AFAR 2303 Cost Accounting-1

AFAR 2303
COST ACCOUNTING
INSTRUCTOR: DAVE U. CERVAS, CPA U.S. CMA CTT MRITax
CONTENT AUTHOR: ARMEE JAY L. CRESMUNDO, CPA MSA
I. System of Cost Accumulation
 Cost Accounting – a part of the accounting system that measures costs for decision-
making and financial reporting purposes.
 Cost Accounting Processes:

1. Cost Accumulation – involves collecting costs by natural classification, such as
materials or labor.
2. Cost Allocation or Cost Assignment – involves tracing and assigning costs to cost
objects, such as departments or products
 Cost Allocation System:

1. Actual/Historical Cost System – cost information is accumulated as cost is
incurred, but the presentation of results is delayed until all operations of the
accounting period have been performed or, in a service business, until the period’s
services have been rendered.
2. Standard Cost System – cost information is recorded based on predetermined
quantities of resources to be used and predetermined prices of those resources.
Actual costs are recorded separately, and variances between actual and standard
costs are collected in a separate account.
3. Normal Cost System – this system is a combination of the actual cost system and
the standard cost system. This system accumulates only the actual amounts of
direct material and direct labor costs. Factory overhead costs are accumulated on
the basis of a predetermined rate.
 Cost Accumulation System:

1. Job Order Costing – a cost accumulation system that is used by firms that provide
limited quantities of products or services unique to a customer’s needs or
specifications. Costs are assigned or traced to individual products.
2. Process Costing – a system that is used by firms that produce many units of a
single product (or nearly identical products) for long periods at a time. In this
system, costs are accumulated in a particular operation or department for an
entire period, after which the total cost incurred is divided by the total
(equivalent) units produced to determine the average cost per unit of product.
3. Backflush Costing – a streamlined cost accounting method that simplifies, speeds
up, and reduces accounting effort/procedures in accumulating product costs. This
system eliminates the detailed tracking of the cost of work-in-process.
4. Activity-Based Costing – a two-stage procedure that uses multiple drivers to
predict and allocate costs to products and services.
AFAR 2303 COST ACCOUNTING 1

II. Job-order Costing System
A. Overview
 Job order costing presupposes the possibility of physically identifying the jobs
being manufactured and charging each job with its own cost. The detailed records
showing the costs of each job constitute a subsidiary ledger supporting the
general ledger’s work-in-process account.
B. When to Use
 Job order costing is used when the products manufactured within the department
or cost center are heterogeneous or dissimilar type of product.
 Example of companies where job costing is applicable:

1. Made-to-work factories, workshops, and repair shops
2. Construction companies
3. Printing companies
4. Aircraft manufacturing companies
5. Professional servicing companies (accounting, legal, architectural, etc.)
C. Procedures for Costing Products Under Job Order Costing

1. Direct materials and direct labor are traced to a particular job.
2. Costs not directly traceable are applied to individual jobs using a predetermined
overhead rate (if normal costing is used).
Budgeted Overhead Cost
Predetermined Overhead Rate =
Budgeted Allocation Base
3. If normal costing is used, over- or under-applied overhead is computed by

comparing the actual overhead cost over applied overhead cost. The difference
may be disposed entirely as to the Cost of Goods sold (if the difference is
immaterial or when it is more practical to use COGS) or be allocated to Cost of
Goods Sold, Finished Goods Inventory, or Work in Process Inventory (if the
difference is material).
D. Accounting for Scrap, Waste, Spoilage, and Rework

 Scraps – these are materials that are: (1) filings or trimmings remaining after
processing materials, (2) defective materials that cannot be used or returned to
the vendor or not suitable for manufacturing operations, or (3) Broken parts
resulting from employee or machine failures.
Scrap sales may be accounted for as:

1. additional revenue
2. reduction to Cost of Goods Sold
3. reduction to Factory Overhead Control
4. reduction from the cost of materials traceable to a particular job.

 Waste – the amount of raw materials left over from a production processor
production cycle for which there is no further use. Waste do not have sales value;
thus, it must be discarded.
 Spoilage – partially or fully completed units are in some way defective or not
correctable because it is impossible to correct them, or it is uneconomical to
correct them. Spoilage can be caused either by the customer or by an internal
failure.
Spoilage is caused by the customer when the customer takes action for some
changes after the production has started or after the units were already produced
and are ready to be delivered. When such was the case, the unrecoverable
portion of the spoilage shall be charged to a particular job.
Spoilage is caused by an internal failure when it is caused by factors in the quality

of production, such as employee error or machine error. When such was the case,
the unrecoverable portion of the spoilage shall be charged to the Factory
Overhead.
 Rework – the process of correcting defective goods to bring them to a salable

condition. Rework can be caused either by the customer or by an internal failure.
When rework is caused by the customer, the cost of rework shall be charged
to a particular job. If rework results from an internal failure, the cost shall
be charged to the Factory Overhead.
E. Journal Entries
Transaction Journal entry
Raw materials xxx
Raw materials purchased
Accounts payable xxx
Work in process (direct materials) xxx
Raw materials used Manufacturing overhead control (indirect materials) xxx
Raw materials xxx
Factory payroll xxx
Withholding taxes payable xxx
Factory wages earned SSS contribution payable xxx
Pag-ibig contribution payable xxx
Salaries and wages payable xxx
Work in process (direct labor) xxx
Labor charged to production Manufacturing overhead control (indirect labor) xxx
Factory payroll xxx
Manufacturing overhead control xxx
Manufacturing overhead costs Accounts payable and other accounts xxx
Manufacturing overhead applied Work in process xxx
to products Manufacturing overhead control xxx
Finished goods xxx
Transfer of finished goods Work in process xxx
Cost of goods sold xxx
Sale of finished goods Finished goods xxx

F. Statement of Cost of Goods Manufactured and Sold
ABC Company
Statement of Cost of Goods Manufactured and Sold
For the year ended December 31, 20xx
Direct Materials
Raw materials inventory, January 1 Pxxx
Raw materials purchases xxx
Total raw materials available xxx
Raw materials inventory, December 31 (xxx)
Raw materials used xxx
Indirect materials used (xxx)
Direct Materials Used Pxxx
Direct Labor xxx
Manufacturing overhead applied xxx
Total Manufacturing Cost xxx
Work in Process Inventory, January 1 xxx
Total Cost of Goods Placed into Process xxx
Work in Process Inventory, December 31 (xxx)
Cost of Goods Manufactured xxx
Finished Goods Inventory, January 1 xxx
Total Cost of Goods Available for Sale xxx
Finished Goods Inventory, December 31 (xxx)
Cost of Goods Sold Pxxx
G. Disposition of Under- or Over-applied Manufacturing Overhead

 Over-applied overhead (a credit balance in Manufacturing Overhead Control)
results when product costs are overstated because the actual overhead costs
were lower than expected (applied overhead).
 Under-applied overhead (a debit balance in Manufacturing Overhead Control)

results when product costs are understated because the actual overhead costs
were higher than expected (applied overhead).
 If the amount is material, the over- or under-applied overhead should be

allocated proportionately to all goods that have been worked on during the year.
Some of the goods are still in process, some are finished goods, and some have
already been sold, thus, the over- or under-applied balance should logically be
allocated among Work in Process, Finished Goods and Cost of Goods Sold.
If under-applied:
Work in Process xxx
Finished Goods xxx
Cost of Goods Sold xxx
Manufacturing Overhead Control xxx

If over-applied:
Work in Process xxx
Finished Goods xxx
 If the amount is immaterial, it is customary to close over- or under-applied

overhead costs directly to the Cost of Goods Sold account.
If under-applied:
If over-applied:
PRACTICE PROBLEMS
Problem 1: The following data were taken from the records of Fast Track Company:
08/31/2020 09/30/2020
Inventories:
Raw materials P? P50,000
Work in process 80,000 95,000
Finished goods 60,000 78,000
 Raw materials purchased amount to P46,000.

