ADVANCED FINANCIAL ACCOUNTING AND REPORTING

JOB ORDER COSTING

Cost Accounting
13.1 Describe the system of cost accumulation or costing system
13.1.1 Differentiate actual costing, normal costing, and standard costing
13.2 Job Order Costing
13.2.1 Record transactions using job order costing procedures
13.2.2 Compute Cost of Goods Manufactured and Sold
13.2.3 Account for spoiled units and rework costs
13.2.4 Allocate service department cost

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COST ACCUMULATION SYSTEMS

A job order costing system is the product costing system used by entities that make relatively small
quantities or distinct batches of identifiable, unique products (services). The word "job" is synonymous
with client, engagement, project, or contract.

A process costing system is the product costing system used by entities that produce large quantities of
homogeneous goods.

VALUATION METHODS

Actual Costing. This is a valuation method whereby production inputs are valued at the actual cost, which
is the actual amount paid for direct materials, direct labor and overhead costs in determining the cost of
Work in Process Inventory. All factory overhead incurred would be applied to Work-in-Process

The problem is that the total actual costs of overhead are not known until the end of the period. It is not
practical to wait until the end of the period to cost products, since cost is factor in setting prices.
Furthermore, if monthly overhead costs are used, unit costs could vary widely if actual costs fluctuate from
month to month. Service businesses that have few customers and/or low volume may use an actual cost
system.

Normal Costing. This is a valuation method that uses actual direct material, actual direct labor, and
applied overhead (estimated using predetermined overhead rates) in determining the cost of Work in
Process Inventory. This workbook assumes the use of normal costing. Estimated overhead costs are
divided by estimated production for the year to determine an application rate.

Standard Costing. This is a valuation method wherein standards (predetermined benchmarks) are
developed for direct material and direct labor quantities and/or costs are overhead is applied to production
using a predetermined rate that is considered standard. In a standard cost system, standard costs are
developed for all inputs per unit of production. Input costs charged to inventory are based on the number of
inputs that should have been used to make a unit of product at the price that should have been paid for each
input unit. For example, if overhead is applied on machine hours, it would be applied to the number of
hours that should have been used to make that unit, not the actual number of machine hours used.

ACTUAL COSTING NORMAL COSTING STANDARD COSTING

DIRECT Actual Price X Actual Actual Price X Actual Standard Price X Standard
MATERIALS Quantities Quantities Quantity Allowed for
Actual Output
DIRECT LABOR Actual Direct Rate X Actual Direct Rate X Standard DL Rate X
Actual Hours Actual Hours Standards Hours Allowed
for Actual Output
FACTORY Actual Indirect Cost Budgeted Factory Standard Overhead Rate X
OVERHEAD Overhead Rate X Standard Inputs Allowed
Actual Quantity of for Actual Output
Cost Allocation Based
Job-Order Costing
Job-order costing is a system for allocating costs to groups of unique products. It is applicable to the
production of customer-specified products such as the manufacture of special machines and even to cost a
particular service (e.g., providing legal services for the client of a law firm). Each job becomes a cost
center for which costs are accumulated. A subsidiary record (job-order cost sheet) is needed to keep track
of all unfinished jobs (work in process) and finished jobs (finished goods). Note that the total of unfinished
job cost sheets will equal the work in process balance.

Accounting for Overhead

Accounting for manufacturing overhead is an important part of job-order costing and any other costing
system. Overhead consists of all manufacturing costs other than direct materials and direct manufacturing
labor. The distinguishing feature of manufacturing overhead is that while it must be incurred in order to
produce goods, it cannot be directly traced to the final product as can direct materials and direct
manufacturing labor. Therefore, overhead must be applied, rather than directly charged, to goods produced.
The overhead application process is described below.

Overhead items are grouped by cost behavior (e.g., fixed and variable).
The fixed and variable overhead costs are estimated for the forthcoming period (e.g., P200,000 for variable
overhead and P400,000 for fixed overhead).
A denominator (activity) base is chosen. A common choice is direct labor hours or machine hours.
The actual activity level is estimated for the forthcoming year (e.g., 80,000 hours).

