COSTCON PRELIMS REVIEWER by Kirsten Manalili 1

CHAPTER 1: Introduction to Cost Accounting

- primary objective of accounting
Provide financial information about an - first, we have internal users - managers for planning, controlling and decision making. Then we have
economic entity to different types of users external users – the government, those who provide funds and those who have various interests in the
operations of the of the entity.
- expanded phase of general or financial accounting which informs management promptly with the cost of
rendering a particular service, buying and selling a product, and producing a product.
Cost Accounting
- It is the field of accounting that measures, records, and reports information about costs.
- is recognized today as being essential to efficient cooperation of business and industry.
Structured Costs Accounting Systems - these systems should show what cost were incurred and where and how these costs were utilized
- involves the conversion of raw materials into finished goods through the application of labor and the
Manufacturing Process
incurrence of various factory expenses
Comparison of Financial, Managerial, and Cost Accounting
- is the use of accounting information for reporting to external parties, including investors and creditors.
- is primarily concerned with financial statements for external use by those supply funds to the entity and
other persons who may have vested interest in the financial operations of the firm.
- financial statements are the output from an accounting system
- focus on the enterprise as a whole
- is based on historical transaction data
 The information maybe historical, quantitative, monetary, and verifiable.
 The data are historical and are supported by documents.
 The information provided by financial accounting is usually presented in the form of financial
statement, tax returns, and other formal reports distributed to various external users.
- is required for many firms organizes as corporations because of the requirements of the Securities and
Financial Accounting
Exchange Commission (SEC)
- Bureau of Internal Revenue also required financial accounting information for compliance with the
country’s tax laws
Suppliers of Funds Creditors
 Stockholders - who provide debts are also interested on
 Partners the financial statement of the entity.
 Sole Proprietors
- attempts to present some degree of precision in reporting historical information while at the same time
emphasizing verifiability and freedom from bias in the information, relevance to general verifiability and
freedom from bias in the information, relevance to the general user and some degree of timeliness in
reporting which is not as critical in managerial accounting.
- focuses on the needs of parties within the organizations, rather than interested parties outside the
organization.
- commonly addresses individual or divisional concerns rather than those of the enterprises as a whole.
- the information may be current or forecasted, quantitative or qualitative, monetary or non-monetary and
most of all timely the data futuristic and some of the costs are not recorded on the accounting books of the
organization.
- managerial accounting
methods are tools that are
available for use to
management.
- the timing of information
Managerial Accounting and its relevance to the
decision on hand has greater
significance to the
international decision-maker.

