COST ACCOUNTING

Lesson 1: Introduction to Cost

Accounting (from the word file given)

Comparison of Financial, Managerial and Cost

Accounting
 Financial Accounting – use of accounting
information for reporting to external parties,
including investors and creditors. It is
primarily concerned with financial
statements for external use of stakeholders.
 Managerial Accounting – focuses on the
needs of parties within the organization,
rather than interested parties outside the
organization.
 Cost Accounting – the intersection
between the financial and managerial
Two Basic Product-Costing Systems
accounting. It provides product cost
1. Job order costing – a system for allocating
information to the stakeholders.
costs to groups of unique product.
2. Process costing – system applicable to a
Merchandising vs. Manufacturing Operations continuous process of production of the
Merchandising company normally buys a product same or similar goods.
that is ready for resale when it is received. Major Difference Between Process and Job
Order Costing
Cost of goods sold refers to the direct costs of
producing the goods sold by a company. Also
Process Costing Job Order Costing
referred to as Cost of sales.
1. Homogeneous units 1. Unique jobs are
pass through a series of worked on during a time
Cost of goods sold for a merchandising company: similar processes. period
2. Costs are 2. Costs are
accumulated by accumulated by
processing department. individual job.
3. Unit costs are 3. Unit costs are
computed by dividing determined by dividing
the individual the total costs on the job
departments’ costs by cost sheet by the
the equivalent number of units on the
production. job.
4. The cost of production 4. The job cost sheet
report provides the detail provides the detail for
for the WIP account for the WIP account.
each department
Manufacturing company refers to a large-scale
production of goods that converts raw materials,
parts, and components into finished merchandise Lesson 2: Costs – Concepts and Classifications
using manual labor and/or machines. The cost of
goods sold for manufacturing company is more Cost is the cash or cash equivalent value sacrificed
complex than in merchandising company. for goods and services that are expected to bring a
current or future benefit to the organization.
Classification of Costs
A. Manufacturing costs/Product
costs/Inventoriable costs (Part of COGS)
1. Direct materials (DM) – materials that
become part of a finished product and can
be conveniently and economically traced to
specific product units. These materials are
direct costs.
2. Direct labor (DL) – labor costs for specific
work performed on products that can be
conveniently and economically traced to
end products. These are direct costs.
3. Factory overhead (FOH) – varied
collection of production-related costs that
cannot be practically or conveniently traced
directly to end products. Indirect materials
and labor are part of factory overhead costs.
Prime costs = DM + DL
Conversion costs = DL + FOH
B. Non-manufacturing costs/Period costs
(Part of operating expenses)
1. Marketing or selling expense – costs
necessary to secure customer orders and
get the finished product or service in to the
hands of the customer.
2. Administrative or general expenses –
include all-executive, organizational, and
clerical expenses that cannot logically be
included under either production or
marketing.
C. Costs Classified as to Variability
1. Fixed costs – costs which remain constant
in total, irrespective of the volume of
production. Two categories:
a. Committed fixed costs – costs that
represent relatively long term commitments on the
part of management as a result of a past decision.
Example is depreciation
b. Managed fixed costs – costs that are
incurred on a short-term basis and can be more
easily modified in response to changes in
management objectives. Example is advertising,
research and development.
2. Variable costs – costs which vary directly,
in total, in relation to volume of production.
3. Mixed costs – costs with fixed and variable
components.
Two types of mixed costs:
a. Semi-variable costs – fixed portion of a semi-
variable cost usually represents a minimum fee for
making a particular item or service available.
Example is the cost of electricity.
b. Step costs – the fixed part of step costs
changes abruptly at various activity levels because
these costs are acquired in indivisible portions. It is
similar to a fixed cost within a very small relevant
range.
There are different methods of separating mixed
costs into fixed and variable components:
1. Scatter graph
2. High-low point – identify the highest and
lowest activity then deduct both to get the
value of denominator. Get the value of the
cost of the highest and lowest activity then
deduct both to get the value of your
numerator. Then divide to get the variable
rate.
3. Method of least square – there are 3
formulas to be used in least-square method:
Y = a + bx
∑Y = na + b ∑x
∑XY = ∑xa + b ∑x2
Common cost – cost of facilities or services
employed in two or more accounting periods,
operations, commodities, or services.
Joint costs – costs of materials, labor, and
overhead incurred in the manufacture of two or
more products at the same time.
Capital expenditure – expenditure intended to
benefit more than one accounting periods and is
recorded as an asset. Example is depreciation,
amortization and depletion
Revenue expenditure – expenditure that will
benefit current period only and is recorded as an
asset.
Standard costs – predetermined costs for DM, DL
and FOH. It is a budget for the production of one
unit of product or service.
Opportunity costs – the benefit given up when
one alternative is chosen over another.
Differential costs – costs that is present under one
alternative but is absent in whole or in part under
another alternative.
Relevant costs – future cost that change across
the alternatives. Example, COGS, advertising and
others.

