COST ACCOUNTING MODULE
The learner should be able to understand
COST ACCOUNTING AND CONTROL
(COST 1) MODULE
SCOPE
In this module, the learner is able to demonstrate understanding of key concept,
uses and importance of Cost Accounting and Control in real business world.
The course is designed as an introduction to higher cost accounting syllabus. This
will provide the students with clear understanding and appreciation of the concepts,
tools, and techniques of the cost accounting; gives students fundamental knowledge,
both theoretically and practically on cost accounting; examines the procedures
underlying the development of cost accounting system for managerial decision,
control, and performance reporting.
OVERVIEW AND OBJECTIVES
CHAPTER LEARNING COMPETENCIES
The learner should be able to understand
and know:
 The basic concepts of cost
accounting and its purpose.
1  The different classifications of
COST ACCOUNTING- Basic Concepts manufacturing costs – its
and the Job Order Cost Cycle inventories, cost accumulation
system and chart of costs.
 The introduction to the job order
cost system under normal costing.
The learner should be able to understand
2 and know:
Purchasing Materials  The detailed procedures and
documents required to account for
purchasing materials.
 The materials purchasing
procedures, reorder point and
economic order quantity.
and know:
 The appropriate systems for storing
3
and issuing materials and its
internal control.
Storing and Issuing Materials
 The principles of internal control,
special issuing procedures and
computerized system for issuance
of materials
The learner should be able to understand
and know:
 How to calculate the cost of
4 materials issued.
Controlling and Costing Materials  How physical inventories of
materials are taken
Inventory
 The different inventory costing
methods and inventory valuation
The learner should be able to understand
and know:
 One of the major cost elements
5 specifically the Labor cost.
Labor Accounting –Control and
 The accounting system for labor
Costing
cost: timekeeping and payroll
procedures; and charging labor
costs to production.
The learner should be able to understand
and know:
 The procedures in applying
manufacturing overhead using a
6 single predetermined overhead
Manufacturing Overhead Accounting
rate.
– Actual and Applied  The procedures in recording
manufacturing overhead.
 To analyze the under or over-
applied overhead.
The learner should be able to understand
7 and know:
Manufacturing Overhead –  The need for departmentalization
Departmentalization and its procedures.
 The different classifications of
department and calculation of
COST ACCOUNTING MODULE
departmental overhead application
rates.
The learner should be able to understand
and know:
 The difference between traditional
and activity-based costing.
8  The benefits and limitations of ABC
Systems.
Activity Based Costing (ABC) System
 The factors that indicate the need to
Method
switch to activity based costing
system.
 The hierarchy of activity levels and
steps for implementing ABC.
The learner should be able to understand
and know:
 The last two steps in the job order
9 cost accounting cycle: accounting
Completing the Cost Cycle and for the completion of goods and
Accounting for Production Losses accounting for the sale of goods.
 How to account for the production
losses such as scrap, spoiled goods
and defective goods.
Chapter 1:
COST ACCOUNTING- Basic Concepts and the Job Order
Cost Cycle
Objectives:
The learner should be able to understand and know:
 The basic concepts of cost accounting and its purpose.
 The different classifications of manufacturing costs – its inventories, cost
accumulation system and chart of costs.
 The introduction to the job order cost system under normal costing.
Start of Discussion
 BASIC CONCEPTS
The accounting system is the major quantitative information system in almost
every organization. It provides information for:
 Internal Reporting to managers, for use in planning and controlling
operations; for use in formulating plans and policies. (Management
accounting)
 External Reporting to stockholders, government and other outside parties.
(Financial Accounting)
Where does “cost accounting” fit within the framework?
In this broadest sense, cost accounting has the same three major purposes
as those described above. However, the third purpose simultaneously deals with
costing of products for inventory valuation and income determination. It therefore
fulfills the demands of outsiders and those of management for such information.
Cost Accounting is a management accounting, plus a small part of financial
accounting to the extent that its product costing function satisfies the needs of
external reporting.
 COST ACCOUNTING
- A system that records, summarizes, analyzes, and interprets the details of the
costs of materials, labor, and overhead necessary to produce and sell an
article.
- Refers to the gathering and providing information for decision needs of all
sorts, ranging from the management of recurring operations to the making
of strategic decisions and the formulation of major organizational policies.
- Refers to recording, classifying and reporting all costs aspects of company
performance during a particular period of time.
 PURPOSE OF COST ACCOUNTING
 Accounting tools for planning and controlling activities.
 Through modern systems of cost accounting, it is possible to know how much
it costs to construct, manufacture, or sell goods or to render various services.
 The ability to make specific and detailed identification and measurement of
cost elements permits management to reach decisions and evaluate results
with greater intelligence.
COST ACCOUNTING MODULE
 A knowledge of the costs of doing business is needed to estimate a job or to CONVERSION COSTS = Direct Labor + Manufacturing Overhead
bid for jobs or contracts.
 Cost accounting is also used in preparing a company’s budget.  INVENTORIES FOR A MANUFACTURING COMPANY
 Standard cost procedures are helpful in evaluating the results of operations.  RAW MATERIALS INVENTORY
- reflects the cost of raw materials inventory and factory supplies that will be
used in the manufacturing process.
 CLASSIFICATION OF MANUFACTURING COSTS
Manufacturing is the process of converting materials into finished goods by  WORK IN PROCESS INVENTORY
using labor and incurring other costs, generally called manufacturing overhead. - reflects the cost of raw materials, direct labor and manufacturing overhead
of goods on which manufacturing has begun but has not been completed at
 DIRECT MATERIALS the end of the fiscal period.
- Also called as raw materials, are those materials used in manufacturing
process that become a significant part of the finished goods.  FINISHED GOODS INVENTORY
- reflects the costs of goods that have been completed and are ready for sale.
 DIRECT LABOR
- The employees who work directly with the raw materials in converting  SYSTEM OF COST ACCUMULATION
them to finished goods represent direct labor. The basic objective of cost accounting is the determination or accumulation of a
product’s cost for inventory valuation and income determination.
 MANUFACTURING OR FACTORY OVERHEAD
- All costs incurred in the factory that cannot be considered direct materials 1. ACTUAL COST SYSTEM (HISTORICAL)
or direct labor. - An actual cost system collects the actual amounts of direct material, direct
- It is usually subdivided into three categories: indirect materials, indirect labor and factory overhead that are incurred for each product. The total
labor and manufacturing overhead. manufacturing costs are known only after the operation has been
completed.
 Indirect Materials – are used in small amounts in the manufacturing
process or that cannot easily be traced to specific products. Another type 2. STANDARD COST SYSTEM (Predetermined)
of indirect material, sometimes called factory supplies or operating - Costs are determined in advance from analysis and forecasts made before
supplies, consists of items that are used in the manufacturing process but the actual production begins.
do not become part of the finished goods.
3. NORMAL COST SYSTEM
 Indirect Labor – the wages of factory personnel who do not work directly - Combination of the actual and standard cost system. This cost system
on raw materials. accumulates only the actual amounts of direct material and direct labor
costs. Factory overhead costs are accumulated on the basis of a
 Other Manufacturing Overhead – includes such as payroll taxes on factory predetermined rate.
wages, rent, depreciation, taxes and insurance on factory building and
machinery and equipment. Product Costs Actual Costing Standard Costing Normal Costing
Direct Materials Actual Standard Actual
 PRIME AND CONVERSION COSTS Direct Labor Actual Standard Actual
PRIME COSTS= Direct Materials + Direct Labor Factory Overhead Actual Standard Predetermined
COST ACCOUNTING MODULE
 TYPES OF COSTS SYSTEMS Additional raw materials were purchased during the month of June at a cost of
P86,900. The purchase is debited to the asset account, Materials.
 JOB ORDER COST SYSTEM – accumulates costs applicable to each specified
job order or lot of similar goods manufactured on a specific order for stock or Materials 86,900
for a customer. When production on a job begins, the job is assigned a Vouchers/Accounts Payable 86,900
number, and a form called a job cost sheet is set up.
Raw Materials Used
 PROCESS COST SYSTEM – accumulates costs without attempting to allocate During the month, raw materials costing P90,400 were used as follows: Direct
them during the accounting period to specific units of goods being Materials P84,600 and Indirect materials 5,800.
manufactured. It is often referred to as average costing.
Work in process 84,600
 DUAL SYSTEMS – is often used when a company makes a standard parts or Manufacturing Overhead Control 5,800
subassemblies continuously and then incorporates them into finished goods Materials 90,400
built to customer specifications.
Factory Wages Earned
 INTRODUCTION TO JOB ORDER COST CYCLE – NORMAL COSTING During the month, wages and salaries totaling P102,300 were earned by the factory
 WORK FLOW employees and charged from factory payroll register to the Factory Payroll account,
The cost accountant’s job is to design a system in which all cost elements are as shown below:
recorded as incurred and then charged to production as the work flows through
the operating cycle. Factory Payroll 102,300
Withholding taxes payable 1,300
PROCUREMENT PRODUCTION WAREHOUSING SELLING SSS Contribution payable 200
Materials Work In Process Finished Goods COGS Pag-Ibig Contribution Payable 300
Factory Payroll Salaries and Wages Payable 100,500
MOH Control

Sample Problem: Labor Charged to Production

The Journal Entries and Accounts An analysis of the records indicates that labor costs of P102,300 should be allocated
as follows: Direct labor P66,500 and Indirect labor P35,800.
Beginning Balances
Freshmen Printers, Inc. is using a job order cost accounting system for some time. Work in Process 66,500
Assume that on June 1 these balances appear in the following accounts: Manufacturing Overhead Control 35,800
Factory Payroll 102,300
121 Materials P50,000
122 Work in Process 40,000 Manufacturing Overhead Costs
126 Finished Goods 30,000 Other overhead costs such as utilities, insurance and depreciation totaling P23,500
were incurred during the month.
Raw Materials Purchased Manufacturing Overhead Control 23,500
Vouchers payable and other accounts 23,500
COST ACCOUNTING MODULE
Manufacturing Overhead Applied to Products Less: WIP, ending xx
It is estimated that 80% of the direct labor cost is chargeable to jobs worked on Total Costs of Goods Manufactured P xx
during the month of June. An estimate of overhead applicable to each job must be Add: Finished Goods, beginning xx
made. Total Goods Available for Sale P xx
Less: Finished Goods, ending xx
Work in Process 53,200 Total Cost of Goods Sold P xx
Manufacturing Overhead control 53,200

