Cost Accounting PDF

RIZAL TECHNOLOGICAL UNIVERSITY-BONI
COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY

DEPARTMENT OF ACCOUNTANCY
JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS
Cost Accounting
COST ACCOUNTING
Cost Accounting – is a system that records, summarizes, analyzes, and interprets the
detail of the costs of materials, labor, and overhead necessary to produces and sell an
article.
Statement of Goods Manufactured:
Direct Materials Used: Beginning Raw Materials Inventory + Raw Materials Purchases
– Ending Raw Materials Inventory – Indirect Materials Used
Total Manufacturing Cost: Direct Materials Used + Direct Labor + Overhead applied
Total Good Placed in Process: Manufacturing Cost + Beginning Work in Process
Inventory
Cost of Goods Manufactured: Total Goods Placed in Process – Ending Work in Process
Inventory
Total Goods Available for Sale: Cost of Goods Manufactured + Beginning Finished
Good Inventory
Cost of Goods Sold: Total Goods Available for Sale – Ending Finished Goods Inventory
Manufacturing Costs Classified
Direct Material – also called raw materials, are materials and supplies that are
consumed during the manufacture of a product, and which are directly identified with
that product. (ex: fabric used to assemble clothing)
Direct Labor – is production or services labor that is assigned to a specific product,
cost center, or work order.
Manufacturing Overhead – is all indirect costs incurred during the production process.
Typed of Manufacturing Overhead:
Indirect Material – materials that are used in small amounts in the
manufacturing process or that cannot be easily traced to specific products.
(ex: oil, cleaning supplies, tape, etc.)
Indirect Labor – is the cost any labor that supports the production
process, but which is not directly involved in the conversion of materials
into finished products
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Other Manufacturing Cost
Prime Cost – Direct material + Direct labor
Conversion Cost – Direct labor + Manufacturing overhead
Types of Inventories:
Raw Materials Inventory – total cost of all component parts currently in stock that have
not yet been used in work-in-process or finished goods production.
Work in Process Inventory – is materials that have been partially completed through
the production.
Finished Goods Inventory – are goods that have been completed by the manufacturing
process.
Types of Cost
1. According to Ease of Traceability
a. Direct Cost - that can be traced directly to a particular object of cost
b. Indirect Cost – that cannot be traced to a particular object of costing
2. According to Timing Charge against Revenue
a. Product Costs – part of inventory and are charged against revenue (all
manufacturing cost)
b. Period Costs – are not inventoriable and are charged against revenue
immediately.
3. According to Behavior
a. Variable costs – vary in total in proportion to changes in activity
b. Fixed Costs – remain constant regardless of the level of activity
c. Mixed Costs – vary in total but not in proportion to changes in activity
4. According to Decision Making
a. Relevant Cost - cost that will differ under alternative courses of action
b. Standard Cost - predetermined cost based on some reasonable basis such
as past experiences, budgeted amounts, industry standards, etc.
c. Opportunity cost - benefit forgone or given up when an alternative is
chosen over the other/s.
d. Sunk costs - historical costs that will not make any difference in making a
decision
Different Department
Procurement/Purchasing – buys supplies from the supplier
Production Department - responsible for the manufacture of goods
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Warehousing – Stores goods
Selling – sells the goods
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PURCHASING OF MATERIALS
Purchasing department - the primary buyer of goods and services in a private sector
company.
Receiving department – in charged with the inspection of incoming shipments and
verification of the quantities received on order
Storeroom (stockroom) – responsible for protecting materials against physical
deterioration and ensuring the stocks are properly issued.
Accounting department – records all the transactions in the accounts after documentary
evidences have been supplied by other departments.
Treasury Department – pays all the invoices after approval by the accounting
department.
Purchasing Agent – buy products and services for organizations to use.
Reorder Point – when to buy
Lead time – length of time it takes for the material to be delivered from the supplier after
an order has been placed.
Safety Stock – minimum level of materials that should be maintained to ensure that the
company does not run out of materials.
Economic Order Quantity – how many to buy, the formula to calculate the economic
order quantity (EOQ) is the square root of [(2 times the annual demand in units
times the incremental cost to process an order) divided by (the incremental annual cost
to carry one unit in inventory)].
Purchase Requisition - is a document used as part of the accounting process to initiate
a merchandise or supply purchase.
Purchase Order is a commercial document and first official offer issued by a buyer to a
seller indicating types, quantities, and agreed prices for products or services.
Receiving Report - is used to document the contents of a delivery to a business.
Control Procedures
1. Order Cycling – materials are reviewed on a regular cycle, and orders are
placed to maintain a desired inventory level.
2. Min-max method – Minimum and maximum inventory levels are determined,
reordering is done when the minimum level is reached.
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3. Two-bin Method – prepares two bins, when the first bin is empty, an order is
placed and the second bin is used until the order is received.
4. ABC plan – A – most expensive items, B – moderately priced items, C –
inexpensive items
5. Automatic order system – order id automatically placed when the inventory
reaches predetermined level.
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STORING AND ISSUING MATERIALS

Materials Requisition - is a source document that the production department uses to
request materials for manufacturing process.
Materials ledger - card is a manual record of the units of raw materials flowing through
a warehouse.
Materials Requisition Journal – special journal for recording the requisition of materials.
Job cost sheet - is a compilation of the actual costs of a job. This is typically
formatted and distributed for consumption by the management team, to see if a job
was correctly bid. The sheet is usually completed after a job has been closed, though
it can be compiled on a concurrent basis.
Departmental Overhead sheet – where manufacturing overheads are charged.
Returned Materials Report – when materials are returned to storeroom as a result
of requisitioning too many materials.
Return Shipping Order – prepared by purchasing agent when materials are returned
to supplier.
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CONTROLLING AND COSTING MATERIALS INVENTORY
COSTING PROBLEMS
1. What would be the value of units issued?
2. What would be the value of units on hand?
HIGHER INVENTORY= LOWER COST OF GOOD SOLD= GREATER PROFITS OR

