Cost Accounting and Control Midterms - Edited

OBE-Based
Cost
Accounting
and Control
A Course Module for Students
Burauen Community
College
For Internal Use Only
ii
Cost Accounting and
Control
A Course Module for Student
Burauen Community College
Written and Designed by:

Burauen, Leyte
localcollegebcc@gmail.com
Prepared by:
Jessevie Fatima M. Cadion, CPA
jesseviecadion@gmail.com
i
BCC VISION
Burauen Community College shall emerge as the
premier local public educational institution in
Eastern Visayas which is responsive to the needs of
the community, and develops students to meet the
economic, social, and environmental challenges as
active participants in shaping the world of the
future.
BCC MISSION
Burauen Community College offers holistic, and
outcomes-based experiential learning to develop
the youth to be responsible individuals with
integrity and service as agents of equality. It will
serve as a venue for the development of individuals
in the areas of academics, research, community
extension, and innovative technology.
ii
Cost Accounting and Control:
A Course Module for Students
© 2022
ALL RIGHTS RESERVED. No part of this publication All rights are reserved. No part of
this publication may be reproduced, stored in a retrieval system or transmitted in any
form or by any means, electronic, mechanical, photocopying, recording or otherwise,
without prior permission of the institution.
This module contains information obtained from highly regarded resources. A wide
variety of references are listed. Reasonable efforts have been made to publish reliable
data and information, but the institution cannot assume responsibility for the legality
of all materials or the consequences of their use. The institution has attempted to trace
the copyright holders of all material in this module and express regret to copyright
holders if permission to publish has not been obtained. If any copyright material has
not been acknowledged, let us know so we may rectify in any future reprint. Registered
trademark of products or corporate names are used only for explanation and
identification without intent to infringe
For students who want to purchase additional copies of this module, you may
send your request to locallcollegebcc@gmail.com or you may visit the institution
for an in-person request.
iii
TABLE OF CONTENTS
Preface v
Course Outline vi
Prelims
Introduction to Cost Accounting 9

Cost Accounting Defined 9
Part 1
Purpose of Cost Accounting 10
Relationship of Financial, Cost, and 11
Management Accounting
Cost Management 13
Assessment 14-17
Part 2 Cost: Concepts and Classification 19

Cost Defined 20
Classification of Costs 21-24
Assessment 25-27
Cost Behavior: Analysis and Use 29

Part 3
Cost Behavior Analysis 30
High-Low Method 31
Scatter Graph Method 33
Least Square Method 36
Assessment 39-43
Part 4 45
Cost Flows
Flow of Costs in Service & Merchandising 46
Companies
Flow of Costs in Manufacturing 48
Companies
Actual Overhead 49
Applied Overhead 50
Assessment 56
Concepts and Principles of Job-Order 58

Part 5 Costing System
Primary Documents Used for 59
Accumulating Costs
Assessment 60-61
References
62
iv
Preface
Have you ever been into a factory where a large number of

products are being produced? Have you ever wondered how are
prices of these products being determined when they are brought
to the market for sale? This module will help you understand better how
companies cost their products or services and control these costs in order
to maximize their profits.
This module aims to help the student understand the factors and
aspects necessary to come up with an effective cost system. It explores on
the details of the key components of manufacturing from one department
to the next, specifically materials, labor, and overhead and transcends into
the understanding the flow of costs during the work in process stage until
the completion of goods. It will aid them in the production of the necessary
deliverables and reports pertinent to the cost system.
v
COURSE OUTLINE
Prelims
Week
1 Orientation
1 Introduction to Cost Accounting
2 Cost: Concepts and Classification
3 Cost Behavior: Analysis and Use
4 Cost Flows
5 Concepts and Principles of Job-Order Costing
System
6 Preliminary Evaluation
Midterms
Week
7, 8 Accounting using Job-Order Costing System
9 Concepts and Principles of Process Costing System
10, 11 Accounting using Process Costing System (FIFO)
12 Midterm Evaluation
Finals
Week
13 Accounting Using Process Costing System
(AVERAGE)
14 Accounting for Production Losses under Process
Costing System
15 Concepts and Principles in Joint Products and By-
product Costing System
16 Joint Products and By-product Costing System
17 Output Consultation
18 Final Evaluation
vi
PART I: PRELIMS
Introduction to
Cost Accounting
Cost Accounting and Control ‖ Cadion 8

1 Introduction to Cost Accounting
LEARNING
OUTCOMES
LO1. Utilize costs and

costs accounting
concepts in solving
costs problems.
T
LEARNING
OBJECTIVES
he organizations and managers are
1. Define Cost
most of the times interested in and
Accounting.
worried for the costs. The control of costs of the
past, present and future is part of the job of all the
2. Discover the
managers in a company. In order to plan and
importance of
control activities of a business, management must
Cost Accounting.
first have information about the costs involved in
performing different business operations. In the
3. Connect the
companies that try to have profits, the control of
relationship
costs affects directly to them. This information
among Financial
about costs will help management for decision-
Accounting,
making regarding price and mix assignation of
Management
products and services and in determining whether
Accounting, and
specific activities are profitable and whether the
Cost Accounting.
various departments within the business are
operating efficiently.
4. Discover the
importance of cost
The accounting concepts and practices for
management.
measuring the cost of performing different
business activities and of manufacturing various
products are called Cost Accounting. The cost
accounting systems can be important sources of
information for the managers of a company. For
this reason, the managers understand the forces
and weaknesses of the cost accounting systems,
and participate in the evaluation and evolution of
the cost measurement and administration
systems.
Purpose of Cost Accounting Prelims
Cost Accounting is a field of accounting that measure, records, and

reports information about costs. It is an expected phase of general or financial
accounting which informs management promptly with the cost of rendering a
particular service, buying and selling a product, and producing a product. It is
concerned with cost determination and cost control.
WHAT IS THE PURPOSE OF COST ACCOUNTING?
• Quantify Productivity - The first important purpose of cost accounting

revolves around the quantification of productivity. In translation, it
allows companies to tangibly record their employees’ performances
based on the output levels. This is extremely useful as it can be utilized
for important decisions that have to be made subsequently. For
instance, if the productivity levels are experiencing a downward-sloping
trend, accounting could help run analyses that pinpoint the underlying
causes. Moreover, being able to figure out how well a business is
performing through accounting strategies is easily the most convenient
manner to gather data needed for change implementation.
• Help With Decisions - Other than productivity, according to Forbes,

cost accounting is also widely used to help managers derive important
decisions about the business in general. To better understand this,
consider the following scenario: If a business switches its suppliers and
starts working with new raw materials, they will have to evaluate the
efficiency of production using those fresh inputs. Fortunately,
accountants can run fairly simple volume and price variance reports that
showcase how the cost-to-benefit ratio is behaving. Thus, if the new raw
materials are causing the workers to spend more time building the
product, the volume variance may be unfavorable. From there, the
accountant can create reports that will point the management in the
right direction. In other words, cost accounting will allow them to see
actual statistics and crucial data that helps with material decisions.
• Minimize Production Costs – Cost minimization is a basic rule used

by producers to determine what mix of labor and capital produces output
at the lowest cost. In other words, what the most cost-effective method
of delivering goods and services would be while maintaining a desired
level of quality. Producers are always in search of ways to minimize the
costs. Doing so allows them to maintain as much of their revenues as
possible. Expectedly, cost accounting will achieve this perfectly since it
revolves around reports on profitability and alternative solution
research.
• Sustainability Efforts - Finally, this profession also deals with the

sustainability efforts related to production processes. Before explaining
how, one must recognize that practically every company is looking for
alternatives that will make them more sustainable and efficient. In