To allocate the costs of overhead to units produced, an activity base must be chosen for use in the
computation of a predetermined overhead rate. This activity base should bear a causal relationship to the
incurrence of overhead costs. Examples of activity bases are
Direct manufacturing labor hours
Direct manufacturing labor cost
Machine hours
For example, overhead may result from (be a function of) hours worked regardless of who works, which
would mean that direct manufacturing labor hours should be the activity base. If, on the other hand, more
overhead costs were incurred because of heavily automated operations, machine hours might be a more
appropriate activity base.

However, for internal purposes, management may use several approaches to determine the activity level, as
shown below.

Approach Definition
Theoretical capacity Output is produced efficiently 100% of the time.
Practical capacity ADJUSTED FOR: factors such as days off, down-time,
etc. Output is produced maximum percentage of time
practical (75-85%).
Normal capacity ADJUSTED FOR: long-run product demand. Average
(COMMONLY USED) annual output necessary to meet sales and inventory
fluctuations over 4-5-year period

Note that theoretical capacity is larger than practical capacity, which is larger than normal volume.
Expected annual capacity fluctuates above and below normal volume. At year-end fixed overhead may be
Overapplied—More is applied than incurred because
Overhead costs were overestimated,
Actual activity was greater than normal capacity, and/or
Actual overhead costs were less than expected.
Underapplied—Less overhead is applied than incurred because
Overhead costs were underestimated,
Actual activity was less than normal capacity, and/or
Actual overhead costs were more than expected.
Disposition of Under- and Overapplied Overhead
If the under- or overapplied overhead is immaterial, it is frequently written off to cost of goods sold on
grounds of expediency.
Cost of goods sold (debit or credit) xx
Factory overhead (debit or credit) xx

If the amount of under- or overapplied variable overhead is significant, then an adjustment must be made
to all goods which were costed at the erroneous application rate during the current period. The goods with
the incorrect costs will be in three accounts: Work in Process Control, Finished Goods Control, and Cost of
Goods Sold.
Proration may be made based upon total ending balance (before proration) of the three accounts or on
some other equitable basis. The exam will normally give specific directions on what allocation base should
be used. The amount of under- or overapplied fixed overhead should always be charged to cost of goods
sold.

Problem 1. The following information was taken from the records of London Company.

• Operating Expenses amount to P24,000 which is 8% of Sales

• Net income for the month is 22% of Sales
• Finished Goods, end is 1/3 of COGS
• Finished Goods, beg is 80% of F/G end
• Purchases amount to P70,000
• Beginning Inventory is 80% of Ending Inventory
• Direct Materials amount to P60,00 which is 25% of total manufacturing cost
• Factory overhead is 150% of Direct Labor Cost
Required: Prepare the necessary journal entries

Problem 2. The Showa manufacturing company recorded the following transactions during 2020:

a. Raw materials purchased on account, P820,000.

b. Raw materials were requisitioned for use in production, P760,000 (P720,000 direct materials and
P40,000 indirect materials).
c. Direct labor, P150,000; indirect labor, P220,000; sales commission, P180,000; and administrative
salaries, P400,000.
d. Sales travel costs were P34,000.
e. Utility costs incurred in the factory, P86,000.
f. Advertising expenses were P360,000.
g. Depreciation for the year was P700,000 (P560,000 relates to factory and P140,000 relates to selling and
administrative activities).
h. Insurance expired during the year, P20,000 (P14,000 relates to factory operations and P6,000 relates to
selling and administrative activities).
i. Fine manufacturing company worked 160,000 machine hours. Manufacturing overhead was applied to
production.
j. Goods costing P1,800,000 were completed during the year.
k. The goods costing P1,740,000 were sold to customers for P3,000,000.

The Showa manufacturing company uses job order costing system. The company uses machine hours to
apply overhead cost to jobs. At the beginning of 2020, the company estimated that 150,000 machine hours
would be worked and P900,000 overhead cost would be incurred during 2020.