 Factory overhead amount to P63,000 which is 75% of direct labor cost.
 Selling and administrative expenses amount to P25,000 which is 8% of sales.
 Net income for September 2020, P40,000.
Compute for the cost of goods manufactured and the amount of raw materials inventory on
August 31, 2020.
A. P272,500 ; P162,500 C. P290,500; P162,500
B. P305,500; P154,500 D. P290,500; P154,500
Problem 2: Crack Company uses a job order costing system. During August 2020, the
following costs appeared in the Work in Process Inventory account:
Beginning balance P192,000
Direct material used 560,000
Direct labor incurred 480,000
Applied overhead 384,000
Cost of goods manufactured 1,480,000

Crack 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 P44,800 of overhead. What
amount of direct material was included in this job?
A. P35,200 C. P35,840
B. P55,360 D. P64,000
Problem 3: Products at Red Manufacturing are sent through two production departments:
Fabricating and Finishing. Overhead is applied to products in the Fabricating Department
based on 150 percent of direct labor cost and P18 per machine hour in Finishing. The
following information is available about Job #297:
Fabricating Finishing
Direct material P31,800 P11,600
Direct labor cost P? P960
Direct labor hours 440 120
Machine hours 100 300
Overhead applied P8,580 P?
What is the total cost of Job #297?

A. P52,940 C. P61,860
B. P60,100 D. P64,060
Problem 4: Strong Products has no Work in Process or Finished Goods inventories at the
close of business on December 31, 2020. The balances of Strong Products' accounts as of
December 31, 2020, were as follows:
Cost of goods sold – unadjusted P6,120,000
Selling & administrative expenses 2,700,000
Sales 10,800,000
Manufacturing overhead control 2,100,000
Manufacturing overhead applied 1,944,000
Pretax income for 2020 is:

A. P1,824,000 C. P2,136,000
B. P1,980,000 D. P1,860,000
Problem 5: Speed Company uses a job order cost system. The following data were obtained
from the company's cost records as of July 31. No jobs were in process at the beginning of
July, all costs listed being incurred during the month.
Job Order No. Direct Materials Direct Labor Hours Direct Labor Cost
1001 P4,320 1,300 P1,600
1002 9,150 3,700 7,250
1003 11,275 8,200 14,325
1004 3,225 1,500 2,800
1005 6,500 3,200 6,100
1006 2,750 980 1,650

 Manufacturing overhead costs are charged to jobs on the basis of P1.50 per direct labor
hour.
 The actual manufacturing overhead cost for the month totaled P30,350.
 During July, only Job Order Nos. 1003 and 1006, were still in process.
 Jobs 1001 and 1002 were shipped out and the customers were billed P9,000 for Job 1001
and P20,000 for Job 1002.
The cost of goods manufactured would be:

A. P55,500 C. P55,495
B. P56,495 D. P57,500
Problem 6: The Vigor Company uses job order costing. At the beginning of August, two jobs
were in process.
Job 769 Job 772
Materials P80,000 P28,000
Direct Labor 40,000 12,000
Applied factory overhead 60,000 18,000
 There was no inventory of finished goods on August 1.

 During the month of August, Job 773, 774, 776, 778 and 779 were started.
 Materials requisitions for August totaled P520,000; direct labor cost, P400,000; and
actual factory overhead, P640,000.
 The only job still in process at the end of August is Job 779, with costs of P56,000
materials and P36,000 for direct labor.
 Job 776, the only finished job on hand at the end of August has a total cost of P80,000.
The cost of goods sold at normal is:

A. P1,572,000 C. P1,532,000
B. P1,600,000 D. P1,652,000
Problem 7: XYZ Company has the following balances as of the year ended December 31,
2020:
Debit
Direct materials inventory P135,000
WIP inventory 310,500
Finished goods inventory 445,500
Cost of goods sold 670,500
Credit
Factory department overhead P36,000
Additional information were as follows:

Cost of direct materials purchased during 2020 P369,000
Cost of direct materials requisitioned in 2020 423,000
Cost of goods completed during 2020 918,000

Cost of direct labor 360,000
Factory overhead is applied at 120% of direct labor.
Compute the following:

(1) Beginning direct materials inventory
(2) Beginning finished goods inventory
(3) Actual factory overhead incurred
A. P270,000 ; P225,000 ; P396,000 C. P189,000 ; P198,000 ; P396,000
B. P189,000 ; P216,000 ; P432,000 D. P270,000 ; P198,000 ; P468,000
Problem 8: W company has over applied overhead of P60,000 for the year. Before
disposition of over applied overhead, selected year end balances from W's accounting
records were:
Sales P1,000,000
Cost of Goods Sold 750,000
Direct Materials Inventory 50,000
Work in Process Inventory 180,000
Finished Goods Inventory 270,000
Under W's accounting system, over or under applied overhead is allocated to appropriate
inventories and cost of goods sold based on year end balances. In its year end income
statement, W should report cost of goods sold of
A. P712,500 C. P714,000
B. P730,000 D. P787,500
III. Process Costing System

A. Overview
 Process costing accumulates all the costs of operating a process for a period of
time and then divides the costs by the number of units of product that passed
through that process during the period. If the product of one process becomes the
material of the next, a unit cost is computed for each process.
B. When to Use
 Process costing is used when the products are manufactured under the conditions
of continuous processing or under mass production methods where the
products manufactured within a department or cost center are homogeneous.
 Example of companies where process costing is applicable:

1. Flour mills
2. Brewery
3. Chemical plants
4. Textile factories (under mass production)
5. Commodities manufacturer (paper, lumber, pipe, plastics, petroleum, sugar,
etc.)