Part 1 Introduction to Cost Accounting
translation, they are researching ways that facilitate lower or non-

existent waste as well as higher utilization percentages. Regular types
of accounting, however, seldom have anything to do with sustainability
because they do not look at the future periods. Managerial style of
accounting, on the other hand, is always dedicated to ranking best
future alternatives in terms of cost, efficiency, and even longevity.
• Some other important purposes of cost accounting include the

verification of proper internal procedures, bridging the gap between
people charged with governance, and managing employees fruitfully.
Notwithstanding, starting the research of cost accounting with the
aforementioned four objectives in mind will be a great way to gain an
understanding fast.
RELATIONSHIP OF FINANCIAL ACCOUNTNG, MANAGEMENT

ACCOUNTING, AND COST ACCOUNTING
Cost accounting provides information relating to cost of acquiring and

utilizing resources for both management and financial accounting.
Cost accounting measures, analyzes, and reports financial and non-
financial information relating to the costs of acquiring or using resources in the

organization. Cost accounting supplements financial accounting by providing
break-downs or details for cost figures contained in all-purpose financial

statements. Financial accounting reports are derived from posting to the

general ledger while cost accounting reports are based on cost data as
accumulated in subsidiary ledgers for costs and expenses incurred. Thus, by
its nature, cost accounting facilitates management accounting in the sense that
its purpose is to provide internal reports for use in planning and control and in
making non-routine decisions.
Cost accounting information addresses the demands of both financial

and management accounting by providing product cost information to (1)
external parties (stockholders, creditors, and various regulatory bodies for
investment and credit decisions); and (2) internal managers who are
responsible for planning, controlling, decision-making, and evaluating
performance. Considering the fact that cost data are used in both
financial and managerial accounting, we can say that cost accounting
is indeed a part of both classifications and acts as a bridge between
financial and management accounting. This relationship is presented
below:
Financial Accounting Managerial Accounting
Cost Accounting Data Base
(Cost Accounting Data Base serves as the foundation from which many external and
internal accounting reports emerge)
One area in which managerial and financial accounting overlap is in

accounting for manufacturing activities. In a manufacturing company,
manufacturing costs are of vital importance both to managerial and financial
accountants. Financial accountants need information about manufacturing
costs in order to determine the cost of a manufacturing company’s inventories
and its cost of goods sold. Managerial accountants must supply managers with
prompt and reliable information about manufacturing costs for use in such
decision as:
• What sales price must we charge for our products to earn a reasonable
profit?
• Can we produce a particular type of product at a cost which will enable
us to sell it at a competitive price?
• Would it be less expensive for us to buy certain parts used in our
products, or to manufacture these parts in out plant?
• Should we install a more highly automated assembly line?

WHAT IS COST MANAGEMENT?
Cost management is the process of planning and controlling the costs

associated with running a business. It includes collecting, analyzing and
reporting cost information to more effectively budget, forecast and monitor
costs. Cost management practices can be applied to specific projects or to the
company's overall operating model. Cost management typically focuses on
generating savings and maximizing profits in the longer term.
Cost management is said to be a more comprehensive concept than cost

accounting in that the emphasis is on managing and reducing costs rather than
measuring and reporting costs. In other words, it is long run proactive
approach rather than a short-term reactive approach. For example, a great
deal of attention is given to reducing costs at the design stage of a product’s
life cycle rather than simply attempting to measure and control cost during the
production stage.

ASSESSMENT
Name: __________________________________ Score: ___________

Degree Program/Year/Section: ____________ Date: ____________
Instruction: Encircle the letter of the correct answer.
1. Cost Accounting is directed toward the needs of
A. Regulatory agencies C. External users

B. Internal users D. Stockholders
2. Broadly speaking, cost accounting can be defined as a(n)
A. External reporting system that is based on activity-based costs.

B. System used for providing government and creditors with
information about a company’s internal operations.
C. Internal reporting system that provides product costing and other
information used by managers in performing their functions.
D. Internal reporting system needed by manufacturers to be in
compliance with Cost Accounting Standards Board pronouncements.
3. Cost accounting provides all, EXCEPT:
A. Information for management accounting and financial accounting.

B. Pricing information from marketing studies.
C. Financial information regarding the cost of acquiring resources.
D. Non-financial information regarding the cost of operational
efficiencies.
4. Cost accounting is necessitated by
A. The high degree of conversion found in certain businesses.

B. Regulatory requirements for manufacturing companies.
C. Management’s need to be aware of all production activities.
D. Management’s need for information to be used for planning and
controlling activities.
5. Financial accounting and cost accounting are both highly concerned with
A. Preparing budgets
B. Determining product costs
C. Providing managers with information necessary for control purposes
D. Determining performance standards

6. Cost accounting and management accounting
A. Require an entirely separate group of accounts than financial

accounting uses.
B. Focus solely on determining how much it costs to manufacture a
product or provide a service.
C. Provide product/service cost information as well as information for
internal decision making.
D. Are required for business record-keeping as are financial and tax
accounting.
7. In comparing financial and management accounting, which of the

following more accurately describes management accounting
information?
A. historical, precise, useful

B. budgeted, informative, adaptable
C. required, estimated, internal
D. comparable, verifiable, monetary
8. Which of the following topics is more concerned to management

accounting than to cost accounting?
A. Generally Accepted Accounting Principles

B. Inventory valuation
C. Impact of economic conditions on company operations
D. Cost of goods sold valuation
9. The process of ___________ causes the need for cost accounting.
A. Conversion B. Sales C. Controlling D. Allocating
10. Which of the following statements is false?

I. A good cost accounting system is narrowly focused on a continuous
reduction of cost.
II. Modern cost accounting plays a significant role in management
decision making.
A. I only B. II only C. Both I and II D. Neither I nor II
11. Which of the following statements is true?
A. Management accounting is a subset of cost accounting.

B. Cost accounting is a subset of both management and financial
accounting.
C. Management accounting is a subset of both cost and financial
accounting.

