Cost Accounting Cycle

Cost Accounting

 Provides the additional information required by

management, and also provides data necessary for the
preparation of external financial statement.
Cost Accounting Cycle
 Process performed during the accounting period in
recording data, classifying, determining the total cost,
determining product cost, determining selling price,
controlling cost
Manufacturing Inventory Accounts
 Most manufacturing companies use the perpetual inventory
approach.

Example of perpetual inventory entry:

*To purchase goods from a supplier

Account Debit Credit
Merchandise Inventory XXX
Accounts payable XXX

*To record freight costs

Account Debit Credit
Merchandise Inventory XXX
Accounts payable XXX
Perpetual Inventory Method
The perpetual inventory method is a method of accounting
for inventory that records the movement of inventory on a
continuous (as opposed to periodic) basis.

It has become more popular with the increasing use of

computers and perpetual inventory management software.
At the end of an accounting period, the balance on the
perpetual inventory account should be the same as the
physical inventory available.
 Under the perpetual inventory method each time there is
a movement journals are processed to record the
change. Purchases are debited to inventory and sales
are credited to inventory, with the debit going to the cost
of goods sold account.
*To record the sale of goods to a customer
Account Debit Credit
Sales XXX
Accounts receivable XXX
Cost of goods sold XXX
Merchandise Inventory XXX
Manufacturing Inventory Accounts
 Accounting for inventories is the more difficult part of
manufactuting accounting when compared with
merchandising accounting.

 Instead of dealing with one account- Merchandise

Inventory-three must be used: Materials Inventory, Work
in Process Inventory (WIP), and Finished Goods
Inventory(FGI).
Materials Inventory
 Made up of the balances of materials and supplies on
hand.

 For Merchandising company, goods taken out of

inventory are items that have been sold. When a sale is
made, debit Cost of Goods Sold(COGS) and credit
Merchandise Inventory. Materials, on the other hand,
are usually not purchased for resale but for use in
manufacturing a product.
 Therefore, an item taken out of Materials inventory and
requisitioned into production is transferred to the WIP
account(not COGS).
 Figure 3-1 Merchandise Inventory versus
Materials Inventory
Goods costing 45,300
were sold

Cost of Goods Sold

Merchandise Inventory

Banlance 1/1 24,600 Sold 45,300 Sold 45,300

Purchases 53,200

Balance 32,500

Materials Inventory Work in Process

Balance 1/1 24,600 Issued 45,300 Balance 1/1 25,100

Mat. Used 45,300

Purchases
53,200

Balance Mats. costing 45,300 were

32,500 issued to production
Work in Process Inventory
 All manufacturing costs incurred and assigned to products being
produced are classified as WIP inventory costs.

 The issuance of material production, shown in Figure 3-1, begins the

production process.

 Materials must be cut, molded, assembled, or in some other way

changed into a finished product.

 To make this change, people, machines and other factory resources

(bhildings, electricity, supplies, and so on) must be used.
 All of these costs are manufacturing cost elements (product costs) all of
them enter into accounting for Work in Process Inventory.

 WIP--MATERIALS, LABOR and OVERHEAD

Figure 3-2 The Work in Process Inventory
Account
Productsvcoating P 201,600
were completed and transferred to
finished goods inventory

Work in Process Inventory Account Finished Goods Inventory

Completed during the Balance 1/1 70,000

Balance 1/1 25,100 period
201,600 Completed 201,600
Materials 45,300

Labor 79,700

Overhead 65,000

Balance 13,500
Elements of Manufacturing Cost
Direct Materials
 Cost of material which can be readily identified with a
certain product. Examples are lumber used in making
furniture, fabric used in the production of clothing. Part of
the product being manufactured.
 Materials that cannot be readily identified with any
particular item re called indirect materials. Materials that
actually become part of the finished product but whose
costs are insignificant, such as thread, screws, rivets, bolts,
nails, and glue.