The balances of raw materials, work in process (WIP), and finished goods at the beginning of 2020 were as
follows:
• Raw materials: P40,000
• Work in process: P30,000
• Finished goods: P60,000
Required:
1. Prepare journal entries from the above information.
 2. Prepare a journal entry to close the balance in manufacturing overhead account (over or
under applied manufacturing overhead) to cost of goods sold.

Problem 3.
The following information was gathered for Rogers Company for the year ended December 31, 20X5.
Budgeted Actual
Direct labor-hours 75,000 77,500
Factory overhead P525,000 P558,000

Assume that direct labor-hours are the cost-allocation base.

Required:
a. Compute the budgeted factory overhead rate.
b. Compute the factory overhead applied.
c. Compute the amount of over/underapplied overhead.

Problem 4. Mardel Company has the following balances as of the year ended December 31, 20X5.

Direct Materials Inventory P15,000 Dr.

WIP Inventory 34,500 Dr.
Finished Goods Inventory 49,500 Dr.
Factory Department Overhead 4,000 Dr.
Cost of Goods Sold 4,500 Dr.

Additional information is as follows:

Cost of direct materials purchased during 20X5 P41,000

Cost of direct materials requisitioned in 20X5 47,000
Cost of goods completed during 20X5 102,000
Factory overhead applied (120% of direct labor) 48,000

Required:
a. Compute beginning direct materials inventory.
b. Compute beginning WIP inventory.
c. Compute beginning finished goods inventory.
d. Compute actual factory overhead incurred.
JOB ORDER COSTING

MULTIPLE CHOICE

Question 1 & 2 are based on the following given data

The following cost data pertain to Arque Company for the month of February 2021

Inventories 02/01/21 02/28/21

Materials P40,000 P50,000
Work in process 25,000 25,000
Finished goods 60,000 70,000

Direct labor cost 120,000

Factory overheads applied 108,000
Cost of goods sold 378,000

1. The cost of goods manufactured for February 2021 was

a. P378,000
b. P388,000
c. P398,000
d. P423,000
2. The total amount of direct materials purchases during February 2021 was
a. P50,000
b. P170,000
c. P180,000
d. P220,000

Questions 3 through 5 are based on the following information

Astoveza Company had the following inventories at the beginning and end of March 2021

03/01/21 03/31/21
Direct Materials P36,000 P30,000
Work-in-process 18,000 12,000
Finished goods 54,000 72,000

The following additional manufacturing cost data were available for the month of March
Direct materials purchased P84,000
Direct labor payroll 60,000
Direct labor rate per hour 7.50
Factory overhead rate per direct labor hour 10.00

3. During March 2021 prime cost added to production was

a. P90,000
b. P140,000
c. P144,000
d. P150,000
4. During March 2021 conversion cost added to production was
a. P60,000
b. P80,000
c. P140,000
d. P150,000
5. The cost of goods manufactured for March 2021 was
a. P212,000
b. P218,000
c. P230,000
d. P236,000
Questions 6 through 9 are based on the following data
Avilla Company provided the following inventory balances and manufacturing cost data for the month of
January 2021
Inventories
Increase in Direct Materials P10,000
Increase in Work-in-process 5,000
Decrease in Finished goods 15,000

Month of
January 2021
Cost of goods manufactured P515,000
Factory overhead applied 150,000
Direct materials used 190,000
Actual factory overhead 144,000

Under Avilla’s cost system, any over or under applied overhead is closed to the cost of goods sold
account at the end of the calendar year.

6. What was the total amount of direct material purchase during January 2021?
a. P180,000 c. P195,000
b. P190,000 d. P200,000
7. How much direct labor cost was incurred during January 2021?
a. P170,000
b. P175,000
c. P180,000
d. P186,000
8. What would cost of goods sold be if under or over applied overhead were closed to cost of goods
sold?
a. P509,000 c. P530,000
b. P524,000 d. P536,000

9. Assuming that ending inventories of the Work in Process and Finished Goods are P40,000 and
P30,000 respectively, what would cost of goods sold be if under or over applied overhead were
allocated to inventories and cost of goods sold?
a. P509,700
b. P524,700
c. P526,300
d. P530,300
10. Kelly Company uses a job order costing. Factory overhead is applied to production at a budgeted
rate of 150% of direct labor costs. Any overapplied or underapplied factory overhead is closed to
the cost of goods sold account at the end of the month. Additional information is available as
follows:

Work in Process beg.

