III Job Order Costing

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UNIT III – JOB ORDER COSTING

Lesson 1 – Concept and application
Cost Accumulation Method:
1. Job order costing – cost is traced to individual batch, order, specific unit, lot or contract.
2. Process Costing – cost is traced to department, operation or some other subdivision within the factory
as long as it involves continuous flow rather than a series of separate jobs.
3. Activity Based Costing (ABC) – a system in which multiple overhead cost pools are allocated using
bases that includes one or more non-volume-related factors.
4. Backflush costing - is often used by companies that have adopted the JIT of inventory control which
works backward through the available accounting information completed.
JOB ORDER COSTING
 The product manufactured are heterogeneous or dissimilar products.

 Products are manufactured individually or in a distinct lots, jobs, contracts or batches
 Each job requires different amounts of materials, labor and overhead.
 It helps in finding out the cost of production of every order and thus helps in ascertaining profit or loss
made out on its execution. The management can judge the profitability of each job and decide its future
courses of action.
 A job is a cost object that can be distinguished easily because:

a. They are unique in some way
b. Separate document are kept the record the costs of the jobs in the form of Job Cost Sheets.
Job Cost is determined in six steps:
1. Select an allocation base for computing the predetermined factory overhead rate(s).
2. Estimate the overhead for each overhead cost pool.
3. Calculate the predetermined overhead rate(s) by dividing the estimated overhead by the estimated
allocation base.
4. Record direct costs for each job- direct materials and direct labor- as they are incurred.
5. Apply factory overhead using the predetermined overhead rate as job are completed.
6. If there is over or under applied overhead ( compare actual FO and Applied FO), either write it off to
cost of goods sold or allocate it – if the amount is material –to WIP end, FG end and COGS.
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EXAMPLE OF JOB ORDER COST SHEET
Job Cost sheet

Job Number ____________ Description: ________________
Date Started: ___________ Date completed: _____________
No. of units completed: ________
Direct Materials
Date Requisition No. Quantity Unit Price Cost
Direct Labor
Date Time Card No. Hours Rate Cost
Factory Overhead
Date Activity Base Quantity Application rate Cost
Cost Summary
Direct Materials ______________

Direct Labor ______________
Factory overhead ______________
Total Cost ______________
MAJOR SOURCE DOCUMENTS FOR JOB ORDER COSTING
1. Job order cost sheet

a. records accumulate product costs of specific units or small units of batches of units for both product
costing and control purposes.
b. file of job order cost sheets for uncompleted jobs serves as a perpetual book inventory and subsidiary
ledger for Work in Process Control.
c. a separate job cost sheet is prepared for each job.
2. Materials Stockcard
a. there records are the perpetual book inventory of cost and quantities of materials on hand.
b. the file of materials stock cards for unused materials is the subsidiary ledger for Materials Control.
c. a separate stock card is prepared for each type of material on hand.
3. Finished Goods Stockcard

a. there records are the perpetual book inventory of cost and quantities of completed goods held for sale.
b. the file of finished goods stock cards for unused materials is the subsidiary ledger for Finished Goods
Control.
4. Factory overhead Control Cost Record

a. there records accumulate detailed factory overhead costs by department.
b. the file of these records for the accounting period is the subsidiary ledger for Factory Overhead Control.
c. a separate stock card is prepared for each type of material on hand.
5. Materials Requisition, Time Ticket and Clock Card

a. the source document for charging costs to jobs and department,
b. to aid fixing responsibility for control and usage of materials and labor.
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Unit III – JOB ORDER COSTING

Name: ________________________________ Score ___________
Course/Section__________________________ Date: ___________
Assignment 1 – Theory
1. Which one of the following is least likely to be an objective of a cost accounting system?
a) Product costing and inventory evaluation c) Sales commission determination’
b) Department efficiency d) Income determination
2. What is the best cost accumulation procedure to use when many batches, each differing as to product
Specification?
a) Job order b) process c) actual d) standard
3. What is the best cost accumulation procedure to use when there is a continuous mass production of like
units?
a) Job order b) process c) actual d) standard
4. In job order the costing the basic document to accumulate the cost of each order is:
a) Invoice b) Purchase order c) Requisition sheet d) Job cost sheet
5. All cost related to the manufacturing function in a company are:

a) Prime cost b) Direct cost c) Product cost d) Conversion cost
6. These costs varies in amount in direct proportion to the volume of production.

a) fixed costs b) variable costs c) semi-variable costs d) standard cost
7. In cost terminology, conversion costs consist of:

a) Direct and indirect labor c) Direct labor and factory overhead
b) Direct labor and direct materials d) Indirect labor and variable factory overhead
8. The wages of the factory janitorial staff should be classified as:

a) Factory overhead cost b) Direct labor cost c) Period cost d) Prime cost
9. What is the nature of the work- in- process account?

a) Inventory b) Cost of goods sold c) Productivity d) Nominal
10. A nonmanufacturing business may use:

a) job order but not process costing c) either job order or process costing
b) process costing but not job order d) neither job order nor process costing
11. In a traditional job order cost system, the issue of indirect materials to a production department increases:
a) Material account c) Factory overhead account
b) Work in process account d) Factory overhead applied.
12. A job costing system has a separate job cost record for each job. This information is stored in:
a) A cost ledger c) the product ledger
b) the general ledger d) a subsidiary ledger
13. All of the are debited to the work in process account except:
a). Applied factory overhead c) direct materials used
b) direct labor incurred d) Actual factory overhead incurred
14. Which of the following production operation would be most likely to employ a job order system of cost
accounting?
a) Toy manufacturing c) crude oil refining
b) Shipbuilding d) candy manufacturing
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15. The unit cost of a product, under job order costing can be determined only:
a) upon completion of the job c) at the end of month
b) at the point of time d) not given
II – Modified True or False: Write “T” if the statement is correct, and if the statement is incorrect,
underline the word or group of words that makes the statement incorrect.
____1. A job order cost system identifies costs with a particular product.
____2. A company producing furniture would probably use a job order cost system.
____3. When materials are purchased, the Raw Materials Inventory account is debited.
____4. Sales commissions should be added to the Factory overhead account.
____5. A job order cost system is appropriate when a large volume of uniform products are produced.
____6. Conversion costs consists direct materials and factory overhead.
____7. The cost sheet is a supporting document for materials.
____8. Product costs are historical figures and therefore are of a little use to the managers.
____9. Depreciation of factory equipment should be charged to Factory overhead Control account.
___10. Indirect materials are conversion cost.
___11. Manufacturing costs is synonymous to product costs.
___12. Most factory overhead costs are direct costs.
___13. Cost of marketing departments should be charged to Factory overhead.
___14. Direct materials are variable and a prime costs.
___15. Direct labor costs incurred are recorded initially as an increase in Work in process account.
III - Indicate what cost system is appropriate for each.
A = Job Order Costing B = Process Costing
1. Hollow Blocks Manufacturing _______________________

2. Cement Manufacturing ________________________
3. Printing Enterprise ________________________
4. Auto Repair Shop ________________________
5. Shoe Manufacturing ________________________
6. Candy Manufacturing ________________________
7. Dress Shop ________________________
8. Glass Manufacturing ________________________
9. Paper manufacturing _______________________
10. Soft drinks manufacturing ________________________
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Name: ________________________________ Score ___________
Course/Section__________________________ Date: ___________
Assignment 2 – Problem
Marvel Corporation uses job order costing and had the following inventories as of July 1. 2020:
Finished goods ( Job no: 1120 , 300 units @ P 105) P 31,500

Work in process 24,300
Materials 27,900
The work in process inventory:

Job 1121 Job 1122
Direct materials :
100 units X @ 45 4,500
200 units Y @ 36 7,200
Direct Labor
80 hours @ 40 3,200
120 hours @ 45 5,400
Factory overhead applied at the rate of P 30 per direct labor hours 2,400 3,600
10,100 16,200
Materials Inventory:
Material X - 300 units @ 45 13,500
Material Y - 400 units @ 36 14,400
27,900
During July 2020, the following transactions were completed:
a. Materials purchases: Material X, 1,000 units @ 46; Materials Y, 1,500 units @ 35; indirect materials,
P 15,000, at terms n/30.
b) 50 units of Material Y were returned to supplier.
c) Materials issued on a FIFO basis were as follows: Job 1121 - Material X, 350 units; Job 1122 , Material Y,
300 units; Job 1123 – Materials X, 300 units; Job 1124 – Materials X, 100 units and Material Y, 400 units.
( Note: transactions are to be taken in consecutive order) Indirect materials amounting to P 6,750 were
issued.)
c) Payroll amounting to P 150,000 was paid. Of the total payroll, 50% represented direct labor, 20% for indirect
labor, 15% for sales and 15% for administrative salaries. The direct labor cost was distributed as follows
Job 1121- 300 direct llabor hours @ P 40 per hour; Job 1122 - 450 direct labor hours @ P 45 per hour, Job
1123, 450 direct labor hours @ 40 and Job 1124- 550 direct labor hours @ P 45 per hour .
d) Other factory overhead (other than those previously mentioned) incurred includes, depreciation of factory
building,P 5,000; depreciation of factory equipment, P 3,000; light, heat and power, P 6,000, Water bill,
P 1,000; expired insurance of factory building and equipment, P 1,500 and factory supplies, P 1,500.
e) Factor overhead was applied to production at a rate of P 30 per direct labor hours.
f) Jobs 1121 and 1122 were completed and transferred to finished goods warehouse.
g) Jobs 1120 and 1121 were sold at a gross profit rate of 40% of cost. Terms: 2/15, 1/20, n/60.
h) Full collection was made within 15 days from the date of sale.
i) Full payment was made to suppliers of materials purchased.
j) The over or under applied factory overhead is to be closed to cost of goods sold account.
REQUIRED:
1. Prepare Job order cost sheet for Jobs 1121, 1122, 1123 and 1124.
2. Journalize the above transactions. (Use 2 columns journal)
3. Prepare the schedule of inventories as of July 31, 2020.
(Adapted)
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SOLUTION:
Job Cost sheet
Job Number __1121 _____ Description: ________________
Direct Materials
Direct Labor
Factory Overhead
Cost Summary

Total Cost ______________
Job Cost sheet

Job Number ___1122 ____ Description: ________________
Direct Materials
Direct Labor
Factory Overhead
Cost Summary

Total Cost ______________
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Job Cost sheet

Job Number ___1123_________ Description: ________________
Direct Materials
Direct Labor
Factory Overhead
Cost Summary

Total Cost ______________
Job Cost sheet

Job Number ___1124_____ Description: ________________
Direct Materials
Direct Labor
Factory Overhead
Cost Summary
Total Cost ______________
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– Journal entries
Debit Credit
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Name: ______________________ Score___________
Section _____________________ Date: ___________
Assignment 3: Brief Exercises. Use Yellow for supporting computations.
___1. During the month of January, FR Co,’s direct labor cost totaled P 36,000 and direct labor cost was 60% of
prime cost. If total manufacturing costs during January P 85,000, the manufacturing overhead was:
a) P 24,000 b) P 25,000 c) P 49,000 d) P 60,000
___2. The following selected information pertains to Ajax Processing Co., direct materials, P 62,500; indirect
materials, P12,500; P 75,000 of direct labor ,P 11,250 of indirect labor; and other factory overhead
incurred, P37,500.
The total conversion cost was:

a) P 136,250 b) P 137,500 c) P 250,000 d) P 273,750
___ 3. Peterson Company uses a job order cost system and applies factory overhead to production orders on
the basis of direct labor cost. The overhead for 2020 are 200% for Dept. A and 50% for Dept. B. Job
123 started and completed during 2020, was charged with the following costs:
Department
A B .
Direct materials P 25,000 P 5,000
Direct Labor ? 30,000
Factory Overhead 40,000 ?
The total manufacturing costs associated with Job 123 should be:
a) P 135,000 b) P 180,000 c) P 195,000 d) P 240,000
___4. The Childers Company manufactures widgets. During the fiscal year just ended, the company incurred
prime costs of P 1,500,000 and conversion costs P 1,800,000. Overhead is applied at the rate of 200% of
direct labor cost.
How much of the above costs represents material costs?

a) P 1,500,000 b) P 300,000 c) P 900,000 d) P 600,000
___5. The gross margin for Core Company for 2020 was P 325,000 when sales were P 700,000. The Finished
Goods beginning inventory was P 60,000 and the Finished Goods ending inventory was P 35,000. The
cost of goods manufactured was:
a) P 300,000 b) P 350,000 c) P 230,000 d) P 375,000
___6. Tarzan Co. employs a job order cost system. It manufacturing activities in July, 2020, its first month of
operation, are summarized as follows
JOB NUMBERS
1201 1202 1203 1204
Direct materials P 7,000 P 5,800 P 11,600 P 5,000
Direct labor cost 6,600 6,000 8,400 2,400
Direct labor hours 1,100 1,000 1,400 400
Units produced 200 100 1,000 300
Manufacturing overhead applied at the rate of P 2 per direct labor hour for variable overhead, P 3 per
hour for fixed overhead. Jobs 1201; 1202 and 1203 were completed in July. What is the cost of the
completed jobs?
a) P 62,900 b) P 62,500 c) P 72,900 d) P 65,900

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___7. A company had the following usage of direct labor and direct materials:
Hours Pounds
Direct labor ( P 8 per hour) 400
Direct materials (P 10 per pound) 300
Incomplete job 101 has used 20 hours of direct labor and 8 pounds of direct materials. Factory overhead is
applied at the rate of 200% of direct labor peso. What is the balance in work-in-process relating to job 101?
a) P 560 debit b) P 560 credit c) P 12,600 debit d) P 12,600 credit
For items 8- 12: Adams Co, Uses a job order costing system and the following information is available from its
records. The company has 3 jobs in process #05, # 08 and # 12.
Raw materials used P 120,000
Direct labor per hour P 8.50
Overhead applied based on direct labor cost 120%
Direct material was requisitioned as follows for each job respectively: 30%, 25% and 25%; the balance of the
requisitions was considered indirect. Direct labor hours per job are 2,500; 3,100 and 4,200, respectively.
Indirect labor is P 33,000. Other factory actual overhead totaled P 36,000.
8. What is the prime cost of Job # 05? _______________________________________
9. What is the total amount of overhead applied to Job # 08? __________________________
10. What is the total amount of actual factory overhead? _______________________________
11. How much overhead is applied to Work in Process? ______________________________
12. If Job # 12 is completed and transferred, what is the balance of Work in Process Inventory at the end of the
period if overhead is applied at the end of the period? _________________
13. Banka Company manufactures tools to customers’ specifications. The following data pertain to Job 5011 for
February:
Direct materials used P4,200
Direct labor hours worked 300
Direct labor rate per hour P 8.00
Machine hours used 200
Applied factory overhead rate/machine hr. 15.00
What is the total manufacturing cost recorded or Job 5011 for February?
a.P8,800 b.P9,600 c.P10,300 d.P11,100
14 & 15 are based on the following cost data that pertain to Matatag Co. for the month of February, 2020:
Inventories February 1, 2020 February 28, 2020
Materials P40,000 P50,000
Work in process 25,000 35,000
Finished goods 60,000 70,000
February 1-28, 2020

Direct labor cost P120,000
Factory overhead applied 108,000
Cost of goods sold 378,000
14. The total amount of direct materials purchases during February, 2020 was:
a. P50,000 b. P170,000 c. P180,000 d. P220,000
15. The cost of goods manufactured for February, 2020 was:

a. P378,000 b. P388,000 c. P398,000 d. P428,000
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for items 16 - 17: The following data were taken from the records of FTC Corporation:
Inventories 8/31/2020 9/30/2020

Raw Materials P ? P 50.000
Work in Process P 80,000 P 95,000
Finished Goods P 60,000 P 78,000
 Raw materials purchased amount to P 46,000.

