Integrated Cost Accounting System

Integrated cost accounting system is an accounting system in which the cost and
financial accounts are combined in one set of accounts. The flow of costs in
manufacturing companies will be our basis for the accounting entries of transactions.
The cost accumulation recording system is based on a system of control
accounts. A ​control account is a summary account, where entries are made from
totals of transactions for a period.For example, the balance in the overhead control
account will be supported by lots of overhead accounts (factory utilities, indirect
materials, indirect labor, machinery depreciation, etc.) which will add up to agree with
the total amount in the overhead control account. A system of control accounts enables
one to check the accuracy of the various accounting entries, since the total of all the
individual entries in the various subsidiary ledger accounts should agree with the control
account, which will have received the totals of the various transactions. The ​subsidiary
ledger​ is the file of all individual accounts supporting the total control account.

The Flow of Costs through the Accounts

Cost flow describes the way costs are accounted for from the point at which they
are incurred to the point at which they are recognized as an expense on the income
statement. We will begin with a description of exactly how the three manufacturing cost
elements - direct material, direct labor, and manufacturing overhead - flow through Work
in Process, into Finished Goods and, finally, into Cost of Goods Sold.

Accounting for Materials

The following are the documents that are prepared for every request for and
usage of raw materials:
1. Materials requisition form - is the document to be used in requesting for
materials needed in the factory. The type and quantity of materials will be
entered on this form and will be checked and signed by the manager or
supervisor of the factory.
2. Materials issuance or withdrawal form - is the form used for the release of
materials requested for use in the production. This will be prepared by the
warehouse manager and signed by the supervisor or manager upon receipt of
the requested materials. This is the basis for determining the amounts of direct
materials and indirect materials.
3. Purchase requisition form - is the request for the purchase of materials from
suppliers. When the quantity of materials stored in the warehouse or storage
facility is low or is no longer enough for production requirements, the warehouse

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 supervisor will make a request to the purchasing department to buy the
materials. Upon receipt of this document, the purchasing department will contact
at least two suppliers for the price of the materials.
4. Purchase order - is the document to be used for the purchase of materials from
a supplier. This will be submitted together with the result of canvassing of prices
from different suppliers, to the purchasing department manager for approval. The
purchase order is usually prepared in three or more copies and will be given to
the accounting and finance departments for control and monitoring.
5. Receiving report - will be prepared by the person responsible for the receipt of
materials purchased from the supplier. This will be attached to the cash or
charge invoice supporting the purchase and will be forwarded to the accounting
and finance department for processing the payment of the account to the
supplier.
6. Delivery receipt - this form is prepared for the receipt of materials ordered for
the factory when the storage and production facilities are separate from that of
the purchasing department. This is usually the case for medium-sized or big
manufacturers.

Accounting for Labor Costs

Accounting for labor costs can be divided into the following two distinct phases:
1. Computations of the gross pay for each employee and calculation of payments to
be made to employees, net of amounts of income tax withheld, SSS, Philhealth,
and Pag-ibig contributions, advances to employees, union dues and other
deductions from gross salary.
2. Allocation of labor costs to work in process inventory (direct labor) and
manufacturing overhead (indirect labor).

The human resource department of a firm is responsible for the preparation of

payroll. Time cards and other methods of recording of time spent by every employee on
their jobs are gathered by the human resource personnel. The completed payroll will
then be forwarded to the finance department for payment.
The cost accounting department is responsible for the calculations of amounts of
direct labor and indirect labor costs. The next step is to record the amounts in the
journals and ledgers.

Accounting for Manufacturing Overhead

Accounting for manufacturing overhead costs involves entering details of the
actual amount of manufacturing overhead incurred on the debit side of the factory

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overhead control account. The total amount of overhead charged to production is
recorded on the credit side of the factory overhead control account. The manufacturing
overheads are charged to production using budgeted or predetermined overhead rates.
In most cases, the actual amount of overhead incurred will not be in agreement with the
overhead applied to production. The difference represents the underapplied or
overapplied of factory overheads which is transferred to the cost of goods sold account.

Cost Accounting Cycle Journal Entries

Illustrative Problem:
Bataan Company is a manufacturer of a single product. The company’s inventory
balances were as follows at the beginning and end of the year:
Beginning Balance Ending Balance
Raw Materials P26,000 P20,000
Work in process P71,000 P53,000
Finished goods P66,000 P81,000

The company applies overhead using a predetermined overhead rate based on

machine hours. At the beginning of the year, the company estimated that it would work
44,000 machine hours and incur P176,000 in manufacturing overhead cost. The
following transactions were recorded for the year:
1. Raw materials were purchased, P459,000.
2. Raw materials were requisitioned for use in production, P465,000 (P431,000
direct and P34,000 indirect).
3. The following employee payroll costs were incurred: direct labor, P296,000;
indirect labor, P63,000; and selling and administrative salaries, P157,000.
4. Selling costs, P134,000.
5. Factory utility costs, P14,000.
6. Depreciation for the year was P119,000 of which P114,000 is related to factory
operations and P5,000 is related to selling and administrative activities.
7. Manufacturing overhead was applied to production. The actual level of activity for
the year was 47,000 machine hours.
8. Sales for the year totaled P2,287,000.

Required:
A. Prepare the journal entries for transactions 1 - 8.
B. Use T-accounts to post the journal entries.
C. Was the overhead overapplied or underapplied. By how much?
D. Prepare the schedule for Cost of Goods Manufactured for the year.

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 E. Prepare the Income Statement for the year. The company closes the overapplied
or underapplied overhead to Cost of Goods Sold.

Answer to the requirements of the Illustrative Problem

A. Journal entries:
1. Raw Materials Inventory P450,000
Cash P450,000
2. Work in Process Inventory P431,000
Factory Overhead Control 34,000
Raw Materials Inventory P465,000
3. Work in Process Inventory P296,000
Factory Overhead Control 63,000
Selling and Administrative Expenses 157,000
Cash P516,000
4. Selling and Administrative Expenses P134,000
Cash P134,000
5. Factory Overhead Control P 14,000
Cash P 14,000
6. Factory Overhead Control P114,000
Selling and Administrative Expenses 5,000
Accumulated Depreciation P119,000
7. Work in Process Inventory P188,000
Applied Factory Overhead P188,000
(P176,000/44,000 budgeted machine hours = P4 x 47,000 actual machine hours)
8. Cash P2,287,000
Sales P2,287,000

B. T-Accounts

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