Cost Accounting and Control: Cagayan State University

CAGAYAN STATE UNIVERSITY
MODULE
for
COST ACCOUNTING AND CONTROL
NANCY E. DONIEGO, CPA, Ph.D.
Subject Teacher
Cost Accounting and Control
Unit 1 INTRODUCTION TO COST ACCOUNTING
INTRODUCTION
This unit introduces to the learners cost accounting. It starts from the basic elements
of accountability and arrives to describe each part of cost accounting.
LEARNING OUTCOMES/TOPIC OBJECTIVES

Define cost accounting as a source of information for internal parties within the
organization
Identify the objective of cost accounting
Distinguish between financial, managerial and cost accounting
Distinguish between cost, expenses, and losses.
Distinguish between direct and indirect cost.
Define the three integral component of a product
Define prime cost and conversion cost
Define variable, fixed, and mixed cost
Distinguish between common cost and joint cost.
Distinguish between capital expenditures and revenue expenditures.
Distinguish between merchandising and manufacturing operation
PRESENTATION OF CONTENT
DEFINITION OF COST ACCOUNTING

Cost accounting is the art and science of recording, classifying, summarizing, and
analysing costs to help management make prudent business decisions
OBJECTIVE OF COST ACCOUNTING

The main objectives of cost accounting are as follows:
1. Ascertainment of cost.
2. Cost control and cost reduction
3. Assisting management in decision-making including pricing, profit planning,
budgeting
RELATIONSHIP of Financial, Management and Cost Accounting

Financial Accounting
❖ Accounting information is used for reporting to external parties, including

investors and creditors.
❖Concerned primarily with financial statements for external use by those who supply
funds to the entity and other persons who may have vested interest in the
financial operations of the firm.
❖Reports prepared to focus on the enterprise as a whole.
❖Information may be historical, quantitative, monetary and verifiable.
❖Information provided is usually presented in the form of financial statements, tax
returns and other formal reports distributed to various external users and
regulatory agencies of the government like SEC, BIR.
❖Information may also be used internally to provide a basis for financial analysis by
management.
Managerial Accounting
❖Focuses on the needs of parties within the organization, rather than interested
parties outside the organization.
❖Information commonly addresses individual or divisional concerns rather than
those of the enterprise as a whole.
❖Information may be current or forecasted, quantitative or qualitative, monetary and
non-monetary and most of all timely, the data are futuristic and some of the costs
are not recorded in the accounting books of the organization.
❖More concern on the timeliness of the information so management cannot wait until
tomorrow for information that is required for today’s decision.
Cost accounting
❖
The intersection between financial and managerial accounting.
❖
Information is needed and used by both financial and managerial accounting
❖
Provides product cost information to external parties, such as stockholders, creditors
and various regulatory boards for credit and investment decisions.
❖
Provides product cost information also to internal parties such as managers for
planning and controlling.
COST is the cash or cash equivalent value sacrificed for goods and services that are
expected to bring a current or future benefit to the organization. Costs are incurred to
produce future benefits in a profit making firm, future benefits mean revenue. As
costs are used up in the production of revenue, they are said to expire. Expired costs
are called expenses. In each period, expenses are deducted from revenues in the
income statement to determine the period’s profit. A loss is a cost that expires
without producing any revenue benefit. The focus of cost accounting is on costs. Not
expenses.
CLASSIFICATION OF COSTS
I. Costs classified as to relation to a product
A. Manufacturing costs/product cost
1. Direct Materials
2. Direct labor
3. Factory overhead
B. Non-manufacturing costs/period cost

1. Marketing or selling expense
2. General or administrative expense
II. Costs classified as to variability
A. Variable costs
B. Fixed costs
C. Mixed costs
III. Costs classified as to relation to manufacturing departments
A. Direct departmental charges
B. Indirect departmental charges
IV. Costs classified as to their nature as common or joint
A. Common costs
B. Joint cost
V. Costs classified as to relate to an accounting period.
A. Capital expenditures
B. Revenue expenditures
VI. Costs for planning, control, and analytical processes
A. Standard costs
B. Opportunity costs
C. Differential costs
D. Relevant costs
E. Out-of-pocket cost
F. Sunk cost
G. Controllable cost
MANUFACTURING COSTS/PRODUCT COSTS/INVENTORIABLE COSTS
Direct materials cost are those materials used that can be traced to the finished
products.
Direct labor costs are the amount paid as wages to those working directly on the
product.
Factory overhead costs a catch all for manufacturing cost that cannot be classified as
direct materials and direct labor costs.
For example, if we are to produce a T-shirt, we need cloth, thread, needle,
scissors, sewing machine, dress maker, sewing machine oil, janitor,
factory/building, electricity. From here we are to identify what are the types of
costs we encounter to produce the product.
Direct Material is the cloth
Direct labor is dressmaker wage that directly makes the product
Factory overhead are the thread, needle, scissors, depreciation of sewing
machine, sewing machine oil, electricity and rent or depreciation of the factory
building, wage of the janitor that cannot be traced on the product but are
needed to produce/make the product.
Prime Cost
Direct Direct labor Factory

Materials overhead
Conversion Costs
Prime costs = Direct labor plus Direct materials

Conversion costs = Direct labor plus Factory overhead
Total manufacturing cost = Direct labor plus Direct materials plus Factory overhead
NON-MANUFACTURING COSTS/PERIOD COSTS
Marketing or selling expenses includes all costs necessary to secure customer

orders and get the finished products or service into the hands of the customer.
Examples are advertising, shipping, sales travel, sales commissions, sales salaries,
and expenses associated with finished goods warehouses.
General or administrative expense includes all executive, organizational and
clerical expenses that cannot logically be included under either production or
marketing.
COSTS CLASSIFIED AS TO VARIABILITY
Fixed costs are costs which remain constant in total, irrespective of the volume of
production.
Fixed cost may be classified into two categories, depending on the ability of
management to influence the level of these costs in the short term.
1) Committed fixed cost – cost that represents relatively long term

commitments on the part of the management as a result of past decisions.
Example – depreciation on equipment.
2.) Managed fixed cost (also known as discretionary, programmed, or planned
fixed costs) – costs that are incurred on a short-term basis and can be more
easily modified in response to changes in management objectives. Examples –
advertising, research and development and costs of training of employees.
Shown below is a graph of fixed cost. It is clearly shown that total fixed costs remain
unchanged as activity changes. When activity triples from 10 to 30 units total fixed
cost remains constant at P1,500. If the activity level is 10 units then fixed cost per unit
is P150. If the activity level is 30 units, then the fixed cost per unit declines to P50 per
unit.
Total fixed cost
1,500
10 20 30 Activity
Variable costs are cost which vary directly, in total, in relation to volume of
production. Examples are: direct materials, direct labor, royalties, and commission of
salesmen.
Shown on the next page is a graph of total variable cost. Total variable cost increases
proportionately with the activity. When activity doubles from 10 to 20 units, total
variable cost doubles from P1,000 to P2,000. However, the variable unit cost remains
the same as activity changes.
Total variable cost

3,000
2,000
1,000
10 20 30 Activity
Mixed costs are cost with fixed and variable components.
Two types of mixed cost
1. Semi-variable cost the fixed portion of a semi-variable cost usually represents a

minimum fee for making a particular item or service available. The variable
portion is the cost charged for actually using the service. Example, a cellular plan
with a fixed rate of P15,000 at a specified number of times of usage, however if
the user exceeds the time allowed, then charges will be made on a per minute
basis.
Semi-variable cost
35,000 Semi-variable cost
30,000 Variable after (15,000)
25,000
20,000
15,000 ---------------------------------------------------------
10,000 Fixed (P15,000)
5,000
0
10 30 Activity
2. Step costs the fixed part of step cost changes abruptly at various activity levels
because these costs are acquired in indivisible portions. Example, a Supervisor’s salary
of P20,000 needed for every 10 workers, then if 15 workers are used, 2 supervisors
(With a salary of P40,000) will be needed. If 18 workers are used, still 2 supervisors
would be needed. If the number of workers increases to 22, three supervisors will be
needed.
Semi-variable cost
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
10 20 30 40 50 number of workers
To summed it up,
When, TOTAL COST UNIT COST
PRODUCTION
Fixed cost CONSTANT DECREASES
Variable cost INCREASES CONSTANT
And when, TOTAL COST UNIT COST

PRODUCTION
Fixed cost CONSTANT INCREASES
Variable cost DECREASES CONSTANT
Common costs is a cost of facilities or service employed in two or more accounting

periods, operations, commodities, or services. Example, if two departments are
occupying the same building, the depreciation of the building is a common cost
subject to allocation based on the floor area occupied.
Joint cost is a costs of materials, labor, and overhead incurred in the manufacture of
two or more products at the same time. A major difficulty inherent to joint costs
is that they are indivisible and they are not specifically identifiable with any of
the products being simultaneously produced. These costs are also subject to
allocation. Example, direct materials, direct labor, and factory overhead cost
incurred to manufacture two or more products up to the split-off (or where they
will go separate ways).
Capital expenditures are expenditures intended to benefit more than one

accounting period and are recorded as an asset. The allocation of the cost to the
different periods is depreciation for the fixed tangible asset, amortization for
intangible assets and depletion for wasting assets.
Revenue expenditures are expenditures that will benefit the current period only and
are recorded as an expense.
Direct departmental charges are costs that are immediately charged to the
particular manufacturing department(s) that incurred the costs since the costs
can be conveniently identified or associated with the department(s) that
benefited from said costs.
Indirect departmental charges are costs that are originally charged to some other
manufacturing department(s) or account(s) but are later allocated or transferred
to another department(s) that indirectly benefited from said cost.
Standard costs are predetermined costs for direct materials, direct labor, and factory
overhead. They are established by using information accumulated from past
experience and data secured from research studies. In essence, a standard cost is
a budget for the production of one unit of product or service. It is the cost
chosen by the managerial accountant to serve as the benchmark in the budgetary
control system.
Opportunity costs the benefit given up when one alternative is chosen over another.
Opportunity cost are not usually recorded in the accounting system. However,
opportunity cost should be considered when evaluating alternatives for decision-

making. Example, Eva is employed with a company that pays her a salary of
P35,000 a month. She is thinking of leaving the company and returning to
school. Since returning to school would require that she give up her P420,000
salaries. The foregone salary would be an opportunity cost of seeking further
education.
Differential costs a cost that is present under one alternative but is absent in whole
or in part under another alternative. An increase in cost from one alternative to
another is known as incremental cost, while a decrease in cost is known as
decremental cost. Differential cost is a broader term, encompassing both cost
increases(incremental costs) and cost decreases (decremental costs) between
alternatives. To illustrate, assume Avon Corp. Is thinking about changing its
marketing method from distribution through retailer to distribution by direct
sale. Present cost and revenues are compared to projected cost and revenues in
the table below:
Retailer Direct sale Differential
Distribution Distribution Cost and
(Present) (Proposed) Revenues
Revenues (V) P 900,000 P 1,200,000 P 300,000
Cost of goods sold (V) 450,000 600,000 150,000
Advertising (V) 80,000 45,000 (35,000)
Commission (V) - 40,000 40,000
Warehouse Depreciation (F) 50,000 80,000 30,000
Other expenses (F) 60,000 60,000 -
Total 640,000 825,000 185,000
Net Income P 260,000 P 375,000 P 115,000
========= ========== =========
Relevant costs a future cost that changes across the alternatives. In the example
above, the relevant costs are cost of goods sold, advertising, commissions and
warehouse depreciation.
Out-of-pocket cost - cost that requires the payment of money (or other assets) as a
result of their incurrence.
Sunk cost - refers to money that has already been spent and which cannot be
recovered. To illustrate the notion of a sunk cost, assume that a firm has just
paid P250,000 for a special purpose machine. Since the cost outlay has been
made, The P250,000 investment in the machine is a sunk cost. Even though the
purchase may have been unwise, no amount of regret can relieve the company of
its decision, nor can any future decision cause the cost to be avoided.
Controllable cost is considered to be a controllable cost at a particular level of

management if that level has the power to authorize the cost. For example,
entertainment expenses would be controllable by a sales manager if he or she
had power to authorize the amount and type of entertainment for customers.
On the other hand, depreciation of warehouse facilities would not be
controllable by the sales manager(Non-controllable costs), since he or she
would have no power to authorize warehouse construction.
LEARNING ASSESSMENT
Part 1
True or False
1. Controller is not an internal user.

2. Planning is a function that involves setting the goals and objectives of an entity.
3. The manager that is establishing objectives is performing a planning
management function.
4. Most internal reports are summarized rather than detailed.
5. Management accounting information pertains to subunits of the entity and
may be very detailed.
6. Cost accounting is not important to any company.
7. Management accounting applies to all forms of business organizations.
9. The degree of timeliness is not critical in management accounting.
10. Cost accounting is the intersection between financial and management
accounting.
11. Job order costing is used by companies making one-of-a-kind products.
12. Financial accounting information generally pertains to an entity as a whole
and is highly aggregated.
13. Determining the unit cost of manufacturing a product is an output of Cost
accounting.
14. Management accounting information generally prepared for stockholders.
Part 2
Problem 1
Presented below is a list of costs and expenses usually incurred by Fidel Corporation,
manufacturer of furniture in its factory.
1. Metal used in manufacturing tables.
2. Insurance on factory machines.
3. Leather used in manufacturing furniture.
4. Wages paid to machine operators.
5. Depreciation of factory machinery.
6. Salaries of factory supervisors.
7. Wood used in manufacturing furniture.
9. Sand paper, volts, and nails.
10. Rent of factory building
Required: Classify the above items into the following categories: (a) direct materials,
(b) direct labor, and (c) manufacturing overhead.
Problem 2
Classify the following as to fixed, variable or mixed

1. Factory rent
2. Wages for workers paid based on units produced.
3. Equipment maintenance.
4. Cost Accountant’s salary.