***After the transfer, the Manufacturing Overhead Control account will have a INCOME STATEMENT
balance. It can be under-applied or over-applied overhead that is usually adjusted to Sales P xx
the Cost of Goods Sold account or pro-rated to WIP, Finished Goods and COGS. Less: Cost of Goods Sold xx
Gross Profit P xx
Transfer of Finished Goods Less: Operating Expenses xx
During the month, some jobs were completed and transferred to the finished goods Net Income Before Tax P xx
warehouse. These job cost P225,100. Provision for income tax xx
Net income after tax P xx
Finished goods 225,100
Work in Process 225,100
-End of Discussion-
Sale of Finished Goods SELF-CHECK TEST:
During the month, finished goods costing P221,500 were sold to various customers.  Identification: Provide the correct answer for each of the following
questions.
Cost of Goods Sold 221,500 1. The glue used in manufacturing armchairs and the thread used in sewing a
Finished Goods 221,500 suit are classified as this type of manufacturing cost. (Be specific)
2. It is the overall financial plan for future activities.
3. Reflects the primary sources of costs for units in production.
 FORMULAS 4. If the applied overhead is greater than the actual costs incurred, the
manufacturing overhead control account will have a credit balance that will
STATEMENT OF COST OF GOODS SOLD be called as
Raw Materials, beginning P xx 5. Indicates the costs required to convert the raw materials into finished
Add: Purchases xx products.
Total Raw Materials Available P xx
Less: Raw Materials, ending xx  True or False.
Total Materials Used P xx 1. The cost accountant’s job is to design a system in which specific cost elements
Add: Direct Labor xx are recorded as incurred and then charged to production as the work flows
Manufacturing Overhead Applied xx through the operating cycle.
Total Manufacturing Costs P xx 2. Purchases of materials, labor and overhead are recorded as credits to
Add: WIP, beginning xx Materials, Factory Payroll and Manufacturing Overhead control.
Total Costs of Goods Put in Process P xx
COST ACCOUNTING MODULE
3. A debit balance in the Manufacturing Overhead Control account means that a. Materials were purchased on account for P229,040.
less overhead was applied to jobs than the actual cost incurred. b. Payroll totaling P220,000 was accrued.
4. Conversion costs are consists of the direct labor and direct materials. c. Payroll was distributed as follows:: Jobs 101, 5,000 DLH @ P8; Job 102, 8,000
5. The work in process inventory reflects the manufacturing costs of goods on hrs. @ P10; Job 103, 6,000 hrs. @ P6. Indirect labor, P24,000 and selling and
which manufacturing has begun but has not been completed at the end of admin expense P40,000.
the fiscal year. d. Materials were issued as follows: P103,200 to Job 101; P84,000 to Job 102;
P29,150 to Job 103. Indirect materials costing P15,040 were issued.
 PROBLEM 1-1 e. Factory overhead was applied to Job 101, 102 1nd 103 at a rate of P4.50 per
Journal Entries and Statement of Cost of Goods Sold direct labor hour.
f. Jobs 101 and 102 were completed and immediately sold on account for P250,000
On January 1, the general ledger of Freshmen Company contained the and P270,000 respectively.
following accounts and balances: g. After allowing a 5% cash discount, a net amount of P494,000 was collected on
accounts receivable.
Cash P 94,000 h. Marketing and administrative expenses, other than salaries, paid during the
Accounts Receivable 100,000 month amounted to P30,000. Other factory overhead paid, P49,720.
Finished Goods 65,000 i. Payments on account, other than payrolls paid, amounted to P170,000.
Work in Process 15,000 j. Applied Factory overhead is closed to factory overhead control. The over and
Materials 44,000 under applied overhead is then closed to Cost of goods sold.
Machinery 90,600
Accumulated Depreciation- Machinery 20,000 Required:
Accounts Payable 118,750 1. Journalize the January transactions.
Ordinary Shares 200,000 2. Prepare a cost of goods sold statement.
Retained Earnings 69,850

Details of inventory are: Chapter 2:

Finished goods inventory: P65,000
Job 101 Job 102 PURCHASING MATERIALS
WIP inventory:
Direct materials: 1,000 units of A @ P5 5,000 Objectives:
400 units of B @ P3 1,200 The learner should be able to understand and know:
Direct labor: 1,000 hours @ P4 4,000  The detailed procedures and documents required to account for purchasing
400 hours @ P5 2,000 materials.
Factory overhead applied at the rate of  The materials purchasing procedures, reorder point and economic order
2,000 800 quantity.
P2 per direct labor hour
Total P 11,000 P 4,000
Start of Discussion
Materials inventory : P44,000
 MATERIALS CONTROL
During January, the following transactions were completed:
COST ACCOUNTING MODULE
Requirements to an effective material internal control system: - Receiving report shows all the details of the shipment, including
 Materials of the desired quality must be available when needed. comments on the condition of the materials received.
 Correct quantities and types of materials must be on hand at the right time - Receiving clerk receives the materials purchased. He/She is responsible
for production to proceed on schedule. for unpacking them, checking quantities and transferring them into
 Materials must be purchased on the most favourable prices. storeroom.
 Materials must be protected from loss or theft. - Storeroom supervisor signs the final copy to confirm that the materials
 Risks of spoilage and obsolescence must be minimized. have reached the storeroom.
 Cost of materials handling and storage must be kept to a minimum. - Storeroom clerk records the receipt of materials in a subsidiary ledger by
making an entry.
 ORGANIZATION FOR CONTROL
1. Purchasing Department Comparing Documents
2. Receiving Department - The purchasing department compares the supplier’s invoice or purchase
3. Storeroom (Stockroom) invoice with the purchase order and receiving report to make sure that
4. Accounting Department the materials ordered have been received in good condition and those
5. Cash Department listed only on the invoice.
- If all documents are in order, a check voucher also called disbursement
 MATERIALS PURCHASING PROCEDURES voucher, is prepared with supporting documents attached to it.
Purchasing Agent
- Has the responsibility for purchasing materials. Recording the Voucher
- The purchasing agent’s staff is part of the procurement section of the - The accounting department checks all the documents if they are properly
purchasing department. approved and signed.
Purchase Requisition - In verifying the account distribution against purchase order, the voucher
- Inform the purchasing agent of a need for materials. clerk enters the purchase in the voucher register. The voucher is send to
- Once the materials reach the reorder point, the storeroom supervisor the cash department for filing in the unpaid vouchers file.
completes a purchase requisition requesting that materials be ordered. Paying the Voucher
- Before the due date, the voucher is removed from the unpaid vouchers
Purchase Order file.
- When purchasing department receives the purchase requisition, source - Cash department prepares a check for the amount in the voucher
of supply must be selected.
- The purchase order is a written authorization to the supplier to ship the
 INVENTORY MANAGEMENT
specific material.
Formulation and administration of plans and policies to efficiently and
- Effective internal control procedures require that all purchase orders be
satisfactorily meet production and merchandising requirements and minimize
pre-numbered. costs relative to inventories.

