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Approved Cae Bsa Bsma Bsia Bsais Acc 123
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TABLE OF CONTENTS
Page No.
Course Outline 5
Course Outline Policy 5
Course Information 10
Metalanguage 12
Essential Knowledge 12
Self-Help 14
Let’s Check 15
Let’s Analyze 16
In A Nutshell 20
QA List 21
Keywords Index 21
Metalanguage 22
Essential Knowledge 22
Self-Help 39
Let’s Check 40
Let’s Analyze 41
In A Nutshell 44
QA List 46
Keywords Index 46
Metalanguage 47
Essential Knowledge 47
Self-Help 51
Let’s Check 51
Let’s Analyze 53
In A Nutshell 56
QA List 58
Keywords Index 58
Course Schedule 59
1
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
Metalanguage 61
Essential Knowledge 61
Self-Help 65
Let’s Check 66
Let’s Analyze 67
In A Nutshell 68
QA List 69
Keywords Index 69
Metalanguage 70
Essential Knowledge 70
Self-Help 82
Let’s Check 82
Let’s Analyze 83
In A Nutshell 85
QA List 86
Keywords Index 86
Metalanguage 87
Essential Knowledge 87
Self-Help 89
Let’s Check 89
Let’s Analyze 90
In A Nutshell 91
QA List 93
Keywords Index 94
Course Schedule 94
2
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
Metalanguage 95
Essential Knowledge 95
Self-Help 97
Let’s Check 98
Let’s Analyze 100
In A Nutshell 101
QA List 102
Keywords Index 102
Metalanguage 103
Essential Knowledge 103
Self-Help 108
Let’s Check 108
Let’s Analyze 111
In A Nutshell 111
QA List 112
Keywords Index 112
Metalanguage 113
Essential Knowledge 113
Self-Help 115
Let’s Check 115
Let’s Analyze 117
In A Nutshell 117
QA List 119
Keywords Index 119
Course Schedule 120
Metalanguage 121
Essential Knowledge 121
Self-Help 131
Let’s Check 131
Let’s Analyze 133
3
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
In A Nutshell 134
QA List 136
Keywords Index 136
Metalanguage 137
Essential Knowledge 137
Self-Help 146
Let’s Check 146
Let’s Analyze 151
In A Nutshell 152
QA List 154
Keywords Index 154
Metalanguage 155
Essential Knowledge 155
Self-Help 159
Let’s Check 160
Let’s Analyze 161
In A Nutshell 162
QA List 163
Keywords Index 163
Course Schedule 163
4
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
5
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
6
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
Penalties for Late The score for an assessment item submitted after
Assignments/Assessments the designated time on the due date, without an
approved extension of time, will be reduced by 5%
of the possible maximum score for that assessment
item for each day or part day that the assessment
item is late.
7
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
8
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
9
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
CC’s Voice: Hello, Future Accountants! Welcome to this course, ACC 123 –
Cost and Control. This course will surely help you in your journey
to becoming an accountant by learning the basics of cost accounting
principles and other management concepts.
CO : In this course, you will learn the key concepts of cost recognition,
classification, measurement and cost management principles in
planning, implementation, analysis and control. You will also learn
to apply the key concepts in cost accounting in the preparation of
cost of goods manufactured and sold and the preparation of cost of
production report in a job order costing system or process costing
system.
Let us begin!
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
Big Picture
Week 1-3: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to
Metalanguage
In this section, the most essential terms relevant to the study of cost accounting
system and to demonstrate ULOa will be operationally defined to establish a common
frame of refence on how to use the terms. You will encounter these terms as we go
through the study of cost accounting system. Please refer to these definitions in case you
will encounter difficulty in understanding cost accounting concepts.
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
9. Cost Management system – primarily concerned with producing outputs for internal
information users, using inputs and processes needed to satisfy management
objectives.
10. Operational control system – designed to provide accurate and timely feedback
concerning the performance of managers and others relative to their planning and
control of activities.
Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes) for the first three (3)
weeks of the course, you need to fully understand the following essential knowledge that
will be laid down in the succeeding pages. Please note that you are not limited to
exclusively refer to these resources. Thus, you are expected to utilize other books,
research articles and other resources that are available in the university’s library e.g.
ebrary, search.proquest.com etc.
The difference between cost management system and financial accounting system
lies primarily in its targeted users. Cost management information is for internal users,
whereas financial accounting information is purposely for external users. Cost
management is not bound by the externally imposed rules of financial reporting e.g.
Generally Accepted Accounting Principles (GAAP). It provides more details than financial
accounting.
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
3
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
The purpose of cost accounting is to help management determine how much is the
manufacturing cost of each product that the company is producing. It aids management
in making decisions concerning its productivity and profitability. It provides information to
management for planning, control and decision. The three major areas of cost accounting
are the following:
a. Planning – this is the process of defining plan of activities which are geared
towards satisfaction of the objectives of the firm. It provides the foundation upon
which the control function operates. It is future oriented and it tries to ensure the
company’s continuity.
b. Control – this refers to functions which are directed to check and ensure that
people's activities are gearing towards getting on the objectives of the firm.
c. Decision making - this is about the assessment of alternative courses of action.
action. The decision may involve commitments that are considered long-term (for
example, buying a new equipment) or short term commitment (for example, to
accept or to reject an order).
Self-Help: You can also refer to the sources below to help you further understand
the lesson:
* Lanen, W 2017, Fundamentals of Cost Accounting. 5th Edition. New York, NY:
McGraw- Hill Education
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
Let’s Check
Activity 1. Now that you know the most essential terms in the study of cost management
system, let us try to check your understanding of these terms. In the space provided,
write the term/s being asked in the following statements:
_______________4. This refers to a system that is designed to provide correct and timely
feedback about the performance of managers relative to planning and control of activities.
Let’s Analyze
Activity 1. You are now familiar with the essential terms in the study of cost management
system. Below are some questions for you to answer. Please provide a thorough
explanation for each question.
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
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2. Enumerate the three major areas of cost accounting and discuss each.
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
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3. How does Cost accounting differ from Financial and Management Accounting?
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In a Nutshell
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
Based from the definition of the most essential terms in the study of cost and
management accounting and the learning exercises that you have done, please feel free
to write your arguments or lessons learned below. I have indicated my arguments or
lessons learned.
1. Cost accounting and cost management play a vital role in the company’s profit. It
helps management improve its economic performance.
2. Financial accounting reports refer to the whole of the organization, whereas cost
and management accounting focuses on small parts of the organization.
Your Turn
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
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Q & A List
Keywords Index
10
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
Metalanguage
In this section, the most essential terms relevant to the study of classifying costs
and to demonstrate ULOb will be operationally defined to establish a common frame of
refence on how to use the terms. You will encounter these terms as we go through the
study of different cost terminology and the journal entries required in accounting for
Material, Labor and Overhead.
1. Direct costs – are those costs which can be specifically traced to or identified
with a particular product.
2. Indirect costs – are those which cannot be identified with a particular product
and which are incurred for the benefit of all products.
3. Variable costs – are costs that vary/change in total proportion to the related
level of activity or volume.
4. Fixed costs – are costs that do not change in total for a given time period and
not affected by the changes in the related level of activity or volume.
5. Inventoriable costs – are costs of a product that are presented in the balance
sheet as assets when they are incurred and that become cost of goods sold
only when the product is sold.
6. Period costs - are all costs in the income statement other than cost of goods
sold e.g. selling expenses, advertising expenses
7. Product costs – these costs include direct materials, direct labor and
manufacturing overhead.
8. Mixed Costs – costs having both a fixed component and a variable component
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes) for the first three (3)
weeks of the course, you need to fully understand the following essential knowledge that
will be laid down in the succeeding pages. Please note that you are not limited to
exclusively refer to these resources. Thus, you are expected to utilize other books,
research articles and other resources that are available in the university’s library e.g.
ebrary, search.proquest.com etc.
Classification of Costs
Cost behavior refers to how a cost will react to changes in the level of activity. The
most common classifications are: Variable costs, Fixed costs and Mixed Costs.
1. Variable costs vary directly in proportion with the level of activity. Examples of
variable costs are direct materials and power. These costs fluctuate with
operating activity. Total variable cost is linear and unit variable cost is constant.
2. Fixed costs such as depreciation and rent remain constant over a wide range
of activity for a specified period.
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
3. Mixed costs are costs that contain both a variable and fixed component.
4. Other costs:
4.1 Standard Costs are costs that have been established by using information
accumulated from past experience and data secured from research studies.
4.2 Opportunity Costs are costs which will measure the opportunity that is lost
or sacrifice when the choice of one course of action requires that an
alternative course of action be given up.
4.3 Differential Cost is the difference between the cost of two alternative
decisions, or of a change in output level.
4.4 Out of Pocket Cost is a potential future outlay of cash that management
needs to decide whether or not to make.
4.5 Sunk costs are costs that have been created by a decision in the past and
which cannot be changed by any decision that will be made in the future.
Sunk costs are irrelevant for decision-making.
4.6 Relevant costs are those future costs which will be changed by a decision
while irrelevant costs are those costs which will not be affected by a
decision.
4.7 Controllable costs are costs which are subject to regulation by the manager
of the responsibility center.
4.8 Non-controllable costs are those costs which are not within the control of a
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
manager.
Direct Materials
Direct materials are materials which can be directly traced to goods or services
being produced. The cost of these materials can be directly charged to products because
physical observation can be used to measure the quantity consumed by each product.
Materials that become part of a tangible product or that are used in providing a service
are usually classified as direct materials. Examples of direct materials are: steel in an
automobile, wood in a furniture, alcohol in cologne, denim in jeans, braces for correcting
teeth, surgical gauze and anesthesia for an operation, ribbon in a corsage, and food on
an airline are all direct materials.
Direct Labor
Direct labor is a labor that is directly traceable to the goods or services being
produced. This refers to the effort exerted directly to the product/service. Employees who
convert raw materials into a product or who provide a service to customers are classified
as direct labor. Workers on an assembly line at Toyota, a chef in a restaurant, a surgical
nurse for an open-heart operation, and a pilot for Cathay Pacific Air Lines are examples
of direct labor.
Overhead
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
All production costs other than direct materials and direct labor are considered
overhead. In a manufacturing firm, overhead is also known as factory burden or
manufacturing overhead. All indirect materials and indirect labor are charged to
manufacturing overhead. Many inputs other than direct labor and direct materials are
needed to produce products. Examples include depreciation on buildings and equipment,
maintenance, supplies, supervision, materials handling, power, property taxes,
landscaping of factory grounds, and plant security. Supplies are generally those materials
necessary for production that do not become part of the finished product or are not used
in providing a service. Dishwasher detergent in a fast-food restaurant and oil for
lubricating production equipment are examples of supplies.
Prime and Conversion Costs
Prime cost is the sum of direct materials cost and direct labor cost. Prime costs
can be traced directly to a specific batch of products and vary directly with the amount of
products produced.
Conversion cost is the sum of direct labor cost and overhead cost. It is the cost
of resources that transform raw materials in production from one physical state to another.