5. Depreciation based on output.
6. Salary of factory supervisor.
7. Telephone (monthly).
8. Paper in the manufacture of books.
9. Wages of machine operators.
10. Commission of salesmen.
Part 3
Classify each of the following cost of Joan Company in two ways: (a) Variable Cost or Fixed Cost; (b)
Inventoriable cost or Period Cost:
(a) (b)
Example: Direct labor Variable cost Inventoriable cost
1. Wood used in bookcases ____________ _______________

2. Machine depreciation based on machine hours ____________ _______________
3. Fire insurance on factory equipment. ____________ _______________
4. Wiring used on radios. ____________ _______________
5. Indirect Materials ____________ _______________
6. Sales commissions. ____________ _______________
7. Bottles used to package liquid. ____________ _______________
8. Gasoline for a delivery truck ____________ _______________
9. Straight-line depreciation of trucks used for
delivery of sales to customers ____________ _______________
10. Machine operator’s hourly wages. ____________ _______________
Part 4
MULTIPLE CHOICE
1. Indirect material cost is a

Conversion cost Prime cost
a. No No
b. No Yes
c. Yes Yes
d. Yes No
2. Direct labor cost is a

Conversion cost Prime cost
a. No No
b. No Yes
c. Yes Yes
d. Yes No
3. Indirect labor is a
a. Prime cost c. Period cost
b. Conversion cost d. Non-manufacturing cost
4. In a job cost system, manufacturing overhead is

An indirect cost of jobs A necessary element of production
a. No Yes
b. No No
c. Yes Yes
d. Yes No
5. Prime cost and conversion cost share what common element of total cost?
a. Variable overhead c. Direct materials
b. Fixed overhead d. Direct labor
6. Which of the following is an element of prime cost

Direct materials Direct labor
a. Yes Yes
b. Yes No
c. No Yes
d. No No
7. Wages paid to factory machine operators of a manufacturing plant are an element of

Prime cost Conversion cost
a. No No
b. No Yes
c. Yes No
d. Yes Yes
8. Cost that vary inversely with changes in volume include
a. Total variable costs c. Total fixed costs.
b. Total variable costs divided by volume d. Total fixed costs divided by
volume
9. When a unit of product is the cost object, factory overhead generally is:
a. A direct manufacturing cost. c. Both a and b.
b. An indirect manufacturing cost. d. None of the above.
10. Factory rent is:

a. A prime cost and an inventoriable cost.
b. A prime cost and a period cost.
c. A conversion cost and an inventoriable cost.
d. A conversion cost and a period cost.
11. Examples of factory overhead costs are:

a. Lubricants for factory machinery. c. Both a and b.
b. Depreciation of factory machinery. d. None of the above.
12. In general, cost that could usually be most reliably predicted is:
a. Variable cost per unit c. Total variable cost.
b. Fixed cost per unit d. Total fixed cost.
13. Factory supplies used would be an example of which of the following?

Prime cost Conversion cost
a. Yes Yes
b. Yes No
c. No Yes
d. No No
14. For a manufacturing company, which of the following is an example of a period

rather than a product cost?
a. Depreciation of factory equipment. c. Wages of machine operator.

b. Wages of a sales person. d. Insurance on factory equipment.
15. The variable portion of the semi variable cost of electricity for a manufacturing
plant is a:
Conversion cost Period cost
a. No No
b. No Yes
c. Yes No
d. Yes Yes
16. Indirect costs are also known as:

a. Differential costs c. Opportunity costs
b. Common costs. d. Sunk costs
17. Variable cost

a. Increases on a per unit basis as the number of units produced increases.
b. is constant if expressed on a per unit basis.
c. remains the same in total as production increases.
d. is not affected by changes in activity from period to period.
18. All of the following are examples of product cost except:

a. Depreciation on the company’s retail outlets. c. Insurance on the factory equipment.
b. Salary of the plant manager. d. Rental costs of the factory facility.
19. The distinction between indirect and direct cost depends on

a. whether a cost is controllable or non-controllable.
b. whether a cost is variable or fixed.
c. whether a cost is a product or a period cost.
d. whether a cost can be conveniently and physically traced to a unit under
consideration.
20. Which of the following should not be included as manufacturing overhead in the
manufacture of a wooden chair?
a. Glue in the chair.
b. The amount paid to the individual who stains the chair.
c. The workman’s compensation insurance of the supervisor who oversees production.
d. The factory utilities of the department in which production takes place.
Part 5
Ram Company completed the following transactions for October, 2020:

a) Purchased on account direct materials of P180,000.
b) The factory payroll was recorded. Direct labor P60,000; Indirect labor P20,000.
Employee payroll deductions were recorded as follows:
Withholding taxes P11,200
SSS premiums 2,400
Philhealth Contributions 375
Pag-ibig Funds Contribution 1620
c) Indirect materials of P20,000 were purchased.
d) Employer payroll tax expense is recorded as follows:
SSS premiums P3,600

Philhealth Contributions 375
Pag-ibig Funds Contribution 1620
e) Materials issued: direct materials – P120,000; indirect materials – P10,000.
f) Defective materials P5,000 were returned to vendors.
g) Accounts payable totalling P148,300, including accrued payroll, were paid.
h) Sundry factory expenses of P24,900 were recorded as liabilities.
i) Factory overhead was charged to production at 120% of direct labour costs.
j) Goods completed with a total cost of P180,000 were transferred to finished goods.
k) Sales were P210,000 and cost P140,000 to produce.
Requirements:
1) Entries to record the transactions given above.
2) Statement of Cost of Goods Manufactured and Sold
Unit 2 COST ACCOUNTING CYCLE
INTRODUCTION
This unit introduces to the learners the world of manufacturing business. A raw
material put into process with the intervention of direct labor, machines, and
overhead to finished products, and how these activities are recorded and reported to
users.

Distinguish between merchandising and manufacturing operation
Understand the cost accounting cycle
Prepare the different financial statements for a service entity, merchandising entity
and manufacturing entity
MERCHANDISING versus MANUFACTURING Operations
Cost of Goods Sold for a Merchandising Company

Balance Sheet Transaction Income
Statement Preparation
Preparation
Cash
Purchases
Plus:
Merchandise
Inventory
Beginning
Cost of Cost of
Merchandise Cost of Goods Cost of
Inventory Unsold items Available for Sold items Goods Sold
Ending Sale
● Normally buys a product that is ready for resale when it is received.

● Nothing needs to be done to the product to make it saleable except possibly to

prepare a special package or display.
● As shown in the figure above, Purchases and Merchandise inventory beginning
totals Cost of goods available for sale. Separate the sold and unsold goods.
The unsold goods at the end of the period are called Merchandise inventory
ending. The sold goods during the period are called Cost of Goods Sold.
● Notice that inventory is a balance sheet account and Cost of goods sold is an
Income statement account.
Cost of Goods Sold for a Manufacturing Company
Balance Sheet Transaction Income

Statement Preparation
Preparation
Cash
Purchase of
Materials Labor Overhead
Materials Materials
Inventory Storage
Work In- Production Process

process
(Work in process)
Inventory
Finished Cost of Goods Manufactured Cost of

Goods (Finished goods) Goods sold
Inventory
● Computing the cost of goods sold for a manufacturing company is more

complex.
● It maintains three inventory accounts, Materials inventory, Work in process
inventory and Finished goods inventory.
● Purchased materials unused during production process make up the ending
Materials inventory balance.
● The cost of materials used plus the cost of labor services and factory overhead
are transferred to the Work in process Inventory account when the materials,
labor services, overhead items are used in the production process.
● The three types of cost mentioned are often called direct materials, direct labor
and factory overhead. These costs are accumulated in the Work in process
inventory account during an accounting period. When a batch or order is
completed, all manufacturing costs assigned to completed units are moved to
the Finished goods inventory account.
● Cost remaining in the Work in process inventory account belongs to partly
completed units. These costs make up the ending balance in the Work in
process inventory account.
● The Finished goods inventory account is set up the same way as the
Merchandise Inventory account under Merchandising.
● Cost of completed goods are entered into the Finished Goods. Then costs
attached to unsold items at year end make up the ending balance in the
Finished goods inventory account. All costs related to units sold are transferred
to the Cost of Goods Sold account and reported on the income statement.
ACTIVATING PRIOR LEARNINGS
The accounting equation:
Accounting cycle starts with understanding the accounting equation, shown on the
diagram below, Assets equals liabilities plus equity/capital. The normal balance of an
asset is debit, the normal balance of a liability is credit and the normal balance of equity
is credit, makes the equation always equal, meaning, total debits must equal always to
total credits in every entry in the original book of entry called journal. All transactions
that have an increased effect on assets, liabilities and equity/capital will follow its
normal balance, and any decreases in effect to assets, liabilities and capital will follow
the reverse of the normal balance. The transactions/accounts affecting equity/capital
accounts are investments, revenue, expenses and withdrawals. Initial and all
additional investments and revenue increases the Capital account therefore, are
recorded as credit. Expenses and withdrawals decrease the Capital account
therefore are recorded as debit. The total revenue and expenses are closed to the
Income Summary account. The net amount of Income Summary is closed to the
Capital Account.
Assets = Liabilities + Equity Investment increase=Credits

Normal balance debit credit credit Revenue equity
Increases debit credit credit Expenses decrease=Debits
Decreases credit debit debit Withdrawals equity
Sole proprietorship Owners, Capital

Income Summary
Manufacturing Cost Flow
Product costing, inventory valuation and financial reporting depend on the defined,
structured flow of manufacturing cost. This manufacturing cost flow was outlined in
the discussion of the three manufacturing inventory accounts. The figure below
summarizes the entire cost flow process as it relates to accounts in the general ledger.
Materials inventory Factory payroll Factory overhead control

Bal.1/1 24,000 Issued 45,300 DL 79,700 79,700 total mfg.cost 65,000 65,000
Purch. 53,200
Bal. 31,900
Work in process inventory

Bal. 1/1 25,100 Completed 201,600
Materials 45,300
Labor 79,700
Overhead 65,000
Bal. 13,500
Finished goods inventory Cost of goods sold

Bal.1/1 70,000 Sold 240,500 240,500
Completed 201,600
Bal. 31,100
Here we concentrate on the general pattern of manufacturing cost flow, as shown

above. The cost flow begins with costs being incurred. Manufacturing cost starts in
many ways. They may be cash payments, incurred liabilities, fixed assets depreciation,
or expired prepaid expenses. Once these costs have been incurred they are recorded
either direct materials, direct labor, or factory overhead costs. As the resources are
used up, the company transfers its cost to the Work in process inventory account.
When production is completed, costs assigned to finished units are transferred to the
Finished goods inventory account. In much the same way, costs attached to the units
sold are transferred to the Cost of goods sold account.
ILLUSTRATION OF COST ACCOUNTING CYCLE
Darwin Company contained the following account balances:

Cash P 100,000
Accounts receivable 60,000
Finished goods 35,000
Work in process 18,000
Materials 50,000
Accounts payable 10,000
Accrued payroll 8,000
Common stock 200,000
Retained Earnings 45,000
During January 2020, the following transactions were completed.
a) Materials purchased on account, P200,000.
b) Factory overhead incurred on account, P35,000.
c) Payroll for the period consist of: direct labor – P140,000; Indirect labor – P30,000;
sales salaries – P25,000; and administrative salaries – P15,000.
Deductions from payroll were as follows:
Withholding taxes P 18,520
SSS Premiums 8,400
Philhealth contributions 1,125
Pag-ibig Funds 6,300
d) P175,000 was paid for payroll.
e) Computation of employer’s payroll tax is as follows:
Factory Selling Administrative

SSS Premiums P8,500 P1,250 P 750
Philhealth 600 375 150
Pag-ibig Funds 5,100 750 450
f) Materials issued: direct materials – P185,000; indirect – P35,000.
g) Factory overhead was charged to production at 80% of direct labor cost
h) Work finished and placed in stock – P410,000.
i) Cost of goods sold – P385,000. Markup was 40% of cost.
j) Cash collected from customers, P405,000.
k) Payments for liabilities amounted to P220,000, other than payroll
Requirements:
1. Journal entries to record the above transactions.
2. Cost of goods sold statement for January, 2020.
3. Statement of Comprehensive Income for January, 2020.
4. Statement of Financial position as of January 31, 2020.
Solution:
a) Materials 200,000
All purchases of materials needed and to be issued in the production of
company products are recorded in Materials accounts may it be direct materials or
indirect materials.
b) Factory overhead control 35,000

All actual factory overhead incurred are recorded with Factory Overhead
Control account
c)Payroll 210,000
Withholding taxes 18,520
SSS Premiums 8,400
Philhealth contributions 1,125
Accrued Payroll 175,655
This is to record the total accrual of salaries with corresponding mandatory
deduction to be remitted to concerned agencies. Withholding tax will be remitted
with the Bureau of Internal Revenue, SSS premiums to Social Security System,
Philhealth contribution to PHIC and Pag-ibig Fund contribution to HDMF. Accrued
Payroll account is a liability account to recognize liability to employees.