Receiving Report INVENTORY MODELS

 Economic Order Quantity
COST ACCOUNTING MODULE
The quantity to be ordered, which minimizes the sum of the ordering and carrying  BILL OF MATERIALS
costs.  Lists all materials needed on the job and the date they will be needed.
 Ensure that sufficient material is available.
Where: o-cost of placing one order
√𝟐𝑫𝒐  Debit and Credit Memorandums
EOQ= D-annual demand in units Debit memorandum is a notice to the vendor of a deduction from the invoice
𝒄
c- annual costs of carrying one unit in inventory for one for the cost for the returned materials.
year Credit Memorandum is prepared by the purchasing agent as a notice for
additional cost to the supplier.
*When applied to manufacturing operations, the EOQ formula may be used to
compute the Economic Lot Size (ELS)  CONTROL PROCEDURES
Where o- set-up cost 1. Order cycling
2. Min-max method
√𝟐𝑫𝒐
ELS= D-annual production requirement 3. Two-bin method
𝒄 4. ABC plan
c- annual cost of carrying one unit in inventory for 5. Automatic order system
one year
-End of Discussion-
*When the EOQ figure is available, the average inventory is computed as follows:
Average Inventory= EOQ/2 SELF-CHECK TEST:
 Multiple Choice:
 Reorder Point 1. In a well-controlled material system, the purchasing agent performs the following
When to reorder: activities except the
- Lead Time-period between the time order is placed and received a. Placing of purchase orders with supplies
- Normal Time Usage- Normal Lead Time x Average Usage b. Receiving the purchase requisitions
- Safety Stock- (Maximum LT- Normal LT) x Average Usage c. Approving and checking of invoices
- Reorder Point if there is NO safety stock required d. Preparation of purchase order.
= Normal Lead Time Usage
- Reorder Point if there is Safety stock required 2. The purchase requisition is a document used to
= Safety stock + Normal Lead Time Usage or a. Initiate the return of merchandise to the vendor
= Maximum LT x Average Usage b. Inform the purchasing agent a need for materials
c. Initiate payment for materials ordered
 COMPUTERIZED MATERIALS PURCHASING SYSTEM d. Inform the purchasing department of a receipt of materials
 On-line purchasing system for materials allows companies to have up-to-date
information and improves the organization’s purchasing process. 3. The purchase order
 A computerized purchases system has an inventory file, a supplier file, and a. Is the list of materials requirements for each step in the production cycle
an open purchase order file in its memory. b. Contracts for quantities to be delivered
 To improve the process of requisitions, a computerized system can provide c. Informs the purchasing agent of the quantity and kind of materials needed
information about purchases to the various users of the system. d. Authorizes the storeroom to deliver materials to a given department
COST ACCOUNTING MODULE
4. The purchasing department performs all of the following functions, except
a. Compares quantities received with the suppliers’ packing list
b. Receives purchase requisitions for materials
c. Keeps informed concerning sources of supply, prices, and delivery schedules
d. Prepares and places purchase orders.
5. The factor that need not be considered when calculating an inventory economic
order quantity (EOQ) is
a. Safety stock level
b. Annual stock level
c. Annual sales of a product
d. Order-placing costs
6. A company has been ordering more than the economic order quantity. This
would result in
a. More frequent order points
b. Carrying costs greater than order costs
c. Equal safety stock costs and carrying costs
d. Carrying costs less than order costs
7. The materials requisition
a. Authorizes the storeroom to deliver types and quantities of materials to a
given department
b. Is the list of material requirements for each step in the production cycle
c. Informs the purchasing agent of the quantity and type of materials needed
d. Contracts for quantities to be delivered
8. The purchase requisition may originate from all of the following, except
a. A storeroom clerk
b. A materials record clerk
c. A receiving department clerk
d. Other department employee who needs materials f special nature
9. The receiving department does all of the following except
a. Unloads and unpacks incoming materials
b. Keeps informed concerning sources of supply, prices and delivery schedules
c. Matches materials received with descriptions on purchase orders
d. Arranges for inspection, when necessary
10. Charr Company has correctly computed its EOQ as 500 units. However,
management would order in quantities of P600 units. How will Charr’s total
annual purchase order cost and total annual carrying cost for an order quantity
of 600 units compare to the respective amounts for an order quantity of 500
units?
a. Lower purchase order cost and higher carrying cost
b. Higher purchase order cost and lower carrying cost
c. Higher purchase order cost and higher carrying cost
d. Lower purchase order cost and lower carrying cost
 Problem Solving:
Problem 2-1
Pakyawan Company is a wholesaler. It purchases 800,000 units of Product Z each
year for sale to retailers. The cost of placing an order is P40. The cost of holding one
unit of inventory for one year is P4.
REQUIRED:
1. Compute the economic order quantity.
2. How many order would Pakyawan place under the EOQ policy?
3. Compute the annual carrying cost for the EOQ.
4. Compute the annual ordering cost for the EOQ.
5. Compute the total inventory-related cost at the EOQ.
6. Previously, Pakyawan had been purchasing 8,000 units of product Z per order.
What is the ordering cost per year under the previous policy? The annual carrying
cost? How much money does using the EOQ policy save the company over the
policy of purchasing 8,000 unit per order?
Problem 2-2
Edwin Company sells educational toys. One raw material that it orders is plastic. The
plastic is melted and placed in molds to be used for the production of various toys.
Information pertaining to the plastic raw material is as follows:
Economic Order quantity 120,000 pounds
Average daily usage 8,000 pounds
Maximum daily usage 12,000 pounds
Lead time 3 days
REQUIRED:
1. What is the reorder point assuming no stock is carried?
2. Should the company decide to carry safety stock, how many units should that
be?
COST ACCOUNTING MODULE
3. What is the reorder point assuming that safety stock is carried? **Note:
No materials are issued from the storeroom without a materials requisition.

Chapter 3:  PRINCIPLES OF INTERNAL CONTROL

The procedures for storing and issuing materials should reflect the following
Storing and Issuing Materials principles of internal control:
 Admittance to the storage area must be restricted.
Objectives:  Materials ledger cards showing all receipts and issuance must be maintained.
The learner should be able to understand and know:  Each type of materials must be clearly identified, stored and carefully
 The appropriate systems for storing and issuing materials and its internal protected while on storage.
control.  Materials must be issued only upon proper written authorization.
 The principles of internal control, special issuing procedures and  The accounting system should include a periodic check of the materials ledger
computerized system for issuance of materials against the balance of the raw materials control account.
 Different persons must be involved in the storing and issuing operations.
Start of Discussion
 SPECIAL ISSUING PROCEDURES
 STORING MATERIALS Materials returned to Storeroom
 Storeroom Supervisor – responsible for the protection of the materials in - When returning materials to storeroom, a return materials report is
the storeroom, and for the identification of materials. prepared as a result of requisitioning too many materials, withdrawing wrong
 Bin tag – an informal record showing the quantities of the materials received, materials or other reasons.
issued and on hand at all times.
Materials Returned to Suppliers
 ISSUANCE OF MATERIALS - A return shipping order authorizing the return to supplier is prepared by
the purchasing agent together with a debit memorandum, both in triplicate.

 COMPUTERIZED SYSTEM FOR MATERIALS’ ISSUANCE

- Uses the quantity and material number to update the inventory file for that
material and to determine whether more units should be ordered.
- Facilitates to update inventory records, simplifies processing purchase orders,
and provides effective internal control system for materials issuance.

-End of Discussion-

SELF-CHECK TEST:
 Questions:
1. What are the internal control procedures for purchasing accompanied in
storing and issuing materials?
COST ACCOUNTING MODULE
2. Where does a material ledger card used for? c. Materials ledger card
3. Why is it important to have a material requisition before issuing materials d. Purchase order
from the storeroom?
4. Do principles of internal control need to reflect in the procedures of storing 6. The bin tag
and issuing materials? a. is a record showing the vouchers issued
5. Give some basic concepts to be followed by manufacturing companies in b. is an informal but carefully maintained record showing the quantities of
storing and issuing raw materials. the materials received, issued, and on hand
c. is a name tag used by employees for identification purposes
 Multiple Choice Questions: d. is a record of materials requisitions
1. Entries made in Materials account in the general ledger are the following,
except 7. After recording the materials requisition in the materials requisition journal,
a. Materials purchased the cost clerk post the data from the requisitions to the material section of
b. Materials issued the
c. Materials returned a. Departmental overhead analysis sheet
d. Materials reserved and on order b. Bin tag
c. Job cost sheet
2. Indirect materials that cannot be charged to a specific job are posted from d. Materials ledger card
the materials requisition to the
a. Materials ledger card 8. What is the purpose of using a materials requisition journal?
b. Departmental overhead analysis sheet a. To avoid losses due to thief
c. Bin tag b. To avoid writing the many long and repetitious entries in issuing and using
d. Receiving report materials
c. To avoid mathematical errors
3. No materials may be issued without a written document called the d. To avoid error in journalizing the requisitions
a. Receiving report
b. Materials issued 9. The person who is responsible of recording the requisition in the materials
c. Materials requisition ledger card is the
d. Material ledger card a. Storeroom supervisor
b. Storeroom clerk
4. The person who is responsible for the protection of the materials in the c. Purchasing agent
storeroom, and for identification of the materials is the d. Accounting clerk
a. Storeroom clerk
b. Receiving clerk 10. A materials requisition journal
c. Storeroom supervisor a. Is a special journal where the issuance is journalized
d. Purchasing agent b. Is a general journal where the requisition is journalized
5. Materials return to storeroom are recorded in the following documents, c. Is a special journal where the purchase requisition is recorded
except d. Is a special journal where the purchase orders are recorded
a. Bin tag
b. Returned materials report
COST ACCOUNTING MODULE
Chapter 4: 8 Requisition 500
18 Purchase 700 210 147,000
Controlling and Costing Materials Inventory
22 Requisition 800
31 Purchase 500 220 110,000
Objectives:
The learner should be able to understand and know:
The ending inventory is 700 units.
 How to calculate the cost of materials issued.
 How physical inventories of materials are taken
FIFO- Periodic
 The different inventory costing methods and inventory valuation
Units Unit cost Total Cost
From Jan.18 Purchase 200 P210 P 42,000
From Jan.31 Purchase 500 220 110,000
Start of Discussion 700 P152,000

Cost of Goods Sold

 INVENTORY COSTING METHODS Inventory – January 1 P160,000
Purchases (147,000 + 110,000) 257,000
 Specific Identification Goods Available for Requisition P417,000
- Means that specific costs are attributed to identified items of inventory. Inventory – January 31 (152,000)
- This method is appropriate for inventories that are segregated for a specific Cost of Materials used P265,000
project and inventories that are not ordinarily interchangeable.

FIFO – Perpetual
This requires the preparation of stock card.
Three Methods to Determine Cost of Ending Inventory
 First In, First Out (FIFO) Purchases Requisition Balance
- The goods first purchased are first sold and consequently the goods Unit Total Unit Total Unit Total
Date
remaining in the inventory at the end of the period are those most recently Units Cost cost Units cost cost Units Cost Cost
purchased or produced. Jan.1 800 200 160,000
8 500 200 100,000 300 200 60,000
- The objection to this method is that there is improper matching of cost against
18 700 210 147,000 300 200 60,000
revenue. 700 210 147,000
22 300 200 60,000
500 210 105,000 200 210 42,000
Illustration – FIFO 200 210 42,000
The following data pertain to an inventory item: 31 500 220 110,000 500 220 110,000

Unit Requisition
Units Total Cost
cost in units  Weighted or Moving Average Method
Beginning - All the costs are commingled and an average cost is computed with each new
Jan.1 800 200 P160,000
Balance purchase and assigned to materials issued and on hand.
COST ACCOUNTING MODULE
 Weighted Average – Periodic Total 1,000 207 207,000
- Average cost is computed by dividing the total cost of goods available for 22 Requisition (800) 207 (165,600)
requisition by the total number of units available for requisition. Balance 200 207 41,400
31 Purchase 500 220 110,000
The preceding illustrative data are used. Total 700 216 151,400

Cost of Materials used from the stock card

Units Unit cost Total cost
January 8 Requisition 100,000
Jan. 1 Beginning Balance 800 200 160,000
22 Requisition 165,600
18 Purchase 700 210 147,000
31 Purchase 500 220 110,000 265,600
Total Goods Available for Sale 2,000 417,000
 Last in, First out (LIFO)
Weighted Average unit cost (417,000/2,000) P208.50 - The last materials purchased are the first materials to be used. Then the
Inventory cost (700 x P208.50) 145,950 materials on hand are assumed to be the first one purchased.