For a manufacturing firm, conversion cost can be interpreted as the cost of converting
raw materials into a final product.
Prime Cost and Conversion Cost
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)
Nonproduction costs are divided into three categories: research and development
costs, marketing (selling) costs, and administrative costs. Because the amount and timing
of the benefits of these costs cannot be reasonably estimated, for external financial
reporting, they are called period costs and cannot be inventoried. Period costs are
expensed in the period in which they are incurred. Thus, none of these costs can be
assigned to products or appear as part of the reported values of inventories on the
balance sheet. Research and development (R&D) costs are expenditures aimed at
developing new products and processes, or at modifying existing products or processes.
Examples of R&D costs include laboratory research aimed at discovery of new
knowledge, searching for applications of new research findings or other knowledge,
conceptual formulation and design of possible product or process alternatives, testing in
search for or evaluation of product or process alternatives, modification of the formulation
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
17
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
Order Point
A minimum level of inventory should be determined for each type of raw material,
and inventory records should indicate how much of each type is on hand. A subsidiary
materials ledger, in which a separate account is maintained for each material, is needed.
The point at which an item should be ordered, called the order point, occurs when
the predetermined minimum level of inventory on hand is reached.
Calculating the order point is based on the following data:
1. Usage—the anticipated rate at which the material will be used.
2. Lead time—the estimated time interval between the placement of an order and the
receipt of the material.
Stock-outs may occur due to inaccurate estimates of usage or lead time or various
other unforeseen events, such as the receipt of damaged or inferior materials from a
supplier or a work stoppage at a supplier’s plant.
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
Assume that a company’s expected daily usage of an item of material is 100 lb,
the anticipated lead time is five days, and the desired safety stock is 1,000 lb. The
following calculation shows that the order point is reached when the inventory on hand
reaches 1,500 lb:
100 lb (daily usage) 5 days (lead time) .(100@5)________________ 500 lb
Safety stock required ___________________________________1,000 lb
Order point ____________________________________________ 1,500 lb
If estimates of usage and lead time are accurate, the level of inventory when the
new order is received would be equal to the safety stock of 1,000 lb. If, however, the new
order is delivered three days late, the company would need to issue 300 lb of material
from its safety stock to maintain the production level during the delay.
Economic Order Quantity (EOQ).
The order point establishes the time when an order should be placed, but it does
not indicate the most economical number of units to be ordered. To determine the quantity
to be ordered, the cost of placing an order (order costs) and the cost of carrying inventory
in stock (carrying costs) must be considered.
Order costs and carrying costs move in opposite directions—annual order costs
decrease when the order size increases, while annual carrying costs increase when the
order size increases. The optimal quantity to order at one time, called the economic order
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
quantity, is the order size that minimizes the total order and carrying costs over a period
of time, such as one year
In summary, if the company wants to determine when to order, use the Order Point
Formula whereas use the Economic Order Quantity (EOQ) when determining how many
units are to be ordered.
Formula for calculating EOQ:
Illustrative Problem: Assume that the following data have been determined by analyzing
the factors relevant to materials inventory for South Paint Company:
Number of gallons of material required annually ......................... 10,000
Cost of placing an order ............................................................ Php 10.00
Annual carrying cost per gallon of inventory…............................. Php 0.8
Using the EOQ formula, 500 gallons should be ordered at one time:
Journal Entries:
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
21
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
supervisors, janitors, clerks, and factory accountants who support all jobs worked on
during the period.
For example, the plant manager of a car manufacturing facility is an indirect
laborer. Indirect labor costs are charged to Factory Overhead. You may also think of
the distinction between direct labor and indirect labor relative to service firms. For
example, auditors with a public accounting firm would be considered direct labor relative
to the individual jobs that they worked on, whereas the salary of the managing partner
would be indirect labor that should be allocated to all of the clients audited in determining
the total cost of servicing clients. Other examples of indirect labor in an accounting firm
would include the human resources function, the technical support staff, and the
secretarial function.
The accounting system of a manufacturer must include the following procedures
for recording payroll costs:
1. Recording the hours worked or quantity of output by employees in total
and by job, process, or department.
2. Analyzing the hours worked by employees to determine how labor time
is to be charged.
3. Charging payroll costs to jobs, processes, departments, and factory
overhead accounts.
4. Preparing the payroll which involves computing and recording employee
gross deduction, and net earnings.
Payroll Function
The payroll function’s primary responsibility is to compute the employees’ wages
and salaries. It involves combining the daily wages, determining the total earnings, and
computing deductions and withholdings for each employee. The department must
maintain current information concerning regulatory requirements regarding wages and
salaries because a specified amount of the employee’s wages are subject to social
security (FICA) and income tax deductions. Additional deductions, approved by the
employee, can be taken for group insurance premiums, union dues, contributions to a
tax-sheltered annuity, and so on.
Forms used to record earnings information may vary considerably from company
to company; however, all forms possess some common characteristics. The payroll
record shown below for the period ending February 16, provides typical information. It
assembles and summarizes each period’s payroll data and serves as a subsidiary record
for the preparation of a general journal entry.
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
Payroll Record
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
Illustrative Problem:
An employee earns Php20 per hour for up to 200 units of production per day. An
employee who produces more than 200 units per day receives an additional piece rate of
Php.50 per unit. Assume that an employee worked eight hours per day with the following
unit production for the week. Calculate the earnings for the week.
Day Hours Units Hourly Piece-rate Total
Earnings Earnings Earnings
Monday 8 200 Php160.00 Php160.00
Tuesday 8 175 160.00 160.00
Wednesday 8 225 160.00 Php12.50 172.50
Thursday 8 250 160.00 25.00 185.00
Friday 8 150 160.00 160.00
Total 40 1,000 Php800.00 Php37.50 Php837.50
In summary, prepare journal entries to record the payroll, pay the payroll and distribute
the payroll.
III. Accounting for Overhead
Apply factory overhead using predetermined rates. Factory overhead includes many
different costs, some of which will not be known until the end of the accounting period.
Because it is desirable to know the approximate cost of a job or product soon after its
completion, some method must be established for estimating the amount of factory
overhead that should be applied to the finished product. Through the estimating
procedure, a job or product will be charged an estimated amount of factory overhead
expense as it is worked on. At the end of a period, the actual factory overhead costs
can be compared to the estimated factory overhead applied to jobs. If the company
encounters a difference, it can determine the reasons for the variance and distribute it to
the appropriate accounts.
The flexible budget, which includes the expected departmental factory overhead costs
at given levels of production, is used to establish predetermined factory overhead rates.
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
The rates are computed by dividing the budgeted factory overhead cost by the budgeted
production. The budgeted production may be expressed in such terms as machine
hours, direct labor hours, direct labor cost, and units produced:
1. Direct labor cost method formula
Overhead rate = factory overhead cost
direct labor cost
For example, assume that the budgeted factory overhead cost for Department A
amounts to Php100,000, and the estimated direct labor cost is expected to be
Php200,000. The predetermined overhead rate would be 50% of direct labor dollars
(Php100,000/Php200,000). Also, assume that during the first month of operations, Job
100 incurred Php1,000 for direct materials and Php3,000 for direct labor, and that the job
is completed by the end of the month. Using the predetermined rate to estimate factory
overhead, the total job cost is computed as follows:
Job 100
Direct materials ........................................................... Php1,000
Direct labor. ....................................................................... 3,000
Factory overhead (50% of direct labor) ............................ 1,500
Total cost of completed job. .........................................Php5,500
The direct labor cost method is appropriate in departments that require mostly human
labor and in which the direct labor cost charges are relatively stable from one job to another.
2. Machine hour method
Assume that the factory overhead budget is Php100,000, consisting mostly of
machine-related costs, and it is expected that 10,000 machine hours will be required to
meet production. The predetermined rate would be Php10 per machine hour
(Php100,000/10,000 hours). Assuming that Job 100, now completed, used Php1,000 for
direct materials, Php3,000 for direct labor, and required 300 machine hours, its cost is as
follows:
Job 100
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
Assume that Job 100, now completed, required Php1,000 for direct materials,
Php3,000 for direct labor, 500 direct labor hours, 75 machine hours, two setups, and two
design changes. The cost of the job would be computed as follows:
Job 100
Direct materials ................................................................................... Php1,000
Direct labor (500 hours).. ........................................................................... 3,000
Factory overhead related to:
Direct labor usage (500 hours@Php3/direct labor hour) ...................... 1,500
Machine usage (75 hours@Php8/machine hour) ..................................... 600
Machine setups (2 setups@Php200/setup) .............................................. 400
Design changes (2 changes@Php400/design change) ............................. 800
Total cost of complete job .................................................................. Php7,300
Illustrative Problem:
Assume that ABC Company uses the machine hour method to apply factory
overhead. Additional data:
Predetermined overhead rate is Php20 per hour
Direct materials used Php3,000
Direct labor 2,200
Direct labor hours 150
Machine hours 175
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
After selecting the overhead application method and computing the predetermined
rate to be used, all jobs or processes should be charged with the estimated overhead
cost rather than the actual factory overhead costs being incurred. The estimated factory
overhead is applied to production by a debit to Work in Process and a credit to an
account entitled Applied Factory Overhead. Use of the separate applied factory
overhead account rather than the credit side of the factory overhead control account
avoids confusing the actual factory overhead charges, which are debited to the factory
overhead control account, with the estimated charges that are debited to work in process.
At the end of a period, the debit balance in Factory Overhead is compared to the credit
balance in Applied Factory Overhead is compared to the credit balance in Applied Factory
Overhead to determine the accuracy of the predetermined rates.
To illustrate the use of a predetermined overhead rate, assume that a company has
estimated a rate of Php5 per direct labor hour and that production jobs actually required
1,000 direct labor hours to complete. Using the direct labor hour method, we see that
Php5,000 of estimated factory overhead cost would be applied to all jobs worked on
during the period as follows:
(a) Work in Process ........................................ 5,000
Applied Factory Overhead ............................... 5,000
Applied factory overhead to jobs (1,000 hours @ Php5).
Also assume that the actual factory overhead for the period was Php5,500, recorded as
follows:
(b) Factory Overhead ....................................... 5,500
Accounts Payable ..................................... 5,500
At the end of the period, the applied factory overhead account is closed to the factory
overhead control account:
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Self-Help: You can also refer to the sources below to help you further understand
the lesson:
* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A
Strategic Emphasis (7th Ed.) New York: NY: McGraw-Hill Education
Let’s Check
Activity 1. Instruction: Please select the best answer under each item.
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6. An expense that is likely to contain both fixed and variable components is:
a. Security guard wages
b. Supplies
c. Heat, light and power
d. Small tools
9. Prime cost and conversion cost share what common element of total cost?
a. Direct labor
b. Commercial expense
c. Variable overhead
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d. Fixed overhead
Let’s Analyze
Activity 1. The different cost terminology have greatly contributed as foundations of the
basic knowledge in cost accounting. At this point, you will be required to answer the
following questions.
Problem 1.