SMALLER LOSSES
LOWER INVENTORY= HIGHER COST OF GOOD SOLD= SMALLER PROFITS AND
GREATER LOSSES
Specific identification of cost- means specific costs are attributed to identify items of
inventory.
Perpetual inventory system- when there are large numbers of items of inventory that
are usually interchangeable. Under this system, unit cost and total cost should be
computed each time materials are received or issued. The primary basis of valuation is
cost.
INVENTORY COSTING METHOD

1. First in, first out (FIFO) method. The first materials purchased (the oldest or the
earliest) are the first materials to be used. The materials on hand are therefore assumed
to be the last one purchased.
FIFO is easier and less costly to use because FIFO requires less recordkeeping than the
LIFO; that it reflects the actual physical flow of goods; and that inventory shown in the
balance sheet is more relevant because it includes the most recent costs and is an
estimation of replacement cost.
FIFO does not match current cost against current sales revenue, because the ending
inventory is priced at the most recent cost, resulting the cost of goods sold to be priced
at the oldest costs this can lead to distortions of net income in period of rising prices since
the cost of goods sold is understated.
2. Last in, First out (LIFO) method. The last materials purchased (the recent) are the
first materials to be used. Then the materials on hand are assumed to be the first one
purchased.
Under LIFO, the current costs are matched against current revenue, because the cost of
goods sold contains the most recent cost. Therefore, the income figure is a better
measure contains of the current earnings.
Some critics oppose the use of LIFO because it is usually represents an unrealistic
physical flow of goods. However, as stated earlier the physical flow of goods does not
have to correspond to the inventory costing method used.
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3. The moving average method. All costs are commingled and an average cost is
computed with each new purchase and assigned to materials issued on hand.
Under Moving Average Method, the units and cost of each new purchase are added to
the balances already on hand when the purchase is received, and new average cost per
unit is computed. When materials are issued, they are charged out at this average cost
until another purchase is received or a return is recorded, when a new average cost per
unit is computed.
ADVANTAGE: It is relatively simple to apply, especially with computers. It produces
inventory valuation that approximates current value if there is a rapid turnover of
inventory.
ARGUMENT: There may be a considerable lag between the current cost and inventory
valuation since the average unit cost involves early purchase.
II. VALUATION OF COST OR NET REALIZABLE VALUE, WHICHEVER IS LOWER

Inventories shall be measured at the lower of cost and net realizable value. Net
realizable value (NRV) refers to the estimated selling price in the ordinary course of
business less the estimated cost of completion and the estimated cost necessary to make
the sale. When the net realizable value has declined below the original cost, inventory
should be valued at net realizable value instead of cost. The rule of cost or net realizable
value, whichever is lower may be applied as follows:
Lower of Cost or Net Realizable Value by Item
The basis of valuation (the lower figure) is identified for each item and is multiplied by the
quantity on hand to obtain the value of LCNRV.
Lower of Total Cost or Total NRV
The lower of this total is then used as the inventory valuation.
III. APPLICATION OF THE RULE OF COST OR NET REALIZABLE VALUE,

WHICHEVER IS LOWER
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FIRST APPROACH- Each materials ledger card is adjusted according to the lower of cost
or NRV. The cars are then totaled to determine the new valuation.
The loss is recorded in general journal as:

Dr. Loss on Inventory Write-down
Cr. Materials
This method results in an increase on the cost of goods sold for the difference between
the cost and the NRV and does not show the inventory loss as a separate item on the
income statement.
SECOND APPROACH- inventory is recorded at cost and any loss on inventory write-
down is accounted for separately by:
Dr. Loss on Inventory Write-down

Cr. Allowance for Inventory Write-down
In subsequent years, the allowance account is adjusted upward or downward depending

on the difference between the cost and net realizable value of inventory at year-end.
Preferably, 2nd approach is used in order that the effects of write-down and reversal of
write-down can be clearly identified.
At the end of the later periods, the allowance account will again be adjusted to reflect the
inventory value at the time.
*If the net realizable value exceeds the cost of inventory, the valuation account is no
longer necessary. An entry would be made to close the Allowance for Inventory Write-
down by:
Dr. Allowance for Inventory Write-down

Cr. Recovery from inventory Write-down
The inventory should be shown in SFP at Cost.
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LABOR ACCOUNTING- CONTROL AND COSTING
Labor cost is one of the major elements in a manufacturing operation. It includes keeping
of records of time worked by employees, computing and recording their earnings, and
charging costs to production.
Part 1: TIMEKEEPING PROCEDURES

Timekeeping
(1) accumulation of the total number of hours worked by each employee so that their
earnings can be computed
(2) determination how the labor hours were spent so that distribution can be made in the
cost records.
TIME RECORDS- basis for calculating gross wages of employees. Appropriate
deductions are computed to determine employee’s net pay and to compute employer’s
payroll taxes.
• Time cards. The 1st step in the timekeeping process is to gather data on how
many hours have been worked by each hourly rate employee.
• If the time card system is used, all time cards are collected from the rack at the
end of the week and sent to the timekeeping department.
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• The payroll clerk then computes the total hours worked by each worker and it is
transferred from time cards to payroll register (payroll sheet).
• After all the hours worked by each employee have been entered in the payroll
register, regular earnings, overtime premium earnings, and total earnings are
computed and recorded.
Weekly Factory Payroll Register