 Factory overhead amount to P 63,000 which is 75% of direct labor cost.
 Selling and Administrative expenses amount to P 25,000 which is 8% of sales.
 Net income for September 2014, P 40,000.
16. The amount of raw materials inventory on August 31, 2020:________________________
17. The cost of good manufactured on August 31, 2020 _______________________________
For 18- 20: XYZ Company has the following balances as of the year ended December 31, 2020:
Debit
Direct materials inventory P 135,000
Work in Process Inventory P 310,500
Finished Goods inventory P 445,500
Cost of Goods Sold P 670,500
Credit
Factory Department Overhead P 36,000
Additional information were as follows:

Cost of direct materials purchased during 2020 P 369,000
Cost of direct materials requisitioned in 2020 P 423,000
Cost of goods completed during 2020 P 918,000
Cost of direct labor P 360,000
Factory overhead is applied at 120% of direct labor
18. Direct materials inventory, January 1, 2020: __________________________
19. Finished Goods inventory, January 1, 2020: ___________________________
20. Actual factory overhead incurred during 2020: __________________________
21. The following information relates to Job # 246, which is being carried out FLEER Corp. to meet customer’s
order.
Dept. A Dept. B
Direct materials used P 5,000 P 3,000
Direct labor hours employed 400 200
Direct labor rate per hour P 4.00 P 5.00
Overhead rater per Direct labor hour P 4.00 P 4.00
Administrative and other overhead 20% of full production cost
Profit mark up 25% of selling price
The selling price to the customer of Job # 246 is:
a. P 16,250 b) P 20,800 c) P 17,333 d. P 19,500

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22. CCC Company uses a job order costing system. During August 2020, the following appeared in the Work in
Process Inventory account:
Beginning balance P 192,000

Direct materials used 560,000
Direct labor incurred 480,000
Applied overhead 384,000
Cost of goods manufactured 1,480,000
CCC Company applies overhead on the basis of direct labor cost. There was only one job left in Work in Process
at the end of August which contained P 44,800 of overhead.
What amount of direct materials was included in this job?

a) P 35,200 b) P 35,840 c) P 55,360 d) P 64,000
23. Products at RRD Manufacturing are sent through two production departments: Fabricating and Finishing.
Overhead is applied to products in the Fabricating department based on 150% of direct labor cost and P 18
per machine hour in finishing. The following information is available about Job # 297:
Fabricating Finishing
Direct materials P 31,800 P 11,600
Direct labor cost ? P 960
Direct labor hours 440 120
Machine hours 100 300
Overhead applied P 8,580 ?
What is the total cost of job # 297?

a) P 52,940 b) P 60,100 c) P 61,860 d) P 64,060
For 24 & 25 are based on the following information: The work in process account of Malinis Co. uses a job order
cost system follows:
WORK PROCESS
Apr 1 Balance P25,000 Finished goods P125,450
Direct materials 50,000
Direct labor 40,000
Factory overhead 30,000
is applied to production at a predetermined rate based on direct labor cost. The work in process at April 30
represents the cost of Job No. 456 which has been charged with direct labor cost of P3,000 and Job No. 789
which has been charged with applied overhead of P2,400.
24. The cost of direct materials charged to Job Order Nos. 456 and 789 totaled
a. P4,200 b. P4,500 c. P7,600 d. P8,700
25. Prime cost during the month totaled:

a. PP70,000 b. P90,000 c. P120,000 d. P145,000
26. Job 213 required direct materials costing P 20,000 and direct labor costing P 5,000 ( 300 hrs). Additional
factory overhead of P 0.80 per direct labor hour cost is charged to the job. It was discovered that the labor
cost shown was 125% of the correct amount due to erroneous overtime premiums.
The correct cost of Job 213 is:

a) P 28,000 b) P 27,200 c) P 24,240 d) not given (specify) _______
End
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Lesson 2 – Accounting for Materials
Accounting system for materials:
1. Perpetual method - maintains material ledger for the continuous recording of materials received and
issued to production department. Materials purchased are recorded using “ Materials Inventory” account.
Both the cost of material issued to production and ending inventory can be easily determined after every
transaction.
2. Periodic method - materials purchased are recorded using the account “ Purchases” and requires a
periodic count and valuation of inventory (often monthly). The cost of materials issued to production
department can be determined by deducting the inventory end from the total cost of materials available
for use. Under this method cost of material issued to production and ending inventory cannot be easily
determined.
MATERIALS CONTROL
 Material controls basically aims at efficient purchase, storage and consumption of materials. Since
materials is the major part of the total manufacturing cost, the company should have a good and effective
system of internal control over materials not only to guard against theft but also to minimize waste and
misuse due to excessive inventories, overissuance, deterioration, spoilage and obsolescence.
 Objectives Of Materials Control

The following are the major objectives of materials control.
1. To ensure better quality of materials at right quantity at right time for efficient and uninterrupted
production of output.
2. To maintain the cost of materials at the minimum level.
3. To purchase materials at a reasonable price.
4. To minimize the handling cost and time in storing and using the materials.
5. To provide information to the management about raw materials, their costs and availability.
6. To protect materials against loss by fire, theft and leakage.
7. To avoid obsolescence of materials by adopting an appropriate method of materials issue.
 Modern system of inventory control include the following features:

a. Physical safeguards for receiving, storing and issuing materials.
b. Formal procedures for ordering and paying for materials
c. Perpetual inventory system to provide an ongoing record of the quantity and value of each type of
materials received and issued and the balance on hand.
 Two basic aspects od material control:

1. Physical control or safeguarding of materials
2. Control of investment in materials
Physical control of materials

1. Limited access - only authorized personnel should have access to material storage area. All issuance
of materials for use in production and release of finished goods for shipment should be properly
documented and approved.
2. Segregation of duties – different functions – purchasing, receiving, storage, use and recording - should
be segregated to minimize opportunities of misappropriation of inventories
3. Accuracy in recording – inventory records should permit the determination of inventory quantities on
hand upon request and cost records should provide the data for evaluation of inventories for the
preparation of financial statements.
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Control of investment in materials

 Maintain the proper balance of materials on hand.
 An inventory of sufficient size and diversity for efficient operation must be maintained, but the size should
not be excessive in relation to the scheduled production needs.
 In planning and controlling the inventory size, these factors should be considered – a) when orders
should be placed and b) how many units should be ordered.
 Commonly used control procedures

1. Order cycling – method where materials on hand are reviewed on a regular basis.
2. Min-max method – based on the assumption that materials inventory have minimum and maximum
levels. Minimum quantity is the order point, an order is placed to increase the inventory to the
maximum level
3. Two-bin method – materials are divided and place into two separate bins. The first bin contains
materials that will be used between the time an order was received and the next order. The second
bin contains the materials that will be used between the ordering and the delivery, plus additional
safety stock. When the first bin is emptied, an order is place. This method is used for materials that
are considered inexpensive and/or non-essential.
4. Automatic order system – used by most companies that are computerized. An order is automatically
placed when the level of inventory reaches a predetermined order point quantity. Perpetual
inventory record cards are maintained.
5. ABC plan – used by companies with large number of materials, each having different value. This is
a systematic way of grouping materials into separate classification and determining the degree of
control that each group requires.
 Economic Order Quantity (EOQ) - represents the quantity necessary to get the best price while
keeping inventory at an appropriate level to ensure uninterrupted production. In determining the
quantity to be ordered, the cost of placing an order and the cost of carrying inventory must be
considered. The formula to compute for EOQ:
EOQ = 2CN
K
where: EOQ = economic order quantity

C = cost of placing an order
N = number of units required annually
K = carrying cost per unit of inventory
Illustration 1:
The Norman Company predicts that 64,000 units of materials will be used during the year. The
materials are expected to cost P 20 per unit. It is anticipated that it will cost P 40 to place an
order. The annual carrying cost is P 2.00 per unit
Determine: Economic Order Quantity

Solution:
EOQ = 2 x 64,000 x 40 EOQ = 5,120,000

2 2
EOQ = 2,560,000
EOQ = 1,600 units +

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Material Purchasing Procedures

 Purchasing agent – person who has responsibility of purchasing materials in correct quantities at the
proper time and at the lowest price. The purchasing agent’s staff is part of the procurement section of
the purchasing departments.
 The purchasing staff keeps informed of various source of supply, negotiates purchase contracts,
prepares purchase orders and follow up deliveries. Their routine work begins with the receipt of purchase
requisition.
Business Papers used to Support Material Transactions

1. Purchase requisition –
 Informs the purchasing agent concerning the quantity and type of materials needed.
 is a document or a written request for materials sent to the purchasing department and is
prepared in duplicate. The original copy is sent to purchasing department and the duplicate copy
is retained in the storeroom files. This must be numbered for easy reference. This request is
prepared by storeroom supervisor once the materials reach the reorder point.
 Reorder point – point at which the item should be ordered occurs wen the predetermined
minimum level of inventory on hand is reached. The following factors should be considered:
a. Usage – the anticipated rate at which the materials will be used.
b. Lead time – the length of time or the interval between the placement or order and the receipt
of the materials.
c. Safety stock estimated minimum level of inventory needed to protect against running out of
stock.
Example: assume that expected daily usage of material X is 100 units, and it takes 4 days to receive
an order and the estimated safety stock is 400 units, then the reorder point is:
LTQ = Daily usage 100 units x 4 days (lead time) 400 units
SSQ = Safety stock 400 units
Reorder point 800 units
Note: it means that when Material X inventory reaches 800 units, then the storeroom supervisor
must prepare a purchase requisition for purchase of material X.
Reorder Point = Sum of Lead time Quantity (LTQ) + Safety Stock Quantity (SSQ)
where:
LTQ = normal usage x normal lead time
SSQ = Safety stock (in usage) + Safety Stock (in time)
SS (in usage) = (Maximum usage – Normal usage ) x Normal lead time
SS ( in time) = (Maximum lead time – Normal lead time) x normal usage
Maximum Inventory Level = SSQ + order size
Average inventory = Order size /2
Minimum Inventory level - SSQ
Example:
RFF Corporation makes available the following information relative to Material AC:
Annual demand 30,000 units
Working days in a year 300 days
Normal lead time 12 days
Maximum lead time 19 days
Maximum usage per working day 125 units
Economic order size 6,000 units
Calculate the following:

1. Safety Stock:
2. Reorder Point
3. Average inventory
4. Maximum inventory
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Solution:
Lead time quantity : - 12 days x (30,000/300) = 12 days x 100 = P 1,200
Safety Stock ( in time) : = ( 19 days – 12 days) 7 days x 100 = 700

( in usage) = (125 units – 100 units) 25 units x 12 days = 300 = 1,000 units
Reorder point = LTQ + SSQ = 1,200 + 1,000 = 2,200
Average inventory = (OS/2) + SSQ = (6,000/2) + 1,000 = 4,000
Maximum inventory = OS + SSQ = 6,000 + 1,000 = 7,000
2. Purchase Order
 A contract for appropriate type and quantities of materials to be delivered at a specified date to
assure uninterrupted operations
 a written request to a supplier for a specified goods at an agreed price and also stipulates the
term of delivery and terms of payment.
 This document is prepared by the purchasing agent after the receipt of the purchase requisition.
 All purchase orders should be prenumbered to provide control for the issuance.
 At the end of each month, the accountant verifies that all the numbered purchase order either sent
to the suppliers or are on hand to ensure that purchase orders are used only for authorized
purposes.
 This is prepared in 5 copies to be distributed as follows:
a. suppliers – as an authority to deliver the materials
b. storeroom – as a notification that the materials requested are on order.
c. Receiving department – as an authorization to accept incoming shipment.
d. Purchasing department – (2 copies) for file in unfilled order.
3. Receiving Report
 Certifies quantities received and ma report results of inspection and testing for quality.
 Shows all details of the shipment, including comments on the condition of the materials received.
The goods are checked to be sure that they are not damaged and they met the specifications of the
purchase order.
 The clerk prepares a receiving report in quadruplicate – the original copy are sent to purchasing
department (to indicate order was received); to the accounts payable department - to be compared
with the purchase order and supplier’s invoice, one copy to the storeroom together with the
materials and purchase order (for entry in the store records), then the storeroom supervisor signs
the final copy to confirm that the materials reached the storeroom and this final copy is kept in the
receiving clerk’s permanent file.
4. Disbursement voucher
 If the three documents agree or in order – the purchase order, receiving report and purchase
invoice, payment is authorized. A disbursement voucher is prepared , with the supporting
documents, once approved the voucher is sent to accounting department for recording.
 When the voucher and the supporting documents reached the accounting department, the voucher
clerk check all the documents if they are properly approved and signed. Double checking is another
part of an effective internal control. After checking, the voucher clerk records the purchases in the
voucher register.
 A check is prepared in the Cash department for the amount in the voucher. The check is recorded in
the check register and sent to the supplier. The voucher is marked paid and records the check
number and date of payment in the voucher.
.
5. Materials Requisition Slip
 Authorization to the storeroom to issue materials to departments.
 A written order to the storekeeper to deliver materials or suppliers to the place designated or to
issued materials to the person presenting a properly executed requisition.
 Each requisition form shows the job number, the department requesting the goods, their quantity
and description and the unit cost and total cost of the goods issued.
 The cost of the goods charged to the production is entered on the materials requisition form and thie
quantity and the amount are entered in the materials ledger card under issuance column.
43
6. Materials ledger card – record the receipt and issuance of each class of materials and provide a
perpetual inventory record.
Objectives of Store Keeping