a. Economic measure such as pesos

Various bases may be appropriate to report
b. Physical measure such as pound, gallons, tons, or units
managerial information
c. Relationship measure such as ratios
- is the intersection between financial and managerial
accounting
- provides product cost information to external parties, such as
stockholders, creditors and various regulatory boards for credit
Cost Accounting
and investment decisions
- provides product information also to internal parties such as
managers for planning and controlling
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1. Materials Inventory
2. Work in Process Inventory (3) Inventory Accounts of a Manufacturing Company
3. Finished Goods Inventory
Materials Inventory Balance - purchased materials unused during production process
- cost of materials used plus the cost of labor services and factory overhead (includes such items as indirect
materials, indirect labor, utility costs, depreciation of factory machinery, depreciation of factory building,
and supplies) are transferred to this account when they are used in the production process
Work in Process Inventory
- all three types of cost are accumulated in this account
- costs remaining in the Work in Process Inventory belong to partly completed units – they make up the
ending balance in the WP Invty.
1. Direct Materials (DM)
2. Direct Labor (DL) (3) Types of Cost
3. Factory Overhead (FO)
- when a batch or order is completed, all manufacturing costs assigned to the completed units are moved to
this account
Finished Goods Inventory - set up the same way as Merchandise Inventory
- cost of completed goods are entered here
- costs attached to unsold items at year end make up its the ending balance
Cost of Goods Sold - all costs related to units sold are transferred here and reported on the income statement.
Uses of Accounting Data
information product by a cost accounting
- provides a basis for determining product cost and aids management in planning and controlling operation
system
- cost procedures must be designed to permit the computation of unit costs as well as total product cost.
- unit cost information is also useful in making a variety of important marketing decision
 Determining the selling price of product - a knowledge of the cost of manufacturing a unit of
product helps in setting the selling price, which should be high enough to cover the cost of
production, pay a portion of marketing and administrative expenses and provide a profit.
 Meeting Competition - if a competitor is selling the product at a low price, detailed information
regarding unit costs can be used to determine the action to be taken by the company. The
company would know if selling price must be reduced, or manufacturing costs must be reduced,
or the product must be eliminated.
 Bidding on Contracts - many manufacturing firms must submit competitive bids in order to be
Determining Product Costs awarded manufacturing contracts by the government or private firms. The bid price must be able
to cover cost to be incurred and at the same provide profit for the company. It must not be set so
high so as to be able to compete with other bidders.
 Analyzing profitability - unit cost information enables management to determine the amount of
profit that each product earns and possibly eliminate those that are least profitable, thereby
concentrating efforts on those items that are most profitable.
- costs are said to be used for managerial accounting purposes when cost are used inside the organization
by managers to evaluate the performance of operations or personnel, or as a basis for decision making.
- when cost are used by outsiders, such as stockholders or creditors to evaluate the performance of top
management and make decisions about the organization, we say costs are used for financial accounting
purposes.
- is the process of establishing objective or goals for the firms and determining the means by which the
firm will attain them
Planning - is essential to good management because it provides a means of coordination all of the operations of firm
- Cost accounting helps in the development of plans by providing historical costs that serve as basis for
projecting data for planning
1. Strategic planning
2. Tactical planning (3) Components of Planning
3. Operations planning
Strategic planning - concerned with setting long range goals and objectives to determine the overall direction of the company
- concerned with plans for a shorter range (or time period) and emphasizes plans to achieve the strategic
Tactical planning
goals
- relates to the day to day implementation of tactical plans and emphasizes the coordination of the major
Operations planning
factors of production (materials, labor, and facilities)
- is the process of monitoring the company’s operations and determining whether the objectives identified
Control
in the planning process are being accomplished.
1. Job Order Costing
(2) Basic Product-Costing Systems
2. Process Costing
Job Order Costing - a system for allocating cost groups of unique product
- is applicable to the production of customer specified products such as the manufacture of special
machines
- each job becomes a cost center for which cost are accumulated.
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- a subsidiary record (job cost sheet) is needed to keep track of all unfinished jobs (work in process) and
finished jobs (finished goods).
- a system applicable to a continuous process of production of the same or similar goods, e.g., oil refining
and chemical production.
Process Costing
- since there is no need to determine the costs of different groups of products because the product is
uniform, each processing department become a cost center.
- both provide product unit cost information for pricing, cost control, inventory valuation, and income
Objective of the Two Systems
statement preparation.
Characteristics of Job Order Costing
- is a product costing system used by companies making one-of-a-kind or special order products
- in computing unit costs, the total manufacturing cost for each job order are divided by the number of
good units produced for that order.
- may also be used when producing a set quantity of a product for inventory replenishment, such as a
production run of 500 identical lawn mowers
Job Order Cost Accounting System - the primary characteristics of a job order cost system are as follows:
 It collects all manufacturing costs and assigns them to specific job or batches of product.
 It measures costs for each completed job, rather than for set time periods.
 It uses just one Work in Process Inventory Control account in the general ledger. The account is
supported by a subsidiary ledger of job order cost cards or sheets for each job in process at any point
of time.
Characteristics of Process Costing
- is a product costing system used by companies that make a large number of similar products or maintain
a continuous production flow. In these cases, it is more economical to account for products-related cost for
a period of time (a week or a month) than to try to assign them to specific products or job orders.
- unit costs are computed by dividing total manufacturing cost assigned to a particular department or work
center during a period by the equivalent unit of production.
- the main characteristics of a process cost accounting system are as follows:
Process Cost Accounting System
 Manufacturing costs are grouped by department or work center, with little concern for specific
job orders.
 It emphasizes a weekly or monthly time period rather than the time taken to complete a specific
order.
 It uses several Work in Process Inventory account – one for each department or work center in
the manufacturing process.
- many manufacturing firms have production system which are not suited for strictly job-order costing or
process costing, but instead require a costing system which incorporation ideas from both called

Hybrid Costing

- is hybrid costing system often used in repetitive manufacturing where finished products have common, as
Operation Costing well as distinguishing characteristics.
- based on the variations, the products and the related costs are identified by batches or by production runs.
- large order of identical units as a group through the same production sequence
Batch
- in batch production cost are allocated to each batch
Major Differences Between Process & Job Order Costing
Process Costing Job Order Costing
1. Homogeneous units pass through a series of similar
1. Unique jobs are worked on during a time period
processes.
2. Cost are accumulated by processing department 2. Cost are accumulated by individual job
3. Unit cost are computed by dividing the individual 3. Unit cost are determined by dividing the total costs on the
departments’ cost by the equivalent production job cost sheet by the number of units on the job
4. The Cost of production report provides the detail of the 4. The job cost sheet provides the details for the work in
Work in Process account for each department process account
*As a general rule job systems are usually more costly than process systems.
CHAPTER 2: Cost Concepts and Classifications
- is the cash-to-cash equivalent value satisficed for goods and services that are expected to bring a current
or future benefit to the organization.
- are incurred to produced future benefits in a profit-making firm, future benefits usually mean revenue. As
Cost
cost are used up in the production of revenues, they are said to expire.
- is a sacrifice of resources
- expired costs are called expenses
Outlay Cost - past, present, or future cash outflow
Opportunity Costs - forgone benefit from best alternative course of action
Expense - cost charged against revenue in an accounting period
- is a cost that expires without producing any revenue benefit.
Loss
- the focus of cost accounting is on costs, not expenses.
Classification of Costs
A. Manufacturing cost/ product costs
1. Direct materials
2. Direct labor
Cost classified as to relation to a product 3. Factory overhead
B. Non- manufacturing cost/ period costs
1. Marketing or selling expense
2. General or administrative expense
 Variable costs
Cost classified as to variability  Fixed costs
 Mixed costs
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Cost classified as to relation to A. Direct departmental charges
manufacturing departments B. Indirect departmental charges
Cost classified to their nature as common or  Common costs
joint  Joint cost
Cost classified as to relation to an accounting 1. Capital expenditures
period 2. Revenue expenditure
 Standard costs
 Opportunity costs
 Differential cost
Cost for planning, control, and analytical
 Relevant cost
processes
 Out-of-pocket cost
 Sunk cost
 Controllable cost
Manufacturing Cost/ Product Cost/ Inventoriable Costs
- costs that are recorded as an asset in inventory when incurred and expensed as Cost of Goods Sold when
Product Costs sold
- costs related to inventory: direct materials, direct labor, factory overhead
- are the basic ingredients that are transformed into finished products through the use of labor and factory
overhead in the production process.
Direct Materials - are those that can be traced to the finished product can they form part of the product.
- materials that become part of a finished product and can be conveniently and economically traced to
specific product units. The costs of these materials are direct costs.
- In some cases, however, even though a material becomes part of a finished product, the expense of
actually tracing the cost of a specific materials is too great.
Indirect Materials - these minor materials and other production supplies that cannot be conveniently or economically traced
to specific products are accounted for as indirect materials.
- indirect materials cost are part of factory overhead costs.
- represent the amount paid as wages to those working directly on the product.
Direct Labor - Direct labor cost include all labor costs for specific work performed on products that can be
conveniently and economically traced to end products.
- labor costs for production related activities that cannot be conveniently and economically traced to end
Indirect Labor Costs products
- accounted for as factory overhead costs
Prime Costs - the “primary” costs of the product
Conversion Costs - costs necessary to “convert” materials into finished product
Prime Cost = Direct Labor + Direct Materials Total Manufacturing Cost
Conversion Cost = Direct Labor + Factory Overhead = Direct Materials + Direct Labor + Factory Overhead

