Cost

Accounting
Module 1
P R E PA R E D B Y:
CRISTOPHERSON PEREZ,
C PA
What is Cost Accounting?
Cost accounting Is a discipline that focuses on techniques or method for determining the cost of a
project, process, core services for the purpose of planning and controlling activities, improving quality
and efficiency, and for making decisions.

It provide information on a company’s cost on and may be used for both internal and external purposes.

According to Horngren, Cost Accounting measures and reports financial and non-financial information
relating to the cost of acquiring or consuming resources in an organization. It provides information on a
company's cost and may be used for both internal and external purposes.

Raiborn states that cost accounting identifies, defines, measures, reports, and analyzes the various
elements of direct and indirect cost associated with producing and marketing goods and services. It
also measures the performance , product quality , and productivity .
Uses of Cost Data
Cost accounting information is very useful in determining product and service costs and in setting
prices for the product and the service.

Knowing the costs of a product or service helps the management set the selling price enough to
recover the cost of production, cost of performing a function, distribution, administration and to
provide allowance for reasonable profit. These costs information also help the management in
deciding whether to maintain, to reduce or to increase the selling price of the product to have a
fair competition in the market.

The accumulated costs information are summarized and reported to the management for
effective planning to attain the company’s goal and objectives.
Uses of Cost Data
In manufacturing, if the management has sufficient information about the cost data, it can
prepare a detailed production plan, which usually includes the following:
a. The number of units to be produced;
b. The type of manufacturing operations to be performed;
c. The desired quality of the product;
d. The number of personnel to be utilized (laborers and non-laborers);
e. The type of materials to be used
f. The level of materials inventory to be maintained in order not to encounter overstocking or stock-out of
materials
g. The delivery schedules
h. And other production schedules
Uses of Cost Data
Once a production plan has been laid out, it would be easier for the management to perform the
function of control where actual results are compared with expected results set by the
management to allow the management team to make corrective measures on areas where
significant differences are noted.

In controlling, responsibility is assigned to different departments or group of workers who has

control over and accountable for the costs charged to that department or group. In this manner,
the accountability for costs or production results is easily identified.
Classification of costs
The costs of an object, product, project or service represent the cash or cash
equivalent of resources used in acquiring the goods, manufacturing a
product, and performing a function. It also includes the cost of distributing
the products or services to the ultimate consumers. The cash equivalent is
used because non-cash assets can be exchanged for the desired goods or
services.
Product Cost
Manufacturing cost is the sum of the inputs or resources used in the conversion of raw materials
into finished product. This type of cost is often referred to as product cost or inventoriable cost.
The product costs include costs of direct materials, direct labor, and factory overhead. The
accumulated cost of direct materials, direct labor, and factory overhead is summarized in a work
in process account.
At the end of a period, the cost of completed goods is transferred to the finished goods account.
The cost of unfinished goods, on the other hand, is left in the work in process account, which is
also reported in the balance sheet as current assets.
The sold portion of the finished goods is reported as expense in the income statement, as cost of
goods sold, while the unsold goods are reported in the balance sheet as finished goods.
Product Cost
A manufacturing company normally maintains three inventory accounts: finished goods, work in
process, and raw materials. The raw materials inventory represent the unused portion of direct
and indirect materials.

For a retailing or merchandising company (a company engaged in buying goods ready for sale),
product costs include the purchase price of goods bought for resale plus the transportation costs
and other direct costs incurred in bringing the goods to the place of the buyer.
Product Cost
For a construction company, the product costs include the cost of construction materials, labor of
carpenters and overhead incurred in construction like cost of power, light & water, insurance,
hospitalization and other health benefits for workers, maintenance of construction equipment,
compensation of foremen, cost of constructing temporary house for the workers and for
construction materials, depreciation of equipment, rentals and other expenses incurred in the
construction site.

For a service organizations, its product costs are classified either as direct or indirect costs. Their
inventory accounts are usually for supplies like office supplies for accounting firms or law firms,
medical supplies for hospitals and medical clinics, cleaning supplies for utility firms and food
supplies for restaurants and bars. The most significant portion of their costs is labor because the
workers utilized their own efforts in delivering service.
Elements of Product Costs:
Manufacturing Company
1. Materials. Materials include the raw materials and other factory supplies used in manufacturing operations. They
are classified as either (a) direct materials or (b) indirect materials.