C. Procedures for Costing Products Under Process Costing
1. Calculate the physical units to account for.
2. Calculate the physical units accounted for (verify that step 1 equals step 2).
3. Calculate the equivalent units of production.
4. Calculate the total cost to account for.
5. Calculate the cost per equivalent unit of production.
6. Assign the costs to inventory accounts (verify that the total costs transferred out
plus the costs in ending inventory (step 6) equal the costs determined in step 4).
D. Equivalent Units of Production

 EUP measures the amount of work done in each production phase in terms of fully
processed units during a given period. Incomplete units are also computed in
terms of equivalent completed units. Calculation is made separately for cost from
preceding departments, materials, and conversion costs.
 Calculation of EUP and Cost Allocation – Weighted Average Method

1. Calculate the total physical units to account for.
The total units to account for are the sum of whole and partial units worked
on in the department during the current period. It is equal to actual beginning
inventory units plus actual units started.
2. Calculate the physical units accounted for.

Units were either completed and transferred out or remain (partially completed)
in ending WIP.
3. Calculate the Equivalent Units of Production (EUP) using the weighted

average method.
The units started and completed equal the difference between the number of
units completed for the period and the units in beginning inventory; it can also
be computed as the number of units started during the period minus the units in
ending inventory.
Two sets of EUPs are computed: Direct materials and Conversion (Labor and
overhead).
WA EUP is computed as the units transferred out plus the equivalent units in
ending inventory.
4. Calculate the total costs to account for.

The total costs to account for consist of the cost of beginning inventory plus
current period costs for DM and Conversion. The beginning inventory cost and
the costs added must be segregated by cost component.

The cost per equivalent unit of production is found by dividing the total costs
to date by the EUP quantity for each cost category. Note that the total cost per
equivalent unit cannot be calculated by taking the total cost divided by a
quantity because each of the two cost components has a different number of
equivalent units of production.
6. Assign costs to inventories.

The amount of cost transferred to the next department is found by multiplying
the number of units transferred by the total cost per equivalent unit. The amount
of costs assigned to ending WIP Inventory is found by summing the cost of each
equivalent unit in ending inventory. The total cost accounted for is the sum of the
costs transferred out and the ending inventory cost.
 Calculation of EUP and Cost Allocation - FIFO Method

1. Calculate the total physical units to account for.
The total units to account for are the sum of whole and partial units worked
on in the department during the current period. It is equal to actual
beginning inventory units plus actual units started.
2. Calculate the physical units accounted for.

Units were either completed and transferred out or remain (partially
completed) in ending WIP.
3. Calculate the equivalent units of production using the FIFO Method.

Under the FIFO Method, the work performed last period is not co-mingled
with work of the current period. Only current period work is considered
(i.e., the work performed during the current period to complete the beginning
inventory, the work performed during the current period on units started and
completed, and the work performed during the current period on the ending
inventory units). Units started and completed and ending inventory are the
same as under the Weighted Average Method. EUPs are computed as follows
(for Materials and Conversion Costs):
Work done this period on beginning units xxx
+ Work done this period on units started & completed xxx
+ Work done this period on ending units xxx
Total EUPs xxx
4. Calculate the total costs to account for.

The total costs to account for consist of the cost of beginning inventory plus
current period costs for DM and Conversion. The beginning inventory cost
and the costs added must be segregated by cost component.

The cost per equivalent unit is found by dividing the DM current period cost
by the DM current period work (i.e., the DM EUP) and by dividing the
Conversion current period cost by the Conversion current period work (i.e.,
the CC EUP).
6. Assign costs to inventories.

A two-step computation is needed to determine the cost of goods transferred
out under the FIFO method.
a. Determine the total cost of the units started last period and
finished this period.
b. Determine the cost of the units started and completed this period.
As under the weighted average method, the amount of costs assigned to

ending WIP Inventory is found by summing the cost of each equivalent unit
in ending inventory. The total cost accounted for is the sum of the costs
transferred out and the ending inventory cost.
E. Accounting for Lost Units

1. Normal Lost Units
 These are lost units which are inherent, usual, or expected by the nature of
operations and within tolerable limits set by the company for human and
machine errors and, therefore, it cannot be avoided.
 Equivalent Units of Production:

Stage of Inspection Work Done
Start of the Production Zero. Any lost units discovered at the start of production are
(continuous loss) treated as if they were never put into production because
they are already expected even before the actual production.
During the production Zero. Lost units during the production are assumed to have
(continuous loss) been discovered at the start of the production because
difficulties might arise finding the right stage of completion
for lost units.
End of production 100%
(discrete loss)
 Cost of Normal Lost Units

FIRST DEPARTMENT
Start/during the production No cost of lost units.
End of the production Unit cost, this department times EUP of normal loss
SECOND DEPARTMENT
Start/during the production Unit cost, preceding department times actual normal
lost units
End of the production (Unit cost, preceding department times actual normal
lost units) plus (Unit cost, this department times EUP of
normal loss)

 Absorbing Units
Start/During End
FIFO METHOD
In Process, Beginning, Finished, Transferred X
Started/Received, Finished and Transferred X X
In Process, Ending X
WEIGHTED AVERAGE METHOD

Started/Received, Finished and Transferred X X
In Process, Ending X
 Normal Losses are treated as product costs; thus, the good units absorb the
cost of units lost.
2. Abnormal Lost Units

 These are lost units which are unusual, or unexpected, or even though
expected but it exceeds the normal limits.
 Equivalent Units of Production

Stage of Inspection Work Done
Start of the Production Zero. Since the lost units were discovered at the start of
production, then they will be removed from the actual
production and will never be processed.
During the production Depends on the point of inspection or what particular
(continuous/discrete loss) percentage abnormal loss happens.
End of production 100%
(continuous/discrete loss)
 Cost of Abnormal Lost Units

FIRST DEPARTMENT
Start the production No cost of lost units.
During/End of the production Unit cost, this department times EUP of normal loss
SECOND DEPARTMENT
Start/during the production Unit cost, preceding department times actual normal
lost units
During/End of the production (Unit cost, preceding department times actual abnormal
lost units) plus (Unit cost, this department times EUP of
abnormal loss)
 The cost of abnormal losses should be accumulated and treated as a loss in the
period in which those losses occurred (period cost).

F. Cost of Production Report
1. Weighted Average Method
ABC Company
Cost of Production Report – Department
For the month ended December 31, 20xx
Equivalent Units
Whole Transferred Direct Conversion
UNITS Units in Materials Costs
Units to account for:
Beginning work in process xxx
Started in production xxx
Total units to account for xxx
Units accounted for:

Completed and transferred out xxx xxx xxx xxx
Ending work in process xxx xxx xxx xxx
Total units accounted for xxx xxx xxx xxx
Transferred Direct Conversion Total

COSTS in Materials Costs Costs
Costs to account for:
Beginning work in process Pxxx Pxxx Pxxx Pxxx
Costs added during the period xxx xxx xxx xxx
Total costs to account for xxx xxx xxx xxx
Divide by: Total EUP xxx xxx xxx
Cost per equivalent unit Pxxx Pxxx Pxxx Pxxx
Costs accounted for:

Completed and transferred out Pxxx Pxxx Pxxx Pxxx
Total costs accounted for Pxxx Pxxx Pxxx Pxxx
NOTES:
1. The number of units to account for must equal the number of units accounted for. To compute for ending
work in process (in units), the formula is: Total units to account for – completed and transferred out.
2. In computing EUP, the percentage to be multiplied for completed and transferred out should be 100%
both for direct materials and conversion costs. For ending work in process, EUP for direct materials are
100% if added at the beginning of the process and 0% if added at the end of the process. EUP for
conversion costs is computed using the percentage completed as provided.
3. Cost per EUP is computed by dividing total cost (per component) by the EUP for that component. This
is done separately for direct materials, conversion costs, and transferred in units (only when what is
involved is a receiving department).
4. Total costs accounted for should likewise be computed separately by component. The formula is: EUP (per
component) x Cost per EUP (per component). The column for total costs is calculated by simply adding
the total costs in each component.
5. The total costs to account for should also equal the total costs accounted for.

