COST ACCOUNTING

CONTROLLING AND COSTING MATERIALS INVENTORY

I. Costing of Materials Received

A. Freight-in
1. Charged directly to STORES account
Entry:
Stores XXX
Vouchers Payable XXX

2. treated as factory overhead

Entry:
Factory overhead control XXX
Vouchers payable XXX

3. May be accumulated in the Freight-in account. As materials are issued

from the storeroom, freight is added to work in process account using an
application rate.
Applied rate=Estd. Freight-in
Estd. Material issuance
Entries:
Freight in XXX
Vouchers payable XXX

Work in process – Mats. (cost + freight) XXX

Stores XXX
Applied freight in XXX

4. May be accumulated in the Freight-in account. As materials are

purchased, freight in added to the Stores account using an application
rate.
Applied rate=Estd. Freight-in
Estd. Purchases
Entries:
Freight in XXX
Vouchers payable XXX

Stores (cost plus freight) XXX

Vouchers payable XXX
Applied freight in XXX

Example 1
A delivery for XYZ Trading is accompanied by an invoice indicating the
following:
Description Weight Unit Cost Amount
Materials X 900 kgs. P5 4,500
Materials Y 1,200 kgs. 4.50 5,400
Materials Z 1,500 kgs. 4.20 6,300
Subtotal 16,200
Freight charges 4,050
Total 20,250

Determine the adjusted unit cost for each item if freight-in is to be added to
the cost of materials purchased based on:
a. Invoice price b. Weight

Example 2
The Tab Co’s budget for the first half of the year contains the following
estimates:
Estimated material purchases P 3,000,000
Estimated freight-in 60,000
Estimated material issuances 2,400,000
 The following selected transactions were incurred during the month of March:
March 4- Purchased materials from Sun-X Company, P170,000.
March 5- Received a bill from JRS, P3,400 for freight on materials purchased
on March 4.
March 6- Issued direct materials to production, P40,000 (at invoice price of
March 4)

Required:
Prepare the entries in general form to record all the three transactions above
using each of the methods applicable for freight-in as follows:
a. Charged directly to the stores account
b. Charged to factory overhead
c. Added to work in process upon issuance of materials using an application
rate
d. Added to purchases using an application rate.

B. Purchase discounts
Materials are recorded at net of purchase discount allowable whether taken or
not. Purchase discount forfeited will be recorded as other expenses.

Example 3
Materials are purchased at a list price of P100,000 subject to the terms of 10,
5, 2/10, n/30. Prepare journal entries to record the (1) purchase, (2)
subsequent payment within the discount period, and (3) subsequent payment
beyond the discount period.

C. Materials handling costs - the term material handling costs refers to the expense
involved in purchasing, receiving, storing and issuing materials.
1. treated as factory overhead account
Factory overhead control XXX
Vouchers payable/Sundry credits XXX

2. Added to the cost of materials issued

Applied rate=Estd. MHc
Estd. Mat. issuances
Entries:
Materials handling costs XXX
Vouchers payable/Sundry credits XXX

Work in process-mat. (cost + MHC) XXX

Stores XXX
Applied material handling costs XXX

3. Added to the cost of purchases

Applied rate=Estd. MHc
Estd. Mat. purchases
Entries:
Materials handling costs XXX
Vouchers payable/Sundry credits XXX

Stores (cost plus MHC) XXX

Vouchers payable XXX
Applied materials handling costs XXX

Example 4
Mintu Industries had the following estimates for the current year:
Purchasing department costs P 400,000
Receiving department costs 250,000
Warehousing department costs 550,000
Purchases 4,800,000
Material issuances 4,000,000
 During the month of August, records show the following actual costs:
Purchasing department costs 32,500
Receiving department costs 18,900
Warehousing department costs 44,300
Purchases (at net invoice costs) 390,000
Materials issuances (at net invoice costs) 310,000
The Material Handling costs account is maintained in the books.

Required:
Prepare summary entries in general journal form to record for the month of
August using each of the following methods of treating material handling
costs:
1. Charged to factory overhead
2. Added to cost of purchases (using a single application rate)
3. Added to cost of materials issued (using a single application rate)

II. Costing of Materials Issued

a. First-in, first out Method-follows the principle that materials used in a job
or process should be issued in the order and at the price of original
purchase. The method assumes that materials are issued from the oldest
supply in stock and that the cost of those units when placed in stock is the
cost of these same units when issued to the factory and debited to work in
process.
b. Moving Average Method- Issuing materials at an average cost assumes
that each batch taken from the storeroom is composed of uniform
quantities from each shipment in stock at the date of issue.
The moving average method divides the total cost of all materials of a
particular class by the number of units on hand to find the average price. The
cost of a new invoice is added to the total in the balance column, the units are
added to the existing quantity, and the new total is divided by the new
quantity to arrive at the new average price.