A. Direct materials. Direct materials are those materials traceable to the product being produced.

Examples:
Direct Materials Product manufactured
Lumber Furniture
Galvanized Iron and steel Jeepneys and trucks
Leather Bags, belts, wallets, and shoes
Fabrics Shirts, dresses, coats, and other related
gents and ladies apparels
Flour, sugar, and butter Bread and other pastries
Elements of Product Costs:
Manufacturing Company
1. Materials. Materials include the raw materials and other factory supplies used in manufacturing operations. They
are classified as either (a) direct materials or (b) indirect materials.

B. Indirect materials. These are materials necessary in manufacturing operations but are not directly included in or
not a significant part of the product. They include operating janitorial and factory supplies used in the factory such as
nails, screws, washers, glue, sand paper, lubricating oil, grease, cleaning materials and other materials needed to
maintain the working area and plant equipment in a usable and safe condition. The costs of indirect materials are
relatively small in relation to the cost of all other raw materials.
 Elements of Product Costs:
Manufacturing Company
2. Labor. Labor represents the compensation and other benefits paid to the workers in the factory. They are
classified as (a) Direct labor and (b) Indirect labor.

A. Direct labor – represents compensation and benefits paid to those who physically work on the conversion of raw
materials into a finished product and are easily traceable to a specific process or job order. They include the basic
pay, cost of living allowances, 13th month pay, and cash equivalents of non-cash incentives given on a regular basis.

Prime costs = Direct materials + Direct labor

Conversion costs = Direct labor + Manufacturing Overhead

Elements of Product Costs:
Manufacturing Company
2. Labor. Labor represents the compensation and other benefits paid to the workers in the factory. They are
classified as (a) Direct labor and (b) Indirect labor.

B. Indirect labor – represents wages of personnel other than the direct laborers, which are necessary to the
manufacturing process or service but are not directly related to the actual conversion of raw materials into a finished
product.

These include the supervisor’s fee, wages paid to other workers such as janitors, inventory control clerks, guards,
and other personnel in the factory, employee benefits such as employer’s share in SSS, PHIC, and HDMF, vacation
and holiday pay, health insurance of workers, educational benefits, overtime and night premium, cost of housing and
accommodation for stay-in workers, and performance bonuses for deserving workers.
Elements of Product Costs:
Manufacturing Company
2. Manufacturing Overhead. Manufacturing overhead is an indirect product cost and it includes production costs
other than direct materials and direct labor.

They include:
a. Factory supplies such as oil and other cleaning materials used in the factory
b. Wages of supervisors, factory maintenance personnel, raw materials handlers, and security officers stationed in the factory
premises
c. Depreciation of factory plant and equipment
d. Insurance and property taxes on factory plant and equipment
e. Maintenance and repairs on factory plant and equipment
f. Power, light, and water
g. Telephone and mailing costs
h. Cost of regulatory compliance such as meeting factory safety requirements and disposal of waste materials
i. Idle time by factory workers due to machine breakdowns or new set ups which are unavoidable in production process. During
their idle time, the workers are not productive therefore the cost is spread over the entire production not to a specific product.
Period Costs
Period costs are operating expenses that are associated with time periods, rather than with the
production of goods and services.

Period costs are charged directly to expense accounts on the assumption that their benefit is
recognized entirely in the period when the cost is incurred.

They are non-manufacturing costs and non-inventoriable costs.

