Professional Documents
Culture Documents
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.
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.
EXAMPLE OF JOB ORDER COST SHEET
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
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.
Marvel Corporation uses job order costing and had the following inventories as of July 1. 2020:
Materials Inventory:
Material X - 300 units @ 45 13,500
Material Y - 400 units @ 36 14,400
27,900
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)
SOLUTION:
Job Cost sheet
Job Number __1121 _____ 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
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
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
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 ______________
– Journal entries
Particulars Debit Credit
Unit III – JOB ORDER COSTING
Lesson 1 – Concept and application
___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.
___ 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.
___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?
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?
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.
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
14. The total amount of direct materials purchases during February, 2020 was:
a. P50,000 b. P170,000 c. P180,000 d. P220,000
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
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
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.
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 ?
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
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.
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.
1. To ensure better quality of materials at right quantity at right time for efficient and uninterrupted
production of output.
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.
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.
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.
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
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
EOQ = 2,560,000
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.
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
Solution:
Lead time quantity : - 12 days x (30,000/300) = 12 days x 100 = P 1,200
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.
6. Materials ledger card – record the receipt and issuance of each class of materials and provide a perpetual
inventory record.
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.
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.
B. Moving average –
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 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
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.
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:
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.
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
Loss on inventory write-down 6,000
Allowance f or write-down of inventory 6,000
Write-down of inventory
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
Allowance f or write-down of inventory 2,000
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
Allowance f or write-down of inventory 5,000
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.
Net overage:
Debit Credit
Materials xxx
Factory overhead control xxx
Net overage
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:
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
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
July 15 Materials Inventory 186,2000
Accounts payable 186,200
Purchased. Terms: 5%, 2/15, n/30
a. If full payment is made on July 28, 2020: (within the discount period)
b. If full payment is made on August 10, 2020: (beyond the discount period)
Journal entries:
2020 Debit Credit
July 15 Materials Inventory 186,2000
Allowance for purchase discount 3,800
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
Allowance for purchase discount 3,800
Cash 186,200
Full payment
b. If full payment is made on August 10, 2020: (beyond the discount period)
2020 Debit Credit
Aug. 10 Accounts payable 190,000
Purchase discount lost 3,800
Cash 190,000
Allowance for purchase discount 3,800
Full payment
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.
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
Materials Inventory 53,000
Accounts payable 53,000
Purchases. Terms: n/30
Percentage = 3,000/50,000 = 6%
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.
Debit Credit
Cash xxx
Scrap Revenue xxx
Sale of scrap materials
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
Sale of scrap materials
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
Factory overhead control xxx
Sale of scrap materials
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.
1. The entry to record the scrap materials returned to the storeroom would be:
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
Factory overhead control 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.
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.
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.
Note: the amount of spoiled goods = No. of units spoiled x estimated sales value per unit
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.
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.
Solution:
a. Charged to all production.
Debit Credit
a. Work in process 66,000
Materials Inventory 20,000
Payroll 24,000
Factory overhead applied 22,000
Manufacturing cost applied
c. Cash 400
Spoiled goods 400
Sale of spoiled goods
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).
c. Cash 400
Spoiled goods 400
Sale of spoiled goods
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
a. Work in process 66,000
Materials Inventory 20,000
Payroll 24,000
Factory overhead applied 22,000
Manufacturing cost applied
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
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
UNIT III – JOB ORDER COSTING
Lesson 2 – Accounting for Materials
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.
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
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
The cost of inventory at January 30, under the FIFO method is: ___________________________
9. determine the cost per pound if freight is allocated based on shipping weight.
AA ________________ BB ______________________ EE __________________
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:
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.
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.
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?
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?
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:
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:
Activity 2 – Records of the Eastwood Company show the following purchases and issues of materials during October
2020:
a) FIFO Costing:
STORES LEDGER CARD
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.
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.
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:
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.
Note: Work in process was debited for direct labor and Factory overhead control for indirect labor.
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.
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.
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:
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.
The following data are given for the period Sept 16 - 21, 2020
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%.
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
3. How much must the total charge to factory overhead for the week? ___5,855__________
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)
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
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
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
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.
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.
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:
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:
5. Machine hours – appropriate when there is a direct relationship between factory overhead cost and machine
hours. The formula is:
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.
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.
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
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
Factory overhead control 110,000
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
Factory overhead control 130,000
To close factory overhead accounts
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
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.
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:
Solution:
1. Predetermined overhead rate = Budgeted overhead = P 1,677,000 = P 6.45/DLH
Budgeted direct labor hours 260,000
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)
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.
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
Service oriented
1. Material handling Quantity, value of materials
2. Billing and accounting Number of documents
3. Indirect materials Value of indirect materials
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.
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
Molding Decorating Bldg & Grounds Factory Adm.
Budgeted FOH P 400,000 P 600,000 P 80,000 P 120,000
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
2. Step Method
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
3. Algebraic Method
Additional information for the illustrative problem:
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:
Molding Decorating Bldg & Grounds Factory Adm.
Budgeted FOH P 400,000 P 600,000 P 80,000 P 120,000
Allocated FO:
Bldgs & Grounds 46,939 28,163 (93,878) 18,776
Factory Adm. 55,510 69,388 13,878 ( 138,776)
Total Factory overhead P 502,449 P 697,551
Base 200,000 Mhrs 100,000 DLhrs
Factory overhead rate P 2.51/Mhr P 6.98/DLHr
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
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.
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:
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
Total overhead applied P 5,400
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
Total overhead applied P 3,850
End
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.
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: ________________________________
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.
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:
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 ___________________
13. 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 _______________
14. 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.
15. 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.
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
16. 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
17. SET Inc, produces three products. Production and cost information is as follows:
18. 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.
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:
19. What must be the variable overhead rate in each of the three producing department?
20. 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:
How much is the underapplied (overapplied) factory overhead variance in each department?
Dept. A ___________ Dept. B __________ Dept. C _________
21. 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).
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.
22. 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.
26. the journal entry to record factory overhead applied to production would be:
Debit Credit
27. the journal entry to record over or underapplied overhead would be:
Debit Credit
28. the journal entry to close over or underapplied overhead would be:
Debit Credit
29. The following data are summarized for KL Manufacturing Company at the end of the current year 2020:
What was the company’s factory overhead application rate based on direct labor cost?
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:
30. The fixed portion of the fixed factory overhead application rate : _______________________
31. The variable portion of the factory overhead application rate : ________________________
32. 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:
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
31 General journal (accrual) 4,540 406 3,230
407 1,310
31 General journal (accrual) 13,500 408 13,500
31 General journal (accrual) 1,500 409 1,500
REQUIRED: Postings to the general ledger account and factory overhead analysis sheet (with footings)
GENERAL LEDGER
Date Particulars Ref. Total 402 403 404 405 406 407 408 409
End
REFERENCES
Cabrera, Ma. E., et.al. (2018-2019) Cost Accounting and Control. Manila. GIC Enterprises & Co. Inc.
De Leon, N., et.al.(2019) Cost Accounting and Control. Manila. GIC Enterprises & Co. Inc.
Mejorada, N. (2000) Cost Accounting (Second Edition), Manila: Goodwill Book Store