Factory overhead control 30,000
Selling expense control 25,000
Administrative expense control 40,000
Payroll 210,000
This is a corollary account to distribute the Payroll account to the proper
account.
d) Accrued Payroll 175,000

Cash 175,000
To recognize the payment to employees.
e) Factory overhead control 14,200

Selling expense control 2,375
Adm. Expense control 1,350
SSS prem. payable 10,500
MC payable 1,125
PFC payable 6,300
To recognize the employer share.
f) Work in process 185,000

Materials 220,000
To recognize the issuance of materials to production. Direct materials are
recorded as Work in process and the indirect materials is recorded as factory overhead
control.
g. Work in process 112,000

Factory overhead applied 112,000
The three elements of manufacturing cost – direct materials, direct labor and factory
overhead - are now accumulated in the Work in process, and the debits in the account
are as follows:
Transaction Transaction Amount

c Direct labor P 140,000
f Direct materials 185,000
g Factory overhead 112,000
Total P437,000
=======
h) Finished goods 410,000
To recognize the transfer of finished goods from work in process.
i) Accounts receivable 539,000

Sales (385,000x140%) 539,000
To recognize the sales on account.
Costs of goods sold 385,000

Finished goods 385,000
To recognize costs of goods sold.
j) Cash 405,000
To recognize the collections.
k) Accounts payable 220,000

Cash 220,000
To recognize payment of liabilities
l) Cost of goods sold 2,200

To close factory overhead applied and factory overhead control.
Factory overhead control Factory overhead applied
b) 35,000 g) 112,000
c) 30,000
e) 14,200
f) 35,000
114,200
======
The actual factory overhead incurred totals P114,200, the factory overhead applied is
P112,000, the variance of P2,200 is recognized as debit or addition to Cost of goods sold
to close the factory overhead applied and factory overhead control. If applied is less
than the actual, debit/add to Cost of goods sold. If the actual is less than the applied
credit/less to Cost of Goods sold account.
2. Cost of goods sold statement
Darwin Company
Cost of Goods Sold Statements
For the month ended January 31, XXXX
Direct materials used

Materials, January 1 50,000
Purchases 200,000
Total available 250,000
Less> Mat.- Jan. 31 30,000
Ind. Materials 35,000 65,000 185,000
Direct labor 140,000
Factory overhead 114,200
Total manufacturing costs 439,200
Work in process, January 1 18,000
Cost of goods put into process 457,200
Less: Work in process, January 31 47,200
Cost of goods manufactured 410,000
Finished goods – January 1 35,000
Total goods available for sale 445,000
Less: Finished goods – January 31 60,000
Cost of goods sold, normal 385,000
Under-applied factory overhead 2,200
Cost of goods sold, actual 387,200
3. Income Statement
Darwin Company
Statement of Comprehensive Income
For the month ended January 31, XXXX
Sales 539,000
Less: Cost of goods sold 387,200
Gross profit 151,800
Less: Operating expenses
Selling 27,375
Administrative 16,350 43,725
Net income 108,075
4 Balance sheet
Darwin Company
Cost of Goods Sold Statements
As of January 31, XXXX
Assets Liabilities and Equity

Cash 110,000 Accounts payable 25,000
Accounts receivable 194,000 Accrued payroll 8,655
Finished goods 60,000 W/tax payable 18,520
Work in process 45,000 SSS Prem. payable 18,900
Materials 30,000 Medicare Cont. payable 2,250
PFC payable 12,600
Common stock 200,000
_______ Retained earnings 153,075
Total 439,000 439,000 (Norma
De Leon)
LEARNING ASSESSMENT
PROBLEM 1:
Jonna Company submits the following data for May 2020:
Direct labor cost P160,000
Cost of goods sold 550,000
Factory overhead – applied at 150% of direct labour costs.
Inventories May 1, 2020 May 31, 2020
Finished goods P150,000 P122,000
Work in process 129,200 124,000
Materials 124,000 115,000
Required: Cost of goods sold statement.
PROBLEM 2:
Jean Company completed the following transactions for October 2020

a) Purchased on account direct materials of P180,000.
b) The factory payroll was recorded: direct labor – P60,000; Indirect labor –
P20,000. Employee deductions were recorded as follows:
Withholding taxes P 11,200
SSS Premiums 2,400
Philhealth contributions 375
c) Indirect materials of P20,000 were purchased.
d) Employer’s payroll tax expense is recorded as follows:
SSS Premiums P3,600

Philhealth 375
e) Materials issued: direct materials – P120,000; indirect – P10,000.
f) Defective materials P5,000 were returned to vendors.
g) Accounts payable totalling P148,300, including accrued payroll, were paid.
h) Sundry factory expenses of P24,900 were recorded as liabilities.
i) Factory overhead was charged to production at 120% of direct labor costs.
j) Goods completed with a total cost of P180,000 were transferred to finished
goods.
k) Sales were P210,000 and Cost P140,000 to produce.
Requirements:
1. Journal entries to record the above transactions.
2. Cost of goods sold statement for May 31, 2020.
Unit 3 JOB ORDER COSTING
INTRODUCTION
Job order costing is used when many different products with different features are
produced during a particular period. This process allows companies to allocate all of
the costs incurred in a business, whether direct or indirect to jobs. We will discuss
manufactured jobs, and follow a couple jobs from the beginning to end.
 Define Job order costing;

Explain the flow of costs in a job order costing system;
Demonstrate the mechanics of a job order costing system;
Prepare a job order cost sheet;
Prepare a cost of goods sold statement.
Job order costing or job costing is a system for assigning and

accumulating manufacturing costs of an individual unit of output. (Couch)
Job order costing is a system that takes place when customers order small, unique
batches of products. This system determines the price of each individual product and
ensures that the cost for each product is reasonable enough for a customer to
purchase it while still allowing the company to make a profit. (indeed.com)
CHARACTERISTICS OF JOB ORDER COSTING –

(a) A job consists of a single order or contract.
(b) It is a cost unit by itself.
(c) Each job is unique in nature.
(d) Products are not manufactured for general-consumption.
(e) Under job costing, the cost of each job is ascertained after the completion of the
job.
(f) The costs of each job are ascertained by adding materials, labor, and overheads.
(g) Each order is given a job number.
(h) Costs are accumulated with reference to this number.
(i) Costs are ascertained for each order.
(j) Generally, the duration of the job order is comparatively short (products).
(k) Work-in-progress may or may not exist at the end of the accounting period.
(l) An important feature of job costing is that it is possible to identify a job at each
stage of its manufacturing process.
(m) By comparing the actual cost of each job against the price charged for each job,
the profit or loss made on each job is ascertained.
(n) Under this method, the cost of each job and the profit or loss made on each job
undertaken is found out separately.
In job costing, it is not necessary that each job will flow through all the production
cost centers in a predetermined manner. The purpose of job costing is to bring
together all the costs incurred for completing a job. The industries need not to incur
selling and distribution expenses as the customers themselves come to place orders
and collect the goods after production. (qsstudy.com)
MAJOR SOURCE DOCUMENTS FOR JOB ORDER COSTING
Materials requisition form

To track materials being used in current items/orders, companies use a materials
requisition form. This form states that certain materials have been taken from
inventory and put toward the creation of the job order. Sections you may find on the
materials requisition form can include:
● The date the material was retrieved from inventory

● The unique job number
● The exact amount of material retrieved
● Item number and description
● How much each material item costs
● Total of all items retrieved
● Who requested the item(s)
● Who priced the item(s)
● Who the item(s) was given to
Sample of Materials requisition

When an employee inputs information into the materials requisition form, they may
need to find the requested information from other sources. For instance, when trying
to figure out how much the material items cost, they might ask the accounting
department for updated pricing.
Job cost sheet

This sheet is the main source for tracking an item to keep pricing an inventory
accurate. To maintain this accuracy, this job cost sheet needs to track information
including:
● The date the job was started

● The date employees completed the job
● The date the order was shipped to the customer
● Customer information, usually their address
● Job records information, including overhead cost, what materials were used and
labor information
● The summary of the final cost of the job
Sample of Job cost sheet

Each of the job information details above will have its own section to clearly show the
reader what information is needed and what is currently being tracked.
Time ticket
As an employee works on a unique order, they are often required to fill out a
timesheet recording the work they have completed. Sections of a time ticket can
include:
● Employee's name and ID number

● The specific job number they're completing
● A list of each job
● The date each job started
● How many hours each job took the employee to complete
● The employee's hourly rate
● The total cost of the job
● Accounting and supervisor approval
Sample of Time ticket
Predetermined overhead rate
Factory overhead costs are allocated to jobs in process using a predetermined

overhead rate. The predetermined overhead rate is determined by estimating
(during the budget process) total factory overhead costs and dividing these total costs
by direct labor hours or direct labor rate. For example, assume a company using direct
labour cost for the allocation of overhead estimated its total overhead costs to be
P300,000 and total direct labour cost to be P250,000. The company's predetermined
overhead rate for allocating overhead to jobs in process is 120% of direct labor dollars,
and is calculated as follows:
Predetermined overhead rate = P300,000 = 1.2 or 120%

P250,000
If direct labor costs are P20,000 for the month, overhead of P24,000 (P20,000 × 120%)
would be allocated to work‐in‐process inventory. Factory overhead would be allocated
to individual jobs based on the portion of the P20,000 direct labor cost that is assigned
to each job. If job number 45 had P9,000 in direct labor cost for the month, factory
overhead of P10,800 (P9,000 × 120%) would also be allocated to the job.
Once a job is completed, the total costs assigned to the job are transferred from work‐
in‐process inventory to finished goods inventory. Once the job is sold and delivered,
the job costs are transferred from finished goods inventory to cost of goods sold.
THE FLOW OF COSTS IN A JOB ORDER COST SYSTEM (CliffsNotes.com)

Key:
● A Purchased raw materials
● B Direct material requisition to be used on jobs
● C Direct labor payroll based on time ticket
● D Indirect materials used
● E Indirect labor payroll
● F Other overhead costs incurred
● G Overhead applied to jobs (direct labor cost x 80% predetermined overhead
rate)5
● H Transfer completed jobs to finished goods inventory
● I Transferred sold jobs to cost of goods sold
● J Paid wages
ILLUSTRATIVE PROBLEM:
The Joana Company had the following inventories on August 1 of the current year.
Finished goods P50,000
Materials 44,000
The Works in process account controls two jobs
Job 401 Job 402
Materials P6,000 P11,200
Labor 5,000 6,000
Factory overhead 4,000 4,800
P15,000 P22,000
====== ======
The following information pertains to August operations:
1) Materials purchased on account, P56,000.
2) Materials issued for production P50,000. Of this amount, P6,000 was for indirect
materials; the difference was distributed: P11,000 to Job 401; P14,000 to Job 402;
and P19,000 to Job 403
3) Materials returned to the warehouse from the factory, P1,600, of which P600 was
for indirect materials, the balance is from Job 403.
4) Materials returned to vendors, P2,000.
5) Payroll after deducting P6,050 for withholding taxes, P3,200 for SSS premiums,
P750 for Medicare, and P2,400 for Pag-ibig, was P65,600. The payroll due to the
employees was paid during the month.
6) Payroll was distributed as follows: P20,800 to Job 40; P25,000 to Job 402; P21,000
to Job 403 and the balance represents indirect labor.
7) The share of the employer for payroll was recorded – P4,000 for SSS premiums,
P750 for Medicare contributions and P2,400 for Pag-ibig funds.
8) Factory overhead, other than any previously mentioned, amounted to P30,000.
Included in this figure were P6,000 for depreciation of factory building and
equipment, and P1,900 for expired insurance on the factory. The remaining
overhead was unpaid at the end of August.
9) Factory overhead was applied to production at the rate of 80% of direct labour
cost.
10) Job 401 and 402 were completed and transferred to the finished goods warehouse.
11) Job 401 was shipped and billed at a gross profit of 40% of cost.
12) Cash collections from accounts receivable during August were P70,000.
Requirements:
1. Journal entries to record the above transactions
2. Job order cost sheets.
3. Cost of Goods sold statement. (De Leon, 2019 edition)
1. JOURNAL ENTRIES
1. Materials 56,000
Materials purchased.
2. Work in process 44,000

Factory overhead control 6.000
Materials 50,000
Materials issued to production.
Job 401 P11,000

Job 402 14,000
Job 403 19,000
P44,000
=======
3. Materials 1,600
Work in process (Job 403) 1,000
Factory Overhead Control 600
Materials returned to warehouse from factory.
4. Accounts payable 2,000

Materials 2,000
Materials returned to vendors.
5. Payroll 78,000
Withholding taxes payable 6,050
SSS Premiums payable 3,200
Phil Health contributions payable 750
Pag-ibig funds contributions payable 2,400
Payroll for the month.