Recording Returns of Materials – FIFO and LIFO

 Return to Supplier – The supplier is charged at the original acquisition
cost. However, if the return is made when the “Balance” column of the
material ledger card no longer show the original cost, the entry in the
material ledger card will be the next available price under the “Received”
column in negative.
 Return to Storeroom – Materials returned are recorded under the
“Issued” column in negative at the same issued price.

Example 5
Un-Unnoy Co had the following materials purchases and issues for a specific inventory
item:
Balance on hand, August 1 700 units @ P10
300 units @ P11
Purchases:
August 3 1,200 units @ P12
August 22 1,000 units @ P14
August 25 excess materials from
Aug. 14 issues 120 units
Issues to production:
August 14 800 units
August 16 returns to vendor from
Aug. 3 purchase 200 units
August 20 600 units

Required:
Compute the cost of materials used for the month, and the cost assigned to the
August 31 inventory under each of the following perpetual inventory costing methods:
a. First in, first out b. Last in , first out c. Moving average
 COST ACCOUNTING
INVENTORY VALUATION

Valuation at Cost or Net Realizable Value, Whichever is Lower (PAS No. 2)

Net Realizable value – 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.

Lower of Cost or Net Realizable Value by Item

Assume the following data of X Company:

Description Quantity Cost/unit NRV/unit Lower of cost

or NRV
Material A 50 100 95 __________
Material B 30 110 120 __________
Inventory valuation __________

Lower of total cost or total NRV

Description Quantity Cost/unit NRV/unit Total cost Total NRV

Material A 50 100 95 ________ ________

Material B 30 110 120 ________ ________
________ ________
________ ________

Inventory valuation ________

Two approaches to record Inventory Write-down

1. Each materials ledger card is adjusted to show the new unit values.
Entry:
Cost of Sales XXX
Materials XXX

2. A valuation account is set up to reduce the total value of the inventory to net
realizable value. The individual materials ledger cards are not changed and continue to
reflect cost.
Entry:
Loss on Inventory Write-down XXX
Allowance for Inventory Write-down XXX
(to record loss resulting from decline in NRV of inventory)
- addition to cost of goods sold

Allowance for Inventory Write-down XXX

Recovery from Inventory Write-down XXX
(to record recovery resulting from adjustment of allowance account)
- reduction from the cost of goods sold

Sample problem:
Year 1 Year 2 Year 3 Year 4
Inventory at cost 100,000 100,000 120,000 125,000
Inventory at NRV 80,000 95,000 125,000 140,000

Required: Record any adjustment for the inventory in each year.

Adjustment of Inventory Shortage or Overage
1. Materials ledger cards are corrected.

Inventory Shortage – missing materials were being charged out on a requisition on the
closing date
Materials ledger card
Received Issued Balance
XX
XX (XX)

Inventory Overage – recorded at the cost of the last issue of material

Materials ledger card

Received Issued Balance
XX
XX XX

2. Prepare entry to adjust the accounts for the net shortage or overage
Entries:
Manufacturing overhead control XXX
Materials XXX
(to record the net shortage)

Materials XXX
Manufacturing overhead control XXX
(to record the net overage)

Sample Problem:
Year 1 Year 2
Inventory based on Physical count 10,000 12,000
Inventory at general ledger 12,000 11,000

Record the net shortage or overage for each year.

JUST IN TIME INVENTORY MANAGEMENT

- focuses on reducing the cost of inventory
- raw materials arrive just in time to be placed into production
III. Scrap defined. It is the residue of manufacturing processes. In a sawmill, it
would include sawdust, bark, and discarded end pieces.

IV. Accounting for Scrap

Scrap with Low sales Vaue
a. Credit to income account
Cash XX
Misc. Income XX
b. Credit to specific job
Cash XX
Work in process-Mat. XX
c. Credit to factory overhead
Cash XX
Factory overhead control XX
Scrap with high sales value

Stores-Scrap (at estd. MV) XX

Work in process-mat XX
Or
FOH control or XX
Income from scrap sale XX

Cash or AR XX
Stores-Scrap XX

V. Wast materials defined. Raw materials remaining from the production cycle
but not usable for any purpose.

VI. Spoiled goods are units that do not meet production standards and are sold
for their salvage value (or market value). When spoiled goods are discovered,
they are taken out of production and no further work is performed on them.