Cost of Goods Sold

Inventory – January 1 P160,000  MEASUREMENT OF INVENTORY (PAS 2)
Purchases 257,000 Inventories shall be measured at the lower of cost and net realizable value
Goods Available for Requisition P417,000 (LCNRV).
Inventory – January 31 (145,950)
Cost of Materials used P271,050  Net Realizable Value (NRV)
- Estimated selling price in the ordinary course of business less the estimated
cost of completion and estimated cost of disposal.
 Weighted Average – Perpetual - When the NRV has declined below the original cost, inventory should be
- When used in conjunction with the perpetual system, the weighted average valued at NRV instead of cost.
method is popularly known as the moving average.
- A new weighted average cost per unit must be computed after every purchase Determination of Net Realizable Value
and purchase return. Inventories are usually written down to net realizable value on an item by item
- The total cost of goods available for requisition after every purchase and or individual basis. However, it may be appropriate in some circumstances to
purchase return is divided by the total units available for requisition to get a group similar or related items.
new weighted average unit cost.
 ACCOUNTING FOR INVENTORY WRITEDOWN
Units Unit cost Total cost  If the cost is lower than net realizable value, there is no accounting problem
Jan 1 Balance 800 200 160,000
because the inventory is measured at cost and the increase in value is not
8 Requisition (500) 200 (100,000)
recognized.
Balance 300 200 60,000
18 Purchase 700 210 147,000
COST ACCOUNTING MODULE
 If the net realizable value is lower than the cost, the inventory is measured LCNRV Item by item or individual P7,850,000
at net realizable value and the decrease in value is recognized.
Cost NRV LCNRV
 METHODS OF ACCOUNTING FOR INVENTORY WRITEDOWN Category 1 1,400,000 1,490,000 1,400,000
a. Direct Method or Cost of goods sold method Category 2 3,500,000 3,460,000 3,460,000
- The inventory is recorded at the lower of cost or net realizable value. Category 3 3,100,000 3,150,000 3,100,000
- This method is also known as cost of goods sold method because any loss
on inventory writedown is not accounted for separately but buried in the LCNRV by Category 7,960,000
cost of goods sold.
Cost NRV LCNRV
LCNRV by Total 8,000,000 8,100,000 8,000,000
b. Allowance method or loss method
- The inventory is at cost and any loss on inventory writedown is accounted
The inventory is measured at the lower of cost and net realizable value applied on
for separately.
an item by item or individual basis.
- This method is also known as loss method because a loss account, “loss
on inventory writedown” is debited and a valuation account, “allowance
Cost - December 31, 2020 8,000,000
for inventory writedown” is credited.
Net Realizable Value 7,850,000
Inventory Writedown 150,000
Illustration:
Inventory data at December 31, 2020:
DIRECT METHOD
Cost NRV LCNRV
The inventory is recorded at lower of cost and net realizable value at year-end.
Category 1
A 110,000 100,000 100,000
B 690,000 750,000 690,000 Inventory – December 31, 2020 7,850,000
C 600,000 640,000 600,000 Income Summary 7,850,000
Subtotal 1,400,000 1,490,000
Category 2 ALLOWANCE METHOD
D 2,000,000 1,900,000 1,900,000 The inventory is recorded at cost at year-end.
E 1,500,000 1,560,000 1,500,000 Inventory – December 31, 2020 8,000,000
Subtotal 3,500,000 3,460,000 Income Summary 8,000,000
Category 3
F 1,500,000 1,460,000 1,460,000 The inventory writedown is accounted for separately:
G 1,600,000 1,690,000 1,600,000 Loss on inventory writedown 150,000
Subtotal 3,100,000 3,150,000 Allowance for Inventory Writedown 150,000
Grand total 8,000,000 8,100,000 7,850,000
COST ACCOUNTING MODULE
***Note: 29 Issued 250 units, Requisition 08.
- Any writedown to NRV should be recognized as an expense in the period in
which the writedown occurs. Any reversal should be recognized in the income Required:
statement in the period in which the reversal occurs. 1. Enter the beginning balance on a materials ledger card for each of the two
inventory costing methods; FIFO and weighted average. (Periodic and Perpetual)
Round unit costs to the nearest centavo under the weighted average costing
-End of Discussion- method.
2. Give the ending inventory for each inventory costing method.
SELF-CHECK TEST:
 Problem 4-1
Assume the inventory records of Marupok Company shows the following data:
 Problem 4-3
Goodboy Printers presented the following data for the fiscal year ending January 31,
Units Unit cost Net Realizable Value
Materials: 2020:
R1 1,000 P110 P100
S2 2,000 250 260 Sales P729,370
T3 3,000 300 330 Sales Returns and allowances 48,211
Goods in Process: Finished Goods inventory, beginning 47,910
X4 4,000 500 480 Finished Goods inventory, ending 49,620
Y5 5,000 650 620 Cost of goods manufactured 422,280
Finished Goods: Selling expenses 96,357
A6 2,000 800 790 Administrative expenses 60,061
B7 2,000 730 780 Loss on inventory writedown 9,682
Income tax rate 30%
Required:
Determine the valuation of inventory in accordance with Philippine Accounting
Standards No. 2 “Inventories”. Required:
Prepare a statement of comprehensive income for the current year.

 Problem 4-2  Problem 4-4

The Mimi Manufacturing Company uses the perpetual inventory system in controlling The following data relates to the materials inventory of LS Manufacturing, Inc. on
its materials. Data relating to Material B-10 during March 2020 are given below: July 31,2020:
Materials Inventory at Cost P365,900
March 1 Balance 1,000 units at P125 each. Materials Inventory at NRV 379,100
5 Issued 400 units, Requisition 01.
9 Received 600 units at P140 each, Purchase Order 06 Required:
13 Issued 850 units units, Requisition 04
22 Received 200 units at P145 each,Purchase Order 023
COST ACCOUNTING MODULE
1. Journal entry for July 31, 2020. Assuming that the company wants to report Chapter 5:
materials inventory on its statement of financial position using the lower of cost
Labor Accounting –Control and Costing
and net realizable value.
2. Journal entry for July 31,2021 assuming the following Objectives:
Materials Inventory P348,105 The learner should be able to understand and know:
Net Realizable Value 341,755  One of the major cost elements specifically the Labor cost.
3. Journal Entry for July 31, 2022, assuming:  The accounting system for labor cost: timekeeping and payroll procedures;
Materials Inventory P337,740 and charging labor costs to production.
Net Realizable Value 339,675
4. Compute for the allowance for inventory writedown for year 2020, 2021 and
2022. Start of Discussion

 TIMEKEEPING PROCEDURES
 Problem 4-5 Involves two major procedures in labor costing:
Zeny Company manufactures and sells four products, the inventories of which are 1. Accumulation of the total number of hours worked by each employee so that
priced at cost or net realizable value whichever is lower. A normal profit of 30% is their earnings can be computed;
usually maintained on each product. The following data is compiled as of December 2. Determination how the labor hours were spent so that distribution can be
31,2020: made in the cost records.

Original Cost to Estimated Selling Normal  Time Cards

- Sometimes called clock card.
Product cost Sell Price Price
- This is the most common form of employee’s attendance record.
A1 P700 P150 P800 P700
B2 475 205 950 950
C3 255 50 300 350  PAYROLL PROCEDURES
The number of hours worked each day of employees under the hourly rate is
D4 450 260 1,000 900
transferred from the time card to the payroll register (payroll sheet).
Required:
 Weekly Factory Payroll Register
Determine the unit value for each product applying the lower of cost or net realizable After computing the gross earnings of each employee, appropriate deductions
in valuing inventory. are made and entered in the proper columns and the net pay for each employee
is determined.
 Semi-monthly Factory Payroll
Used to record salaries of some factory supervisors and managers who earned
fixed monthly salaries payable in two installments.

 Deductions from Employee’s Earnings

 Income taxes
 SSS Contributions
COST ACCOUNTING MODULE
 Phil. Health Contributions  EMPLOYER’S CONTRIBUTIONS
 PAG-IBIG Fund or Development Mutual Fund Contributions - Employer’s contribution relating to factory workers are charged to
 Employer’s Contributions Manufacturing Overhead Control account.
- Employer’s contributions relating to other employees are charged to
 Recording Payroll from the Payroll Register expense.
Factory Payroll xxx
Withholding tax payable xxx  Labor-Related Costs
SSS Contributions Payable xxx Fringe Benefits – are expenditures made by the employer on behalf of the
Phil. Health Contributions Payable xxx employees. These costs are charged to MOH account. However, few companies
Pag-ibig Contributions Payable xxx treat fringe benefits related to direct labor as part of direct labor cost rather than
Payroll Payable xxx MOH.

 Paying the Payroll  Overtime Premium Computation

Payroll Payable xxx Illustration:9,360
Vouchers Payable xxx An employee is required to work beyond 8 hours on ordinary working days. The
employee is to be paid an additional for overtime work in an amount equal to his
Vouchers Payable xxx regular rate plus fifty percent thereof. If the employee is paid P30 per hour for regular
Cash in Bank xxx working day, his overtime hourly rate is computed as follows:

 CHARGING LABOR COSTS INTO PRODUCTION Regular hourly rate P30

Time Tickets Overtime premium pay rate 15
- Sometimes called job time cards, are used to show how time used on Overtime hourly rate P45
specific jobs.
- The format of time tickets varies depending on the organization of the If the employee worked for 12 hours in an ordinary day, his gross earnings for the
company and the extent to which the company’s operations are day would be:
computerized.
Earnings at regular rate (8 hrs. x P30) P240
Unearned Wages Overtime (4 hrs. x P30) 120
- Labor costs that have been incurred but not yet been paid are to be Overtime premium (4 hrs. x P15) 60
accrued. Gross earnings P420
- Production is charged with all labor costs in the period in which they are
incurred. Overtime Premium may be charged to: (Journal entry)
1. Specific Job
 Recording Labor Costs Work in Process xxx
Work in Process xxx Factory Payroll xxx
Manufacturing Overhead Control xxx
Factory Payroll xxx 2. Manufacturing Overhead Control
Work in Process xxx
Manufacturing Overhead Control xxx
COST ACCOUNTING MODULE
Factory Payroll xxx 1. Journal entry to record the labor cost if the overtime premium is charged to the
jobs worked on during the overtime hours.
2. Journal entry to record the labor cost if the overtime premium is not charged to
-End of Discussion- specific jobs.