Out-of-pocket cost - cost that requires the

payment of money as a result of their incurrence.

Sunk costs – a cost for which an outlay has

already been made and it cannot be changed by
present or future decision.

Controllable cost – it is said to be a controllable

cost at a particular level of management if that level
has power to authorize the cost.

Lesson 3: Cost Accounting Cycle

Manufacturing Inventory Accounts

1. Materials Inventory – made up of the
balances of materials and supplies on hand.
2. Work in Process inventory – all
manufacturing costs incurred and assigned
to products being produced.
3. Finished goods inventory - cost of
products completed but unsold as of that
date.
COST ACCOUNTING (PPT)
COST ACCOUNTING DEFINED
-Is a system that records, summarizes, analyzes,
and interprets the details of cost of materials, labor,
and overhead necessary to produce and sell an
article.
-Refers to the gathering and providing of
information for decision needs – ranging from the
management recurring operations to the making of
strategic decisions and the formulation of major
policies
Indirect materials
Indirect labor
Other manufacturing overhead
MANUFACTURING OVERHEAD CLASSIFIED
Indirect materials – this are materials used in the
manufacturing process that cannot be easily
traceable to the finished goods.
-Glue used in manufacturing arm chairs; Thread
used in sewing a suit; Screw, nail and paint used in
construction

-Refers to recording, classifying and reporting all Indirect Labor – wages incurred for factory
costs aspects of company performance during personnel who did directly work on finished
period product.

PURPOSE OF COST ACCOUNTING Salary of factory supervisors and managers;

Wages of janitors, crew and maintenance
-Helps the management in planning and controlling personnel
activities
Other manufacturing overhead – cost incurred
-Helps the management in answering questions other than indirect materials and indirect labor.
like:
*Which of our costs are out of line, and how can Rent, depreciation, taxes and insurance on factory
they be controlled? building and machinery; Heat, light and power of
*Are our sales prices set realistically in relation to factory machinery and equipment; Repairs and
costs? maintenance of factory machinery and equipment
*What is the unit cost of each type manufactured?
Prime Cost and Conversion Cost
-The ability to make specific and detailed
identification and measurement of cost elements
permits management to reach decisions and
evaluate results with greater intelligence

MANUFACTURING COSTS

Direct Materials – are materials used in the

manufacturing process that become significant part
of the finished goods

Direct Labor – the labor hours incurred of

employees directly attributable in converting raw
materials to finished goods.

Factory overhead – are costs incurred in the

factory other than directmaterials and direct labor.
 NONMANUFACTURING OVERHEAD AND COST
CLASSIFIED AS TO VARIABILITY, DIFFERENT
METHODS OF SEPARATING MIXED COSTS INTO
FIXED AND VARIABLE COMPONENTS, OTHER
COSTS,

(SAME INFO DUN SA HANDOUT/WORDFILE)

SAMPLE PROBLEMS

SAMPLE PROBLEM
 NOTE:
Variable cost per unit- Constant
Total variable cost- Depends on the volume
Fixed cost per unit- Depends on the volume
Total fixed cost - Constant