2. First-in, First-out (FIFO) Method
ABC Company
Cost of Production Report – Department
For the month ended December 31, 20xx
Equivalent Units
Whole Transferred Direct Conversion
UNITS Units in Materials Costs
Units to account for:
Beginning work in process xxx
Started in production xxx
Total units to account for xxx
Units accounted for:

Beginning work in process xxx xxx xxx xxx
Started and completed xxx xxx xxx xxx
Total units accounted for xxx xxx xxx xxx
Transferred Direct Conversion Total

COSTS in Materials Costs Costs
Costs to account for:
Total costs to account for xxx xxx xxx xxx

Divide by: Total EUP xxx xxx xxx
Cost per equivalent unit Pxxx Pxxx Pxxx Pxxx
Costs accounted for:

Costs to complete beginning WIP xxx xxx xxx xxx
Total costs for beginning WIP xxx xxx xxx xxx
Started and completed xxx xxx xxx xxx
Transferred out/to FG xxx xxx xxx xxx
Total costs accounted for Pxxx Pxxx Pxxx Pxxx
NOTES:
1. The number of units to account for must equal the number of units accounted for. For FIFO, the total units
accounted for consists of three things: (a) beginning balance, (b) started and completed during the period,
and (c) in process at the end. The total units completed and transferred out consist of the (a) beginning
balance and (b) started and completed during the period.
2. In the FIFO method, costs from the previous period are not merged with the costs from the current
period. Therefore, the equivalent units of production calculation are for the current period.
a. For transferred in units, the current-period EUP in beginning inventory is 0% because these units
were transferred in last period. Therefore, no additional costs for these units were transferred in this
period. Remember, we are calculating equivalent units of production for the current period
only. However, the EUP during the current period will be 100% (both for started and completed
this period and in process ending).

b. For direct materials, current-period EUP is 100% for the completed units, both beginning work-
in-process units and units started and completed this period, because they are 100% complete. For
ending work in process, EUP for direct materials are 100% if added at the beginning of the process
and 0% if added at the end of the process.
c. For conversion costs, the current-period EUP in beginning inventory is the percentage that is
completed in the current period (for example, if beginning inventory is 40% complete, then the
current-period EUP is 60%). For units that were started and completed, current-period EUP is 100%.
For the units in ending work in process, current-period EUP is the percentage done during the
current period.
d. Here is a summary of the percentages to be used in computing EUP:
Transferred in Direct Materials Conversion Costs
% completed – current
Beginning in process 0% 100%
period
Started and completed 100% 100% 100%
% completed – current
Ending in process 100% 0% or 100%
period
3. Cost per EUP is computed by dividing costs added during the period (per component) by the EUP for
that component. This is done separately for direct materials, conversion costs, and transferred in units
(only when what is involved is a receiving department). Take note that beginning work in process costs is
not included in the computation of EUP unlike in Weighted Average Method.
4. Total costs accounted for should likewise be computed separately by component. The formula is: EUP (per
component) x Cost per EUP (per component). The column for total costs is calculated by simply adding
the total costs in each component. The difference in FIFO method is that the cost for beginning WIP is
simply added to the costs to complete beginning WIP. Here are the important formulas:
a. Costs to complete beginning WIP = EUP, beginning WIP x cost per EUP
b. Started and completed = EUP, started and completed x cost per EUP
c. Ending work in process = EUP, ending WIP x cost per EUP
5. The total costs to account for should also equal the total costs accounted for.
6. The unit costs for beginning WIP and for those started and completed are computed separately in the
FIFO method since costs of previous period are not co-mingled with the costs of the current period. The
formula is: Total costs / Total units.
G. Journal Entries
Transaction Journal entry
Raw materials inventory xxx
Raw materials purchased
Accounts payable xxx
Work in process (direct materials) xxx
Raw materials used Manufacturing overhead control (indirect materials) xxx
Raw materials inventory xxx
Work in process (direct labor) xxx
Labor costs incurred Manufacturing overhead control (indirect labor) xxx
Wages payable xxx
Manufacturing overhead control xxx
Manufacturing overhead costs Accounts payable and other accounts xxx
Manufacturing overhead costs Work in process xxx
allocated Manufacturing overhead control xxx
Transfer from Department 1 to Work in process – Department 2 xxx
Department 2 Work in process – Department 1 xxx
Transfer from Department 2 to Finished goods xxx
finished goods Work in process – Department 2 xxx
Cost of goods sold xxx
Sale of finished goods
Finished goods xxx
Over-allocated manufacturing Manufacturing overhead control xxx
overhead costs Cost of goods sold xxx

PRACTICE PROBLEMS
Problem 1: JVC Company makes fabric-covered hat boxes. The company began September
with 500 boxes in process that were 100 percent complete as to cardboard, 4/5 complete as
to cloth, and 3/5 complete as to conversion costs. During the month, 3,300 boxes were
started. On September 30, 350 boxes were in process (100 percent complete as to cardboard,
30 percent incomplete as to cloth, and 45 percent incomplete as to conversion costs). Using
the FIFO method, what are equivalent units for cloth?
A. 3,295 C. 3,450
B. 3,395 D. 3,595
Problem 2: URL Company uses a FIFO process costing system. The company had 10,000
units that were 40% percent incomplete as to conversion costs at the beginning of the month.
The company started 30,000 units this period and had 9,000 units in ending Work in Process
inventory that were 50% complete as to conversion costs. What are the equivalent units for
conversion costs?
A. 35,500 C. 31,500
B. 29,500 D. 25,500
Problem 3: XYZ Company uses a weighted average process costing system and started
30,000 units this month. XYZ had 12,000 units that were 4/5 incomplete as to conversion
costs in beginning Work in Process Inventory and 3,000 units that were 40 percent complete
as to conversion costs in ending Work in Process Inventory. What are equivalent units for
conversion costs?
A. 37,800 C. 40,200
B. 40,800 D. 42,000
Problem 4: LMN Company Co. uses a FIFO process costing system. The company had 5,000
units that were 60 percent complete as to conversion costs at the beginning of the month.
The company started 22,000 units this period and had 7,000 units in ending Work in Process
Inventory that were 35 percent complete as to conversion costs. What are equivalent units
for materials if materials are added at the beginning of the process?
A. 18,000 C. 22,000
B. 25,000 D. 27,000
Problem 5: Finale Manufacturing Co. operates two consecutive departments, X & Y and uses
FIFO costing. The February 2020 production data for Department Y are as follows:
In process, February 1 12,000 units, 1/3 incomplete
Received from Dept. X 60,000 units
In process, February 28 10,000 units, 2/5 completed
Normal loss 5,000 units
What should be the equivalent production assuming that the normal loss occurred at the
beginning? At the end? When the units were 1/5 completed?
A. 53,000 ; 62,000 ; 58,000 C. 57,000 ; 58,000 ; 57,000
B. 53,000 ; 58,000 ; 54,000 D. 61,000 ; 66,000 ; 62,000

