GRC Acctg For Mats, Labor, & OH Module

Accounting for Materials,
Labor, and Overhead
PROFESSOR: JOHN ANTHONY M. LABAY, CPA, MBA

Global Reciprocal Colleges
454 GRC Bldg. Rizal Ext. cor. 9th Avenue Grace Park, Caloocan City
I. DISCUSSION
PRODUCT COST
A product cost (inventoriable cost) is one that is associated with making or acquiring
inventory. For financial accounting purposes, product costs include all the costs that are
involved in acquiring or making product. In the case of manufactured goods, these costs consist
of direct materials, direct labor, and manufacturing overhead.
Cost Classification for Manufacturing/Product Cost

1. Materials – includes the raw materials and other factory supplies used in manufacturing
operation.
a. Direct Materials
b. Indirect Materials
2. Labor – includes salary and wages cost paid to the workers in the factory.
a. Direct Labor
b. Indirect Labor
3. Manufacturing/Factory Overhead – includes all other manufacturing/ production costs

not included in direct material and direct labor.
ACCOUNTING FOR MATERIALS
Inventory Methods of Accounting for Materials
1. Perpetual Inventory Method

Perpetual inventory system may be defined as a method of recording stores balances after every
receipt and issue to facilitate regular checking and to obviate closing down for stock taking.”
So perpetual inventory system implies continuous maintenance of stock records and in its broad
sense it covers both continuous stocks taking as well as up to date recording of stores books.
The balance of the same item of store in bin card should correspond with that shown in the
materials or store ledger card and a frequent checking of these two records should be made and
compared with the actual or physical quantity of materials in stock.
2. Periodic Inventory Method

Periodic inventory system is that does not require a day-to-day record of inventory changes.
Costs of materials used and costs of goods sold cannot be calculated until ending inventories,
determined by physical count, are subtracted from the sum of opening inventories and
purchases (or costs of goods manufactured in the case of a manufacturer).
Procedures for Materials

Although production processes and materials requirements vary, the cycle of procurement and
use of materials usually involves the following steps:
1. Engineering and planning determine the design of the product, the materials specifications,
and the requirements at each stage of operations. Engineering and planning not only
determine the maximum and minimum quantities to run and the bill of materials for given
products and quantities but also cooperate in developing standards where applicable.
Cost Accounting and Control Page 1

2. The production budget provides the master plan from which details concerning materials
requirements are eventually developed.
3. The purchase requisition informs the purchasing agent concerning the quantity and type of
materials needed.
4. The purchase order contracts for appropriate quantities to be delivered at specified dates to
assure uninterrupted operations.
5. The receiving report certifies quantities received and may report results of inspection and
testing for quality.
6. The materials requisition notifies the storeroom or warehouse to deliver specified time or is
the authorization for the storeroom to issue material to departments.
7. The materials ledger cards record the receipt and the issuance of each class of materials and
provide a perpetual inventory record.
Economic Order Quantity (EOQ) Decision Model
Inventory management is an important part of profit planning for manufacturing and

merchandising companies. It is the planning, coordinating, and control activities related to the
flow of inventory into, through, and from an organization. Cost of goods sold is largest single
cost item for some retailers. Better decisions regarding the purchasing and managing of goods
for sale can cause large percentage increases in net income when net income is small percentage
of revenues.
Five Categories of Costs Associated with Goods for Sale:

1. Purchasing costs – costs of goods acquired from suppliers including incoming freight or
transportation costs.
2. Ordering costs – include costs of preparing purchase orders and receiving goods.
3. Carrying costs – costs of holding inventory of goods for sale.
4. Stockout costs – costs arising when a customer demands a unit of product and that unit is
not on hand.
5. Quality costs – costs of product or service not in conformance with a preannounced or
prespecified standard.
Economic order quantity (EOQ) is a decision model that calculates optimal quantity of
inventory to order under a set of assumptions (balancing ordering and carrying costs). (How
much to order of a given product). The purpose of the EOQ model is to identify the least cost
quantity of a material to be purchased at each order point.
Formula: 2 x annual demand x cost per order