METHOD OF LEAST SQUARE

HIGH-LOW POINT METHOD

COST ACCOUNTING CYCLE (WORD FILE)
Lesson 4: Job Order Costing
The flow of the manufacturing costs, namely,
direct materials, direct labor and factory overhead,
parallels the flow of products through the
manufacturing operations. Following are the steps
in a typical cycle of operations of a firm using the
Job Order Cost System:
1. Procurement – Materials and supplies needed
for manufacturing are ordered, received
and stored. Direct and indirect factory labor and
services are obtained.
2. Production – Materials are transferred from the
storeroom to the factory. Labor tools,
machines, power and other costs are applied to
complete the product.
3. Warehousing – Finished goods are moved from
the factory to the warehouse where they are held
until they are sold.
4. Selling – Firm looks for and finds customers.
Merchandise is shipped from the warehouse
when sales are made. The sales are recorded in
the books.
It is the job of the cost accountant to design a
system in which all cost elements are recorded
and incurred, and then charged to production as
the work flows through the operating cycle.
The provision for special cost accounts sets the
stage for charging costs in accordance with the
flow of work. The process can best be understood if
analyzed step by step as follows:
1. Procurement: Purchases of materials are
debited to Materials, labor incurred to Payroll,
and actual overhead costs incurred to
Manufacturing Overhead Control. As these costs
are used or applied in factory operations, they are
credited to these accounts and
transferred to production.
2. Production: Costs of materials used as well as
labor and factory overhead incurred
transferred to production are debited to Work in
Process. As goods are finished and
moved from the factory, their total cost is removed
from the Work in Process account by a
credit entry and a debit to Finished Goods.
3. Warehousing: The cost of finished goods
transferred from Work in Process is recorded as
a debit to Finished Goods. The cost of merchandise
shipped from the warehouse to the customers is
credited to Finished Goods and debited to Cost of
Goods Sold.
4. Selling: As finished goods are sold and shipped
from the warehouse, their cost is debited
to Cost of Goods Sold. At the end of the accounting
period, this account is closed by a
credit and a debit to Income Summary. (Guerrero
2018)
INTRODUCTION TO THE JOB ORDER
COST CYCLE – NORMAL COSTING

Work Flow (same info sa word file)

1. Procurement
2. Production
3. Warehousing
4. Selling
Recording of cost incurred
(same info sa word file)
1. Procurement
2. Production
3. Warehousing
4. Selling
 EXCEL FILE

STATEMENT OF COST OF GOODS SOLD FOR

MANUFACTURING COMPANY
Accounting for Materials
Material Control
Two basic aspects of materials control
1. Physical control or safeguarding of materials
a. Limited access – only authorized personnel
should have access to materials storage area.
b. Segregation of duties – purchasing, receiving,
storage, use, and recordings should be segregated
to minimize opportunities for misappropriation of
inventories.
c. Accuracy in recording – inventory records
should permit the determination of inventory
quantities on hand upon request, and cost records
should provide the data for the valuation of
inventories for the preparation of financial
statements.
2. Controlling the Investment in Materials
Most important objective of materials control is
maintaining the proper balance of materials on
hand. The planning and control of the materials
inventory investment requires careful study of the
following factors: usage of funds, costs of materials
handling, storage, insurance and others.
These factors should be considered in
determining (1) when orders should be placed, and
(2) how many units should be ordered.
a. Order point – point at which an item should be
ordered
a.1 Usage – the anticipated rate at which the
materials will be used
a.2 Lead time – the estimated time interval
between the placement of an order and receipt of
the material.
a.3 Safety Stock – the estimated minimum level of
inventory needed to protect against running out of
stock.
Formula: Daily usage * Lead time + Safety stock
b. Economic Order Quantity (EOQ) – purchase
order which results in the minimum total inventory
cost.
Methods of Computing EOQ
1. Tabular Method – several purchase order
quantity alternatives are listed in separate columns.
The column with the lowest total amount of
inventory cost will be the economic order quantity.
2. Formula Method:
EOQ – Economic Order Quantity
C – cost of placing an order (ordering cost)
N – number of units required annually (annual
demand)
K – carrying cost per unit of inventory
Number of orders = N / EOQ
Total order cost = Number of orders * C or
(N/EOQ) * C
Average inventory = EOQ / 2
Total carrying cost = Average inventory * K or
(EOQ/2) * K
Total costs = Total order cost + Total carrying cost
(TOTAL ORDER COST SHALL BE EQUAL TO
TOTAL CARRYING COST)
Business Papers Used to Support Material
Transactions
1. Purchase Requisition – is a written request,
usually sent to inform the purchasing department if
a need for materials or supplies.
2. Purchase Order – a written request to a supplier
for specified goods on an agreed upon price. The
request also stipulates terms of delivery and terms
of payment.
3. Receiving Report – when the goods that were
ordered are delivered, the receiving department will
unpack and count them.
4. Material Requisition Slip – a written order to
the storekeeper to deliver materials or supplies to
the place designated or to issue the materials to the
person presenting a properly executed requisition.
Methods of Costing Materials
1. First-in, first-out (FIFO) method is based on the
assumption that cost should be charged to
manufacturing cost or cost of goods sold in the
order in which incurred. Inventories are stated in
terms of the most recent costs and expense in
charged with the earliest costs incurred.