Problem 6: Progress Manufacturing Company applies process costing in the manufacture of
its sole product, "Enermix".
 Manufacturing starts in Department 1 where materials are all added at the start of
processing. The good units are then transferred to Department 2 where all the
incremental materials needed for its completion are added after final inspection.
 In Department 1, units are inspected at the end of processing while in Department 2,
inspection takes place when the units are 90% completed.
 Department 1 uses FIFO costing while Department 2 uses the weighted average
costing.
The production data for the month of August show the following:
UNITS Department 1 Department 2
Beginning work in process, August 1 8,000 4,000
Work to be done 80% 20%
Ending work in process, August 31 12,000 7,000
Work completed 2/3 5/7
Started in process during August 60,000
4% of units started
Normal spoilage 1,000
in process
1/4 of normal
Abnormal spoilage 500
spoilage
COSTS
Work in process, August 1:
Transferred in P- P114,180
Materials 54,000 85,950
Conversion Costs 39,000 112,290
Current costs:
Transferred in P- P?
Materials 792,000 336,000
Conversion Costs 1,235,520 513,000
Question 1: Total costs transferred to Department 2 and the amount of work in-process, end in
Department 1
A. P1,690,920 ; P316,800 C. P1,783,920 ; P316,800
B. P1,704,720 ; P158,400 D. P1,783,920 ; P219,720
Question 2: Total costs transferred to the Storeroom and the amount of work in-process, end in
Department 2
A. P2,633,460 ; P290,100 C. P2,589,900 ; P233,100
B. P2,589,900 ; P290,100 D. P2,633,460 ; P233,100

Problem 7: The cost data and production data for AB Company for the month of August were
as follows:
Cost Data:
Work in process, August 1: Materials P20,800
Conversion costs 27,600
Cost added this month: Materials 240,000
Conversion costs 640,800
Production Data:
Work in process, August 1 (60% incomplete) 3,750 units
Started in production this August 40,000 units
Transferred out 36,250 units
Work in process, August 31 (30% to be done) 6,500 units
Normal lost units 550 units
Abnormal lost units ?
Question 1: All materials are added at the start of the process and lost units are detected at
the inspection point of 75% completion. Using the FIFO method, what are the costs assigned
to units transferred out and units in ending work in process?
A. P807,650 ; P113,450 C. P807,650 ; P111,800
B. P809,300 ; P111,800 D. P809,300 ; P113,450
Question 2: Using the average method, what are the costs assigned to units transferred out
and units in ending work in process?
A. P807,638 ; P113,450 C. P809,143 ; P111,941
B. P799,229 ; P113,450 D. P799,212 ; P38,748
Question 3: What is the cost of abnormal lost units under FIFO method and average method?
A. P8,100 ; P8,100 C. P5,430 ; P5,400
B. P9,900 ; P9,920 D. P8,100 ; P8,112
IV. Backflush Costing System

A. Overview
 Backflush costing, or backflushing, is often used by companies that have adopted
the Just in Time (JIT) inventory control system. These companies have regarded
carrying inventory as a non-value-adding activity; hence, they attempt to
minimize inventory by making components available just-in-time to be used in
the process.
 The purpose of backflush costing is to reduce the number of events that are
measured and recorded in the accounting system.

B. Features of Backflush Costing
1. Work-in-process is usually eliminated.
2. Journal entries to inventory accounts may be delayed until the time of product
completion.
3. Standard costs are used to assign costs to units when journal entries are made.
C. Methods of Accounting for Backflush Costing

Method 1 Method 2 Method 3
Trigger points 1. Purchase of raw 1. Purchase of raw
materials materials
2. Completion of 1. Completion of
finished goods. finished goods.
3. Sale of finished 2. Sale of finished 2. Sale of finished
goods. goods. goods.
Inventory Raw and in Process Raw and in Process Finished Goods
accounts (RIP)
Finished Goods
Main features 1. Three trigger 1. Two trigger points 1. Two trigger points
points 2. Use of combined 2. Simplest of all
2. Use of combined raw material and in
raw material and process account
in process account 3. No finished goods
account
D. Journal Entries
Method 1 Method 2 Method 3
Purchase of raw Raw and in process Raw and In Process
No entry
materials Accounts payable Accounts Payable
Incur
Conversion cost Conversion cost Conversion cost
conversion
Various accounts Various accounts Various accounts
costs
Finished goods Finished goods
Completion of
Raw and in process No entry Accounts Payable
finished goods
Conversion cost Conversion cost
Cost of goods sold
Sale of finished Cost of goods sold Cost of goods sold
Raw and in process
goods Finished goods Finished goods
Conversion cost
Under-applied
Cost of goods sold Cost of goods sold Cost of goods sold
conversion
Conversion cost Conversion cost Conversion cost
costs
PRACTICE PROBLEMS
Problem 1: The MNO Manufacturing Company uses a Materials and In-Process (MIP)
inventory account. At the end of each month, all inventories are counted, their conversion
costs components are estimated, and inventory account balances are adjusted accordingly.
Raw materials is backflushed from MIP account to Finished Goods account. The following
data is for the month of August:
Beginning balance of MIP account P 67,725

Conversion cost incurred 8,400
Raw materials purchased 1,190,000
Conversion cost allocated 9,275
Ending balance of MIP account 73,325
The amount of direct materials and conversion costs to be backflushed to finished goods are:
A. P1,184,400 and P9,275 respectively C. P1,184,400 and P8,400 respectively
B. P1,190,000 and P9,275 respectively D. P1,190,000 and P8,400 respectively
Problem 2: DD Company uses a Materials and in process (MIP) account and charges all
conversion cost to Cost of Goods Sold (CGS). At the end of each month, all inventories are
counted, their conversion cost components are estimated, and inventory account balances
are adjusted. Raw material cost is backflushed form MIP to finished goods. The following
information is for the month of August:
Beginning balance of MIP account P50,000
Beginning balance of Finished Goods account, including
P12,500 of conversion cost 78,000
Raw materials received on credit 700,000
Ending balance of MIP account 60,000
Ending balance of Finished Goods account, including
P10,000 of conversion cost 75,000
How much is the material cost of the units completed?