D. Financial accounting is a subset of cost accounting.
12. The person most likely to use management accounting information is a

(an):
A. Banker evaluating a credit application

B. Shareholder evaluating a stock investment
C. Governmental taxing authority
D. Assembly department supervisor
13. Management accounting is considered successful when it:
A. Helps creditors evaluate the company’s performance

B. Helps managers improve their decisions
C. Is accurate
D. Is relevant and reported annually
14. Management accounting
A. Focuses on estimating future revenues, costs, and other measures to

forecast activities and their results.
B. Provides information about the company as whole.
C. Reports information that has occurred in the past that is verifiable and
reliable.
D. Provides information that is generally available only on a quarterly or
annual basis.
15. Which of the following statements is false?
A. A primary purpose of cost accounting is to determine valuations needed

for external financial statements.
B. A primary purpose of management accounting is to provide information
to managers for use in planning, controlling, and decision-making.
C. The act of converting production inputs into finished products or services
necessitates cost accounting.
D. Two primary hallmarks of cost and management accounting are
standardization of procedures and use of generally accepted accounting
principles.
16. Cost accounting

I. Provides information on the efficiency of factory labor.
II. Provides information on the cost of servicing.
III. Provides information on the performance of an operating division.
A. I and II only B. II and III only C. I and III only D. I, III, and III
17. The Institute of Management Accountants issues

A. Statements on Accounting Research for Managers

B. Statements of Management Accounting
C. Statements of Management and Cost Accounting
D. Cost Accounting Standards
18. Cost accounting standards
A. Are legal standards set by the Institute of Management Accountants for

use in all manufacturing and professional businesses.
B. Are set by the Cost Accounting Standards Board and are legally binding
on all manufacturers, but not service organizations.
C. Do not exist except for those legal pronouncements for companies
bidding or pricing cost-related contracts with the government.
D. Are developed by the Cost Accounting Standards Board, issued by the
Institute of Management Accountants, and are legally binding on CMAs.
19. Management accounting reports can be described as
A. General-purpose C. Macro-reports
B. Special-purpose D. Classified financial statements
20. Modern cost accounting plays a role in:

I. Planning new products
II. Evaluating operational processes
III. Controlling costs
A. I and II only B. II and III only C. I and III only D. I, III, and III

Purpose of Cost Accounting Prelims
PART II: PRELIMS
Cost: Concepts and

Classification

2 Cost: Concepts and
Classification
LEARNING
OUTCOMES
LO2. Account
materials, labor and
overhead costs using
job order costing,
process costing and
joint and by- product
U
costing.
nderstanding costs and how they
behave is critical in business. Costs are
associated with all types of
LEARNING organizations – business, non-business,
OBJECTIVES manufacturing, retail, and service. Generally,
the kind of costs that are incurred and the way
in which these costs are classified depends on
1. Define Cost. the type of organization involved.
2. Relate Cost Object The cost information is used for two purposes in
and Cost Accounting most organizations: (1) the cost accounting
System. systems provides information to evaluate the
performance of an organizational unit or his
3. Categorize the manager, and (2) also provide the means for
classification of Costs. estimating the unit cost of products or services
that the organization can manufacture or
4. Illustrate cost
provide to others.
accumulation methods.
Costs are critical information in most decisions.
Everything has a cost. The critical need for
accurate and reliable score-keeping in which
historical costs are properly identified and
measures is underscored as decision support.
This chapter clearly defines the terms and
concepts typically used in identifying costs.

Cost Defined Prelims
COST DEFINED
Cost is the resources sacrificed measured by the price paid or

required to be paid to acquire goods or services that will give current or
future benefits to the enterprise. It reflects the monetary measure of
resources given up to attain an objective such as making goods or
delivering services.
COST vs EXPENSES
Frequently the term “cost” is used synonymously with the term

“expenses”. Most people think that cost and expense have the same
meaning, and technically they do. However, when it comes to
business, cost and expense have different meanings. Cost refers to the
cost of production and operations. Expense refers to monthly expenses
such as rent, utilities, etc.
Expenses are defined in PAS 1 as a gross outflow of economic

benefits during the period in the course of ordinary activities when those
outflows result in decrease in equity, other than those relating to
distributions to owners.
Costs are incurred to produce benefits. In a profit-making firm,

future benefits usually mean revenues. As costs are used up in the
production of revenues, they are said to expire. Expired costs are called
expenses. Hence, expenses in its broadest sense include all expired costs
which are matched with revenue to determine income. Every expense is a
cost, but not every cost is an expense; assets are costs, for example, but
they are not yet expenses.
COST OBJECT and COST ACCOUNTING SYSTEM
A cost object is a term used primarily in cost accounting to describe

something to which costs are assigned. Common examples of cost objects
are: product lines, geographic territories, customers, departments or
anything else for which management would like to quantify cost. The
selection of a cost object provides the answer to the most fundamental
question about cost: The cost of what?
On the other hand, a cost accounting system consists of the

techniques, forms, and accounting records used to develop timely
information about cost data in some organized ways by means of an
accounting system. Cost accounting system helps determine how much the
production of a good or service will cost. There are two types of systems:

Part 2 Cost: Concepts and Classification
(1) job order costing and (2) process costing.
1. Job order costing is typically used by businesses with diversified or

customizable products, or by companies that provide services, where
labor is the dominant expense — for example, a specialist furniture
manufacturer or a plumbing or electrical services provider.
In other words, no two jobs are exactly the same. Job order costing
estimates and tracks costs for direct materials, labor and overhead
costs.
2. Process costing is often the better choice for firms that mass-
produce standardized products. Instead of estimating the cost of
each item involved in the production process, process costing
assumes the unit cost of each item is the same and allocates
production costs evenly across the company’s entire output.
The purpose of a cost accounting system is to provide current

information about the total cost and the per-unit cost of manufacturing
a product or performing a service. This information is used by financial
accountants to value inventories and cost of goods sold, and by
managerial accountants for controlling costs and planning future
operations.
CLASSIFICATION OF COSTS
Costs can be classified into different categories and for different

purposes. Costs may be categorized according to following:
ACCORDING TO FUNCTION
1. Manufacturing costs (a.k.a. product costs or inventoriable cost)
- These are costs associated with the manufacture of goods or

the provision of services.
- Manufacturing costs are not regarded as expenses of the current
period; rather they are costs of creating inventory. The costs of a
product that are regarded as an asset for external financial reporting,
and are not expensed until the product is sold.
- It includes cost of raw materials used (direct materials), direct labor,
and factory overhead.
Total = Direct materials + Direct labor + Factory

Manufacturing cost used cost overhead

• Direct materials - These are also called raw materials used in

the manufacturing process which becomes a significant part of the
finished goods. These materials are easily traced to a finished
product (e.g., the seat on a bicycle).
• Direct labor - The payment made to the employees who work

directly with the raw materials in converting them to finished
goods represent the direct labor. It is also the wages of anyone
who works directly on the product (e.g., the assembly-line wages
of the bicycle manufacturer).
• Manufacturing overhead - All costs in the factory which

cannot be considered direct materials or direct labor are
classified as manufacturing overhead costs such as:
a. Indirect materials - materials and supplies other than

those classified as direct materials,
b. Indirect labor - personnel who do not work directly on the
product (e.g., manufacturing supervisors), and
c. Other factory overhead costs not easily traceable
to a finished good (e.g., insurance, property taxes,
depreciation of manufacturing equipment, and
utilities).
Prime cost – the primary cost incurred to produce a product, and it is the
sum of direct materials and direct labor.
Prime cost = Direct materials used + Direct labor cost
Conversion Cost – the cost necessary to convert raw materials into a

finished product.
Conversion cost = Direct labor cost + Factory overhead cost
2. Non-manufacturing costs (a.k.a. period costs or

commercial/operating expenses)
- These are costs related to the functions of designing,

developing, marketing, distribution, customer service, and
general administration.
- These are the costs that are charged to expense as incurred and not