Direct Materials P4,000
Direct Labor 2,000
Factory overhead applied 3,000
P9,000

Jobs 102,103 and 104 were started during February. Direct materials requisitions for February
totaled P26,000. Direct labor costs of P20,000 were incurred for February. Actual factory overhead
was P32,000 for February. The only job still in process at the end of February was Job No 104,
with costs of P2,800 for direct materials and P1,800 for direct labor
The cost of goods manufactured for February was :
a. P77,700
b. P79,700
 c. P78,000
d. P85,000

11. Ludenio Company applies factory overhead on the basis of direct labor hours. Budget and actual
data for direct labor and overhead for the year are as follows:

Budget Actual
Direct labor hours ........................................................... 600,000 650,000
Factory overhead costs ................................................... P720,000 P760,000

The factory overhead for Ludenio for the year is:

a. overapplied by P20,000 c. underapplied by P20,000
b. overapplied by P40,000 d. underapplied by P40,000

12. The Prends Company estimated Department A's overhead at P255,000 for the period based on an
estimated volume of 100,000 direct labor hours. At the end of the period, the factory overhead
control account for Department A had a balance of P265,500; actual direct labor hours were
105,000. What was the over- or under-applied overhead for the period?
a. P2,250 c. P15,000
b. P(2,250) d. P(15,000)

13. Mico Corporation has a job order cost system. The following debits (credits) appeared in Work in
Process for the month of July:

July 1, balance ......................................................................................... P 12,000

July 31, direct materials........................................................................... 40,000
July 31, direct labor ................................................................................. 30,000
July 31, factory overhead ........................................................................ 27,000
July 31, to finished goods ........................................................................ (100,000)

Mico applies overhead to production at a predetermined rate of 90% based on the direct labor
cost. Job 1040, the only job still in process at the end of July, has been charged with factory
overhead of P2,250. What was the amount of direct materials charged to Job 1040?
a. P6,750 c. P2,500
b. P2,250 d. P4,250

14. The following information were taken from the accounting records of Yanni Music Company
for 2020:
Increase in raw materials inventory P 45,000
Decrease in finished goods inventory 150,000
Raw materials purchases 1,290,000
Direct labor payroll 600,000
Factory overhead 900,000
Freight out 135,000
The cost of raw materials used during the period amounted to:
a. 1,245,000 c. 1,335,000
b. 1,290,000 d. 1,380,000

15. Ambo, Inc. manufactured 50,000 kilos of Compound Am in 2020 at the following costs:

Opening work-in-process of P88,125.

Materials of P182,500 of which 90% is direct materials
Labor of P242,500 of which 93% is direct labor
Closing work-in-process of P67,500

Factory overhead is 125% of direct labor cost and includes indirect materials and indirect labor.
The cost goods manufactured is:
a. 651,056
b. 692,306
c. 706,906
d. 727,531
ADVANCED FINANCIAL ACCOUNTING AND REPORTING

ACCOUNTING FOR SPOILAGE, REWORK, AND SCRAP

A. Terminology
1. Spoilage: units of production that do not meet the standards required by
customers for good units and that are discarded or sold for reduced prices
(partially completed or fully completed units of output)

2. Reworked units: unacceptable units of production that are subsequently repaired

and sold as acceptable finished goods

3. Scrap: material left over when making a product that has low sales value
compared with the sales value of the main product

Account for spoilage in job costing

1. Normal spoilage attributable to a specific job: job bears the cost of the spoilage
reduced by current disposal value of that spoilage

2. Normal spoilage common to all jobs: cost of spoilage charged as manufacturing

overhead

3. Abnormal spoilage: charged to an abnormal loss account

Account for rework in job costing

A. Normal rework attributable to a specific job—rework costs charged to that job

B. Normal rework common to all jobs—costs of rework charged to manufacturing
overhead and spread, through allocation, over all jobs
C. Abnormal rework—charged to separate loss account
D. Account for scrap