√ carrying cost per unit
Reorder point is the quantity level of the inventory on hand that triggers a new order. (When to
order)
Formula: Reorder point = Number of units sold per unit of time x Purchase-order lead time
Safety stock is the inventory held at all times regardless of the quantity of inventory ordered
using the EOQ model. It is used as a buffer against unexpected increases in demand, uncertainty
about lead time and unavailability of stock from suppliers. It is computed using demand
forecasts (usually based on experience) to minimize sum of annual relevant stockout costs and
carrying costs.
Just in Time (JIT) Manufacturing

Just in Time (JIT) is a production and inventory control system in which materials are
purchased and units are produced only as needed to meet actual customer demand.
When Companies use Just in Time (JIT) manufacturing and inventory control system, they
purchase materials and produce units only as needed to meet actual customers demand. In just
in time manufacturing system inventories are reduced to the minimum and in some cases is
zero. JIT approach can be used in both manufacturing and merchandising companies. It has
the most profound effects, however, on the operations of manufacturing companies which
maintain three class of inventories-raw material, Work in process, and finished goods.
Traditionally, manufacturing companies have maintained large amounts of all three types of
inventories to act as buffers so that operations can proceed smoothly even if there are
unanticipated disruptions. Raw materials inventories provide insurance in case suppliers are
late with deliveries. Work in process inventories are maintained in case a workstation is unable
to operate due to a breakdown or other reason. Finished goods inventories are maintained to
accommodate unanticipated fluctuations in demand. While these inventories provide buffers
against unforeseen events, they have a cost. In addition to the money tied up in the inventories,
expert argue that the presence of inventories encourages inefficient and sloppy work, results in
too many defects, and dramatically increase the amount of time required to complete a product.
Just-In-Time Concept
Under ideal conditions a company operating at JIT manufacturing system would purchase only
enough materials each day to meet that day’s needs. Moreover, the company would have no
goods still in process at the end of the day, and all goods completed during the day would have
been shipped immediately to customers. As this sequence suggests, "just-in-time" means that
raw materials are received just in time to go into production, manufacturing parts are completed
just in time to be assembled into products, and products are completed just in time to be shipped
to customers.
Although few companies have been able to reach this ideal, many companies have been able
to reduce inventories only to a fraction of their previous level. The result has been a substantial
reduction in ordering and warehousing costs, and much more efficient and effective operations.
In a just in time environment, the flow of goods is controlled by a pull approach. The pull
approach can be explained as follows. At the final assembly stage, a signal is sent to the
preceding workstation as to the exact amount of parts and materials that would be needed over
the next few hours to assemble products to fill customer orders, and only that amount of
materials and parts is provided. The same signal is sent back to each preceding workstation, so
a smooth flow of parts and materials is maintained with no appreciable inventory buildup at
any point. Thus, all workstations respond to the pull exerted by the final assembly stage, which
in turn respond to customer orders. As one worker explained, "Under just in time system you
don't produce anything, anywhere, for anybody unless they ask for it somewhere downstream.
Inventories are evil that we are taught to avoid".

The pull approach described above can be contrasted to the push approach used in
conventional manufacturing system. In conventional system, when a workstation completes its
work, the partially completed goods are pushed forward to the next work station regardless of
whether that workstation is ready to receive them. The result is an unintentional stockpiling of
partially completed goods that may not be completed for days or even weeks. This ties up funds
and also results in operating inefficiencies. For one thing, it becomes very difficult to keep
track of where everything is when so much is scattered all over the factory floor.
Another characteristic of conventional manufacturing system is emphasizing on "keeping

everyone busy" as an end on itself. This inevitably leads to excess inventories particularly work
in process inventories. In Just in time manufacturing, the traditional emphasize of keeping
everyone busy is abandoned in favor of producing only what customers actually want. Even if
that means some workers are idle.
Benefits / Advantages of Just in Time Manufacturing System