to a particular product and are not inventoried.
Marketing expenses (a.k.a. selling expenses) – expenses necessary in

order to sell the product, such as advertising expense, delivery expenses,
etc.
General and Administrative expenses – expenses incurred in the

direction, control, and administration of the enterprise, such as
administrative and office salaries, rent of office building, etc.
ACCORDING TO EASE OF TRACEABILITY
1. Direct costs - those that can be traced directly to a particular object

of costing such as a particular product, department, or branch.
Examples include materials and direct labor. Some operating
expenses can also be classified as direct costs, such as advertising
cost for a particular product.
2. Indirect costs - those that cannot be traced to a particular object

of costing. They are also called common costs or joint costs. Indirect
costs include factory overhead and operating costs that benefit more
than one product, department, or branch.
ACCORDING TO THE VOLUME OF PRODUCTION OR BEHAVIOR
1. Variable costs
- A cost that changes in total in direct proportion to changes in
activity or output.
- A decrease in activity brings a proportional decrease in total variable
cost, and vice versa.
- Examples include direct materials, direct labor, and sales commission
based on sales.
- Variable cost by its nature is a rate per unit of activity or output. A
variable cost per unit remains constant as activity or output changes
within a relevant range.
2. Fixed costs
- The cost that remains unchanged in total within relevant
range for a given period despite a fluctuation in volume of
production.
- Fixed cost by its observed nature is a lump of costs that is not
normally divisible.
- Examples include rent, insurance, and depreciation using the
straight-line method.

- These are costs that varies per unit as the volume of production
changes:
➢ Fixed cost per unit decreases as volume of production increase
➢ Fixed cost per unit increases as volume of production decrease
3. Semi-variable costs (a.k.a. mixed costs)

- costs that vary in total but not in proportion to changes in
activity.
- It basically includes a fixed cost portion plus additional variable cost.
- An example would be electricity expense that consists of a fixed
amount plus variable charges based on usage.
ACCORDING TO RELEVANCE TO DECISION MAKING
1. Relevant cost - cost that will differ under alternative courses of

action. In other words, these costs refer to those that will affect a
decision.
2. Standard cost - predetermined cost based on some reasonable

basis such as past experiences, budgeted amounts, industry
standards, etc. The actual costs incurred are compared to standard
costs.
3. Opportunity cost - benefit forgone or given up when an alternative

is chosen over the other/s. Example: If a business chooses to use its
building for production rather than rent it out to tenants, the
opportunity cost would be the rent income that would be earned had
the business chose to rent out.
4. Sunk costs - historical costs that will not make any difference in
making a decision. Unlike relevant costs, they do not have an impact
on the matter at hand.
5. Controllable costs - refer to costs that can be influenced or

controlled by the manager. Segment managers should be evaluated
based on costs that they can control.

ASSESSMENT
Name: __________________________________ Score: ___________

I. COST CLASSIFICATION
Consider the following items:
A. Tomatoes used in the manufacture of Heinz ketchup

B. Administrative salaries of executives employed by Southwest Airlines
C. Wages of assembly-line workers at a Ford plant
D. Marketing expenditures of the Los Angeles Dodgers baseball club
E. Commissions paid to Coca-Cola's salespeople
F. Straight-line depreciation on manufacturing equipment owned by Dell
Computer
G. Shipping charges incurred by Office Depot on out-going orders
H. Speakers used in Sony home-theater systems
I. Insurance costs related to a Mary Kay Cosmetics' manufacturing plant
Required:
Complete the table that follows and classify each of the costs listed as (1)
a product or period cost and (2) a variable or fixed cost by placing an "X"
in the appropriate column.
Product or Period Cost Variable of Fixed Cost

Item Product Period Variable Fixed
A
B
C
D
E
F
G
H
I
II. COST CLASSIFICATION

Eastside Manufacturing produces small electric engines. Identify the

following costs as direct materials (DM), direct labor (DL), manufacturing
overhead (MOH), or a period cost (PC). Also indicate whether the cost is
variable (V) or fixed (F) with respect to behavior.
A. Commissions paid to salespeople

B. Straight-line depreciation on the factory building
C. Salary of the plant supervisor
D. Wages of the assembly-line workers
E. Machine lubricant used in production activities
F. Engine casings used in production activities
G. Advertising placed in trade journals
H. Lease payments for the president's automobile
I. Property taxes paid on the factory facilities
III. PROBLEM SOLVING
1. Goldmine Inc. manufactures stainless steel flatware (knives, spoon

and forks). The following are some costs incurred in the factory in
2021 for flatware production:
Material costs:
Stainless steel P444,500
Equipment oil and grease P12,000
Plastic and fiberglass for handles P22,500
Labor costs:
Equipment operators P200,000

Equipment mechanics P50,000
Factory supervisors P118,000
a. What is the direct material cost for 2021?

b. What is the direct labor cost for 2021?
c. What is the total overhead cost for 2021?
2. SILVERMAN Manufacturing’s accounting records showed the following

manufacturing cost for 2021:

Direct materials …………………………….. P336,500

Direct labor …………………………….. 180,750
Indirect materials …………………………….. 67,125
Indirect labor …………………………….. 132,000
Factory utilities …………………………….. 152,250
Factory rent …………………………….. 81,500
Freight-in …………………………….. 31,000
Commissions …………………………….. 142,000
Legal expenses …………………………….. 59,925
Advertising expenses …………………………….. 3,850
Depreciation – factory equipment ………………………….. 12,500
Depreciation – office equipment …………………………….. 6,250
Doubtful accounts …………………………….. 18,000
Salary of president’s secretary …………………………….. 1,500
a. What is the prime cost for 2021?

b. What is the conversion cost for 2021?
c. What is the total product cost for 2021?
d. What is the total period cost for 2021?

PART III: PRELIMS

Cost Behavior: Analysis
and Use

3 Cost Behavior: Analysis and Use
LEARNING
OUTCOMES
LO2. Account
job order costing,
process costing and
costing.
K
LEARNING nowing the behavior of costs is very
OBJECTIVES useful in the management of
a company for a variety of purposes.
1. Cite the cost For example, knowing how costs behave
behavior enables managers or administrators predict
assumptions. profits when sales volume and production
changes. Knowing the behavior of costs is also
2. Identify the useful in estimating costs. In turn, the
classification of estimated costs affect various decisions of the
costs as to its
administration, for example, if it should use
behavior.
machinery exceeded capacity to produce and
sell a product at a reduced price.
3. Define relevant
range.
The behavior of a cost refers to the manner in
4. Discover the which a cost changes at the time that a related
methods of activity level changes such as production or
separating semi- sales volume, labor or machine hours, etc. to
variable costs into understand the behavior of costs, the following
their fixed and two factors must be considered: (1) the
variable elements. activities that is believed that caused the cost to
be incurred must be identified. These activities
are called activity bases (or activity drivers)
And (2) the activity range on which changes in
the cost are of interest must be specified. This
activity range is called relevant rank.