Company A has developed the following data to assist in controlling one of its inventory
items:
Problem 2:
On January 1, the ledger of the Vovin Furniture Company contained, among other
accounts, the following: Finished Goods, Php25,000; Work in Process, Php30,000;
Materials, Php15,000. During January, the following transactions were completed:
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(d) The total payroll for January amounted to Php31,000, including marketing salaries
of Php7,500 and administrative salaries of Php5,500. Labor time tickets show that
Php15,500 of the labor cost was direct labor.
(e) Various factory overhead costs were incurred for Php12,000 on account.
(f) Total factory overhead is charged to the work in process account.
(g) Cost of production completed in January totaled Php58,000, and finished goods in
the shipping room on January 31 totaled Php18,000.
(h) Customers to whom shipments were made during the month were billed for
Php88,000. (Also record entry for cost of goods sold.)
Required: Prepare journal entries for the transactions, including the recording, payment,
and distribution of the payroll.
Problem 3.
Divoc Corp. estimates that its production for the coming year will be 10,000 widgets, which
is 80% of normal capacity, with the following unit costs: materials, Php40; direct labor,
Php60. Direct labor is paid at the rate of Php24 per hour. The widget shaper, the most
expensive piece of machinery, must be run for 20 minutes to produce one widget. Total
estimated overhead is expected to consist of Php400,000 for variable overhead and
Php400,000 for fixed overhead.
Required: Compute the overhead rate for each of the following bases, using the expected
actual capacity activity level:
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In a Nutshell
Activity 1. Principles of cost accounting have been developed to enable
manufacturers to process the many different costs associated with manufacturing and to
provide built-in control features. The information produced by a cost accounting system
provides a basis for determining product costs and selling prices, and it helps
management to plan and control operations.
Based from the definition of the most essential terms in the study of cost
accounting and the learning exercises that you have done, please feel free to write your
arguments or lessons learned below. I have indicated my arguments or lessons learned.
1. Cost accounting procedures provide the means to determine product costs that
enable the preparation of meaningful financial statements and other reports
needed to manage a business.
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2. All three elements of manufacturing cost flow through the Work- in- Process
Inventory account.
3. The cost of direct materials and direct labor used in production are charged
(debited) directly to Work in Process while all other factory costs , e.g. indirect
labor, indirect materials, and other factory expenses are charged to the Factory
Overhead account and later transferred to Work in Process.
Your Turn
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Q & A List
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12.
Keywords Index
Big Picture in Focus: ULOc. Compare fixed, variable and mixed costs and
explain how to separate mixed costs into their fixed and variable components
using the high-low method, the scatterplot method, and the method of least
squares.
Below are the essential terms that you are going to encounter in the pursuit of
ULOc: Understand fixed, variable and mixed costs and how to separate mixed costs into
their fixed and variable components using the high-low method, the scatterplot method,
and the method of least squares. Again, you are advised to frequently refer to these
definitions to help you understand the succeeding topics. I would like to highly recommend
that you refresh your knowledge about ULOa and ULOb to understand further ULOc.
1. Identifying Cost Behavior Patterns. Direct materials and direct labor are classified
as variable costs. Variable costs are costs that vary in direct proportion to volume
changes. In contrast are those costs that remain the same in total when production
levels increase or decrease. These unchanging costs are referred to as fixed costs.
Semi-variable costs, also called mixed costs, have characteristics of both variable
and fixed costs.
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2. Three methods of separating mixed costs into their fixed and variable components:
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The scattergraph method estimates a straight line along which the semi-variable
costs will fall. The cost being analyzed is plotted on the y-axis of the graph, and the
activity level, such as the number of units produced, is plotted on the x-axis. After the
past observations of cost and production data are plotted on graph paper, a line is drawn
by visual inspection representing the trend shown by most of the data points. Usually an
equal number of data points fall above and below the line. The point where the straight
line intersects the y-axis represents the total fixed costs. The variable cost per unit is
computed by subtracting fixed costs from total costs at any point on the graph and then
dividing by the activity level for that point read from the x-axis.
Formula: Y=a + bX
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Y=a + bx
b = nƩXY- (ƩX)(ƩY)
--------------------
nƩX2 – (ƩX)2
b = (6)(38,575,000)-(9,100)(24,500)
(6)(14,490,000)-(9,100)2
b = 231,450,000-222,950,000
86,940,000-82,810,000
b = 8,500,000
4,130,000
a = (ƩY)-(ƩX)
n
a = 24,500-(2.0581)(9,100)
6
a = 24,500-18,728.71
6
a = 5,771.29
6
a = 961.88 (fixed cost)
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Y = a + bX
Y = 961.88 + 2.0581
Self-Help: You can also refer to the sources below to help you further understand
the lesson:
* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A
Strategic Emphasis (7th Ed.) New York: NY: McGraw-Hill Education
Let’s Check
Activity 1. Choose the best answer on the following questions and for questions that
require calculations, please show your solution.
1. The following relationships pertain to a year's budgeted activity for Bibs Company:
High Low
Direct labor hours 400,000 300,000
Total costs Php154,000 Php129,000
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2. A company allocates its variable factory overhead based on direct labor hours.
During the past three months, the actual direct labor hours and the total factory
overhead allocated were as follows:
October November December
Direct labor hours 2,500 3,000 5,000
Total factory
overhead allocated Php80,000 Php75,000 Php100,000
Based upon this information, the estimated variable cost per direct labor hour
was:
a. Php.125
b. Php12.50
c. Php.08
d. Php8
3. The technique that can be used to determine the variable and fixed portions of a
company’s costs is:
a. Scatter-graph method
b. Poisson analysis
c. Linear programming
d. Game theory
4. As a result of analyzing the relationship of total factory overhead to changes in
machine hours, the following relationship was found:
Y= Php1,000 + Php2 X
The Y in the equation is an estimate of:
a. total factory overhead
b. total fixed costs
c. total machine costs
d. total variable costs
Y= Php1,000 + Php2 X
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High Low
Cost per month Php39,200 Php32,000
Machine hours 24,000 15,000
Using the high-low method of analysis, the estimated variable cost per machine
hour is:
a. Php12.50
b. Php0.80
c. Php0.08
d. Php1.25
7. In the high-low method, two points chosen from the scatter-graph are the high and
low points with respect to activity level. These two points are then used to compute
the intercept and the slope of the line on which they lie.
a. True
b. False
8. Variable costs are those that change in total as activity usage changes.
a. True
b. False
9. Fixed costs are those that do not change in total as activity output changes.
a. True
b. False
10. Mixed costs the costs that have both a variable and a fixed component.
a. True
b. False
Let’s Analyze
Activity 1. In this part, you are once again required to answer the following questions
below:
Problem 1:
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High and Low Points Method. A controller is interested in analyzing the fixed and variable
costs of indirect labor as related to direct labor hours. The following data have been
accumulated:
Required: Determine the amount of the fixed portion of indirect labor expense and the
variable rate for indirect labor expense, using the high and low points method. (Round
the variable rate to three decimal places and the fixed cost to the nearest whole number.)
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Problem 2:
Method of Least Squares. The management of Vidco Inc. would like to separate the fixed
and variable components of electricity as measured against machine hours in one of its
plants. Data collected over the most recent six months follow:
Electricity Machine
Month Cost Hours
January Php1,100 4,500
February 1,110 4,700
March 1,050 4,100
April 1,200 5,000
May 1,060 4,000
June 1,120 4,600
Required: Using the method of least squares, compute the fixed cost and the variable
cost rate for electricity expense. (Round estimates to the nearest peso.)
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In a Nutshell
Activity 1. Cost behavior is the general term for describing how cost changes when the
level of output changes. A cost that does not change as output changes is a fixed cost.
A variable cost, on the other hand, changes in proportion to changes in output. Output is
the result of activities and can therefore be measured by activity drivers.
In this part, you will be required to draw conclusions, perspectives, arguments and
ideas from the unit lesson. I will supply the first item and you will continue the rest.
1. Cost behavior is the way in which a cost changes in relation to changes in activity
output. The time horizon is important in determining cost behavior because costs can
change from fixed to variable, depending on whether the decision takes place over the
short run or the long run.
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9.____________________________________________________________________
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Q & A List
Keywords Index
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Course Schedule
This section calendars all the activities and exercises, including readings and lectures, as
well as time for making assignments and doing other requirements.
Big Picture
Week 4-5: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to
b. Explain the cost flows associated with job order costing, identify the different
source documents used and prepare the necessary journal entries relative to job-
order costing transactions.
Big Picture in Focus: ULOa. Discuss the cost concepts in product and
service costing.
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Metalanguage
In this section, the most essential terms relevant to the study of cost concepts and
to demonstrate ULOa will be operationally defined to establish a common frame of
refence. You will encounter these terms as we go through the study of cost accounting.
1. Service Firms – are firms whose service are characterized by its intangible nature
and cannot be inventoried.
2. Manufacturing Firms – are firms that use raw materials to make a finished good
4. Cost of goods sold - is the cost of the product transferred to the income statement
when inventory is sold
5. Product costs for a manufacturing firm include only the costs necessary to complete
the product: direct materials, direct labor, and factory overhead.
6. Cost – is the cash or noncash assets sacrificed for goods and services that are
expected to bring a current or future benefit to the organization.
8. Cost object – is any item, such as products, customers, departments, projects, for
which costs are measured and assigned.
9. Indirect costs – are costs that cannot be traced easily and accurately to a cost object.
10. Direct costs – are those costs that can be traced easily and accurately to a cost
object
11. Direct tracing - is the process of identifying and assigning costs to a cost object that
are specifically or physically associated with the cost object.
12. Drivers – are factors that cause changes in resource usage, activity usage, costs,
and revenues.
13. Driver tracing – is the use of drivers to assign costs to cost objects.
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15. Cost driver – is any factor that causes a change in the cost of an activity.
16. Normal activity level – is the average activity usage that a firm experiences in the
long term
17. Expected activity level – is the production level the firm expects to attain for the
coming year
Essential Knowledge
Accurate information about the cost of products and services is important in each
management function: strategic management, planning and decision making,
management and operational control, and financial statement preparation. Cost
accounting systems differ significantly between firms that manufacture products and
merchandising firms that resell those products. Merchandising firms include both retailers,
which sell the final product to the consumer, and wholesalers, which distribute the product
to retailers. Service firms often have little or no inventory, so their costing systems are
relatively simple.
Product inventory for both manufacturing and merchandising firms is treated as an
asset on their balance sheets.
(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)
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A major feature of the operational model of the cost accounting system is the
cost assignment process. The major objective of the cost accounting system is the
assignment of costs to cost objects. This assignment process is achieved by three
subprocesses: direct tracing, driver tracing, and allocation. Allocation is the least accurate
and least desirable approach, and generally, a cost accounting system should be
designed to minimize allocations. Understanding the assignment process is fundamental
to understanding cost management systems.
(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)
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Cost Accumulation
Cost accumulation refers to the recognition and recording of costs. The cost
accountant needs to develop source documents that keep track of costs as they occur. A
source document describes a transaction. Data from these source documents can then
be recorded in a database. The recording of data in a database allows accountants and
managers the flexibility to analyze subsets of the data as needed to aid in management
decision making. The cost accountant can also use the database to see that the relevant
costs are recorded in the general ledger and posted to appropriate accounts for purposes
of external financial reporting.