Cash 65,600
Payment of payroll due to the employees.
6. Work in process 66,800

Payroll 78,000
Classification of Payroll.
Job 401 P20,800
Job 402 25,000
Job 403 21,000
P66,800
=======
7. Factory Overhead Control 7,150

SSS Premiums payable 4,000
Phil Health cont. payable 750
Pag-ibig cont. payable 2,400
recognize employer share on payroll.
8 Factory Overhead Control 30,000

Accumulated Depreciation 6,000
Prepaid insurance 1,900
Actual factory overhead incurred.
9. Work in process (P66,800x80%) 53,440

Factory Overhead Applied 53,440
Factory overhead applied to production.
Job 401 P16,640

Job 402 20,000
Job 403 16,800
P53,440
=======
10. Finished goods 144,440

Work in Process 144,440
Cost of completed Jobs.
Job 401 63,440
Job 402 81,000
11. Accounts receivable 88,816

Sales (63,440 x 140%) 88,816
Sale of Job 401.
Cost of goods sold 63,440

Finished Goods 63,440
Cost of Job 401 to cost of sale.
12. Cash 70,000

Collections.
13. Cost of goods sold 310

Closing of Factory overhead Control and Factory overhead
applied.
2. COST SHEETS
Job 401
Direct materials Direct labour Factory overhead
6,000 5,000 4,000
11,000 20,800 16,640
17,000 25,800 20,640
Job 402
Direct materials Direct labor Factory overhead
11,200 6,000 4,800
14,000 25,000 20,000
25,200 31,000 24,800
Job 403
Direct materials Direct labor Factory overhead
19,000 21,000 16,800
(1,000)
3. COST OF GOODS SOLD STATEMENT
Joana Company
Cost of Goods Sold Statement
For the month ended August 31, 2020
Direct materials used

Materials, August 1 P44,000
Purchases P56,000
Less. Purchase returns 2,000 54,000
Total available for use 98,000
Less: Materials, Aug. 31 49,600
Ind. Materials 5,400 55,000 P43,000
Direct labor 66,800
Factory overhead 53,440
Total manufacturing costs 163,240
Work in process, Aug. 1 37,000
Cost of goods put into process 200,240
Less: Work in process, Aug. 31 55,800
Cost of goods manufactured 144,440
Finished goods, Aug. 1 50,000
Total goods available for sale 194,440
Less: Finished goods, Aug. 31 131,000
Cost of goods sold - normal 63,440
Add. Under applied factory overhead 310
Cost of goods sold P63,750
LEARNING ASSESSMENT
MULTIPLE CHOICE
____ 1. Under job order cost accumulation, the factory overhead control
account controls:
A. factory overhead analysis sheets
B. all general ledger subsidiary accounts
C. job order cost sheets
D. cost reports by processes
E. materials inventories
2. Supplies needed for use in the factory are issued on the basis of:
A. job cost sheets
B. materials requisitions
C. time tickets
D. factory overhead analysis sheets
E. clock cards
3. Finished Goods is debited and Work in Process is credited for a:

A. transfer of completed goods out of the factory
B. transfer of completed production to the finished goods storeroom
C. purchase of goods on account
D. transfer of materials to the factory

E. return of unused materials from the factory
4. In job order costing, when materials are returned to the storekeeper that
were previously issued to the factory for cleaning supplies, the journal entry should be
made to: (AICPA adapted)
A. Materials
Factory Overhead
B. Materials
Work in Process
C. Purchases Returns
Work in Process
D. Work in Process
Materials
E. Factory Overhead
Work in Process
5. Under a job order cost system, the dollar amount of the entry to transfer
the inventory from Work in Process to Finished Goods is the sum of the costs charged
to all jobs: (AICPA adapted)
A. completed during the period
B. started in process during the period
C. in process during the period
D. completed and sold during the period
E. none of the above
6. When a manufacturing company has a highly automated plant

producing many different products, probably the most appropriate basis of applying
factory overhead costs to Work in Process is:
A. units processed
B. machine hours
C. direct labor hours
D. direct labor dollars
7. At the end of the year, Paola Company had the following account
balances after applied factory overhead had been closed to Factory Overhead Control:
(ICMA adapted)
Factory Overhead Control........................................................ $ 1,000 CR

Cost of Goods Sold................................................................ 980,000 DR
Work in Process.............................................................. 38,000 DR
Finished Goods............................................................... 82,000 DR
The most common treatment of the balance in Factory Overhead Control would be to:
A. carry it as a deferred credit on the balance sheet
B. report it as miscellaneous operating revenue on the income statement
C. credit it to Cost of Goods Sold
D. prorate it between Work in Process and Finished Goods
E. prorate it among Work in Process, Finished Goods, and Cost of Goods Sold
8. In service businesses using job order costing, the most commonly used
base for applying overhead to jobs is:
A. machine hours
B. direct materials consumed

C. direct labor cost
D. meals, travel, and entertainment
9. In service businesses using job order costing, the hourly rate used to
charge costs to a job usually includes:
A. both labor and overhead cost
B. labor cost only
C. overhead cost only
D. labor, overhead, and miscellaneous costs
10. Work in Process is debited and Materials is credited for:

A. the issuance of direct materials into production
B. the issuance of indirect materials into production
C. the return of materials to the storeroom
D. the application of materials overhead
11. Factory Overhead Control is debited and Payroll is credited for:

A. the recording of payroll
B. the distribution of indirect labor costs
C. the distribution of direct labor costs
D. the distribution of withholding taxes
12. Applied Factory Overhead is debited and Factory Overhead is credited to:
A. close the estimated overhead account to actual overhead
B. record the actual factory overhead for the period
C. charge estimated overhead to all jobs worked on during the period
D. to record overapplied overhead for the period
13. The best overhead allocation base to use in a labor-intensive

manufacturing environment probably would be:
A. materials cost
B. machine hours
C. direct labor hours
D. units of production
14. Finished Goods is debited and Cost of Goods Sold is credited for:
A. transfer of completed goods to the customer
B. sale of a customer order
C. return of materials to the supplier
D. return of goods by the customer
15. Overapplied factory overhead would result if: (AICPA adapted)

A. the plant were operated at less than normal capacity
B. factory overhead costs incurred were less than costs charged to production
C. factory overhead costs incurred were unreasonably large in relation to units produced
D. factory overhead costs incurred were greater than costs charged to production
E. a firm incurred a significant amount of overhead
PROBLEM
During June, the following transactions took place at the Cassandran Corp.
June 3 Purchased materials, P30,000.

5 Requisitioned materials from inventory, P20,000 (75% of these
were direct; 25% were indirect). Direct materials of P3,000 and
indirect materials of P1,000 were for Job 00‑ 1. The remainder
were for Job 00‑ 2.
7 For Job 00‑ 2, returned P150 of direct materials and P200 of
indirect materials.
8 Recorded liabilities for payroll: direct labor, P15,000 and indirect
labor, P5,000. Of the direct labor cost, 60% was for Job 00‑ 1; the
remainder was for Job 00‑ 2.
10 Incurred other factory overhead costs, P20,000 (all applicable to
Jobs 00‑ 1 and 00‑ 2).
14 Applied overhead at the rate of 200% of direct labor cost to Jobs
00‑ 1 and 00‑ 2, which were completed and transferred to the
finished goods account today.
Required: Assuming that Jobs 00‑ 1 and 00‑ 2 were the only jobs during the period and
that all overhead (as recorded above) is the total applicable overhead for these
projects:
(1) Journal entries to record above transactions.
(2) Prepare a job order cost sheet for each job.
(3) Determine the difference between applied and actual overhead for the month.
Unit 4 JUST-IN-TIME AND BACKFLUSHING
INTRODUCTION
Just-in-time inventory management is a positive cost-cutting inventory management

strategy; its goal is to improve the company's return on investment by reducing non-
essential costs and increasing efficiency.
LEARNING OBJECTIVES
Understand the JIT philosophy
Know and understand the five key elements involved in the operation of a JIT
system
Differentiate the JIT system from the traditional costing system
DEFINITION OF JUST-IN-TIME
Just-in-time inventory is a management strategy that aims to increase a firm’s

operating efficiency and decrease the level of waste by only keeping enough stock on
hand to fill current orders or maintain production. (Dictionary)
Just-in-time (JIT) means that raw materials are received just in time to go to
production, manufactured parts are completed just in time to be assembled into
products, and products are completed just in time to be shipped to customers. (Norma
D. De Leon)
Just in time inventory is the reduced amount of inventory owned by a business after it
installs a just-in-time manufacturing system. The intent of a JIT system is to ensure
that the components and sub-assemblies used to create finished goods are delivered to
the production area exactly on time. Doing so eliminates a considerable investment in
inventory, thereby reducing the working capital needs of a business. This type of
system is called a "pull" system. Under the JIT concept, inventory may be reduced by
the following means: (tools)
· Reduced production runs. Fast equipment setup times make it economical to

create very short production runs, which reduces the investment in finished goods
inventory.
· Production cells. Employees walk individual parts through the processing steps
in a work cell, thereby reducing scrap levels. Doing so also eliminates the work-in-
process queues that typically build up in front of a more specialized work station.
· Compressed operations. Production cells are arranged close together, so there is

less work-in-process inventory being moved between cells.
· Delivery quantities. Deliveries are made with the smallest possible quantities,
possibly more than once a day, which nearly eliminates raw material inventories.
· Certification. Supplier quality is certified in advance, so their deliveries can be
sent straight to the production area, rather than piling up in the receiving area to
await inspection.
· Local sourcing. When suppliers are located quite close to a company's
production facility, the shortened distances make it much more likely that deliveries
will be made on time, which reduces the need for safety stock.
Advantages of JIT Inventory
There are a multitude of improvements related to JIT inventory, particularly in

relation to reduced cash requirements and the ease with which manufacturing
problems can be uncovered. Advantages of JIT inventory include:
· Working capital. JIT inventory is designed to be exceedingly low, so the

investment in working capital is minimized.
· Obsolete inventory. Since inventory levels are so low, there is little risk of
having much obsolete inventory.
· Defects. With so little inventory on hand, defective inventory items are easier
to identify and correct, resulting in lower scrap costs.
· Process time. A thoroughly implemented JIT system should shorten the amount
of time required to manufacture products, which may decrease the quoted lead times
given to customers placing orders.
· Engineering changes orders. It is much easier to implement engineering change
orders to existing products, because there are few existing stocks of raw materials to
draw down before you can implement changes to a product.
Disadvantages of JIT Inventory
There is one key problem with JIT inventory, but it is a large one:
· Shortages. Low JIT inventory levels make it more likely that any problem in the
supplier pipeline will lead to a shortage that will stop production. This risk can be
mitigated through the use of expensive overnight delivery services when shortages
occur. (tools)
Just-in-time (JIT) costing differs from traditional costing with regards to the accounts
used and the timing of cost recording. In JIT, we do not maintain Materials inventory,
because we buy materials unless it is put into process. We do not maintain Work in
process inventory because it won’t take time to process because of automation. And
so with Finished goods inventory because we will not make it until somebody wants it,
so it's immediately sold. That is why JIT uses backflushing by eliminating so many
accounts used under the traditional costing. All cost, Direct Material, Direct Labor
and Factory Overhead are all recorded in the Cost of Goods Sold. Since we do not
make a product until it is sold, every single day all costs will be put to the cost of
goods sold until the end of the period. At the end of the period if we find goods at the
loading dock area for delivery to a client with complete data of cost, that is to be
backflush to the finished goods account. The entry would be: debit Finished goods and
credit to Cost of goods sold. When we go to the production area and there are still in
process so that is a work in process. The entry would be: Debit to Work in process and
Credit to Cost of goods sold.
Comparison of Cost Flows in Traditional and Back-flush Costing
(Hooper)
To compare JIT costing with traditional costing assumes that TRAMS Co.
manufactures cellular phones and uses a JIT production system. The following
transactions occurred during January.
(1) TRAMS purchased P20,000 of raw materials.
(2) All materials purchased were requisitioned for production.
(3) TRAMS incurred direct labour costs of P8,000.
(4) Actual factory overhead cost amounted to P24,000.
(5) TRAMS applied conversion costs total P32,000 (including direct labour
cost of P8,000)
(6) Finished goods from the production area totals P51,600 and sold P51,500
of its completed cellular phones.
JOURNAL ENTRIES UNDER THE TRADITIONAL COSTING SYSTEM

(1)Materials 20,000
Account Payable 20,000
(2)Work in Process 20,000
Materials 20,000
(4)Factory Overhead Control 24,000
Miscellaneous accounts 24,000
Factory Overhead Applied 24,000
(6)Finished Goods 51,600
Work in Process 51,600

(7)Cost of Goods Sold 51,500
Finished Goods 51,500
JOURNAL ENTRIES UNDER THE JUST-IN-TIME COSTING SYSTEM
Under JIT costing, no entries are made for transactions (2), (3), and (5). Entry (2) is not
necessary because the placement of materials into production is implied in transaction
(1) when the materials are first received. No separate entry is made for (3) because
direct labor is combined with factory overhead and maybe debited first to conversion
cost or maybe debited directly to cost of goods sold. For illustration we will use direct
to Cost of Goods Sold.
(1) Raw and in process 20,000

Accounts Payable 20,000
Miscellaneous Accounts 24,000
(5) Cost of Goods Sold (Direct materials) 19,600

Raw and in process 19,600
(P20,000 purchases-WIP – end P400)
(6)Finished goods 100
Cost of Goods Sold 100
Cost Flows through T Accounts in Traditional and Back-flush Costing
(Hooper)
LEARNING ASSESSMENT
MULTIPLE CHOICE
1. One of the requirements for a JIT system to be successful is:

A. cyclical production
B. adequate inventory stock
C. coupling it with job order costing
D. high quality and balanced work loads
E. all of the above
2. All of the following are terms used to describe the JIT effort to reduce
inventories of work in process and raw materials, except:
A. backflush production
B. stockless production
C. lean production
D. ZIP production
E. none of the above are appropriate terms
3. The JIT production ideal is a batch size of:

A. one hundred
B. ten
C. one
D. zero
4. The objective of reducing inventory to zero is possible if all of the

following conditions are present, except:
A. low or insignificant setup costs
B. minimum lead times
C. long setup times
D. balanced and level work loads
E. no interruptions due to stockouts
5. The continuing reduction of inventories is achieved by all of the

following steps except:
A. inventories are reduced until a problem is discovered
B. once the problem is defined the inventory level is increased to
keep the system operating smoothly
C. the problem is analyzed and practical ways are identified to
reduce it
D. once the problem is removed, the inventory level is increased
until another problem is discovered
E. all of the above steps are required
6. In a JIT system, velocity is inversely related to:

A. backflushing
B. throughput time
C. acceleration
D. zero inventory production
7. If 500 units are produced per day and 2,000 units are in process at any
time, the throughput time is:
A. 1/2 day
B. 1/4 day
C. two days
D. four days
8. In a JIT system, if the rate of output is doubled while the number of

units in process is cut in half, then the speed of the system has been:
A. reduced by 25%
B. doubled
C. reduced by 50%
D. quadrupled
9. Of the following, the only activity that adds value to a product is:
A. processing time
B. moving time
C. waiting time
D. inspection time
E. all of the above
10. The costs to be offset against the savings from lower work in process
levels in a JIT system include all of the following, except:
A. handling a larger number of small batches of work in process
B. the higher probability of shutdowns due to the smaller safety
stock
C. the possibility that setup costs cannot be reduced enough to
offset the larger number of setups
D. the possibility of customer dissatisfaction due to slower response
time to orders
E. all of the above
11. Advantages that result from reducing raw materials inventory include all
of the following except:
A. a decreased possibility of not being able to produce a unit when
required
B. a need for less storage space
C. a reduced risk of obsolescence
D. a reduced risk of damaged materials
E. all of the above are advantages
12. Under a JIT approach to purchasing, the ideal number of vendors for
each material is:
A. two
B. less than six
C. one
D. as many as can supply quality goods
13. All of the following are obstacles to JIT purchasing, except:

A. the layout of the production process
B. the frequency of schedule changes
C. the attitudes of purchasing agents and suppliers
D. the distance from suppliers
E. all of the above are obstacles
14. JIT purchasing eliminates all of the following documents, except:

A. purchase requisitions
B. blanket purchase orders
C. receiving reports
D. materials requisitions
E. all of the above are eliminated
15. All of the following statements apply to a JIT work cell except that:
A. a cell is responsible for the entire production of a product or part
B. every worker in the cell specializes in a single task
C. a cell's workers may be evaluated and rewarded as a team
D. all workers in a cell are responsible for product quality
E. all of the above statements apply
16. All of the following are JIT performance measures, except:

A. capacity utilization
B. cycle time efficiency
C. inventory turnover
D. unscheduled maintenance downtime
E. number of defects
17. The cost accounting system that is noted for its lack of detailed tracking
of work in process during the accounting period is:
A. process costing
B. job order costing
C. standard costing
D. actual costing
E. backflush costing
18. The cost accounting system that would be most apt to use a single
inventory account entitled Raw and In Process (RIP) would be:
A. backflush costing
B. process costing
C. job order costing
D. historical costing
E. standard costing
19. To backflush materials cost from Raw and In Process (RIP) to Finished
Goods, the calculation would be:
A. materials in ending RIP inventory plus materials received during
the period minus materials in the beginning RIP inventory
B. materials in ending finished goods inventory plus materials cost
transferred from RIP minus materials in beginning finished goods inventory
C. materials in beginning finished goods inventory plus materials
cost transferred from RIP minus materials in ending finished goods inventory
D. materials in beginning RIP inventory plus materials received

during the period minus materials in ending RIP inventory
20. Cheeta Company has materials cost in the June 1 Raw and In Process of
$10,000, materials received during June of $205,000 and materials cost in the June 30
Raw and In Process of $12,500. The amount to be backflushed from Raw and In
Process to Finished Goods at the end of June would be:
A. $215,000
B. $202,500
C. $207,500
D. $217,500
21. In backflush costing, if the conversion cost in the Raw and In Process
was $500 on July 1 and $1,000 on July 31, the account to be credited at the end of July
for the $500 increase would be:
A. Raw and In Process
B. Finished Goods
C. Raw Materials
D. Cost of Goods Sold
22. In backflush costing, if the conversion cost in Raw and In Process was
$1,000 on March 1 and $400 on March 31, the account to be credited for the $600
decrease would be:
A. Raw and In Process
B. Finished Goods
C. Raw Materials
D. Cost of Goods Sold
PROBLEM 1.
The LanFat Manufacturing Company uses a Raw and In Process (RIP) inventory
account and expenses all conversion costs to the cost of goods sold account. At the
end of each month, all inventories are counted, their conversion cost components are
estimated, and inventory account balances are adjusted accordingly. Raw material
cost is backflushed from RIP to Finished Goods. The following information is for the
month of August:
Beginning balance for RIP account, including P4,800 of conversion cost P 43,500
Raw materials received on credit............................................................................ 680,000
Ending RIP inventory per physical count, including
P5,300conversioncost estimate............................................................. 47,200
Required: Prepare all journal entries involving the RIP account.
PROBLEM 2.
The ATM Manufacturing Company produces only for customer order, and most work
is shipped within twenty-four hours of the receipt of an order. ATM uses a Raw and In
Process (RIP) inventory account and expenses all conversion costs to the cost of goods
sold account. At the end of each month, inventory is counted, its conversion cost
component is estimated, and the RIP account balance is adjusted accordingly. Raw
material cost is backflushed from RIP to Cost of Goods Sold. The following
information is for the month of June:
Beginning balance of RIP account, including P900 of conversion cost P8,500

Raw materials received on credit............................................................................ 187,000
Ending RIP inventory per physical count, including P1,100 conversion
cost estimate.................................................................................................. 7,900
Required: Prepare all journal entries involving the RIP account.
PROBLEM 3.
The Clifton Manufacturing Company has a cycle time of 1.5 days, uses a Raw and In
Process (RIP) account, and charges all conversion costs to Cost of Goods Sold. At the
end of each month, all inventories are counted, their conversion cost components are
estimated, and inventory account balances are adjusted. Raw material cost is
backflushed from RIP to Finished Goods. The following information is for May:
Beginning balance of RIP account, including P600 of conversion cost P5,500

Beginning balance of finished goods account, including P2,000 of
conversion cost......................................................................................... 6,000
Raw materials received on credit....................................................................... 173,000
Ending RIP inventory per physical count, including P850 conversion
cost estimate............................................................................................... 6,200
Ending finished goods inventory per physical count, including P1,550
conversion cost estimate............................................................................... 4,900
Required: Prepare all the journal entries that involve the RIP account and/or the
finished goods account.
Unit 5 ACCOUNTING FOR MATERIALS
INTRODUCTION
This unit looks at how material costs are accounted for and how inventory can be
valued. Materials refer to the basic inputs, ingredients or components that undergo
significant changes in a production process.
LEARNING OBJECTIVES
Understand the controls on acquisition and usage of materials

Know and understand the inventory movements
Familiarize with accounting records and procedures
Understand and familiarize the costing based on physical flow: FIFO and Weighted
Average
Be familiar with waste, scrap, spoiled and defective materials
Stock Control
This refers to the processes involved in ordering, purchasing, receiving stocks into
stores, storing and issuing stocks and maintaining appropriate levels of stocks.
(Premium)
The following are the major steps in stock control:
1.Ordering and purchasing
2.Reception and inspection
3.Coding
4.Storage
5.Issuing
6.Stock taking
7.Setting stock levels.
Some Documents Used for Purchasing and Issuing Materials

1. Purchase Requisition note or form: It is a document issued by the stores
department or a user department to the purchasing department authorising the
department to order new stocks.
2. Quotation or Tender Document: This is a document issued to prospective
suppliers to obtain their terms of supply, such as; price, delivery, quantity and
quality. Reliability of supply is also an important factor that needs to be
considered when selecting a supplier.
3. Purchase Order: It is a document prepared by the purchasing department and
sent to a supplier for goods to be supplied.
4. Delivery receipt or note: It is a document which accompanies goods received

from a supplier. This document is signed by the store keeper to confirm that
goods have been delivered.
5. Goods received or Acceptance note or form: It is a document prepared to
acknowledge the acceptability of goods delivered by a supplier.
6. Materials or stores requisition note or form: It is a document issued by a
production or user department to request for materials from the stores
department.
7. Materials Return Note: It is used with materials being returned to store. The
details on this document are similar to materials Requisition Note (since
material return is the reverse of material requisition).
8. Materials Transfer Note: It is issued with materials transferred from on job or
cost centre to another, without first being returned to store. Note that stock
control documents are issued in duplicates or triplicates and copies sent to all
relevant departments.
Storage, Recording and Stocktaking

Materials are normally stored in bins or racks. Proper storage is necessary for the
following reasons:
1. Prompt receipt and issue

2. Protection of materials from damage, theft, deterioration, etc.
3. Correct location and identification of materials
4. Efficient use of storage space
5. Maintenance of correct stock levels
6. Putting stocks under the care of a responsible official and so on.
The following are the two main documents used for recording the receipt, issue
and balance of stocks held:
1. Bin Card: It is used to record the movements of stocks in a particular bin or

location. It records receipts and issues of materials by the storekeeper as well as
stock balances.
2. Stores Ledger Account: It is a subsidiary Ledger maintained by the stores

department to record the movement of stocks both in quantity and value.
Note that stock balance may refer to physical stock balance or free stock
balance. Free stock balance can be calculated as:
Materials in stock (Physical Stock balance) xxxx
Materials on order from suppliers xxxx
Materials requisitioned but not issued (xxxx)
Free stock balance xxxx
Codification of Stocks
This refers to the use of numbers, letters and/ or symbols for the identification of
materials. Some of the benefits gained for using codes are:
1. Time saving
2. Prevention of ambiguity
3. Accurate identification of materials leading to production efficiency
4. Makes computerisation easier
5. More flexible
Stocktaking
This refers to the physical verification of stocks in a store and checking the result
against the book stocks. This may be done on a continuous (more frequent) or
periodic basis.
1. Continuous Stocktaking is the counting and valuing of physical stocks more
frequently. This involves a specialist team counting and checking a number of stock
items on a daily basis, so that each item is checked at least once a year. Valuable items
with high turnover could be checked more frequently.
This system has the following advantages:
a) It avoids the long disruption associated with the annual stock count.
b) Stock discrepancies are revealed promptly.
c) Hold-ups in production are eliminated because store staff will not be so busy
as to be unable to deal with material issues.
d) Improvement in control over stock levels is enhanced.
e) Serves as a moral check on store staff.
f) More time is available for stock count and this reduces errors in stock count.
g) Regular skilled stock takers can be employed to reduce likely errors.
Disadvantages
a) Not suitable where less stocks are carried.
b) May interfere with the core activities of the business.
c) Employment of regular stock takers may lead to additional cost.
2. Periodic Stocktaking
This is the counting and valuing of physical stocks at the end of an accounting period,
usually annually. This system is suitable where low levels of stocks are carried.
Discrepancies after Stocktaking
The physical stocks counted in a store may be different from the book stocks in the
stock records. This discrepancy must be investigated so as to prevent further
occurrence. The following may be the causes of stock discrepancies:
a) Poor record keeping such as omissions or over/under statement of receipts
and issues of stocks.
b) Theft or pilferage
c) Damages, deterioration or evaporation
d) Errors in stock count.
Perpetual and Periodic Inventory Systems

Stock recording may be done regularly or at the end of an accounting period. The
recording of stocks such that the stock records are updated after each receipt and
issue is called Perpetual Inventory System. Where the sock records are updated with
total receipts and issues for a particular accounting period, the system is called
Periodic Inventory System.
Stock Cost
Appropriate levels of stocks must be maintained so as to avoid minimise stock costs.
Stock costs are made up of:
1. Cost of purchase
2. Cost of ordering
3. Cost of holding or storage
4. Stock out cost
The objective of stock control is to minimise the above stock costs.