VII. Accounting for spoilage

a. Normal spoilage is one that results despite efficient production methods. It
is inherent result of the particular process and therefore uncontrollable in
the short run.
1. Applied to all jobs
2. Applied to specific job only.
b. Abnormal spoilage is usually the result of inefficient operation. It is not
expected to arise under efficient operating conditions. Such causes as
machinery breakdowns, accidents, and inferior materials typically result to
abnormal spoilage and are not an inherent part of the production process.
 SPOILED GOODS

NORMAL ABNORMAL LOSS

Charged to all specific jobs

Jobs

Cause: due to internal exacting specifications due to inefficient

Failure operations
Entries:
To record total production costs
WIP-DM XX WIP-DM XX SAME AS SPECIFIC
WIP-DL XX WIP-DL XX
WIP-OH XX WIP-OH XX
Stores XX Stores XX
Factory payroll XX Factory payroll XX
Applied OH XX Applied OH XX
(includes the prov. For (excludes the prov. For
the spoiled goods) the spoiled goods)
To record spoiled goods at market value
FG-seconds(estd. MV)XX FG-seconds(estd. MV)XX
FOH control XX
WIP-DM XX WIP-DM XX
WIP-DL XX WIP-DL XX
WIP-OH XX WIP-OH XX
To record cost of completed job
Finished goods XX Finished goods XX
WIP-DM XX WIP-DM XX
WIP-DL XX WIP-DL XX
WIP-OH XX WIP-OH XX
Example 6
Fashioncraft Co had a production order Job No. 072 for 30,000 pairs of
earrings during the last week of August at the following costs:
Materials P 11 per pair
Labor 6 per pair
Factory overhead 4 per pair (includes P1 allowance
for spoiled goods)

When the job was completed, inspection rejected 1,500 pairs which were sold
for P13 each.

Required:
1. Entries if the loss is to be charged to Job No. 072.
2. Entries if the loss is to be charged to all production of the period.
3. Entries if the loss is to be charged to Job No. 072 to the extent of only
1,250 pieces, the 250 pieces being considered abnormal loss.

Example 7
Unique Fabricators in producing Job No. 143 which called for 3,800 prices
Style No. 55 incurred at cost as follows:
Materials P 21 per piece
Labor 16 per piece
Factory overhead 12 per piece (includes P.80 allowance
for spoiled goods)

When the job was completed, inspection rejected 300 pieces which were sold
for P23 each.

Required:
1. Entries if the loss is to be charged to Job No. 143.
2. Entries if the loss is to be charged to all production of the period.
 3. Entries if the loss is to be charged to Job No. 143 to the extent of only 250
pieces, the 50 pieces being considered abnormal loss.

VIII. Defective goods. A product that does not meet quality control standards and
needs to be reworked to be salable as either irregular or a good product.
IX. Accounting for defective goods

DEFECTIVE GOODS

NORMAL ABNORMAL

Charged to all specific jobs

Jobs

Cause: due to internal exacting specifications

failure
Entries:
To charge the original
Cost to production
WIP-DM XX WIP-DM XX SAME AS SPECIFIC
WIP-DL XX WIP-DL XX
WIP-OH XX WIP-OH XX
Stores XX Stores XX
Factory payroll XX Factory payroll XX
Applied OH XX Applied OH XX
(includes the prov. For (excludes the prov. For
the rework cost) the rework cost)
Additional production costs
FOH control XX WIP-DM XX
Stores XX WIP-DL XX
Factory payroll XX WIP-OH XX
Applied OH XX Stores XX
(includes the prov. For Factory payroll XX
the rework cost) Applied OH XX
(excludes the prov. For
the rework cost)

Example 8
Arts Products Company manufactured among other items, a unique pincer. One
order Job No. 742, requiring delivery of 4,000 pincers shows the following cost per unit:
Materials P 7
Labor 4
Factory overhead applied (based
On labor cost, includes an
Allowance of P.60 for rework
Costs) 5.60

Final inspection revealed that 550 units were improperly machine. These units
were uncoupled, properly machined, and reassembled. Cost of correcting the defective
pincers consisted of materials costing P2,420 and labor cost of P1,320. Overhead is
likewise applied based on labor cost.
Required: Entries to record all cost related to the completion of the order-
1. When the specific job is charged with the rework costs.
2. When the cost of correcting defective units is applied to all jobs.
3.When the specific job is charged with the cost of rework for 400 pincers, and the
excess of 150 pincers being considered abnormal.

Example 9
During the month of March, Job No. 210 for 4,000 kitchen knives were completed at
the following costs per unit:
Materials costs P 5
 Direct labor costs 4
Factory overhead (includes an allowance
Of P1.20 for rework cost) 6

Final inspection disclosed that 200 knives are defective and which were reworked at a
material cost of P600; direct labor cost of P480 and overhead at the predetermined rate
based direct labor cost.
Required: Entries to record all cost related to the completion of the order-
1. When the specific job is charged with the rework costs.
2. When the cost of correcting defective units is applied to all jobs.
3.When the specific job is charged with the cost of rework for 120 units, and the excess
of 80 units being considered abnormal.