COURSE AFAR 1: COST ACCOUNTING

This module is prepared by professor Venus L. Catacutan. She’s an

associate professor in the College of Business and Accountancy-
Accountancy department at Tarlac State University . Being a Certified
DEVELOPER AND THEIR BACKGROUND
Accountant, in addition to her teaching profession, shes’ likewise
involve in public practice which brings to this module some
experiences on specialized accounting concerns of different industries.

COURSE DESCRIPTION

COURSE OUTLINE

CHAPTER 1
INTRODUCTION TO COST ACCOUNTING, COSTS, and COST
TITLE
CONCEPTS
I. RATIONALE
The very first topic of the course is Partnership formation, the expected
learning to be achieved by the student are properly disclosed in the
learning objectives stated below. Prior to taking this course, a student
must have already a concrete knowledge on basic accounting
concepts, and skills in preparing financial statements otherwise the
user of this module must review the basic and financial accounting
undertaken in previous courses(preparatory activities)
INSTRUCTION TO THE USERS
The developmental activities section provides the comprehensive and
vital information concerning accounting for partnership formation. For
assessment of learning,closure activities like theoretical questions
and problem solving with different degree in terms of difficulty were
provided. For evaluation , see the evaluation sectionfor details, and
lastly for activities and preparation to be undertaken for next topic this
module provides the student/s the details.

At the end of the chapter, the student should be able to:

 Distinguish Between Financial, Managerial, and Cost
Accounting
II. LEARNING OBJECTIVES  Distinguish Between Merchandising and Manufacturing
Operations
 Identify the systems of cost accumulation
 Distinguish between job order costing and process costing
III. CONTENT
A. PREPARATORY ACTIVITIES 1.
B. DEVELOPMENTAL ACTIVITIES

COST TERMS, CONCEPTS AND CLASSIFICATION

Cost
 Value foregone or sacrifice of resources for the purpose of achieving some economic benefit which will
promote the profit-making ability of the firm.
 Reflects the monetary measure of resources consumed to attain an objective such as making a good or
performing a service.

Cost Pools
 costs collected into meaningful groups.
 it may be classified by:
i. by type of cost ( labor cost in one pool, material costs in another)
ii. by source (department 1, department 2, and so on)
iii. by responsibility (manager 1, manager 2, and so on)

Cost Object
 any product, service or organizational unit to which costs are assigned for some management purposes
 any item to where costs can be traced and that has a key role in management strategy can be considered
as cost object.
  Products and services are generally cost objects, while manufacturing departments are considered either by
cost pools or cost object, depending on whether management’s focus is on the costs of the products or for
the production department.
 Examples:
 Output. The most common cost objects are a company's products and services, since it wants to
know the cost of its output for profitability analysis and price setting.
 Operational. A cost object can be within a company, such as a department, machining operation,
production line, or process. For example, you could track the cost of designing a new product, or a
customer service call, or of reworking a returned product
 Business relationship. A cost object can be outside of a company - there may be a need to
accumulate costs for a supplier or a customer, to determine the cost of dealing with that entity.
Another variation on the concept is the cost of renewing a license with a government agency.
(www.accountingtools.com)

Cost Drivers
 any factor that has the effect of changing the level of total cost.
 Examples:
 Direct labor hours worked
 Number of customer contacts
 Number of engineering change orders issued
 Number of machine hours used
 Number of product returns from customers (www.accountingtools.com)

Cost Accumulation
 the process of assigning cost to cost pools or from cost pools to cost objects

Cost Assignment
 the assignment of indirect cost to cost pools.
 allocation bases are cost pools to cost objects

Cost Function

Y =a+bx

Where:

Y = Total Cost
a = Total Fixed Costs
b = Variable Cost per Unit
x = units

CLASSIFICATION OF COSTS

1. As to relation to a product

1.1 Manufacturing Costs – all the costs associated with production of goods. These include direct material, direct
labor, and manufacturing overhead.