A. P690,500 C. P690,000
B. P693,000 D. P700,000
Problem 3: The EFG Corporation manufactures electrical meters. For October, there were
no beginning inventories of materials. EFG uses a Just in Time system and backflush costing
with three trigger points for making entries to record their manufacturing process. EFG's
October standard costs per meter are direct materials, P150 and conversion costs, P120. The
following data pertains to October operations:
Materials purchased P825,000
Conversion costs incurred 660,000
Number of finished units 5,250 units
Number of units sold 5,000 units
What are the balances of MIP inventory and Finished Goods Inventory accounts at the end of
October?
A. P825,000 and P67,500, respectively C. P37,500 and P67,500, respectively
B. P825,000 and Pl,417,500, respectively D. P37,500 and P1,417,500, respectively
Problem 4: Vex, general manager of AB corporation, provided the following information for
transactions that occurred during August. The corporation uses JIT costing system.
• Raw materials purchased and requisitioned for product were P84,000
• Direct Labor costs of P78,000 were incurred
• Actual factory overhead costs amounted to P250,000

• Applied conversion costs totaled P340,000, which includes P78,000 of direct labor
• All units were completed
How much is the balance in Finished Goods account in August 31?

A. P412,000 debit C. P412,000 credit
B. P424,000 debit D. P424,000 credit
Problem 5: Finale Company has a cycle time of 3 days, uses a Materials and In Process (MIP)
account, and charges all conversion costs to Cost of Goods Sold. At the end of each month, all
inventories are counted, their conversion costs components are estimated, and inventory
account balances are adjusted. Raw material cost is backflushed from MIP to Finished Goods.
The following information is for August:
Beginning balance of MIP account, including P3,750
of conversion costs P 36,565
Beginning balance of finished goods account, including
P12,500 of conversion costs 37,500
Raw materials received on credit 703,125
Direct labor cost, P468,750; Factory overhead applied, P562,500 1,031,250
Ending MIP inventory per physical count, including
Ending finished goods inventory per physical count, including
What is the conversion costs of units sold in August?

A. P1,027,815 C. P1,033,125
B. P1,030,935 D. P1,031,250
V. Activity-Based Costing System

A. Overview
• This is a costing method that is designed to provide managers with cost
information for strategic and other decisions that potentially affect capacity and
therefore “fixed” as well as variable costs. It is a system in which multiple
overhead cost pools are allocated using bases that include one or more non-
volume-related factors.
• The use of the ABC System means that a company develops an allocation system
that matches its own unique production process. The system refines a costing
system by focusing on individual activities as the fundamental cost objects. It uses
the cost of these activities as the basis for assigning costs to other cost objects such
as products or services.
• Rationale behind the costing system: products consume activities; activities

consume resources.

• Most organizations that use ABC have two costing systems: the official costing
system that is used for preparing external financial reports (GPFS), and the ABC
system that is used for internal decision making and for managing activities.
• Benefits of ABC:
1. ABC leads to more cost pools
2. ABC leads to enhanced control over overhead costs
3. ABC leads to better management decisions
• Decisions for Which ABC Information is Useful:

1. pricing and product mix decisions,
2. cost reduction and process improvement decisions,
3. product design decisions, and
4. decisions for planning and managing activities.
• Limitations of ABC
1. ABC can be expensive
2. Some arbitrary allocations continue
3. ABC data can easily be misinterpreted
B. ABC System vs. Traditional Costing System

• Broad Averaging or "Peanut-Butter Costing" – describes a costing approach
that uses broad averages for assigning (or spreading, as in spreading peanut
butter) the cost of resources uniformly to cost objects when the individual
products or services, in fact, use those resources in non-uniform ways.
• Activity Based Costing (ABC) System – allocates overhead to multiple activity

cost pools and assigns the activity cost pools to products by means of cost drivers.
• Comparisons Between the ABC and Traditional Costing Systems

Activity-Based Costing Traditional Costing
Assume that cost objects consume activities. Assume that cost objects consume resources.
Uses drivers at various levels Uses volume-related allocation bases
Process-oriented Structure-oriented
• When to Switch to ABC

The presence of one or more of the following factors indicates ABC as the superior
costing system.
1. Product lines differ greatly in volume and manufacturing complexity.
2. Product lines are numerous, diverse, and require differing degrees of support
services.
3. Overhead costs constitute a significant portion of total costs.
4. The manufacturing process or the number of products has changed
significantly.
5. Production or marketing managers are ignoring data provided by the existing
system.

C. Levels of Costs and Cost Drivers
1. Unit Level
a. Unit Level Costs – the costs that inevitable increase whenever a unit is
produced. They are the only costs that can be assigned accurately in
proportion to volume.
b. Unit Level Drivers – are measures of activities that vary with the number of
units produced and sold. They are proportional to the volume of output and
the only volume-related allocation bases used in ABC.
c. Unit Level Activities – are performed each time a unit is produced.
2. Batch Level
a. Batch Level Costs – costs caused by the number of batches produced and sold.
b. Batch Level Drivers – measures of activities that vary with the number of
batches produced and sold.
c. Batch Level Activities – are performed each time a batch is handled or
processed, regardless of how many units are in the batch.
3. Product Level
a. Product Level Costs – costs incurred to support the number of different
products produced. They are not necessarily influenced by the production and
sale of one more batch or one more unit.
b. Product Level Drivers – measures of activities that vary with the number of
different products produced and sold.
c. Product Level Activities – relate to specific products and typically must be
carried out regardless of how many batches are run or units of product are
produced or sold.
4. Plant Level
a. Plant Level Costs – costs of sustaining capacity at a production site.
b. Plant Level Drivers – measures of activities that relate to the entire
plant/organization.
c. Organization-Sustaining Activities – carried out regardless of which
customers are served, which products are produced, how many batches are
run, or how many units are made.
D. Examples of Costs, Drivers, and Activities

Activities Costs Drivers
Unit  Cutting  Electricity costs (if electrically  Direct labor hours
 Soldering powered machinery is used in  Direct labor cost
 Painting producing each unit)  Machine hours
 Assembling  Heating costs (if each unit is  Direct material weight
 Packaging heat-treated)  Direct material cost
 Inspection labor (if each unit  Direct material pieces
requires inspection)  Total prime costs
 Units produced
Batch  Scheduling  Setup costs  Setups
 Setting up  Material handling costs  Setup hours

 Blending  Scheduler, setup personnel or  Batches
 Moving material handler labor costs  Production/work
orders
 Material requisitions
Product  Designing  Product design costs  Design changes
 Developing  Cost of patents  Design hours
 Prototyping  Salaries of designers and  Product numbers
 Advertising programmers  Part numbers
 Warehousing
Plant  Heating  Rent/lease cost  Square footage
 Lighting  Depreciation occupied
 Cooling  Property taxes  Kilowatt hours used
 Providing  Insurance on factory building
security
E. Steps in Implementing ABC System

1. Define activities, activity cost pools, and activity measures.
Definitions:
a. Cost driver – a factor that causes a change in the cost pool for a particular
activity. It is used as a basis for cost allocation; any factor or activity that has a
direct cause-effect relationship.
b. Activity – any event, action, transaction, or work sequence that incurs costs
when producing a product or providing a service.
c. Activity Cost Pool - a "bucket" in which costs are accumulated that relate to a
single activity measure in the ABC System
The first major step in implementing an ABC system is to identify the activities
that will form the foundation for the system. This can be difficult, time-consuming,
and involves a great deal of judgment. A common procedure is for the individuals
on the ABC implementation team to interview people who work in overhead
departments and ask them to describe their major activities. Ordinarily, this
results in a very long list of activities. Assign overhead costs to activity cost pools,
2. Assign overhead costs to activity cost pools.