The main benefits of just in time manufacturing system are the following:
1.Funds that were tied up in inventories can be used elsewhere.
2.Areas previously used, to store inventories can be used for other more productive uses.
3.Throughput time is reduced, resulting in greater potential output and quicker response to
customers.
4.Defect rates are reduced, resulting in less waste and greater customer satisfaction.
As a result of advantages such as those cited above, more companies are embracing just in
time manufacturing system each year. Most companies find, however, that simply reducing
inventories is not enough. To remain competitive in an ever changing and ever competitive
business environment, must strive for continuous improvement.
Disadvantages of Just in Time Manufacturing System

Implementing thorough JIT procedures can involve a major overhaul of your business systems
- it may be difficult and expensive to introduce.
JIT manufacturing also opens businesses to a number of risks, notably those associated with
your supply chain. With no stocks to fall back on, a minor disruption in supplies to your
business from just one supplier could force production to cease at very short notice.

ACCOUNTING FOR LABOR
Basic Methods of Wage Payment (Remuneration)

1. Time Wage System – wages are paid on the basis of time spent on the job regardless of the
amount of work done. The unit of time maybe a day, a week, or a month. The basic formula of
payment is as follows:
Gross Pay = Rate per Hour x No. of Hours Worked
2. Piece Wage System – wages are paid based on the amount of work done or output of work.
Thus, an employee is paid direct proportion on his output. The basic formula of payment is as
follows:
Gross Pay = Rate per Unit x No. of Units Produced
Procedures for Labor

1. Recording of the length and time worked by each laborer.
2. Analyzing how such time was spent by the laborer.
3. Charging the labor cost to the jobs or manufacturing overhead.
4. Preparing the payroll.
Various departments are involved in the accounting for labor, namely: personnel department,
payroll department, and accounting department.
Further Classifications of Labor Costs

1. Idle time − Machine breakdowns, material shortages, power failures and the like, result in
idle time. The labor costs incurred during idle time are ordinarily treated as manufacturing
overhead. This spreads the costs across all the production rather than the units in process when
the disruptions occur.
2. Overtime − The overtime premiums for all factory workers are usually considered to be part
of manufacturing overhead. This is done to avoid penalizing particular products or customer
orders simply because they happen to fall on the tail end of the daily production schedule.
3. Labor fringe benefits − These costs relate to employment-related costs paid by an employer
such as insurance programs, retirement plans, and supplemental unemployment programs.
They also include the employer’s share of Social Security, Medicare, workers’ compensation,
federal employment tax, and state unemployment insurance.
- These costs often add up to 30% to 40% of an employee’s base pay.
- Some companies include all of these costs in manufacturing overhead. Other
companies opt for the conceptually superior method of treating fringe benefit
expenses of direct laborers as additional direct labor costs.

ACCOUNTING FOR OVERHEAD
Manufacturing/Factory Overhead Account

The Manufacturing/Factory Overhead Account is used to record the actual overhead incurred
and the amount of overhead applied. This account is debited when overhead is incurred. The
amount of overhead applied is credited to overhead account. It is calculated by multiplying the
predetermined overhead rate to the actual level of activity.
In an actual cost system, factory overhead is assigned directly to products and services. In a
normal cost system, factory overhead is assigned to an overhead control account and then
allocated to products and services.
Overhead must be allocated because it is necessary to (1) determine full cost, (2) it can motivate
managers, and (3) it allows managers to compare alternative courses of action.
Predetermined Overhead Rate