Compute for the Gross earnings of each employee, deductions are made and net pay for
each employee is determined.
Semimonthly Factory Payroll
Used to record salaries of some factory supervisors and managers (earn fixed monthly
salaries payable in 2 installments on the 15th and last day of the month.)
DEDUCTIONS FROM EMPLOYEE’S EARNINGS

a. Income taxes. Employer (collecting agent of government) must withhold income taxes
from the employee’s salaries and wages. The amount withheld is in accordance with a
table issued by BIR.
b. SSS Contributions. the amount deducted is for the protection of the employees and
their families in cases of disability, sickness, old age and death. Employer must also pay
his corresponding share.
c. Phil. Health Contributions. automatically deducted from employees who are
members of SSS. it is to provide the covered employee adequate health insurance.
Employer and employees pay equal amounts monthly based on employee’s salary.
d. PAG-IBIG fund. A member-employee is deducted a certain % of his monthly basic
salary. The employer also contributes an equivalent share which is remitted monthly
together with the employee’s share.
e. Employer’s Contributions. The employer has a corresponding share in the
contributions to the aforementioned contributions. In addition, he is obligated to contribute
Employee’s Compensation Commission (ECC) for its covered employee’s compensation
and gov. insurance, depending upon the specified compensation paid to each employee
every month. These contributions are expenses of the company.
Recording Payroll from the Payroll Register

At the end of the payroll period, the total gross earnings and the totals of each of the
various deductions are posted directly from the payroll register to the general ledger
accounts.
Entry:
Factory Payroll xxx
Withholding Tax Payable xxx
SSS Contributions Payable xxx
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Phil. Health Contributions Payable xxx
Pag-ibig Contribution Payable xxx
Payroll Payable xxx
To record Payroll.
PAYING PAYROLL
• Companies use special bank account for payroll payments.
• Payroll clerk. Prepares a voucher for the net amount of the payroll which is
forwarded to the voucher clerk, who records it in a voucher register.
• Voucher then goes to the treasurer of the cash department, who issues a check in
regular bank account for the amount of the voucher and enters it in a check
register.
• This check is deposited to the special payroll bank account.
• The Payroll liabilities are paid with checks drawn on the regular bank account.
ENTRIES:
Dr. Payroll Payable
Cr. Vouchers Payable
Dr. Vouchers Payable

Cr. Cash in Bank
To record payment of factory payroll
CERTIFICATE OF COMPENSATION- TAX WITHHELD

The employer computes the gross wages and the related tax withheld for each employee,
which are taken from the payroll register. It is prepared in three copies. One copy is given
to each employee. One copy is submitted to the BIR and the last copy is retained by the
employer.
PART II. CHARGING LABOR COSTS INTO PRODUCTION

Labor cost are to be allocated between DIRECT LABOR (charged to WIP) and
INDIRECT LABOR cost (charged to Manufacturing Overhead Control).
TIME TICKETS (JOB TIME CARDS)

To facilitate the allocation of labor costs between DL and IL, it is prepared by each
employee and it is used to show how time was used in specific jobs. Both direct and
indirect workers paid on hourly wage rate (weekly payroll) are required to prepare daily
time tickets indicating their activities.
Note: workers receiving fixed monthly salary (semi-monthly payroll) are not required to
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prepare time tickets (classified as indirect labor). All the data in time tickets, except for
the written description, are entered in the company’s computer. The computer is
programmed to process the data and generate on a weekly basis, a summary of time
tickets.
SUMMARY OF TIME TICKETS is prepared to show the DL and IL incurred in each job
as well as the indirect labor. Postings are made from this summary to the job cost sheet
(for direct labor) and departmental overhead analysis sheets (for indirect labor).
SEMIMONTHLY PAYROLL
Their earnings are classified as Indirect labor and entered in the Departmental Overhead
Analysis Sheet/
UNEARNED WAGES
Labor costs that have been incurred since the last payroll date but have not yet been
paid. This labor costs are to be accrued, so that production is charged with all labor costs
in the month in which they are incurred.
Recording labor cost

Labor costs are transferred to production by the following journal entry in the Journal
Entry:
WIP
Manufacturing Overhead Control
Factory Payroll
To charge labor costs to production for the month
EMPLOYER’S CONTRIBUTION
• Contributions of the employer relating to factory workers are charged to
Manufacturing Overhead Control account.
• Contributions relating to other employees are charged to expense.
Employer’s Payroll Contributions are usually accrued as wages are earned.
LABOR- RELATED COST

Labor Costs comprises not only the wages paid to employees but also expenditures made
by the employer on behalf of the employees, these expenditures are called Fringe
Benefits.
• Example of this are sick pay, vacation and holiday day, health insurance, pension
payments and hospitalization benefits and most companies charged these costs
to Manufacturing Overhead Control account.
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LABOR- RELATED DEDUCTIONS

Example: Union dues, insurance and payroll advances
OVERTIME PREMIUM
Example: Assume that an employee is required to work beyond eight hours on an ordinary
working day. The employee is to be paid and additional compensation for overtime work
in an amount equal to his regular rate plus fifty percent (50%) thereof. If the employee is
paid P 30 per hour for regular working days, his overtime hourly rate is computed as
follows:
Regular hourly rate P 30.00

Overtime premium pay rate (50% of regular rate) 15.00
Overtime hourly rate P 45.00
If the employee worked for 12 hours in an ordinary day, his gross earnings for the day is
computed as follows:
Earnings at regular rate (8 hrs. x P30) P 240.00

Overtime (4 hrs. x P30) 120.00
Overtime premium (4hrs. x P15) 60.00
Gross earnings P 420.00
The overtime premium maybe charged to:

Specific job. If the job is taken as a rush order with knowledge that overtime will be
necessary, the entry would be:
Dr. WIP
Cr. Factory Payroll
Manufacturing Overhead Control. If the job is a regular order which cannot be

completed in the regular working hours, the overtime premium should be charged to
Manufacturing Overhead Control accounts.
Dr. WIP (12 hours’ x P30) 360

Manufacturing Overhead Control 60
Factory Payroll 420
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MANUFACTURING OVERHEAD ACCOUNTING: ACTUAL AND APPLIED
Manufacturing overhead or factory overhead, factory expenses and indirect

manufacturing costs includes all factory costs other than direct materials and direct
labor.
Types of Manufacturing Overhead Costs
Indirect Materials. Ex. Factory supplies, lubricants, cleaning supplies, small tools or
other items used in small amounts in manufacturing.
Indirect labor. Ex. Factory supervisors, factory clerical workers, Factory Payroll clerks,
receiving clerk, storeroom clerks and supervisors, purchasing clerks and overtime
premium.
Other manufacturing overhead. Ex. Employee fringe benefits, employer contributions,
factory utilities, rent of factory building, warehouse and equipment, depreciation of factory
building and equipment, spoiled goods and etc.
CHARGING MANUFACTURING OVERHEAD TO PRODUCTION
Actual costing manufacturing overhead costs is charged to production at an arbitrary

manufacturing overhead costs using arbitrary overhead application rate determined at the
end of the period. Actual costing is not widely used in practice.
To avoid delay in the costing of jobs as experienced in actual costing, most companies
use Normal Costing as it uses a predetermined overhead rate to allocate
manufacturing overhead costs to jobs. It is used to estimate the manufacturing overhead
costs.
Formula: Budgeted manufacturing Overhead divided by (/) estimated amounts or

quantity of (Direct labor costs or hours, machine hours or other bases for the same
activity.
Predetermined rate = Budgeted manufacturing Overhead

Estimated amounts or quantity of
(Direct labor costs or hours, machine hours or other bases for the same activity)
Overhead bases:
• Direct Labor
• Direct Labor Cost
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• Direct material Costs
• Machine hours
• Units of Production
FORMULAS
a. Direct Labor Costs Basis
This method is widely used because it is simple and easy to use.
Estimated Manufacturing overhead Costs = % of Direct Labor Cost
Estimated Direct labor Costs
b. Direct Labor Hours Basis
It assumes that overhead cost tend to vary with the number of hours of direct labor used
Estimated Manufacturing overhead Costs = Rate per Direct Labor Hour
Estimated Direct labor Hours
c. Direct material Cost Basis
Estimated Manufacturing overhead Costs = % of Material Costs
Estimated Direct material costs
d. Machine Hours Basis
Estimated Manufacturing overhead Costs = Rate per Machine Hour
Estimated Direct labor Hours
e. Units of Production Basis
Estimated Manufacturing overhead Costs = Overhead cost per unit of production
Estimated Units of Production
Recording Applied Manufacturing Overhead Costs

At the end of the month, entries are made to record the estimated manufacturing
overhead to be charged to production. The amount for this entry is obtained by totaling
the overhead entries on the job cost sheets during the month.
Dr. Work in process

Cr. Manufacturing Overhead Control
NOTE: The WIP account is not to be debited for any of the actual manufacturing overhead
costs.
Recording Actual Manufacturing Overhead Costs

The actual manufacturing overhead costs is recorded by a debit to manufacturing
overhead control account kept in the general ledger.
OVERAPPLIED OR UNDERAPPLIED OVERHEAD

Results if the actual overhead is not the same with the applied overhead:
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Overapplied Overhead (credit in Manufacturing Overhead Control) results when product
costs are overstated because the actual overhead costs were lower than applied
overhead.
Underapplied Overhead (debit in Manufacturing Overhead Control) results when
product costs are understated because the actual overhead costs were higher than
applied overhead.
At the end of the month the balance of the Manufacturing Overhead Control account is
closed to Overapplied or Underapplied Manufacturing Overhead account in the general
ledger.
Disposition of Overapplied or Underapplied Manufacturing Overhead

At the end of the year, Overapplied or Underapplied Manufacturing Overhead account
must be closed. The disposition of the overapplied or underapplied overhead will depend
on the materiality of the amount.
Assumption 1:
The overapplied or underapplied overhead should be allocated proportionately to all
goods that have been worked on during the year if the amount is material.
Assume that the year end balances of inventories and cost of goods sold were as follows:
Assumption 2:
If the amount is immaterial, it is customary to close underapplied or overapplied overhead
costs directly to the Cost of Goods Sold account. In the example above, the entry to close
the underapplied overhead of ₱100,000 is as follows:
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Cost of Goods Sold 100,000
Underapplied Manufacturing Overhead 100,000
To close underapplied manufacturing overhead at end of the year.
FINANCIAL STATEMENTS PRESENTATION
Statement of Financial Position (SFP)

Underapplied manufacturing overhead is treated as a deferred charge and shown under
Prepaid Expenses in the interim statement of FP. On the other hand, overapplied
manufacturing overhead is shown in the interim statement of FP as other liabilities. At the
end of the year, any balance of underapplied or overapplied manufacturing overhead is
close to Cost of Goods Sold. Thus, the balance will not appear on the end-of-year
statement of FP.
Statement of Comprehensive Income (OCI)

The overapplied or underapplied overhead is included in the Cost of Goods Sold section
of the yearly statement of CI. If overhead has been underapplied, less overhead was
charged to production than what was actually incurred, resulting in the understatement of
the Cost of Goods Sold. Therefore, the amount of the understated overhead is added to
Cost of Goods Sold. If overhead has been overapplied, more overhead was charged to
production than was incurred, resulting in an overstatement of Cost of Goods Sold.
A. Computation for the predetermined rate