- catchall for manufacturing costs that cannot be classified as direct materials or direct labor costs
- are a varied collection of production-related costs that cannot be practically or conveniently traced
Factory Overhead
directly to end products
- also called manufacturing overhead, factory burden, and indirect manufacturing costs
Non-Manufacturing Costs/Period Costs
- costs recognized for financial reporting when incurred
Period Costs
- non-manufacturing costs related to the firm: marketing or selling, general or administrative expenses
- include all costs necessary to secure customer orders and get the finished product or service into the
hands of the customer.
Marketing or selling expenses
- since marketing expenses relate to contacting customers and providing for their needs, these expenses are
often referred to as order-getting and order-filling costs.
- include all executive, organizational, and clerical expenses that cannot logically be include under either
Administrative or general expenses
production and marketing
Cost Classified As To Variability
- one of the most important cost classifications involves the way a cost changes in relation to changes in
1. Fixed the activity of the organization.
2. Variable - Activity refers to a measure of the organization’s output of products or services.
3. Mixed - in specifying cost behavior, the managerial accountant often limits the description to specific range of
activity. This is called the relevant range.
Cost Behavior - how costs respond to a change in activity level within the relevant range
Relevant Range - activity levels within which a given total fixed cost or unit variable cost will be unchanged
Fixed Cost - remains remain unchanged as volume changes
within the relevant range.
- items of cost which remain constant in total,
irrespective of the volume of production
- fixed costs per unit varies inversely to a change
in activity.
- are “fixed” in “total” as activity changes.
- Fixed costs may classified into two categories,
depending on the ability of management to
influence the levels of these costs in the short-term.
1. Committed fixed costs – costs that represent relatively long-term commitments on the part of
management as a result of a past decision. Example – depreciation on equipment.
2. Managed fixed costs (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
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of training of employees
F ixed Cost per unit=Total ¿ Cost ¿
Activity
- costs that change in direct proportion with a
change in the volume within the relevant range
- “vary” in “total” as activity changes
- variable cost per unit stays constant when activity
changes within the relevant range.
Variable Cost - are the items of cost which vary directly, in total,
in relation to volume of production

Total Variable Cost = Activity ×Variable cost per unit

- items of cost with fixed and variable
components.
- two types of mixed costs exist – semi-variable
costs and step costs.
A. Semi-variable cost - fixed portion of
semi-variable cost usually represent a
minimum fee for making a particular
item or service available. The variable
portion is the cost charged for actually
Mixed Cost using the service.
B. Step costs - the fixed part of step costs changes abruptly at various activity levels because these
costs are acquired in indivisible portions. A step cost is similar to a fixed cost within a very
small relevant range.
- one of the most important steps in estimating the variable and fixed components of a mixed cost is to
examine the cause and effect relationship between activities that affect costs,. There are different methods
of separating mixed costs into fixed and variable components;
a) Scattergraph - graphing
b) High-low point – uses two data points
c) Method of lease square – uses all of the data points

Scattergraph

Total Variable Cost =Variable cost per unit ×total output

highest point cost−lowest point cost
Variable rate=
highest output−lowest output
¿ Cost =total cost at highest−(variable rate× output at highest )
High-low Point Method
¿ Cost =total cost at lowest −(variable rate × output at lowest)
Y =FC +VC Y =FC +VX
Where Y = Total Cost
Where VC = total variable cost
V = variable cost per unit
FC = fixed cost
X = activity level
- regression is a statistical procedure to determine the relation between variables.
- it helps managers determine how well the estimated regression equation describes the relations between
costs and activities
- the three formula to be used in least-square method are:
Equation 1 Y = a + bx
Equation 2 ΣY = na + bΣx
Method of Lease Square Regression Analysis Equation 3 ΣXY = Σxa +bΣx²
- alternative formula

b=
∑ (X −x)(Y −¿ y ) ¿ and a= y−x b
∑ ( X −x )2
or VC =n ¿ ¿ and FC =n ¿ ¿
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Common Cost VS Joint Cost