First-Stage Allocation – the process of assigning functionally organized
overhead costs derived from a company's general ledger to the activity cost pools.
First-stage allocations are usually based on the results of interviews with
employees who have first-hand knowledge of the activities.
3. Calculate activity rates.

The activity rates that will be used for assigning overhead costs to products and
customers are computed after doing the first stage allocation. The ABC team
determined the total activity for each cost pool that would be required to produce
the company's present product mix and to serve its present customers.
Computation of activity rate:

Activity rates = Total activity cost / Total activity

4. Assign overhead costs to cost objects using the activity rates and activity
measures.
Second-Stage Allocation – in this allocation stage, activity rates are used to apply
overhead costs to products and customers.
5. Prepare management reports.
PRACTICE PROBLEMS
Problem 1: The budgeted manufacturing overhead costs of JRLD DZON Company for 2020
are as follows:
Type of Cost Cost Amount
Electric Power P1,000,000
Work Cells 6,000,000
Materials Handling 2,000,000
Quality Control Inspections 2,000,000
Product Runs (machine setups) 500,000
TOTAL BUDGETED OVERHEAD COSTS P11,500,000
For the last five years, the cost accounting department has been charging overhead
production costs based on machine hours. The estimated budgeted capacity for 2020 is
2,000,000 machine hours.
The president of Jerald D Company recently attended a seminar on activity-based costing. He

now believes that ABC results in more reliable cost data that, in turn, will give the company
an edge in pricing over its competitors. At the president’s request, the production manager
provided the following data regarding expected 2020 activity for the cost drivers of the
preceding budgeted overhead costs.
Type of Cost Activity Drivers
Electric Power 200,000 kilowatt hours
Work Cells 1,200,000 square feet
Materials Handling 500,000 material moves
Quality Control Inspections 400,000 inspections
Product Runs (machine setups) 50,000 product runs
The Vice President of Marketing received an offer to sell 5,000 doors to a local construction
company. The VP asked the head of the cost accounting to prepare cost estimates for
producing the 5,000 doors. The head of cost accounting accumulated the following data
concerning production of 5,000 doors:
Direct Material cost P200,000
Direct Labor cost 400,000
Machine hours 10,000
Direct Labor hours 20,000
Electric power – kilowatt hours 2,000

Work Cells – square feet 12,000
Number of material handling moves 120
Number of quality control inspections 60
Number of product runs (setups) 30
Requirements:
1. What is the predetermined overhead rate if the traditional measure of machine hours
is used?
2. What is the manufacturing cost per door as presently accounted for?
3. What is the manufacturing cost per door under the proposed ABC method?
Problem 2: Believing that its traditional costing system may be providing misleading
information, an organization is considering an activity-based costing approach (ABC). It now
employs a full-cost system and has been applying its manufacturing overhead on the basis of
machine hours.
The organization plans on using 50,000 direct labor hours and 30,000 machine hours in the
coming year. The following data show the manufacturing overhead that is budgeted.
Activity Cost driver Budgeted Activity Budgeted Cost
Materials handling Number of parts handled 6,000,000 P720,000
Setup costs Number of setups 750 315,000
Machining costs Machine hours 30,000 540,000
Quality Control Number of batches 500 225,000
Total manufacturing overhead cost P1,800,000
Cost, sales, and production data for one of the organization's products for the coming year
are as follows:
Prime Costs:
Direct materials cost per unit P4.40
Direct labor cost per unit (0.05 DLH @ P15/DLH) 0.75
Total prime cost per unit P5.15
Sales and production data:

Expected sales 20,000 units
Batch size 5,000 units
Setups 2 per batch
Total parts per finished unit 5 parts
Machine hours required 80 MH per batch
Question 1: If the organization uses the traditional full-cost system, the cost per unit for this
product for the coming year will be
A. P5.39 C. P6.11
B. P5.44 D. P6.95

Question 2: If the organization employs an activity-based costing system, the cost per unit
for the product described for the coming year will be
A. P6.00 C. P6.21
B. P6.08 D. P6.30
Problem 3: Producer Company makes two products, X and Z. X is being introduced this
period, whereas Z has been in production for two years. For the period about to begin, 1,000
units of each product are to be manufactured. Assume that the only relevant overhead item
is the cost of engineering change orders; that X and Z are expected to require eight and two
change orders; that X and Z are expected to require 2 and 3 machine hours, respectively; and
that the cost of a change order is P600. If Producer applies engineering change order costs
on the basis of machine hours, the cross subsidy per unit arising from this peanut butter-
costing approach is
A. P1.20 C. P3.60
B. P2.40 D. P4.80
VI. Accounting for Joint and By-products

A. Definition of Terms
1. Co-products – are produced simultaneously with other products but not
necessarily from the same raw materials or the same processing operations.
2. Main products – are products of relatively larger value which results from those
manufacturing operations in which companies simultaneously produce two or
more products where the products have different sales value.
3. Joint products – are products that are produced simultaneously by a common
process or series of processes with each product possessing more than nominal
value in the form in which it is produced.
4. By-product – denotes a product of relatively small total value produced
simultaneously with a product of greater total value.
5. Split-off point – the point at which the several products produced simultaneously
through a common process emerge as separable, individual units.
6. Joint costs – are costs incurred prior to split-off point to produce two or more
goods manufactured simultaneously by a single process or series of processing
operations.
7. Separable costs – are costs that are identifiable with the individual product and,
generally, need no allocation.
B. Methods of Allocating Joint Costs to Joint Products

1. Market Value or Sales Value Method – market value of any product is, to some
extent, a manifestation of the cost incurred in its production.
a. Market Value at Split-off Point Approach – a method of assigning joint costs
to joint products based on the sales value at split-off; it requires that all joint
products be salable at the split-off point.
b. Hypothetical Market Value or Net Realizable Approach – a method of
allocating joint cost to joint products that uses a simulated net realizable value
at the split-off point. Approximated value is computed as final sales price

minus incremental separate costs. This method requires that all joint products
be processed further after the split-off point.
2. Quantitative Unit Method – a method of allocating common costs to products
that uses a common unit of measurement as the proration base. Physical measures
are useful in allocating joint cost to products that have extremely unstable selling
prices.
3. Average Unit Cost Method – attempts to allocate joint cost among joint products
so that each product is allocated the same per-unit amount of joint cost, called the
average unit cost, which is obtained by dividing the total number of units
produced into the total joint cost.
4. Weighted Average Method – a method similar to average unit cost method,
except that each product is assigned predetermined weights and per-unit cost
allocated is based on a weighted average unit cost.
C. Methods of Costing By-Products