An efficient system of store keeping has the following objects:
1. ensure uninterrupted supply of materials and stores without delay to various production and service
departments of the organization.
2. To prevent over-stocking and under-stocking of materials.
3. To check in all materials as to quality and quantity.
4. To minimize storage cost.
5. To ensure proper and continuous control over materials.
6. To ensure most effective utilization of available storage space and workers engaged in the process
of store-keeping.
7. To protect materials from loss and wastage due to defective storage.
8. To identify and locate materials in the store-rooms without delay.
9. To protect and safeguard material items against pilferage, theft and fire etc.
10. To develop such a system so that fullest information about store items is available in the stores at
every time.
Materials Internal Control

An internal control procedures for storing and issuing materials should reflect the following principles:
1. Admittance to the storage area should be restricted.
2. Materials ledger cards, covering all receipts and issued should be maintained,
3. Each type of material should be clearly identified, stored and carefully protected while in storage.
4. Materials should be issued only upon proper written authorization.
5. The accounting system should permit a periodic check of the materials ledger against the balance
of the Materials account.
6. Different persons should be involved in storage and issuance operations.
Special Issuing procedures

a. Materials returned to storeroom
 Materials returned to storeroom must be accompanied by returned materials report.
 The storeroom clerk records the materials returned in the materials ledger card under Issued
column in parenthesis.
b. Materials returned to supplier

 A return shipping order is prepared by the purchasing agent together with a debit
memorandum.
 The storeroom clerk receives a copy of the debit memo which is to be used in recording the
return in the materials ledger card under Received column.
c. A computerized system facilitates to update inventory records, simplifies processing purchase orders
and provides effective internal control system for materials issuance.
Accounting procedures for materials procurement and use involves forms and records necessary for financial
accounting and cost accounting purposes.
 Financial accounting – the forms are necessary to be able to record the transactions in the books of
accounts - purchase journal, cash payments journal, general journal and general ledger control account.
 Cost accounting – forms are used for materials control purposes and necessary for costing a job, a
process or department and for maintaining perpetual inventories.
MATERIALS COSTING METHODS:

 First-in, first-out ( FIFO)
Under this method, the first materials purchased ( the earliest) are first to be issued. The materials
on hand are assumed to be the last one purchased
 Average costing methods
a. Weighted average method
- used for periodic system.
- To compute for the weighted average cost per unit:
Total cost of purchases / total units purchased = Weighted average cost/unit
44
b. Moving average method

. - used or perpetual method
- Under this method, the units and cost of each new purchases is added to the balance
already on hand when the purchase was made, a new average unit cost per unit is computed
– total cost (on hand + new purchase) divide by total units (on hand + new purchase).
- When materials are issued, the new average unit cost ( as computed above) is used to
compute for the total cost of materials issued until another purchase is received or return to
supplier is recorded, when a new average unit cost is computed.
 Illustration 1:
The following information is to be used in costing inventory on August 31, 2020:
Aug. 1 Beginning balance 1,600 units @ P6.00
5 Purchases 400 units @ P 7.00
9 Purchases 400 units @ P 8.00
16 Issued 800 units
20 Returned to stockroom 50 units of those issued on Aug 16
24 Purchased 600 units @ P 9.00
25 Returned to supplier 50 units purchased on August 24
27 Issued 1,000 units
REQUIRED: Using a) FIFO b) moving average

1. Prepare the materials stock card
2. Determine the cost of materials issued during August and the cost assigned to the August 31,
2020 inventory
A. FIFO:
STORES LEDGER CARD
RECEIVED ISSUED BALANCE
Unit Unit Units
Date Units Cost Amount Units Cost Amount Units Cost Amount
Aug. 1 1,600 6.00 9,600
5 400 7,00 2,800 1,600 6.00 9,600
400 7.00 2,800
9 400 8.00 3,200 1,600 6.00 9,600
400 7.00 2,800
400 8.00 3,200
16 800 6.00 4,800 800 6.00 4,800
400 7.00 2,800
400 8.00 3,200
20 (50) 6.00 (300) 850 6.00 5,100
400 7.00 2,800
400 8.00 3,200
24 600 9.00 5,400 850 6.00 5,100
400 7.00 2,800
400 8.00 3,200
600 9.00 5,400
26 (50) 9.00 (450) 850 6.00 5,100
400 7.00 2,800
400 8.00 3,200
550 9.00 4,950
27 850 6.00 5,100 250 7.00 1,750
150 7.00 1,050 400 8.00 3,200
_____ ______ ____ ______ 550 9.00 4,950
1,350 10,950 1,750 10,650 1,200 9,900
Total cost of materials issued = 10,650; and materials inventory Aug. 31. 2020 = P 9,900.
45
B. Moving average –
STORES LEDGER CARD
Unit Unit Units
Aug. 1 1,600 6.00 9,600
5 400 7,00 2,800 2,000 6.20 12,400
9 400 8.00 3,200 2,400 6.50 15,600
16 800 6.50 5,200 1,600 6.50 10,400
20 (50) 6.50 (325) 1,650 6.50 10,725
24 600 9.00 5,400 2,250 7.1667 16,125
26 (50) 9.00 (450) 2,200 7.125 15,675
27 1,000 7.125 7,125 1,200 7.125 8,550
1,350 10,950 1,750 12,000
Total cost of materials issued = 12,000 ; and materials inventory Aug. 31. 2020 = P 8,550
c. Weighted Average Method – used for periodic inventory method

1,600 6.00 9,600
400 7,00 2,800
400 8.00 3,200
550 9.00 4,950
2,950 20,550
Weighted average unit cost = 20,550 = 6.966

2,950
Inventory, August 31, 2020 = 1200 units x 6.966 = 8,359
Lower of Cost or Net Realizable value

 PAS 2 provides that inventories shall be measured at the lower of cost or net realizable value.
 Net realizable value 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 decline below the original cost, inventory should be valued at net
realizable value.
 If the cost of inventory exceeds the net realizable value, write-down of Inventories is necessary.
 Write down of inventory are usually carried out item by item or in some circumstances it may be
appropriate to group similar items.
 Accounting for write-down

1. Direct method – any loss on inventory write-down is not accounted for separately but credited to
Inventory This method will increase Cost of goods sold for the difference between the cost
and the NRV. However, material write down and abnormal losses such as theft, obsolescence
are charged to Loss.
2. Allowance method
 The inventory is recorded at cost and any loss on inventory is accounted for separately by
debiting Loss on inventory write-down and allowance for write-down of inventory is credited.
 Loss on write-down of inventory is included in the computation of Cost of goods sold while
the allowance for write-down of inventory is valuation account, a deduction from the
Inventory account.
Cost of Goods sold before recovery from inventory write-down xxx
Add: Loss on inventory write-down xxx
Cost of goods sold after recovery from inventory write down xxx
46
 The allowance is adjusted depending on the difference between the cost and the net
realizable value of the inventory at year end.
 If the required allowance increases, additional loss is recognized.
 If the required allowance decreases, a gain on reversal of inventory write-down is
recognized. Gain should be limited only to the extent of the allowance balance. Gain on
reversal is presented as a reduction from cost of goods sold.
Cost of Goods sold before recovery from inventory write-down xxx

Less: recovery from inventory write-down xxx
Cost of goods sold after recovery from inventory write down xxx
 If the cost of inventory is lower than the net realizable value, no write down is necessary.
Illustration 1:
a. Lower of Cost or NRV by Item:
Total Valuation Lower of

Description Quantity Cost/unit Cost NRV/unit Basis Cost Or NRV
Material C 1,000 P 55 55,000 P 60 Cost 55,000
Material D 600 100 60,000 105 Cost 60,000
Material E 1,100 70 77,000 60 NRV 66,000
Total 192,000 181,000
Inventory, at cost = 192,000

Inventory valuation = 181,000
Inventory write- down = 11,000
Solution – Journal entry:

First Approach: (Direct method)
Debit Credit
Loss on inventory write-down 11,000
Materials Inventory 11,000
Write-down of inventory
Second Approach: (allowance method)

Debit Credit
Allowance f or write-down of inventory 11,000
Note: under the second approach, the inventory is carried at cost = P 192,000, and the allowance for
Write-down of inventory – a valuation accounts- is a deduction from the inventory account.
Materials inventory, cost 192,000

Less: Allowance f or write-down of inventory 11,000
Materials inventory at lower of cost or NRV 181,000
b) Lower of Cost or NRV by total:

Description Quantity Cost/unit Total cost NRV/unit Total NRV
Material C 1,000 P 55 55,000 P 60 60,000
Material D 600 100 60,000 105 63,000
Material E 1,100 70 77,000 60 66,000
Total 192,000 189,000
Inventory, at cost = 192,000

Inventory valuation = 189,000
Inventory write- down = 3,000
47
Solution – Journal entry:

First Approach: (direct method)
Debit Credit
Second Approach: (allowance method)

Debit Credit
Illustration 2: Using the data in illustration 1. assume that there is an allowance for inventory write-down before
any adjustment at P 5,000: (allowance method)
a) By item - under the Second Approach: the journal entry would be:
Debit Credit
Note: the allowance for write down should be increased 6,000 to have a balance of P 11,000 after
adjustment.
b) By total – the journal entry under the second approach shall be:
Debit Credit
Recovery from write-down of inventory 2,000
Recovery from adjustment Write-down of inventory
Note: the allowance for write down should be decreased 2,000 to have a balance of P 3,000 after
adjustment.
Illustration 3: assume that the cost of the inventory is lower that the NRV and there is an allowance for
inventory write-down before any adjustment at P 5,000. The inventory is to be carried at cost and
the entry to close Allowance for write-down of inventory should be:
(Allowance method)
Debit Credit
Recovery from write-down of inventory 5,000
Recovery from adjustment Write-down of inventory
Note: the allowance for write down should be closed because the cost is lower than NRV.
Inventory Shortage or overage
To check the accuracy of perpetual inventory system, a physical count is necessary. Physical count can be
performed at the end of the accounting period or in a continuous or cycle inventory method. The result of the
actual count is compared with the materials ledger card. Difference may occur between the quantity of
materials per actual count and the quantity shown in the Materials ledger card. If quantity per account
exceeds quantity per materials ledger cars, there is an overage and it is entered under the Received column
of the materials ledger card using the cost of the last issue of that material. If the quantity per actual account
is less than the quantity per ledger card, there is shortage, and recorded by an entry under Issued column-
the cost is computed using the costing method (FIFO or moving average as if the missing materials were
being charged out on requisition on the closing date.
48
Pro-forma entry to record:

net shortage:
Debit Credit
Factory overhead control xxx
Materials xxx
Net shortage per actual account
Net overage:
Debit Credit
Materials xxx
Net overage
Special problems in Material Accounting

1. Discounts -
a. Trade discounts – are not recorded – purchases are recorded net of trade discounts.
b. Cash discounts – offered to encourage customers to pay within the discount period.
1) When taken method – purchases and liabilities are recorded at gross at the time of purchases and
discounts are recognized when the account is paid within the discount period.
2) When not taken – purchases and liabilities are recorded net of the discount, when payment is made
beyond the discount period, the discount no availed is charged to “ Purchase discount lost”.
3) When offered – purchases is recorded at net of the discount, the liability is recorded at gross and
the difference is charged or debited to “Allowance for Purchase discount”. When payment is made
beyond the discount period, the allowance for purchase discount is closed to “Purchased discount
lost”.
Illustration:
On July 15 , 2020, ABC Company purchases raw materials with a list price of P 200,000. Terms: 5%,
2/15, n/30.
REQUIRED: Entries to record the purchase and payments assuming a) full payment was made on July
28, 2020; b) full payment was made on August 10, 2020: under the following cases:
1: when taken method is used.

2. when not taken method is used
3. when offered method is used
Solution:
List Price 200,000
Less: Trade discount (5%) 10,000
Invoice Price 190,000
Case 1: when taken method is used – purchases and liability are recorded at gross.
Journal entries:
2020 Debit Credit
July 15 Materials Inventory 190,000
Accounts payable 190,000
Purchased. Terms: 5%, 2/15, n/30
a. If full payment is made on July 28, 2020: (within the discount period)
2020 Debit Credit
July 28 Accounts payable 190,000
Purchase discounts 3,800
Cash 186,200
Full payment
49
b. If full payment is made on August 10, 2020: (beyond the discount period)
2020 Debit Credit
Aug. 10 Accounts payable 190,000
Cash 190,000
Full payment
Case 2: when not taken method is used – purchases and liability are recorded at net of the discount.
Journal entries:
2020 Debit Credit
2020 Debit Credit

Cash 186,200
Full payment
2020 Debit Credit

Purchase discount lost 3,800
Cash 190,000
Full payment
Case 3 : when offered method is used
Journal entries:
2020 Debit Credit
Allowance for purchase discount 3,800
2020 Debit Credit
Cash 186,200
Full payment
2020 Debit Credit
Purchase discount lost 3,800
Cash 190,000
Full payment
50
2. Freight in
a. Direct charging - the freight cost incurred is added to the invoice price- debited to Materials Inventory
account. If two or more materials are purchased and delivered at the same time, the freight cost
incurred should be allocated using the following methods:
1. Relative peso value method – allocated on the basis of the peso value of the items purchased. This
is used if materials purchased are expressed in different terms of measurement.
2. Relative weight method - allocated based of the weight of the items purchased.
b. Indirect charging - the freight cost is charged to Factory overhead control.
Illustration:
An invoice for raw materials A, B and C is received from DAGAN Corporation. The invoice totals are:
A – P 25,000; B – P 15,000; C – P 10,000. The freight costs on this shipment weighing 10,000 kilos is
P 3,000. Shipping weights for the respective materials are 5,000, 2000 and 1,000, respectively. Terms:
2/30, FOB Shipping point, Freight prepaid.
REQUIRED:
1. Entry to record the purchase of materials and the freight using:
a. Direct charging method
b. Indirect charging method
2. The cost per kilo to be entered in the materials ledger cards for A, B and C, if freight is allocated
using:
a. Relative peso value method
b. Relative weight method
Solution:
Requirement 1:
a. Direct charging method:
Debit Credit
Purchases. Terms: n/30
b. Indirect charging method:

Debit Credit
Factory overhead control 3,000
Purchases. Terms: n/30
Requirement 2:
a) Relative peso value method
Materials Invoice Percentage Share in freight Total cost Cost/kilo

A 25,000 6% 1,500 26,500 5.30
B 15,000 6% 900 15,900 7.95
C 10,000 6% 600 10,600 10.60
50,000 3,000 53,000
Percentage = 3,000/50,000 = 6%
51
b) Relative weight method
Materials Invoice Weight/kilo Freight/kl Share in freight Total cost Cost/kilo