Cost Measurement
Accumulating costs simply means that costs are recorded for use. We must
classify or organize these costs in a meaningful way and then associate these costs with
the units produced. Cost measurement refers to classifying the costs; it consists of
determining the dollar amounts of direct materials, direct labor, and overhead used in
production. The dollar amounts may be the actual amounts expended for the
manufacturing inputs or they may be estimated amounts. Often, bills for overhead items
arrive after the unit cost must be calculated; therefore, estimated amounts are used to
ensure timeliness of cost information and to control costs.
The two commonly used ways to measure the costs associated with production
are actual costing and normal costing. Actual costing requires the firm to use the actual
cost of all resources used in production to determine unit cost. While intuitively
reasonable, this method has drawbacks, as we shall see. The second method, normal
costing, requires the firm to apply actual costs of direct materials and direct labor to units
produced, but to apply overhead based on a predetermined estimate.
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An actual cost system uses actual costs for direct materials, direct labor, and
overhead to determine unit cost. In practice, strict actual cost systems are rarely used
because they cannot provide accurate unit cost information on a timely basis. Per-unit
computation of the direct materials and direct labor costs is not the source of the difficulty.
Direct materials and direct labor can be traced to units produced. The main problem with
using actual costs for calculation of unit cost is with manufacturing overhead. Many
overhead costs are not incurred uniformly throughout the year. Thus, they can differ
significantly from one period to the next. For example, a factory located in the Northeast
may incur higher utilities costs in the winter as it heats the factory. Even if the factory
always produced 10,000 units a month, the per-unit overhead cost in December would
be higher than the per-unit overhead cost in June. As a result, one unit of product costs
more in one month than another, even though the units are identical, and the production
process is the same. The difference in the per-unit overhead cost is due to overhead
costs that were incurred nonuniformly.
Normal costing solves this problem associated with actual costing. A cost
system that measures overhead costs on a predetermined basis and uses actual costs
for direct materials and direct labor is called a normal costing system. Predetermined
overhead or activity rates are calculated at the beginning of the year and are used to
apply overhead to production as the year goes on. Any difference between actual and
applied overhead is handled as an overhead variance. Virtually all firms assign overhead
to production on a predetermined basis. A job-order costing system that uses actual costs
for direct materials and direct labor and estimated costs for overhead is called a normal
job-order costing system.
Cost Assignment
Once costs have been accumulated and measured, they are assigned to units
of product manufactured or units of service delivered. Unit costs are important for a wide
variety of purposes. For example, bidding is a common requirement in markets for custom
homes and industrial buildings. It is virtually impossible to submit a meaningful bid without
knowing the costs associated with the units to be produced. Product cost information is
vital in a number of other areas as well. Decisions concerning product design and
introduction of new products are affected by expected unit costs. Decisions to make or
buy a product, to accept or reject a special order, or to keep or drop a product line require
unit cost information. The unit cost is the total product cost associated with the units
produced divided by the number of units produced. For example, if a toy company
manufactures 100,000 tricycles and the total cost of direct materials, direct labor, and
overhead for these tricycles is Php1,500,000, then the cost per tricycle is Php15
(Php1,500,000/100,000).
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Self-Help: You can also refer to the sources below to help you further understand
the lesson:
* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A
Strategic Emphasis (7th Ed.) New York: NY: McGraw-Hill Education
Let’s Check
Activity 1. Let us try to check your understanding of the following cost concepts.
Choose the best answer from the given items.
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b. False
5. In a normal cost system, factory overhead is assigned directly to products and
services.
a. True
b. False
6. In a normal cost system, factory overhead is assigned to an overhead control account
and then allocated to products and services.
a. True
b. False
7. Expected capacity is a long-run measure of activity.
a. True
b. False
8. Normal capacity considers present and future production levels and cyclical
fluctuations.
a. True
b. False
9. Direct tracing is the process of identifying and assigning costs to a cost object that
are specifically or physically associated with the cost object.
a. True
b. False
10. Cost object is any item, such as products, customers, departments, projects, for
which costs are measured and assigned.
a. True
b. False
Let’s Analyze
Activity 1. Since you are now familiar with the essential terms in the study of cost
concepts, I will require you to elaborate your answers on the following questions.
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2. Define the following terms: expected actual activity, normal activity, practical activity,
and theoretical activity.
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3. What is cost measurement? Cost accumulation? What is the difference between the
two?
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In a Nutshell
In this portion of the unit, you will be required to state your arguments or
synthesis relevant to the topics presented. I will supply the first two items and you will
continue the rest.
1. The cost accounting system is set up to serve the company’s needs for cost
accumulation, cost measurement, and cost assignment.
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Your turn
3.____________________________________________________________________
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8.____________________________________________________________________
9.____________________________________________________________________
10.___________________________________________________________________
Q & A List
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Keywords Index
In a Job-order costing, cost is accumulated per job. Each job uses different
amounts of resources. The product or service is often a single unit. Examples of job-order
processes include printing, construction, furniture making, automobile repair, and
beautician services.
Since cost accumulation refers to the recognition and recording of costs, the cost
accountant needs to develop source documents that keep track of costs as they occur. A
source document describes a transaction. Data from these source documents can then
be recorded in a database. The recording of data in a database allows accountants and
managers the flexibility to analyze subsets of the data as needed to aid in management
decision making. The cost accountant can also use the database to see that the relevant
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costs are recorded in the general ledger and posted to appropriate accounts for purposes
of external financial reporting. Well-designed source documents can supply information
in a flexible way. In other words, the information can be used for multiple purposes. For
example, the sales receipt written up or input by a clerk when a customer buys
merchandise lists the date, the items purchased, the quantities, the prices, the sales tax
paid, and the total dollar amount received. Just this one source document can be used in
determining sales revenue for the month, the sales by each product, the tax owed to the
state, and the cash received or the accounts receivable recorded.
The document that identifies each job and accumulates its manufacturing costs
is the job-order cost sheet. An examplel is shown below. Each job-order cost sheet has a
job-order number that identifies the new job.
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(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)
A job-order costing system must have the capability to identify the quantity of
direct materials, direct labor, and overhead consumed by each job. In other words,
documentation and procedures are needed to associate the manufacturing inputs used
by a job with the job itself. This need is satisfied through the use of materials requisitions
The cost of direct materials is assigned to a job by the use of a source document
known as a materials requisition form, an example below. Notice that the form asks for
the description, quantity, and unit cost of the direct materials issued and, most importantly,
for the job number. Using this form, the cost accounting department can enter the total
cost of direct materials directly onto the job-order cost sheet.
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(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)
The materials requisition form may also have other data items such as
requisition number, date, and signature. These data items are useful for maintaining
proper control over a firm’s inventory of direct materials. The signature, for example,
transfers responsibility for the materials from the storage area to the person receiving the
materials, usually a production supervisor.
Direct labor also must be associated with each particular job. The means by
which direct labor costs are assigned to individual jobs is the source document known as
a time ticket (see below). When an employee works on a particular job, he fills out a time
ticket that identifies his name, wage rate, hours worked, and job number. These time
tickets are collected daily and transferred to the cost accounting department, where the
information is used to post the cost of direct labor to individual jobs. Time tickets are used
only for direct laborers. Since indirect labor is common to all jobs, these costs belong to
overhead and are allocated using the predetermined overhead rate.
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Time Ticket
(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)
Jobs are assigned overhead costs with the predetermined overhead rate.
Typically, direct labor hours is the measure used to calculate overhead. For example,
assume a firm has estimated overhead costs for the coming year of Php900,000 and
expected activity is 90,000 direct labor hours. The predetermined overhead rate is
Php900,000/90,000 direct labor hours = Php10 per direct labor hour. Since the number
of direct labor hours charged to a job is known from time tickets, the assignment of
overhead costs to jobs is simple once the predetermined rate has been computed. For
example, an employee worked a total of eight hours on Job 16. From this time ticket,
overhead totaling Php80 (Php10 × 8 hours) would be assigned to Job 16. What if
overhead is assigned to jobs based on something other than direct labor hours? Then the
other driver must be accounted for as well. That is, the actual amount used of the other
driver (for example,machine hours) must be collected and posted to the job cost sheets.
Employees must create a source document that will track the machine hours used by
each job. A machine time ticket could easily accommodate this need.
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For example, from January 2 to January 19, the production supervisor used
three requisition forms to remove Php1,000 of direct materials from the storeroom. From
January 20 to January 31, two additional requisition forms for Php500 of direct materials
were used. The first three forms revealed that the direct materials were used for Job 101;
the last two requisitions were for Job 102. Thus, for January, the cost sheet for Job 101
would have a total of Php1,000 in direct materials posted, and the cost sheet for Job 102
would have a total of Php500 in direct materials posted.
This second entry shows the direct materials flowing from the storeroom to work
in process. All such flows are summarized in the work-in-process inventory account as
well as being posted individually to the respective jobs.
Work-in-Process Inventory is a controlling account, and the job cost sheets are
the subsidiary accounts. Notice that the source document that drives the direct materials
cost flows is the materials requisition form.
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(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)
Since two jobs were in progress during January, time tickets filled out by direct
laborers must be sorted by each job. Once the sorting is completed, the hours worked
and the wage rate of each employee are used to assign the direct labor cost to each job.
For Job 101, the time tickets showed 60 hours at an average wage rate of Php10 per
hour, for a total direct labor cost of Php600. For Job 102, the total was Php250, based on
25 hours at an average hourly wage of Php10.
In addition to the postings to each job’s cost sheet, the following summary entry would be
made:
The summary of the direct labor cost flows is given below. Notice that the direct
labor costs assigned to the two jobs exactly equal the total assigned to Work-in Process
Inventory. Note also that the time tickets filled out by the individual laborers are the source
of information for posting the labor cost flows. Remember that the labor cost flows reflect
only direct labor cost. Indirect labor is assigned as part of overhead.
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Under a normal costing approach, actual overhead costs are never assigned to
jobs. Overhead is applied to each individual job using a predetermined overhead rate.
Even with this system, however, a company must still account for actual overhead
costs incurred. Thus, we will first describe how to account for applied overhead and then
discuss accounting for actual overhead.
Let us assume that Mr. A has estimated overhead costs for the year at Php9,600.
Additionally, since he expects business to increase throughout the year as he becomes
established, he estimates 2,400 total direct labor hours. Accordingly, the predetermined
overhead rate is as follows:
Overhead costs flow into Work-in-Process Inventory via the predetermined rate.
Since direct labor hours are used to assign overhead into production, the time tickets
serve as the source documents for assigning overhead to individual jobs and to the
controlling work-in-process inventory account.
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For Job 101, with a total of 60 hours worked, the amount of overhead cost posted is
Php240 (Php4 × 60). For Job 102, the overhead cost is Php100 (Php4 × 25). A summary
entry reflects a total of Php340 (i.e., all overhead applied to jobs worked on during
January) in applied overhead.
The credit balance in the overhead control account equals the total applied overhead
at a given point in time. In normal costing, only applied overhead ever enters the work in-
process inventory account.