Cost Behavior Analysis Prelims
In the discussion of Rante (2016), cost classification as to its behavior are

classified as variable costs, fixed costs, and mixed costs/ semi- variables
costs. The author offered detailed discussion as follows:
Variable costs - are costs that vary in total in direct proportion to the
changes in the volume of production. Variable costs are a constant amount
on a per unit basis as activity changes within a relevant range. As activity
changes, the total variable costs increase or decrease proportionately with
the activity change, but unit costs remain the same.
Fixed Costs - are costs that are constant in total within relevant range of
activity but variable on a per unit basis. As the activity level increases or
decreases, total fixed costs remain constant but unit cost declines or goes
up.
Mixed costs/ Semi- variable costs - are costs which have both fixed and
variable components such as electricity and water expenses.
WHAT IS COST BEHAVIOR ANALYSIS?
Cost behavior analysis refers to management’s attempt to understand how

operating costs change in relation to a change in an organization’s level of
activity. These costs may include direct materials, direct labor, and
overhead costs that are incurred from developing a product. Management
typically performs cost behavior analysis through mathematical cost
functions.
Cost behavior affects the decisions management makes. Variable costs are
the incremental or differential costs in most decisions. Fixed costs change
only if specific decision included a change in capacity-providing activities
that result in increasing or decreasing the level of fixed costs. Hence, in
order to plan, analyze, control, measure, or evaluate costs at different
levels of activity, fixed and variable costs must be separated.
Cost estimation is the process of determining a cost relationship with the

activity for an individual cost item or a grouping of costs. Three factors
must generally be known to perform such analysis:
1. Variable cost rate

2. Fixed cost amount
3. Level of activity or output
These factors can be brought together in an equation that reflects the cost
behavior within the relevant range. This equation is referred to as a cost
function – an expression that mathematically links costs, their behavior,

Part 3 Cost Behavior: Analysis and Use
and their cost driver. Because accounting assumes that costs are linear
rather than curvilinear, the general formula for a straight-line can be used
to describe any type of cost within a relevant range of activity. The straight-
line formula is expressed as:
y = a + bx
Where: y – total costs (dependent variables)

a – total fixed cost (y-intercept / vertical axis-intercept)
b – variable cost per unit (slope of the line)
x – activity or cost driver based to which y is being related
(independent variable)
COST BEHAVIOR ASSUMPTIONS
Relevant Range Assumption – Relevant range refers to the range of

activity within which the cost behavior patterns are valid. Any level of
activity outside this range may show a different cost behavior pattern.
Time Assumption – The cost behavior patterns identified are true only
over a specified period of time. Beyond this, the cost may show a different
cost behavior pattern.
Linearity Assumption – The cost is assumed to manifest a linear

relationship over a relevant range despite its tendency to show otherwise
over the long run.
METHODS OF SEPARATING SEMI-VARIABLE COSTS INTO THEIR

FIXED AND VARIABLE ELEMENTS
A. High-Low Method – A technique used to determine the fixed and

variable portions of a mixed cost which uses only the highest and
lowest levels of activity and related costs within the relevant range.
➢ This method is simple, but it has the disadvantage of using only two
data points to determine cost behavior, and it is based on the
assumption that the other data points lie on a straight-line between
the high and low points. Because it uses only two data points, it may
result in estimates of fixed and variable costs that are biased. The

two points from all of the observations will only produce reliable
estimates of fixed and variable cost behavior if the extreme points
are representatives of the points in between. As a result, estimates
of total cost based on fixed and variable costs computed with the
high and low methods often are more inaccurate than estimates
derived by other methods that consider a large number of data
points.
Step 1: Select the highest and lowest levels of activity within the relevant
range and obtain the costs associated with those levels.
Step 2: Calculate the change in cost compared to the change in activity.
Step 3: Determine the relationship of cost change to activity change to find

the variable cost element.
Change in the Total Cost

b=
Change in Activity Level
Step 4: Compute the total variable cost (TVC) at either level of activity.
TVC = b x activity level
Step 5: Subtract total variable cost from total cost at either level of activity
to determine fixed cost.
a = Total Cost - TVC
Step 6: Substitute the fixed and variable cost values in the straight-line
formula to get an equation that can be used to estimate total cost at any
level of activity within the relevant range.
To illustrate the above procedures, assume the following data relating to

Brent Corporation’s power usage for the first six months of the current year.
Month Usage (kw) Cost

January 500 P450
February 550 455
March 475 395
April 425 310
May 450 380
June 725 484
Kw usage is within the relevant range of activity. Brent Corporation

estimates its power usage for July at 660 watts.
In this particular case, the high point is 725 kw at a cost of P484, and the
low point is 425 kw at a cost of P310. Once the high and low points are
defined, the values for the fixed cost and the variable rate can be computed
as follows:
_Usage __Cost_
High 725 P 484
Low _425 __ 310_
300 P 174
Variable rate (b) = P174/300 = P 0.58 per Kw

Total Variable Cost (TVC) = P 0.58 x 425 Kw = P 246.50
Total Fixed Cost (a) = P310 – P246.50 = P63.50
The cost formula using the high-low method is:

Total Cost = P63.50 + (P0.58 x Kw)
Hence, the estimated cost for the month of July is:

P446.30 = P63.50 + (P0.58 x 660)
NOTE: for the illustration above, the lowest point was used in determining
the total variable cost and total fixed cost. It should be noted that either
the highest or the lowest point can be used in computing the fixed
cost component.
B. Scatter graph Method – Scatter graph method is a graphical

technique of separating fixed and variable components of mixed cost
by plotting activity level along x-axis and corresponding total cost
(i.e. mixed cost) along y-axis.
➢ In this method, the cost being analyzed (dependent variable) is

plotted on a vertical line (y-axis) and the associated activity
(independent variable) is plotted along a horizontal line (x-axis). A
regression line is then drawn on the graph by visual inspection.
➢ A line drawn is used to estimate the total fixed cost and variable cost
per unit. The point where the line intercepts y-axis is the
estimated fixed cost and the slope of the line is the

Scatter Graph Method Prelims
➢ average variable cost per unit. Since the visual inspection does not
involve any mathematical testing therefore this method should be
applied with great care.
Step 1: Draw scatter graph

Plot the data on scatter graph. Plot activity level (i.e. number
of units, labor hours etc.) along x-axis and total mixed cost
along y-axis.
Step 2: Draw regression line

Draw a regression line over the scatter graph by visual
inspection and try to minimize the total vertical distance
between the line and all the points. Extend the line towards y-
axis.
Step 3: Find total fixed cost

Total fixed is given by the y-intercept of the line. Y-intercept is
the point at which the line cuts y-axis.
Step 4: Find variable cost per unit

V
two points (x1,y1) and (x2,y2) on the line and calculate variable
cost using the following formula:
Variable Cost per Unit = Slope of Regression Line = y2 - y1

x2 - x1
ILLUSTRATION:
Company ABC decides to use scatter graph method to split its factory
overhead (FOH) into variable and fixed components. Following is the data
which is provided for the analysis.
Month Units FOH

1 1,520 $36,375
2 1,250 38,000
3 1,750 41,750
4 1,600 42,360
5 2,350 55,080
6 2,100 48,100
7 3,000 59,000
8 2,750 56,800
The scatter graph is illustrated in the next page. From the graph, the
following information can be noted:

Fixed Cost = y-intercept = $18,000

Variable Cost per Unit = Slope of Regression Line
To calculate the slope, we will take two points on line: (0,18000) and
(3500,68000)
Variable Cost per Unit = (68000 − 18000) ÷ (3500 − 0) = $14.286
➢ This method is an improvement over high-low method because is

utilizes all available data, not just two data points. In addition, the
method makes it possible to inspect the data visually to determine
whether or not such a relationship is approximately linear. Visual
inspection also facilitates detection of abnormal data points, referred
to as outliers. A cost behavior analysis using this method is still
likely to be biased because the cost line drawn through the data plot
is based on visual interpretation and limited by the judgement of the
person drawing the line through the data.
C. Least Squares Method (a.k.a. Regression Analysis) – a cost

behavior analysis method which determines mathematically a line of
best fit or linear regression line through a set of plotted points.
➢ Least squares regression analysis or linear regression method is

deemed to be the most accurate and reliable method to divide the
company’s mixed cost into its fixed and variable cost components.
This is because this method takes into account all the data points
plotted on a graph at all activity levels which theoretically draws
a best fit line of regression.
➢ The least squares regression method follows the same cost
function as the other methods used to segregate a mixed or semi
variable cost into its fixed and variable components. Let’s assume
that the activity level varies along x-axis and the cost varies along
y-axis. The following equation should represent the required cost
line:
y = a + bx
Where:
• y = total cost
• a = total fixed cost
• b = fixed cost
• x = number of units
The values of ‘a’ and ‘b’ may be found using the following formulas:
ILLUSTRATION:
Master Chemicals produces bottles of a cleaning lubricant. The activity

levels and the attached costs are shown below:

Required: On the basis of above data, determine the cost function using
the least squares regression method and calculate the total cost at activity
levels of 6,000 and 10,000 bottles.
Solution:
In our example:
• n=7
• ∑x = 17,310
• ∑y = 306,080
• x2 = 53,368,900
• xy = 881,240,300
We can find the values of ‘a’ and ‘b’ by putting this information in the above
formulas:

Computation of variable cost per unit (b):
The value of ‘b’ (i.e., per unit

variable cost) is $11.77 which can be
substituted in fixed cost formula to find
the value of ‘a’ (i.e., the total fixed
cost).
Computation of total fixed cost (a):
1. Using the method of least squares, the cost function of Master

Chemicals is:
Total Cost of Bottles = $14,620 + $11.77x
2. The total cost at an activity level of 6,000 bottles:

y = $14,620 + ($11.77 × 6,000)
= $85,240
3. The total cost at an activity level of 12,000 bottles:

y = $14,620 + ($11.77 × 12,000)
= $155,860

ASSESSMENT
Name: __________________________________ Score: ___________

I. Instruction: Encircle the letter of the correct answer.
1. The cost estimation method that gives the most mathematically

precise cost prediction equation is
A. High-low method C. Contribution margin method
B. Scatter-diagram method D. Regression analysis
2. As volume increases,
A. Total fixed costs remain constant and per-unit fixed costs increase.
B. Total fixed costs remain constant and per-unit fixed costs decrease.
C. Total fixed costs remain constant and per-unit fixed costs remain
constant.
D. Total fixed costs increase and per-unit fixed costs increase.
3. Which of the following costs changes in direct proportion to a change

in activity level?
A. Variable cost C. Semi-variable cost
B. Fixed cost D. Step-variable cost
4. An outlier is
A. Something that happens outside the organization that does not affect
production.
B. Always used in analyzing a mixed cost.
C. Something that happens inside the organization that does not affect
production.
D. Never used in analyzing mixed cost.
5. The high-low method and least-squares regression are used by

accountants to:
A. Choose among alternative courses of action
B. Estimate costs
C. Maximize output
D. Control operations
6. In regression analysis, the variable that is being predicted is known

as:
A. Independent variable C. Dependent variable
B. Interdependent variable D. Functional variable

Assessment Prelims
7. Since Anytime Pizza is open 24 hours a day, its pizza oven is

constantly on and is, therefore, always using natural gas. However,
when there is no pizza in the oven, the oven automatically lowers its
flame and reduces its natural gas usage by 70%. The cost of natural
gas would best be described as a:
A. Fixed cost C. Step-variable cost
B. Mixed cost D. True variable cost
8. For the past 8 months, Jinan Corporation has experienced a steady

increase in its cost per unit even though total costs have remained
stable. This cost per unit increase may be due to ________ costs
because the level of activity at Jinan is ________.
A. Fixed, decreasing C. Variable, decreasing
B. Fixed, increasing D. Variable, increasing
9. In the formula y = a + bx, “a” represents

A. Mixed cost C. Variable cost
B. Total cost D. Fixed cost
10. Plaza Corporation observed that when 25,000 units were sold, a
particular cost amounted to P70,000 or P2.80 per unit. When volume
increased by 15%, the cost totaled P80,500 (i.e. P2.80 per unit). The
cost that plaza is studying can best be described as a:
A. Variable cost C. Semi-variable cost
B. Fixed cost D. Step-fixed cost
11. If sales revenue doubles, variable costs will

A. Decrease in total
B. Increase in total
C. Decrease on a per unit basis
D. Increase on a per unit basis
12. Sacramento company had P400,000 overhead cost at 50,000

machine hours and P460,000 overhead cost at 60,000 hours. Total
fixed overhead is
A. P60,000 B. P100,000 C. 120,000 D. P320,000
13. GMH Company had P200,000 overhead cost at 25,000 machine

hours and P240,000 overhead cost at P60,000 hours. Variable
overhead per machine hour is
A. P4.00 B. P0.83 C. P1.00 D. P8.00
14. Douglas Corporation recently produced and sold 100,000 units.

Fixed costs at this level of activity amounted to P50,000; variable
costs were P100,000. How much cost would the company anticipate

if during the next period it produced and sold 102,000 units?

A. P150,000 B. 151,000 C. 152,000 D. 153,000
15. Cathy Weymann owns a tailor shop and has gathered information
on utility costs for the past year. She has decided that utilities are a
function of the hours worked during the month. The following
information is available and representative of her utility costs:
Hours worked Utility cost incurred
Low point 1,300 P903
High point 1,680 P1,074
If 1,425 hours are worked in a month, total utility cost (rounded to

the nearest peso) using the high-low method should be:
A. P947 B. 954 C. 959 D. P976
Items 16-18: Yeng Manufacturing, which uses the high-low method, makes
a product called Yin. The company incurs three different cost types (A, B,
and C) and has a relevant range of operation between 2,500 units and
10,000 units per month. Per-unit costs at two different activity levels for
each cost type are presented below.
Type A Type B Type C Total
5,000 units P4 P9 P4 P17
7,500 units P4 P6 P3 P13
16. The cost types shown above are identified by behavior as:
Type A Type B Type C
A. Fixed Variable Semi-variable
B. Fixed Semi-variable Variable
C. Variable Semi-variable Fixed
D. Variable Fixed Semi-variable
17. If Yeng produces 10,000 units, the total cost would be:
A. P90,00 B. 100,000 C. 110,000 D. 125,000
18. The cost formula that expresses the behavior of Yeng’s total cost
is:
A. Y = P20,000 + P13x
B. Y = P40,000 + P9x
C. Y = P45,000 + P4x
D. Y = 60,000 + 5x
19. The slope of the cost line on a scatter graph represents