Direct labor
 Cost of labor who work directly on the product
manufactured. Examples are: salaries of machine
operators or assembly line workers. since these people
work on specific products, their labor costs are assigned
to those products by including the labor peso earned as
part of the WIP Inventory account.
 The wages and salaries of employees who do not work
directly on the units being manufactured are considered
indirect labor. Examples are wages and salaries of
departmen heads, inspectors, supervisors, and
maintenance personnel.
Factory overhead
 Include all costs related to the manufactucring of a
product except direct materials and direct labor.
Examples are indirect materials, indirect labor, and other
manufacturing expenses, such as depreciation on the
factory building, machinery and equipment, supplies,
heat, light, power, maintenance , insurance, rent and
taxes.
Finished Goods Inventory
 The Finished Goods Inventory account, like Materials
Inventory, has same characteristics of the Merchandisinf
Inventory account.

 If we compare Merchandising Inventory account in

Figure 3-1 with the accounting for Finished Goods
Inventory in Figure 3-3 we will see that the credit side of
both accounts is handled in the same way.
Figure 3-1

Both examples show that

when goods or products
are sold, costs of those
Figure 3-3
goods are moved from
the FGI account to the
COGS account.
Figure 3-3 Accounting for Finished Goods
Inventory

Products costing 240,500

were sold during the period

Finished Goods Inventory Cost of Goods Sold

Balance 1/1 70,000 Sold 240,500 Sold 240,500

Completed 201,600

Balance 31,100
 For the merchandising concern, the cost of goods sold
is computed as follows:
The amount of purchases
represents the cost of the
Beginning merchandising inventory 24,600 goods which where
Plus: Purchases(merhandise) 53,200 acquired during period for
Merchanfise available for sale 77,800 resale. Since the
Less: Merchandise inventory end 32,500 manufacturing concern
Cost of goods sold 45,300 makes rather than buys the
product it has available for
sale, the term "finished
goods inventory" replaces
"" in determining the cost of
Beginning finished goods inventory 70,000
goods soldmerchandise
Plus: Cost of goods manufactured 201,600
Total goods available for sale 271,600 inventory" and the term
Less: Finished goods inventory end 31,100 "cost of goods
Cost of goods sold 240,500 manufactured" replaces
"purchases
Manufacturing Statement
 Financial statements of manufacturing companies differ little from those of
merchandising companies.
 Depending on the industry, the account titles found on the balance sheet
are the same in most corporations. (Examples include Cash, Accounts
Receivale, Buildings, Machinery, Accounts Payable and Calital Stock.)
 The head Cost of Goods Manyfactured is used in place of the purchases
account. Also the Merchandise Inventory account is replaced by Finished
Goods Inventory.

 The jey to preparing an income statement for a manufacturing company is

to determine the cost of goods sold. The amount is the end result of a
special manufacturing statement of cost of goods manufactured, which is
prepared to support the figure on the income statement.
 Statement of Cost of Goods Manufactured
and Sold
The flow of a manufacturing costs, shown in Figures 3-1 through 3-4, provide the basis for accounting for manufacturing
costs. In this process all manufacturing costs incurred are considered product costs.
They are used to compute ending inventory balances and cost of goods sold. The cost flowing from one account to another
during the year have been combined into one number in the illustrations to help show basic idea.

Name of Company
Cost of Goods Sold Statement
For the year ended December 31, 2016

Direct mats. used

Materials Inventory, January 1 P 24,600
Add: Purchases 53,200
Total available for use 77,800
Less: Materials Inventory, December 31 ( 32,500) P45,300
Direct labor 79,700
Factory Overhead 65,000
Total manufacturing costs 190,000
Add: WIP, January 1 25,100
Cost of goods put into process 215,100
Less: WIP, December 31 (13,500)
Cost of goods manufactured 201,600
Add: FG, January 1 70,000
Total goods available for sale 271,600
Less: FG, December 31 ( 31,100)
COGS P 240,500