units

Abnormal  Loss No effect

 outside expectations

SPOILED GOODS

NRV of spoiled xx Total units xx

Cost of spoiled (xx) Spoiled units (xx)
Loss xx Good units xx

CASE 1: If the rework costs are charged to the entity/to all production/internal failure.

Total Cost of Goods* xx  * include allowance to cost

Cost of Spoiled (xx)
Cost transferred to FG xx
Divide: Good units xx
Cost per unit xx

Note: Loss will be charged to manufacturing overhead

(MOH) and will be an actual overhead (OH).

CASE 2: Charged to customer/ “exacting specification”/specific job

Total Cost of Goods xx

NRV of Spoiled (xx)
Cost transferred to FG xx
Divide: Good units xx
Cost per unit xx

Note: Loss will be included in the costs

transferred to FG.

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

Defective Units

 Can be sold at original SP

 Still good units
 Incur rework cost

Unit Cost
Specific  WIP ↑
Normal
Defective / Rework Common  OH-C 
Abnormal  Loss 

Components of rework cost:

1. Direct material
2. Direct labor
3. Manufacturing overhead

CASE 1: If the rework costs are charged to the entity/to all production/internal failure.

Total cost of goods xx

Divide: Good units* xx  *Good units = Total units
Cost per unit xx

Note: Rework costs will be charged to manufacturing

overhead (MOH) and will be an actual overhead (OH).

CASE 2: Charged to customer/ “exacting specification”/specific job

Total cost of goods xx

Rework costs xx
Cost transferred to FG xx
Divide: Good units xx
Cost per unit xx

Note: Rework costs will be included in the costs

transferred to FG.

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

PROCESS COSTING
 High volume, similar, identical, homogenous products
 Assembly / Production line
 Ex. Pfizer, Unilab, Toyota, Lenovo, SMC

Objective: to determine the Unit Cost  SP  Demand

Cost of Production Report (CPR) JEs:

1. Units to Accounts For (UTAF) 0% 100% 1. Work-in-Process
2. Units Accounted For (UAF) Units
UTAF Various Accounts
3. Equivalent Units of Production (EUP) UAF
Total Units
4. Cost per EUP  Unit Cost 2. Finished Goods
@ the start
5. Cost Accounted For Work-in-Process

3. Cost of Goods Sold

0% 30% 100% Finished Goods

FIFO
WIP, beg
Methods
0% 30% 100%
WAVE
WIP, beg

Normal  increases UC Discrete  w/ inspection point

Spoilage Normal Spoilage
Abnormal  Loss Continuous  no inspection point
 method of neglect
Formulas:  as if the spoilage did not occur

1. UTAF N. Spoilage  0%
WIP, beg xx
Ab. Spoilage  100%  Loss
Started xx
UTAF xx

2. UAF
FIFO: Materials EUP Conversion Cost EUP
WIP, beg xx 0% Ø (1 – WIP, beg %) xx
Transferred-Out
Started xx 100% xx 100% xx
Normal Spoilage xx 100% xx 100% xx
Abnormal Spoilage xx 100% xx 100% xx
WIP, end xx 100% xx (WIP, end %) xx
UAF xx xx xx

WAVE: Materials EUP Conversion Cost EUP

TO xx 100% xx 100% xx
Normal Spoilage xx 100% xx 100% xx
Abnormal Spoilage xx 100% xx 100% xx
WIP, end xx 100% xx (WIP, end %) xx
UAF xx xx xx

Shortcut for EUP by Sir RMV

4. Cost per EUP
100% % Complete
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐶𝑜𝑠𝑡 Materials Conversion
FIFO = 𝐸𝑈𝑃 Completed / Transferred-out xx xx
EI EUP (EI units x % complete) xx xx
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐶𝑜𝑠𝑡+𝑊𝐼𝑃,𝑏𝑒𝑔 𝑐𝑜𝑠𝑡
WAVE = N. Spoilage xx xx
𝐸𝑈𝑃
Ab. Spoilage xx xx
5. Cost Accounted For Weighted Average EUP xx xx
EUP x Cost Per EUP (Materials) BI EUP LY (BI units x % Complete) (xx) (xx)
+ EUP x Cost Per EUP (Conversion) FIFO EUP xx xx
Cost Accounted For

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

Formula to compute completed/transferred-out units:

Beginning inventory in units xxx

Started/transferred-in units xxx
Ending inventory in units (xxx)
Lost units (normal + abnormal) (xxx)
Completed/transferred-out units xxx

Formulas to compute started and completed units:

Started/transferred-in units xxx Completed/transferred-out units xxx

Ending inventory in units (xxx) Beginning inventory in units (xxx)
Lost units (xxx) Started & completed units xxx
Started & completed units xxx

Lost units: EUP SCHEDULE

 Discrete: Normal/Abnormal
 Direct materials
 If the placement took place first, then 100%
 If the inspection took place first, then 0%

 Conversion costs
 Lost units x % of inspection

 Continuous Loss – method of neglect

 Normal loss = 0% as to materials and conversion costs

 Abnormal loss = 100% as to materials and conversion costs.