A 25,000 5,000 0.375 1,875 26,875 5.375
B 15,000 2,000 0.375 750 15,750 7.875
C 10,000 1,000 0.375 375 10,375 10.375
50,000 8,000 3,000 53,000
Freight/kilo = 3,000/8,000 = 0.375
SCRAP MATERIALS AND WASTE MATERIALS
Scrap materials
 are 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.
 residue of a manufacturing process and often has a value.
 Usually stored until it is sold to scrap dealers or other individuals.
Accounting for Scrap Materials

The accounting procedures depends on:
a. When should the scarp be recognized?
b. How should the revenue from scrap be accounted for?
a. Recognize at the time of sale ( if scrap is sold quickly)

1. If the value of the scrap is immaterial, the entry to record scrap sales:
Debit Credit
Cash xxx
Scrap Revenue xxx
Sale of scrap materials
Note: Scrap Revenue is shown as other revenues in the income statement.
2. If the value of the scrap is material, the accounting depends on whether the scrap is:
a. Traceable or attributable to specific job, the entry would be:
Debit Credit
Cash xxx
Work in process xxx
Note: the credit to Work in process should be entered in the job cost sheet under the Materials
column in parenthesis, to deduct the proceeds from sale of scrap from the materials that
should be charged to the job.
b. Not traceable to specific job or common to all jobs,, the entry would be:
c. Debit Credit
Cash xxx
Note: the credit to Factory overhead control is also recorded in the overhead analysis sheet
in parenthesis, to deduct the proceeds from sale of scrap from the factory overhead
control account.
52
b. Recognize at the time of production ( if scrap is not sold immediately)
1. The entry to record the scrap materials returned to the storeroom would be:
a. Traceable or attributable to specific job, the entry would be:

Debit Credit
Scrap Materials xxx
Work in process xxx
Scrap returned to storeroom
Note: the credit to Work in process should be entered in the job cost sheet under the Materials
column in parenthesis, to deduct the value of scrap from the materials that should be
charged to the job.
b. Not traceable to specific job or common to all jobs, the entry would be:
a. Debit Credit
Scrap Materials xxx
scrap returned to storeroom.
Note: the credit to Factory overhead control is also recorded in the overhead analysis sheet
in parenthesis, to deduct the value of scrap from the factory overhead control account.
2. the entry to record the sale of Scrap Materials
a. If sold at carrying value, the entry would be:

b. Debit Credit
Cash or Accounts Receivable xxx
Scarp materials xxx
Sale of scrap
c. If sold at less than the carrying value, the entry would be:
d. Debit Credit
Cash or Accounts Receivable xxx
WIP or FOC xx
Scrap materials xxx
Sale of scrap
Note: the difference between the Sales price and the carrying value of the scrap is an adjustment
to the account originally credited at the time the scarp was recognized or recorded.
c. If scarp materials will be reused as direct materials,

1. the entry to record scrap returned to storeroom would be ( assuming common to all jobs)
a. Debit Credit
Materials Inveotry xxx
scrap returned to storeroom.
2. when reused as direct materials, the entry would be:

a. Debit Credit
Work in process xx
Materials Inventory xxx
Reuse of scrap
53
Waste materials
 are left over from the production process that has no further use or resale value and may require cost
for their disposal.
 Not usually salable at any price and must be discarded.
 The cost of disposing the waste materials may be allocated to either all jobs ( included in FO applied
application ratio) ot to specific job (not included in the FO application rate).
a) Allocate to all jobs

a. Debit Credit
Accounts payable xxx
Cost of disposing waste materials
b) Allocate to specific job

b. Debit Credit
Work in process (Job #) xxx
Accounts payable xxx
Cost of disposing waste materials
SPOILLED UNITS and DEFECTIVE UNITS,
Spoiled units – units that do not meet production standard s and are either sold for their salvage value or
discarded. When spoiled units are discovered they are taken out of production and no further
work is performed on them.
Defective units – are units that do not meet production standards and must be processed further in order to be
salable as good units or as irregulars.
Two methods of accounting for Spoiled materials
1. Charged to specific job

 Used if the reason for the spoilage is the job itself because of complicated manufacturing process.
 Increased the unit cost of the completed products.
 Pro-forma entry:
Spoiled goods xxx
Work in process xxx
Note: the amount of spoiled goods = No. of units spoiled x estimated sales value per unit
2. Charged to all production

 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 an additional cost which added to
factory overhead rate.
 Pro forma entry:

Spoiled goods xxx
Work in process xxx
Note:1. the amount of spoiled goods = No. of units spoiled x estimated sales value per unit
2. the amount of the work in process = total cost incurred/charged to spoiled units
3. the loss is charged to factory overhead control.
54
Illustration:
ART Company received an order of 2,000 units of Product A, with these unit costs:
Direct materials P 10.00
Direct labor 12.00
Factory overhead ( includes P 1.00 allowance
for spoiled units ) 11.00
Total P 33.00
When the order was completed, 20 rejected units, a normal number, were sold for P 20 each.
REQUIRED: Journal entry(ies) if the loss is:

a. Charged to all production
b. Charged to the specific job.
Solution:
a. Charged to all production.
Debit Credit
a. Work in process 66,000
Payroll 24,000
Manufacturing cost applied
b. Spoiled goods 400

Factory overhead control 260
Work in process 660
Spoiled goods
c. Cash 400
Spoiled goods 400
Sale of spoiled goods
d. Finished goods 65,340

Goods completed
Note: Under this method, the unit cost of completed units remains the same P 33 (65,340/1980) per
unit because the P 1 allowance for spoiled was charged to all production (Factory Overhead
applied = 2,000 x 11).
b) Charged to specific job.

Debit Credit
Payroll 24,000
b. Spoiled goods 400

Work in process 400
Spoiled goos
c. Cash 400
Spoiled goods 400
Sale of spoiled goods

Cost of goods completed.
55
Note: Under this method the unit cost of completed units increases from P 32/unit ( 64,000/2,000) to
P 32.12 (63,600/1980) per unit because of the loss on spoiled units. The Factory overhead was
Applied to production at net of the allowance for spoiled unit (Factory Overhead applied = 2,000 x
10). The loss on spoiled units will be absorbed by the remaining good units.
Cost of spoiled units ( 20 units x P 32) 640

Less: amount recovered ( 20 x P 20) 400
Loss on spoiled units 240
Increase in the units cost of good units = 240/1980 = .12/unit
Accounting for Defective Units
1. charged to all production

 If the reason is normal to the process and the defective do not exceed the normal limit, the additional
cost will be charged to all production or all units processed during the period.
 Pro-forma entry to record additional costs incurred:

Materials xxx
Direct labor xxx
Factory overhead applied xxx
2. charged to specific jobs

 Same as spoiled units – if the reason is the job itself, the additional cost will be charged to all the units
in the job.
 Pro-forma entry to record additional costs incurred:

Work in process xxx
Materials xxx
Direct labor xxx
Factory overhead applied xxx
Illustration:
ART Company received an order of 2,000 units of Product A, with these unit costs:
Direct materials P 10.00
Direct labor 12.00
Factory overhead ( includes P 1.00 allowance
For defective units ) 11.00
Total P 33.00
During the process 50 units were found to be defective and will required additional costs of: Materials,
P 250, labor, P 200 and overhead of P 150.
REQUIRED: Journal entry(ies) if the additional cost is:

a. Charged to all production
b. Charged to the specific job.
Solution:
a. Charged to all production.
Debit Credit
Payroll 24,000
56
b. Factory overhead control 600

Materials inventory 250
Payroll 200
Factory overhead applied 150
Additional costs incurred for defective units
c. Finished goods 66,000

Goods completed
Note: Under this method, the unit cost of completed units remains the same P 33 (66,000/2,000) per
unit because the additional costs of defective was charged to Factory overhead control account
b) Charged to specific job.

Debit Credit
Payroll 24,000
b. Work in process 600

Materials inventory 250
Payroll 200
Factory overhead applied 150
Additional costs incurred for defective units

Cost of goods completed.
Note: Under this method the unit cost of completed units will increase from P 32/unit ( 64,000/2,000) to
P 32.30 (64,600/2,000) per unit because the additional costs incurred for defective units is charged
to work in process, so all the units in the job will share in the cost incurred to rework the defective
units.
End
57

Name: ___________________ Score:_______

Course/Section: ___________ Date: ________
Assignment 1: Theory
I - Instruction: Determine what is being referred to in the statements given below. A list of possible answers is
provided. Write only the letter corresponding to the correct answer.
_____1. This person is responsible for purchasing materials in correct quantities, at the proper time and at the
lowest price.
_____2. This is the length of time it takes the materials to be delivered after placing an order.
_____3. This department receives, check and delivers materials to the storeroom.
_____4. This is a contract to deliver the specified materials
_____5.This is a record of quantities received, issued and on hand at all times.
_____6. This department prepares purchase requisitions.
_____7. This applies only when the demand for a product is constant and minimizes inventory holding and
ordering costs.
_____8. This is the stock held by companies to guard against stock-out.
_____9. This is the systematic control over procurement, storage and usage of materials to avoid excessive
investment in inventories.
_____10. When the first bin is empty, an order is placed. The second bin provides coverage until the order is
delivered
List of possible answer:
A. Direct Materials G. Receiving department M. Accounting Department
B. Two-bin method H. Materials ledger card N. Cash Department
C. Purchasing agent I. Economic order quantity O. Reorder point
D. Lead time J. Purchase requisition P. Receiving Report
E. Safety stock K. Purchase order
F. Direct Labor L. Storeroom
II – Write the correct answer on the space provided.

A. Multiple Choice:
____1. Entries made in the Materials account in the general ledger are the following, except:
a) Materials purchased c) materials returned
b) Materials issued d) materials reserved and on order
____2. When must a new unit cost be calculated under the moving average method?
a) After each issue c) Before each issue
b) After each receipt d) Before each receipt
____3. The costing method that considers materials on hand to be from the last ones purchased is:
a) LIFO b) FIFO c) moving average d) Specific identification
____4. A company has been ordering more than the economic order quantity. This would result in:
a) More frequent order points c) Carrying costs greater that order costs
b) Carrying costs less than order costs d) Equal safety stock costs and carrying
costs
____5. What is the major advantage of using perpetual inventory system?

a) It provides efficient internal control over materials
b) It avoids inventory shortages and overages.
c) It minimizes error in posting receipts and issues of materials.
d) It avoids losses due to theft.
58
____6. The factor that need not be considered when calculating an inventory economic order quantity is:
a) Safety level stock c) order placing costs
b) annual stock level d) annual sales of a product
____7. The purchase requisition may originate from all of the following except:
a) A storeroom employee
b) A material record clerk
c) A receiving department clerk
d) Other department employee who needs materials of a special nature
____8. The following are the objectives of store control, except:

a) To receive materials and store them properly.
b) To make sure proper classification and codification of materials
c) To minimize handling and ordering costs
d) To maintain proper records about materials receipts, issues and balances.
___9. Indirect materials that cannot be charged to a specific job are posted from the materials requisition to the:
a) Materials ledger card c) Bin tag
b) Receiving report d) Departmental overhead analysis sheet
___10. The elapsed time between placing an order for inventory and receiving the order is:
a) lead time b) reorder time c) stockout time d) stocking time
___11. The purpose of the economic order quantity is to:

a) Minimze the safety stock
b) Minimize the inventory quantities
c) Minimize the sum of the order costs and the holding costs
d) Minimize the sum of the demand costs and the backlog costs
___12. One of the elements included in the EOQ formula is:

a) safety stock b) yearly demand c) selling price per item ) lead time for delivery
B. True or False: Write “O” if the statement is true and “X” if the statement is false.
_____13. If scrap materials will be reused as direct materials, Materials Inventory account is to be debited
at its net realizable value when returned to storeroom.
______14. Waste materials are scrap materials which are salable at net realizable value.
______15. Trade discounts are recorded on the books of accounts.
______16. The accounting for scrap materials and waste materials is the same.
______17. At the end of the period, the balance of the Materials Inventory account should equal the total
balance on the materials ledger card.
______18 Under perpetual inventory system, Freight in account is debited for freight costs of materials
purchased.
III. Scrap materials with estimated market value of P 4,500 are gathered and separated from work in process.
They are subsequently sold for P 4,200. Journal entries, under each of the following assumptions:
A. Revenue from sale of scrap is recognized only upon sale as:

19. other income:
20. as adjustment to factory overhead

59
21. as reduction in the cost of a particular job.
B. Scrap is recognized upon separation from work in process:
22. adjustment to factory overhead
23. Refer to # 22, sale of scrap
24, reduction in the cost of a particular job.
25. refer to # 24. Sale of scrap materials
End
60

Name: ___________________ Score:_______

Course/Section: ___________ Date: ________
Instruction: Answers must be supported with computations. Use yellow pad for supporting
computations.
1. Venus Manufacturing Company uses 1,000 units of Chips annually in its production. Order costs consist of
P10 for placing a long-distance call to make the order and P40 for delivering the order by truck to the
company warehouse. Each Chip costs of P100 and the carrying costs are estimated at 15.625% of the
inventory cost.
What is the economic order quantity for chip?

a) 80 b) 90 c) 100 d) 120
2. Using the data in No.1. What is the total order cost?

a) P625 b) P550 c) P525 d) P650
3. Using the data in No.1, what is the carrying cost of the year?
a) P625 b) P650 c) P550 d) P525
4. FFC Company uses 200 units of Material X per week. Purchase order lead time is 3 weeks; the estimated
safety stock is 400 units and the economic order quantity is 450 units. What is reorder point?
a) 2,050 units b) 1,450 units c) 1,000 units d) 600 units
5. The following data relate to Material Afor a given year of SKY company:
Economic order quantity 7,500 units
Cost to place a purchase order P 75
Total cost to place purchase order for the year P 15,000
Cost to carry one unit for the year P6
The estimated annual usage in units would be:

a) 5,625,000 b) 2,250,000 c) 2,000,000 d) 1,250,000
6. Marsh Company had 150 units of product on hand at January 1, costing P 21.00 each. Purchases of a
product A during the month of January were as follows:
Units Unit cost
January 10 200 P 22.00
18 250 23.00
28 100 24.00
Physical count on January 31 shows 250 units of Product A on hand.
The cost of inventory at January 30, under the FIFO method is: ___________________________
7. Under FIFO method:. the cost of materials issued to production is ________________________________
For items 8 – 11:

An invoice for AA, BB and EE is received from Heavyweight Co. Invoice totals are AA= P 125,000; BB=
P 75,000; EE = P 100,000. The freight charges on this shipment amounted to P 7,500. Weights for the
respective materials are 10,000, 6,000 and 7,500 pounds.
8. compute the cost per pound if freight is allocated based on cost.