1.2 Nonmanufacturing Costs – generally include costs related to selling and other activities not related to the
production of goods. These includes:

 Marketing or Selling Expenses – include all costs necessary to secure customer orders and get the finished
product or service into the hands of the customer. (e.g. commission, travel expense, sales salaries. etc.)
 Administrative or General Expenses – include all executive, organizational and clerical expenses that
cannot be logically included under either production or marketing secretarial. (e.g. executive compensation,
general accounting secretarial, public relations, etc.)

2. As to Timing of Recognition as Expense

2.1 Product (Inventoriable Costs) – all cost that involved in acquiring or making a product. These costs are attach or
cling to the units that are produced and are reported as assets until the goods are sold. When goods are sold, the
cost are released from the inventory as expense.
2.2 Period Cost – all costs that are identified with accounting periods and not included in product costs. These cost
are expensed when incurred.

3. As to Variability

3.1 Fixed Cost – items of cost which remain constant in total, irrespective of the volume of production. Cost per unit
decreases as volumes increases and increases as volume decrease. It can be classified into two categories:
 Committed Fixed Costs – costs that represents relatively long-term commitments on the part of
management as a result of past decisions. ex: depreciation of equipment
 Managed/Discretionary Fixed Costs – costs that incurred on short-term basis and can be more easily
modified in response to changes in management objectives. Ex: advertising, research and development
costs and cost of employee training programs.

3.1.a. Illustration

Activity Fixed Cost per Unit Total Fixed Cost

100 20 2,000
200 10 2,000
250 8 2,000
500 4 2,000
1,000 2 2,000

3.2 Variable Cost – items of cost which vary directly in total, in relation to volume of production. As activity changes,
total variable cost also increases or decreases proportionately with activity change, however, unit variable cost
remains unchanged.

3.2.a. Illustration

Activity Fixed Cost per Unit Total Fixed Cost

100 20 2,000
200 20 4,000
250 20 5,000
500 20 10,000
1,000 20 20,000

3.3 Mixed Cost – item of cost with variable and fixed component. There two types:
 Semi-variable costs – fixed portion of the semi-variable cost usually represent a minimum fee for making a
particular item or service available. Ex: Cost of electricity (basic minimum plus specified cost per kilowatt
hour above minimum)

3.3.a. Illustration. Coryentee Electric Cooperative charge its consumers a flat rate of P300 plus P1.5 per kilowatt hour
above minimum. Assume that customer A consumes 100 kwh, customer B consume 150 kwh, customer C consumes
200 kwh, customer D consumes 250kwh and customer E consumes 300 kwh. Compute for total cost incurred by
each of the customers.

Suggested answer:

Customer Actual Consumption Fixed Cost Variable Cost (Above Total Cost
(kwh x cost per kwh) (Minimum) Minimum)
A B A+B
A (100 x P1.5) = P150 P300 0 P300
B (150 x P1.5) = P225 P300 0 P300
C (200 x P1.5) = P300 P300 0 P300
D (250 x P1.5) = P375 P300 (250 – 200) x 1.5 = 75 P375
E (300 x P1.5) = P450 P300 (300-200)1.5 = 150 P450

 Step-cost – the fixed part of the fixed costs changes abruptly at a various activity level because these costs
are acquired in indivisible portions. Ex: Supervisor salary

3.3.b. Illustration. Assume that one supervisor with a salary of P30,000 is needed for every 1 worker, then if 15
workers are used, 2 supervisors (with salaries of P60,000) will be needed. If 18 workers are used, still 2 supervisor
are needed. If the number of workers increases to 22, three supervisors will be needed.

Total Salary of Supervisors

160,000.00

140,000.00

120,000.00

100,000.00

80,000.00

60,000.00

40,000.00

20,000.00

-
5 10 15 20 25 30 35 40 45 50

 Methods of Separating Mixed Costs:

1. High-Low Method -it is based on costs observed at both the high and the low levels of activity within the
relevant rage. Relevant range is a range of activity within which assumption relative to variable cost ad
fixed cost behaviors are valid.
O Steps:
I. Obtain relevant data on past costs and related actual activity levels.
II. Estimate the variable cost per unit or rate using the following equation.
Cost @ High Activity−Cost @ Lowes Activity
uVC =
Highest Activity−Lowest Activity
III. Compute the fixed cost as follows:
FC=TC @highest (¿ lowest) Level−( uVC x Highest (¿ Lowest ) Activity∈units)

3.3.c. Illustration. The following data on supplies and direct labor hours from January to October:
Direct Labor Hours (X) Supplies Cost (Php) (Y)
20 50
40 110
60 150
20 70
30 80
40 100
50 150
10 60
30 110
50 120

Determine the variable cost rate per hour and the fixed cost portion using the high-low method.