Period Costs
They include:
A. Marketing and selling costs: These are the costs of getting and filling orders such as cost of
customer service, cost of documentation, salaries and commissions of sales personnel, advertising
costs, and other expenses associated with the sale of goods and services.
B. Distribution costs: These are the costs of warehousing, transporting, and delivering a product or
service to the customer.
C. Administrative costs: These are the costs associated with the general administration of the
organization that cannot be reasonably assigned to either marketing or production such as salaries and
wages of administrative officers and employees, power and water consumption, transportation and
representation expenses, maintenance cost of office equipment, depreciation of office furniture and
equipment, taxes and licenses, gas and oil expenses, and other expenses in the administrative office.
Direct vs. Indirect Costs
Direct Cost. These are costs that can be obviously and physically traced to a manufacturing process,
job, or order, business unit, segment or department. These costs are often described as those that
would be saved if the segment or business unit would be discontinued or if the product would not be
manufactured.
Direct costs are not only direct materials and direct labor but it also includes the cost to run a business
unit.
They include:
a. Salary of auto-mechanics in Automotive Servicing Co.
b. Salary of a binder in a Printing Company
c. Oil and lubricants in a Trucking Company
d. Steel bars used by a Construction Company
e. Bond papers and telephone expense in a Law Office
f. Cost of detergents in a laundry shop
g. Cost of x-ray, doctor’s fee, laboratory fee & medicine in a hospital.
Direct vs. Indirect Costs
Indirect cost. These are costs related to a particular cost object
but cannot be traced to that cost object in an economically
feasible way.
They are normally incurred for the benefit of several segments
within the organization. In a manufacturing company, these are
overhead costs incurred in the process of production.
Common and Joint Costs
Common costs. Common costs are mutually beneficial costs which occur when the same resource is
used in the output of two or more services or products or simply the costs of facilities or services
shared by two or more departments or operations. Examples of common costs are:
A. Building repairs and maintenance costs
B. Rent of a building occupied by different departments
C. Power and utilities costs
D. Salaries and wages of personnel serving two or more departments
E. Real estate taxes for land and building
F. Permits and licenses
Common and Joint Costs
Joint costs. These are costs incurred in a single process that yields two or more products. They are
production costs (direct materials, direct labor, and factory overhead) incurred up to the extent
where products are separately identified.

Example: the cost of dough, labor or baker, and overhead incurred by a bakeshop
Opportunity and Sunk Costs
Opportunity costs. These costs represent the benefits foregone because one course of action is
chosen over another.

Examples are:

A. The rent revenue foregone if a company decides to use a part of a building rather than leasing
it.

B. The salary foregone if a student decides to be a full-time student rather than a working student.
Opportunity and Sunk Costs
Sunk costs. These costs are costs that have already been incurred and will be changed or avoided
by any future decisions. They are past costs that are unavoidable because they cannot be
changed no matter what action is taken by the management.

Examples are:

A. The acquisition cost of an office equipment

B. The manufacturing costs of finished goods on hand.

Committed and Discretionary Cost
Committed costs. These costs are costs resulting from an organization’s structure or use of
facilities and its basic organization structure.

Examples are:

A. Property taxes

B. Depreciation on building & equipment

C. Salaries of management personnel

D. Cost of renting facilities

Committed and Discretionary Cost
Discretionary costs. These costs are costs resulting from management decision to spend a
particular amount of money for a specific purpose.

Examples are:

A. Amount of money to spend on Research and Development

B. Management development program and contributions to charitable institutions

C. Advertising and promotion

Controllable and Non-controllable
costs
Controllable costs. These costs are costs primarily subject to the influence of a given
responsibility center manager for a given period of time.

Examples are:

A. The cost of raw materials used in manufacturing leather products. The production manager has
the ability to control the materials to be used in production by selecting only materials with high
quality, thus, reducing waste and spoilage.

B. Cost of food in the factory canteen. The canteen manager has the ability to control losses in
terms of spoilage and theft by canteen personnel.
Controllable and Non-controllable
costs
Non-controllable costs. These costs cannot be controlled or influenced by a responsibility center
manager.

Example:

Cost of renting equipment. The owner of equipment has the control over the amount of rent not
the production manager.
Out of Pocket and Budgeted Costs
Out of pocket costs. These costs refer to the cash outlay required to complete a proposed project
or to extend an activity undertaken.

Budgeted costs. These costs refer to planned or predetermined costs.

Capital expenditures and Revenue
expenditures
Capital expenditures. These are expenditures intended to benefit future periods and are reported
as asset in the balance sheet.