Predetermined rate = Budgeted manufacturing Overhead
Estimated amounts or quantity of
(Direct labor costs or hours, machine hours or other bases for the same activity)
A.1 Computation for the predetermined overhead rate for variable and fixed.
Fixed overhead rate = fixed manufacturing overhead / budgeted hours
Variable overhead rate = variable manufacturing overhead / budgeted hours
B. Computation for the over or underapplied overhead.
Predetermined rate x actual hours for the year = over or underapplied overhead
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C. How to compute for the fixed volume variance and spending variance?
SPENDING VARIANCE-controllable variance

VOLUME VARIANCE-capacity variance
What is the total variance?
Spending variance xx
Less: Volume variance xx
Net variance xx
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MANUFACTURING OVERHEAD- DEPARTMENTALIZATION

When a manufacturing firm has several departments that incur overhead costs relating
to different activity levels, departmental overhead application rates are applicable.
Departmentalization requires the use of different overhead rates for applying
manufacturing overhead to the different departments in a factory operation.
In departmentalization, manufacturing overhead must also be estimated except that it
is now done by department.
Classification of Departments
Producing Departments-directly engaged in the manufacturing activities of a firm.
Examples: Assembly, Finishing, and Packaging Departments
Service Departments-assist indirectly by rendering services to producing departments.
Examples: Purchasing, Medical and Maintenance Departments)
Procedures for Departmentalization
1. Calculate the departmental predetermined overhead application rates.
1.1 Prepare a budget of total direct manufacturing overhead costs of producing
departments and total direct expenses of services departments expected at the
selected activity levels.
1.2 To determine the distribution bases in allocating the indirect manufacturing
overhead costs and service department costs, conduct a factory survey.
1.3 Enter budgeted costs that can be traced directly to specific departments as
direct departmental costs.
1.4 Allocate budgeted manufacturing overhead costs that cannot be traced to
specific departments according to the bases selected.
1.5 Distribute budgeted service costs to producing departments
1.6 Divide the total budgeted overhead costs charge to each producing department
by the base selected.
2. Apply the predetermined overhead rates to production on a department basis.
3. Record actual manufacturing overhead costs by departments in the Department
Overhead Analysis Sheet
Direct Departmental Overhead Costs are those that can be easily traced to specific
departments.
Examples:
Repairs and Maintenance-traced to maintenance department
Indirect Labor- traced to payroll summaries of a department
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Indirect Material- traced through stores requisitions of a department
Depreciation of Equipment- traced to department using the equipment.
Allocating Indirect Departmental Cost
There must be a basis for allocation.
INDIRECT DEPARTMENT COSTS DISTRIBUTION/ALLOCATION BASES
Factory Rent Square Footage
Depreciation Factory Building
Fire insurance on building Square Footage
Repairs and Maintenance Square Footage
Telephone Number of employees/Number of telephones
Light Kilowatt hour
Freight-in Materials used
Allocating Service Department Costs

Service Department Costs are reallocated to producing departments because these
costs cannot be directly identified to the products manufactured.
There must also be a reasonable base to be used in charging the cost of operating service
department to the producing department being served.
SERVICE DEPARTMENTS ALLOCATION BASES
Procurement Number of orders or Cost of Materials
Receiving Cost of Materials/Number of orders/Number of units
Storeroom Cost of Materials/Number of requisitions filled; number
of units handled
Factory office Number of employees/Labor hours/Labor Costs
Personnel Number of employees/labor hours/labor cost
Building Maintenance Floor space occupied
Power plant Kilowatt hours of power usage
Methods of Reallocating Service Department Costs to Producing Department

1. Direct Method-costs of each service department are allocated only to producing
departments’ costs.
2. Step Method-allocates service department costs to all service departments as well
as producing departments.
1. Select the service department with the highest cost among the others and allocate it to the producing
departments and other service departments based on a relative level of the apportionment base.
2. Allocate the cost of the remaining service department in the same manner.
3. Do not allocate cost of service departments to those service departments who’ve already been allocated.
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3. Reciprocal Method-service department costs and service department reciprocal
service relationships are described by an algebraic equation. Then, the equations
are solved simultaneously providing a more precise allocation of costs to producing
departments for it considers the mutual services provided among the service
departments.
Recording Applied Departmental Manufacturing Overhead in the Job Cost Sheet
Applied Manufacturing Overhead=Actual Base used x Overhead Application Rate of
the Department.
Entries:
Work in Process xx
Applied Manufacturing Overhead-Dept. A xx
Applied Manufacturing Overhead-Dept. B xx
Recording Actual Departmental Manufacturing Overhead
Manufacturing Overhead-Dept. A xx
Manufacturing Overhead-Dept. B xx
Manufacturing Overhead Control xx
Comparing the Actual and the Applied Manufacturing Overhead