Suggested Answer:

1. VARIABLE COST PER HOUR

P 150−P60
¿
60−10
P 90
¿
50
¿ P 1.80
2. FIXED COST:
@ 60-hour level
FC = P150 – (P1.80 X 60)
= P150 – P108
= P42

@ 10-hour level
 FC = P60 – (P1.80 X 10)
= P60 – P18
= P42

2. Least Squares Regression Method – a statistical technique in which a line of regression is determined
by solving two simultaneous linear equations which are based on the condition that the sum of deviation
above the line equals the sum of deviations below the line.

The equation for the determination of a straight line is:

Y =a+bx
The two linear equations that are used to solve for a and b are:
Equation (1): ΣY = Na + bΣX
Equation (2): ΣXY = ΣXa + bΣX2

Where:

Y = Total Cost
a = Fixed Cost
b = Variable Cost Rate
X = measure of activity
N = number of observations
Σ = Greek letter signifying summation

3.3.d. Illustration. Using the data in Illustration 3.3.c, compute the variable cost rate and the fixed cost under the
Least-squares regression method.

X Y XY X2
20 50 1,000 400
40 110 4,400 1,600
60 150 9.000 3,600
20 70 1,400 400
30 80 2,400 900
40 100 4,000 1,600
50 150 7,500 2,500
10 60 600 100
30 110 3,300 900
50 120 6,000 2,500
ΣX 350 ΣY 1,000 ΣXY 39.600 ΣX2 14.500

Equation (1) 1,000 = 10a + 350b

Equation (2) 39,600 = 350a + 14,500b

To Eliminate one unknown (a), and solve for b, multiply Equation 1 by 35 (least common denominator) and subtract
the new Equation 3 from Equation 2:
Equation (2) 39,000 = 350a + 14,500b
Equation (3) 35,000 = 350a + 12,250b
4,600 =0 + 2,250b
Variable Rate (b) = P2.04

to solve for Fixed Cost (a) substitute the value of b to Equation 1. Thus,
1,000 = 10a + 350 (2.04)
1,000 – 714 = 10 a
a = -216/-10
a = P28.60
3. Scattergraph or Visual Fit – various costs ( the dependent variable) are plotted on a vertical line (y-axis)
and measurement figures (cost drivers or activity levels) are plotted on horizontal line (x-axis). A
straight line is drawn through the points and, using the line, the rate of variability and fixed cost are
computed.
Steps:
O On a graph, plot actual costs (on vertical axis) during the period under study against the
volume levels (on horizontal axis.
O The line of the best fit is then drawn by visual inspection of the plotted points, the line
representing the trend shown by the majority of the points.
 O The fixed cost is estimated by extending the left end of the line to the vertical axis.
O The variable cost rate or slope of the cost line is determined by dividing the difference between
any two level of activities by the difference in costs corresponding to the same level of
activities.

3.3.e. Illustration. Using the data in Illustration 3.3.c, compute the variable cost rate and the fixed cost under the
Scattergraph method.

1. Variable cost rate (b)

P 110−P 70
= 40−20
P 40
= 20
=P2 per hour

2. Fixed cost (a) is P30 is where the line of regression begins.

4. Cost in Relation to the Manufacturing Department or Other Segments

Business is composed of different departments, especially if it is a manufacturing industry, where in the factory is
divided into departments, processes or cost centers. These departments serve as a basis for classifying and
accumulating cost and assigning responsibility for cost control. The departments of a factory generally fall into
two categories.

4.1 Producing Department – is one in which manual and machine operations are performed directly upon
any part of the product manufactured. Producing department costs may be charged to the product because
they have contributed directly to its production. Example are; machining, forming, and assembly
departments.

