ACC 123 – COST ACCOUNTING AND CONTROL – Hand-out 3.

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Topic: Cost Accounting Cycle
Instructor: Marj Jules Lorain V. Juntilla, CPA
REV: 0
COST ACCOUNTING CYCLE

• Cost accounting provides the additional information required by management, and also provides data
necessary for the preparation of external financial statement.
• Cost accounting procedures are necessary for the determination of cost of goods sold on the income
statement and the valuation of inventories on the balance sheet.

Manufacturing Inventory Accounts

• Most manufacturing companies use the perpetual inventory approach.

• The following are the manufacturing inventory accounts:
o Materials Inventory
Materials Inventory account, also Materials Inventory Control account, is made up of the
balances of materials and supplies on hand.
o Work in Process Inventory
All manufacturing costs incurred and assigned to products being produced are classified as
Work in Process Inventory costs.
o Finished Goods Inventory
Finished Goods Inventory takes on the characteristics of Merchandise Inventory.

Elements of Manufacturing Cost

1. Direct materials
This is the cost of material which become part of the product being manufactured and which can be
readily identified with a certain product. Materials that cannot be readily identified with any
particular item manufactured are called indirect materials.

2. Direct labor
The cost of labor for those employees who work directly on the product manufactured are classified as
direct labor. The wages and salaries of employees who are required for the manufacturing process but
who do not work directly on the units being manufactured are considered indirect labor.

3. Factory Overhead

Includes all costs related to the manufacturing of a product except direct materials and direct labor.

Manufacturing Cost Flow

Direct Materials

Direct Labor Work-in-Process Finished Goods Cost of Goods Sold

Factory Overhead

ILLUSTRATION 1. – THE MANUFACTURING STATEMENT

The Noeled Products Company is a small, newly organized company that manufactures dining tables and chairs.
The company’s products are sold to jobbers or wholesale distributors, who in turn sell them to retailers.
The basic steps in the company’s manufacturing process are as follows:

1. Lumber is cut to size for table tops, legs, seats, arms, and backs.
2. The individual pieces of cut lumber are painted in various bright colors.

Page 1 of 2
Source:
Cost Accounting (2016) – De Leon, N., De Leon, E., & De Leon, G.
 ACC 123 – COST ACCOUNTING AND CONTROL – Hand-out 3.0
Topic: Cost Accounting Cycle
Instructor: Marj Jules Lorain V. Juntilla, CPA
REV: 0
3. The pieces are assembled into tables and chairs.

The beginning of Statement of Financial Position for the company on January 1 of the current year is
presented below:

NOELED PRODUCTS COMPANY

Statement of Financial Position

January 1, 2016

ASSETS LIABILITIES AND STOCKHOLDERS’ EQUITY

Cash 80,000 Liabilities 0
Building 750,000
Machinery and equipment 150,000 Capital stock 980,000
Total Assets 980,000 Total Liabilities and
Stockholders’ Equity 980,000

REQUIREMENT 1: Provide the journal entries for the following items.

1. Materials (lumber, paint, screws,' lubricants, and solvents) are purchased on account at a cost of
P50,000.
2. During the month. direct materials (lumber and paint) costing P 40,000 and indirect materials
(screws, lubricants for machine and solvents for cleaning) costing P 1 900 are: issued to the
factory.
3. Total payroll for the month amounted to P36,000, consisting of P20,000 earned by laborers working
on the product; P 7,000 for factory supervision; P 9,000 for sales and administrative employees.
4. Provide the entry for classifying payroll expenses.
5. Depreciation 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-tenths.
6. Depreciation for the machinery and equipment is 20% per year. This is used for factory production
purposes only.
7. The cost of heat, light, and power for the month is 3,000.
8. Miscellaneous expenses for telephone, office supplies, travel, rental of office furniture and
equipment totaled 1,500.
9. Factory overhead is charged to production at 85% of direct labor cost.
10. Assuming that 1,000 units were started and all have been finished.
11. Cost of materials, utilities, and selling and administrative expenses paid amounted to 34,000.
12. 800 tables are sold to jobbers at a net price of 86,240. The gross profit for each table is 40%
based on cost.
13. Cash totaling 55,000 is collected on accounts receivable.
14. The entry to close the factory overhead control and factory overhead applied.
REQUIREMENT 2: Prepare T-accounts for the journal entries.
REQUIREMENT 3: Prepare a Statement of Cost of Goods Sold.

- END OF HAND-OUT -

Page 2 of 2
Source:
Cost Accounting (2016) – De Leon, N., De Leon, E., & De Leon, G.