- cost of facilities or services employed in two or more accounting periods operations, commodities, or
Common Cost
services. Just like indirect costs, these costs are subject to allocation
- 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
Joint Cost
identifiable with any of the products being simultaneously produced. These costs are also subject to
allocation.
Capital Expenditure VS Revenue Expenditure
- expenditure intended to benefit more than one accounting periods and is recorded as an asset. The
Capital expenditure allocation of the cost to the different periods is – depreciation for fixed tangible assets, amortization for
intangible assets and depletion for wasting assets.
Revenue Expenditure - expenditure that will benefit current period only and is recorded as an expense.
Direct VS Indirect Departmental Charges
- costs that are immediately charged to the particular manufacturing department(s) that incurred the costs
Direct Departmental Charges/Costs since the costs can be conveniently identified or associated with the department(s) that benefited from the
said costs.
- costs that are originally charged to some other manufacturing department(s) or account(s) but are later
Indirect Departmental Charges/Costs
allocated or transferred to another department(s) that indirectly benefited from said costs.
Cost For Planning, Control and Analytical Processes
- predetermined costs for direct materials, direct labor, factory overhead.
- they are established by using information accumulated from past experience and data secured from
Standard costs 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
- the benefit given up when one alternative is chosen over another.
Opportunity Cost - are not usually recorded in the accounting system. However, opportunity costs should be considered
when evaluating alternatives for decision-making
- 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 increase and cost decrease between
alternatives.
- the accountant’s differential cost concept is basically the same as the economist’s marginal cost
concept. In speaking of changes in cost and revenue, the economist employs the terms marginal cost and
marginal revenue.
- the revenue that can be obtained from selling one more unit of product is called marginal revenue, and
the cost involved in producing one more unit of product is called marginal cost.

Differential Cost

Relevant Cost - a future cost that changes across the alternatives. In the example above, the relevant cost are cost of
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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.
- future decision, they are not different costs, and therefore they should be used in analyzing future courses
of action.
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 and Non-controllable Costs
- a cost is considered to be a controllable cost at a particular level of management if that level has power to
Controllable Cost
authorize the cost

- essential purpose of any organization

transform inputs into outputs - a manufacturer’s accounting system focuses on work in process, which is the account manufacturer’s
account reflects the costs involved in transforming input materials into finished goods

Summary of Important Formulas:

Total Variable Cost =Variable cost per unit ×total output
highest point cost−lowest point cost
Variable rate=
highest output−lowest output
¿ Cost =total cost at highest−(variable rate× output at highest )
¿ Cost =total cost at lowest −(variable rate × output at lowest)
Y =FC +VC Y =FC +VX
Where Y = Total Cost
Where VC = total variable cost
V = variable cost per unit
FC = fixed cost
X = activity level
The three formula to be used in least-square method are:
Equation 1 Y = a + bx
Equation 2 ΣY = na + bΣx
Equation 3 ΣXY = Σxa +bΣx²
- alternative formula

b=
∑ (X −x)(Y −¿ y ) ¿ and a= y−x b
∑ ( X −x )2
or VC =n ¿ ¿ and FC =n ¿ ¿
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CHAPTER 3: Cost Accounting Cycle
Perpetual Inventory Approach - most manufacturing companies use this approach
1. Materials Inventory
2. Work in Process Inventory (3) Inventory Accounts of a Manufacturer
3. Finished Goods Inventory
- is essential so that the total production costs can be accumulated as goods flow through the manufacturing
Accrual Accounting System
process
- made up of the balances of materials and supplies on hand
Materials Inventory
- an item taken out of Materials Inventory and requisitioned into production is transferred to the Work in
Materials Inventory Control
Process Inventory account
- all manufacturing costs incurred and assigned to products being produced
 Direct labor – labor pero earned
 Overhead costs – Factory overhead control assigned to products by using an overhead rate
Work in Process Inventory (predetermined overhead rate) and charged to Work in Process Inventory
- when completed products are sent to the storage area, their costs are transferred to the Finished Goods
Inventory account
- balance remaining at the end of the period represents the costs that were assigned to products partly
completed and still in process
- when goods or products are sold, the costs of these goods are moved to the Cost of Good Sold account
Finished Good Inventory
- balance at the end of the period is made up of the cost of products completed but unsold as of that date
- compared to a merchandising company computation of cost of goods sold, “finished goods inventory”
replaces “merchandise inventory” and the term “cost of goods manufactured” replaces “purchases”
Beginning finished goods inventory
Plus: Cost of Goods manufactured
Total Goods available for sale
Less: Finshed goods inventory end
Cost of Goods Sold
Cost of Goods Sold
- the key to preparing an income statement for a manufacturing company is to determine the COGS.
- the amount is the end result of a special manufacturing statement, the statement of cost of goods
manufactured, which is prepared to support the figure on the income statement
- is considered an expense for the period in which the related products were sold