SELF-CHECK TEST: Problem 5-3

Problem 5-1 Alex Morada, a production worker earns P27,600 per month and the company pay
May Company is preparing its monthly payroll for August. The following data the worker a year-end bonus equivalent to one month’s wages. Morada is also
apply to Jane Dew, the chief accountant: entitled to a half-month paid vacation payments be treated as indirect costs and
accrued during the 11 ½ months the employee is at work.
a. Year to date, through July:
Gross payroll P144,000 Required: The journal entry to record and distribute the labor cost of the production
SSS premiums withheld 9,360 for the month.
Income tax withheld 19,200
Take home pay P115,440

b. Jane’s August earnings were P18,000. Income tax to be withheld is

P2,400. Chapter 6:
Manufacturing Overhead Accounting – Actual and Applied
The following rates are available for payroll distribution:
Withholding tax 1% Objectives:
SSS Contributions 10% (40% employee; 60% employer) The learner should be able to understand and know:
Employee’s Compensation  The procedures in applying manufacturing overhead using a single
2% (employer only)
Contributions predetermined overhead rate.
Phil. Health Contribution 2% (50% employee; 50% employer)  The procedures in recording manufacturing overhead.
PAG-IBIG Contributions 3% (50% employee; 50% employer)  To analyze the under or over-applied overhead.

Required:
1. The journal entry to record labor incurrence for August. Start of Discussion
2. The journal entry to record labor distribution and the related employer’s
contribution.
 NATURE OF MANUFACTURING OVERHEAD
Problem 5-2 - Manufacturing overhead costs are generally defined as costs that are not
Boruto, an employee of the Naruto Company is paid P300 per hour for a regular week conveniently identified with particular orders or units of products.
for 40 hours. During the week ended November 14, the employee worked for 48 - Other names used for MOH are manufacturing expenses, factory burden,
hours and earned time and a half for overtime hours. factory overhead, factory expenses and indirect manufacturing costs.

Required:  PURPOSE OF OVERHEAD RATES

COST ACCOUNTING MODULE
- The primary purpose of using a predetermined overhead rate is to charge a 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑖𝑛𝑔 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝐶𝑜𝑠𝑡𝑠
= Rate per Direct Labor Hour
fair share of overhead costs to each job. 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝐷𝑖𝑟𝑒𝑐𝑡 𝐿𝑎𝑏𝑜𝑟 𝐻𝑜𝑢𝑟𝑠
- Predetermined overhead rate are used to estimate the manufacturing
overhead costs.
𝑃 96,000
= P2.40 per direct labor hour
 DETERMINATION OF OVERHEAD RATE 40,000 𝐻𝑟𝑠.
- This rate is computed by the preparation of a manufacturing overhead budget
based on a certain activity level. 3. Direct Material Cost Basis
- The ratio is usually called the overhead application rate. To use materials costs as a base, each product manufactured must require
approximately the same amount of materials or materials usage must be
Types of Overhead Rate Bases distributed uniformly throughout the manufacturing process.
1. Direct labor costs
2. Direct labor hours 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑖𝑛𝑔 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝐶𝑜𝑠𝑡𝑠
= Percentage of Materials
3. Direct material costs 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝐷𝑖𝑟𝑒𝑐𝑡 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙𝑠 𝐶𝑜𝑠𝑡𝑠
4. Machine hours Costs
5. Units of production
𝑃 96,000
= 20% of materials costs
Illustration: 𝑃480,000
Assume the following budgeted data for the year:
Manufacturing overhead costs P 96,000 4. Machine Hours Basis
Number of units of production 24,000 units This basis is usually used in automated factory where machine perform most of
Direct material costs P480,000 the work and each item goes through similar sequence of machines.
Machine hours 12,000 hours
Direct labor hours 40,000 hours 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑖𝑛𝑔 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝐶𝑜𝑠𝑡𝑠
= Rate per Machine Hour
Direct labor costs P200,000 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑀𝑎𝑐ℎ𝑖𝑛𝑒 𝐻𝑜𝑢𝑟𝑠

1. Direct Labor Costs Basis 𝑃 96,000

= P8 per machine hour
The direct labor costs basis is usually used in cases where the manufacturing 12,000
overhead costs vary with direct labor costs.
5. Units of Production Basis
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑖𝑛𝑔 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝐶𝑜𝑠𝑡𝑠 The units of production basis have limited uses. This rate is used only if the
= Percentage of Direct Labor manufacturing process is a simple one and only if one type, or a few similar types,
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝐷𝑖𝑟𝑒𝑐𝑡 𝐿𝑎𝑏𝑜𝑟 𝐶𝑜𝑠𝑡𝑠
Costs of products are produced.
𝑃 96,000
= 48% of direct labor costs 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑀𝑎𝑛𝑢𝑓𝑎𝑐𝑡𝑢𝑟𝑖𝑛𝑔 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝐶𝑜𝑠𝑡𝑠
𝑃200,000 = Overhead Cost per Unit of
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑈𝑛𝑖𝑡𝑠 𝑜𝑓 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛
2. Direct Labor Hours Basis Production
This method assumes that overhead costs tend to vary with the number of hours 𝑃 96,000
= P4 per unit
of direct labor used. 𝑃24,000
COST ACCOUNTING MODULE

 RECORDING MANUFACTURING OVERHEAD COSTS  Statement of Financial Position Presentation

 Recording Applied Manufacturing Overhead costs  Statement of Comprehensive Income Presentation
It should be noted that the Work in Process is not to be debited for any of
the actual manufacturing overhead costs.

Work in Process xxx -End of Discussion-

Manufacturing Overhead Control xxx
SELF- CHECK TEST:
 Recording Actual Manufacturing Overhead costs  Problem 6-1
This is recorded by a debit to manufacturing overhead control account. The Pearl Company assembles and sells one product. The costs per unit are:
materials, P15; labor P17. Production for year 2020 is estimated to be 20,000 units.
 OVERAPPLIED OR UNDERAPPLIED OVERHEAD Estimated manufacturing overhead is:
 Overapplied Overhead (credit balance in MOH Control)
- Actual overhead costs < Applied overhead costs Indirect labor P22,000
Indirect materials 16,000
 Underapplied Overhead (debit balance in MOH Control) ` Depreciation 7,000
- Actual overhead costs > Applied overhead costs Light and power 5,000
Others 10,000
***Note:
At the end of the period, the balance of the Manufacturing Overhead Control Completed production for 2020 was 18,000 units and actual manufacturing overhead
account is closed to Overapplied or Underapplied Manufacturing Overhead cost was P56,500. There are no beginning or ending work in process inventories.
account in the general ledger.
Required:
Underapplied Manufacturing Overhead xxx a) The journal entries for materials, labor and overhead.
Manufacturing Overhead Control xxx b) The entry to close the over or underaplied manufacturing overhead.

Manufacturing Overhead Control xxx  Problem 6-2

Overapplied Manufacturing Overhead xxx The following data are available for the Bhelat Company on December 31,2020:

 DISPOSITION OF OVERAPPLIED OR UNDERAPPLIED MNUFACTURING Work in Process Finished Goods Cost of Goods Sold
OVERHEAD Direct materials P 4,000 P12,000 P 24,000
Direct labor 4,000 32,000 64,000
 If the amount is material or significant, the over or underapplied overhead Applied overhead 4,000 32,000 64,000
should be allocated proportionately among Work in Process, Finished goods, Total P12,000 P76,000 P152,000
and Cost of Goods Sold.
The balance of the Manufacturing Overhead Control account has been closed to Over
 If the amount is immaterial or insignificant, the over or underapplied or Underapplied Overhead account. Beginning inventories were immaterial.
overhead should be allocated directly to the Cost of Goods Sold.
COST ACCOUNTING MODULE
Required: c 48,000 48,000 ? (12,000) ?
Prepare journal entry to close the Over and Underapplied Manufacturing Overhead, d ? ? 36,000 2,000 4,000
assuming: e 36,000 40,000 ? 6,000 ?
1. Underapplied overhead of P8,000 is to be allocated to inventories and cost of f 54,000 ? ? (12,000) (4,000)
goods sold. g 32,000 32,000 ? 0 ?
2. Overapplied overhead of P8,000 is to be allocated to inventories and cost of
goods sold in proportion to the balances in those accounts. Required: Complete the missing figures.
3. Underapplied manufacturing overhead of P10,000 is allocated to cost of goods
sold.
4. Underapplied overhead of P1,000 is to be allocated to inventories and cost of
goods sold in proportion to the amounts of applied overhead contained in those
accounts.
Chapter 7:
Manufacturing Overhead – Departmentalization
 Problem 6-3
The normal operating capacity of Regina, Inc. is 150,000 machine hours per month, Objectives:
the level used to compute the predetermined overhead application rate. At this level The learner should be able to understand and know:
of activity, fixed manufacturing overhead is estimated to be P900,000 and variable  The need for departmentalization and its procedures.
manufacturing overhead is estimated to be P450,000. During April, actual production  The different classifications of department and calculation of departmental
required 140,000 machine hours, and actual manufacturing overhead totalled overhead application rates.
P1,305,000.

Required:
Start of Discussion
1. Compute the manufacturing overhead application rate.
2. Is manufacturing overhead for April over-or underapplied and by how much?
3. How much is the controllable variance?  NEED FOR DEPARTMENTALIZATION
4. How much is the volume variance? - In large businesses, factory operations are divided into departments which is
called the departmentalization.
 Problem 6-4 - Departmentalization requires the use of different overhead rates for applying
Following are eight sets of partial manufacturing overhead data, with favourable manufacturing overhead. Various amounts of manufacturing overhead are
variances shown in parenthesis. charged to jobs or products as they pass through the different departments.