A. Fixed cost per unit
B. Total fixed cost
C. Variable cost per unit
D. Sales price per unit

Assessment Prelims
Use the following to answer questions 20-22: Donner Company would like
to estimate the variable and fixed components of its maintenance costs and
has compiled the following data for the last five months of operations.
Labor Hours Maintenance Costs

January 160 P617
February 130 P553
March 180 P596
April 190 P623
May 110 P532
20. Using the least-squares regression method, the estimated variable

cost per labor hour for maintenance is closest to:
A. P1.88
B. P1.52
C. P1.09
D. P1,96
21. Using the least-squares regression method, the estimated total

fixed cost per month for maintenance is closest to:
A. P470
B. P416
C. P400
D. 378
22. Using the least-squares regression equation, the total maintenance

cost for March is:
A. Above the regression line
B. On the regression line
C. Below the regression line
D. Outside the relevant range
II. PROBLEM
The data for ten weeks of activity in one of C&J Electronics operating
departments are:
Hours Maintenance Costs Hours Maintenance Costs

50 P120 30 P80
30 110 20 70
10 60 60 150
70 150 40 110
40 100 20 50

Required:
1. Determine the fixed and variable costs elements using

the high and low method.
2. Plot a statistical scatter graph from the data to obtain
the fixed and variable elements.
3. Use the least squares method to determine the fixed and
variable cost elements.

Assessment Prelims
PART IV: PRELIMS

Cost Flows

4 Cost Flows
LEARNING
OUTCOMES
LO2. Account
job order costing,
process costing and
costing.
LEARNING
OBJECTIVES
T ransforming materials into finished
products ready for sale requires a
number of production and production-
related activities, including
purchasing, receiving, inspecting, storing, and
1. Contrast the flow moving materials; converting them into finished
of costs in products using labor, equipment, and other
Service, resources; and moving, storing, and shipping
Merchandising, the finished products. A manufacturing
and organization’s accounting system tracks these
Manufacturing
activities as product costs flowing through the
Companies.
various inventory accounts.
2. Understand and
The manufacturing cost flow begins when costs
illustrate
Manufacturing are incurred for direct materials, direct labor,
Cost Flows. and overhead. Materials costs flow first into
the Materials Inventory account, which is
used to record the costs of materials when they
are received and again when they are issued for
use in a production process.

Flow of Costs in Service and Merchandising Companies Prelims
All manufacturing-related costs—direct materials, direct labor, and

overhead—are recorded in the Work in Process Inventory account as
the production process begins. These costs represent total manufacturing
costs. When products are completed, their costs are transferred from the
Work in Process Inventory account to the Finished Goods Inventory
account. These costs represent the cost of goods manufactured. Costs
remain in the Finished Goods Inventory account until the products are sold,
at which time they are transferred to the Cost of Goods Sold account.
FLOW OF COSTS IN SERVICE, MERCHANDISING AND

MANUFACTURING COMPANIES
SERVICE COMPANIES
Service companies do not sell tangible products. Rather, they provide

intangible services such as web site development, hair styling, accounting
works, and legal advice.
MERCHANDISING COMPANIES
Merchandising companies purchased goods in finished or almost

finished conditions; thus, those goods typically need little, if any,
conversion before being sold to customers. Cost of what will be sold will
consist of items the business had at the beginning of the period plus the
cost of what has been bought during the period minus what is left at the
end of the period. The cost of goods bought include invoice price plus the
freight cost. Merchandising companies have only one category of inventory
on the balance sheet.
held in when sales occur
Purchases of Inventory Inventory Cost of Sales

plus Freight-in

Part 4 Cost Flows
MANUFACTURING COMPANIES
Manufacturing companies purchase raw material and uses labor,

plant and equipment to convert it into finished products which are sold to
customers. Manufacturing generally occurs in a factory. What is a factory?
It is a place where resources are brought together to produce a product.
Manufacturing companies have three categories of inventory on the balance

sheet:
1. Raw materials inventory – represents the cost of materials

purchased and on hand to be used in the manufacturing process.
2. Work-in-process inventory – are partially completed product

which require further process or work before they can be sold.
3. Finished goods inventory – completed products that have not yet

been sold and ready for sale.
The flow of direct materials in manufacturing companies occurs in the

following four steps:
1. Raw material is purchased from a supplier and placed in the raw

materials inventory.
2. Raw materials are transferred to the production process.
3. Upon completion of processing, the material is transferred to the
finished goods inventory.

Part 4 Cost Flows
4. A customer takes delivery of the product and it is removed from

finished goods inventory.
Cost of Goods Manufactured – is the total production cost of the goods

that were completed and transferred to Finished Goods Inventory during
the period.
Cost of Goods sold – is the cost of inventory that the business has sold
to customers.
FLOW OF COSTS THROUGH A MANUFACTURER’S INVENTORY

ACCOUNTS
The flow of cost to the ledger accounts is based on the source

documents. These documents are the fundamental evidences of accounting
events. For materials, the source documents are purchase invoice,
receiving reports, requisition slips; while for labor, they are time tickets,
clock cards, job tickets; and for factory overhead, vouchers to take up
depreciation or prepaid expenses, vendors’ invoices, utility bills, time
sheets, etc.
Direct Materials Inventory
Beginning balance xxx Direct materials used xxx

Purchases xxx Ending balance xxx
Work-in-process Inventory
Beginning balance xxx Cost of goods manufactured xxx

Direct materials used xxx Ending balance xxx
Direct labor cost xxx
Factory overhead cost xxx
Finished Goods Inventory
Beginning balance xxx Cost of goods sold xxx

Cost of goods manufactured xxx Ending balance xxx

Part 4 Cost Flows
Materials, beginning Total Materials Materials used

+ = available for = +
Purchases use Materials, ending
Work-in-process, beg. Total Cost Cost of goods manufatured

+ = to account = +
Total Manufacturing for Work-in-process, end
cost
Finished goods, beg. Total goods Cost of goods sold

+ = available for = +
Cost of goods manufactured sale Finished goods, end.
ACCOUNTING FOR ACTUAL AND APPLIED OVERHEAD
Accumulation of factory overhead incurred (or actual factory

overhead) takes time especially in cases wherein adjustments are done on
annual basis. Thus, instead of charging actual factory overhead to
production, the practice of charging overhead on predetermined rates is
adapted.
ACTUAL OVERHEAD
As the cost components of overhead are actually incurred, the

Factory Overhead account is debited and the logically offsetting accounts
are credited. The table below provides representative examples of factory
overhead items.
APPLIED OVERHEAD