To illustrate how actual overhead costs are recorded, assume that Silver Company
incurred the following indirect costs for the month of January:
Thus, the amount of the debit side of Overhead Control gives the total actual
overhead costs at a given point in time. Since actual overhead costs are on the debit side
of this account and applied overhead costs are on the credit side, the balance in Overhead
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Control is the overhead variance at a given point in time. For Silver Company at the end
of January, the actual overhead of Php415 and applied overhead of Php340 produce
under applied overhead variance of Php 75 (Php415-340)
The flow of overhead costs is summarized in below. To apply overhead to work in-
process inventory, a company needs information from the time tickets and a
predetermined overhead rate based on direct labor hours.
(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)
When a job is completed, the columns for direct materials, direct labor, and applied
overhead are totaled. These totals are then transferred to another section of the cost
sheet where they are summed to yield the manufacturing cost of the job. This job cost
sheet is then transferred to a finished goods inventory file. Simultaneously, the costs of
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the completed job are transferred from the work-in-process inventory account to the
finished goods inventory account.
For example, assume that Job 101 was completed in January with the completed
job order cost sheet (shown below). Since Job 101 is completed, the total manufacturing
costs of Php1,840 must be transferred from the work-in-process inventory account to the
finished goods inventory account. This transfer is described by the following entry:
(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)
(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)
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In a job-order firm, units can be produced for a particular customer or they can be
produced with the expectation of selling the units as market conditions warrant. When the
job is shipped to the customer, the cost of the finished job becomes the cost of the goods
sold.
When Job 101 is shipped, the following entries would be made. (Recall that the
selling price is 150 percent of manufacturing cost.)
Typically, the overhead variance is not material and is therefore closed to the cost of
goods sold account. Cost of goods sold before adjustment for an overhead variance is
called normal cost of goods sold. After adjustment for the period’s overhead variance
takes place, the result is called the adjusted cost of goods sold. It is this latter figure that
appears as an expense on the income statement.
However, closing the overhead variance to the cost of goods sold account is not done
until the end of the year. Variances are expected each month because of non-uniform
production and non-uniform actual overhead costs. As the year unfolds, these monthly
variances should, by and large, offset each other so that the year-end variance is small.
Nonetheless, to illustrate how the year-end overhead variance would be treated, we will
close out the overhead variance experienced by Silver Company in January. Closing the
under-applied overhead to cost of goods sold requires the following entry:
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(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)
(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)
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Self-Help: You can also refer to the sources below to help you further understand
the lesson:
Let’s Check
Activity 1. Please fill in the blanks with the correct term/s on the following statements.
2. In a normal job order costing system, factory overhead is applied using ___________
rates times ________ input.
3. When a job is begun, the first document in the job order process is the
____________________.
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7. The document that contains all information about the costs of a specific job is a
___________________.
Let’s Analyze
Activity 1. At this juncture, you have already known the cost flows associated with
job-order costing system, I will require you to provide the necessary calculations of
the following questions.
1. Venus Company estimated that Dept. B’s overhead amounted to Php450,000 for
the period based on an estimated volume of 200,000 direct labor hours. At the end
of the period, the Factory Overhead Control account for Dept. B had a balance of
Php300,000; actual direct labor hours were 150,000. Compute for the over or
under-applied overhead for the period.
(2 points)
2. Danbam Corporation has a job order cost system. The following debits (credits)
appeared in Work in Process for the month of August:
August 1,
balance……………………………………………………………….Php 10,000
August 31, direct materials…………………..…………………………………
30,000
August 31, direct labor………………………………………………………….
20,000
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3. Limin Furniture produces special-order furnitures. The company uses job order
costing for pricing and cost accumulation purposes. The following costs were incurred
on two recent jobs:
Direct materials:
Issued ………………………………………………Php6,000 Php7,500
Returned ……………………………………………….. 500 0
Indirect Materials used…………………………………..400 300
Direct labor……………………………………………Php 8,500 Php 14,500
Direct labor rate…………………………………….Php 8.50 per Php10 per hour
Overhead application rate…………………..Php 10 per direct labor hour Php15 per direct labor hour
The company adds a 40% markup on cost in determining the amount to charge for
each job. Please prepare a schedule showing the cost and the amount to be charged to
each job. (5 points)
4. The following completed cost sheets were prepared for three jobs that were in
production during July in the Special Order Division of Blackboard Company:
On July 1, Job 1 was 75% complete as to materials, labor and overhead. It was
finished during the month. The other jobs were started and finished during the month.
Jobs 1 and 3 were sold on acocunt at the end of the month.
Please prepare general journal entries to be record in July to accumulatet these job costs
for Work in Process as well as for Finished Goods and for the sale of the two jobs. (10
points)
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5. Vico Inc. produces customized vans in a job order shop. On August 1, the following
balances appear in the inventory records: (25 points)
The amount in Finished Goods represents Php91,000 recorded for Van 10 and Php68,000
recorded for Van 11. The Work in Process account represents the three vans in process, as follows:
Van 12 Van 13 Van 14
Factory overhead Php65,000 Php40,000 Php 15,000
Dirct labor 50,000 30,000 10,000
Direct materials 16,000 6,000 4,000
In a Nutshell
1. Job costing uses several accounts to control the product cost flows. Direct
materials costs are debited to the Materials Inventory account at time of purchase
and debited to the Work-inProcess Inventory account when production requests
materials.
2. Direct labor costs are debited to the Work-in-Process Inventory account when they
are incurred.
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3._______________________________________________________________
_______________________________________________________________
4. ________________________________________________________________
________________________________________________________________
Q & A List
Keywords Index
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Metalanguage
In manufacturing products, we cannot assume that all units produced are good units.
There are times that errors are made. Sometimes defective units are produced and are
either thrown away or reworked and sold. At this point, we will teach you on how to
account for those manufacturing costs associated with defective units. Below are the
terms you should be familiar with to be able to fully understand on how to treat spoilage
in a job-order costing system.
1. Spoilage – units of production whether fully or partially completed that do not meet
the specifications required by customers for good units and that are discarded or sold
at reduced prices.
2. Rework – units of production that do not meet the specifications of required by
customers but that are subsequently repaired and sold as good finished units.
3. Scrap – is residual material that results from manufacturing a product and can be sold
for relatively small amounts.
4. Normal spoilage – is spoilage inherent in a particular production process.
5. Abnormal spoilage - is spoilage that is not inherent in a particular production process
and would not arise under efficient operating conditions
Essential Knowledge
To understand this distinction, let’s look at an example. Petra, Inc., manufactures cabinets
on a job-order basis. Job 98-12 calls for 100 units with the following costs.
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Overhead is applied at the rate of 150 percent of direct labor costs. At the end of
the job, 100 units are produced. However, three of the cabinets required rework due to
improper installation of shelving. The rework involved six extra direct labor hours and an
additional Php50 of material. How is the rework accounted for? It depends on the reason
for the defective work.
If the defective work was a consequence of the demanding nature of this particular job,
then rework is assigned to the job, as follows.
On the other hand, suppose that the defective work was a consequence of
assigning new, untrained labor to the job. Defects are expected in that case, and the
rework is not assigned to the job but instead to overhead control. The costs are assigned
as follows.
___________________________________________________________________
The costs of spoiled units that cannot be reworked are similarly charged to the job if
caused by the demands of the job, and to overhead control if not.
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Self-Help: You can also refer to the sources below to help you further understand
the lesson:
* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A
Strategic Emphasis (7th Ed.) New York: NY: McGraw-Hill Education
Let’s Check
1. If a normal loss is anticipated on a specific job, the overhead application rate should
include an amount for the cost of defective units less disposal value.
a. True
b. False
2. If a normal loss is anticipated on all jobs, the overhead application rate should include
an amount for the cost of defective units less disposal value.
a. True
b. False
3. Normal spoilage is considered a period cost.
a. True
b. False
4. Abnormal spoilage is considered a period cost.
a. True
b. False
5. The journal entry to record normal spoilage specifically identified with a particular job
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Let’s Analyze
Activity 1. At this point, you are required to elaborate thoroughly your answer on the
questions below:
1. In manufacturing its products for the month of May 2020, Dora Corporation
incurred normal spoilage of P6,000 and abnormal spoilage of P2,000. Compute
for the spoilage cost that Dora should charge as inventoriable for the month of May
2020.
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
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2. A Company produces custom framing. The trainee assigned to cut the mat entered
the mat dimensions incorrectly into the computer. The mat was unusable and had
to be discarded; another mat was cut to the correct dimensions. How is the cost of
the spoiled mat handled?
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
3. Company B produces custom framing. For this job, the dimensions of the picture
were such that the computer-controlled, mat-cutting device could not be used.
Company B warned the customer that this was a particularly difficult job, and its
normal price would be increased to reflect its difficulty. Company B cut the mat by
hand, but the cut was not as straight as it should have been. So the first mat was
thrown and cut another one. How is the cost of the spoiled mat handled?
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
In a Nutshell
1. The cost of normal spoilage is included in the cost of the good units completed
whereas the cost of abnormal spoilage is charged to Overhead Control.
Your turn______________________________________________________
2. _______________________________________________________________
_______________________________________________________________
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_______________________________________________________________
3. _______________________________________________________________
_______________________________________________________________
_______________________________________________________________
4. _______________________________________________________________
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
5. _______________________________________________________________
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________
Q & A List
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Keywords Index
Normal spoilage
Overhead control
Rework
Scrap
Course Schedule
This section calendars all the activities and exercises, including readings and lectures, as
well as time for making assignments and doing other requirements.
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Big Picture
Week 6-7: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to
a. Identify the split-off point in a joint cost situation and distinguish joint products from
byproducts.
b. Explain the appropriate methods for the allocation of joint costs to joint products.
c. Prepare the different income statements showing the revenue/net revenue from by-
products.
Big Picture in Focus: ULOa. Identify the split-off point in a joint cost situation
and distinguish joint products from byproducts.
Metalanguage
1. Joint costs - are the costs of a production process that yields multiple products
simultaneously.
2. Joint products – are two or more products produced simultaneously by the same
process. It becomes separate and identifiable at the split-off point.
3. The split-off point - is the juncture in a joint production process when two or more
products become separately identifiable.
4. Separable costs - are all costs—manufacturing, marketing, distribution, and so
on—incurred beyond the split-off point that are assignable to each of the specific
products identified at the split-off point.
5. By-product is a secondary product recovered in the course of manufacturing a
primary product.
Essential Knowledge
Many manufacturing plants yield more than one product from a joint manufacturing
process. For example, the petroleum industry processes crude oil into multiple products:
gasoline, naphtha, kerosene, fuel oils, and residual heavy oils. Similarly, the
semiconductor industry processes silicon wafers into a variety of computer memory chips
with different speeds, temperature tolerances, and life expectancies. Beef and hides are
products linked in the meatpacking process; neither of these items can be produced
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without producing the other. Other industries that yield joint products include lumber
production, food processing, soap making, grain milling, dairy farming, and fishing.