Budget
Allowance
 CLASSIFICATION OF DEPARTMENTS
Actual Applied Based on
Manufacturing Manufacturing Capacity Controllable Volume  Producing departments
Overhead Overhead Utilized Variance Variance - Are those departments that are directly engaged in the manufacturing
a P60,000 P58,000 P64,000 ? ? activities.
b ? 30,000 ? 2,000 14,000  Service Departments
COST ACCOUNTING MODULE
- Are those departments that assist indirectly by rendering services to Illustration 1:
producing departments. Assume the following data for August 2020:
Service Department Allocation Bases
Personnel Number of employees in each
 PROCEDURES OF DEPARTMENTALIZATION producing department
1. Calculate departmental predetermined overhead application rates. Building maintenance Floor space occupied by each
2. Apply the predetermined overhead rates to production on a department basis. producing department
3. Record actual manufacturing overhead costs by departments in the Power plant Kilowatt hours of power usage in
Departmental Overhead Analysis Sheet. producing department

The following data for each department during August 2020 are obtained:
Number of Floor Kilowatt
 METHODS OF ALLOCATING SERVICE DEPARTMENT COSTS TO
Department Costs Employees Space Hours
PRODUCING DEPARTMENT
Service Department
Personnel P 3,600 5 1,500 -
 Direct Method Building Maintenance 2,000 4 2,500 -
- The costs of each service department are allocated ONLY to producing Power Plant 1,000 2 4,000 -
departments.
Producing Department
 Step Method Machining 11,800 10 10,000 7,000
- Allocates service department costs to all service departments as well as Assembly 8,600 20 10,000 3,000
producing departments. This method allocates service costs to the
operating departments and other service departments in a sequential Suggested Solutions:
process.  Direct Method
- The sequence of allocation generally starts with the service department Department Costs Machining Assembly
that has incurred the greatest costs. After this department’s costs have Personnel P 3,600 P 1,200 P 2,400
been allocated, the service department with the next highest costs has its Bldg. Maintenance 2,000 1,000 1,000
costs allocated, and so forth until the service department with the lowest
costs has had its costs allocated. Power Plant 1,000 700 300
- Costs are not allocated back to a department that has already had all of P 6,600 P 2,900 P 3,700
its costs allocated.
 Step Method
 Reciprocal Method Allocated Costs
- Provides a way to adjust for the reciprocal services provided among the Building Power
Department Cost Personnel Maintenance Plant Machining Assembly
service departments.
Personnel P3,600 P (3,600) P 400 P 200 P1,000 P2,000
- Service department costs and service department reciprocal service
Building
relationships are described by an algebraic equation. Maintenance 2,000 (2,400) 400 1,000 1,000
COST ACCOUNTING MODULE
Power Plant
1,000 (1,600) 1,120 480 C = P126,396
P6,600 P3,120 P3,480
The allocation of costs of Service Departments A, B and C according to
percentage of services:
A B C X Y
Illustration 2:
Cost prior to allocation P200,000 P140,000 P100,000 P- P-
Assume the following data for Departments A, B and C which provides services
Allocation of A (217,259) 32,589 10,863 119,492 54,325
to each other and to producing departments X and Y.
Allocation of B 17,259 (172,589) 15,533 31,066 108,731
Percentage of Services
Allocation of C ________ ________ (126,396) 25,279 101.117
Total Cost A B C X Y
Total P -0- P -0- P -0- P175,837 P264,163
A – P200,000 - 15% 5% 55% 25%
B – 140,000 10% - 9% 18% 63%
C – 100,000 - - - 20% 80% -End of Discussion-
SELF-CHECK TEST:
 Reciprocal Method  Problem 7-1
The following equations may be developed: The Vico Company has two service departments and two producing departments.
A (costs) = P200,000 + .10B The following are the overhead of each department:
B (costs) = P140,000 + .15A
C (costs) = P100,000 + .05A + .09B Service Department:
Factory Administration P129,000
The equations may be solved algebraically as follows: Building and Grounds 105,000
We can use substitution method: Producing Department:
1. A = P200,000 + .10B Machinery 416,000
A = P200,000 + .10 (P140,000 + .15A) Assembly 380,000
A = P200,000 + 14,000 + 0.015A
A - .015A = P214,000 Additional Information:
.985A = P214,000 Estimated Total Labor
Department Square Footage
A = P214,000/ .985 Hours
A = P217,259 Factory Administration 2,900 1,200
Building and Grounds 1,100 1,500
Machinery 2,000 1,900
2. B = P140,000 + .15(P217,259)
Assembly 1,600 3,200
B = P140,000 + 32,589
B = P172,589
The costs of factory administration are allocated based on estimated labor hours;
3. C = P100,000 + .05A + .09B building and grounds costs are allocated based on square footage. The producing
C = P100,000 + .05(P217,259) + .09(P172,589) department uses machine hours, with 30,000 for machinery and 22,800 for assembly.
C = P100,000 + P10,863 + P15,533
COST ACCOUNTING MODULE
Required:  Multiple Choice Question:
Allocate the cost of the service departments to the producing departments by using 1. The most accurate method for allocating service department costs is the
the following methods: a. Step method
a. Direct method b. Direct method
b. Step method c. Reciprocal method
c. Reciprocal method d. Algebraic method

2. The following statement that best describe cost allocation is

 Problem 7-2 a. A company, as a general rule, should allocate indirect costs randomly or based
The estimated departmental manufacturing for producing departments A and B and on an ability to bear” criterion
the estimated costs of service departments C, D and E before any service department b. A company’s total income will remain unchanged no matter how indirect costs
allocations are: are allocated
c. A company can affect total income the most strongly by using the algebraic
method of allocating indirect costs
Producing Department Service Department
d. A company can maximize or minimize total company income by selecting
A P120,000 C P40,000
different bases in which to allocate indirect costs.
B 180,000 D 40,000
E 20,000
3. In determining the right method for allocating depreciation of equipment to
departments, the best recommendation is to
The interdependence of the departments is as follows: a. Use the cost of equipment in the department as a basis for allocation
Service Provided by b. Allocate on the basis of square footage used in a given department
Department C D E c. Charge the amounts to General Plant
A - 30% 40% d. Use algebraic techniques
B 50% 40% 30%
C - 20% - 4. A department that would be classified as a producing department is
D 20% - - a. Production control
E 30% 10% - b. Utilities
Marketing - - 20% c. Finishing
General Office ___-___ ___-___ 10% d. Shipping
100% 100% 100%
5. A department that would be classifies as a service department is
Required: a. Refining
1. Compute the final amount of estimated overhead of each service department b. Receiving
after reciprocal transfer costs have been calculated algebraically. c. Mixing
2. Compute the total factory overhead of each producing department and the d. Assembly
amount of Department E cost assigned to Marketing Department and to General
Office. 6. The method that recognizes service department to another but does not allow
for two-way allocation costs between service department is the
a. Direct method
COST ACCOUNTING MODULE
b. Linear method Chapter 8:
c. Reciprocal method
d. Step method
Activity Based Costing (ABC) System Method
Objectives:
7. In which of the following overhead allocation methods may no other service
The learner should be able to understand and know:
department costs be charged back to a particular service department after the
 The difference between traditional and activity-based costing.
first service department cost has been allocated?
 The benefits and limitations of ABC Systems.
a. The reciprocal and direct method
 The factors that indicate the need to switch to activity based costing system.
b. The step and reciprocal method
 The hierarchy of activity levels and steps for implementing ABC.
c. The direct and step method
d. The step and algebraic method

8. The method of overhead allocation that usually starts with the service department Start of Discussion
rendering the greatest amount of service to the greatest number of other service
departments and the progresses in descending order to the service department
 BROAD AVERAGING OR PEANUT-BUTTER COSTING
rendering services to the least number of other service department is the
- Describes a costing approach that uses broad averages for assigning (or
a. Step method
spreading, as in spreading peanut-butter) the cost of resources uniformly to
b. Direct method
cost objects when the individual products or services, in fact, use those
c. Step and direct method
resources in non-uniform ways.
d. Reciprocal method
 Product undercosting
9. If two service departments served the same number of other service
- A product consumes a high level of resources but is reported to have a low
departments when using the step method, which service department’s costs are
cost per unit.
allocated first?
a. The service department with the most employees.
 Product overcosting
b. The service department with the most direct costs.
- A product consumes a low level of resources but is reported to have a high
c. The service department most crucial to the operation of the production
cost per unit.
department.
 Product cost cross-subsidization
10. Which one of the following characteristics does not relate to departmentalization?
- If a company undercosts one of its products, it will overcost at least one of
a. It’s a way more than one way to divide
its other products.
b. There is more than one way to divide an organization into departments
c. It’s a method of organization that does not work well with public organizations
d. Part of the advantage of departmentalization involves developing  COSTING SYSTEM REFINEMENT
- Making changes to a simple costing system that reduces the use of broad
departmental personnel expertise.
averages for assigning the cost of resources to cost objects and provides
better measurement of the costs of overhead resources used by different cost
objects.
COST ACCOUNTING MODULE
- An activity-based approach refines a costing system by focusing on individual 2. Batch-level activities
activities as the fundamental cost objects. It uses the cost of these activities - Performed each time a batch is handled or processes, regardless of
as the basis for assigning costs to other cost objects such as products or how many units are in the batch.
services. 3. Product-level activities
- Relate to specific products and typically must be carried out regardless
 ACTIVITY BASED COSTING (ABC) SYSTEM of how many batches are run or units of product are run or unit of
- Allocates overhead to multiple activity cost pools and assigns the activity cost product are produced and sold.
pools to products by means of cost drivers. 4. Customer-level activities
- Relate to specific customers.
 Benefits of ABC: 5. Organization-sustaining activities
1. ABC leads to more cost pools - Carried out regardless of which customers are served, which products
2. ABC leads to enhanced control over overhead costs are produced, how many batches are run, or how many units are
3. ABC leads to better management decisions made.