2. Average Method – used for periodic inventory
system. The inventory at the end is computed by
multiplying the weighted average cost per unit by
the units on hand.
Special Problems in Material Accounting
1. Discounts
a. Trade Discount – are not recorded on the books
because purchases are recorded on the books net
of discount
b. Quantity Discount – represents cost savings for
volume purchases.
c. Cash Discount – granted to customers to
motivate them to pay promptly.
Sample problem:
The A Company purchased materials listed at
P40,000; terms, 2/15, n/30 on
August 1. Assume payments as follows:
a. Full payment is made on August 14.
b. Full payment is made on August 30.
2. Freight in
a. Direct charging – the freight incurred on the
purchase of raw materials is added to the invoice
price.
b. Indirect charging – charged to Factory
Overhead Control account. Spoiled Units, Defective
Units, Scrap Material, and Waste Material in a Job
Order Cost System.
a. Spoiled Units– units that do not meet production
standards and are either sold for their salvage or
discarded. When spoiled units are discovered, they
are taken out of production and no further work is
performed on them.
Two methods of Accounting for Spoiled Units
1. Charged to the specific job – the reason for the
spoilage is the job itself. The effect of this method is
that it will increase the unit cost of the remaining
perfect finished articled in the job.
Entry:
Spoiled goods xx
Work in process xx
2. Charged to all production – the spoilage is
considered normal to the process and the number
does not exceed the limit set by the company. All
units manufactured during the period are charged
with an additional cost which is added to the factory
overhead rate.
The unit cost originally charged will not increase
anymore even if there are spoiled units discovered
later on.
Entry:
Spoiled goods xx
Factory overhead control xx
Work in process xx
b. Defective unit – units that do not meet
production standards and must be processed
further in order to be salable as good units or as
irregulars.
Two methods of Accounting for Defective
Materials
1. Charged to the specific job – if the reason for
the defect is the job itself, additional costs incurred.
Entry:
Work in process xx
Materials xx
Payroll xx
Factory overhead applied xx
2. Charged to all production – the reason is
normal to the process and the number of defective
units does not exceed the normal limit, then the
additional costs incurred will be charged to all units
being processed during the period.
Entry:
Factory overhead control xx ACCOUNTING FOR MATERIALS (PPT)
Materials xx
Payroll xx
Factory overhead applied xx

c. Scrap material – left over from the production

process that cannot be put back into production for
the same purpose, but may be usable for a different
purpose or production process or which may be
sold to outsiders for a nominal amount.