Example are:

A. Cost of overhauling heavy equipment

B. Cost of replacing worn out wall of a building

Revenue expenditures. These are expenditures that benefit only the current period and are
reported as expense.
Fixed, Variable, and Mixed Costs
Fixed costs. These are costs that are constant in total within the relevant range of activity but
variable on a per unit basis. As the activity level increases or decreases, total fixed cost remains
constant but unit cost declines or goes up, respectively.

Examples are:

A. Depreciation using the straight-line method

B. Factory rent & factory taxes

C. Factory insurance

D. Supervision Fee

E. Wages of indirect laborers

Fixed, Variable, and Mixed Costs
Variable cost. These are costs that vary in total in direct proportion to changes in the volume of
production. Variable cost is a constant amount on a per unit basis as activity changes within a
relevant range. As activity changes, total variable costs increase or decrease proportionately with
the activity change, but unit variable costs remain the same.
Examples are:
A. Direct materials and direct labor
B. Fuel and other factory supplies
C. Overtime premium
D. Materials handling costs
E. Maintenance costs
Inventory Accounts
Manufacturing companies maintain three inventory accounts, namely:
1. Raw Materials Inventory: This account shows the raw materials available for use in the
manufacturing process. It serves as the controlling account if the company maintains only one
account for its direct and indirect materials. However, if the company maintains a separate account
for its direct and indirect materials or supplies, the account may be changed to Direct Materials
Inventory for direct materials, Factory Supplies Inventory account for indirect materials such as
supplies to be used in the production including janitorial, operating, and repairs supplies intended
for use in the factory.
2. Work in Process Inventory: This account represents the costs of partially completed goods on
which production activities have been started but not yet completed as of a certain period.
3. Finished Goods Inventory: This account summarizes the cost of completed jobs stored in the
warehouse ready for delivery to the customers.
Raw Materials Inventory System
Perpetual Inventory System

The perpetual inventory system requires the need to maintain stock cards for each type of raw
materials to show the summary of the inflow, outflow, and balance of raw materials in quantity and
peso amount.

Under this system, the movement of raw materials is summarized in a Raw Materials Inventory
Account . This method makes it easier for a company to determine the amount of inventory on
hand at any given time.

Although the quantity of raw materials is available at any time by just referring to the stock card, it
is necessary to take physical count of raw materials at least once a year to confirm the balance
reflected in the material stock cards and in the Raw Materials Inventory account.
Raw Materials Inventory System
Periodic Inventory System

Under the periodic inventory system, there is no need to maintain a stock card for the raw
materials. A physical count is made periodically, which is near the end of a period to determine the
units on hand.

The latest purchases are normally left in the warehouse. The raw materials issued are the residual
amount after deducting the physical inventory counted from goods available for sale.
Flow of Cost
Raw Materials
Inventory

Work in Process Finished Goods Finished Goods

Direct Labor Inventory Inventory Inventory

Raw Materials
Inventory
Summary of flow of costs in the
inventory system
Direct Materials Inventory Work in Process Inventory Fnished Goods Inventory
Beg. Balance Xx Beg. Balance Xx Beg. Balance Xx
+Purchases Xx +Direct Materials used Xx +Cost of goods Xx
manufactured
+Freight in Xx +Direct labor Xx
- Purchase Returns & (Xx) +Factory overhead Xx
Allowances/Purchase
discounts
Total Direct materials xx Total manufacturing costs Xx Total Cost of goods Xx
available for use to account available for sale
Less: End balance (xx) Less: End balance (xx) Less: End balance (xx)
DM materials used Xx Cost of goods Xx Cost of goods sols xx
manufactured
Methods of Accumulating
Product Costs
Actual Costing System. Very few companies adopt this method of costing because the overhead costs
cannot be traced easily to individual jobs. This method requires that all production overhead must be
available before any cost allocation can be made to the jobs in process. Under this system, the actual
costs of direct materials used, direct labor, and manufacturing overhead incurred in production are
charged to the job.
Normal Costing System. Under this system, the actual costs of direct materials and direct labor are
charged to the job. The manufacturing overhead applied to production differs from actual costing in the
sense that pre-determined overhead rate is used in computing for the amount of overhead charged to
the job.
The predetermined overhead rate is the ratio of estimated total overhead to the estimated total of cost
driver selected. A company can use one rate (plant-wide) or several rates (departmental rates). If
several rates are used, the budgeted manufacturing overhead is actually divided into several cost pools
and uses each driver as the denominator in computing for the predetermined overhead rate.
Cost Accounting Cycle (Actual Costing
Method – Perpetual Inventory System)
Transactions
1. Purchase of Raw Materials: 5,000 units at
P20.50 each, on account
2. Transportation cost or freight paid on the
purchases, P10,000
Journal Entries
Raw Materials……………………..102,500
Accounts Payable…………………………102,500
Raw Materials……………………….10,000
Cash……………………………………………10,000