During the course of the production cycle, actual overhead costs are incurred. When overhead
is applied to Work in Process, it is commonly applied using a predetermined rate. A
predetermined overhead rate is a budgeted and constant charge per unit of activity. The activity
chosen is called the Overhead Allocation Base or Cost Driver. The commonly used activity
bases are: physical output, direct labor costs, direct labor hours, material costs, and machine
hours. (Predetermined Overhead Rate = Estimated Total Overhead / Estimated Activity Base)
Predetermined overhead rates should be used for three reasons: (1) to assign overhead to Work
in Process during the production cycle instead of at the end of the period; (2) to compensate
for fluctuations in actual overhead costs that have no bearing on activity levels; and (3) to
overcome problems of fluctuations in activity levels that have no impact on actual fixed
overhead costs.
The Need for Predetermined Overhead Rate

Instead of using a predetermined overhead rate, a company could wait until the end of the
accounting period to compute an actual overhead rate based on actual total manufacturing costs
and the actual total units in the allocation base for the period. However, managers cite several
reasons for using predetermined overhead rates instead of actual overhead rates:
1. Managers would like to know the accounting system’s valuation of completed jobs before
the end of the accounting period. Suppose, for example a company waits until the end of the
year to compute its overhead rate. Then there would be no way for managers to know the cost
of goods sold for a job until the close of the year. The job may be completed and shipped before
the end of the year. The seriousness of this problem can be reduced to some extent by
computing the actual overhead more frequently, but that immediately leads to another problem
as discussed below.

2. If actual overhead rates are computed frequently, seasonal factors in overhead costs or in
the allocation base can produce fluctuations in the overhead rates. For example, the cost of
heating and cooling a production facility will be highest in the winter and summer months and
lowest in the spring and fall. If an overhead rate were computed each month or each quarter,
the predetermined overhead rate would go up in the winter and summer and down in the spring
and fall. Two identical jobs, one completed in winter and one completed in spring, would be
assigned different costs if the overhead rate were computed on a monthly or quarterly basis.
Managers generally feel that such fluctuations in overhead rates and costs serve no useful
purpose and are misleading.
3. The use of predetermined overhead rate simplifies the record keeping. To determine the
overhead cost to apply to a job, the accounting staff simply multiplies the direct labor hours
recorded for the job by the predetermined overhead rate.
Multiple Predetermined Overhead Rates

When a single predetermined overhead rate is used for entire factory it is called plant wide
overhead rate. This is fairly common practice – particularly in smaller companies. But in large
companies, multiple predetermined overhead rates are often used.
In a multiple predetermined overhead rate system, each production department may have
its own predetermined overhead rate. This system, even more complex, is considered to be
more accurate. Since it can reflect differences across departments in how overhead costs are
incurred. For example, overhead might be allocated based on machine-hours in departments
that are relatively machine intensive. When multiple predetermined overhead rates are used,
overhead is applied in each department according to its own overhead rate as a job proceeds
through the department.
Underapplied and Overapplied Overhead

Overhead application at a predetermined rate may cause overhead to be under- or overapplied.
(The peso amount of overhead assigned to work-in-process inventory using a predetermined
rate is known as applied overhead.) If actual overhead is greater than applied overhead, then
underapplied overhead results and a debit balance exists in the overhead account. If applied
overhead is greater than actual overhead, then overapplied overhead results and a credit
balance exists in the overhead account. If the amount of under- or overapplied overhead is
immaterial, it is closed directly to Cost of Goods Sold. If the amount is material, it must be
allocated among Work in Process, Finished Goods, and Cost of Goods Sold.

Causes / Reasons of under applied or over applied overhead

The causes / reasons of under or over-applied overhead can be complex. Nevertheless, the basic
problem is that the method of applying overhead to jobs using a predetermined overhead rate
assumes that actual overhead costs will be proportional to the actual amount of the allocation
base incurred during the period. If, for example, the predetermined overhead rate is P50 per
machine hour, then it is assumed that actual overhead cost incurred will be P50 for every
machine hour that is actually worked. There are actually two reasons why this may not be true.
First, much of the overhead often consists of fixed costs that do not grow as the number of
machine hours incurred increases. Second, spending on overhead items may or may not be
under control. If individuals who are responsible for overhead costs do a good job, those costs
should be less than were expected at the beginning of the period. If they do a poor job, those
costs will be more than expected.
Disposition of Underapplied or Overapplied Overhead Balances