Three methods of Accounting for Scrap Material

1. If the scrap recovered can be traced to a specific
job, the entry is Two basic aspects of material control (same sa
word file)
Scrap Materials xx Economic order quantity (same sa w.f.)
Work in process xx
Sample Order Point Problem
2. If the scrap recovered are not traceable to a
specific job, the entry is *Expected daily usage of an item of material is 100
units, the anticipated lead time is 4 days, and it is
Scrap Materials xx estimated that a safety stock of 800 units is
Miscellaneous income xx needed.
Compute for the order point.
3. If the scrap recovered from factory supplies, the
entry is Formula: Daily usage * Lead time + Safety stock

Scrap Materials xx Daily usage = 100

Factory overhead control xx
d. Waste Material – are left over from the
production process that has no further use or resale
value and may require cost for their disposal.
Two methods of Accounting for Waste Material
1. If the cost of disposing the waste materials is
allocated to all jobs, the entry is
Factory overhead control xx
Accounts payable xx
Lead time = 4 days
Safety stock = 800
Order point = (100*4) + 800 = 1,200 units
*Company sells pump housings to other
companies. Would like to reduce inventory costs by
finding optimal order quantity
Annual demand = 1,000 units
Ordering cost = $10 per order
Average carrying cost per unit per year = $0.50

2. If the cost of disposing the waste materials is

allocated to a specific job, the entry is

Work in process inventory xx

Accounts payable xx
*Company sells pump housings to other companies

Annual demand = 1,000 units

Ordering cost = $10 per order
Average carrying cost per unit per year = $0.50

Compute for the following:

No. of orders
Total order costs
Average inventory
Total carrying cost
Total costs
Economic Order Quantity

Number of orders = N / EOQ = 1,000/200 = 5

Total order cost = Number of orders * C or
(N/EOQ) * C = 5 * 10 = 50 (WHEN VIEWED IN EXCEL)
Average inventory = EOQ / 2 = 200/2 = 100
Total carrying cost = Average inventory * K or
(EOQ/2) * K = 100 * 0.50 = 50
Total costs = Total order cost + Total carrying cost
= 50 + 50 = 100

Note that total order costs should be equal to total

carrying cost

Business Papers Used to Support Material

Transactions (same sa word file)

Methods of Costing Materials (same sa w.f.)

Sample Problem in FIFO and Average

Costing
FIFO
WEIGHTED AVERAGE

(WHEN VIEWED IN EXCEL)

MOVING AVERAGE
Special Problems in Material Accounting
(same on word file)

Sample Problem in Discounts

Sample problem: The A Company purchased
materials listed at P40,000; terms, 2/15, n/30 on
August 1. Assume payments as follows:

Full payment is made on August 14.

Full payment is made on August 30.

DEFECTIVE UNITS
METHOD OF ACCOUNTING FOR DEFECTIVE
UNITS (Same sa word file)

Sample problem for defective units

Job 3044 called for the making of 4,000 with these
unit costs:
Direct materials P15
Direct labor 13
Factory overhead
(includes a P1.00 allowance
for defective goods) 12
Total 40
FREIGHT IN
During the process, 300 units were found to be
SPOILED UNITS
defective and required the following total additional
METHOD FOR ACCOUNTING FOR SPOILED
costs: Materials – 2,000, Labor – 4,000 and
UNITS (same sa word file)
Overhead – 2,500.
Accounting for Spoiled Units sample problem
Entries if the loss is charged to the specific job
Job 3044 called for the making of 4,000 with these
Entries if the loss is charged to all production
unit costs:

Direct materials P15

Direct labor 13
Factory overhead
(includes a P1.00 allowance
for spoiled goods) 12
Total 40

When the order was completed, 200 rejected units,

a normal number, were sold for 18.00 each.