Before updating the inventory card, the unit cost

of the raw materials purchased is adjusted to
include the freight. Freight is apportioned equally
to all the units purchased.

Invoice price per unit 20.50

Freight per unit (10,000/5,000) 2.00
Adjusted unit cost P22.50
Cost Accounting Cycle (Actual Costing
Method – Perpetual Inventory System)
Transactions Journal Entries
3. Returned 200 units to the supplier due to defective Accounts payable……………4,100
quality Manufacturing overhead……400
Charged against Accts. Payable (200 x 20.50) 4,100 Raw Materials…………………………4,500
Charged against overhead (200 x 2.00) 400
4. Issuance of Raw Materials: 2,800 Work in process………..63,000
2,800 x 22.50 = 63,000 Raw Materials……………………63,000
5. Return of excess materials to the storeroom, 200 Raw Materials……………4,500
units Work in process………………4,500
6. Factory Payroll: Factory payroll………….125,000
Gross 125,000 SSS Payable…………………….4,800
SSS Payable (4,800) PHIC Payable……………………1,200
PHIC (1,200) HDMF Payable………………….1,200
HDMF (1,200) Withholding tax payable…….9,600
WHT (9,600) Cash (or Wages payable)..108,200
Net pay 108,200
Cost Accounting Cycle (Actual Costing
Method – Perpetual Inventory System)
Transactions Journal Entries
7. Distribution of factory payroll: Work in process………………100,000
80% - direct laborers Manufacturing overhead…..25,000
20% - indirect laborers Factory payroll………………………..125,000
8. Utility expenses of the factory, P20,000 Manufacturing overhead…..20,000
Cash (or Accounts Payable)………20,000
9. Maintenance of factory machineries, P5,000 Manufacturing overhead…….5,000
Cash (or Accounts Payable)……5,000
10. Expired insurance on factory premise, P1,200 and Manufacturing overhead……16,200
Depreciation of Plant equipment, P15,000 Prepaid insurance…………………….1,200
Accumulated depreciation………15,000
11. Actual Overhead applied to the job: Work in process……………..66,200
Indirect labor: 25,000 ; Utility: 20,000 ; Maintenance: Manufacturing overhead………..66,200
5,000 ; Insurance: 1,200 ; Depreciation: 15,000
Cost Accounting Cycle (Actual Costing
Method – Perpetual Inventory System)
Transactions Journal Entries
12. Completion of the work in process (100% is done): Finished Goods…….224,700
Direct materials used: 58,500 Work in process……………224,700
Direct labor: 100,000
MFOH: 66,200
13. Sold all the manufactured goods at cost plus 40% Accounts Receivable…….314,580
mark-up based on COST: Sales……………………………………314,580
Total cost: 224,700
Mark up: 89,880 Cost of sales…………….....224,700
Sales price: 314,580 Finished Goods……………………224,700
Pro-Forma Statement of Cost of Goods Manufactured and Sold
Computation of COGS in
different types of businesses
Illustration: Actual Costing Method
High Street Manufacturing Company has the following account balances at the beginning of the
current year:

Raw materials inventory P50,000

Work in process inventory 150,000
Finished Goods 120,000
Below is the summary of transactions for the month of January:

(a) Purchased of Raw Materials: On account, P200,000; Cash, P80,000

(b) Issuance of Raw Materials to the production department, P180,000 of which 10% is indirect
materials.