Actual>Applied=Underapplied Manufacturing Overhead
Actual<Applied=Overapplied Manufacturing Overhead
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ACTIVITY-BASED COSTING
Traditional Costing (Single Indirect-Cost Pool System)
Cost assigned to products or services are estimated. Predetermined Overhead Rate is
used to estimate overhead. That is, direct labor cost, direct labor hours or machine hours
were the relevant activity base used in the allocation of all overhead costs.
As the variety of products or services increase, the use of a simple (traditional) costing
method of accumulating cost may sometimes result in inaccuracy or misleading cost.
There will be a need to adopt new costing method such as the Activity-Based Costing.
Activity-Based Costing measures variety of different factory activities and their and their
relationship to overhead costs.
Activity-Based Costing is designed to take into account all the different costs that
compose a company’s total overhead and distribute these costs to products: product
consume activities; activities consume resources.
Activity-Based Costing identify the activities that has cause the overhead to be incurred
and group them into activity centers or activity cost pools.
Examples are ordering materials, inspection, setting up machines, and assembling.
The overhead costs that are being allocated to the different activity centers came from
the cost drivers or cost pools. They are organized by categories rather than by
departments. Examples: number of purchase orders, number of setups, or batch-level
activities.
The number of drivers depends on the company and the product the manufacturing firm
produces.
ACTIVITY CENTERS COST DRIVER
Ordering and Receiving Materials Number of Purchase Orders
Setting Up Machines Number of Setups
Machining Machine Hours
Assembling Number of Parts
Painting Number of Parts
Supervising Direct Labor Hours
Unit Cost Computation

Example: JPIA Company produces two products, Product XX and product YY. Additional
data are as follows:
Product XX-high-volume item totaling 50,000 units annually
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Product YY-low-volume item totaling 10,000 units annually
Both products require one hour of direct labor to complete

Estimated Manufacturing Overhead Cost= P3,600,000
Direct Materials Cost per unit:
Product XX= P80
Product YY= P60
Direct Labor Cost per unit:

Product XX= P24
Product YY= P24
Traditional Costing (Illustration)

Number of units per year, Product XX 50,000
Number of units per year, Product YY 10,000
Annual Direct Labor hours 60,000
Estimated Manufacturing Overhead P3,600,000
Divided by Annual Direct Labor Hours 60,000
Predetermined Overhead Rate per DL hour P 60
MANUFACTURING COSTS XX YY
Direct Materials P80 P60
Direct Labor 24 24
Manufacturing Overhead 60 60
Total Unit Cost P164 P144
Activity-Based Costing (Illustration)

1. Identify the activities that pertain to the manufacture of specific products and
allocate manufacturing overhead costs to activity centers.
Example: JPIA Company identified three activity centers: setting up machines,

machining and inspecting.
Estimated Overhead Costs are as follows:

Activity Centers Estimated Overhead
Setting up machines P1,200,000
Machining 2,000,000
Inspecting 400,000
Total Estimated Overhead P3,600,0000
24 | P a g e
2. Identify the cost drivers that accurately measure each activity’s contribution to the
finished products and compute the activity-based overhead rate.
Computing for the Activity-based overhead rate
Estimated Overhead per Activity xx
Divided by Expected Use of Cost Drivers per Activity xx
Activity-Based Overhead Rate xx
Example:
ACTIVITY CENTERS COST DRIVERS EXPECTED USE OF COST DRIVERS PER ACTIVITY
Setting up machines Number of setups 3,000 setups

Machining Machine Hours 100,000 machine hours
Inspecting Number of Inspections 4,000 inspections
Computation:
Setting up machines
Estimated Overhead P1,200,000
Divided by Expected Use of Cost Drivers 3,000
Activity-Based Overhead Rate per set up P 400
Machining
Estimated Overhead P2,000,000
Activity-Based Overhead Rate per machine hour P 20
Inspecting
Estimated Overhead P400,000
Activity-Based Overhead Rate per inspection P 100
3. Allocate Manufacturing Overhead Costs for each activity centers to products using
the activity-based overhead rates.
25 | P a g e
First: Determine the expected use of cost drivers for each product.
ACTIVITY CENTERS COST DRIVERS EXPECTED USE OF COST EXPECTED USE OF COST
DRIVERS PER ACTIVITY DRIVERS PER PRODUCT
Setting up Machines Number of Setups 3,000 set ups 1,000 2,000
Machining Machine Hours 100,000 MH 60,000 40,000
Inspecting Number of Inspections 4,000 inspections 1,000 3,000
Second: Allocate the Overhead Costs per Product

Computing the Allocated Overhead Costs
Expected Use of Cost drivers per Product xx
Multiplied by Activity-Based Overhead Rates xx
Allocated Overhead Costs xx
Product XX
Activity Centers Expected Use of Activity-Based Allocated Overhead
Cost drivers per Overhead Rates Costs
Product
Setting up Machines 1,000 P400 P 400,000
Machining 60,000 P20 1,200,000
Inspecting 1,000 P100 100,000
Total Allocated Costs P1,700,000

Divided by Number of Units Produced 50,000
Overhead Cost per Unit P 34
Product YY
Activity Centers Expected Use Activity-Based Allocated Overhead
of Cost drivers Overhead Rates Costs
per Product
Setting up Machines 2,000 P400 P800,000
Machining 40,000 P20 800,000
Inspecting 3,000 P100 300,000

Divided by Number of Units Produced 10,000
Overhead Cost per Unit P 190
26 | P a g e
Traditional Costing vs. Activity-Based Costing (Unit Cost)
Product XX
Manufacturing Costs Traditional Costing ABC
Direct Materials P80 P 80
Direct Labor 24 24
Product YY
Manufacturing Costs Traditional Costing ABC
Direct Materials P60 P60
Direct Labor 24 24
Advantages of Activity-Based Costing

1. It leads to more cost pools in allocating overhead costs to products.
2. It leads to enhanced control overhead costs.
3. It leads to better management decisions.
Disadvantages of Activity-Based Costing
1. Can be expensive to use
2. Some arbitrary allocations continue (some overhead costs remain to be allocated
by means of some arbitrary volume-based cost driver such as direct labor or
machine hours.
27 | P a g e
THE COMPLETION OF THE COST CYCLE AND ACCOUNTING FOR PRODUCTION LOSSES
To complete the cost cycle, the cost of completed jobs is transferred to the Finished
Goods Inventory from the Work in Process Inventory Account.
When goods are sold, they are shipped to the customers from the warehouse.
Journal Entries to record jobs completed:
Finished Goods Inventory xx
Work in Process Inventory xx
Journal Entries to record sales of finished goods (Sales from Stock)