The Manufacturing Statement

Cost of Goods Manufactured - account title used in place of the Purchases account
Finished Goods Inventory - account title used to replace the Merchandise Inventory Account
- is prepared to summarize the manufacturing activity of the period
- Cost of Goods Manufactured = Purchases
- is a summary of the direct materials, direct labor, factory overhead, and work-in-place (WIP) account
- all manufacturing costs incurred during the year are summarized in this statement
Statement of Cost of Goods Manufactured
- the amount for the cost of goods manufactured should be the same as the amount transferred from the
Work In Process account to the Finished Goods Inventory account
- amount of cost of goods sold should be the same as the amount transferred from the Finished Goods
Inventory account to the Cost of Goods Sold account during the year
Example of Cost of Goods Sold Statement

*factory overhead applied

Actual Costing – all actual FOH Control

Normal Costing – predetermined rates to apply FOH Control to

production (FOH Applied)

Predetermined Overhead Rate = Budgeted overhead cost/specified

volume of activity
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- are the total costs for materials used, direct labor, and factory overhead incurred and charged to
Total Manufacturing Costs
production during an accounting period
Factory Overhead Control - was used to accumulate all actual factory overhead costs
- budgeted, planned factory overhead
- adjusted at the end of the accounting period with factory overhead control after cost of goods sold
statement
- estimated amount charged to production is credited to this account
Factory Overhead Applied
- at the end of the period, the total underapplied (or net over/underapplied) is closed to the Cost of Goods
Sold account
- if the amount is significant, then the amount is prorated to the Cost of Goods Sold, Finished Goods, and
Work in Process account, according to the balances at the end of the period
- Factory Overhead Control > Factory Overhead Applied
- is considered unfavorable because the tendency is to increase the cost of goods sold leading to a decrease
Underapplied Factory Overhead
in gross profit
- added to COGS to get COGS - actual
- Factory Overhead Control < Factory Overhead Applied
- is considered favorable because the effect is a decrease in the cost of goods sold thereby increase the
Overapplied Factory Overhead
gross profit
- deducted from COGS to get COGS – actual
Equations
Materials, beg + Purchases = Total materials available for use = Materials used + Materials, end
WP, beg + Total mfg. cost = Total cost of goods put into process = Cost of goods manufactured + WP, end
FG, beg + cost of goods manufactured = Total goods available for sale = Cost of goods sold + FG, end

Job Cost Sheet

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CHAPTER 7: Accounting for Materials

- purchase of direct and indirect materials is recorded in an account entitled “Purchases” (Expense Method)
- existing materials inventory is recorded in an account entitles “Materials Inventory -Beginning”.
- Cost of Goods Sold and Ending Inventory is determined at the end of each accounting period based on
Periodic Inventory System
actual inventory count.
- no updating of stock cards upon issuance
- methods involved in computing for the unit cost – Average Method.
- the purchase of direct and indirect materials is recorded in an account entitled “Materials Inventory”
(Asset Method) rather than in a purchase account
- both the cost of materials issued and the ending materials inventory can be directly ascertained after each
Perpetual Inventory System transaction
- Cost of Goods Sold and Updated Balance of Inventory is available due to maintenance of stock cards
which involves recording of “INs” and “OUTs”
- methods involved in computing for the unit cost – FIFO, Moving Average
 Forecast Sales or expected demand of your product
 Determine Production Budget for Materials base on sales forecast
 Set the optimum inventory investment that would lower carrying cost and ordering cost
Control Procedure  Analyze cost materiality, usage rate and period of inventory placement.
 Limited access to materials storage areas.
 Segregation of functions for executing purchases, recording and physical access/control.
 Review accuracy of recording.
- main function is to keep expenditures within the limits provided by a preconceived plan
Cost Control System
- should also encourage cost reductions by eliminating waste and operational inefficiencies
Commonly used Control Procedures
- method where materials on hand are reviewed on a regular or periodic cycle
- SET ORDER CYCLE LENGTH (WEEKLY, 30days, 60days, etc.) according to degree importance of
each type of inventory. 
Order Cycling
- at the time of the review, an order will be placed to bring the inventory to a desired level
- a technique often used for small items is the 90-60-30-day method. When inventory level drops to a 60-
day supply, an order will be placed for a 30-day supply.
- set the minimum and maximum level of each type of inventory. 
- order will be placed upon reaching the minimum level that will bring back inventory to maximum level.
Min-Max Method
- used for inexpensive items.
- determined to protect the company against stockout
- used for materials that are considered inexpensive and/or nonessential
- is simple and requires only a minimum of clerical time
- inventory are stocked in two separate bins, order will be placed once the first bin is emptied.
Two Bin Method
- quantity placed on the first bin is equal to consumption during ordering time until delivery of such
materials.
- Second bin – quantity placed on the first bin + safety stock.
- computerized inventory system
- order point is set per item in the program, thus upon reaching such level the program will automatically
Automatic Order System prepare a purchase order.
- used for expensive items and perpetual inventory cards are maintained which record purchases and
issuance of the specific materials
ABC Plan - is a systematic way of grouping materials into separate classification and determining the degree of
control that each group requires.
 A – expensive
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 B – not so expensive
 C – inexpensive
- used by companies with a large number of materials, each one having a different value
- maintaining the proper balance of materials on hand
- it requires the analysis of the following factors:
 Usage of funds
 Costs of materials handling
Optimum Inventory Investment  Storage
 Insurance against fire, theft or other casualty
 Loss from damage, deterioration, and obsolescence
- When orders should be placed – ORDER POINT
- How many units should be ordered - EOQ
Material Control
 Limited Access – only authorized personnel should have access to materials storage area. All issuance
of materials for use in production and release of finished goods for shipment should be properly
documented and approved
 Segregation of Duties – the following functions should be segregated to minimize opportunities for
Physical Control of Materials
misappropriation of inventories – purchasing, receiving, storage, use, and recording
 Accuracy in Recording – inventory records should permit the determination of inventory quantities
on hand upon request, and cost records should provide the data for valuation of inventories for the
preparation of financial statements.
 Order Point – a subsidiary ledger must be kept
for each individual item of raw material used in
the manufacturing process. This ledger will
indicate the inventory on hand for each item. The
point at which an item should be ordered, called
the order point occurs when the predetermined
minimum level of inventory on hand is reached.
This should be where the inventory level reaches
Controlling the Investment in Materials the number of units that would be consumed
during the lead time
- Calculation is based on the following data:
1. Usage – the anticipated rate at which the materials will be used
2. Lead Time – the estimated time interval between the placement of an order and receipt of
the material
3. Safety Stock (or additional inventory) – the estimated minimum level of inventory needed
to protect against running out of stock
- Inventory Usage Rate – quantity of materials used in production over a period of time
- quantity per order which results in minimum total inventory cost.