(c) Company payroll for the month: Factory payroll consisted of P120,000 for direct labor and
P25,000 for indirect laborers; Marketing and Administrative payroll amounts to P40,000 and
P80,000, respectively. (Use Marketing Expense control and Administrative expense control for
marketing and administrative expenses).
(d) The following were accrued at the end of the month: (a) Electricity costs, P22,000; (b) Rent,
P10,000 and (c) Taxes and permits, P5,000. Of the given expenses, 50% is allocated to factory,
20% to marketing and 30% to administrative.

(e) Depreciation for the month: Factory plant and equipment, P7,500; Office furniture and
equipment, P7,500.

(f) Expire insurance, P10,000, allocated in the same manner as in No.4.

(g) Overhead is applied to production.

 (h) At the end of the month, unfinished jobs totaled P75,000 and unsold finished goods amounted
to P90,000.

(i) High Street Manufacturing Company uses the actual cost system in accumulating cost and
perpetual inventory system in accounting for its inventory. The company’s mark-up on cost is
maintained at 40% for the past two years all on a 30 days term.
Required:
A. Determine the following:
7. Selling price of goods sold
1. Raw materials inventory on January 31
8. Total administrative and marketing costs
2. Direct materials charged to the job
9. Net income for the period
3. Total prime costs for the period
B. Journal entries
4. Amount of overhead charged to the job
C. Post on selected accounts
5. Cost of goods manufactured
D. Prepare a Statement of Cost of Goods
6. Cost of goods sold Manufactured and Sold
Solutions: Requirement A,
(1) Raw Materials used:
RM inventory, Jan.1 P50,000
Purchases 280,000
Raw materials available P330,000
RM used 180,000
Raw materials inventory, Jan.31 150,000

(2) Raw materials issued P180,000

Less: Indirect materials, 10% 18,000
Direct materials used P162,000
Solutions: Requirement A,
(3) Direct labor P120,000
Direct materials 162,000
Total Prime costs P282,000

(4) Overhead charge to the job:

Indirect materials P18,000
Indirect labor 25,000
Electricity 11,000
Rent 5,000
Taxes & permits 2,500
Depreciation 7,500
Insurance 5,000
Total OH charged to the job P74,000
Solutions: Requirement A,
(5) Direct materials used P162,000
Direct labor 120,000
Overhead 74,000
Total manufacturing costs P356,000
Add: Work in progress, Jan.1 150,000
Total costs put into process P506,000
Less: Work in process, Jan.31 75,000
Cost of goods manufactured P431,000

(6) Finished goods, Jan.1 P120,000

Add: Goods Manufactured 431,000
Total goods available for sale P551,000
Less: Finished Goods, Jan.31 90,000
Cost of goods sold P461,000
Solutions: Requirement A,
(7) Cost of goods sold P461,000
Multiply by 140%
Selling price P645,400

(8) Administrative & marketing costs: Administrative Marketing

Electricity P6,600 P4,400
Rent 3,000 2,000
Taxes 1,500 1,000
Depreciation 7,500
Insurance 3,000 2,000
Salaries 80,000 40,000
Total P101,600 P49,400
Solutions: Requirement A,

Sales P645,400
Cost of Sales 461,000
Gross Profit P184,400
Less: Administrative expenses P101,600
Marketing costs ______49,400 _____151,000

(9) Net income P33,400

(b) Journal Entries
1. Purchase of Raw Raw Materials 280,000
Materials Accounts Payable 200,000
Cash 80,000

2. Issuance of RM Work in process 162,000

Manufacturing overhead 18,000
Raw Materials 180,000

3. Company payroll Factory payroll 145,000

Marketing exp- control 40,000
Administrative exp. Control 80,000
Accrued payroll 265,000

Work in process 120,000

Manufacturing overhead 25,000
Factory payroll 145,000
(b) Journal Entries
4. Accrual of another Manufacturing overhead 18,500
expenses Marketing exp-control 7,400
Administrative exp.control 11,100
Accrued exp payable 37,000

5. Depreciation Manufacturing OH 7,500

Administrative exp-control 7,500
Accum. Dep’n-factory 7,500
Accum. Dep’n-office 7,500