Accounts Receivable xx
Sales xx
Cost of Goods Sold xx

Finished Goods Inventory xx
Accounting for Production Losses (Job Order Costing System)

Common Production Losses:
1. Cost of Scrap Materials
2. Spoiled Goods (Spoilage)
3. Reworking Defective Goods
Accounting for Scrap
Scrap is the residue of manufacturing process.
Scraps are materials left over when making a product. They are stored until it is sold to
scrap dealers.
Wastes are raw materials left over from a production process. There’s no further use in
it, not salable and must be discarded
Example:
Rabago Company accumulates sawdust and that the scrap from a job has a net sales
value of P2,000.
Sale of Scrap
Journal Entries:
1. When the scrap is sold and its value is immaterial:
28 | P a g e
Cash or Accounts Receivable P2,000
Scrap Revenue P2,000
Note: No entry is made until it is sold

2. When the value is material and the scrap is sold quickly after it is produced, the
treatment depends on whether the scrap is attributable to a specific job or common
to all jobs.
Attributable to Specific Job
Cash/Accounts Receivable 2,000
Work in Process Inventory 2,000
Reason: When sales is attributable to a specific job, proceeds from the sales are deducted
from the cost of materials that have been charged to that job. That’s the reason why we
credit Work in Process Inventory.
Work in Process Inventory is recorded in the Job Cost Sheet.
Common to All Jobs
Manufacturing Overhead Control 2,000
We credit Manufacturing Overhead Control to reduce the cost of the product. It is recorded
in the Overhead Analysis Sheet.
Scrap at the Time of Its Production
Sometimes, the value of scrap is material and the time between storing it and selling or
reusing it can be long.
In this instance, the company inventories scrap at a conservative estimate of its realizable
value so that the production costs and related scrap revenues are recognize in the same
accounting period.
Note: the amount of scrap is recorded to Scrap Inventory when the value of the scrap is
high.
At the time of its production, scrap materials returned to storeroom are recorded as
follows:
29 | P a g e
Attributable to a specific Job
Scrap Inventory 2,000
Common to All Jobs

When sold for the value at which it is recorded, the journal entry will be:
What if the scrap is sold for more or less than the value at which it is recorded?
Continuing with our example but instead the scrap is sold at P1,500, journal entry would
be:
Work in Process Inventory 500
Note: Any difference between the sales price and the recorded value is an adjustment to
the account that was credited (either Work in Process or Manufacturing Overhead
Control).
When the scrap is reused and it is common to all jobs:
Raw Materials Inventory 2,000

Accounting for Spoiled Goods

Spoiled Goods are goods that have been damaged through imperfect machining or
processing.
Spoiled Goods cannot be corrected for it is not possible or technical to correct them
Spoilage vs. Scrap
Spoilage occurs in batches or unusual cases
Scrap is unavoidable and recurs constantly
30 | P a g e
Example:
Job 888 calls for the production of 200 painted office tables. 10 tables have been spoiled
because the lumber used was improperly cured. These spoiled tables may be sold as
seconds at its net disposable value of P3,000 each. Costs accumulated when they were
put into production are as follows:
Materials P456,000
Direct Labor 240,000
Applied Overhead 360,000
Total Manufacturing Cost P1,056,000
Total Manufacturing Cost P1,056,000

Divided by Units produced 200
Unit Cost P5,280
Journal Entries:
The entries to record the above transaction depends on whether the spoilage is due to
customers’ specification or due to internal failure.
Attributable to Specific Job (Due to Customers’ Specification)
Loss on spoiled goods is left as part of the total cost of a specific job.
Spoiled Goods Inventory P30,000

Work in Process Inventory P30,000
To remove estimated disposal value of spoiled goods
from Work in Process Inventory (10 x P3,000).
Finished Goods Inventory 1,026,000

Work in Process Inventory 1,026,000
To record cost of the 90 completed tables.
(P1,056,000-P30,000)
Say Job 888 is sold with a 30% mark up on cost:

Cash/Accounts Receivable 1,333,800
Sales 1,333,800
(P1,026,000 x 130%)
Cost of Goods Sold 1,026,000

31 | P a g e
When the spoiled goods are subsequently sold:
Spoiled Goods Inventory 30,000
Attributable to Specific Job (Due to Internal Failure)

Spreads the cost over all jobs completed during the period.
Loss on the estimated disposal or sales value of the spoiled goods is charged to
Manufacturing Overhead Control.
Spoiled Goods Inventory 30,000
To remove estimated disposal value of spoiled goods
from Work in Process Inventory (10 x P3,000).
To record cost of the 90 completed tables.
(P1,056,000-P30,000)
Say that the good units are delivered to customers at 130% of cost:
Cash/Accounts Receivable 1,304,160
Sales 1,304,160
(P1,026,000 x 130%)
Cost of Goods Sold 1,003,200