4.2 Service Department - a department providing service for the benefit of other departments. In some
instances, these services benefit other service department as well. Although service department does not
directly engage in production, its costs are part of factory overhead and are a cost of the product. Example
are: Maintenance, janitorial and cost accounting department.

4.3 Direct Department charge – is a cost traceable to the department in which it originates. It is readily
identifiable with the originating department. Ex. salary of departmental head.

4.4 Indirect Departmental charge – is a cost shared by several departments that benefit from its incurrence
Example building rent, building insurance
5. Cost in Relation to an Accounting Period

Cost can be classified as capital expenditures and revenue expenditures.

5.1 Capital Expenditure – is intended to benefit future periods and is reported as an asset. The allocation of the
cost to the different periods is depreciation for fixed tangible assets, amortization for intangible assets and
depletion for wasting assets.

5.2 Revenue Expenditure – benefits the current period and is reported as an expense.

The distinction between capital and revenue expenditures is essential to the proper matching of costs and revenue
and to the accurate measurement of periodic income.

6. Cost in Relation to their nature a Common Cost or Joint Cost.

6.1 Common Costs – are cost of facilities or services employed by two or more operations. They are particularly
prevalent in organizations with many departments or segments. The degree of segmentation increases the
tendency for more cost to be common.

6.2 Joint Costs – are cost which arises from the common processing or manufacturing of products produced
from a common raw material. It occurs when the production of one product makes it inevitable that one or more
products are also produced. A joint cost is incurred prior to the point at which separately identifiable products
emerge from the same process.

7. Cost in Relation to a Decision, Action or Evaluation

In making decisions as to what possible actions or alternatives will be chosen, it is of very importance to identify the
cost/s that are relevant to the choice. Different types of cost involve varying kinds of consideration in managerial
analysis for decision making.
With respect to its impact on decision making cost may be:

7.1 Differential Cost – Coast that is present under one alternative but it is absent in whole or part under one
alternative. It is often referred to as marginal cost by economist Marginal cost is the increase in costs from
adding one or more unit of output or doing one more task. Differential cost encompasses both increases
(Incremental costs ) and cost decreases (Decremental costs) between alternatives.

7.2 Standard Cost – are predetermined costs for direct materials, direct labor and factory overhead. They are
established by using information accumulated from past experiences and data secured from research studies.

7.3 Opportunity Cost – is the benefit foregone by selecting another alternative. It is generally the value of the
best alternative not taken. They are very important to be considered when evaluating alternatives for decision
making.

7.4 Out-Of-Pocket Cost – a cost that required cash outlay as a result of their incurrence.

7.5 Relevant cost – a future cost and changes between alternatives. It must differ when decision choices are
compared.

7.6 Sunk Cost – a cost for which an outlay has already been made and does not change across alternatives. It is
a past committed cost, and an irreversible cost. All historical cost are sunk costs.

7.7 Controllable Cost and Non controllable Cost– a cost is controllable or uncontrollable depends on point of
reference. It is considered to be a controllable cost at a particular level of management. If a manager is
responsible for a cost, that cost is a controllable cost with respect to that manager. If that manager is not
responsible for incurring a cost it is a non controllable cost with respect to that manager.

THE NATURE OF COST ACCOUNTING

Rapid changes taking place in the business environment have greatly affected the functions and
roles of management. To cope with the dynamic changes, management needs effective and prompt cost
information in the decision making process, In any type of business organization, be it a manufacturing,
trading or service business, regardless of size, it is imperative for management to be aware not only of
its total costs and expenses, but rather on the total effective utilization of company’s resources. It is in
this premise, cost accounting is considered as the key managerial partner, furnishing management with
necessary tools for planning controlling and evaluating activities, improving quality and efficiency, and
making both routine and strategic decisions.

DEFINITION OF COST ACCOUNTING

 Cost Accounting is an area of accounting concerned with cost determination and cost
control
 Cost accounting encompasses the collection, presentation and analysis of cost data to
help management in its task of creating and executing plans and controlling activities.
 Cost accounting is expanded phase of general or financial accounting which informs the
management promptly with the cost of rendering a particular service, buying and selling
a product, and producing a product. It is the field of accounting that measures, records
and reports information about costs.