AA ________________ BB _____________________ EE __________________
9. determine the cost per pound if freight is allocated based on shipping weight.
AA ________________ BB ______________________ EE __________________
61
Journal entry to record purchase of materials and freight using:

10. Direct charging method
11. Indirect charging method
For tiems 12 – 18:

Mavie Company regularly buys merchandise from Dawson Suppliers and is allowed a trade discount of 10 and
5 from the list price. On September 1, 2020, Mavie Company purchased merchandise with a list price of
P 100,000 and terms 2/10, n/30.
Journal entry to record purchase of materials and payment assuming:
a. when taken method is used: assume full payment was made on September 9, 2020:
b. when not taken method is used: assume full payment was made on September 9, 2020
c same as b. except that the full payment was made of September 25, 2020: the entry to record full payment:
d. when offered method is used and full payment was made on September 9, 2020:
62
e) using method d, except that full payment was made on September 25, 2020: give the entry to record full
payment
19. During the fiscal year just ended, the GLEE Company incurred prime costs of P 2,000,000 and conversion
costs P 1,800,000. Overhead is applied at the rate of 150% of direct labor cost.
How much of the above costs represents material costs ? _____________________
In July 2020, FARM Manufacturing Company plans to sell 400,000 units of their products and increase
their finished goods inventory ending by 27,500 units. The products to be sold in July were produced in June.
Four units of materials are needed to produce 1 unit of product. There are lossess considered normal, during
the process and only 95% of the materials placed in process results in good units. Cost of 1 unit of direct
material is P 2.50. The materials inventory on June 1 is 80,000 units and on June 31, 100,000 units.
20. The Cost of materials to be purchased in June.

a) P 5,460,000 b) P 4,500,000 c) P 4,275.000 d) not given (specify) _________
21. The Cost of materials used in June.

a) P 5,460,000 b) P 4,500,000 c) P 4,275.000 d)not given (specify) ________
22 During July 2019 SEED Company used P 450,000 direct materials. At the end of the month, the direct
materials inventory of the Company was P 25,000 lower than the July 1 inventory. How much was the direct
materials procured during July 2020?
a) P 475,000 b) P 425,000 c) P 400,000 d) not given (specify) _____________
23. During March, Part Company incurred the following costs on Job 109 for the manufacture of 200 motors:
Original cost accumulation:
Direct materials ……………………………… P 660
Direct labor……………………………………. 800
Factory overhead (150% of DL) ……………… 1,200
P 2,660
Direct costs of reworking 10 units:
Direct materials P 100
Direct labor 160
P 260
The rework costs were attributable to the exacting specifications of Job. 109 and the full rework costs were
charged to this specific job. What is the cost per finished unit of Job 109?
a) P 15.80 b) P 14.60 c) P 14.00 d) P 13.30

63
24. Using the same information in no. 24, assuming the rework cost were attributable to internal failure or
charged to factory overhead, what is the cost per finished unit of Job. 109?
a) P 15.80 b) P 14.60 c) P 14.00 d) P 13.30
25. Tool Co. manufactured electric drills to the exacting specifications of various customers. During February
2020, Job # 411 for the production of 1,100 drills was completed at the following costs per unit:
Direct Materials P 100

Direct Labor 80
Factory overhead 120
Total P 300
Final inspection of Job. 411 disclosed 50 defective units and 100 units of normal spoilage. The defective drills
were reworked at a total cost of P 5,000 and the spoiled drills were sold to a jobber for P 15,000.
The unit cost of the good units produced on Job 411 was:
a. P 330 b. P 320 c. P 300 d. P 290
II – Records of the Eastwood Company show the following purchases and issues of materials during October
2020:
October 1 - Beginning balance: 2,800 units @ P 12 per unit

4 - Issued 1,200 units
6 - Received 1,000 units @ P 13.30 per unit.
8 - Issued 1,000 units.
14 - Received 400 units @ P 14.00 per unit.
17 - Issued 1,200 units.
20 - Returned to stockroom 100 units of those issued on October 8.
22 - Received 500 units @ P 14.16 per unit.
24 - Returned to supplier 50 units purchased @ P 14.00 per unit.
25 - Issued 900 units.
27 - Received 1,200 units @ P 13 per unit.
31 - Issued 500 units.
REQUIRED: Using a) FIFO and b) Moving Average;
1. Prepare the materials stock card

2. Determine the cost of materials issued during October and Materials Inventory, October 31,
2020
64
a) FIFO Costing:
STORES LEDGER CARD

Unit Unit Units
65
b) Moving Average:
STORES LEDGER CARD

Unit Unit Units
66

Lesson 3 – Accounting for Labor
Labor Cost
 Price paid for using human resources or compensation paid to employees or workers
 Factory payroll costs are divided into:
a. Direct labor
 Wages paid to the production workers who work directly on the product manufactured or which are
allocated directly to the product and debited to Work in process.
b. Indirect Labor
 wages and salaries of employees or workers who are required for the manufacturing process but who
do not work directly on the units being manufactured and debited to Factory Overhead Control.
Accounting System for Labor includes:

1. Recording the number of hours used in total and by job
2. Recording the quantity produced by the workers
3. Analyzing the hours used by employees to determine how time is to be charged.
4. Allocation of payroll costs to jobs and factory overhead accounts
5. Preparation of payroll, including computation and recording the employees gross earnings , deductions
and net earnings.
Wages Plans
 The plan established by the management is approved by the union and must comply with the
regulations of government agencies.
1. Hourly rate plan - fixed rate per hour is set for each worker. Wages is equal to rate per hour multiplied by
number of hours worked.
2. Piece-rate plan – wages is computed by multiplying the worker’s output by the rate per piece. This plan
provide incentives to the employees to produce more.
3. Modified wage plan - a combination of hourly rate and piece rate plan.
Controlling Labor Cost
1. Timekeeping and Payroll Department

 Responsible for maintain labor records
 Accounts for the time spent by the employees in the factory.
 Timekeeping functions involves two major procedures:
a. accumulation of the total number of hours worked by each employee to compute their earnings.
b. determination on how the labor hours was spent
 Forms and records maintained:
Timekeeping Payroll
a. clock cards a. Payroll records
b. time tickets b. Employee’s earning records
c. production reports c. Payroll summaries
1. Timekeeping and payroll procedures

a. Timekeeping
1. Gather the data on how many hours have been worked by each hourly rate employee from the
time card or clock card.
2. The hours worked should be recorded in the time ticket or individual production report. The time
ticket shows the employee’s starting and stopping time on each job, rate of pay and the amount of
earnings. Individual production report is used if piece rate is used.
3. Time ticket or individual production report are sent to the payroll department on a daily basis and
the pay rates and gross earnings are entered, then forwarded to the accounting department
67
b. Payroll procedures:
1. the data gathered from the time cards or clock cards are transferred to payroll register or payroll
sheet.
 In preparing the payroll, certain mandated government contributions need to be deducted from the
gross pay of each employee. These deductions include the following:
a) SSS contributions
b) Withholding Taxes
c) Philhealth Contributions
d) Pag-ibig Contributions
e) Advances to Employees
 Social Security Contribution – it is a requirement that all employees in the private sector be
members of the Social Security System (SSS). The system provides benefits and services to its
members which include the following: salary loans, educational loans, housing loans, sickness and
death benefits and reimbursement of funeral expenses for deceased members. In consideration for
all these benefits, the employee is required to make a monthly contribution. This contribution is
shared between the employee and employer. The contribution of the employer is an operating
expense.
 Phil. Health Contribution – The PHILIPPINE HEALTH INSURANCE CORPORATION was

established to provide hospitalization and other medical benefits to its members and their
dependents. The employee and employer share in the contribution. The contribution of the employer
is also an operating expense.
 Pag-ibig Fund Contribution – The Pag-ibig Fund is a provident savings and housing fund fro
employees. It aims to generate mass savings geared toward financing homes for its members.
Contributions to the fund are made by the employer and its employees.
 Withholding Income Tax – Under the BIR regulations, every employer is required to
deduct/withheld income tax from the salary of its employees in accordance with a withholding tax
table.
 Employees Compensation - Employees are insured against injuries or death sustained in

connection with work related activities under a system of Employees Compensation. Contributions
for this state insurance fund are made only by the employers.
 Advances to Employees –
Employees sometimes ask for cash advances against their salaries from their employer. This is
referred to as Advances to Employees. The pro-forma entry to record cash advances:
Advances to employees xxx

Cash xxx
Salary advances to Mr.______
Note: Except for cash advances, the above enumerated deductions are remitted to the respective
agencies together with the employer’s share in the contribution.
 Pro-forma entry to record payment of salaries and wages:

Payroll xxx
SSS contributions Payable xxx
Pag-ibig Contributions Payable xxx
Phil.Health Contributions Payable xxx
Withholding Taxes Payable xxx
Advances to Employees xxx
Cash xxx
For payroll for July 1 – 31.
68
2. Charging labor costs into Production

 Time tickets or job time cards show how time was used on specific job. It facilitates the allocation of labor
costs into direct labor and indirect labor.
 A labor cost summary is prepared from the time tickets, which is used as the source in making journal
entry to distribute payroll account.
 Overtime should be shown separately from employee’s regular time. Overtime distribution depends uon
the conditions creating the need for overtime hours – may be charged to work in process of factory
overhead control.
 The format of time ticket depends on the organization of the company.
 Pro forma entry to distribute labor costs:
Work in process xxx
Factory payroll xxx
Note: Work in process was debited for direct labor and Factory overhead control for indirect labor.
Flow of Labor Costs

1. Record the number of hours worked each day by each employee on a time card.
2. Record the hours and type of work performed each day by each employee on a time ticket.
3. Record the total earnings, deductions and net pay of all employees for the payroll period in the payroll
register or payroll sheet. Post the total to the appropriate ledger accounts.
4. Post the earnings, deductions and net pay for each employee to an individual earnings record.
5. Record direct labor costs to the individual job cost sheets. Enter indirect labor costs on the
departmental overhead analysis sheet.
6. Prepare summary of factory wages, prepare journal entry to charge labor cost to production. Post the
amounts to Work in Process account, Factory overhead control account and factory payroll account.
Labor Overhead
1. waiting time or idle time
 Cost of non-productive hours of direct labor caused by lack or work, waiting for materials delays from
scheduling, machine break down, and machine set-up. If the idleness is normal to the production and
cannot be avoided the cost of idle time should be charged to Factory Overhead control.
2. Make-up pay
 Payment is based on output or units produced or paid at a “piecework” rate, and if the units produced
multiplied by the piece rate is less that the guaranteed payment of minimum payment, the difference is
charged to Factory overhead control account. If the units produced is greater than the minimum units to
be produced, then the employee is paid for the additional units produced and the amount is charged to
Work in Process.
3. Overtime Premium
 Additional rate earned for extra hours worked beyond the regular hours or working during holidays or
their rest day.
 Overtime premium is equal to overtime hours x premium rate. Premium rate for overtime is usually
some fraction of the regular rate.
 If the overtime results from the requirement of a specific job- rush order with the knowledge that
overtime is necessary or the customer agrees to pay for the special services, then the premium will be
debited to Work in Process.
 If the overtime is due to random scheduling or a regular job order cannot be completed on time and
overtime is necessary, the premium will be debited to Factory Overhead Control.
4. Shift premium or shift differential

 Extra pay to work during less desirable evening shift ( 2pm to 10 pm) or night shift ( 10pm to 6am),
should be charged to Factory Overhead Control.
5. Employer’s payroll taxes or employer’s share for SSS Premiums, EC contributions, Pag-ibig contribution, and
Philhealth contribution - charged to Factory Overhead Control.
69
Illustration:
Problem 1:
ABC Corp. pays its workers at the rate of P 200 per day plus P 21 for every unit produced in excess of 10 units
during each working day. The production report for two days show:
Number of units completed

Worker Monday Tuesday
A 8 9
B 10 12
C 10 15
D 10 10
E 10 11
REQUIRED:
1. Compute the amount to be paid to each worker.
Solution:
Number of units completed Gross Earnings Charge to
Worker Monday Tuesday Monday Tuesday DL FOH
A 8 9 200 200 340 60
B 10 12 200 242 442
C 10 15 200 305 505
D 10 10 200 200 400
E 10 11 200 221 421 _____
48 57 1,000 1,168 2,108 60
2. Compute the average labor cost per unit for each day.
DLCost Unit Ave. DLC/unit

Monday 960 48 20/unit
Tuesday 1,148 57 20.14/unit
3. The journal entry to charge labor to production.

Factory overhead control 60
Payroll 2,168
To charge labor to production
70
Problem 2:
The following data are given for the period Sept 16 - 21, 2020
Regular OT Jobs worked on

101 102 103
T. Cruz 48 4
P. Garcia 48 5 17 21 13
N. Sanchez 46 3 16 22 10
L. Tan 44 6 15 28 7
B. Bontog 48 4 13 25 14
F. Manta 48 7 14 30 9
T. Cruz is the supervisor with an hourly rate of P 100. all workers under him receive P 70 per hour. Overtime
was rendered on working days on Job 102, based on a rush order except N. Sanchez , who worked
overtime because of a machine breakdown. Accordingly, overtime premium is 50%.
1. the total payroll for the week _____24,405________________
Solution:
Regular OT Total Hrs Jobs worked on
101 102 103 total Idle time
T. Cruz 48 4 52
P. Garcia 48 5 53 17 21 13 51 2
N. Sanchez 46 3 49 16 22 10 48 1
L. Tan 44 6 50 15 28 7 50
B. Bontog 48 4 52 13 25 14 52
F. Manta 48 7 55 14 30 9 53 2
Regular OT Total Hrs Gross Earnings Charge to

Total Hrs OT Prem DL FOH
T. Cruz 48 4 52 5,200 200 5,400
P. Garcia 48 5 53 3,710 175 3,745 140
N. Sanchez 46 3 49 3,430 105 3,360 175
L. Tan 44 6 50 3,500 210 3,710
B. Bontog 48 4 52 3,640 140 3,780
F. Manta 48 7 55 3,850 245 3,955 140
Total 23,330 1,075 18,550 5,855
2. How much must the total charge to direct labor for the week? ______18,550___________
3. How much must the total charge to factory overhead for the week? ___5,855__________
4. The journal entry to charge labor to production.