Joint products and by-products are derived from processing a single input or a
common set of inputs. Joint products are products from the same production process that
have relatively substantial sales values. Products whose total sales values are minor in
comparison to the sales value of the joint products are classified as by-products.
Joint products and by-products both start their manufacturing life as part of the
same raw material. Until a certain point in the production process, no distinction can be
made between the products. The point in a joint production process at which individual
products can be identified for the first time is called the split-off point. Thereafter,
separate production processes can be applied to the individual products. At the split-off
point, joint products or by-products might be salable or require further processing to be
salable, depending on their nature.
* Horngren, C, Datar, S & Rajan 2011, Cost Accounting: A Managerial Emphasis, 14 th Edition
The distinction between main products and by-products rests solely on the relative
importance of their sales value. A by-product is a secondary product recovered in the
course of manufacturing a primary product. It is a product whose total sales value is
relatively minor.
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Joint costs include all manufacturing costs incurred prior to the split-off point
(including direct materials, direct labor, and factory overhead). For financial reporting
purposes, these costs are allocated among the joint products. Additional costs incurred
after the split-off point that can be identified directly with individual products are called
additional processing costs or separable costs.
Other outputs of joint production include scrap, waste, spoilage and defective units.
Scrap is the residue from a production process that has little or no recovery value. Waste,
such as chemical waste, is a residual material that has no recovery value and must be
disposed of by the firm as required. In addition to waste and scrap, some products do not
meet quality standards and can be reworked for resale. Spoiled units are not reworked
for economic reasons. Defective units are reworked to become salable units.
Self-Help: You can also refer to the sources below to help you further understand
the lesson:
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Let’s Check
2. The characteristic that is most often used to distinguish a product as either a joint
product or a by-product is the:
a. amount of labor used in processing the product
b. amount of separable product costs that are incurred in processing
c. amount (i.e., weight, inches, etc.) of the product produced in the
manufacturing process
d. relative sales value of the products produced in the process
3. The allocation of joint costs to individual products is useful primarily for purposes
of:
a. determining whether to produce one of the joint products
b. inventory costing
c. determining the best market price
d. deciding whether to sell at the split-off point
5. Costs to be incurred after the split-off point are most useful for:
a. adjusting inequities in the joint cost allocation procedure
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6. If a company obtains two salable products from the refining of one ore, the refining
process should be accounted for as a(n):
a. reduction process
b. depletion process
c. mixed cost process
d. joint process
7. The assignment of raw material costs to the major end products resulting from
refining a barrel of crude oil is best described as:
a. joint costing
b. differential costing
c. incremental costing
d. variable costing
8. The following components of production that can be allocated as joint costs
when a single manufacturing process produces several salable products
are:
a. indirect production costs only
b. materials, labor, and overhead
c. materials and labor only
d. labor and overhead only
10. The point in a joint production process at which individual products can be
identified for the first time is called:
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c. Order Point
d. Production point
Let’s Analyze
Activity 1. Getting acquainted with the essential terms in the study of joint cost, I will
require you to answer the following questions.
1. Mel Corporation manufactures liquid chemicals X and Y from a joint process. Joint
costs are allocated on the basis of relative market value at split-off. It costs Php5,000
to process 500 gallons of Product X and 1,000 gallons of Product Y to the split-off
point. The market value at split-off is Php10 per gallon for Product X and Php15 for
Product Y. Product Y requires an additional process beyond split-off at a cost of Php5
per gallon before it can be sold. What is Mel’s cost to produce 1,000 gallons of
Product Y? (5 points)
Assuming that total joint costs of Php160,000 were allocated using the market
value at split-off approach, what joint costs were allocated to each product?
(10 points)
3. Best Co. manufactures Products A and B from a joint process. Market value at split-
off was Php 600,000 for 10,000 units of A, and Php200,000 for 15,000 units of B.
Using the market value at split-off approach, joint costs properly allocated to A were
Php140,000. Compute for the total joint costs of Best Company. (5 points)
4. The Coco Corporation manufactures two products out of a joint process—X and Y.
The joint (common) costs incurred are Php250,000 for a standard production run that
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generates 120,000 gallons of X and 80,000 gallons of Y. X sells for Php2.00 per
gallon, while Y sells for Php3.25 per gallon. If there are no additional processing costs
incurred after the split-off point, what is the amount of joint cost of each production
run allocated to Product X? (5 points)
In a Nutshell
1. A joint cost is the cost of a single production process that yields multiple products
simultaneously.
2. The split-off point is the juncture in a joint production process when the
products become separately identifiable.
Your turn
1. ________________________________________________________________
________________________________________________________________
________________________________________________________________
2. ________________________________________________________________
________________________________________________________________
________________________________________________________________
3. ________________________________________________________________
________________________________________________________________
________________________________________________________________
4. ________________________________________________________________
________________________________________________________________
________________________________________________________________
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Q & A List
Keywords Index
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The allocation of costs must be done for financial reporting purposes—to value
inventory carried on the balance sheet and to determine income. The following are the
methods of allocating joint costs. These methods include the:
For example, suppose that a sawmill processes logs into four grades of lumber totaling
3,000,000 board feet as follows.
Total joint cost is Php186,000. Using the physical units method, how much joint
cost is allocated to each grade of lumber? First, we find the proportion of the total units
for each grade; then, we assign each grade its proportion of joint cost.
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Solution:
The physical units method may be used in any industry that processes joint
products of differing grades (e.g., flour milling, tobacco, and lumber).
Another method to allocate joint cost is the Weighted Average Method wherein
weight factors can be assigned. These weight factors may include such diverse elements
as amount of material used, difficulty to manufacture, time consumed, difference in type
of labor used, and size of unit. These factors and their relative weights are usually
combined in a single value, which we might call the weight factor.
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By multiplying the number of cases by the weight factor, we obtain the weighted number
of cases. Then, the physical units method can be applied as the percentage of weighted cases for
each grade is obtained and multiplied by the joint cost to yield the allocated joint cost.
Solution:
Sales-Value-at-Split-Off Method
Using the same example of lumber mill costs given in the preceding discussion of
the physical units method, the joint cost of Php186,000 is distributed to the various grades
on the basis of their market value at split-off.
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Solution:
First and second 450,000/1000=450 x 300 =135,000; 135,000/500,100 =.2699 x 186,000= 50,201
----------
Note that joint cost is allocated on the basis of each product’s share of hypothetical sales
value. Thus, Alpha receives 40 percent of the joint cost (Php2,300) because it accounts
for 40 percent of the hypothetical sales value. The net realizable value method is
particularly useful when one or more products cannot be sold at the split-off point but
must be processed further. Constant Gross
When sales value is used to allocate joint costs, we are talking about sales value
at the splitoff point. However, on occasion, there is no ready sales price for the individual
products at the split-off point. In this case, the net realizable value method can be used.
First, we obtain a hypothetical sales value for each joint product by subtracting all
separable (or further) processing costs from the eventual sales value. This approximates
the sales value at split-off. Then, the net realizable value method can be used to prorate
the joint costs based on each product’s share of hypothetical sales value.
Suppose that Company Y manufactures two products, Alpha and Beta, from a
joint process. One production run costs Php5,750 and results in 1,000 gallons of Alpha
and 3,000 gallons of Beta. Neither product is salable at split-off, but must be further
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processed such that the separable cost for Alpha is Php1 per gallon and for Beta is Php2
per gallon. The eventual sales price for Alpha is Php5 and for Beta, Php4. Joint cost
allocation using the net realizable value method is as follows:
Solution:
Note that joint cost is allocated on the basis of each product’s share of hypothetical
sales value. Thus, Alpha receives 40 percent of the joint cost (Php2,300) because it
accounts for 40 percent of the hypothetical sales value. The net realizable value method
is particularly useful when one or more products cannot be sold at the split-off point but
must be processed further.
The net realizable value method is easy to apply. However, it assigns all profit to
the hypothetical sales value. In other words, the further processing costs are assumed to
have no profit value even though they are critical to selling the products. The constant
gross margin percentage method corrects for this by recognizing that costs incurred after
the split-off point are part of the cost total on which profit is expected to be earned, and it
allocates joint cost such that the gross margin percentage is the same for each product.
Using the data for Alpha and Beta, we can allocate the Php5,750 joint cost using the
constant gross margin percentage method.
First, total revenues and costs are calculated to determine overall gross margin and the
gross margin percentage. Then, revenues for the individual products are adjusted for
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gross margin, separable costs are deducted, and the resulting figure is the allocated joint
cost.
Joint production processes result in the output of two or more products that are
produced simultaneously. Joint or main products have relatively significant sales value.
By-products have relatively less significant sales value. Joint costs must be allocated to
the individual products for purposes of financial reporting. Several methods have been
developed to allocate joint costs. These include the physical units method, the weighted
average method, the sales-value-at-split-off method, the net realizable value method, and
the constant gross margin method.
Self-Help: You can also refer to the sources below to help you further understand
the lesson:
* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic
Emphasis (7th Ed.) New York: NY: McGraw-Hill Education
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Learning.
Let’s Check
Activity 1. Please answer the following questions. Choose the best anwer.
1. The method used for the allocation of joint costs to products is important:
a. only in the minds of accountants
b. because profits will be affected when ending inventories change from the
beginning of the period
c. because its validity for justifying prices before regulatory authorities is
unquestioned
d. because profit margins differ when the relative sales value method is
used
3. All of the following are methods of allocating joint production costs except the:
a. market value method
b. quantitative unit method
c. average unit cost method
d. recognition of net revenue method
4. If a company obtains two salable products from the refining of one ore, the refining
process should be accounted for as a(n):
a. reduction process
b. depletion process
c. mixed cost process
d. joint process
5. The following is acceptable regarding the allocation of joint product costs to a by-
product:
None Allocated Some Portion Allocated
a. not acceptable not acceptable
b. acceptable acceptable
c. acceptable not acceptable
d. sometimes acceptable never acceptable
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6. Company Kim manufactures Products WX and YZ using a joint process. The joint
processing costs are Php10,000. Products WX and YZ can be sold at split-off for
Php12,000 and Php8,000 respectively. After split-off, Product WX is processed
further at a cost of Php5,000 and sold for Php21,000, whereas Product YZ is sold
without further processing. If the company uses the market value method for
allocating joint costs, the joint cost allocated to WX is:
a. Php4,000
b. Php5,000
c. Php6,000
d. Php6,667
8. Company A produces three main joint products and one by-product. The by-
product's relative market value is quite low compared to that of the main products.
The preferable accounting for the by-product's net realizable value is as:
a. an addition to the revenues of the other products allocated on
their respective net realizable values
b. revenue in the period in which it is sold
c. a reduction in the joint cost to be allocated to the three main
products
d. a separate net realizable value upon which to allocate some
of the joint costs
9. Bett Co. manufactures Products A and B from a joint process. Market value at split-
off was Php700,000 for 10,000 units of A, and Php300,000 for 15,000 units of B.