Note: When spoilage is result of internal failure, sales and profits are lesser than that of
resulting from due to customers’ specification.
Illustration:
SPOILAGE COST CHARGED TO
Particular Job (888) All Production
Total Cost of 200 tables P1,056,000 P1,056,000
Less: Scrap Value of Job 888 30,000
All production (5,280x10) 52,800
Cost of good tables P1,026,000 P1,003,200
Divided by number of good tables 190 190
Cost of Good tables P5,400 P5,280
32 | P a g e
Accounting for Defective Goods
Defective Goods are units of production that fail to meet production standards but can
be brought up to the said standard by adding more materials, labor, and overhead.
Rework Costs are additional cost required to bring these goods up to standard.
Assume that in our above illustration, ten spoiled tables are reworked. The additional
costs of reworking tables are as follows:
Direct Materials= P2,000
Direct Labor= P3,000
Manufacturing Overhead= P4,500
Journal Entries:
Before considering rework costs:
Work in Process Inventory P52,800
Raw Materials Inventory P22,800
Payroll 12,000
Applied Manufacturing Overhead 18,000
Rework Costs Charged to Specific Job

Factory Payroll 3,000
Good tables reworked:

Finished Goods Inventory 62,300
Rework Costs Charged to All Jobs

Factory Payroll 3,000
Good tables reworked:

33 | P a g e
REWORK COST CHARGED TO
Particular Job (888) All Production
Total Cost of 200 tables P1,056,000 P1,056,000

Add Rework Costs 9,500 _________
Cost of good tables P1,065,500 P1,056,000
Divided by number of good tables 200 200
Cost of Good tables P 5,237.50 P 5,280
Note: Rework Costs that are identifiable to a specific job are added to the costs of that
job.

JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS OFFICERS

F.Y. 2019-2020
President: GABRIEL DAVE AMOS

Executive Secretary: JOYCE ANNE ROSETA
Vice President for Academics: JUSTIN RABAGO
Vice President for Non-Academics: JOYCE ANNE CLEOFE
Vice President for Membership: SPENCER KIM CHICANO
Vice President for Finance & Logistics: CARL JEROME CHING
Vice President for Audit: JANE BOBADILLA
Vice President for Internal Linkages: LOWELA BARBACHANO
Vice President for External Linkages: HANNAH APALE TUBLE
Vice President for Communication: ERIKA MAGTIBAY
Adviser: PROF. ROWELL C. MARASIGAN, CPA, MBA
Prepared by:
SARAH NICOLE SANTOS

BRIGITTE STACY EVANGELISTA
JELYN NICOLE MIÑA
JOSHUA PIROTE
DONNA MECHELLE TANAEL
FRITZ REIZEN LOPEZ
THEA SOFIA BARABICHO
JOHN PATRICK ABRAHAM BENTULAN
Academic Enhancement Committees
JUSTIN RABAGO
Vice President for Academics
34 | P a g e

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RIZAL TECHNOLOGICAL UNIVERSITY-BONI

COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY

STORING AND ISSUING MATERIALS

CONTROLLING AND COSTING MATERIALS INVENTORY

HIGHER INVENTORY= LOWER COST OF GOOD SOLD= GREATER PROFITS OR

INVENTORY COSTING METHOD

II. VALUATION OF COST OR NET REALIZABLE VALUE, WHICHEVER IS LOWER

Lower of Cost or Net Realizable Value by Item

Lower of Total Cost or Total NRV

The lower of this total is then used as the inventory valuation.

III. APPLICATION OF THE RULE OF COST OR NET REALIZABLE VALUE,

The loss is recorded in general journal as:

Dr. Loss on Inventory Write-down

In subsequent years, the allowance account is adjusted upward or downward depending

Dr. Allowance for Inventory Write-down

The inventory should be shown in SFP at Cost.

LABOR ACCOUNTING- CONTROL AND COSTING

Part 1: TIMEKEEPING PROCEDURES

Weekly Factory Payroll Register

DEDUCTIONS FROM EMPLOYEE’S EARNINGS

Recording Payroll from the Payroll Register

Dr. Vouchers Payable

CERTIFICATE OF COMPENSATION- TAX WITHHELD

PART II. CHARGING LABOR COSTS INTO PRODUCTION

TIME TICKETS (JOB TIME CARDS)

Recording labor cost

LABOR- RELATED COST

LABOR- RELATED DEDUCTIONS

Regular hourly rate P 30.00

Earnings at regular rate (8 hrs. x P30) P 240.00

The overtime premium maybe charged to:

Manufacturing Overhead Control. If the job is a regular order which cannot be

Dr. WIP (12 hours’ x P30) 360

MANUFACTURING OVERHEAD ACCOUNTING: ACTUAL AND APPLIED

Manufacturing overhead or factory overhead, factory expenses and indirect

Types of Manufacturing Overhead Costs

CHARGING MANUFACTURING OVERHEAD TO PRODUCTION

Actual costing manufacturing overhead costs is charged to production at an arbitrary

Formula: Budgeted manufacturing Overhead divided by (/) estimated amounts or

Predetermined rate = Budgeted manufacturing Overhead

Recording Applied Manufacturing Overhead Costs

Dr. Work in process

Recording Actual Manufacturing Overhead Costs

OVERAPPLIED OR UNDERAPPLIED OVERHEAD

Disposition of Overapplied or Underapplied Manufacturing Overhead

FINANCIAL STATEMENTS PRESENTATION

Statement of Financial Position (SFP)

Statement of Comprehensive Income (OCI)

A. Computation for the predetermined rate

SPENDING VARIANCE-controllable variance

What is the total variance?

MANUFACTURING OVERHEAD- DEPARTMENTALIZATION

Allocating Service Department Costs

Methods of Reallocating Service Department Costs to Producing Department

Comparing the Actual and the Applied Manufacturing Overhead

Unit Cost Computation

Both products require one hour of direct labor to complete

Direct Labor Cost per unit:

Traditional Costing (Illustration)

Activity-Based Costing (Illustration)

Example: JPIA Company identified three activity centers: setting up machines,

Estimated Overhead Costs are as follows:

Setting up machines Number of setups 3,000 setups