 FOUR DECISIONS TO WHICH ABC INFORMATION IS USEFUL:  STEPS FOR IMPLEMENTING ABC
1. Pricing and product mix decisions. 1. Define activities, activity cost pools, and activity measures.
2. Cost reduction and process improvement decisions. 2. Assign overhead costs to activity cost pools.
3. Product design decisions 3. Calculate activity rates.
4. Decisions for planning and managing activities 4. Assign overhead costs to cost objects using the activity rates and activity
measures.
 LIMITATIONS OF ABC: 5. Prepare management reports.
1. ABC can be expensive
2. Some arbitrary allocations continue  Formula:
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑 𝑝𝑒𝑟 𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑦
= Activity Based Overhead Rate
 WHEN TO SWITCH TO ABC 𝐸𝑥𝑝𝑒𝑐𝑡𝑒𝑑 𝑈𝑠𝑒 𝑜𝑓 𝐶𝑜𝑠𝑡 𝐷𝑟𝑖𝑣𝑒𝑟𝑠 𝑝𝑒𝑟 𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑦
The presence of one or more of the following factors indicates ABC as the superior
costing system: Cost Driver is the activity that causes the incurrence of certain costs. It may be
1. Product line differ greatly in volume and manufacturing complexity. volume-based or non-volume based.
2. Product lines are numerous, diverse and require differing degrees of support
services.
3. Overhead costs constitute a significant portion of total costs. Illustration 1:
4. The manufacturing process or the number of products has changed
significantly. Traditional Costing VS. Activity Based Costing
5. Production or marketing managers are ignoring data provided by the existing King Company produces two products, Product XX and Product YY. Product XX is a
system. high-volume item totaling 50,000 units annually while Product YY is a low-volume
item totaling only 10,000 units per year. Both products require one hour of direct
 HIERARCHY OF ACTIVITY LEVELS: labor to complete.
1. Unit-level activities
- Are performed each time a unit is produced.
COST ACCOUNTING MODULE
The direct materials cost per unit is P80 for Product XX and P60 for Product YY with Setting up Machines P1,200,000 1/3 P 400,000
direct labor cost for both products at P24 per unit. Estimated annual manufacturing 2/3 P 800,000
overhead costs is P3,600,000. Machining 2,000,000 6/10 1,200,000
Estimated overhead costs of P3,600,000 are allocated directly to each activity centers 4/10 800,000
as shown below: Inspecting 400,000 1/4 100,000
3/4 300,000
Activity Centers Estimated Overhead Total Allocated OH Costs P3,600,000 P 1,700,000 P 1,900,000
Setting up Machines P 1,200,000 Divided by Units Produced 50,000 10,000
Machining 2,000,000 Overhead Cost per Unit P 34.00 P 190.00
Inspecting 400,000
Total P 3,600,000 Total Unit Cost per Product:
 Product XX - 80 + 24 + 34 = 138
The cost drivers identified by King and their total expected use per activity center are  Product YY – 60 + 24 + 190 = 274
shown below:
Expected Use  Comparison of Traditional and ABC System
Expected Use of
of Cost Driver The units under traditional costing are significantly distorted. The cost of
Activity Centers Cost Drivers Cost Drivers per
per Product
Activity producing Product XX is overstated by P26 per unit (P164-138) and the cost of
XX YY
producing Product YY is understated by P130 (P274-144).
Setting up Machines Number of setups 3,000 set ups 1,000 2,000

Machining Machine hours 100,000 machine

***Note:
60,000 40,000
hours In activity-based costing, activities consume resources and products consume
Inspecting Number of activities. We allocate the cost first to each activity then compute overhead (pool)
inspections 4,000 inspections 1,000 3,000 rates for each activity then allocate the costs of the resources to each product based
on the activities consumed.

Suggested Solutions: -End of Discussion-

 Traditional Costing
The predetermined overhead rate is P60 per direct labor hour.
(P3,600,000/60,000 DLH) SELF-CHECK TEST:
 Problem 8-1
Freshmen Corporation produces flat-screen computer monitors. Consider the following
Total Unit Cost per Product:
selected costs that arose during the current year:
 Product XX - 80 + 24 + 60 = 164
 Product YY – 60 + 24 + 60 = 144
Direct materials used P 3,640,000
Plant rent, utilities and taxes 1,229,000
New technology design engineering 2,040,000
 Activity Based Costing Materials receiving 318,000
Manufacturing run/ set-up charges 115,000
Estimated Propo ABC Allocation per Product Equipment depreciation 92,000
Activity Centers
Overhead rtion XX YY General management salaries 1,564,000
COST ACCOUNTING MODULE
frames. The controller wants to compare overhead allocated under the current
Required: Determine the cost of the firm’s simple job-costing system and a newly-designed activity-based job costing system.
1. Unit-level activities
2. Batch-level activities
3. Product-sustaining activities Total budgeted costs in each indirect cost pool and the budgeted quantity of activity
4. Facility-level activities driver are as follows:
Budgeted Quantity of
Budgeted Overhead Activity Driver Activity driver
Purchasing P 70,000 Purchase orders processed 2,000
 Problem 8-2
Owel Spray Paints, Inc. has used a traditional cost accounting system to apply Material Handling 87,500 Material moves 5,000
quality-control costs uniformly to all products at a rate of 16 percent of direct-labor Machine maintenance 237,500 Machine hours 10,500
cost. Monthly direct labor cost for the enamel paint line is P98,000. In an attempt to Product inspection 18,900 Inspections 1,200
more equitably distribute quality control cost, Owel is considering activity based Packaging 39,900 Units produced 3,800
costing. The monthly data shown in the following chart have been gathered for the P453,600
enamel paint line.
Job 215 Job 325 Information related to Job 215 and Job 325 follows. Job 215 incurs more batch-
Number of purchase orders 25 8 level costs because it uses more types of materials that need to be purchased,
Number of material moves 10 4 moved, and inspected relative to Job 325.
Machine-hours 40 60
Number of inspections 9 3 Quantity of Driver for
Units produced 15 6 Activity Cost Pool Cost Driver Pool Rates
Enamel Paint
Incoming material
Type of material P23 per type 24 types
Required: inspection
1. Calculate the monthly quality-control cost to be assigned to the enamel point In-process inspection Number of units 0.28 per unit 35,000 units
line under each of the following product-costing system. Product certification Number of orders 144 per order 50 orders
a. Traditional system which assigns overhead on the basis of direct-labor cost.
b. Activity-based costing
REQUIRED:
2. Does the traditional product-costing system overcost or undercost the enamel a. Compute the total overhead allocated to each job under a simple costing
paint line with respect to quality-control costs? By what amount? system, where overhead is allocated based on machine-hours.
b. Compute the total overhead allocated to each job under an activity based
costing system using the appropriate activity drivers.
 Problem 8-3 c. Explain why Smith’s Custom Framing might favor the ABC job costing
The job costing system at Fel’s Custom Framing has five indirect cost pools system over the simple job costing system, especially in its bidding process.
(purchasing, materil handling, machine maintenance, product inspection, and
packaging). The company is in the process of bidding on two jobs; Job 215, an order  Problem 8-4
of 15 intricate personalized frames and Job 325, an order of 6 standard personalized Hazelnut Company uses activity-based costing. The company produces two
products: coats and hats. The annual production and sales volume of coats is
COST ACCOUNTING MODULE
8,000 units and of hats is 6,000 units. There are three activity cost pools with the  Recording Jobs Completed
following expected activities and estimated total costs: The cost of the jobs completed is recorded by the following entry:
Finished Goods Inventory xxx
Expected Expected Work in Process xxx
Activity Estimated
Activity Activity Total
Cost Pool Cost
Coats Hats  Recording Sales of Finished Goods
Accounts Receivable/Cash xxx
Activity 1 P20,000 100 400 500
Sales xxx
Activity 2 P37,000 800 200 1,000
Cost of Goods Sold xxx
Activity 3 P91,200 800 3,000 3,800 Finished Goods Inventory xxx

Required:  ACCOUNTING FOR PRODUCTION LOSSES IN A JOB ORDER COSTING

Using ABC, the cost per unit of coats and hats are approximately? SYSTEM
- Production losses that happens in the manufacturing process includes cost of
scrap materials, spoiled goods, and reworking defective goods.
- In most cases, these losses originated from lack of quality control and should
Chapter 9:
be prevented if not estimated at all.
Completing the Cost Cycle and Accounting for Production
Losses  ACCOUNTING FOR SCRAP
Scrap – is the residue of manufacturing process. These are materials left over
Objectives: when making a product. Scrap materials often has a value.
The learner should be able to understand and know:
 The last two steps in the job order cost accounting cycle: accounting for the
 Recognizing Scrap at the Time of Sale
completion of goods and accounting for the sale of goods.
 How to account for the production losses such as scrap, spoiled goods and  If the value of scrap is low or immaterial:
defective goods. Cash/Accounts Receivable xxx
Scrap Revenues xxx

 If the value of scrap is material and the scrap is sold quickly after it is
Start of Discussion
produced, the accounting depends on whether:

 COMPLETING THE COST CYCLE a) Scrap is Attributable to a Specific Job

- When jobs are completed, the finished goods are moved from the factory to Cash/ Accounts Receivable xxx
the warehouse. This chapter will describe how warehousing and selling Work in Process Inventory xxx
operations are controlled thru costs records and reports.
b) Scrap is Common to All Jobs
COST ACCOUNTING MODULE
Cash/ Accounts Receivable xxx Illustration:
Manufacturing Overhead Control xxx Assume that Job 911 calls for the production of 200 painted office tables. These
tables were put into production and costs accumulated to date are as follows:
 Recognizing Scrap at the Time of its Production
 At the time of its production, scrap materials returned to storeroom is Materials P 456,000
recorded as follows: Direct labor 240,000
Applied overhead (150% of DL cost) 360,000
a) Scrap is Attributable to a Specific Job Total cost charged to Job 911 P1,056,000
Scrap Inventory xxx
Work in Process Inventory xxx Unit cost (P1,056,000/200) P 5,280.00

b) Scrap is Common to All Jobs Suppose that the ten tables are spoiled because the lumber used was improperly
Scrap Inventory xxx cured. These spoiled tables may be sold as seconds at its net disposal value of
Manufacturing Overhead Control xxx P3,000 each.

