manufactured is part of the cost of goods

LECTURE 01 sold.
● Raw materials inventory - remaining
Cost Accounting
unused raw materials in producing a
- Recording of all costs incurred in a business
product, and part of the cost of goods
in a way that can be used to improve its
manufactured. (Inventory refers to physical
management. (did not mention that cost
count; raw materials beginning and ending)
acctg is only applicable to
● Raw materials purchases - total purchases
manufacturing/factories)
of raw materials to be used in producing a
- A form of managerial accounting that aims
product during the year. (in merchandising
to capture a company’s total cost of
it is merchandising purchases)
production by assessing the variable costs
● Direct labor - salary of the workers whose
of each step of production as well as fixed
job functions are directly associated with
costs, such as rent expense and salaries.
the manufacture of the product.
(this describes cost of production -
● Manufacturing Overhead (Factory
expenses incurred in producing a product)
Overhead or Indirect Costs) - total
- Variable costs- costs subject to change
expenses or costs incurred not directly
every now and then ; it varies; influences by
associated with the products. Although
the production/sales volume ; if it
their relationship is not directly related, the
increases, variable costs also increases
product will not achieve its finished status
- Sales volume- number of item sold in the
without these costs. ( Indirect labor
market at a certain period of time
(security guard, factory supervisors etc),
- Fixed costs- not subject to change ; not
factory supplies (packaging materials,
dependent on the volume of sales and
cleaning materials), factory utilities,
number of production ex. rent expense and
(electricity, water, internet etc) depreciation
salary expense
- factory bldg., depreciation - machine &
- Used internally by management in order to
equipment, insurance - machine &
make fully-informed business decisions.
equipment, repairs & maintenance,
(the purpose of cost acctg is to help the
miscellaneous)
management to make crucial decisions,
● Work in process inventory - the results of
make business strategies.)
physical count of unfinished products at the
- Considers all input costs associated with
end of a certain period. The amount of
production, including both variable and
work in process at the beginning shall be
fixed costs.
added to the total of raw materials, direct
Cost Accounting VS. Financial Accounting
labor and overhead to arrive at the total
- Financial Accounting provides information
amount of goods put into production. Work
to external financial statement users ;
in process end shall be deducted to arrive at
wants to satisfy the needs of management,
the cost of goods manufactured.
employees, investors, regulators and other
● Unit cost of the product - amount of cost
users ; must adhere to standards
of goods manufactured on a per unit basis. ;
(PFRS/PAS) end product: financial
total cost of goods manufactured divided
statements to see the profitability, stability
by total units produced during the year
and sustainability
(Selling price will be based here, markup)
- Cost Accounting is not required to adhere
● Variable cost - cost or expenses incurred
to set standards and can be flexible to meet
which are always subject to change due to
the standards of management ; expected to
different factors like inflation, economic
meet the needs of management
condition etc. The cost also changes
- The computed cost of the product
depending upon the volume of sales or
(otherwise known as the cost of goods
volume of production.
manufactured) form part of the income
● Fixed cost - costs or expenses incurred
statement; while income statement is part
which are not subject to change regardless
of financial reporting.
of the number of units produced or volume
Terminologies
of sales. Examples are salaries and rent
● Cost of goods manufactured - total cost
expenses which are covered by agreement.
incurred in manufacturing a product. It is
Fixed costs may be changed in cases of
composed of materials, direct labor and
inflation, revision of contract, or
factory overhead. Cost of goods
government regulations.
 ● Period costs - all the costs that are
identified with accounting periods and not
included in product costs ; expensed on the
income statement in the period in which
they are incurred ; not included as part of
the cost of either purchased or
manufactured goods. ( outside the factory,
usually part of company’s operating,
administrative(office maintenance), selling,
expenses ; ‘not included in the cost of the
product )
Note:
Cost of goods manufactured is not a financial
statement, it is just a schedule.
LECTURE 03
Cost Behavior
- How a cost will react as changes take place
in the level of business activity. (Changes in
cost) ; movement of the amount of costs in
different circumstances and situations.
- Uncontrollable e.g., inflation — primary
reason: lack of production or supplies,
secondary reason: too much money in
circulation
- Managers who understand how costs
behave are better able to predict what costs
will be under various operating
circumstances.
- Is essential to adequate decision making in
the planning and control of firm activity. ( to
make reliable & realistic projections ; in
order to reduce cost, the variable cost must
be reduced since it is controllable )
Importance
● Planning - includes budgeting ; management
makes decisions based in part on
expectations as to the future. These
expectations should be based on data
relevant to the decision objectives, gathered
and analyzed in a competent, unbiased
fashion. Failure in this activity could mean
displacement of costs due to unexpected
events.
● Control - success/failure depends on how
you control what you have planned ; process
of using feedback information for
comparison with expectations and the
implementation of actions on the basis of
that comparison ; this control mechanism
pertains to the comparison of actual costs