1. Cost of purchase refers to the amount paid to suppliers for goods bought. This
constitutes the largest of all stock costs.
2. Ordering cost is the cost associated with the processes involved in placing an
order and receiving goods into store. Examples include;
a) Clerical and administrative cost associated with purchasing, receiving
and recording stocks.
b) Transportation costs
c) Set-up cost (for stocks manufactured internally, etc.
3. Holding cost refers to the costs associated with keeping stocks in the store.
These include.
a) Insurance cost.
b) Deterioration.
c) Obsolescence.
d) Interest on capital tied up in stocks.
e) Cost of storage and handling of stocks such as rent, storage equipment, cost
of extra staff salary for operation of the store, etc.
The following may be some of the reasons for holding stocks:

1. To avoid interruptions in the production process due to shortages.
2. To take care of seasonal fluctuations or variations in demand usage.
3. To meet future shortages in supply.
4. To ensure that expected demand can be met.
5. To take advantage of bulk discounts.
6. A means of investment.
7. To minimise the effect of inflation.
8. As a necessary part of the production process i.e. in the case of maturing
cheese, wine, etc.
9. To provide a buffer between processes.
Stock out Costs

Stock out refers to the running out of stocks by a business. The cost of stock out may
include:
a) Loss of customer goodwill.
b) Cost of production stoppages.
c) Demotivation of production personnel due to stoppages in production.
d) Loss of contribution from lost sales
e) Additional cost of urgent orders
STOCK LEVELS
The following are the three main levels of stocks that are set:
1. Maximum stock level: This is the level beyond which stocks should not exceed. If
stocks exceed this level, too much capital will be tied up in stocks. The level is
calculated as,
Maximum stock level = Re-order level + Re-order quantity − (Minimum

Usage × Minimum lead time)
Factors influencing this level are:

1. Rate of consumption.
2. Lead time.
3. Reliability of suppliers.
4. General economic and political conditions.
5. Storage capacity or facility.
6. Rate of deterioration.
7. Availability of funds.
2. Reorder level: The level at which a new purchase order must be issued for the
replenishment of stocks.
Re-order Level = Maximum usage × Maximum lead time

time.
3. Minimum Stock Level: It is the least quantity of stocks below which stocks should
not fall if stock out is to be prevented. Minimum stock level is also called Buffer stock
or Safety stock. It is calculated as:
Re-order Level = Minimum usage × Minimum lead time.
Other Terminologies:
Lead time is the period between when an order is made and the receipt of stocks. It is
also called re-order period, delivery period, etc.
Usage: This is also known as consumption and refers to the quantity of stocks
consumed during a specified period.
Average usage is also called normal usage. It can be calculated as;
Average usage = Minimum usage + Maximum usage

2
2
Average lead time is also normal lead time and is calculated as;
Average lead time = Minimum lead time + Maximum lead

time
2
Reorder quantity refers to the quantity of stocks ordered when stocks get to the
reorder stock level. Reorder quantity can be calculated from the maximum stock level
formula. Where this quantity is carefully chosen so as to minimise total stock cost, the
quantity is called Economic Order Quantity (EOQ).
The EOQ can be ascertained using any of the following:

● Formula approach,
● Tabular approach,
● Graphical approach
The formula is given below:
Average stock level may be calculated from one of the following formulae. Each
formula gives a different answer
Average stock level = Minimum stock level + Maximum stock level

2
Economic Batch Quantity (EBQ)

This is similar to the EOQ model but is normally used where a business manufactures
for its own consumption. The EBQ model uses a similar formula to that of the EOQ
model with a minor modification as follows:
(Premium)
INVENTORY MOVEMENTS
Materials requisition, the movement of materials into the production process, is one of
the early stages in the manufacturing of goods. The entire production process is
recorded in the financial records of the company, and each stage of the process has its
own journal entries. However, this doesn't mean that the overall inventory account
balance actually changes. Learning the journal entries of the production process can
help you determine the effects of production on the balances of balance of inventory
or any other account. (Freedman)
Initial Purchase
When you initially purchase materials for use, you record the purchase in the
accounting records at cost. This entry consists of a debit to raw materials inventory
and a credit to accounts payable or cash. The entry increases the total inventory
account. If you make the purchase on account, it also increases current assets and
current liabilities. However, if you make the purchase with cash, assets do not change.
Because raw materials inventory is a permanent account, the purchased materials will
remain at cost until you use the materials in production. (Freedman)
Requisition
Requisitioning materials, also known as putting materials into production, is the
second step in the production process. Company accountants must account for direct
and indirect materials separately. Record requisitions of direct materials, materials
that can be directly traced to products, as a debit to the work in process and a credit to
the raw materials inventory accounts. Record indirect materials, materials that cannot
be directly traced to products, as a debit to the manufacturing overhead account and a
credit to raw materials inventory. Because the requisitioning process is a transfer
between two inventory accounts, the overall inventory balance on the financial
statements does not change. (Freedman)
Finished Goods
Once goods are completed, you transfer costs out of the work in process account and
record them as finished goods. Make this entry as a credit to work in process and a
debit to finished goods. Like a requisition, this entry is a transfer between two
inventory sub-accounts, and the overall inventory balance does not change. The cost
of goods manufactured will remain in the finished goods inventory account until the
goods are sold. (Freedman)
Cost of Goods Sold
The last step in the inventory process is to sell goods to customers. Record this step in
the process as a debit to the costs of goods sold account and a credit to finished goods
inventory. In addition, the company will record a credit to the sales account and a
debit to the accounts receivable or cash account. The first entry accounts for the cost
of the product, and the second entry accounts for the revenue from the sale. The
difference between the two entries is the gross profit on the sale. The movement of
cost from finished goods to cost of goods sold decreases assets and increases expense.
However, the recognition of the sale of the goods in the second entry increases
revenue and assets. If the item is sold at a profit, the increase in revenue in the second
entry will be greater than the increase in expense in the first entry. (Freedman)
(Tuition)
ACCOUNTING FOR MATERIALS
Inventory Recording System Inventory Costing System
1. Perpetual FIFO
Weighted Average
2. Periodic FIFO
Weighted Average
Fast Ferraris Ltd manufactures and sells Ferraris made to order. The company
uses a perpetual inventory system. During the month of May 2020, the company
had the following transactions for ALU104 (which is a special type of aluminum used
to make body of each car):
May No. units Unit cost Total cost
1 Opening balance 1,000 $8.00 $8,000
5 Purchase on credit 600 $8.53 $5,118
9 Issues to JOB120 200

25 Returns to storeroom from 200

JOB340
27 27 Purchase on credit 200 $10.00 $2,000
30 30 Issues to JOB500 600
1a. PERPETUAL SYSTEM – F.I.F.O. Method

Required:
a. Assuming the unit cost of inventory is assigned using the First‐In, First‐Out
method, prepare an inventory ledger card (stock card) to record these transactions.
b. Prepare a general journal entry to record the total purchases for May 2012.
c. Prepare a general journal entry to record the total issues for May 2012.
d. Prepare a general journal entry to record the return of materials from production to
the storeroom.
e. A physical stock count was conducted at the end of the month which shows only
540 units of this material on hand. Prepare a general journal entry to record the cost of
any inventory variance.
1b. PERPETUAL SYSTEM – Weighted Average Method

Required:
a. Assuming the unit cost of inventory is assigned using the Weighted Average
method, prepare an inventory ledger card (stock card) to record these transactions.
b. Prepare a general journal entry to record the total purchases for May 2012.
c. Prepare a general journal entry to record the total issues for May 2012.
d. Prepare a general journal entry to record the return of materials from production to
the storeroom.
e. A physical was conducted at the end of the month which shows only 540 units of
this material on hand. Prepare a general journal entry to record the cost of any
inventory variance.
Solution 1a:
a)
b) Raw materials controls $,12,518

Accounts payable $12,518
To record purchase of raw materials
c) Work in process $16,624

Raw materials control $16,624
To record issue of direct materials to production
d) Raw materials control $1,706

Work in process $1,706
To record return of direct materials from production to storeroom
e) Cost of Goods Sold $540

Raw materials control $540
To record stock count adjustment (60 units @ $9.00 ea.). 60 units is the
difference of 600 units in the Stock card versus the actual physical count taken
at month end of 540 units. $9.00 unit cost is used due to FIFO costing system.
Solution 1b:
a)
b) Raw materials controls $12,518

To record purchase of raw materials.
To record issue of direct materials to production.
d) Raw materials control $1,688

Work in process $1,688
To record return of direct materials from production to storeroom.
e) Cost of Goods Sold $522

Raw materials control $522
To record stock count adjustment (60 units @ $8.70 ea.). 60 units is the
difference of 600 units in the Stock card versus the actual physical count taken
at month end of 540 units. $8.70 unit cost is used, the most recent average cost
at the stock card.
NOTE 1:
WA Unit Cost = Value B/F + Value Purchases / Qty B/F + Qty Purchases
= $8,000 + $5,118 / 1,000 + 600
= $13,118 / 1,600
= $8.20
Enigma Ltd manufactures and sells custom‐made wooden puzzles via their online
store. The company uses a periodic inventory system. During the month of
March 2020, the company had the following transactions for PINE205 (which is a type
of wood used to make puzzles for children):
March No. Of Units Unit Cost Total Cost
1 Opening balance 1,100 $8 $8,800

A physical stock count was conducted at the end of the month which shows 500 units
of this material on hand.
2a. PERIODIC SYSTEM – F.I.F.O. Method

Required:
a. Assuming the unit cost of inventory is assigned using the First‐In, First‐Out
method, prepare an inventory ledger card (stock card) to record these transactions
and calculate the total cost of materials issued.
b. Prepare a general journal entry to record the total purchases for March 2012.
c. Prepare a general journal entry to record the total issues for March 2012.
2b. PERIODIC SYSTEM – Weighted Average Method

Required:
a. Assuming the unit cost of inventory is assigned using the Weighted Average
method, prepare an inventory ledger card (stock card) to record these transactions
and calculate the total cost of materials issued.
b. Prepare a general journal entry to record the total purchases for March 2012.
c. Prepare a general journal entry to record the total issues for March 2012.
Solution 2a:
a)
The value of the closing inventory balance of 500 units was determined as shown
above because under the F.I.F.O. method, it is assumed that the earlier items of stock
are consumed first. Therefore, the closing stock is made up of the most recent
inventory purchases.

($ value of cost of materials available for use LESS $ value of opening balance)

Please note;
Under the periodic system, there are no entries for:
❏ Material returns from the factory to the storeroom.
❏ Stock counts adjustments (stock shortages or surpluses).
These transactions have to be treated as part of material issues because records are not
maintained for every inventory movement.
Solution 2b:
a)

($ value of cost of materials available for use LESS $ value of opening balance)
c) Work in progress $17,040

Please note;
Under the periodic system, there are no entries for:
❏ Material returns from the factory to the storeroom
❏ Stock count adjustments (stock shortages or surpluses)
These transactions have to be treated as part of material issues because records are not
maintained for every inventory movement.
NOTE 2:
WA Unit Cost = Value B/F + Value Purchases / Qty B/F + Qty Purchases
= $8,800 + $12,500 / 1,100 + 1,400
= $21,300 / 2,500
= $8.52 (nsfsakai)
WASTE, SCRAP, SPOILED UNITS, AND DEFECTIVE MATERIALS AND GOODS

SPOILED UNITS are units that do not meet production standards and are either sold
for their salvage value or discarded. When spoiled units are discovered, they are taken
out of production and no more further work is performed on them.
DEFECTIVE UNITS are units that do not meet production standards and must be
processed further in order to be salable as good units or irregulars.
SCRAP MATERIALS are left over from the production process that cannot be put
back into production for the same purpose, but maybe usable for a different purpose
or production process or which may be sold to outsiders for a nominal amount.
WASTE MATERIALS are left over from the production process that has no further use
or resale value and may require cost for their disposal.
TWO METHODS OF ACCOUNTING FOR SPOILED MATERIALS
1. Charged to the specific job – this method is used if the reason of the spoilage is
the job itself, because it requires exacting specifications, or a difficult, intricate or
complicated manufacturing process. The effect of this method is that it will increase
the unit cost of the remaining perfect finished articles in the job.
Entry: Spoiled goods xxx
Work in process xxx
The amount debited to spoiled goods and credited to work in process is equal to the
number of units spoiled multiplied by the estimated sale value per unit.
2. Charged to all production – this method is used if the reason of spoilage is
considered normal to the process and the number does not exceed the limit set by the
company. With this method, all units manufactured during the period are charged
with an additional cost which is added to the factory overhead rate. The unit cost
originally charged will not increase anymore even if there are spoiled units discovered
later on.
Entry: Spoiled goods xxx
Factory overhead control xxx
Work in process xxx
The amount debited to spoiled goods is equal to the number of units spoiled
multiplied by the estimated sales value per unit. The amount credited to work in
process is equal to the total cost incurred/charged to the spoiled units. The loss is
charged to the factory overhead control.
If the number of units spoiled exceeds the limit set by the company, or if the reason is
not considered normal to the process, the loss on the spoiled unit is charged to a loss
account.
TWO METHODS OF ACCOUNTING FOR DEFECTIVE MATERIALS

1. Charged to the specific job – same for spoiled units, if the reason for the defect is
the job itself, the additional cost incurred (materials, labour, and overhead) will be
charged to all units in the job.
Entry: Work in process xxx
Materials xxx
Payroll xxx
Factory overhead applied xxx
2. Charged to all production – if the reason is normal to the process and the number
of defective units do not exceed the normal limit, the additional costs incurred will be
charged to all units being processed during the period.
Entry: Factory overhead control xxx
Materials xxx
Payroll xxx
Factory overhead applied xxx
ACCOUNTING FOR SCRAP MATERIALS

A cost accounting system should provide a method of costing and control for scrap as
it does for spoilage and defective units. When the amount of scrap produced exceeds
the norm, it could be an indication of inefficiency. A predetermined rate for scrap
should be prepared as a guide for comparison with the actual scrap those results. If
large differences occurred, Management should find the reasons and correct the
problem. Scrap materials have commonly been accounted for in either of the following
ways.
1. If the scrap recovered can be traced to a specific job, the entry is
Scrap/Scrap Materials xxx
Work in process xxx
The amount recovered for the scrap will be entered negative (-) on the materials
section of the job or cost sheet.
2. If the scrap recovered are not traceable to a specific job, the entry os
Scrap/Scrap materials xxx
Miscellaneous Income xxx
3. If the scraps recovered are from factory supplies, the entry is

Scrap/Scrap materials xxx
Factory Overhead Control xxx
ACCOUNTING FOR WASTE MATERIAL

1. If the cost disposing the waste materials is allocated to all jobs, the entry is
Factory overhead control xxx
Accounts payable xxx
2. if cost of disposing the waste materials allocated to a specific job, the entry is
Work in Process inventory - (Job number) xxx
Accounts payable xxx
Waste exceeding a specified normal level (based on past experience) indicates

inefficiencies somewhere in the production process and signals management to take
corrective action. Although the cost of disposing of waste materials is minimal as
compared to the total production costs, in some manufacturing and service
corporations it may involve significant expenditures. For example, a chemical
manufacturer may have toxic waste which requires special packaging before disposal
and thus results in an expensive disposal cost. The cost of disposing of most types of
waste is expected to increase significantly in the near future as existing garbage dumps
fill up and more elaborate and expensive forms of disposal must be developed. (Norma
D. De Leon)
LEARNING ASSESSMENT
MULTIPLE CHOICE
1. The cycle of materials procurement and use includes all of the following steps
except for:
A. determining the cost of goods sold
B. the production budget
C. preparing the receiving report
D. maintaining the materials ledger
E. engineering to determine materials specifications
2. In a well-controlled materials system, the Purchasing Department performs all

of the following activities except the:
A. placing of purchase orders with suppliers
B. receiving of purchase requisitions
C. maintaining of information on market prices for goods used
D. preparation of purchase orders
E. approving and checking of invoices
3. The purchase requisition is a document used to:

A. initiates the return of merchandise to the vendor
B. inform the purchasing agent of a need for a materials item
C. initiate payment for merchandise received
D. inform the Purchasing Department of a receipt of goods
E. authorize the vendor to supply merchandise or materials
4. The expense that theoretically is not a correct part of inventory cost is:
A. freight-in
B. freight-out
C. inspection costs
D. accounting costs for materials received
E. purchasing costs
5. Theoretically, cash discounts permitted on purchased raw materials should be:

A. added to other income, whether taken or not

B. added to other income, only if taken
C. deducted from inventory, whether taken or not
D. deducted from inventory, only if taken
6. The materials requisition:

A. is the list of materials requirements for each step in the production
sequence
B. informs the purchasing agent of the quantity and kind of materials
needed
C. contracts for quantities to be delivered
D. certifies quantities received and reports results of inspection and testing
E. authorizes the storeroom to deliver types and quantities of materials to a
given department
7. The purchase order:

sequence
needed
given department
8. The bill of materials:

sequence
needed
given department
9. The receiving report:
sequence
needed
given department
10. The purchasing department performs all of the following functions except:
A. receives purchase requisitions for materials, supplies, and equipment
B. keeps informed concerning sources of supply, prices, and delivery
schedules
C. prepares and places purchase orders
D. compares quantities received with the suppliers' packing list
E. arranges for the reporting among the purchasing, receiving, and
accounting departments
11. The purchase requisition may originate with all of the following except:
A. a storeroom employee
B. a materials record clerk
C. a receiving department clerk
D. a research, engineering, or other department employee who needs
materials of a special nature
E. a computer
12. The receiving department does all of the following except:

A. unloads and unpacks incoming materials
B. keeps informed concerning sources of supply, prices, and delivery
schedules
C. matches materials received with descriptions on purchase orders
D. arranges for inspection, when necessary
E. routes accepted materials to the appropriate departments
13. A cost of having too few items on hand in inventory is:

A. frequent stockouts
B. excessive insurance costs
C. payment of additional warehouse space
D. spoilage costs
E. costs of obsolescence
14. Of the following, the expense that is not relevant to determining the most
economic quantity to order is:
A. additional costs to store inventory
B. rental of warehouse space under a ten-year lease
C. interest expense of financing purchases
D. spoilage costs
E. variable costs of placing an order
15. A company has been ordering more than the economic order quantity. This
would result in:
A. more frequent order points
B. carrying costs greater than order costs
C. equal safety stock costs and carrying costs
D. carrying costs less than order costs
E. insufficient safety stock costs
16. The use of quantitative models can be modified to improve the management of
inventory by:
A. including only fixed costs in the EOQ analysis
B. employing a minimum safety stock level because delivery time and
inventory usage rates may vary
C. purchasing inventory only once a year to save on ordering cost
D. purchasing inventory monthly to save on carrying cost
E. eliminating semi variable costs from any consideration in the EOQ
analysis because of the difficulty of estimating those costs
17. An inventory control technique that reviews quantities on hand periodically

and orders sufficient quantities to bring inventory up to a desired level
expressed as a number of days' or weeks' supply is the:
A. two-bin method
B. ABC inventory control method
C. order cycling method
D. min-max method
E. automatic order point system
18. The factor that need not be considered when calculating an inventory
economic order quantity (EOQ) is:
A. annual sales of a product
B. safety stock level
C. order-placing costs
D. storage costs
E. risk of inventory obsolescence and deterioration
19. Brad Company has correctly computed its economic order quantity as 500
units. However, management would rather order in quantities of 600 units.
How will Brad's total annual purchase order cost and total annual carrying cost
for an order quantity of 600 units compare to the respective amounts for an
order quantity of 500 units?
A. higher purchase order cost and lower carrying cost
B. lower purchase order cost and higher carrying cost
C. higher purchase order cost and higher carrying cost
D. lower purchase order cost and lower carrying cost
20. For its economic order quantity model, a company has a $10 cost of placing an
order and a $2 annual cost of carrying one unit in stock. If the cost of placing
an order increases by 20%, the annual cost of carrying one unit in stock
increases by 25%, and all other considerations remain constant, the economic
order quantity will:
A. decrease
B. increase
C. remain unchanged
D. either increase or decrease, depending on the reorder point
E. either increase or decrease, depending on the safety stock
21. For inventory management, ignoring safety stocks, a valid computation of the
reorder point is:
A. order costs plus carrying costs
B. the square root of the anticipated demand during lead time
C. the anticipated demand per day during lead time times lead time in days
D. the economic order quantity
E. the economic order quantity times the anticipated demand during lead
time
22. The Cappalari Company wishes to determine the amount of safety stock that it
should maintain for Product D to result in the lowest cost. The following
information is available:
Stockout cost...................................................................... P 80 per occurrence

Carrying cost of safety stock............................................ P 2 per unit

Number of purchase orders.............................................. 5 per year
The options available to Cappalari are as follows:
Units of Probability of Running

Safety Stock out of Safety Stock
10 50%
30 30%
50 10%
55 5%
The number of units of safety stock that will result in the lowest cost is:
A. 30
B. 50
C. 55
D. 10
23. The following information is available for Odyssey Company's Material Y:
Annual usage in units...................................................................... 10,000

Working days per year.................................................................... 250
Normal lead time in working days................................................ 30
Maximum lead time in working days............................................ 70
Assuming that the units of Material Y will be required evenly throughout the year, the
order point would be:
A. 2,000
B. 2,800
C. 2,105
D. 1,200
E. 1,600
24. The following information relates to Hudson Company's Material A:
Annual usage in units...................................................................... 7,200

Working days per year.................................................................... 240
Normal lead time in working days................................................ 20
Maximum lead time in working days............................................ 45
Assuming that the units of Material A will be required evenly throughout the year, the
safety stock and order point would be:
Safety Stock Order Point
A. 750 1,350
B. 600 750
C. 600 1,350
D. 750 600
25. Penguin Company manufactures winter jackets. Setup costs are P2.00.
Penguin manufactures 4,000 jackets evenly throughout the year. Using the
economic order quantity approach, the optimal production run would be 200
when the cost of carrying one jacket in inventory for one year is:
A. P0.10
B. P0.20
C. P0.40
D. P0.05
26. In a period of rising prices, using which of the following inventory cost flow
methods would result in the highest ending inventory?
A. fifo
B. average cost
C. weighted average cost
D. moving average cost
E. lifo
27. The inventory cost flow method that involves computations based on broad
inventory pools of similar items is:
A. dollar-value lifo
B. average cost
C. moving average
D. fifo
E. regular quantity of goods lifo
PROBLEMS
PROBLEM 1.
Order Point, Inventory Levels, Ordering Cost. Charleston Company has developed
the following data to assist in controlling one of its inventory items:
Economic order quantity............................................................ 1000.... liters

Average daily use........................................................................... 100.... liters
Maximum daily use........................................................................ 120.... liters
Working days per year................................................................. 250..... days
Safety stock..................................................................................... 140.... liters
Cost of carrying inventory......................................................... $1.00 per liter per year
Lead time............................................................................................ 7 working days
Required: Compute the following:
(1) Order point

(2) Average inventory
(3) Maximum inventory assuming normal lead time and usage
(4) Cost of placing one order
PROBLEM 2.
Materials Costing Methods Using Materials Ledger Card. A company that uses a
perpetual inventory system had the following transactions for Material 999 during
July:
July 1 Beginning balance: 2,800 units @ $12.00 per unit

4 Issued 1,200 units
6 Received 1,000 units @ $13.30 per unit
8 Issued 1,000 units
14 Received 400 units @ $14.00 per unit
17 Issued 800 units
20 Received 500 units @ $14.16 per unit
Required: Prepare a materials ledger card for Material 999, using (1) fifo costing, (2)
average costing.
Unit 6 ACCOUNTING FOR LABOR
INTRODUCTION
This unit introduces to the learners that Labor cost represents human contribution.
Labor cost is sensitive in nature. The reason is that the labor cost is fully based on the
human behavior i.e. labour behavior.
LEARNING OUTCOMES
Identify Direct and Indirect labor.

Determine cost incurrence and distribution.
Know the recording of labor cost.
Identify documents and their flow in labour costing and control.
Understand and know payroll preparation and distribution.
CLASSIFICATION FOR LABOR
1. Direct labor – is that portion of salary or wage, which can be identified with and
charged to a single unit cost of production.
The direct labor cost has the following characteristics.

a. It has direct relationship with the product or process or cost unit.
b. It can be measured quantitatively.
c. It is sufficiently material in amount. (Matters)
2. Indirect labor
a) Labor identified with particular product but which is not considered feasible
to measure and charge to a specific production order.
b) Labor expected for the benefit of production in general and not identified
with a particular product. (Norma D. De Leon)
3. Labor overhead
a) Waiting time or idle time – cost of non-productive hours of direct labor

caused by lack of work, waiting for material delays from scheduling, machine
breakdown and machine set-up. If idleness is normal for the production and cannot
be avoided the cost idle time should be charged to factory overhead control. Let
assume, Maria Cruz spent 30 hours on Job 1001 and was idle for 10 hours during the
week. Maria’s rate is P80.00 per hour for a 40-hour work week as per contract. The
entries to record Maria’s worked week would be:
Payroll 3,200
To record the week’s payroll.
Work in process Job 1001 (30 hours x P80) 2,400

Factory overhead control-idle time (10hours xP80) 800
Payroll 3,200
To distribute payroll.
b) Make-up pay – When payment to an employee is based solely on the

number of units produced, the employee is said to be paid at a “piecework” rate. Many
companies will pay employees a minimum wage, but they can earn more if they
produce more. This labor payment system benefits new employees because it
guarantees them a minimum salary while they are learning their new job (during
which time they usually do not produce enough units). If the output multiplied by the
piece rate results in an amount less than the guaranteed wage, the difference is
charged to factory overhead control. If the output multiplied by the piece rate results
in an amount greater than the guaranteed wage, the employee is paid the amount
earned. Let us assume Maria Cruz is paid P20 per piece produced and during the week
she produces 60 pieces. If guaranteed week pay is P1,500, then the difference between
P1,500 (guaranteed pay) and P1,200 (actual pay) is charged to factory overhead control.
The entry to record Maria’s pay is:
Payroll 1,500
Work in process (60 pieces x P20) 1,200

Factory overhead control-difference 300
Payroll 1,500
If Maria, in the previous illustration, guaranteed a weekly pay of P1,000. Then

the entry will be:
Work in process (60 pieces x P20) 1,200
Payroll 1,200
c) Overtime premium – represent the amount paid, in excess of regular rate,

to employees working in excess of 8 hours in a day or working during holidays or their
rest day. Regular earning represents the total hours worked including overtime hours
multiplied by the premium rate. The premium rate for overtime is usually some
fraction of the regular rate. For example, if Maria worked for 50 hours during the
week and she paid time add a half then the entry will be:
Payroll 4,400
Work in process (50 hour x P80) 4,000

Factory overhead control (10 hour x P40) 400
Payroll 4,400
If overtime results from requirements of a specific job and not from random
scheduling the overtime premium should be charged to the specific job that caused
the overtime, then the premium will be debited to work in process instead of factory
overhead control.
d) Shift premium – extra pay to work during less desirable evening shift (2pm
to 10pm) or night shift (10pm to 6am). This shift premium, or shift differential, should
be charged to factory overhead control rather than work in process. Assume Maria is
assigned to night shift and is paid a shift premium of P20 per hour, entry for her pay
will be:
Payroll 4,000
Work in process (40 hour x P80) 3,200

Factory overhead control (40 hour x P20) 800
Payroll 4,000
e) Employers’ payroll taxes – amounts remitted to different government

agencies for SSS premiums, Philhealth contributions and Pag-ibig contributions
GROSS EARNINGS OF EMPLOYEES

1. Wages – gross earnings of an employee who is paid by the hour for only the
actual hours worked.
2. Salaries – gross earnings of an employee who is paid a flat amount per week or
month regardless of the hours worked in a period.
3. Gross earnings – the compensation of an employee and includes regular pay
and overtime premiums.
PAYROLL DEDUCTIONS
1. Employee’s income tax – the amount of tax to be withheld each period depends
on the following:
a) Amount of the employee’s earnings and frequency of the payroll

period.
2. Social Security System premiums – levied against both the employer and the
employee in equal amounts (based on table provided).
3. PhilHealth Contributions – levied against both the employer and the employee
in equal amounts (based on table provided).
4. Pag-ibig Contributions - levied against both the employer and the employee in
equal amounts (based on table provided).
PROCEDURES FOR RECORDING PAYROLL