Illustrative Example:
In the Celica Machine Shop, 5 car parts out of a job lot of 50 car parts are spoiled.
Costs assigned prior to the inspection point are P2,000 per part. When the spoilage is
detected, the spoiled goods are inventoried at P600 per part, net of disposal value

Normal Spoilage Attributable to a Specific Job

When normal spoilage occurs because of the specifications of a particular job, that job bears
the cost of the spoilage minus disposal value of the spoilage. The journal entry to recognize
disposal value is as follows:

Materials Control (spoiled goods at current net disposal value): 5 units x P600 per unit 3,000
Work – in – Process Control (specific job): 5 units x P600 per unit 3,000

Note, the Work – in – Process Control (specific job) has already been debited (charged)
P10,000 for the spoiled parts (5 spoiled parts x P2,000 per part). The net cost of normal
spoilage P7,000 (P10,000 – P3,000), which is an additional cost of the 45 (50 – 5) good
units produced. Therefore, total cost of the 45 good units is P97,000: P90,000 (45 units x
P2,000 per unit) incurred to produce the good units plus the P7,000 net cost of normal
spoilage. Cost per good unit is P2,155.56 (P97,000 /45 good units).

Abnormal Spoilage

If the spoilage is abnormal, the net loss is charged to the Loss from Abnormal Spoilage
account. Unlike normal spoilage costs, abnormal spoilage costs are not included as a part of
the cost of good units produced. Total cost of the 45 good units is P90,000 (45 units x
P2,000 per unit). Cost per good unit is P2,000 (P90,000 / 45 good units).

Materials Control (spoiled goods at current net disposal value): 5 units x P600 /unit 3,000
Loss from Abnormal Spoilage: (P10,000 - P3,000) 7,000
Work – in – Process Control (specific job): 5 units x P2,000 per unit 10,000

Rework

Rework is units of production that are inspected, determined to be unacceptable, repaired,

and sold as acceptable finished goods. Reworks are distinguish as (1) normal rework
attributable to a specific job, (2) normal rework common to all jobs, and (3) abnormal
rework.

Consider the Celica Machine Shop data in Example. Assume the five spoiled parts are
reworked. The journal entry for the P10,000 of total costs (the details of these costs are
assumed) assigned to the five spoiled units before considering rework costs is as follows:

Work – in – Process Control (specific job) 10,000

Materials Control 4,000
Wages Payable Control 4,000
Manufacturing Overhead Allocated 2,000

Assume the rework costs equal P3,800 (comprising P800 direct materials, P2,000 direct
manufacturing labor, and P1,000 manufacturing overhead).

Normal Rework Attributable to a Specific Job

If the rework is normal but occurs because of the requirements of a specific job, the rework
costs are charged to that job. The journal entry is as follows:

Work – in – Process Control (specific job) 3,800

Materials Control 800
Wages Payable Control 2,000
Manufacturing Overhead Allocated 1,000

Normal Rework Common to All Jobs

When rework is normal and not attributable to a specific job, the costs of rework are
charged to manufacturing overhead and are spread, through overhead allocation, over all
jobs.

Manufacturing Overhead Control (rework costs) 3,800

Materials Control 800
Wages Payable Control 2,000
Manufacturing Overhead Allocated 1,000

Abnormal Rework

If the rework is abnormal, it is recorded by charging abnormal rework to a loss account.

Loss from Abnormal Rework 3,800

 Materials Control 800
Wages Payable Control 2,000
Manufacturing Overhead Allocated 1,000

SCRAP
To illustrate, we extend our Celica example. Assume the manufacture of car parts generates
scrap and that the scrap from a job has a net sales value of P900.

Recognizing Scrap at the Time of Its Sale

When the peso amount of scrap is immaterial, the simplest accounting is to record the
physical quantity of scrap returned to the storeroom and to regard scrap sales as a separate
line item in the income statement. In this case, the only journal entry is as follows:

Sale of scrap: Cash or Accounts Receivable 900

Scrap Revenues 900

When the peso amount of scrap is material and the scrap is sold quickly after it is produced,
the accounting depends on whether the scrap is attributable to a specific job or is common
to all jobs.