SCOPE OF COST ACCOUNTING

In today’s economy, every type and kind of activity, regardless of size, in which monetary value
is involved, should consider the use of accounting concepts and techniques. Nowadays, cost accounting
is evolving into cost management since the current trend is towards empowerment of the lower level of
management, rapidly changing production methods and more types of product calling for continuous
improvement the emphasizes on quality productivity and environment.
Cost accounting information is designed for managers. Since managers are taking decisions only for their
own organization, there is no need for the information to be comparable to similar information from
other organizations. Instead, the important criterion is that the information must be relevant for
decisions that managers operating in a particular environment of business including strategy make. Cost
accounting information is commonly used in financial accounting information, but first we are
concentrating in its use by managers to take decisions. The accountants who handle the cost accounting
information generate add value by providing good information to managers who are taking decisions.
Among the better decisions, the better performance of your organization, regardless if it is a
manufacturing company, a bank, a non-profit organization, a government agency, a school club or even
a business school. The cost-accounting system is the result of decisions made by managers of an
organization and the environment in which they make them.
The organizations and managers are most of the times interested in and worried for the costs. The
control of the costs of the past, present and future is part of the job of all the managers in a company. In
the companies that try to have profits, the control of costs affects directly to them. Knowing the costs of
the products is essential for decision-making regarding price and mix assignation of products and
services.
The cost accounting systems can be important sources of information for the managers of a company.
For this reason, the managers understand the forces and weaknesses of the cost accounting systems,
and participate in the evaluation and evolution of the cost measurement and administration systems.
Unlike the accounting systems that help in the preparation of financial reports periodically, the cost
accounting systems and reports are not subject to rules and standards like the Generally Accepted
Accounting Principles. As a result, there is a wide variety in the cost accounting systems of the different
companies and sometimes even in different parts of the same company or organization.

OBJECTIVE OF COST ACCOUNTING

The general views regarding the objectives of modern cost accounting are as follows:
1. Determining product or service costs from the time of research and development until
distributed and customers’ servicing is completed. It is not limited to valuing inventories, pricing
them and controlling their quantities.
2. Providing quantitative information for the creation and execution of plans/budgets as well as far
the establishment of measures and procedures for the controlling and evaluation purposes of
management. Qualitative information such as those in performance evaluation are useful in
management decision making and therefore should be provided by modern cost accounting
which is known as cost management accounting.
FINANCIAL ACCOUNTING vs MANAGEMENT ACCOUNTING

Financial Accounting - involves systematic recording of business transactions, governed by a body of

international financial reporting standards (IFRS) leading to the preparation of financial statements for
the use of various interested parties, internal as well as external.

Management Accounting – concerned with providing financial information judgements and effective
decisions which further the organization’s goals.

Financial Accounting Management Accounting

 Reports to both internal and
external (i.e. owners, lenders,
government, managers)
 Emphasis is on summaries of
financial consequences of past
activities
 Objectivity and verifiability
 Precision of information is required
 Only summarized data for the
entire organization are prepared
 Must follow IFRS
 Mandatory for external reports
 Reports to internal only (e.g.
managers)
 Emphasis on future-oriented data
needed in decision-making.
 Relevance is emphasized
 Timeliness of information is
required
 Detailed segment reports about
departments, products, customers,
and employees are prepared
 Need not follow IFRS
 Not mandatory

RELATIONSHIP OF COST ACCOUNTING TO FINANCIAL AND MANAGEMENT ACCOUNTING

Cost accounting is the intersection between financial and managerial accounting. Cost accounting information is
needed and used by both financial and managerial accounting. It provides product cost to both external parties and
internal parties for decision making and planning and performance evaluation.

MERCHANDISING VS MANUFACTURING OPERATIONS

Merchandising – buys a product that is ready for resale.

Formula:

Beginning Merchandise inventory xx

Add: Net Purchases xx
Add: Freight-in xx
Cost of Goods Available for Sale xx
Less: Ending Merchandise Inventory xx
Cost of Goods Sold xx

Manufacturing – the process of converting materials into finished goods by using labor and incurring other costs,
generally called manufacturing overhead.