Entries if the loss is charged to the specific job

Entries if the loss is charged to all production
SCRAP MATERIALS AND METHODS OF
ACCOUNTING FOR SCRAP MATERIALS
WASTE MATERIALS (same sa word file)
METHODS OF ACCOUNTING FOR WASTE
MATERIAL
1. If the cost of disposing the waste materials is
allocated to all jobs, the entry is
Factory overhead control xx
Accounts payable xx
2. If the cost of disposing the waste materials is
allocated to a specific job, the entry is
Work in process inventory xx
Accounts payable xx
Accounting for Factory Overhead
Factory overhead refers to the cost pool used to
accumulate all indirect manufacturing costs.
Examples of the factory overhead include the
following:
Maintenance of factory building and equipment
Three Categories of Factory Overhead:
1. Variable factory overhead – these are costs
that vary in direct proportion to the level of
production, within the relevant range. Variable
costs per unit remains constant as production either
increases or decreases. Total variable cost varies
in direct proportion to production.
2. Fixed factory overhead – these are costs that
remain constant within the relevant range
regardless of the varying levels of production. The
total remains constant but the fixed cost per unit
varies inversely with the production.
3. Mixed factory overhead – have the
characteristics of both variable and fixed
costs.
Factors to be Considered in the Computation of
Overhead Rate
1. Base to be used
a. Direct labor hours – most commonly used base
or denominator in the computation of the
predetermined factory overhead. The formula is
expressed as:
b. Direct labor cost – this method is recommended
if it can established that there is a direct
relationship between labor cost and factory
overhead.
Formula is:
c. Machine hours – this may occur in companies
departments that are largely automated so that
majority of the factory overhead cost consist of
depreciation on factory equipment.
d. Direct materials costs – this method is
appropriate if it can be inferred that factory
overhead costs are directly related to direct
material cost as in cases where direct materials are
a very large part of total costs.
e.Units of production – this is the most simple
method to use because units produced are readily
available.
Steps in Computation of Departmentalized
Overhead Rate
1. Divide the company into segments, called
departments, cost centers, to which expenses are
charged.
2. Estimate the factory overhead for each
department
3. Select and estimate the base to be used by each
department
4. Allocate the service department costs to the
producing departments
5. Compute the factory overhead rate.
Typical Allocation Bases for Common Costs
1. Labor-related common costs
2. Machine-related common costs
3. Space-related common costs
4. Service-related common costs
Methods of Allocating Service Department Cost
to Producing Departments
1. Direct method – the most widely used method.
This method ignores any service rendered by one
service department to another, it allocates each
service department’s total costs directly to the
producing department.
2. Step method – sometimes called sequential
method of allocation. This method recognizes
service rendered by service departments to other
service departments and is more complicated
because it requires a sequence of allocation.
3. Algebraic method – sometimes called
reciprocal method. This method allocated costs by
explicitly including the mutual services rendered
among all departments.
Factory overhead variance – the difference
between the actual factory overhead as shown by
factory overhead control account and the overhead
charged to productions as shown by the factory
overhead applied account.
Classification of manufacturing overhead
variance
a. Underapplied overhead
= FOC (actual) > FOApplied
b. Overapplied overhead
= FOC (actual) < FOApplied
Causes of manufacturing overhead variance:
a. Spending variance – variance due to the
expense factors
Spending variance
= Actual factory overhead – Budget allowed based
on capacity used
b. Idle capacity or volume variance – the
variance due to different in volume and activity
factors.
Idle capacity
= Budget allowed based on capacity used – Factory
overhead applied
Accounting for Factory Overhead (PPT)
SAME LAHAT SA WORD FILE
Sample problem
A Company estimates factory overhead at
P450,000 for the next fiscal year. It is estimated
that 90,000 units will be produced at a material cost
of 600,000. Conversion will require an estimate
100,000 direct labor hours at a cost of P3.00 per
hour, with 45,000 machine hours.
Compute the predetermined factory overhead rate
based on:
1. Material cost
2. Units of production
3. Machine hours
4. Direct labor costs
5. Direct labor hours.
Answers
1. Estimated factory overhead / Estimated material
cost = 450,000 / 600,000 X 100 = 75%
2. Estimated factory overhead / Units of production
= 450,000 / 90,000 = P5.00/unit
3. Estimated factory overhead / Estimated machine
hours = 450,000 / 45,000 = P10/machine hr
4. Estimated factory overhead / Estimated labor
cost = 450,000 / 300,000 X 100 = 150%
5. Estimated factory overhead / Estimated labor
hours = 450,000 / 100,000 = 4.5/dlh
Methods of Allocating Service Department Cost
to Producing Departments