incurred with budgeted amounts, otherwise
known as comparative analysis. (actual
happening must be compared with the plan
to measure the performance )
● Cost Analysis - related to control ; result of
controlling function should be analyzed ;
integral part of the planning and control
function ; the key to effective cost
prediction lies in an understanding of cost
behavior patterns.
Types of Cost Behavior Patterns
● Variable Cost - within the control of the
company ; costs that change in total as the
level of activity changes in the short run and
within the relevant range.
- To economists, the short run is a time
period long enough to allow management
to change the level of production or other
 activity within the constraints of current
total productive or operating capacity.
- Relevant range - range activity withinTypes of Fixed Costs
which assumptions relative to variable - For planning purposes, fixed cost can be
cost and fixed behavior are valid.
- In the relevant range, the variable cost
per unit is assumed to remain constant.
(total variable cost is the one changing,
increases as activity increases)
- Activity base - measure of whatever
causes the incurrence of variable cost ;
also called cost driver ex: units of
production, units sold, direct labor hours,
and machine hours (changes in unit
produce / sold)
Examples:
Manufacturing Company
➔ Direct Materials - depends upon the
volume of production
➔ Direct Labor - based on contract ;
depends on the unit produced ( if
permanent, can be mixed)
➔ Some manufacturing overhead such as
indirect materials (packaging materials),
materials handling costs (delivery
charges), energy costs (water, electricity),
supplies - based on unit produced
➔ Distribution Costs - depends upon the
order
➔ Sales Commission - depends on the sales
Merchandising Company
➔ Cost of Sales - depends upon the
purchases, beginning and ending
inventory
➔ Sales Commission
Service Oriented
➔ Direct labor and materials used to
perform the services such as auto repair,
consulting, supplies, travel expenses -
customers and nature of transaction are
not the same everyday
● Fixed Cost - costs that remain constant in
total regardless of changes in the level of
activity within the relevant range (not
related to activity within relevant range)
- May change due to outside factors
(mandate of govt) such as price changes
- Fixed cost per unit will react inversely
with change in activity; fixed cost
decreases per unit as the activity level
rises and increases per unit as the
activity level falls (total fixed costs
remain constant)
- Sometimes referred to as capacity costs,
since they result from outlays made for
buildings, equipment, skilled professional
employees, and other items needed to
provide the basic capacity for sustained
operations.
viewed as being committed or discretionary.
➔ Committed Fixed Costs - represent long
term commitment on the part of
management as a result of past decision;
relate to the investment in facilities,
equipment, and the basic organizational
structure of the firm ex: depreciation of
buildings and equipment (acctg policies),
taxes on real estate (govt), insurance
(contract; insured-insurer), salaries
(contract; employer-employee)
- Two characteristics: long term in nature,
and can’t be significantly reduced even
for short periods of time without
seriously impairing the profitability or
long term goals of the organization.
➔ Discretionary / Management Fixed
Costs- Incurred on a short-term basis
and can be more easily modified in
response to changes in mgmt objectives ;
usually arise from annual decisions by
management to spend in certain fixed
cost areas (within discretion and
decision ; can reduce fixed cost) ex:
advertising, research, public relations,
management development programs,
internship for students)
LECTURE 04
Analysis and Use
MIXED COST (SEMI-VARIABLE COST)
This contains both variable and fixed cost
elements. The typical example of mixed
cost is rent expense.
Rent Expense: On January 01, 2022,
Audrey Gift Shop opened its store at SM
City North EDSA. The firm signed an
agreement with SM Shopping Malls
Corporation wherein the amount of
monthly rent is P25,000 plus 10% of
Audrey’s sales during the month. For the
month of January 2022, Audrey was able
to generate sales of P100,000. What is
the rent expense of Audrey for the month
of January 2022?
Audrey’s rent expense will be P35,000.
Fixed cost is P25,000, while variable cost
is P10,000 (P100,000 x 10%).
 HIGH-LOW METHOD
The high-low method of analyzing mixed
cost is based on cost observed at both Fixed cost:
the high and low levels of activity within
the relevant range.
Steps in applying the high-low cost
estimation:
1. Obtain relevant data on past costs
and related actual activity levels
2. Estimate the variable cost per unit LEAST SQUARES REGRESSION
or rate using the following METHOD
equation: A statistical technique which is often
used in separating mixed costs into their
fixed and variable components is least
square regression.
Basically, a line of regression is
determined by solving two simultaneous
3. Compute for the fixed cost as linear equations which are based on the
follows: condition that the sum of deviations
above the line equals the sum of
deviations below the line.
The equation for the determination of a
straight line is:
Y = a + bX
The two linear equations that are used to
PROBLEM C-04-01 solve for a and b are:
Krista Manufacturing Corporation provided the Equation (1) ∑Y = Na + b∑X
following data for the last ten months. These data Equation (2) ∑XY = ∑Xa + b∑X2
will be used to estimate the variable and fixed
manufacturing overhead. Y Total cost
a Fixed cost
HIGH-LOW METHOD b Variable cost per year
X Measure of activity (hrs/ units)
Direct labor hours X Supplies cost Y
20 P50 N Number of observations
40 110 ∑ Greek letter SUMMATION
60 150
20 70 Let’s use the data of Krista Manufacturing
30 80 Corporation and determine the variable cost rate
40 100 and the fixed cost under the least squares
50 150 regression method.
10 60
30 110
50 120