Economic order quantity

Total inventory cost

EOQ=
√ 2(cost of order )(number of units required annually)
( carrying cost per unit)
- Total Inventory Cost = Ordering Cost + Carrying Cost
∨
2 CN
K √
1. Salaries and wages of employees engaged in purchasing, receiving, and inspecting materials
Factors to be considered in determining
2. Communication costs associated with ordering
order costs
3. Materials accounting and record keeping
1. Materials storage and handling
Factors to be considered in determining 2. Interest, insurance, and property taxes
carrying costs 3. Loss due to theft, deterioration, or obsolescence
4. Records and supplies associated with the carrying of inventories
Methods for Computing Economic Order  Tabular Method
Quantity  Formula Method
number of units required annually
Annual Ordering Costs Annual ordering costs= ×cost per purchase order
EOQ
EOQ
Annual carrying costs= × carrying cost per unit per year
2
Annual Carrying Costs (Holding Costs)

Special Problems in Material Accounting

Discounts - constitute a reduction in the list price
- generally given in terms of percentage and are used to convert single price list into a series of price lists
Trade Discounts for different types of middleman
- are not recorded in the books because purchases are recorded on the books net of the discount
Quantity Discounts - represent cost savings for volume purchases and are not given explicit accounting recognition in the
COSTCON PRELIMS REVIEWER by Kirsten Manalili 12
books
- granted to customers to motivate them to pay promptly
a. When taken method – purchases and liabilities are recorded at gross amounts at the time of
purchase. Discount is only recognized when the account is paid within the discount period
b. When not taken method – purchases and liabilities are recorded at net at the time of purchase;
when payment is made after the lapse of the discount period, the discount not availed of is charges
Cash Discounts
to a “Purchase Discount Lost” account
c. When offered method – purchases are recorded at net and the liability is recorded at gross, the
difference is charges to an “Allowance for Purchase Discount” account. When payment is made
after the lapse of the discount period, the discount not availed is charged to the “Purchase Discount
Lost” account
Freight-In
- freight cost is added to Materials Inventory Account and added to the invoice price
- if two or more materials are purchased and delivered at the same time, the freight must be allocated using
the following methods:
 Relative Peso Method – freight is allocated based on the peso value of the items purchased; is used
for materials purchased and expressed in different terms of measurement
freight cost
Share∈freight per item= × per item∨group cost
total groupitems cost
Direct Charging group∨item cost
Share∈freight per item= × freight cost
total groupitems cost
 Relative Weight Method – freight is allocated based on the weight of the items purchased
freight cost
Share∈freight per item= × weight per item∨group
total weight
weight per item∨group
Share∈freight per item= × freight cost
total weight
Indirect Charging - freight incurred is debited to the Factory Overhead Control account
Accounting for Spoiled Units, Defective Units, Scrap Materials, and Waste Materials in a Job Order Cost System
- purpose of materials accounting is to provide a summary from the general ledger of the total cost of
materials purchased and used in manufacturing.
Accounting for Materials
- all materials issued during the month and materials returned to stock are recorded on a summary of
materials issued and returned from OR commonly called materials requisition form.
- units that do not meet production standards and are either sold for their salvage value or discarded.
- when discovered, they are taken out of production and no further work is performed on them
Spoiled Units
- has imperfections that cannot be economically corrected. The loss can be treated as part of the Cost of the
Job (Chargeable to Specific Job) or charge to Factory Overhead (Chargeable to all productions).
- units that do not meet production standards and must be processed further in order to be salable as good
units or as irregulars
- accounting is for the additional costs to be incurred in reprocessing the units to convert them into perfect
Defective Units
articles
- has imperfections that are correctable. The extra costs are either charged to the job (Chargeable to
Specific Job) or charged to Factory Overhead (Chargeable to all productions).
- left over from the production process that cannot be put back into production for the same purpose, but
may be usable for a different purpose or production process or which may be sold to outsiders for a
nominal amount
- when the amount of scrap produced exceeds the norm, it can be an indication of inefficiency; a
predetermined rate for scrap should be prepared as a guide for comparison with the actual scrap results
- consists of recyclable materials left over from product manufacturing and consumption, such as parts of
vehicles, building supplies, and surplus materials.
Scrap Materials - unlike waste, scrap has monetary value, especially recovered metals, and non-metallic
materials are also recovered for recycling.
- scrap Materials may be accounted
 Charged to Specific Job
 Charged to All Production
 As Other Income
- Scrap Sales - usually recognized at the point of sale
- left over from the production process that has no further use or resale value and may require cost for their
disposal
Waste Materials - do not affect the number of units, also it can either be charged to all production or to specific job.
Disposal costs for waste materials will increase the production costs.