Scrap Attributable to a Specific Job

Job – costing systems sometimes trace scrap revenues to the jobs that yielded the scrap.
This method is used only when the tracing can be done in an economically feasible way. For
example, the Celica Machine Shop and its customers, such as the Toyota Corporation, may
reach an agreement that provides for charging specific jobs with all rework or spoilage costs
and then crediting these jobs with all scrap revenues that arise from the jobs. The journal
entry is as follows:

Scrap returned to No journal entry. [Notation of quantity received and

storeroom: related job entered in the inventory record]

Sale of scrap: Cash or Accounts Receivable 900

Work – in – Process Control 900
Posting made to specific job cost record.

Unlike spoilage and rework, there is no cost assigned to the scrap, so no distinction is made
between normal and abnormal scrap. All scrap revenues, whatever the amount, are credited
to the specific job. Scrap revenues reduce the costs of the job.

Scrap common to all jobs

The journal entry in this case is as follows:

Scrap returned to No journal entry. [Notation of quantity received and

storeroom: related job entered in the inventory record]

Sale of scrap: Cash or Accounts Receivable 900

Manufacturing Overhead Control 900

Recognizing Scrap at the Time of Its Production

Scrap Attributable to a Specific Job

The journal entry in the Celica example is as follows:

Scrap returned to Materials Control 900
storeroom:
Work – in – Process Control 900

Scrap Common to All Jobs

The journal entry in this case is as follows:

Scrap returned to Materials Control 900

storeroom:
Manufacturing Overhead Control 900

Observe that the Materials Control account is debited in place of Cash or Accounts
Receivable. When the scrap is sold, the journal entry is as follows:

Sale of scrap: Cash or Accounts Receivable 900

Materials Control 900

Scrap is sometimes reused as direct material rather than sold as scrap. In this case,
Materials Control is debited at its estimated net realizable value and then credited when the
scrap is reused. For example, the entries when the scrap is common to all jobs are as
follows:

Scrap returned to Materials Control 900

storeroom:
Manufacturing Overhead Control 900

Reuse of scrap: Work – in – Process Control 900

Materials Control 900

PROBLEM 1. Journal Entries for Scrap. Munoz Metal Products accumulates metal
shavings from the shop floor and sells them periodically to a nearby scrap dealer. Scrap
sales, on account, for the period just ended total P2,300.

Required: Indicate the journal entries when:

(1)The scrap sales are viewed as additional revenue.
(2)The scrap sales are viewed as a reduction of the cost of goods sold during the period.
(3)The scrap sales are viewed as a reduction of factory overhead.
(4)The scrap sales are traceable to individual jobs and are viewed as a reduction in the cost
of materials used on the jobs.

PROBLEM 2. Spoilage in a Job Order Cost System. Walker Inc. manufactures custom
wood products. During the current period, an order for 2,000 workbenches was begun on
Job 1994. After the job was completed, the benches were inspected and 100 units were
determined to be defective. The customer has agreed to accept the order with only 1,900
units instead of the quantity originally ordered. The spoiled units can be sold as seconds for
P25 each. Spoiled goods are kept in a separate inventory account from finished goods.
Total costs charged to Job 1994 follow:

Materials ................................................................................... P 5,100

Labor (200 hours x P15 per hour) .................................................. 3,000
Factory overhead (P9.50 per labor hour) ........................................ 1,900
Total cost charged to Job 1994 ...................................................... P10,000
Custom jobs are marked up 150 percent on cost.

Required:
(1) Assuming that the defective units were the result of an internal failure (i.e., an
employee error or a machine failure), prepare the appropriate general journal entries
to record the transfer of the defective units to a separate inventory account and the
completion and shipment of Job 1994 to the customer.
(2) Assuming that the defective units were the result of a change in design specified by
the customer after the units were completed, prepare the appropriate general journal
entries to record the transfer of the defective units to the separate inventory account
and the completion and shipment of Job 1994 to the customer.

