Professional Documents
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Cost Accounting is defined as a systematic set of procedures for recording and reporting
measurements of the cost of manufacturing goods and performing services in the aggregate
and in detail. It is also a method of managerial accounting which aims to capture the total
production cost of a business by measuring variable costs of each production phase as well
as fixed cost.
A merchandising company buys a product that is ready for resale when it is purchased.
The product will not be changed to make it salable except for special packaging or display.
It has only merchandise inventory in the financial statements.
In processing, direct labor and overhead are incurred. It has three kinds of inventories
namely – raw materials, work in process and finished goods.
Manufacturing Inventories:
1. Materials inventory – upon purchased of raw materials, the costs are charged to
materials inventory account. Any unused raw materials at the end of the period will
be the ending balance of the said account.
2. Work in process – when the materials are processed, labor and overhead are
incurred. Hence, the materials, labor and overhead will be charged to work in
process account. Any unfinished work at the end of the period will be the ending
balance of the said account.
3. Finished Goods - when the goods are completely processed, the cost incurred to
complete the goods are charged to finished goods account. Any unsold goods at the
end of the period will be the ending balance of the said account.
1. Direct Materials are the basic ingredients that are transformed into finished products
through the use of labor and factory overhead in the production process. Direct
materials are those that can be traced to the finished product. All manufactured
products are made from basic direct materials. The basic materials for bread is flour,
wood for tables and chairs, and meat for hamburger.
2. Direct Labor represents the amount paid as wages to those working directly on the
product. The direct labor for table and chair is the wages paid to carpenter, for bread
the bakers’ wages, and chef’s wages for cooked meals/products.
3. Factory Overhead costs are other manufacturing costs that cannot be classified as
direct material or direct labor. Examples are indirect materials, indirect labor,
depreciation of plant building and machinery , repairs and maintenance.
1. Marketing or selling expenses include all costs necessary to secure customer orders
and get the finished product or service into the hands of the customer. Examples are
advertising, shipping, sales travel, sales commissions, sales salaries and expenses
associated with finished goods warehouse.
2. Administrative or general expenses include all executive, organizational and clerical
expenses that cannot logically be included under either production or marketing.
Examples are executive compensation, general accounting, secretarial and similar
expenses having to do with the overall administration of the organization as a whole.
1. Fixed costs remain constant in total, irrespective of the volume of production. Fixed
costs are not related to activity within the relevant range. Fixed costs are assignable
to department based on different allocation methods. Examples are salaries of
production executives, depreciation of equipment computed on a straight line
method, periodic rent payments and insurance. Cost per unit decreases as volume
increases, and increases as volume decreases.
2. Variable costs are items of cost which vary directly, in total, in relation to volume of
production. Examples are: direct materials, direct labor, royalties and commission of
salesmen. Cost per unit remains constant as volume changes within a relevant range.
3. Mixed cost are items with fixed and variable components. Mixed costs vary with the
level of production, though not in direct relation to it, probably because part of the
cost is fixed while the rest is variable.
Part 1. Classify the above items into the following categories (a) direct materials, (b) direct
labor and (c) manufacturing overhead.
Presented below is a list of costs and expenses usually incurred by Stensland Corporation, a
manufacturer of furniture, in its factory:
1. Salaries for assembly line inspectors
2. Insurance on factory machines
3. Upholstery used in manufacturing furniture
4. Wages paid to assembly line workers
5. Depreciation of factory machinery
6. Salaries of factory supervisors
7. Wood used in manufacturing furniture
8. Glue, nails, paint, and other small parts used in production
9. Property taxes on factory building
10. Factory manager’s salary
Part 2. Classify the following as either manufacturing (M), selling (S), or administrative (A).
1. Factory Supplies
2. Advertising
3. Rent on factory building
4. Freight-Out
5. President’s Salary
6. Cost of machine breakdown
7. Legal Expenses
8. Samples
9. Bad debts
10. Travel expenses of salesman
MANUFACTURING FLOW
The manufacturing company buys raw materials to be charged to Materials account. For
these materials to be processed Direct Labor and Factory overhead will be incurred. Thus,
these three cost elements will be charged to work in process account. After the goods are
completely processed, the cost of goods to manufactured will be transferred to Finished
Goods. When the goods have been sold, the cost of goods sold will be charged to the Cost
of Goods Sold account, which is deducted from Sales to get the gross profit.
Manufacturing Cost:
Raw Raw Materials Finished Cost of Goods
Materials Direct Labor Goods Sold
Figure 1: Cost of Accounting Cycle—Flow of Manufacturing Cost
Factory Overhead
Work-in Process
ILLUSTRATION OF MANUFACTURING COST
FLOW
Name of Company
Cost of Goods Sold Statement
For the year ended December 31, 2020
Name of Company
Income Statement
For the year ended December 31, 2020
Sales P481,000
Cost of Goods Sold ( 240,500)
Gross Profit P 240,500
Selling Expenses ( 50,000)
Administrative Expenses ( 25,000)
Interest Expense ( 5,000)
Net Income P 160,500
Assessment Mina Manufacturing Company purchases of materials during March totaled P110,000.
While direct labor cost incurred was P160,000 and factory overhead amounted to P80,000. Other
information pertaining to Mat’s inventories and other costs incurred for March are as follows:
March 1 March 31
Inventories:
Finished Goods P102,000 P105,000
Work in process 40,000 36,000
Less mMaterials 20,000 26,000
Costs incurred during the month:
Selling Expenses P 65,000
Administrative Expenses 23,500
Interest Expense 7,200
Sales Revenue for the month P 603,750
Required: Cost of goods sold for the month ended March 31 of the current year
and Income Statement for the month ended March 31 of the current year.