What disposition should be made of an underapplied overhead or overapplied overhead balance
remaining in the manufacturing overhead account at the end of a period?
Generally, any balance in the account is treated in one of the two ways.
1. Closed out to cost of goods sold.
2. Allocated between work in process (WIP), finished goods and cost of goods sold in
proportion to the overhead applied during the current period in the ending balances of these
account.
The second method, which allocates the under or overapplied overhead among ending
inventories and cost of goods sold is equivalent to using an “actual” overhead rate and is for
that reason considered by many to be more accurate than the first method. Consequently, if the
amount of underapplied or overapplied overhead is material, many accountants would insist
that the second method be used.
Closed Out to Cost of Goods Sold

Closing out the balance in manufacturing overhead account to cost of goods sold is simpler
than the allocation method. Cost of goods sold is increased by the amount of underapplied and
decreased by the amount of overapplied overhead.
Allocated Between Accounts

Allocation of under or overapplied overhead between work in process (WIP), finished goods
and cost of goods sold (COGS) is more accurate than closing the entire balance into cost of
goods sold. The reason is that allocation assigns overhead costs to where they would have gone
in the first place had it not been for the errors in the estimates going into the predetermined
overhead rate.
If the amount of under-applied or over-applied overhead is significant, it should be allocated

among the accounts containing applied overhead: Work in Process Inventory, Finished Goods
Inventory, and Cost of Goods Sold. A significant amount of “under-applied” or “over-applied”
overhead means that the balances in these accounts are quite different from what they would
have been if actual overhead costs had been assigned to production.

II. PROBLEMS
1. Mic Corp. uses 1,000 units of material annually in its production. Order costs consist of P10
for placing a long-distance call to make the order and P40 for delivering the order by truck to
the company warehouse. Each material costs P100, and the carrying costs are estimated at
15.625% of the inventory cost.
Required:
a. Compute the economic order quantity for material and the total order costs and carrying costs
for the year.
b. Determine the best order quantity if material is purchased only in multiples of 25 units.
(Round answers to the nearest whole peso.)
2. Bhe Company estimates that it will consume 400,000 units of Part X in the coming year.
The ordering cost for this unit is P3.20. What would be the carrying costs per unit if the EOQ
model indicates that it is optimal to place exactly 50 orders for the upcoming year?
3. Chales Company has developed the following data to assist in controlling one of its inventory
items:
Required:
Determine how much of the worker's wages for the week would be classified as direct labor
cost and how much would be classified as manufacturing overhead cost.
Economic order quantity 1000 liters
Average daily use 100 liters
Maximum daily use 120 liters
Working days per year 250 days
Safety stock 140 liters
Cost of carrying inventory P1.00 per liter per year
Lead time 7 working days
Required: Compute the following:

a. Order point
b. Average inventory
c. Maximum inventory assuming normal lead time and usage
d. Cost of placing one order
4. A direct labor worker at Gal Corporation is paid P20 per hour for regular time and time and
a half for all work in excess of 40 hours per week. This employee works 44 hours during a
week in which there was no idle time.
Required: Determine how much of the worker's wages for the week would be classified as
direct labor cost and how much would be classified as manufacturing overhead cost.

5. A direct labor worker at Lang Corporation is paid P16 per hour for regular time and time
and a half for all work in excess of 40 hours per week. This employee works 49 hours in a
given week but is idle for 4 hours during the week due to equipment breakdowns.
Required:
6. A direct labor worker at San Corporation is paid P22 per hour for regular time and time and
a half for all work in excess of 40 hours per week. The company's fringe benefits cost P6 for
each hour of employee time (both regular and overtime). Last week this employee worked 43
hours but was idle for 4 hours due to material shortages. The company treats all fringe benefits
as part of manufacturing overhead.
Required:
cost and how much would be classified as manufacturing overhead cost. Show your work.
7. A direct labor worker at Vor Corporation is paid P14 per hour for regular time and time and
relating to direct labor as added direct labor cost and the remainder as part of manufacturing
overhead.
Required:
8. The following labor data for the past week were prepared for Mr. Master, an employee of
Boo Corp.:
Day Units Produced Hours Worked