ACCOUNTING FOR SPOILAGE, REWORK, AND SCRAP

MULTIPLE CHOICE

1. The Harleysville Manufacturing Shop produces motorcycle parts. Typically, 10 pieces out of a job lot
of 1,000 parts are spoiled. Costs are assigned at the inspection point, P50.00 per unit. Spoiled pieces
may be disposed of at P10.00 per unit. The spoiled goods must be inventoried appropriately when the
normal spoilage is detected. Job 101 requires the production of 2,500 good parts.
Which of the following journal entries would be correct if the spoilage occurred due to specifications
required for Job 101?
a. Work-in-Process Control P100
Materials Control P100
b. Materials Control P100
Work-in-Process Control P100
c. Materials Control P250
Work-in-Process Control P250
d. Work-in-Process Control P250
Materials Control P250

2. A difference between job costing and process costing is

a. that job-costing systems usually do not distinguish between normal spoilage attributable to all
jobs and normal spoilage attributable to a specific job.
b. that job-costing systems usually distinguish between normal spoilage attributable to a specific
job and spoilage common to all jobs.
c. that process costing normally does not distinguish between normal spoilage attributable to a
specific job and spoilage common to all jobs.
d. both (b) and (c).

3. Which of the following entries reflects the original cost assignment before production items are
reworked?
a. Work-in-Process Control XXX
Materials Control XXX
Wages Payable Control XXX
Manufacturing Overhead Allocated XXX
b. Finished Goods Control XXX
Work-in-Process Control XXX
c. Manufacturing Overhead Allocated XXX
Materials Control XXX
Wages Payable Control XXX
Work-in-Process Control XXX
d. Materials Control XXX
Wages Payable Control XXX
Work-in-Process Control XXX
Manufacturing Overhead Allocated XXX
4. Accounting for rework in a process-costing system
a. accounts for normal rework in the same way as a job-costing system.
b. requires abnormal rework to be distinguished from normal rework.
c. if the rework is normal, then rework is accounted for in the same manner as accounting for
normal rework common to all jobs.
d. all of the above are correct.

5. In accounting for scrap, which one of the following statements is FALSE?

a. Normal scrap is accounted for separately from abnormal scrap.
b. In accounting for scrap, there is no distinction between the scrap attributable to a specific job
and scrap common to all jobs.
c. Initial entries to scrap accounting records are most often made in peso terms.
d. All of the above are false.

6. When the amount of scrap is immaterial, the easiest accounting entry when recording scrap sold for
cash is
a. Sales of Scrap
Cash
b. Cash
Manufacturing Overhead Control
c. Cash
Sales of Scrap
d. Accounts Receivable
Sales of scrap

7. Assume the amount of scrap is material and the scrap is sold immediately after it is produced. If the
scrap attributable to a specific job is sold on account, the journal entry is:
a. Work-in-Process Control
Cash
b. Work-in-Process Control
Accounts Receivable
c. Accounts Receivable
Work-in-Process Control
d. Work-in-Process Control
Accounts Receivable

8. If scrap, common to all jobs, is returned to the storeroom and the time between the scrap being
inventoried and its disposal is quite lengthy, the journal entry is:
a. Work-in-Process Control
Materials Control
b. Materials Control
Work-in-Process Control
c. Manufacturing Overhead Control
Materials Control
d. Materials Control
Manufacturing Overhead Control

9. The accounting for scrap under process costing is similar to

a. the accounting under job costing when scrap is different for each job.
b. the accounting under job costing when scrap is common to all jobs.
c. the accounting under process costing when scrap is different for each job.
d. the accounting under process costing when scrap is a common to all jobs.

10. During March, Vaughan Company incurred the following costs on Job 009 for the manufacture of
200 motors:

Original cost accumulation:

 Direct materials ..................................................................................... P 660
Direct labor ........................................................................................... 800
Factory overhead (150% of direct labor) .............................................. 1,200
P 2,660
Direct costs of reworking 10 units:
Direct materials ..................................................................................... P100
Direct labor ........................................................................................... 160
.............................................................................................................. P260

The rework costs were attributable to the exacting specifications of the customer. What is the
cost per finished unit of Job 009?
A. P15.80
B. P14.60
C. P14.00
D. P13.30
E. none of the above
ADVANCED FINANCIAL ACCOUNTING AND REPORTING