Using the market value at split-off approach, joint costs properly allocated to A
were Php140,000. Total joint costs were:
a. Php98,000
b. Php200,000
c. Php233,333
d. Php350,000
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10. Company ABC processes raw material into products V1, V2, and V3. Each ton of
raw material produces five units of V1, two units of V2, and three units of V3. Joint
processing costs to the split-off point are Php15 per ton. Further processing results
in the following per unit figures:
V1 V2 V3
Additional processing costs per unit Php28 Php30 Ph25
Selling price per unit 30 35 35
If joint costs are allocated by the net realizable value of finished product, what
proportion of joint costs should be allocated to V1?
a. 20%
b. 30%
c. 33 1/3%
d. 50%
Let’s Analyze
Activity 1. Getting acquainted with the essential terms in the study of the different
appropriate methods for the allocation of joint costs to joint products, I will require you to
provide an answer to the following questions.
1. Minnie Oil Co. produces three joint products: gasoline, kerosene, and naphtha.
Total joint production cost for November was Php59,500. The units produced and
unit sales prices at the split-off point were:
In determining costs by the weighted average method, each unit is weighted as follows:
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In a Nutshell
Activity 1. In this part, you will be required to draw conclusions, perspectives, arguments
and ideas from the unit lesson. I will supply the first item and you will continue the rest.
1. The sales value at split-off method is preferable when market prices exist at split-
off because using revenues is consistent with the benefits-received criterion;
further, the method does not anticipate subsequent management decisions on
further processing and is simple.
Your turn
2.
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3.
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4.
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5.
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________________________________________________________________
________________________________________________________________
________________________________________________________________
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Keywords Index
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Typically, by-products are not allocated any of the joint product costs. Instead,
byproduct sales are listed as an additional sales revenue on the income statement, or
they are treated as a deduction from the cost of goods sold and as other income.
Sales Php400,000
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3. As other income
Sales Php400,000
Self-Help: You can also refer to the sources below to help you further understand
the lesson:
* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic
Emphasis (7th Ed.) New York: NY: McGraw-Hill Education
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Let’s Check
Activity 1. Please choose the best answer on the following questions.
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d. is produced along with main products but its sales value does not
cover its production cost
5. X Company manufactures two products, A and B,which can be sold at split-
off point or needs further processing and eventually sold as a very good
quality items. What is the basis of the decision to sell these products at split-
off point or needs further processing?
a. allocation of the joint cost using an equitable and rational
allocation basis
b. assumption that the joint cost must be allocatd using a quantitative
or physical unit method
c. assumption that the joint cost is irredlevant
d. allocation of the joint cost using the sales value or market value
method
6. A separable cost is also known as a:
a. cost incurred after split-off point
b. cost incurred before split-off point
c. cost incurred on by-priduct
d. cost incurrred on main product
7. It is the point where two or more products come out and can be identified
separately.
a. joint point
b. change point
c. split-off point
d. break-even point
8. This method uses measurement units such as tons, gallons, kilograms,
pounds, and feet to apportion joint cost :
a. market value method
b. average unit cost method
c. weighted averge method
d. quantitative unit method
9. This is a cost incurred to produce two or more products in a common
production process:
a. mixed cost
b. basic cost
c. joint cost
d. direct cost
10. The quantitative unit method of joint cost allocation is known as:
a. physical unit method
b. joint product method
c. direct [roduct method
d. by-product method
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Let’s Analyze
Activity 1. Getting acquainted with the different presentation of by-products in the income
statements, I will require you to provide an answer to the item below:
1. Glad Company produces tea bags. As part of the manufacturing process, the tea
leaves are separated from the stalks and stems. The tea leaves are sold as the
main product, while the stalks and stems are sold as the by-product for use in
nursery mulch. During August, the company processed 25,000 boxes of tea bags
at a unit cost of Php.75. Beginning inventory consisted of 2,000 boxes at a unit
cost of Php.70 per box. During August, 20,000 boxes were sold for Php1.75 each.
The company also sold 500 pounds of stalks and stems at a total price of Php850.
Marketing and administrative expenses amounted to Php12,000.
Required: Prepare an income statement showing the operating income for August,
assuming that the revenue from the company's by-product sales is deducted from
the production costs. (Show unit costs for the ending inventory using the average
cost method rounded to three decimal places.)
In a Nutshell
Your Turn
3.
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4.
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____________________________________________________________________
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5.
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6.
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Q & A List
Keywords Index
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COURSE SCHEDULE
This section calendars all the activities and exercises, including readings and lectures, as
well as time for making assignments and doing other requirements.
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Big Picture
Week 8-9: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to
a. Discuss the basic characteristics of process costing, including cost flows,
journal entries, and the preparation of the production cost report.
b. Prepare a departmental production report using the FIFO method and
weighted average method.
c. Explain how spoilage is treated in a process costing system.
Cost Flows
The cost flows for a process-costing system are similar to those for a job-order
costing system. The primary difference is that a job-order costing system accumulates
manufacturing costs by job, and a process-costing system accumulates manufacturing
costs by process. See below for the difference.
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(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)
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system is a simpler and less expensive system to operate than a job-order costing
system. Another reason that a process-costing system is simpler is that laborers tend to
specialize in particular processes. Although time tickets are still used to track direct labor
hours of any particular laborer, there is no need to allocate them to various processes.
Below illustrates the cost flows in a process-costing system.
For example, the journal entries for the tableting department.
1. Work in Process—Tableting 600
Work in Process—Mixing 600
To transfer goods to tableting.
When goods are completed in one process, they are transferred with their costs to
the subsequent process.
For example, mixing transferred Php600 of its costs to tableting, and tableting
(after further processing) transferred Php800 of costs to bottling. A cost transferred from
a prior process to a subsequent process is referred to as a transferred-in cost. These
transferred-in costs are (from the viewpoint of the process receiving them) a type of
direct materials cost. This is true because the subsequent process receives a partially
completed unit that must be subjected to additional manufacturing activity, which
includes more direct labor, more overhead, and, in some cases, additional direct
materials.
For example, the second journal entry for the tableting department reveals that Php400
of additional manufacturing costs was added after receiving the transferred-in goods
from mixing. Thus, while mixing sees the active and inert powders as a combination of
direct materials, direct labor, and overhead costs, tableting sees only the powder—a
direct material, costing Php600.
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(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)
Illustrative Problem:
Happy Corporation uses process costing in its two production departments. A separate
work in process account is kept in the general ledger for each production department.
The following data relate to operations for the month of June:
Beginning Added
Inventory During March
Direct materials cost: Department A Php 4,000 Php24,000
Department B 2,000 19,000
Direct labor cost: Department A 5,000 39,000
Department B 3,500 34,000
Applied overhead: Department A 11,000 89,000
Department B 3,500 34,000
During June, 40,000 units with a cost of Php5 each were transferred from Department A
to Department B, and 35,000 units with a cost of Php9 each were transferred from
Department B to finished goods inventory.
Required: Prepare the appropriate general journal entries to record the cost charged to
the producing departments during June and the cost of units transferred from Department
A to Department B and Department B to finished goods inventory.
SOLUTION
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Illustrative Problem:
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(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)
(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)
(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)
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Star Company Mixing Department Production Report for October (FIFO Method) Unit
Information
(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)
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(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)
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Star Company Mixing Department Production Report for October (Weighted Average
Method) Unit Information
(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)
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Self-Help: You can also refer to the sources below to help you further understand
the lesson:
* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic
Emphasis (7th Ed.) New York: NY: McGraw-Hill Education
Let’s Check
Activity 1. Please choose the best answer on the following questions.
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4. Assuming that a company has no beginning work in process inventory and the
ending work in process inventory is 50% complete as to conversion costs, the
number of equivalent units as to conversion costs would be:
a. less than the units completed
b. more than the units completed
c. less than the units placed in process
d. the same as the units completed
6. The beginning work in process as to conversion costs was 60% complete and the
ending work in process as to conversion costs was 45%. The amount of the
conversion cost included in the ending work in process (using the average cost
method) is determined by multiplying the average unit conversion costs by what
percentage of the total units in ending work in process?
a. 60%
b. 55%
c. 45%
d. 50%
7. Assuming that company Y reports two different unit costs for goods transferred to
the next department, it is reasonable to assume that :
a. the department accounts for lost units at the end of the process
b. a FIFO costing method I used
c. lost unit costs are computed separately
d. an average costing method is used
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9. FIFO method of process costing will produce the same cost of goods manufactured
amount as the average cost method when there is no beginning inventory.
a. True
b. False
10. The FIFO method of process costing differs from that of the average cost method
because it considers the stage of completion of beginning work in
in process in computing equivalent units of production, whereas the average cost
method does not consider the stage of completion of beginning work in process.
a. True
b. False
Let’s Analyze
Activity 1. Getting acquainted with the basic characteristics of process costing, I will
require you to answer the following questions.
1. Harana Company uses process costing to account for the costs of its only product, X.
Production takes place in two departments—Sanding and Polishing. On December
31, the inventory for Product X was as follows:
No unused materials
Work in process—
Sanding Department 700 units (3/4 complete as to labor)
Work in process—
Polishing Department 900 units (1/2 complete as to materials and
3/4 complete as to direct labor)
Finished Goods 500 units
Required:
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2. Karren Beach Products reports the following data for the first department in its
production process:
In a Nutshell
Your turn
2.__________________________________________________________________
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Q & A List
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Step 1: You analyze the physical flow of production units. Determine the number of units
on hand in beginning work-in-process, the number of units started into production (or
received from a prior department), the number of units completed, and the number of
units in ending work-in-process inventory. The analysis of physical units includes
accounting for both input and output units. Input units include beginning work-in-process
inventory and all units that enter a production department during an accounting period.
Output units include units that are complete and transferred out from a production
department and units in the ending work-in-process inventory.
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======
* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic Emphasis, 7 th Ed
Step 3: You determine the total costs for each manufacturing cost element. The total
manufacturing costs for each cost element (materials, labor, and overhead) include the
current costs incurred and the costs of the units in work-in-process beginning inventory.
The amount of these costs is obtained from material requisitions, labor time cards, and
factory overhead allocation sheets. The total manufacturing cost for each cost element is
also called total cost to account for. Be sure that the total cost determined in this step
must agree with the total cost assigned in step five.
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* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management : A Strategic Emphasis, 7th Ed
Step 4: The purpose of computing direct materials, direct labor, and factory overhead
costs per equivalent unit of production is to have a proper product costing and income
determination for an accounting period, which includes both complete and incomplete
units.
* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic Emphasis, 7 th Ed
Step 5: This is the last step wherein you assign total manufacturing costs to units
completed and ending work-in- process. The objective of the production cost report is to
assign total manufacturing costs incurred to the units completed during the period and
the units that are still in process at the end of the period. The total costs assigned in step
five should equal the total costs to be accounted for in step three.
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* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic Emphasis, 7th Ed
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* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic Emphasis, 7 th Ed
Under the FIFO costing method, the equivalent units and manufacturing costs in
beginning work in process are excluded from the current-period unit cost calculation.
Thus, the FIFO method recognizes that the work and costs carried over from the
prior period legitimately belong to that prior period.
Since FIFO excludes prior-period work and costs, we need to create two
categories of completed units. FIFO assumes that units in beginning work in process are
completed first, before any new units are started.