Monday ................................................... 110 8
Tuesday ................................................... 125 8
Wednesday .............................................. 120 8
Thursday ................................................. 135 8
Friday ...................................................... 130 8
Master's wage rate is P15 per hour, and the standard production rate is 15 units per hour.
Required: Determine the daily wages for Master and the labor cost per unit for units produced
during each day of the week, assuming that the company is on a straight piecework incentive
wage plan and that a worker is guaranteed a wage of P15 per hour. (Round the unit labor cost
to two decimal places.)

9. Dnd Corp. estimates that its production for the coming year will be 10,000 widgets, which
is 80% of normal capacity, with the following unit costs: materials, P40; direct labor, P60.
Direct labor is paid at the rate of P24 per hour. The widget shaper, the most expensive piece of
machinery, must be run for 20 minutes to produce one widget. Total estimated overhead is
expected to consist of P400,000 for variable overhead and P400,000 for fixed overhead.
Required: Compute the overhead rate for each of the following bases, using the normal
capacity activity level:
a. physical output
b. materials cost
c. direct labor cost
d. direct labor hours
e. machine hours
(Round answers to the nearest whole peso or percentage.)
10. Louis Inc. manufactures sound equipment. The company estimates the following costs at
normal capacity and other items for the coming period:
Direct materials P300,000
Direct labor 520,000
Factory overhead (fixed) 300,000
Factory overhead (variable) 240,000
Normal capacity 100,000 direct labor hours
Expected production 80,000 direct labor hours
Required: Compute the overhead application rate for fixed, variable, and total overhead per
direct labor hour, using both the normal capacity and the expected actual capacity activity
levels.
11. The management of the Corporation would like to investigate the possibility of basing its
predetermined overhead rate on activity at capacity rather than on the estimated amount of
activity for the year. The company's controller has provided an example to illustrate how this
new system would work. In this example, the allocation base is machine-hours and the
estimated amount of the allocation base for the upcoming year is 71,000 machine-hours. In
addition, capacity is 86,000 machine-hours and the actual activity for the year is 64,100
machine-hours. All of the manufacturing overhead is fixed and is P4,579,500 per year. For
simplicity, it is assumed that this is the estimated manufacturing overhead for the year as well
as the manufacturing overhead at capacity and the actual amount of manufacturing overhead
for the year.
Required:
A. Determine the underapplied or overapplied overhead for the year if the predetermined
overhead rate is based on the estimated amount of the allocation base.
B. Determine the underapplied or overapplied overhead for the year if the predetermined
overhead rate is based on the amount of the allocation base at capacity.

12. The following information is available concerning the inventory and cost of goods sold
accounts of AAA Company at the end of the most recent year:
Work in Finished Cost of Goods

Process Goods Sold
Direct material P 5,000 P 8,000 P 11,000
Direct labor 6,000 15,000 15,000
Applied overhead 4,000 12,000 24,000
Year-end balance P15,000 P35,000 P 50,000
Applied overhead has already been closed to Factory Overhead Control.
Required:
Give the journal entry required to close Factory Overhead Control, assuming:
a. Overapplied overhead of P10,000 is to be allocated to inventories and Cost of Goods Sold
in proportion to the balances in those accounts.
b. Underapplied overhead of P10,000 is to be allocated to inventories and Cost of Goods Sold
in proportion to the amounts of applied overhead contained in those accounts.