Sample Problem using Direct Method

B Company’s factory is divided into four

departments – producing departments; Molding and
Decorating, serviced by the Buildings and Grounds,
and the Factory Admin departments. Building and
Grounds cost will be allocated using square feet
and Factory Administration cost will be allocated
using direct labor hours. In computing
predetermined overhead rates, machine hours are
used as the base in Molding and direct labor hours
as the base in Decorating.

Step Method
Sample Problem in Factory Overhead Variance

Accounting for Labor
Labor cost is the price paid for using human
resources. The compensation paid to employees
who engage in production related activities.
The accounting system of a manufacturer must
include the following procedures for recording
payroll costs.
1. Recording the numbers of hours used in total
and by job.
2. Recording the quantity produced by the workers
3. Analyzing the hours used by employees to
determine how time is to be changed
4. Allocation of payroll costs of jobs and factory
overhead accounts
5. Preparation of payroll, including computation and
recording of the employees gross earnings,
deductions, and net earnings.
Deduction to payroll
1. Withholding taxes
2. SSS Contribution
3. Philheakth Contributions
4. Pagibig Funds Contribution
Pro forma entry:
Payroll xx
Withholding Tax Payable xx
SSS Premium Payable xx
PhilHealth Payable xx
Pag-Ibig Payable xx
Accounts Payable xx
Work in Process (Direct) xx
Factory overhead control (Indirect) xx
Payroll xx
Classification for Labor
1. Direct labor – labor identified with particular
products which is considered feasible to be
measured and charged to specific production
order cost sheet.
2.Indirect labor – labor identified with particular
products but which is not considered feasible to
be measure and charge to a specific production
order.
3. Labor overhead
a. Waiting time or idle time – cost of non-
productive hours of direct labor caused by lack
of work, waiting for materials delay from
scheduling,machine breakdown and machine
set-up. If the idleness is normal – charged to
factory overhead control.
Sample: Kath spent 36 hours on Job 101 and
was idle for 4 hours during the week. Kath’s
rate is P50 per hour for a 40-hour week, as per
union contract. How much will be charged to
work in process and factory overhead control?
b. Make-up pay – when payments to an
employee are based solely on the number of
units produced, the employee is said to be paid
at a “piecework” rate. If the output multiplied by
the piece rate > guaranteed wage, charged to
work in process. If the output multiplied by the
piece rate < guaranteed wage, the difference
will be charged to factory overhead
control.
Sample: Beth is paid P15 per piece and
produced during the week 80 pieces. If the
guaranteed weekly pay id P1,500. How much
should be charged to work in process? Factory
overhead?
If the guaranteed weekly pay is P1,000. How
much should be charged to work in process?
Factory overhead?
e. Employers’ payroll taxes - amount remitted
to different government agencies for SSS
premium, PhilHealth contributions, and Pag-Ibig
contributions. Charged to factory overhead
control.

c. Overtime premium – represents amount

paid, in excess of regular rate, to employees
working in excess of 8 hours in a day, or
working during holidays or their rest day. The
overtime is normally charged to factory
overhead control. If overtime results from the
requirements of a specific job – charged to work
in process.
Sample: Diane worked for 45 hours during the
week for P50/hr and the company paid half of
the rate for overtime charges. How much should
be charged to work in process? Factory
overhead control?

If the overtime worked by Diane was caused by

a rush order and the customer agreed to pay
the special service. How much should be
charged to work in process? Factory overhead
control?

d. Shift premium – extra pay to work during

less desirable evening shift of night shift and will
be charged to factory overhead control.

Sample: Anne is assigned to night shift from

10pm to 6am and is paid a shift premium of P20
per hour aside from her regular rate of P50.
How much should be charge to work in
process? Factory overhead?