Payroll 24,405
To charge labor to production
71

Name: ____________________ Score: _________

Course/Section _____________ Date: __________
Assignment 1 - Theory
I – Instruction: Determine what is being referred to in the statements given below. A list of possible answers is
provided. Write only the letter corresponding to the correct answer.
____1. it is concerned with the total number of hours worked by each employee and what a worker does each
hour he is being paid.
____2. It provides additional financial compensation to workers and at the same time reduces the fixed
overhead cost per unit.
____3. It shows how each employee’s net pay is arived at by providing columns for gross pay and deductions
aside from net pay.
____4. This represents the number of hours a worker has devoted to a job during a day.
____5. This is concerned with the determination of the breakdown of the payroll and the making of labor costs
sheets or production reports.
____6. It shows when the worker reports for work and when he goes out and is used as a basis in the
computation of his gross pay.
____7. This is used by a worker in accounting for the total number of hours timed in for a day.
____8. This is treated as a direct charge to a job when overtime work is due to the rush nature of a job.
____9. This refers to keeping track of labor cost in total and per unit, comparing them with pre-determined
figures and adopting prompt remedial measures in case there are differences.
____10. The premium is treated as _____ when overtime is due to greater volume of work, slow production or
inadequate plant capacity.
List of Possible answers:

A. Labor cost control G. Overtime Premium M. Factory Overhead
B. Work in Process H. Time Ticket N. Time Card
C. Indirect Labor I. Timekeeping O. Daily Time Report
D. Time and Motion study J. Payroll sheet P. Factory Overhead Control
E. Earnings record K. Cost accounting phase in labor Q. Financial accounting
F. Shift Pay cost control phase in labor cost control
L. Incentive System
II – MODIFIED TRUE OR FALSE: Write “O” if the statement is true and if the statement is false, underline the
word or group of words which makes the statement false.. STRICTLY NO ERASURES
___1. Record keeping is the procedure for keeping records of the hours worked by each employee.
___2. SSS Premiums are not levied on the employer.

___2. Direct labor is debited to Work in Process while inidrect labor costs is debited to Factory Overhead
Control.
___3. Financial accounting phase involves payroll preparation.
___4. Gross Earnings includes regular pay and overtime premium.
___5. Labor cost is the price paid for using human resources.
___6. Total factory labor cost is composed of direct labor and indirect labor.
___7. Cost of non productive hours of direct labor should be debited to Work in Process.
___8. Overtime premium is always charged to Manufaucturing overhead.
___9. Employer’s contributions for SSS, Philhealth and Pag-ibig are charged to Factory Overhead Control. (for
factory workers)
___10. Cost accounting phase is concerned with the allocation of the payroll charges to the different jobs.
72

Name: ____________________ Score: _________

Course/Section _____________ Date: __________
Assignment 2- PRACTICE – (with supporting computations)

1. Ms. Joy, a punch press operator in a metal fabricating plant is randomly assigned to various jobs. The
straight-time wage rate is P 40 per hour with time and one-half for time over 40 hours per week. How much
of these earnings should be charged to Manufacturing Overhead Control account if 47 hours are worked in
one week.
a) P 1,974 b) P 280 c) P 140 d) P 0
2. Jose Santos worked 46 hours in one week at a rate of P 45 an hour. He is paid one and a half times the
regular rate for hours worked in excess of 40. What is the gross earnings of Jose Santos:
a) P 2,340 b) P 2,205 c)P 2,070 d) P 1,800
3. Mike G., a production employee is paid P 180 per hour for a regular work of 40 hours. During the week ended
March 23, Mike G worked 50 hours and earned time and a half for overtime hours.
What is the amount that should be charged to Work in Process account if the overtime premium is charged to
production worked during the overtime hours?
a) P 9,900 b) P 9,500 c)P 9,000 d)P 8,900
4. Using the data in no. 3, what is the amount that should be charged to Work in Process account, if the
overtime premium is charged to manufacturing overhead?
a) P 9,900 b) P 9,500 c)P 9,000 d)P 8,900
5. Ronald Factory provides for an incentive scheme for its factory workers which features a combined
minimum guaranteed wage of P 875 per week and piece rate of P 11.25. Production report for the week
show.
Employee Units produced
R 67
O 78
L 80
A 82
N 72
D 75
The portion of the weekly payroll that should be charged to factory overhead is:
a) P 5,325 b) P 5,275 c) P 5,217.50 d) P 217.50
6. Five hours of labor are allowed per unit of a product at the rate of P 50 per hour. Budgeted
volume for June is 25,000 units. Total regular working hours for June is 160 per worker.
What is the estimated number of labor hours required to produce 25,000 units __________________
7. Refer to number 6: How many workers must be available for the production in June? _____________
8. Refer to number 6: how much must be the budgeted labor cost for June? ______________________
9. Twenty workers paid at a wage rate of P 50 per hour, worked for 40 hours each, entirely Job 101 during the
past week. Eight other who are paid at a wage rate of P 40 per hour , spent half of their 40 – hour week on
Job 101 and the remainder of their time on Job 102. In addition , Mr. Arce, a part timer, worked on Job 102
for 16 hours but was unable to work 4 hours because of the inefficiency of his fellow workers in a priorstage.
Mr. Arce earns P 45 per hour. Salaries for supervisors and maintenance personnel related to Job 101 and
102 amounted to 3,750.
Give the entry to record labor cost (ignore payroll withholdings)
73
10. RUSS Manufacturing Co. has provided you with the following information:
Raw materials purchased P 135,000
Beginning raw materials inventory 100,000
Ending raw materials inventory 175,000
Factory overhead (including P 85,000 of indirect labor and P 20,000
of indirect materials) 227,500
Total Manufacturing costs 960,000
Direct labor cost for the year amounted to?

a) P 692,500 b) P 677,500 c) P 642,500 d) P 382,500
11. The Norman company recently adopted an incentive plan. Factory workers are paid P 7.50 per unit with a
guaranteed minimum wage of P 2,000 per week. Following is a report on employees’ productivity for the
week ending May 19, 2020. All employees worked the full 40-hour week.
Weekly Summary
Employee’s Name Units Produced
R. Cruz 240
J. Briones 286
C. David 275
A. Mendoze 240
F. Rivera 225
R. Tolentino 285
REQUIRED: 1. Compute each employee’s gross pay.

2. What amount should be charged to Work in Process?
3. What amount should be charged to Factory Overhead Control?
4. Give the entry to record labor cost (ignore payroll withholdings)
12. The following data are given for the period July 12 – 18, 2020:
Total hours Regular OT Jobs worked on Others
21 22 23
R. Santos 48 48
J. Carlos 46 43 3 12 20 9 Delivery 4
M. Perez 50 48 2 15 25 9
B. Gomez 53 46 7 16 30 5
L. Lina 53 45 8 17 15 20
G. Tonio 51 45 6 10 18 17 Repairs 5
R. Santos is the foreman with an hourly rate of P 60. all workers under him receive P 50 per hour. Overtime
was rendered on working days on Job 23, based on a rush order. Accordingly, overtime premium is 25%.
1. How much must the total charge to direct labor for the week?
2. How much must be the total payroll for the week?
3. How much must be the total charge to factory overhead control for the week?
End
74

Lesson 4 – Accounting for Factory Overhead
Factory Overhead - includes all costs related to the manufacturing of a product except direct materials and
direct labor. It includes:
 indirect materials - materials which cannot be readily identified with any particular item manufauctured.
 indirect labor - wages and salaries of employees who are required for the manufacturing process but
who do not work directly on the units being manufactured.
 other manufacturing expenses such as depreciation of factory building, machinery and equipment,
factory supplies, heat light, power maintenance, insurance, etc.
 Divided into 3 categories:
a. fixed – overhead costs that remain constant within the relevant range regardless of the level of
production.
b. variable – overhead cost that vary in direct proportion to the level of production..e.g. indirect materials
c. mixed – overhead costs that are partly fixed and partly variable. The fixed and variable component
must be separated for purposes of planning and control.
Control of Factory Overhead Costs

 The size of the company and the types of products are the key factors to be considered to account for
factory overhead.
 If there are many types of overhead costs, factory overhead analysis sheet should be maintained. This
is a subsidiary ledger for Factory overhead Control account in the general ledger, which represents the
actual factory overhead incurred during the period.
Charging Factory Overhead to Production
a. Budgeting factory overhead costs

Budgets are management operating plans expressed in quantitative terms, such as unit of production
and related costs. After the fixed and variable factory overhead costs have been classified separately,
budgets can be prepared for expected level of production. The separation of fixed and variable
components permits the company to prepare a flexible budget.
b. the budgeted factory overhead based on a certain level of activity or production is the basis in the
computation of predetermined overhead rate or overhead application rate.
c. the overhead for each job is applied by determining the actual base selected on the job multiplied by the
factory overhead predetermined rate or application rate.
d. Normal costing is commonly used by most companies to avoid delays in costing the job wherein direct
materials and direct labor are applied at actual costs while factory overhead costs are applied based a
predetermined rate.
Factors to be considered in the computation of overhead rate:

1. Base to be used - should be related to the functions represented by the overhead cost being applied.
a. Physical output
b. Direct materials cost
c. Direct Labor cost
d. Direct labor hours
e. Machine hours
2. Activity level to use

a. Normal capacity
b. Expected actual capacity
3. Inclusion or Exclusion of Fixed Factory Overhead

a. Absorption costing – method used for cost accounting
b. Direct costing – method used for internal reporting (management services)
75
4. Use of Single rate or several rate:

a. Plant-wide or blanket rate – one rate for all producing departments
b. Departmentalized rate – one rate for each producing department
BASE TO BE USED
1. Physical Output or units of production – the simplest method and appropriate if a company or
department manufactures only one product. The formula is:
FOH rate/unit = Estimated Factory overhead

Estimated units of production
2. Direct Material Cost - appropriate if factory overhead costs are directly related to direct materials and
direct materials are a very large of the total cost. This base is not appropriate if a company manufactured
more than one product. The formula is:
FOH rate (Percentage of direct material cost) = Estimated Factory overhead x 100
Estimated direct material cost
3. Direct Labor cost - appropriate if factory overhead costs are directly related to direct labor costs. The
formula is:
FOH rate (Percentage of direct labor cost) = Estimated Factory overhead x 100
Estimated direct labor cost
4. Direct Labor hours – most commonly used base in the computation of FOH application rate. The formula
is:
FOH rate/ direct labor hour = Estimated Factory overhead

Estimated direct labor hours
5. Machine hours – appropriate when there is a direct relationship between factory overhead cost and
machine hours. The formula is:
FOH rate/ machine hour = Estimated Factory overhead

Estimated machine hours
Capacity production – the capacity of production that should be adopted in estimating the factory overhead
costs.
1. Theoretical, maximum or idle capacity – capacity to produce at full speed without interruption. It gives
no allowance for human capacity to achieve the maximum nor due allowance to for any circumstances
that might result to stoppage of production within or not within the control of management. The plant is
assumed to function 24 hours a day, 7 days a week and 52 weeks a year.
2. Practical capacity - a capacity of production that provides allowance for circumstances that might result
to stoppage of production.
3. Expected actual capacity – a capacity concept based on a short range outlook which is feasible only for
firms whose products are seasonal or where the market and style changes allows price adjustment
according to competitive conditions and customer demands.
4. Normal capacity – a capacity of production taking into consideration the utilization of the plant facilities
to meet commercial demands served over a period long enough to level out the peaks and valleys which
come with seasonal variations. This capacity is commonly used in the computation of overhead rates.
76
Methods of accumulation of factory overhead costs
1. Non-controlling account system – an account for each kind of overhead expense according to their
nature is opened in the ledger and charges to such account are made upon incurrence of the expense.
2. Controlling account system – a Factory Overhead Control account is opened in the general ledger
wherein the overhead expenses are charged and a subsidiary ledger or overhead analysis sheet is
maintained to show in detail the nature and account of the expense. This method is commonly adopted
by companies because overhead analysis sheets or subsidiary ledgers for overhead permit a greater
degree of control as related accounts can be grouped together and the various expenses incurred by
different departments can be described in detail.
Recording Factory Overhead Costs

1. Applied Factory Overhead - the application of factory overhead to jobs, pro forma entry is:
Debit Credit
Work in Process xxx
Factory Overhead Applied xxx
To record applied factory overhead
2. Actual Factory Overhead Incurred – the incurrence of factory overhead expenses, pro forma entry is:
Debit Credit
Factory Overhead Control xxx
Cash/Accounts Payable/Payroll/Materials xxx
To record actual factory overhead
Factory Overhead variance

 The difference between the actual factory overhead and applied factory overhead charged to
production.
 Classification of factory overhead variance
a. Overapplied – FOH applied is greater than Actual Factory overhead (favorable variance) Pro-forma
entry (amounts are assumed)
Debit Credit
Factory Overhead Applied 120,000
Overapplied Factory overhead 10,000
To close factory overhead accounts
b. Underapplied – FOH applied is less than Actual Factory overhead (unfavorable variance). Pro-
forma entry (amounts are assumed)
Debit Credit
Factory Overhead Applied 120,000
Underapplied Factory Overhead 10,000
To close factory overhead accounts
 Disposition of Overapplied or underapplied Factory overhead

a. If the amount is immaterial – close the underapplied or overapplied Factory overhead to Cost of
Goods Sold. The entry would be: (This is usually used in practice)
Debit Credit
Cost of Goods sold 10,000
Underapplied Factory Overhead 10,000
To close underapplied factory overhead
77
b. if the amount is material, the overapplied or underapplied factory overhead should be allocated
proportionately to all goods that have been worked during the year – Work in Process, Finished
goods and Cost of goods sold, pro forma entry is:
Debit Credit
Work in process, inventory xxx
Finished goods inventory xxx
Cost of Goods sold xxx
Underapplied Factory Overhead xxx
To close underapplied factory overhead
Causes of Factory overhead variance

a. Spending variance – the variance is due to expense factor
b. idle capacity or volume variance – the variance is due to difference in volume and activity factors
Computation:
1. Spending variance:
Actual factory overhead xxx
Less: Budget allowed based on capacity used:
Fixed factory overhead xxx
Variable factory overhead xxx xxx
Spending variance xxx
Note: If actual FOH is more than budget allowed, the variance is unfavorable.
2. Volume variance or idle capacity

Budget allowed based on capacity used xxx
Less: Applied factory overhead xxx
Volume variance xxx
Note: If applied FOH is more than budget allowed, the variance is favorable
Illustration:
Selected data for PMP Manufacturing Company for the year 2019 follow:
Budgeted for the year Actual for the year