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

JOINT AND BY-PRODUCT COSTING
 two or more different products are manufactured in the same production process

Example:

Company X Chairs, Tables, Cabinets

Common to
all products A (Chairs)
B (Tables) Main Products
Joint Cost C (Cabinets)
DM, DL, OH (WIP) Separable Cost
0% 30% X (By-Product) 100%
(Further
 Saw dust Processing Cost)
 Relatively (FPC)
Split-off point small value

Issue #1: How to allocate Joint Cost to the main products?

1. Physical Measure (# of units, kg, meters)

2. Sales Value at Split-off (# of units x SP @ S.O.)
(MV)
3. NRV @ Split-off (# of units x SP – CTS) @ S.O
4. Approximated / Estimated / Hypothetical NRV (# of units x Final SP – CTS – FPC) @ S.O

Issue #2: How to report by-products?

S.O / Production Sale
 always measured at NRV
By-Product Invty Cash
Significant / Material  recognized @ point of production
WIP (↓ JC) By-P Invty
By-Product (inventory)

Insignificant / Immaterial recognized @ point of sale

no entry Cash
Other Inc.

Addition to sales revenue of the main product

Alternative Presentation for Other Income
Reduction from cost of sales

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

JUST-IN-TIME & BACKFLUSH COSTING
JIT  inventory management system; produce as needed
Traditional: manufacture  warehouse  order  deliver

 Benefits: reduces inventory storage cost & obsolescence

A JIT system requires an attitude that places emphasis on the following:

 Cooperation with a value chain perspective

 Respect for people at all levels
 Quality at the source
 Simplification or just enough resources
 Continuous improvement
 A long-term perspective

A JIT system also incorporates the following practices:

 Just-in-time purchasing
 Focused factories
 Cellular manufacturing
 Just-in-time production
 Just-in-time distribution
 Simplified accounting
 Process oriented performance measurements

Backflush Costing  simplified accounting

 trigger points (points wherein we make JEs)
Traditional JE (4 TP) Backflush (3 Trigger Points) 2 Trigger Points 1 Trigger Point

1. RM 1. MIP (RIP) V1 1. MIP 4. COGS

AP Purchase AP Purchase AP Purchase AP Sale
CC-Applied

2. WIP Production
3. FG 4. COGS
Var. Accts MIP Completion MIP Sale
CC-Applied CC-Applied

3. FG 4. COGS V2 3. FG
Completion Sale
WIP FG AP Purchase
CC-Applied

4. COGS Sale 4. COGS Dec. 31

Sale
FG FG CC-Applied
CC-Control
Diff  COGS

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM

ACTIVITY-BASED COSTING
 allocates overhead to multiple activity cost pools and assigns the activity cost pools to products and services by
means of cost drivers.
 A cost driver is any factor or activity that has a direct cause-effect relationship with the resources consumed.

Recall: Manufacturing Cost

Factory
DM
✔
DL 5hrs
OH rent, dep’n, taxes, insurance A B
₱100,000
300 units

𝑇𝑜𝑡𝑎𝑙 𝑂𝐻
OH Rate = 𝐶𝑜𝑠𝑡 𝐷𝑟𝑖𝑣𝑒𝑟
(Units produced, MH, LH)
Example:

A B Total A B
Units Produced 100 200 300 DM 2,000 4,000
Machine Hours 40 60 100 DL 5,000 10,000
DM ₱2,000 ₱4,000 OH 24,000 36,000
DL ₱5,000 ₱10,000 31,000 50,000
OH ₱60,000 ÷ 100 ÷200
÷ 100 UC 310 250
600/hr
Traditional Costing
OH  Product
1 OH Rate
Activity-Based Costing  more accurate cost allocation method

Products  Activities  Resources (MH, LH)

Steps:

1. Identify Activities
2. Identify Cost Driver per activity
3. Compute OH rate per activity (multiple OH rate)
4. Allocate OH to proceeds

Activity-Based Management (ABM)

Process of identifying value-adding activities  necessary to produce a product; maximize ↓ Costs,

Nonvalue-adding activities  do not add value to products; minimize ↑ Profitability
Activity Levels:

1. Unit Level  activities performed for each unit of production.

2. Batch Level  activities performed for each batch of products rather than each unit.
3. Product Level  activities performed in support of an entire product line.
4. Factory/Facility Level  activities required to support an entire production process.
5. Organizational Level

Quality Cost: High-quality products; ↓ defects / spoilages; ↑ profitability

1. Prevention Cost - cost to avoid defects during production

- Ex. Training workers, proper maintenance

2. Appraisal Cost - identification of defects before shipment

- Ex. Inspection cost / point

3. Internal Failure Cost - actual removal of defects before shipment

- Rework Cost

4. External Failure Cost - already been shipped with defects

- Ex. warranty, replacement

Reference: Sir Brad’s Lecture + Pinnacle Handout Compiled by: CPM