III. ASSESSMENT
1. Cart Graphics uses a special purpose paper in 80% of its jobs. The paper is purchased in
100-sheet packages at a cost of P100 per package. Management estimates that the cost of
placing and receiving a typical order is P15, and the annual cost of carrying a package in
inventory is P1.50. Cart uses 2,600 packages each year (Working days in a year: 250 days).
Production is constant, and the lead time to receive an order is 5 days.
Required:
a. The economic order quantity is approximately:
b. The reorder point is:
2. Peeman carries a part that is popular in the manufacture of automatic sprayers. Demand for
this part is 4,000 units per year; order costs amount to P30 per order, and carrying/holding costs
total P1.50 per unit. Peeman currently places four orders per year with its suppliers.
Management is considering the implementation of an economic order quantity model in an

effort to better manage its inventories.
Required:
a. Compute Peeman's economic order quantity.
b. Compute total annual inventory costs if Peeman follows the EOQ policy.
3. A direct labor worker at Chin Corporation is paid P14 per hour for regular time and time and
as part of manufacturing overhead.
Required:
4. A direct labor worker at Kim Corporation is paid P18 per hour for regular time and time and
relating to direct labor as added direct labor cost and the remainder as part of manufacturing
overhead.
Required:

5. Don Corp. estimates that its production for the coming year will be 10,000 widgets, which
is 80% of normal capacity, with the following unit costs: materials, P40; direct labor, P60.
Direct labor is paid at the rate of P24 per hour. The widget shaper, the most expensive piece
of machinery, must be run for 20 minutes to produce one widget. Total estimated overhead is
expected to consist of P400,000 for variable overhead and P400,000 for fixed overhead.
Required: Compute the overhead rate for each of the following bases, using the expected actual
capacity activity level:
a. physical output
b. materials cost
c. direct labor cost
d. direct labor hours
e. machine hours

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Accounting for Materials,

Labor, and Overhead

PROFESSOR: JOHN ANTHONY M. LABAY, CPA, MBA

Cost Classification for Manufacturing/Product Cost

3. Manufacturing/Factory Overhead – includes all other manufacturing/ production costs

ACCOUNTING FOR MATERIALS

Inventory Methods of Accounting for Materials

1. Perpetual Inventory Method

2. Periodic Inventory Method

Procedures for Materials

Cost Accounting and Control Page 1

Economic Order Quantity (EOQ) Decision Model

Inventory management is an important part of profit planning for manufacturing and

Five Categories of Costs Associated with Goods for Sale:

Formula: 2 x annual demand x cost per order

Just in Time (JIT) Manufacturing

Cost Accounting and Control Page 3

Another characteristic of conventional manufacturing system is emphasizing on "keeping

Benefits / Advantages of Just in Time Manufacturing System

Disadvantages of Just in Time Manufacturing System

Cost Accounting and Control Page 4

ACCOUNTING FOR LABOR

Basic Methods of Wage Payment (Remuneration)

Procedures for Labor

2. Analyzing how such time was spent by the laborer.

3. Charging the labor cost to the jobs or manufacturing overhead.

4. Preparing the payroll.

Further Classifications of Labor Costs

Cost Accounting and Control Page 5

ACCOUNTING FOR OVERHEAD

Manufacturing/Factory Overhead Account

Predetermined Overhead Rate

The Need for Predetermined Overhead Rate

Cost Accounting and Control Page 6

Multiple Predetermined Overhead Rates

Underapplied and Overapplied Overhead

Cost Accounting and Control Page 7

Causes / Reasons of under applied or over applied overhead

Disposition of Underapplied or Overapplied Overhead Balances

Closed Out to Cost of Goods Sold

Allocated Between Accounts

If the amount of under-applied or over-applied overhead is significant, it should be allocated

Cost Accounting and Control Page 8

Required: Compute the following:

Cost Accounting and Control Page 9

Day Units Produced Hours Worked

Cost Accounting and Control Page 10

Cost Accounting and Control Page 11

Work in Finished Cost of Goods

Applied overhead has already been closed to Factory Overhead Control.

Cost Accounting and Control Page 12

b. The reorder point is:

Management is considering the implementation of an economic order quantity model in an

Cost Accounting and Control Page 13

Cost Accounting and Control Page 14

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