Direct labor hours 260,000 248,300
Factory overhead
Fixed P 585,000 578,400
Variable 1,092,000 1,039,940
Total 1,677,000 1,618,340
Overhead is applied on the bases of direct labor hours.
Determine: 1. Predetermined overhead rate and variable overhead rate

2. over or underapplied factory overhead for the year
3. spending variance
4. volume variance
Solution:
1. Predetermined overhead rate = Budgeted overhead = P 1,677,000 = P 6.45/DLH
Budgeted direct labor hours 260,000
Variable overhead rate = Budgeted variable overhead = P 1,092,000 = P 4.20/DLH

Budgeted direct labor hours 260,000
78
2. Over or underapplied FOH

Actual factory overhead 1,618,340
Applied factory overhead ( P 6.45 x 248,300hrs) 1,601,535
Underapplied overhead (unfavorable) 16,805
3. Spending variance:
Actual factory overhead 1,618,340
Less: Budget allowed based on capacity used:
Fixed factory overhead 585,000
Variable factory overhead ( P 4.20 x 248,300) 1,042,860 1,627,860
Spending variance (Favorable) (9,520)
4. Volume variance or idle capacity

Budget allowed based on capacity used 1,627,860
Less: Applied factory overhead 1,601,535
Volume variance – unfavorable 26,325
Net variance (unfavorable) 16,805
FACTORY OVERHEAD - DEPARTMENTALIZATION
 Departmental overhead application rate is appropriate if manufacturing company has several departments
that incur overhead cost relating to different activity level.
 Departments are classified into:
a. producing departments – departments that are directly engaged in manufacturing activities, such as:
assembly, finishing and packaging departments.
b. service departments - departments that assist indirectly by rendering services to production

departments, such as: purchasing, medical, maintenance, etc.
 Departmentalized overhead rate are for producing departments only.
 Steps in computation of Departmentalized Overhead rate:

1. Divide the company into segments called departments, cost centers, to which expenses are charge.
2. Estimated the factory overhead for each department (direct departmental charges plus indirect
departmental charges).
3. Select and estimate the base to be used by each department.
4. Allocate the service department cost to the producing departments.
5. Compute the factory overhead rate
 Typical allocation for common costs

Common cost Typical allocation base
Labor related
1. Supervision No. of employees, payroll amount of DLHs
2. Personnel services Number of employees
Machine related
1. Insurance on equipment Value of equipment
2. Taxes on equipment Value of equipment
3. Equipment depreciation Machine hours, value of equipment
4. Equipment maintenance Number of machines, machine hours
Space related
1. Building rental Space occupied
2. Building insurance Space occupied
3. Heat and air-conditioning Space occupied, volume occupied
4. Interior building maintenance Space occupied
79
Service oriented
1. Material handling Quantity, value of materials
2. Billing and accounting Number of documents
3. Indirect materials Value of indirect materials
METHODS OF ALLOCATING SERVICE DEPAPRTMENT COST TO PRODUCING DEPARTMENTS
1. Direct method
 most widely used
 costs of each service department are allocated only to producing departments.
 Ignores any services rendered by one service department to another service department.
2. Step Method - sequential method of allocation.

 Recognizes services rendered by one service department to another service department.
 The allocation starts with the department that renders service to greatest number of other service
departments and ends with the department that renders service to the least number of other
departments. Once a service department’s cost is allocated , no subsequent service department cost is
allocated to it.
3. Algebraic method - reciprocal method-

 Allocates costs by explicitly including the mutual services rendered among all departments.
 Service department costs and service department reciprocal service relationships are described by an
algebraic equation.
Illustration (source: Cost Accounting and Control by Norma D De Leon, et.al)

Kappa Gamma Company’s factory is divided into four departments – producing departments – Molding and
Decorating – serviced by the Buildings and Grounds and the Factory Administration Departments. Building anf
Grounds cost will be allocated using square feet ( flor area) and the Factory Administration cost will be allocated
using direct labor hhours. In computing the predetermined overhead rates , machine hours are used as the base
for Molding and direct labor hours as the base for Decorating.
Molding Decorating Bldg & Grounds Factory Adm.

Budgeted FOH P 400,000 P 600,000 P 80,000 P 120,000
Direct labor hours 200,000 100,000
Floor area 100,000 60,000 2,000 4,000
Machine hours 200,000 100,000
REQUIRED: allocate the cost of the service departments and compute the predetermined FOH rate using:
1. Direct method
2. Step method – start with buildings and grounds
3. Algebraic method
Solution:
1. Direct Method
Allocated FO:
Bldgs & Grounds 50,000 30,000 (80,000)
Factory Adm. 80,000 40,000 ( 120,000)
Total Factory overhead P 530,000 P 670,000
Base 200,000 Mhrs 100,000 DLhrs
Factory overhead rate P 2.65/Mhr P 6.70/DLHr
Allocation of Bldg & Ground costs (sq.ft) Allocation of Factory Adm. Cost( DLHrs)
Molding = 100/160 x 80,000 = 50,000 Molding = 200/300 x 120,000 = 80,000
Decorating = 60/160 x 80,000 = 30,000 Decorating = 100/300 x 120,000 = 40,000

80
2. Step Method

Allocated FO:
Bldgs & Grounds 48,781 29,268 (80,000) 1,951
Factory Adm. 81,301 40,650 ( 121,951)
Allocation of Bldg & Ground costs (sq.ft) Allocation of Factory Adm. Cost( DLHrs)
Molding = 100/164 x 80,000 = 48,781 Molding = 200/300 x 121,951 = 81,301
Decorating = 60/164 x 80,000 = 29,268 Decorating = 100/300 x 121,951) = 40,650
Factory Adm. 4/164 x 80,000 = 1,951
3. Algebraic Method
Additional information for the illustrative problem:
Service provided by:

Blg & Grounds Factory Adm.
Molding 50% 40%
Decorating 30% 50%
Bldgs. & Grounds - 10%
Factory Adm. 20% -
Solution:
Algebraic equation:
Buildings and Grounds = 80,000 + 10%(FA)
Factory Administration = 120,000 + 20% (B&G)
Substitution:
Buildings & Grounds = 80,000 + 10% (120,000 + 20% (B&G)
= 80,000 + 12,000 + .02BG
BG - .02BG = 92,000
BG = 92,000 /.98
BG = 93,878
Factory Administration = 120,000 + 20% (BG)

= 120,000 + 20% (93,878)
= 120,000 + 18,776
FA = 138,776
Allocation of costs:
Allocated FO:
Bldgs & Grounds 46,939 28,163 (93,878) 18,776
Factory Adm. 55,510 69,388 13,878 ( 138,776)
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ACITIVITY BASED COSTING (ABC)
 Also known as transaction costing

 An overhead cost allocation system that allocates overhead to multiple activity cost pools and assigns the
activity cost pools to products or services by means of cost drivers that represent the activities used.
 The activities are traced to individual product units on the basis of frequency of consumption of overhead
resources by each product.
 Based on the concept that products consumes activities and activities consumes resources and if a
product consumes many resources or activities that comprised overhead, it should bear a greater share of
overhead costs that other product that does not consumes an any activity units.
 Can be expensive to use
 Benefits of Activity- Based Costing - more accurate product costing which necessitates:
a. more cost pools used to assign overhead
b. enhanced control over overhead
c. better management decisions
Traditional costing method - a single plant wide rate called predetermined overhead rate is used.
Activity – any event, transaction, action or work consequence that causes a cost to be incurred in producing a
product or providing services.
Activity cost pool – the overhead allocated to a distinct type of activity or related activities.
Cost driver – any factory or activity that has a direct cause-effect relationship with the resources consumed.
These are used to assign activity cost pools to products or services
Example of Activity Cost Pools and Cost Drivers:

Illustration 4-3
82
Five Basic Steps in Applying ABC

1. Assemble similar actions into activity centers.
 Classify the actions into the different level of activities:
a. unit-level activities – are performed each time a unit is produced. (Cost driver is a unit
output). Examples – assembly, stamping and machining.
b. batch-level activities – performed each time a batch or group of units is produced (cost driver is
group od units of output.)Examples: machine set-ups, rder procressing.
c. product-level activities – cost f activities undertaken to support the production individual
products. Examples: product designing, product testing.
d. facility-level activities – are those which sustain a facility’s general manufacturing process or
costs not traceable to individual product but support the organization as a whole.
Examples: plant supervision, building occupancy and personnel administration.
2. Classify the costs by activity center and by type of expense - identify the activities that consume
resources and assign cost to them. Costs traceable to the activity center should be assigned direct to
the activity centers.
3. Select cost drivers - identify cost drivers associated with each activity .
4. Compute the cost rate per cost driver unit or transactions. Each activity could have multiple cost drivers.
5. Assign cost to products by multiplying the cost driver rate by the volume of cost driver units consumed
by the product.
Illustration: (source: Cost Accounting and Control by Norma D De Leon, et.al)
NDL Company has 3 products, namely: C, D and E and three related overhead activities: product-line
Setups, number of handles and number of parts. The number of setups refer to the number of times each
product line is readied for production. The number of handles refers to the number of times each product
is moved to from one work station to another. The number of parts refers to the number of parts that is
used in making each product. The production, overhead activities and their corresponding costs are
shown below:
Units Total Total Total No. of Times Number

Product produced DL hours DL cost DM cost Setups handled of parts
C 20 30 P 300 P 600 2 2 1
D 100 150 1,500 3,000 4 2 2
E 100 70 700 3,000 2 2 2
250
Budgeted cost of each cost driver:

Setups P 6,200
Time handled 3,300
Number of parts 3,000
Total budgeted cost 12,500
A. Traditional Costing – using direct labor hours as the base:

The overhead application rate would be:
FOH rate = P 12,500/ 250 DLHrs

= P 50/ per direct labor hour
The factory overhead would be applied as follows:

Product Applied Overhead No. of units FOH cost/unit
C = 30 hrs x P 50 P 1,500 20 P 75
D = 150 hrs x P 50 7,500 100 75
E = 70 hrs x P 50 3,500 100 35
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The total manufacturing cost for each product:
Product C Product D Product E

Direct materials P 600 P 3,000 P 3,000
Direct Labor 300 1,500 700
Factory overhead applied 1,500 7,500 3,500
Total cost P 2,400 P12,000 P 7,200
Cost per unit P 120/unit P 120/unit P 72/unit
B. Activity-Based Costing (ABC)

The factory overhead rate is computed by dividing the total cost of each overhead activity by the total
frequency for each activity:
Setup ( 6,200/ 8 ) = P 775 per setup
Handling ( 3,300 / 6 ) = 550 per handling
No. of parts ( 3,000/5) = 600 per part
The Factory overhead applied to the products would be:

Product C:
Setup = 2 x P 775 P 1,550
Handling = 2 x P 550 1,100
No. of parts = 1 x P 600 600
Total overhead applied P 3,250
Product D
Setup = 4 x P 775 P 3,100
Handling = 2 x P 550 1,100
No. of parts = 2 x P 600 1,200
Product E:
Setup = 2 x P 775 P 1,550
Handling = 2 x P 550 1,100
No. of parts = 2 x P 600 1,200
The total manufacturing cost for each product:
Product C Product D Product E

Direct materials P 600 P 3,000 P 3,000
Direct Labor 300 1,500 700
Factory overhead applied 3,250 5,400 3,850
Total cost P 4,150 P 9,900 P 7,550
Cost per unit P 207.60 P 99.00 P 75.50
End
84

Name: ____________________ Score________
Course/Section: _____________ Date::________
Assignment 1 – Theory
I - Identification:
_____________1. This basis is used only if only one type or a few similar types of products are produced.
_____________2. A credit balance in factory overhead control account.
_____________3. A budget which does not segregate fixed and variable components.
_____________4. This costing system charges the product with the use of predetermined overhead rate
determined at the beginning of the year based on budgets.
_____________5. Invisible part of the finished product.
_____________6. This variance is due to budget or expense factor.
_____________7. This rate is computed by dividing the budgeted factory overhead by a certain level of
activity .
_____________8. This costing system is used to avoid any delay in the costing of jobs.
_____________9. This used when estimates of factory overhead can be reasonably estimated at the start of the
Period.
_____________10. Overhead costs varies in direct proportion to change in volume of operation.
_____________11. This variance is the difference between the actual manufacturing overhead and the
budgeted factory overhead based on a budget capacity used.
_____________12. This is the basis usually used where machine performs most of the work.
_____________13. This variance is due to volume or activity factors.
_____________14. This overhead cost remains constant in amount within the relevant range.
_____________15. This is most appropriate when there is correlation between the total factory overhead and
the number of direct labor hours.
II- Modified True or False: Write “T”, if the statement is true, if the statement is false, underline the word or
group of words that makes the statement false.
___ 1. Direct labor cost is widely used in charging factory overhead to production.
___ 2. Budget allowance is synonymous to budgeted factory overhead
___ 3. Factory overhead variance is treated as a product cost when it is closed to cost of goods sold.
___ 4. Applied factory overhead is equal to the actual base multiplied by the actual overhead rate.
___ 5. A manufacturing overhead sheet is maintained if there are many types of overhead costs.
___ 6. Overapplied factory overhead occurs when actual is less than applied factory overhead
___ 7. Normal capacity refers to the budgeted level of production for the period.
___ 8. A debit balance in manufacturing overhead control is underapplied overhead variance.
___ 9. Factory overhead variance is treated as a period cost when it is closed to cost of goods sold.
___ 10. Actual costing charges the product with the use of predetermined overhead rate determined at the
beginning of the year based on budgets.
___11. Activity based costing is considered to be a traditional costing method.
___12. Under ABC, indirect manufacturing costs are predominantly assigned on the basis of direct machine
hours.
___13. Setup cost is an example of a batch-level cost.
___14. The cost to set up production equipment is best allocated directly to products via machine hours.
___15. Manufacturing costs are often organized in the general ledger by function and department. When
applying activity-based costing, these manufacturing costs will be sorted by activities.
85
III - Classify the following items into:

A. Producing department B – Service department
1. Toolroom 9. Extracting
2. Materials Receiving 10. Cutting
3. Cost Accounting 11. Receiving
4. Assembly 12. Finishing
5. Carpentry 13. Purchasing
6. Mixing 14. Painting and Varnishing
7. Maintenance 15. Plant Security
8. Personnel
II - Classify the following items into:

A. Direct Departmental Expense B – Indirect Departmental Expense
1. Superintendence 9. Supervision
2. Repairs and maintenance 10. Indirect labor
3. Indirect materials 11. Depreciation - Building
4. Depreciation – mach and Equipt 12. Labor fringe benefits
5. Factory rent 13. Light, power and water (w/o departmental meter
6. Indirect materials 14. General factory expenses
7. Insurance - building 15. Plant Security
8. Factory Supplies
IV - Multiple Choice:
1. In activity-based costing, overhead costs are allocated into:

a) cost accounts b) costs centers c) costs pools d) cost groups
2. Activity-based costing seeks to identify suitable

a) expense drivers b) activity drivers c) value drivers d) cost drivers
3. Machine hour is an example of a ______________ activity

a) Batch-level b) Facility-level c) Product-level d) Unit-level
4. Machine setup is an example of a: ___________ activity

5. TV advertisement is an example of a ________activity

6. Landscaping is an example of a __________ activity

7. Which of the following is typically regarded as a cost driver in traditional costing practices?
a) Number of purchase order processed c) Number of transactions processed
b) Number of customers served d) Number of direct labor hours worked.
8. a company using activity based costing:

a) tries to identify cost drivers
b) allocate all costs to individual products
c) Looks for the activity with which total costs are most closely associated.
d) Is probably using the JIT philosophy
9. In ABC, preliminary costs allocation assigns costs to:

a) Departments b) Processes c) Products d) Activities
10. In ABC, final costs allocations assigns costs to:

a) Departments b) Processes c) Products d) Activities
86

Name: ____________________ Score________

Course/Section: _____________ Date::________
Assignment 2 – Practice
Instruction: Answers must be supported with computation.
1. Kymo Corporation, a Japanese manufacturer of television sets, provides the following data for 2020:
Budgeted overhead cost P 20,000,000
Budgeted activity 20,000 machine hours
Actual overhead cost P 21,500,000
Underapplied overhead P 500,000
Determine the amount of machine hours worked at Kyoko Corporation during 2020:
a) 22,000 b) 21,000 c) 20,500 d) 20,000
FRENCH Corporation estimates that its production for the coming year will be 10,000 units, which is 80% of
normal capacity, with the following unit costs:
Materials P 40.00
Direct Labor 60.00
Direct labor is paid at the rate of P 24 per hour. The machine should be run for 20 minutes to produce one
unit. Total estimated overhead is expected to consist of P 400,000 for variable overhead and P 400,000 for
fixed overhead.
Determine the predetermined rate based on:
2. Units of production using the expected actual capacity activity level. _______________________
3. Direct labor hours: _____________________________________________________________
4. Machine hours : ________________________________________________________________
5. Material costs : _________________________________________
6. Direct Labor costs : _____________________________________
7. Material cost using the normal capacity activity level: ________________________________
8. Units of production using the normal capacity activity level. ____________________________
9. Machine hours using the normal capacity activity level. _______________________________
10. The following information relates to DD Corporation for the last year. DD uses direct labor hours as
overhead base.
Estimated direct labor hours 136,000 hours
Estimated manufacturing overhead costs P 108,800
Actual manufacturing overhead 108,480
Overapplied manufacturing overhead 3,520
What was actual number of direct labor hours worked last year? ____________
11. Factory overhead variance is underapplied P 3,000 and spending variance is favorable P 2,000. Budget
allowed on actual capacity is P 30,000.
How much is the applied factory overhead? ______________________

87
JGG Company has two service departments and three producing departments each producing a separate
product. For a number of years, the company has allocated the overhead costs of the service departments to
the producing departments on the basis of annual sales pesos which lead serious inequities. The auditor
recommended that maintenance and engineering service hours be used as a better service cost allocation
basis. The following data was available:
Service Departments Producing Departments

Maintenance Engineering Dept. A Dept. B Dept. C
Maintenance hours 400 800 200 200
Engineering hours 400 800 400 400
Overhead costs P 12,000 P 54,000 P 80,000 P 90,000 P 50,000
12. Using the direct method of cost allocation, how much maintenance cost would be allocated to:
a) Department A ______________ c) Department C __________________________
b) Department B _____________ d) Engineering department ___________________
12. Under the step of cost allocation, what is the total amount of Service Department’s cost allocated:
(start with Engineering)
a) Department A ________________ c) Department C______________
b) Department B _______________
13. D Santos uses a job order cost system with machine hours as a overhead basis. The following information
relates to D Santos for last year.
Estimated machine hours for the year 42,000

Actual machine hours for the year 40,800
Predetermined overhead rate P 1.50 per MH
Underapplied factory overhead P 2,600
What is the peso amount of the following items?

Estimated OH Applied OH Actual OH
a) P 61,200 P 63,000 P 60,400
b) 61,200 63,000 65,600
c) 63,000 61,200 58,600
d) 63,000 61,200 63,800
14. United Company has used the traditional costing system to apply overhead costs to all the products that it
manufactures at 14.5% of direct labor cost. Monthly direct labor cost for its Product JJ is P 27,500. In an
attempt to distribute costs more equitably, United is considering activity based costing. The monthly data
shown below have been gathered for Product JJ.
Activity Cost Driver Cost rates Quantity

Materials Inspection Type of materials P 11.50 per type 12 types
In process inspection Number of units P 0.14 per unit 17,500 units
Product certification Per order P 77 per order 25 orders
What is the monthly overhead cost allocated to Product JJ using the activity-based costing?
a) P 525.50 lower than the cost using the traditional cost system.
b) P 68.64 per order
c) P 8,500
d) P 525.50 higher than the cost using the traditional cost system
88
15. IRR Manufacturing company produces three products. Production and cost information show the
following:
Model F Model A Model Q
Units produced 1,000 3,000 6,000
Direct labor hours 2,000 1,000 2,000
Number of inspections 20 30 50
Using ABC, the inspection costs of P50,000, allocated to each unit of Model F would be:
a) P 5.00 b) P 10.00 c) P 20.00 d) some other answer
16. SET Inc, produces three products. Production and cost information is as follows:
Model Y Model O Model U

Units produced 2,000 6,000 12,000
Direct labor hours 4,000 2,000 4,000
Number of inspections 100 150 250
The consumption ratio for the number of setups would be:

Y O U Y O U
a) 40$ 20% 40% c) 10% 30% 60%
b) 20% 30% 50% d) some other answer
17. Product 53 uses 200 hours of direct labor and has 2,000 machine steps. C. G, the cost accountant, has
been considering using either direct labor hours or machine steps as the cost driver. The ratio of overhead
costs to direct labor hours is P 60. The assignment of overhead cost to Product 53 using direct labor hours
would result in a higher charge by P 4,000 than it machine steps were used as the cost driver.
Determine the ratio of overhead cost to machine steps.

a) P 60 b) P 6 c) P 4 d) P 2
The departmental rates in KMG Manufacturing company are as follows:

Department A: P 5 per direct labor hour
Department B: 20% of direct labor cost
Department C: P 8 based on 20,000 machine hours
Normal capacities are 30,000 labor hours, Dept. A; P 400,000 labor cost, Dept. B; and 20,000 machine hours,
Dept. C. Analysis of the estimated expenses of each producing department shows:
Dept. A Dept. B Dept. C

Fixed expenses P 30,000 P 25,000 P 20,000
Charged by service departments 45,000 30,000 60,000
18. What must be the variable overhead rate in each of the three producing department?
Dept. A ___________ Dept. B ___________ Dept. C______________
19. Refer to No. 20, assume that actual capacity and actual factory overhead per producing departments
(after the distribution of service department costs) were as follows:
Actual Factory Overhead

Department A : 32,000 labor hours P 152,000
Department B: P 388,000 direct labor cost 95,000
Department C: 21,500 machine hours 168,000
How much is the underapplied (overapplied) factory overhead variance in each department?
Dept. A ___________ Dept. B __________ Dept. C _________
89
20. Imperial Company has two service departments (S1 and S2) and two producing departments (P1 and P2).
Department data for January 2014 were as follows:
S1 S2
Overhead costs P 27,000 P 18,000
Service provided to:
S1 - 20%
S2 10% -
P1 50% 30%
P2 40% 50%
What is the total allocated service department costs to P2 if the company uses the reciprocal or algebraic
method of allocating its service departments costs? (Round computations to the nearest whole number).
a) P 19,800 b) P 21,949 c) P 22,500 d) P 23,051
D Best clothing Company uses the direct labor hours method for applying manufacturing overhead. The
overhead application rate for 2020 is 8.60 per hour based on anticipated fixed costs of P 348,000 and
anticipated variable costs of P 684,000, with an expected volume of 120,000 labor hours.
During the year the company actually operated for 115,800 hours, incurring fixed overhead of P 348,000 and
variable overhead of P 637,880.
21. What is the under or overapplied factory overhead for the year?
a) P 10,500 underapplied c) P 10,000 underapplied
b) P 10,500 overapplied d) P 10,000 overapplied.
22. What is the fixed volume variance?

a) P 12,180 favorable c) 15,180 favorable
b) P 12,180 unfavorable d) P 15,180 unfavorable
23. What is the spending variance?

a) P 22,180 favorable c) P 32,180 favorable
b) P 22,180 unfavorable d) P 32,180 unfavorable
24. What is the net variance: _________________
25. the journal entry to record factory overhead applied to production would be:
Debit Credit
26. the journal entry to record over or underapplied overhead would be:
Debit Credit
27. the journal entry to close over or underapplied overhead would be:
Debit Credit
90
28. The following data are summarized for KL Manufacturing Company at the end of the current year 2020:
Direct materials cost P 250,000

Direct labor cost 375,000
Factory Overhead cost 106,250
Machine hours 27,500
Direct labor hours 62,500
Units of production 12,500
What was the company’s factory overhead application rate based on direct labor cost?
a. 28 1/3% b) 42 ½% c) 85% d) 170%
Normal Operating Capacity of WWW Inc. is 150,000 machine hours per month, the level used to compute the
predetermined factory overhead application rate, At this level of activity, fixed factory overhead is estimated to
be P 300,000 and variable overhead is estimated to be P 150,000. During March, actual production required
140,000 machine hours, and the actual factory overhead totaled P 435,000.
Determine:
29. The fixed portion of the fixed factory overhead application rate : _______________________
30. The variable portion of the factory overhead application rate : ________________________
31. The ABC Manufacturing Company uses an analysis sheet as subsidiary record for factory overhead. The
chart of accounts shows the following codes for factory overhead items:
400 Factory Overhead Control 405 Labor fringe benefits

401 Applied Factory Overhead 406 Light and Power
402 Supervision 407 Water
403 Indirect Labor 408 Depreciation
404 Indirect Materials 409 Insurance
The following are the debit postings to the general ledger account Factory Overhead Control for, 2020:
Breakdown
Date Reference Amount Code Amount
Dec. 31 Voucher register P 36,585 402 P 21,000
403 5,800
405 3,500
406 3,875
407 2,410
31 Requisition journal 10,450 404 10,450
31 General journal (accrual) 5,500 403 3,350
405 2,150
407 1,310
REQUIRED: Postings to the general ledger account and factory overhead analysis sheet (with footings)
91
GENERAL LEDGER
FACTORY OVERHEADD CONTROL Account No. _400_

Date Particulars PR Debit Date Particulars PR Credit
Dec 31
FACTORY OVERHEAD ANALYSIS SHEET
Date Particulars Ref. Total 402 403 404 405 406 407 408 409
End
92
REFERENCES
Cabrera, M.E., Cabrera,G.A. (2018-2019) Cost Accounting and Control. Manila. GIC Enterprises & Co. Inc.
Bagayao, IY. AFAR Quick Notes. Manila. Lead Review Center
De Leon, N., De Leon, E., De Leon, G.(2019) Cost Accounting and Control. Manila. GIC Enterprises & Co.
Inc.
Guerrero, P. (2019) Cost Accounting. Manila. Conanan Educational Supply.
MEJORADA, N.D. (2000) COST ACCOUNTING (Second Edition), Manila: Goodwill Book Store
VICENTE, M.V. (2009) COST ACCOUNTING. Manila: Mutual Bookstore.

III Job Order Costing

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UNIT III – JOB ORDER COSTING

Cost Accumulation Method:

JOB ORDER COSTING

 The product manufactured are heterogeneous or dissimilar products.

 A job is a cost object that can be distinguished easily because:

Job Cost is determined in six steps:

EXAMPLE OF JOB ORDER COST SHEET

Job Cost sheet

Direct Materials ______________

MAJOR SOURCE DOCUMENTS FOR JOB ORDER COSTING

1. Job order cost sheet

3. Finished Goods Stockcard

4. Factory overhead Control Cost Record

5. Materials Requisition, Time Ticket and Clock Card

Unit III – JOB ORDER COSTING

5. All cost related to the manufacturing function in a company are:

6. These costs varies in amount in direct proportion to the volume of production.

7. In cost terminology, conversion costs consist of:

8. The wages of the factory janitorial staff should be classified as:

9. What is the nature of the work- in- process account?

10. A nonmanufacturing business may use:

III - Indicate what cost system is appropriate for each.

A = Job Order Costing B = Process Costing

1. Hollow Blocks Manufacturing _______________________

Unit III – JOB ORDER COSTING

Finished goods ( Job no: 1120 , 300 units @ P 105) P 31,500

The work in process inventory:

During July 2020, the following transactions were completed:

Direct Materials ______________

Job Cost sheet

Direct Materials ______________

Job Cost sheet

Direct Materials ______________

Job Cost sheet

Unit III – JOB ORDER COSTING

Assignment 3: Brief Exercises. Use Yellow for supporting computations.

The total conversion cost was:

How much of the above costs represents material costs?

a) P 62,900 b) P 62,500 c) P 72,900 d) P 65,900

a) P 560 debit b) P 560 credit c) P 12,600 debit d) P 12,600 credit

8. What is the prime cost of Job # 05? _______________________________________

9. What is the total amount of overhead applied to Job # 08? __________________________

10. What is the total amount of actual factory overhead? _______________________________

11. How much overhead is applied to Work in Process? ______________________________

February 1-28, 2020

15. The cost of goods manufactured for February, 2020 was:

Inventories 8/31/2020 9/30/2020

 Raw materials purchased amount to P 46,000.

16. The amount of raw materials inventory on August 31, 2020:________________________

17. The cost of good manufactured on August 31, 2020 _______________________________

Additional information were as follows:

18. Direct materials inventory, January 1, 2020: __________________________

19. Finished Goods inventory, January 1, 2020: ___________________________

20. Actual factory overhead incurred during 2020: __________________________

The selling price to the customer of Job # 246 is:

a. P 16,250 b) P 20,800 c) P 17,333 d. P 19,500

Beginning balance P 192,000

What amount of direct materials was included in this job?

What is the total cost of job # 297?

25. Prime cost during the month totaled:

The correct cost of Job 213 is:

Unit III – JOB ORDER COSTING

 Objectives Of Materials Control