Thus, one category of completed units is that of beginning work-in-process units.
The second category is for those units started and completed during the current period.
These two categories of completed units are needed in the FIFO method so that each
category can be costed correctly. For the units started and completed, the unit cost is
obtained by dividing total current manufacturing costs by the current-period equivalent
output. However, for the beginning work-in-process units, the total associated
manufacturing costs are the sum of the prior-period costs plus the costs incurred in the
current period to finish the units. Thus, the unit cost is this total cost divided by the units
in beginning work in process.
Illustrative Problem:
Dalitay Tool Company manufactures a product in two departments, Shaping and
Assembly. The product is cut out of sheet metal, bent to shape, and painted in the
Shaping Department. Then, it is transferred to the Assembly Department where
component parts purchased from outside vendors are added to the unit. A process cost
system with a FIFO cost flow assumption is used to account for work in process
inventories. Data related to November operations in the Assembly Department follow:
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Illustrative Problem:
Cove Corporation manufactures a product in three departments. The product is cut out
of lumber in the Cutting Department, then transferred to the Planing Department where it
is shaped and certain parts purchased from outside vendors are added to the unit, and
finally transferred to the Finishing Department where it is primed, painted, and packaged.
Since only one product is manufactured by the company, a process cost system is used.
The company adopted the average cost flow assumption to account for its work in process
inventories. Data related to September operations in the Planing Department follow:
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Beginning Added
Costs charged to the department: Inventory This Period
Costs from the preceding department Php15,500 Php63,250
Materials 7,800 20,700
Direct labor 3,200 16,750
Factory overhead 9,975 39,900
Required: Prepare a September cost of production report for the Planing Department.
Cove Corporation
Planing Department
Cost of Production Report
For September, 2019
132
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
Self-Help: You can also refer to the sources below to help you further understand
the lesson:
* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic
Emphasis (7th Ed.) New York: NY: McGraw-Hill Education
* Lanen, W 2017, Fundamentals of Cost Accounting. 5th Edition. New York, NY:
McGraw- Hill Education
133
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
Let’s Check
Activity 1. Please answer the following questions. Show your calculations.
1. Department A is the first stage of Tine Company's production cycle. The following
information is available for conversion costs for the month of April:
Units
Beginning work in process (60% complete) 20,000
Started in April 340,000
Completed in April and transferred to Department B 320,000
Ending work in process (40% complete) 40,000
Using the FIFO method, the equivalent units for the conversion cost are:
a. 336,000
b. 360,000
c. 324,000
d. 320,000
2. The Aper Company computed the physical flow of units for Department A for the
month of April as follows:
Units completed:
From work in process on April 1 10,000
From April production 30,000
Total 40,000
Materials are added at the beginning of the process. Units of work in process at
April 30 were 8,000. The work in process at April 1 was 80% complete as to
conversion costs, and the work in process at April 30 was 60% complete as to
conversion costs. What are the equivalent units of production for the month of April
using the FIFO method?
134
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
3. Cord Company computed the flow of physical units completed for Department M
for the month of March as follows:
Units completed:
From work in process on March 1 15,000
From March production 45,000
Total 60,000
Materials are added at the beginning of the process. The 12,000 units of work in
process at March 31 were 80% complete as to conversion costs. The work in
process at March 1 was 60% complete as to conversion costs. Using the FIFO
method, the equivalent units for March conversion costs were:
a. 60,600
b. 55,200
c. 57,000
d. 54,600
4. Season Co. adds materials at the beginning of the process in Department P. The
following information pertains to Department P's work in process during May:
Units
Work in process on May 1
(60% complete as to conversion cost) 3,000
Started in May 25,000
Completed in May 20,000
Work in process on May 31
(75% complete as to conversion cost) 8,000
Under the average costing method, the equivalent units for conversion cost are:
a. 26,000
b. 25,000
c. 24,000
d. 21,800
135
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
Materials Php1
Conversion 3
Transferred-in 5
6.
136
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
7. Darao Processing Co. uses the average costing method and reported a beginning
inventory of 5,000 units that were 20% complete with respect to materials in one
department. During the month, 11,000 units were started; 8,000 units were
finished; ending inventory amounted to 8,000 units that were 60% complete with
respect to materials. Total materials cost during the period for work in process
should be spread over:
a. 7,200 units
b. 12,800 units
c. 11,200 units
d. 13,200 units
Units
Work in process, April 1 (50% complete) 40,000
Started in April 240,000
Work in process, April 30 (60% complete) 25,000
Materials Conversion
A. 255,000 255,000
B. 270,000 280,000
C. 280,000 270,000
D. 305,000 275,000
Materials
Units Costs
Beginning work in process 17,000 Php12,800
Started in June 82,000 69,700
Units completed 85,000
Ending work in process 14,000
All materials are added at the beginning of the process. Using the average cost
method, the cost per equivalent unit for materials is:
137
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
a. Php0.825
b. Php0.833
c. Php0.85
d. Php0.97
10. Coode Manufacturing has three producing departments in its factory. The ending
inventory in the Milling Department consisted of 3,000 units. These units were
60% complete with respect to labor and factory overhead. Materials are applied
at the end of the milling process. Unit costs for the complete process in the Milling
Department are: materials, Php1; labor, Php2; and factory overhead, Php3. The
appropriate unit cost for each unit in the ending inventory is:
a. Php2
b. Php5
c. Php3
d. Php6
Let’s Analyze
Activity 1. At this point in time, you are now familiar with the preparation of the cost
production report. Please provide an answer to the following questions.
Units in beginning inventory (90% materials, 80% labor and overhead) 1,000
Units received from the Shaping Department this period 3,000
Units transferred to Finished Goods Inventory this period 2,800
Units in ending inventory (50% materials, 40% labor and overhead) 1,200
Beginning Added
Costs charged to the department: Inventory This Period
Costs from the preceding department Php23,600 Php29,250
Materials 7,700 13,375
Direct labor 3,500 9,672
Factory overhead 4,900 16,616
Required: Prepare a September cost of production report on a FIFO basis for the
138
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
Assembly Department.
Mixing Cooking
Department Department
Factory overhead incurred Php7,500 Php9,000
General factory overhead apportioned 5,000 6,000
Required: Prepare a partial cost of production report, showing the total cost to be accounted
for in each department.
In a Nutshell
Activity 1. In this part, you will be required to draw conclusions, perspectives, arguments
and ideas from the unit lesson. I will supply the first item and you will continue the rest.
1. The two methods of preparing the departmental production cost report in process
costing are the weighted-average method and first-in, first-out (FIFO) method. The
weighted-average method includes costs incurred in both current and prior periods
that are shown as the beginning work-in-process inventory of this period. The FIFO
method includes only costs incurred during the current period in calculating unit cost
Your turn
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
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Q & A List
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
12.
Keywords Index
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
Big Picture in Focus: ULOc. Explain how spoilage is treated in a process costing
system.
There are two types of spoilage—normal and abnormal. Normal spoilage occurs
under normal operating conditions. It is uncontrollable in the short term and is considered
a part of product cost. That is, the costs of lost units are absorbed by the good units
produced. Abnormal spoilage exceeds expected losses under efficient operating
conditions and is charged as a loss to operations in the period detected.
Two approaches are used to account for normal spoilage in process costing
systems. The first approach is to count the number of spoiled units, prepare a separate
equivalent unit computation with the cost per unit of the spoiled goods, and then allocate
the cost to the good units produced.
The second approach is to omit the spoiled units in computing the equivalent units
of production; the spoilage cost is thus included as part of total manufacturing costs. The
first approach provides more accurate product costs because it computes the costs
associated with normal spoilage and spreads them over the good units produced. The
second approach is less accurate because it spreads the costs of normal spoilage over
all units—good completed units, units in ending work-in-process inventory, and abnormal
spoiled units.
Following the five-step procedure described earlier, we just need to add normal spoilage
and abnormal spoilage components in the calculations. Please see calculations below.
143
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic Emphasis 7 th Ed
144
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic Emphasis 7th Ed
FIFO method
145
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic Emphasis 7th Ed
146
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic Emphasis 7 th Ed
Self-Help: You can also refer to the sources below to help you further understand
the lesson:
* Hansen, D & Mowen, M 2015, Cornerstones of Cost Management (3rd Ed.). Mason, OH:
Cengage Learning
147
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
* Lanen, W 2017, Fundamentals of Cost Accounting. 5th Edition. New York, NY: McGraw-
Hill Education
Let’s Check
Activity 1. Please answer the following questions..
4. The sum of beginning work in process inventory units and started units is
subtracted from the sum of ending work in process inventory units and transferred
out units of goods to calculate
a. Gross weighted spoilage
b. Inventoriable spoilage
c. Partial spoilage
d. Total spoilage
148
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
5. The production units that do not meet customer specification, but can be sold to
othe customers as finished goods
a. Reduced work
b. Spoilage
c. Rework
d. scrap
6. An example of rework is
a. Short lenghts from wood work
b. Defective aluminum cans recycled by manufacturer
c. Detection of defective pieces before shipment
d. All of above
8. If the beginning work in process inventory units are 2,600, units started are 9,000
ending work in process units are 2,300 and the completed good units are 8,000
then total spoilage will be
a. 1,200 units
b. 990 units
c. 1100 units
d. 1000 units
10. The costing which explains how and when scrap affects the operting income of a
company
a. Inventory costing
b. Conversion costing
c. Normal scrap costing
d. Abnormal scrap costing
Let’s Analyze
149
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
Activity 1. At this point in time, you are now familiar with how spoilage is treated in a
process costing system. Please provide an answer to the problem below.
1. Leny Corporation produces a product through a continuous process in two
departments. Materials in this department are added at the beginning of the process.
The production and cost data were taken from Department B during the month of
August 2019.
Production data:
Received from Dept. A 70,000 units
Completed and transferred 50,000 units
In process, end (50% complete) 5,000 units
Lost 5,000 units
Cost data:
Received from Dept. A P460,000
Materials 75,000
Labor 21,875
Overhead 143,750
In a Nutshell
Activity 1. In this part, you will be required to draw conclusions, perspectives,
arguments and ideas from the unit lesson. I will supply the first item and you will
continue the rest.
Your turn
2.
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150
College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
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Q & A List
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
7.
8.
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12.
Keywords Index
COURSE SCHEDULE
This section calendars all the activities and exercises, including readings and lectures, as
well as time for making assignments and doing other requirements.
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
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and all are exhorted to exercise self-management and self-regulation.
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Blended Delivery (OBD) course. Any breach and violation shall be dealt with properly
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Handbook.
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Values, specifically in the adherence to intellectual honesty and integrity; academic
excellence by giving due diligence in virtual class participation in all lectures and
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University shall institute monitoring mechanisms online to detect and penalize
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5. Students shall independently and honestly take examinations and do assignments,
unless collaboration is clearly required or permitted. Students shall not resort to
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7. By enrolling in OBD course, students agree and abide by all the provisions of the
Online Code of Conduct, as well as all the requirements and protocols in handling
online courses.
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College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137
YOLANDA S. BARCELONA
Author
Approved by:
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