6. Insurance exp Manufacturing overhead 5,000

Marketing exp-control 2,000
Administrative exp-control 3,000
Prepaid insurance 10,000
(b) Journal Entries
7. OH applied to Work in process 74,000
production Manufacturing OH 74,000

8. Good completed Finished goods 431,000

Work in process 431,000

9. Sales on account Accounts receivable 645,400

Sales 645,400

Cost of sales 461,000

Finished goods 461,000
(a) Post to select accounts:
Raw Materials Work in Process
1/3 50,000 2) 180,000 1/3 150,000 8) 431,000
1) 280,000 1/31 150,000 2) 162,000
3) 120,000 1/31 75,000
7) 74,000

Manufacturing overhead
2) 18,000 7) 74,000
3) 25,000
4) 18,500
5) 7,500
6) 5,000
 High Street Manufacturing Company
Statement Cost of Goods Manufactured and Sold
January 31, 2016

Raw Materials Used:

RM inventory, Jan. 1 P50,000
Add: Purchases 280,000
Raw materials available P330,000
Less: Inventory, Jan.31 P150,000
Indirect materials used 18,000 168,000 P162,000
Direct Labor 120,000
 High Street Manufacturing Company
Statement Cost of Goods Manufactured and Sold
January 31, 2016

Manufacturing overhead:
Indirect materials used P18,000
Indirect labor 25,000
Depreciation 7,500
Insurance 5,000
Others 18,500 74,000
 High Street Manufacturing Company
Statement Cost of Goods Manufactured and Sold
January 31, 2016

Total Manufacturing costs P356,000

Add: Work in process, Jan. 1 150,000
Total cost of work put into process P506,000
Less: Work in process, Jan. 31 75,000
Cost of goods manufactured P431,000
Add: Finished Goods, Jan.1 120,000
Goods available for sale P551,000
Less: Finished Goods, Jan. 31 90,000
Cost of Goods sold P461,000
 Illustration. Normal Costing method,
Perpetual Inventory System
Triple A Manufacturing Company submitted the following summary of transactions for its first year
operations.
a. Raw Materials purchased, P2,350,000
b. Factory payroll
- Indirect labor, P150,000
- Direct labor. P1,500,000
c. Material Requisition for the period
- Indirect materials, P190,000
- Direct Materials, P1,200,000
 Illustration. Normal Costing method,
Perpetual Inventory System
d. Overhead is applied to production at 75% of direct labor costs. Budgeted overhead for the year
amounted to P1,200,000 while actual overhead amounted to P1,150,000.

e. Good completed for period equal to 80% of goods put into process.

f. 75% of total production was sold at 40% mark-up on cost.

g. Close overhead variance to cost of sales.

Required: Journal entries following the flow of cost.

Solutions:
Transactions Journal Entries Dr Cr
a. Purchase of RM Raw Materials 2,350,000
Accts. Payable or cash 1,350,000

b. Factory Payroll Factory payroll 1,650,000

Accts. Payable or Cash 1,650,000

Work in Process 1,500,000

Manufacturing overhead 150,000
Factory payroll 1,650,000

c. Issuance of RM Work in process 1,200,000

Manufacturing overhead 190,000
Raw materials 1,390,000

d. OH applied to Work in process 1,125,000

production Manufacturing OH 1,125,000

Actual overhead Manufacturing OH 1,150,000

Various accounts 1,150,000
Solutions:
Goods put into process
Direct materials 1,200,000
Direct labor 1,500,000
MOH 1,125,000
Total costs of goods put into process 3,825,000
Portion completed 80%
Goods manufactured 3,060,000
Solutions:
e. Completion Finished Goods 3,060,000
Work in process 3,060,000

f. Sale Accounts receivable 3,213,000

Sales 3,213,000
(3,060,000 * 75% *140%)

Cost of Sales 2,295,000

Finished goods 2,295,000

g. Over/ under apllied Cost of Sale 25,000

OH Manufacturing OH 25,000
Actual overhead – 1,150,000
Applied overhead – 1,125,000
Under applied OH – 25,000