Three Major Manufacturing Cost Classification:

1. Direct Material – materials used in the manufacturing process that become significant part of the finished
goods. Ex: cloth and button in manufacturing clothing.
2. Direct Labor – employees who worked directly with the raw materials in converting them to finished goods
represent direct labor.
3. Manufacturing Overhead – All other costs incurred in the factory that cannot be considered direct material or
direct labor. This includes the following:
 Indirect materials – materials that are used in small amounts in the manufacturing process or that
cannot easily trace to specific products.
 Indirect labor – wages of factory personnel who do not work directly on raw materials. (e.g. janitors,
factory supervisors, and maintenance crew)

Prime and Conversion Cost

Prime Cost – sum of direct materials and direct labor.
Conversion cost – sum of direct labor and manufacturing overhead.

Inventories for Manufacturing Company:

1. Raw Materials Inventory - reflects the cost of raw materials and factory supplies that will be used in the
manufacturing process.
2. Work in Process Inventory – reflects the cost of raw materials, direct labor, and manufacturing overhead of
goods on which manufacturing has begun but has not been completed at the end of the period.
3. Finished Goods Inventory – reflects the cost of goods that have ben completed and are ready for sale.

Formula:

Raw Materials Inventory, beginning XX

Add: Purchases XX
Less: Purchase Returns XX
Less: Purchase Discounts XX
Add: Freight-in XX
Total Raw Materials Available for use XX
Less: Raw Materials Inventory, ending XX
Raw Materials, used XX
Less: Indirect Materials XX
Direct Materials Used XX
Add: Direct Labor XX
Add: Manufacturing (Factory) Overhead XX
Total Manufacturing Cost XX
Add: Work in Process Inventory, beginning XX
Total Goods Put into Process XX
Less: Work in Process inventory, end XX
Cost of Goods Manufactured XX
Add: Finished Goods Inventory, beginning XX
Total Goods Available for Sale XX
Less: Finished Goods Inventory, end XX
Cost of Goods Sold XX

SYSTEM OF COST ACCUMULATION

1. Actual Cost System (Historical) – direct materials, direct labor and manufacturing overhead costs are
determined as they occur simultaneously with the manufacturing operation, but the total of these costs is
known only after the operation has been completed.
2. Standard Cost System (Predetermined) – Under this system, costs are determined in advance from analysis
and forecasts made before the actual production begins.
3. Normal Cost System – This is a combination of Actual and Standard cost system. It accumulates only the
actual amounts in direct material and direct labor cost. Factory overhead costs are accumulated based on a
predetermined rate.

TWO BASIC PRODUCT COSTING SYSTEM

1. Job Order Costing – a system for allocating costs to group of unique products. It is applicable to the
production of special machines. Each job becomes a cost center for which cost are accumulated.
2. Process Costing – a system applicable to a continuous process of production of the same or similar goods.
Each processing department becomes a cost center.

Major Differences Between Job Order and Process Costing

PROCESS COSTING JOB ORDER COSTING

Homogenous units pass through a series of
similar processes
Costs are accumulated by processing
department
Unit costs are computed by dividing the
Unique jobs are worked on during a time
period.
Costs are accumulated by individual job.
Unit costs determined by dividing total
 individual departments’ costs by the equivalent
production.
The cost of production report provides the
detail for the Work in Process account for each
department
costs on the job cost sheet by the
number of units on the job
The job cost sheet provides the detail for
the work in process account

C. CLOSURE ACTIVITIES

I. QUESTIONS:

1. Define financial accounting.

2. Define management accounting.
3. How does management accounting serve both external users and internal users?
4. What are the differences between financial accounting and management accounting?
5. Why is managerial accounting information more “future oriented” than financial accounting?
6. Differentiate job order costing and process costing.
7. What are the main characteristics of job order costing?
8. What are the main characteristics of process costing?
9. How would you classify the monthly bill (plan) for Smart/Globe cellphone?
10. Consider education as a product. What are the direct costs and the indirect costs to a university in rducating
a student?

II. PROBLEMS

Problem 1.
Leon Corporation has the following data relating to its power usage for the first six months of the current year.