 Spoilage Attributable to a Specific Job ( Due to Customer Specifications)

 When the scrap is sold, the journal entry is:
Cash/ Accounts Receivable xxx 1) To removed estimated disposal value of spoiled goods from Work in
Scrap Inventory xxx Process:
Spoiled Goods Inventory 30,000
***Note: When the scrap is sold for more or less than the value at which it Work in Process Inventory 30,000
is recorded. Any difference is treated as an adjustment to the account that
was originally credited (Work in Process Inventory or Manufacturing 2) To record the cost of the completed inventory.
Overhead Control). Finished Goods Inventory 1.026,000
Work in Process Inventory 1,026,000
 If the scrap is reused as direct materials rather than sold as scrap:
Materials xxx  Spoilage Common to All Jobs (Due to Internal Failure)
Manufacturing Overhead Control xxx 1) To record estimated sales value of spoiled goods and charged loss to MOH
control:
Work in Process Inventory xxx Spoiled Goods Inventory 30,000
Materials xxx Manufacturing Overhead Control 22,800
Work in Process Inventory 52,800
 ACCOUNTING FOR SPOILED GOODS
Spoiled goods are goods that have been damaged through imperfect machining 2) To record the cost of the completed good inventory.
or processing. Spoiled goods cannot be corrected because it is not technically Finished Goods Inventory 1.003,200
possible or economical to correct them. Work in Process Inventory 1,003,200
COST ACCOUNTING MODULE
Work in Process Inventory 9,500
 Comparison of the Accounting Treatment: Materials 2,000
Spoiled Cost Charged to Payroll 3,000
Particular Job All Production Applied Mfg. Overhead 4,500
Total Cost of 200 tables P 1,056,000 P 1,056,000
2) To record cost of ten tables transferred to Finished goods after reworked
Less: Scrap Value of Job 911 30,000 - is done.
All Production _____-____ 52,800 Finished Goods Inventory 62,300
Cost of Good Tables 1,026,000 1,003,200 Work in Process Inventory 62,300
Divided by Good Tables 190 190
Unit Cost of good tables P 5,400 P 5,280  Rework Cost Charged to All Jobs
Manufacturing Overhead Control 9,500
Materials 2,000
Payroll 3,000
 ACCOUNTING FOR DEFECTIVE GOODS (Rework Costs)
Applied Mfg. Overhead 4,500
Defective goods are units of production that fail to meet production standards
but that can be brought up to standard by adding more materials, labor and
 Comparison of the Accounting Treatment
overhead.
Rework costs are the additional costs required to bring defective goods to
Reworked Cost Charged to
standard.
Specific Job All Jobs
Illustration: Total Cost of 200 tables P 1,056,000 P 1,056,000
Assume the ten spoiled tables from the previous illustration are reworked. The Add: Rework Costs _____9,500 _________
journal entry to record the total costs of the ten spoiled goods before considering Cost of Good Tables P 1,065,500 P1,056,000
rework costs is:
Divided by Good Tables _______200 ______200
Unit Cost of good tables P 5,327.50 P 5,280
Work in Process Inventory 52,800
Materials 22,800
Payroll 12,000
Applied Mfg. Overhead 18,000 -End of Discussion-

Assume that the ten spoiled tables are reworked. The additional costs of SELF-CHECK TEST:
reworking the tables equal P9,500 of which P2,000 direct materials, P3,000 direct  Multiple Choice Questions:
labor and P4,500 manufacturing overhead. 1. In a job-order costing, the disposal value of spoilage that is common to all jobs
should be credited to
 Rework Cost charged to Specific Job a. Materials
1) To record rework costs of 10 tables: b. Work in Process
COST ACCOUNTING MODULE
c. Manufacturing Overhead c. Raw materials remaining from the production cycle but not usable for any
d. Applied Manufacturing Overhead purpose.
d. Finished goods that do not meet quality control standards and cannot be
2. In a job-order costing, the cost incurred to rework unit that are common to all reworked.
jobs should be debited to:
a. Materials 7. The sale of scrap from a manufacturing process is recorded as a/an
b. Work in Process a. Decrease in manufacturing overhead control
c. Manufacturing Overhead b. Increase in manufacturing overhead control
d. Applied Manufacturing Overhead c. Decrease in finished goods control
d. Increase in finished goods control
3. In a job-order costing, the recovery value of scrap that is significant in economic
value, abnormal, and due to the nature of particular jobs should be credited to 8. Assuming the value of scrap sales is material, when it is not necessary to record
a. Materials the value of scrap in inventory as it is produced?
b. Work in Process a. When it is sold regularly
c. Manufacturing overhead b. When the unit value fluctuates
d. Loss from Abnormal Spoilage c. If it is recognized as miscellaneous revenue
d. If it is recognized as an offset to overhead
4. In a job-order cost system, the cost incurred to rework units that are normal and
due to the nature of particular jobs should be debited to: 9. Waste materials consist of
a. Materials a. Raw materials remaining from the production cycle but not usable for any
b. Work in Process purpose.
c. Manufacturing Overhead b. Finished goods that do not meet quality control standards and cannot be
d. Applied Manufacturing Overhead reworked
c. Defective units that may be used or sold.
5. In a job-order costing system, the disposal value of spoilage that is normal and d. Raw materials remaining from the production cycle but usable for purposes
due to the nature of particular jobs should be debited to other than the original purpose.
a. Materials
b. Work in Process 10. A product that does not meet quality control standards and needs to be reworked
c. Manufacturing Overhead to be saleable as either an irregular or a good product is classified as
d. Applied Manufacturing Overhead a. Spoiled goods
b. Defective units
6. Scrap materials consists of c. Scrap materials
a. Defective units that may be used or sold d. Waste material
b. Raw materials remaining from the production cycle but usable for purposes
other than the original purpose
COST ACCOUNTING MODULE
 Problem 9-1
The Freshy Now Metal Fabricators, Inc. accumulates fairly large quantities of metal
shavings and trimmings from the products it manufactures. At least once a month,
the scrap metal is sold to a local producer for further processing. This month’s scrap
sales on account total P2,500.
Required:
Give the appropriate journal entry to record the sale of the scrap for each of the
following alternatives:
1. The scrap sales are viewed as additional revenue.
2. The scrap sales are viewed as a reduction of the cost of goods sold during the
month.
3. The scrap sales are viewed as a reduction of manufacturing overhead control.
4. The scrap sales are traceable to individual jobs and are viewed as a reduction in
the cost of materials used on the jobs.
 Problem 9-2
Haggard Later Company uses a job-order cost system to account for its production
costs. During the current period, 2,000 plastic tables were molded and assembled on
Job 209. The total cost incurred on the job is:
Materials P24,000
Labor (1,000 hours hrs. x P10 per hr.) 10,000
Manufacturing overhead (P20 per labor hour) 20,000
Total Cost charged to Job 209 P54,000
Before being transferred to Finished Goods Inventory, the plastic tables were
inspected and 100 were found to be spoiled. The spoiled plastic tables cannot be
reworked because the defects are embedded in the plastics; however, they can be
sold at P10 each. The company maintains a separate Spoiled Goods Inventory
account for defective products and charges the unrecoverable cost of spoilage to
Factory Overhead Control.
Required:
1. Give the appropriate journal entries to record the total cost of Job 209, the
spoilage cost and the transfer of goods to an inventory account.
2. Determine the unit cost for each plastic table.
 Problem 9-3
BGC Melting and Repair Shop, is a special order manufacturer of metal products.
Each period the company accumulates fairly large quantities of metal shavings and
trimmings from the products it manufactures. At least once a month, the scrap metal
will be melted and sold at a local dealer. This month scrap sales total P1,100, during
the current period 400 door facings were cut to an incorrect size on Job 345 and had
to be replaced. Although, the defective facings cannot be used on Job 345, they can
be sold as seconds for P4.50 each. The cost of cutting the 400 defective facings is:
Materials P2,400
Labor (20hours @ P15 per hour) 300
Manufacturing overhead (20 hours @ P45 per hour) 900
Required:
1. Prepare the journal entry to credit Job 345 for the cost of the spoiled door
facings and to record the transfer of the spoiled door facings to Spoiled Goods
Inventory at their salvage value.
2. Prepare the journal entry to record the sale on account of all the scrap
accumulated during the period and the spoiled goods in inventory.
 Problem 9-4
MG Housing, Inc. manufactures tiles for housing companies. During the current
period, an order for 2,000 tiles was begun on Job 777 for Lumilla Homes. Jobs are
marked up 150 percent of cost. Total costs charged to Job 777 are:
Materials P184,000
Labor (6,000 hours @ P12 per hour) 72,000
Manufacturing overhead (P24 per labor hour) 144,000
On inspection, 200 units of the tiles were found to have defects. Materials costing P4
and 30 minutes are required to correct each defective unit. Manufacturing overhead
is charged is charged to production on the basis of direct labor hours.
COST ACCOUNTING MODULE

Required:
1. Assuming that the defective units are the result of an internal failure:
a. Give the journal entries to record the total costs of Job 777, the rework costs
and the transfer of goods to inventory account.
b. Determine the unit cost for each unit manufactured.
2. Assuming that the defective units are the result of a change in specifications after
the units are completed:
a. Give the journal entries to record the total costs of Job 777, the rework costs
and the transfer of goods to an inventory account.
b. Determine the unit cost for each unit manufactured.

LEARNING RESOURCES:
1. Principles and Procedural Applications
Cost Accounting
Pedro P. Guerrero

2. Cost Accounting
Guillermo M. De Leon Jr.
Norma D. De Leon