Two Methods for Accounting for Spoiled Units, Defective Units, Scrap Materials, and Waste Materials in a Job Order Cost System
- spoilage, defects, and scraps are traceable to specific job or product.
Charged to the specific job - debited to “Work in Process account”.
- beyond normal limits
- account being debited “Factory overhead control “.
Charged to all production
- within normal limits
Accounting for Spoiled Materials
Charged to the specific job - is used if the reason for the spoilage is the job itself, because it requires exacting specifications, or a
difficult, intricate, or complicated manufacturing process
- increases unit cost of the remaining perfect finished articles in the job
- allowance for spoiled work is not added in entries (remove additional costs)
Spoiled Goods xxx
Work in Process xxx
- amount debited to spoiled goods and credited to WIP is equal to the number of units sold multiplied by
the estimated sales value per unit
Cost of Spoiled = units spoiled x (cost – additional cost) xxx
Less: Amount recovered from sale = units spoiled x sale price xxx
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Loss on spoiled goods xxx

loss
increase∈unit cost =
remaining units
- is used if the reason for spoilage is considered normal to the process and the number does not exceed the
limit set by the company
- all units manufactured during the period are charged with additional costs added in the factory overhead
rate
- unit cost originally charged will not increase
Spoiled Goods xxx
Charged to all production Factory Overhead Control xxx
Work in Process xxx
- debit to spoiled goods is equal to the number of units spoiled multiplied by the estimated sales value per
unit
- credit to WIP is equal to the total costs incurred/charged to the spoiled units
- loss is charged to the factory overhead control
Accounting for Defective Materials
- if the reason for the spoilage is the job itself (same as spoiled units), additional costs incurred will be
charged to all units in the job
- allowance for spoiled work is not added in entries (remove additional costs)
Work in Process xxx
Materials xxx
Charged to the specific job
Payroll xxx
Factory Overhead Applied xxx
total costs
increase∈unit cost =
total units
- if the reason for spoilage is normal to the process and the number of defective units does not exceed the
normal limit, then the additional costs incurred will be charged to all units being processed during the
period
Factory Overhead Control xxx
Charged to all production
Materials xxx
Payroll xxx
Factory Overhead Applied xxx
Accounting for Scrap Material

Scrap/scrap Materials xxx

Scrap recovered is traceable to a specific job
Work in Process xxx
- amount recovered will be entered negative ( ) on the materials section of the job order cost sheet

Scrap recovered is not traceable to a specific

Scrap/scrap Materials xxx
job
FOH-C or Miscellaneous Income (if FOH-C is closed xxx

Scrap recovered is from factory supplies Scrap/scrap Materials xxx

Factory Overhead Control xxx
Accounting for Waste Material

Cost of disposing waste is allocated to all Factory Overhead Control xxx

jobs
Accounts Payable xxx

Cost of disposing waste is allocated to a Work in Process Inventory – (Job number) xxx
specific job
Accounts Payable xxx
 COSTCON PRELIMS REVIEWER by Kirsten Manalili 14
Charged to specific job(beyond normal limit) Charged to all production (within normal limit)