Determine the variable cost rate per hour and

the fixed cost portion using the high- low
method.

SOLUTION TO PROBLEM C-04-01

Variable cost rate per hour:
Equation (1) ∑Y = Na + b∑X •Types of companies that use job order costing
1,000 = 10a + 350b include those in construction, printing, special
Equation (2) ∑XY = ∑Xa + b∑X2 equipment manufacturing, ship building, custom
39,600 = 350a + 14,500b furniture, professional services, medical services,
To eliminate one unknown (a), and solve for b advertising agencies etc.
multiply equation 1 by 35 (least common
denominator) and subtract the new Equation 3 PROBLEM 5-01-C: PERLITA MANUFACTURING
from Equation 2. The reason why we have to COMPANY
multiply it by 35 is to make 10 as 350. Perlita Manufacturing Company uses job order
Equation (2) 39,600 = 350a + 14,500b costing. On January 1, 2022, the company’s
Equation (3), 35,000 = 350a + 12,250b inventory balances were as follows:
Equation 1
multiply by 35 Raw Materials Inv. P200,000
4,600 = 2,250b Work in process 150,000
Variable cost P2.04 Inv.
or “b” Finished goods Inv. 300,000

To solve for “a” or fixed cost, substitute the value The following transactions took place during
of “b” to equation 1, thus:
1,000 = 10a + 350 (2.04)
1,000 = 10a + 714
1,000 -714 = 10a
To solve for “a” or fixed cost, substitute the value
of “b” to equation 1, thus:
286 = 10a
a= 10a + 714
a= P28.60
LECTURE 05 - Job Order Costing
PRODUCT COSTING
This is the process of accumulating, classifying,
and assigning direct materials, direct labor and
factory overhead costs to products or services.
•Each company’s costing system needs to be
designed to supply managers with information for
running the business.
•The company’s strategy and processes guide
accountants in designing the costing system.
•The costing system should never dictate the
choice of strategy or process.
JOB ORDER COSTING
The jobs or batches of products or services are
the cost objects. This means, for purposes of
determining product cost, all manufacturing costs
incurred are assigned to jobs.
•A job order costing system is appropriate in a
situation in which most costs incurred for the job
can be readily identified with specific customers,
contracts or projects.
•Job order costing systems are often found in
medium to small firms that produce for customer
order.
the year:
1. Raw materials purchased on account,
P4,100,000.
2. Raw materials inventory requisitioned and
issued for use in production, P3,800,000
(P3,600,000 direct materials and P200,000
indirect materials).
3. Cost were incurred for employee services:
direct labor – P750,000; indirect labor –
P1,100,000; sales commission – P900,000;
and administrative salaries – P2,000,000
4. Sales travel cost, P170,000
5. Utility cost in the factory, P430,000
6. Advertising costs, P1,800,000
7. Depreciation for the year, P3,500,000 (80%
relates to factory operations, and 20%
relates to selling and administrative
activities.
8. Insurance expired during the year,
P100,000 (70% relates to factory
operations, and 30% relates to selling and
administrative activities).
9. Factory overhead applied to production.
Due to greater than expected demand for
its products, the company worked 800,000
machine hours during the year.
10. Goods costing P9,000,000 to manufacture
according to their job cost sheets
completed during the year.
11. Goods sold on account to customers during
the year at a total selling price of
P15,000,000. The goods cost P8,700,000
to manufacture according to their job cost
sheets.
Required:
a) Prepare journal entries to record the above
transactions
b) Post the transactions to their respective ledgers
c) Prepare journal entry to close the balance of
factory overhead applied account.
d) Prepare income statement for the year.