SERVICE DEPARTMENT COST ALLOCATION

The following are the three specific methods use for allocating costs of service or
support departments to operating or production departments

1. Direct allocation method

a. Most widely used method of allocating support department costs

b. Allocates each support department’s costs directly to operating departments
c. Benefit of simplicity
d. Disadvantage is failure to recognize reciprocal services provided among support
departments

2. Step-down allocation method (also called sequential allocation method)

The step method allocates service department costs to other service departments
as well as production departments. The allocation process is

Select the service department serving the most other service departments
(1) When more than one service department services an equal number of service
departments, select the department with the highest costs
(2) Allocate the costs of the service department selected in step 1 to the
production departments and other service departments based on a relative
level of the apportionment base as in the direct method.
(3) Allocate the costs of each remaining service department selected in the same
manner as described in step 1.

Costs of service departments are never allocated back to departments whose costs
have already been allocated.

3. Reciprocal allocation method

a. Allocates costs by explicitly including mutual services provided among all
support departments
b. Conceptually most precise method because considers mutual services provided
among all support departments
 c. Highlights complete reciprocated costs of support departments and how those
costs differ from budgeted or actual costs of departments—key input for
decisions about outsourcing
d. Requires three steps:
i. Step 1: Express support department costs and support department
reciprocal relationships in the form of linear equations

ii. Step 2: Solve the set of linear equations to obtain the complete
reciprocated costs of each support department

iii. Step 3: Allocate the complete reciprocated costs of each support

department to all other departments (both support departments and
operating departments) on the basis of the usage percentages (based on
total units of service provided to all departments)

SERVICE DEPARTMENT COST ALLOCATION

Problem 1. Overhead Distribution Via Direct Method. Geo-trig Inc. has three
producing departments (Sine, Cosine, and Tangent) and two service departments (Rhombus
and Triangle). Data that summarize overhead activity for January are:

Producing Departments Service Departments

Sine Cosine Tangent Rhombus Triangle
Total overhead before service
department allocations ...... P50,000 P80,000 P30,000 P40,000 P20,000
Square footage
occupied ......................... 3,000 4,000 3,000 1,000 1,500
Number of employees ........... 50 30 20 10 10

Rhombus costs are distributed on the basis of square footage occupied, while Triangle costs
are distributed on the basis of number of employees. The direct method is used for
allocating service department costs to producing departments.

Required: Prepare a schedule indicating the detailed components of overhead costs for the
producing and service departments, including the directly assigned and allocated overhead.

Problem 2. Overhead Allocation Via the Step Method. Granny's Nut Co. operates with
three producing departments (Cutting, Dividing, and Shelling that are serviced by two
service departments Equipment Maintenance and General Plant). Costs are allocated using
the step method with the service department servicing the greatest number of other
departments allocated first. General Plant is allocated on the basis of square footage and
Equipment Maintenance is allocated on the basis of direct labor hours. Relevant May data
are:
Producing Departments Service Departments
Equipment General
Cutting Dividing Shelling Maintenance Plant
Overhead before
allocation of service
department costs ............. P105,000 P93,000 P87,000 P56,000 P30,000
Square footage .................... 8,000 12,000 6,000 4,000 --
Machine hours used .............. 6,000 2,000 7,000 -- --
Direct labor used .................. 5,000 6,000 9,000 -- --
Required: Prepare a schedule indicating the allocation of service department costs to
producing departments and the rate per machine hour for applying overhead in each
producing department. (Round to the nearest cent.)

PROBLEM 3. Overhead Distribution Via the Simultaneous Method. Orleans Corp.

operates two producing departments, C and D, and two service departments, E and F. The
overhead before allocation of service department costs, together with the usage of services
from the service departments, is:

Overhead Before
Allocation of Service Services Provided by
Department Department Costs E F
Producing:
C ............................................... P18,000 30% --
D ............................................... 29,000 30% 80%
Service:
E................................................
8,000 -- 20%
F ................................................
1,400 40% --
P56,400
Required: Prepare the overhead distribution, using the simultaneous method to allocate the
service departments' costs to the producing departments.