CHAPTER 9: Accounting for Labor

Labor - is the physical or mental effort expended in manufacturing a product
Labor Cost - is the price paid for using human resources
Factory Labor - compensation paid to employees who engage in production related activities
- principal labor cost is ___ paid to production workers
Wages
- are payments made on an hourly, daily, or piecework basis
Salaries - are fixed payments made regularly for managerial or clerical services
- represents payroll costs that are allocated directly to the product and is debited to the work in process
account
Direct Labor
- labor identified with particular products which is considered feasible to be measured and charged to
specific production order cost sheet
- costs of labor costs incurred for a variety of jobs that are related to the production process but are
considered either too remote or too insignificant to be charged directly to production
- are charged to the factory overhead control account
Indirect Labor
- labor identified with particular products but which is not considered feasible to measure and charge to a
specific production order
- labor expected for the benefit of production in general and not identified with particular products
1. Recording the numbers of hours used in total and by job
2. Recording the quantity produced by the workers
The accounting system of a manufacturer
3. Analyzing the hours used by employees to determine how time is to be charged
must include the following procedures for
4. Allocation of payroll costs to jobs and factory overhead accounts
recording payroll costs:
5. Preparation of the payroll, including computation and recording of the employees gross earnings,
deductions, and net earnings
1. Hourly-rate Plan
2. Piece-rate Plan (3) Wage Plans
3. Modified Wage Plan
- definite rate per hour is set for each employee
- wages are calculated by multiplying the rate per hour by the number of hours worked
Hourly-rate Plan
Wages=rate per hour × hours worked
- simple to use but does not provide incentive for the employee to achieve a high level of productivity
- earnings are calculated by multiplying the employee’s output by the rate per piece
Piece-rate Plan - provides an incentive for the employee to produce more however, the employee might sacrifice quality to
maximize earnings
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- combines the features of hourly-rate and piece-rate plans
Modified Wage Plan - ex. setting a minimum hourly wage plan paid by the company even if an established quota is not attained
by an employee. If quota is exceeded, additional payment per piece is added to the minimum wage level
Controlling Labor Costs
- accounts for the time spent by the employees in the factory
- their responsibilities are carried out by completing and maintaining the following forms and records:
Time-keeping Department  clock cards
 time tickets
 production reports
- computes each employee's gross earnings, the amount of withholdings and deductions, and the net
earnings to be paid to the employee
- their responsibilities are carried out by completing and maintaining the following forms and records:
Payroll Department  payroll record
 employee’s earning records
 payroll summaries
Accounting for Labor Costs
Time ticket - shows the employee’s starting and stopping time on each job, the rate of pay, and the amount of earnings
Individual Production Reports - are used instead of time tickets when labor costs are calculated using piece rates
Time ticket & Individual Production
- are sent to payroll on a daily basis
Reports
Factory Overhead Ledger & Labor Cost
- the accounting department records the earnings in these records
Summary
- is used as the source for making a general journal entry to distribute payroll to the appropriate accounts.
- the entry is then posted to the control accounts, Work in Process and Factory Overhead in the general
Labor Cost Summary ledger
- in preparing this, it is important to separate any overtime from an employee's regular time because the
accounting treatment may be different for each type of pay
- if an employee works beyond the regularly scheduled time but the employee is paid at the regular hourly
Overtime Pay
rate, this extra pay is called ____.
- if an additional rate is allowed for the extra hours work, the additional rate earned is referred to as ____.
- the premium pay rate is added to the employee's regular rate for the additional hours worked
- premium rate will depend on the collective bargaining agreement (CBA) between management and the
union
Overtime Premium  When charged to Factory Overhead account  all jobs worked on during the period share
the cost of overtime premiums paid
 When charged to Work in Process  if it was a rush contract, it would be appropriate to charge
the premium pay to the job

Employee’s Payroll Taxes

- requires employers to pay Social Security taxes on wages and salaries equivalent to approximately 55%
of the total contribution credited to the employee
- benefits are: pension upon retirement (lump sum equivalent to 18 months × the computed monthly
Social Security System (SSS) Contribution
pension and on the 19th month and up to the death of the retiree, monthly pension will be credited to the
retiree’s bank account) salary, educational loan, maternity leave (with pay), housing loan and sometimes
calamity loan
- amount contributed by the employer is equal to the amount deducted from the employee’s salary or wage
- maximum deduction per table P375 for salaries P30,000 and over
PhilHealth Contributions - contribution of the employer, maximum, is also P375
- the amounts reimbursable, allowed by law, or professional fees, room, medicine and other expenses
(amount is paid directly to the hospital)
- amount ducted from the employee’s salary is equivalent to 3% of basic or P100, whichever is lower
- contribution of the employer is also equal to the amount deducted from the employee
HDMF or Pag-Ibig Funds Contributions - some of the benefits are: educational loan, salary loan, housing loan
- upon the retirement, the total amount deducted from the employee’s salary plus the contribution of the
employer plus dividends earned will be returned to the employee
Labor Overhead
- cost of non-productive hours of direct labor caused by lack of work, waiting for materials, delays from
scheduling, machine breakdown and machine setup
Waiting time or idle time
- if their idleness is normal for the production and cannot be avoided, the cost idle time should be
charged to factory control
- when payments to an employee are based solely on the number of units produced, the employee is said to
be paid at a “piecework” rate
- benefits new employees because it guarantees them a minimum salary while they are learning their new
Make-up pay job
- if output × piece rate results in
 Amount < (less than) guaranteed wage  difference is charged to factory overhead control
 Amount > (greater than) guaranteed wage  employee is paid the amount earned
- represents amount paid, in excess of regular rate, to employees working in excess of eight hours in a
day, or working during holidays or their rest day
- regular earnings represent the total hours work, including overtime hours, by the regular rate
- represents the overtime hours multiplied by the premium rate which is usually some fraction of the
Overtime Premium
regular rate
- if overtime results from the requirements of a specific job, the overtime premium should be charged to
the specific job that caused the overtime by debiting the premium to the Work in Process account
instead of Factory Overhead Control
- extra pay to work during less desirable evening shift (2pm – 10pm) or night shift (10pm – 6am)
Shift Premium or Shift Differential
- should be charged to factory overhead control
- amounts remitted to different government agencies for SSS premiums, PhilHealth contributions, and Pag-
Employee’s Payroll Taxes
Ibig contribution
Gross Earnings of Employees
Wages - gross earnings of an employee who is paid by the hour for only the actual hours worked
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- gross earnings of an employee who is paid a flat amount per week or month regardless of the hours
Salaries
worked in a period
Gross Earnings - the compensation of an employee and includes regular pay and overtime premiums
Payroll Deductions
- the amount of tax to be withheld each. Depends on the following:
1. Amount of the employee’s earnings
Employee’s Income Tax
2. Frequency of the payroll period
3. Classification of the tax payer and number of qualified dependents
Social Security System premiums - levied against both the employer and the employee
PhilHealth Contributions - levied against both the employer and the employee in equal amounts
Pag-Ibig Contributions - levied against both the employer and the employee in equal amount