Month Usage (Kw)Cost

Jan. 500 $450
Feb. 550 455
Mar. 475 395
Apr. 425 310
May 450 380
June 725 484

Assume usage is within the relevant range of activity.

Required:

a. Using the high-low method, compute the cost formula.

b. Leon Corporation estimates its power usage for July at 660 watts. Compute the total
power cost for July.

Problem 2.

Browning Company owns two luxury automobiles that are used by employees on company business. Mileage and
expenses, excluding depreciation, by quarters for the most recent year are presented below:

Quarter Mileage Expenses

First 3,000 $  550
Second 3,500 560
Third 2,000 450
Fourth  3,500    600
12,000 $2,160

Required: Determine the variable cost per mile (nearest tenth of a cent) and the fixed costs per quarter, using the
method of least squares.

Problem 3.
 Davis Company manufactures wood file cabinets. The following information is available for June 2008:

Beginning Ending
Raw Material Inventory $ 6,000 $ 7,500
Work in Process Inventory 17,300 11,700
Finished Goods Inventory 21,000 16,300

a. Direct labor is $9.60 per hour and overhead for the month was $9,600. Compute total manufacturing costs for
June, if there were 1,500 direct labor hours and $21,000 of raw material was purchased.

b. Direct labor is paid $9.60 per hour and overhead for the month was $9,600. What are prime costs and conversion
costs, respectively if there were 1,500 direct labor hours and $21,000 of raw material was purchased?

c. Direct labor is paid $9.60 per hour and overhead for the month was $9,600. If there were 1,500 direct labor hours
and $21,000 of raw material purchased, Cost of Goods Manufactured is:

d. Direct labor is paid $9.60 per hour and overhead for the month was $9,600. If there were 1,500 direct labor hours
and $21,000 of raw material purchased, how much is Cost of Goods Sold?

Problem 4.

Action Trainers provides a personalized training program that is popular with many companies. The number of
programs offered over the last five months, and the costs of offering these programs are as follows:

Programs Offered Costs Incurred

Jan 55 $15,400
Feb 45 14,050
Mar 60 18,000
April 50 14,700
May 75 19,000

a. Using the high-low method, compute the variable cost per program and the total fixed cost per month.
b. Using the least squares regression method, compute the variable cost per program and the total fixed
cost per month.

Problem 5.

Long Enterprises

Inventories: March 1 March 31

Raw material $18,000 $15,000
Work in process 9,000 6,000
Finished goods 27,000 36,000

Additional information for March:

Raw material purchased $42,000
Direct labor payroll 30,000
Direct labor rate per hour 7.50
Overhead rate per direct labor hour 10.00

50. a. Refer to Long Enterprises. For March, prime cost incurred was:
b. Refer to Long Enterprises. For March, conversion cost incurred was
c. Refer to Long Enterprises. For March, Cost of Goods Manufactured was

IV. SYNTHESIS/ GENERALIZATION

CHAPTER SUMMARY:
 Cost Accounting – the subfield of accounting that records, measures, and reports information about costs.
 Cost accounting is the intersection between financial and managerial accounting.
 There are three major manufacturing cost classification namely direct material, direct labor and
manufacturing overhead.
 The three inventories in manufacturing business are raw material inventory, work in process inventory and
 finished goods inventory.
 The systems of cost accumulation are actual, standard, and normal cost system.
 The two basic product costing systems are job order costing and process costing

V. EVALUATION
The student’s performance will be evaluated as follows:

20% Attendance, Poll Questioning and Oral Exercises

20% Portfolio Journal for work exercises
20% Formative Examination (One online/Offline written quiz covering this specific topic)
40% Summative Examination (This topic is one of the topics included in the Online/Offline Written Examination)
VI. ASSIGNMENT/ AGREEMENT
Research and read about our next topic, Cost and Cost Concepts.

Cabrera,et. al, COST ACCOUNTING AND CONTROL 2018-2019 ed.

De Leom, et. al, COST ACCOUNTING.
VII. REFERENCES Guerrero, COST ACCOUNTING Vol 1.
Rainborn, et. al, Cost Accounting Second ed.

END OF CHAPTER 1