1. Gross Revenue Method – by-products are not costed separately; instead, sale of
by-product is treated as an addition to gross revenue or as a reduction to costs
a. By-product revenue treated as Other Income
b. By-product revenue treated as Additional Sales Revenue
c. By-product revenue treated as Deduction from the Cost of Goods Sold
d. By-product revenue treated as Deduction from the Production Cost
2. Net Revenue Method – similar to gross revenue method, except that the net
realizable value of the by-product is used instead of the sales value.
3. Replacement Cost Method – a method that credits production cost of the main
products at the current market or placement rate. This method is used by
companies whose by-products are used somewhere within the same company.
4. Market Value (Reversal Cost) Method – a method similar to (1d) above, except
that instead of using the actual revenue received, an estimate of the by-product's
value at the time of recovery is used.
PRACTICE PROBLEMS
Problem 1. Solmix Company produces four solvents from the same process: A, B, C, and D.
Joint product costs are P45,000. (Round all answers to the nearest peso.)
Sales price Disposal cost Further Final sales
Barrels per barrel per barrel processing price per
At split-off at split-off costs barrel
A 2,250 P30.00 P19.50 P6.00 P40.50
B 3,000 24.00 12.00 7.50 30.00
C 4,200 33.00 21.00 12.00 46.50
D 6,000 45.00 28.50 13.50 58.50
If Solmix sells the products after further processing, the following disposal costs will be
incurred: A, P7.50; B, P3.00; C, P10.50; D, P18.00

1. Using a physical measurement method, what amount of joint processing cost is
allocated to Product B?
A. P17,475 C. P8,738
B. P6,555 D. P12,235
2. Using sales value at split-off, what amount of joint processing cost is allocated to
Product A?
A. P22,165 C. P11,380
B. P5,910 D. P5,542
3. Using net realizable value at split-off, what amount of joint processing cost is allocated
to Product C?
A. P10,850 C. P7,750
B. P5,085 D. P21,315
Problem 2: EE Company produces chemical H and I. The processing also yields by product
X, another chemical. The joint costs of processing are reduced by the NRV of X. Joint costs for
the month of August were P2,900,000. Below are additional data:
Product Units Market Value
H 1,000 P5,000,000
I 2,000 P2,500,000
X 500 P 500,000
An additional P120,000 were spent to complete the processing of X. The company uses the
NRV method of allocating joint costs.
How much is the amount of joint cost allocated to Product I?

A. P1,260,000 C. P1,680,000
B. P840,000 D. P1,600,000
Problem 3: MM company produces joint products A and B together with by product C. A is

sold at split off, but B and C undergo additional processing. Production data pertaining to
these products for a year ended December 31, 2020, are as follows:
A B C Total
Joint costs P1,200,000
Separable costs P435,000 P56,000 491,000
Production in pounds 100,000 150,000 40,000 290,000
Sales price per pound P5 P9 P2.5
There are no beginning or ending inventories. No materials are spoiled in production. Joint
costs are allocated to joint products to achieve the same gross profit rate for each joint
product. Net revenue from by product is deducted from joint production costs of the main
product. How much is the share of B in the joint cost?
A. P843,658 C. P430,000
B. P747,520 D. P726,000

Problem 4: RR Company makes two products Y and Z. They are initially processed from the
same materials and then after split off, further processed separately. Additional information
is as follows:
Y Z Total
Final sales value P40,500 P49,500 P90,000
Sales value at split off P33,000 P47,000 P80,000
Cost beyond split off P9,000 P11,000 P20,000
Joint cost prior to split off P15,000
Using the Actual NRV approach, how much is the joint cost assigned to Y and Z?
A. P6,000 and P9,000 C. P6,750 and P8,250
B. P6,188 and P8,812 D. P7,500 and P7,500
Problem 5: JKLM Company buys Article G for P0.80 unit. At the end of processing in
Department 1 Article G split into products D, E and F. Product D is sold at split-off point with
no further processing, E and F require further processing before they can be sold; E
processed in Department 2; and F is processed in Department 3. The following is a summary
of costs and other related data for the year ended July 30, 2020.
Department 1 Department 2 Department 3
Cost of Article G
Direct materials P1,440,000 - -
Direct labor 210,000 P675,000 P975,000
Factory overhead 150,000 315,000 735,000
Product D Product E Product F

Units sold 300,000 450,000 675,000
Units on hand on July 30, 2020 150,000 - 225,000
Sales P450,000 P1,440,000 P2,126,250
JKLM uses the estimated net realizable value method to allocate joint cost.
1. The cost of Product E sold for the year ended July 30, 2020
A. P1,470,000 C. P 990,000
B. P1,440,000 D. P1,350,000
2. The cost of ending inventory for Product D

A. P270,000 C. P180,000
B. P225,000 D. P540,000

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AFAR 2303

 Cost Accounting Processes:

 Cost Allocation System:

 Cost Accumulation System:

AFAR 2303 COST ACCOUNTING 1

 Example of companies where job costing is applicable:

C. Procedures for Costing Products Under Job Order Costing

3. If normal costing is used, over- or under-applied overhead is computed by

D. Accounting for Scrap, Waste, Spoilage, and Rework

Scrap sales may be accounted for as:

AFAR 2303 COST ACCOUNTING 2

Spoilage is caused by an internal failure when it is caused by factors in the quality

 Rework – the process of correcting defective goods to bring them to a salable

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G. Disposition of Under- or Over-applied Manufacturing Overhead

 Under-applied overhead (a debit balance in Manufacturing Overhead Control)

 If the amount is material, the over- or under-applied overhead should be

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 If the amount is immaterial, it is customary to close over- or under-applied

 Raw materials purchased amount to P46,000.

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What is the total cost of Job #297?

Pretax income for 2020 is:

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The cost of goods manufactured would be:

 There was no inventory of finished goods on August 1.

The cost of goods sold at normal is:

Additional information were as follows:

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Compute the following:

III. Process Costing System

 Example of companies where process costing is applicable:

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D. Equivalent Units of Production

 Calculation of EUP and Cost Allocation – Weighted Average Method

2. Calculate the physical units accounted for.

3. Calculate the Equivalent Units of Production (EUP) using the weighted

4. Calculate the total costs to account for.

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6. Assign costs to inventories.

 Calculation of EUP and Cost Allocation - FIFO Method

2. Calculate the physical units accounted for.

3. Calculate the equivalent units of production using the FIFO Method.

4. Calculate the total costs to account for.

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6. Assign costs to inventories.

As under the weighted average method, the amount of costs assigned to

E. Accounting for Lost Units

 Equivalent Units of Production:

 Cost of Normal Lost Units

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WEIGHTED AVERAGE METHOD

2. Abnormal Lost Units

 Equivalent Units of Production

 Cost of Abnormal Lost Units

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1. Weighted Average Method

Units accounted for:

Transferred Direct Conversion Total

Costs accounted for:

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Units accounted for:

Transferred Direct Conversion Total

Costs added during the period xxx xxx xxx xxx