1. Recording the number of hours used in total and by job.
2. Recording the quantity produced by the workers.
3. Analysing the hours used by employees to determine how time should be charged.
4. Allocation of payroll cost to jobs and factory overhead accounts.
5. Preparation of the payroll, including computation and recording of employee gross
earnings, deductions and net earnings.
WAGE PLANS
1. Hourly-Rate Plan – a definite rate per hour is set for each employee. The
employee wages are calculated by multiplying the rate per hour by the
number of hours worked. The hourly rate plan is simple to use but does not
provide incentive for the employee to achieve a high level of productivity. The
employee is paid for merely “being on the job”.
2. Piece-Rate plan – earnings are calculated by multiplying the employee’s
output by the rate per piece. The plan provides an incentive for the employee
to produce more. However, the employee might sacrifice quality to maximize
earnings.
3. Modified Wage Plan – This plan combines the features of hourly-rate and
piece-rate plans. An example of a modified wage plan would be to set a
minimum hourly wage that will be paid by the company even if an established
quota of production is not attained by an employee. If the established quota is
exceeded, additional payment per piece would be added to the minimum
wage level.
CONTROLLING LABOR COST
Maintaining labor records is the responsibility of the time keeping and payroll
departments. The time keeping department accounts for the time spent by the
employee in the factory. The payroll department computes each employee’s gross
earnings, the amount of deductions and the net earnings to be paid to the employee.
The departmental responsibilities of time-keeping and payroll are carried out by

completing and maintaining the following forms and records:
Time-keeping Payroll
Clock cards Payroll records
Time tickets Employee’s earning records
Production reports Payroll summaries
ACCOUNTING FOR LABOR COST
ILLUSTRATIVE PROBLEM 1
Cruz, an employee of the Abad Cabinet Co., submitted the following data for work
activities last week:
Day Units Produced Each Day

Monday................................. 30
Tuesday................................. 32
Wednesday............................. 46
Thursday................................ 28
Friday.................................... 34
During the week, Cruz worked eight hours each day. Compensation was based on a
modified wage plan where an employee earns P25 per finished unit and is guaranteed
a minimum of P100 per hour.
Instructions: Complete the schedule below. (Round labor cost per unit to the
nearest peso.)
Earnings at Piece-rate Make-up Daily Labor Cost
Day P100 per Hour Earnings Guarantee Earnings per Unit
Monday __________ __________ __________ __________ _______

Tuesday __________ __________ __________ __________ ________
Wednesday __________ __________ __________ __________ _________
Thursday __________ __________ __________ __________ _________
Friday __________ __________ __________ __________ _________
(Planet)
SOLUTION:
Earnings at Piece-rate Make-up Daily Labor
Cost
Day per Hour Earnings Guarantee Earnings per Unit
Monday 800 750 50 800 25
Tuesday 800 800 - 800 25
Wednesday 800 1150 - 1150 25
Thursday 800 700 100 800 25
Friday 800 850 - 850 25
ILLUSTRATIVE PROBLEM 2
The Mark Manufacturing Company pays employees every week, Monday, June 1, is the
beginning of a new payroll period. The following payroll summary is prepared by the
payroll department and forwarded to accounting for recording:
Mark Manufacturing Company

Payroll Summary
For the Period June 1-6
Factory Sales and
Worker Adm. Employee Total
Gross Earnings P10,000.00 P20,000.00 30,000.00
Deductions:
Withholding tax P 1,979.25 P2,833.33 P4,812.58
SSS premiums 333.30 500.00 833.30
Philhealth contributions 125.00 250.00 375.00
Pag-ibig contributions 100.00 100.00 200.00
Total deductions P2,537.55 P3,683.33 P6,220.88
Net earnings P7,462.45 16,316.67 P23,779.12
======== ======== =========
Assuming that of the total factory payroll of P10,000, P3,000 is indirect labor. The
following schedule provides the information on employer’s payroll taxes for the
period.
SSS Premiums Pilhealth Pag-ibig Total
Factory payroll 706.70 125 100 931.70
Selling and Adm. 1,060.00 125 100 1,285.00
Total 1,766.70 250 200 2,216.70
======= === === =======
Required: Consider the above data were verified and authorized payment, prepare all
necessary journal entry to record the June 6 payroll.
JOURNAL ENTRIES:
June 6 Payroll 30,000.00
Withholding tax payable 4,812.58
SSS premium payable 833.30
Philhealth contributions payable 375.00
Pag-ibig funds contribution payable 200.00
Accrued Payroll 23,779.12
To record the payroll is authorization.
Accrued payroll 23,779.12

Cash 23,779.12
To record the payment net earnings to employees.

Selling and Administrative expense control 20,000
Payroll 30,000
To record the distribution of the payroll.
Factory overhead control 931.70

Selling and Administrative expense control 1,285.00
SSS premium payable 1,766.70
Philhealth contributions payable 250.00
Pag-ibig funds contribution payable 200.00
To record the employer’s payroll taxes.
Application
True or False
Instructions: Indicate your answer in the Answers column by writing a “True” for a
correct statement or a “False” for an incorrect statement.
1. The cost of direct labor is charged to the factory overhead account.
2. A serious limitation of a piece-rate wage plan is that no incentive is provided by
the plan design to maintain a high degree of employee productivity.
3. The payroll function includes completing and maintaining the payroll records and
the employees’ earnings records.
4. The payroll accrual computation should not include the employees’ withholdings.
5. Non-contributory pension plans are completely funded by the employer.
6. The employee earnings record contains the earnings history for a single employee,
whereas the payroll record shows the earnings data for all employees for a specific
payroll period.
7. The debit posted to Factory Overhead for payroll costs represents the indirect
labor cost recorded in the factory overhead ledger.
8. If the overtime hours incurred on a job were merely the result of random
scheduling, the cost of the overtime premium should be charged to the specific
job worked on during the overtime period.
9. Employers and employees share equally the cost of the social security program.
10. In theory, payroll taxes on factory direct labor should be charged to Work in
Process as direct labor, but in practice they usually are included in Factory
Overhead.
11. Shift premiums usually are charged to Factory Overhead in order to avoid a
substantial distortion of costing of jobs due to differences in worker productivity.
12. In a modified wage plan, a make-up guarantee is paid when an employee works
fewer hours than recommended to produce the established quota.
13. The costs of vacation pay and holiday pay should be accrued in the periods that
the employees actually work.
Multiple Choice
Instructions: In the Answers column, place the letter of the choice that most correctly
completes each item.
_____ 1. A modified wage plan:
a. Usually results in less total wages than an hourly- rate plan
b. Is riskier from an employee’s viewpoint than a piece-rate plan
c. Directs management’s attention to the employees unable to meet quotas
d. Has a make-up guarantee when an employee’s production exceeds the quota
_____ 2. The document that provides evidence of an employee’s total time in the
plant is the:
a. Labor time record c. Labor cost summary
b. Daily performance report d. Requisition
_____ 3. An example of a fringe cost is:
a. The direct labor wage rate
b. Withheld taxes
c. Union dues paid by the employee
. The employer portion of FICA tax
_____ 4. The wage plan which most bases an employee’s earnings on the quantity of
the employee’s production is termed a(n):
a. Hourly rate plan c. Piece-rate plan
b. Modified wage plan d. None of the above
_____ 5. In job order costing, payroll taxes paid by the employer for factory
employees are usually accounted for as:
a. Direct labor c. Work in process
b. Factory overhead d. Administrative costs
_____ 6. When a rush order is received during the week and it must be completed
during an overtime shift, the overtime premium is charged to:
a. General and Administrative Expenses
b. Accrued Overtime Premium Receivable
c. Factory Overhead Control
d. The job worked on during the overtime period
_____ 7. All of the following items are included as accrued expenses when the
accounting period does not correspond with the payroll date except:
a. Indirect labor wages
b. Overtime premium
c. Employee withholdings
d. Employer payroll taxes
Problem solving
Computing earnings with incentive compensation.
B. Arroyo, an employee of the Cincinnati Cabinet Co., submitted the following data for
work activities last week:
Day Units Produced Each Day

Monday................................. 60
Tuesday................................. 64
Wednesday............................. 92
Thursday................................ 56
Friday.................................... 68
During the week, Arroyo worked eight hours each day. Compensation was based on a
modified wage plan where an employee earns P12.50 per finished unit and is guaranteed a
minimum of P100 per hour.
Instructions:Complete the schedule below. (Round labor cost per unit to the nearest
whole cent.)
Earnings at Piece-rate Make-up Daily Labor Cost
Day P100 per Hour Earnings Guarantee Earnings per Unit
Monday __________ __________ __________ __________ __________

Tuesday __________ __________ __________ __________ __________
Wednesday __________ __________ __________ __________ __________
Thursday __________ __________ __________ __________ __________
Friday __________ __________ __________ __________ __________
REFERENCES
CliffsNotes.com. (n.d.). Retrieved from https://www.cliffsnotes.com/study-

guides/accounting/accounting-principles-ii/traditional-cost-systems/job-order-cost-
system
Couch, A. (n.d.). Retrieved from https://www.accountingcoach.com/blog/what-is-job-

order-costing
Dictionary, A. (n.d.). Retrieved from

https://www.myaccountingcourse.com/accounting-dictionary/just-in-time-inventory
Freedman, J. (n.d.). Retrieved from https://smallbusiness.chron.com/happens-

inventory-account-materials-requisitioned-67253.html
Hooper, H. (n.d.). Retrieved from

http://college.cengage.com/accounting/needles/2002e/fm/shared/ppts/chapter19.ppt
indeed.com. (n.d.). Retrieved from https://www.indeed.com/career-advice/career-

development/job-order-costing-system
James R. Martin, P. C. (n.d.). Retrieved from https://maaw.info/TradABCJITTOC.htm
Matters, M. (n.d.). Retrieved from https://accountlearning.com/labour-cost-meaning-

classification-labour-cost-control/
mccc.edu. (n.d.). Retrieved from

https://www.mccc.edu/~horowitk/documents/Chapter02_000.pdf
Norma D. De Leon, E. D. (n.d.). 2019 Edition.
nsfsakai. (n.d.). Retrieved from

https://nsfsakai.nthsydney.tafensw.edu.au/access/content/group/0f4ea869-0e76-
4936-b16e-
7407f58a3a5d/AccountingAndFinance/Archive/FNSACC507A%20Management%20Acc
ounting/WEEK%204_FNSACC507A_Management%20Accounting_WORKED%20EXA
MPLES.pdf
Planet, S. (n.d.). Retrieved from

https://www.summaryplanet.com/summary/accounting-for-labor.html
Premium, N. (n.d.). Retrieved from https://nhyirapremiumuniversity.com/accounting-

for-material/
qsstudy.com. (n.d.). Retrieved from

https://www.qsstudy.com/accounting/characteristics-of-job-order-costing
tools, A. (n.d.). Retrieved from https://www.accountingtools.com/articles/what-is-

just-in-time-jit-inventory.html
Tuition, O. (n.d.). Retrieved from https://opentuition.com/fia/ma1/accounting-for-

materials-costs/

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What is the objective of cost accounting?

What is the objective of cost accounting?

What is the difference between financial accounting, managerial accounting and cost accounting?

What is the difference between financial accounting, managerial accounting and cost accounting?

CAGAYAN STATE UNIVERSITY

COST ACCOUNTING AND CONTROL

NANCY E. DONIEGO, CPA, Ph.D.

Unit 1 INTRODUCTION TO COST ACCOUNTING

LEARNING OUTCOMES/TOPIC OBJECTIVES

DEFINITION OF COST ACCOUNTING

OBJECTIVE OF COST ACCOUNTING

RELATIONSHIP of Financial, Management and Cost Accounting

❖ Accounting information is used for reporting to external parties, including

B. Non-manufacturing costs/period cost

MANUFACTURING COSTS/PRODUCT COSTS/INVENTORIABLE COSTS

Direct Direct labor Factory

Prime costs = Direct labor plus Direct materials

NON-MANUFACTURING COSTS/PERIOD COSTS

Marketing or selling expenses includes all costs necessary to secure customer

COSTS CLASSIFIED AS TO VARIABILITY

1) Committed fixed cost – cost that represents relatively long term

Total fixed cost

Total variable cost

Mixed costs are cost with fixed and variable components.

Two types of mixed cost

1. Semi-variable cost the fixed portion of a semi-variable cost usually represents a

And when, TOTAL COST UNIT COST

Common costs is a cost of facilities or service employed in two or more accounting

Capital expenditures are expenditures intended to benefit more than one

opportunity cost should be considered when evaluating alternatives for decision-

Controllable cost is considered to be a controllable cost at a particular level of

1. Controller is not an internal user.

Classify the following as to fixed, variable or mixed

4. Cost Accountant’s salary.

Example: Direct labor Variable cost Inventoriable cost

1. Wood used in bookcases ____________ _______________

1. Indirect material cost is a

2. Direct labor cost is a

4. In a job cost system, manufacturing overhead is

6. Which of the following is an element of prime cost

7. Wages paid to factory machine operators of a manufacturing plant are an element of

10. Factory rent is:

11. Examples of factory overhead costs are:

13. Factory supplies used would be an example of which of the following?

14. For a manufacturing company, which of the following is an example of a period

a. Depreciation of factory equipment. c. Wages of machine operator.

16. Indirect costs are also known as:

17. Variable cost

18. All of the following are examples of product cost except:

19. The distinction between indirect and direct cost depends on

Ram Company completed the following transactions for October, 2020:

SSS premiums P3,600

Unit 2 COST ACCOUNTING CYCLE

LEARNING OUTCOMES/TOPIC OBJECTIVES

MERCHANDISING versus MANUFACTURING Operations

Cost of Goods Sold for a Merchandising Company

● Normally buys a product that is ready for resale when it is received.

● Nothing needs to be done to the product to make it saleable except possibly to

Cost of Goods Sold for a Manufacturing Company

1. Wood used in bookcases ___