Part 4 Cost Flows
Factory overhead is applied based on a predetermined formula,

and considerable thought needs to be put into the appropriate basis
(cost drivers) for making this allocation. An account simply called “Applied
Factory Overhead” is credited to reflect the overhead application to work-
in-process.
THE FACTORY OVERHEAD ACCOUNT
The Factory Overhead account is not a typical account. It does not

represent an asset, liability, expense, or any other element of financial
statements. Instead, it is a suspense or clearing account. Amount go into
the account, and are then transferred back out to other accounts. In this
case, actual overhead goes in, and applied overhead goes out. The credits
to this account are generated when overhead is applied to production; and
the debits represent the actual amounts being spent on overhead.
• The factory overhead account is used to bridge the gap between the
irregular way overhead costs are incurred and the regular systematic
application or allocation of overhead costs to units of production.
• The overhead account is debited for the actual overhead costs as
incurred.
• The overhead account is credited for the overhead costs applied to
production in the work-in-process account.
• Throughout the year, the balance in the manufacturing overhead
account may fluctuate between debit and credit as the timing of when
actual overhead is incurred typically does not match the timing of
when units are produced.
• At the end of the year, there may be a balance in the account that is
typically closed directly to cost of goods sold.
THE BALANCE OF FACTORY OVERHEAD
At the end of the period, both Applied Factory Overhead and Factory
Overhead account are closed. The Applied Factory Overhead account is
closed directly to the Factory Overhead account. In some cases, the applied
overhead exactly equaled the actual overhead, leaving a zero balance in
the Factory Overhead account. This means that the predetermined
allocation rate was exactly on the money – allocating exactly what was
incurred during the period. More often than not, this level of perfection will
not result. Since the Factory Overhead account is debited for actual
overhead incurred and credited for allocated overhead, the balance of
account is identified as the factory overhead variance.
• Manufacturing overhead is applied or added to each job while it is in

Part 4 Cost Flows
process.
• The manufacturing overhead account is a holding account for the
actual overhead costs incurred (debits) and applied to work-in-
process (credits).
o Actual overhead costs flow into the account as they are
incurred.
o Applied overhead costs flow out of the account as the jobs
proceed through the production process
Factory Overhead
Beginning balance
+ Actual overhead - Overhead applied

Costs incurred
= Underapplied = Overapplied
➢ If the applied overhead is less than the actual amount incurred,

overhead variance is said to be underapplied (reflected as debit
balance in the Factory Overhead account). It is said to be an
“unfavorable” outcome because not enough jobs were produced to
absorb all of the overhead incurred. This might result from below
normal levels of output or overspending. In any event, the fact
remains that more was spent than allocated.
➢ If the applied overhead exceeds the actual amount incurred,

overhead is said to be overapplied (reflected as credit balance in
the Factory Overhead account). This is usually viewed as a
“favorable” outcome because less has spent than anticipated for the
level of achieved production.

Factory Overhead Journal Entries Prelims
JOURNAL ENTRIES
• To charge overhead to production:
Work-in-process inventory xxx

Applied Factory Overhead xxx
Predetermined Estimated Factory Overhead

Overhead rate = Estimated activity base
Applied Factory Predetermined Amount of actual

Overhead = Overhead rate x activity base
• To take up actual factory overhead:
Factory Overhead xxx

Cash/Other accounts xxx
• To close applied factory overhead account to factory overhead

account:
Applied Factory Overhead xxx

• To take up factory overhead variance:
a. If Overapplied (actual overhead < applied overhead)

Factory Overhead Variance xxx
b. If Underapplied (actual overhead > applied overhead)
Factory Overhead Variance xxx


Part 4 Cost Flows
DISPOSITION OF FACTORY OVERHEAD VARIANCE
Always keep in mind that the goal is to “zero out” the Factory
Overhead account and measure the actual cost incurred. Hence, the factory
overhead variance must be disposed. At the end of the accounting period,
any balance in the account is treated in one of the two ways:
Method 1: Closed out to cost of goods sold; or
Method 2: Allocated between work-in-process (WIP) inventory, finished

goods inventory and cost of goods sold in proportion to the overhead
applied during the current period in the ending balances of these accounts.
The second method, which allocates the under or over‐applied 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 under‐
applied or over‐applied overhead is material, many accountants would
insist that the second method be used.
METHOD 1: 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.
• Where the overhead is under‐applied, the following journal entry is

made:
Cost of goods sold xxx

Manufacturing overhead xxx
• Where the overhead is over‐applied, the following journal entry is

made:
Manufacturing overhead xxx

Cost of goods sold xxx
After passing one of these journal entries, cost of goods sold is adjusted.
Consequently, cost of goods sold is increased by the amount of under‐
applied and decreased by the amount of over‐applied overhead.

Part 4 Cost Flows
METHOD 2: Allocated Between Accounts
Allocation of under or over‐applied overhead between work-in-

process (WIP) inventory, finished goods inventory, 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.
ILLUSTRATION:
SOLUTION:

Part 4 Cost Flows
SUMMARY OF ACCOUNTING FOR FACTORY OVERHEAD
• At the beginning of the period:
Estimated amount of overhead / Estimated amount of allocation base

= predetermined overhead rate
• During the period:
o Predetermined overhead rate x actual amount of allocation

base incurred = total manufacturing overhead applied
o Actual overhead costs are added to the manufacturing

overhead account
• At the end of the period:
Actual manufacturing overhead cost – Total manufacturing overhead

applied = Underapplied overhead if a debit or Overapplied if a credit.
The underapplied or overapplied overhead is closed to Cost of Goods

Sold.

Assessment Prelims
ASSESSMENT
Name: __________________________________ Score: ___________

PROBLEMS
Problem 1: The Denmark Company estimates its factory overhead for the
next period at P500,000. It is estimated that 10,000 units will be produced
at a materials cost of P400,000 and will require 25,000 direct labor hours
at an estimated cost of P250,000. The machines will run about 80,000
hours.
Required: The predetermined factory overhead rate based on:
1. Material cost
2. Units of production
3. Machine hours
4. Direct labor cost
5. Direct labor hours
Problem 2: The Marco Company budgeted overhead at P255,000

for the period for Department A, on the basis of a budgeted volume of
P100,000 direct labor hours. At the end of the period, the Factory Overhead
account for Department A had a balance of P270,000; actual direct labor
hours were P 105,000.
Required:
1. Compute for the overhead application rate

2. Compute for the applied factory overhead
3. Compute for the over or under-applied overhead

PART V: PRELIMS
Concepts and Principles of
Job-Order Costing System

5 Concepts and Principles of Job-
Order Costing System
LEARNING
OUTCOMES
LO2. Account
job order costing,
process costing and
costing.
A
LEARNING ccording to Hilton (2017), a job-order
OBJECTIVES
costing system is used in an industry
where products are made individually,
1. Define and discuss
or in relatively small batches, and one
job-order costing
system concepts.
product or batch is readily distinguishable from
the other.
2. Identify and
illustrate the The job order costing system is used when
primary various items used are sufficiently different
documents used from each other and has a significant cost.
in accumulating Manufacturing companies usually receive orders
costs for job-order for products or services. The products and
costing system. services made under this costing system have
two dominant characteristics:
1. Unique and are produced or provided

individually, in lots, batches, or in some
other grouping; and
2. Products or services use different
amounts of inputs of materials, labor and
overhead.
The cost of materials, labor and overhead in job

order costing system are accumulated to a
specific job. A job is a single unit or group of
units identifiable as being produced to distinct
customer specifications.

Part 5 Concepts and Principles of Job-Order Costing System
Job 1
Direct Materials Used Cost of
Finished
Direct Labor Job 2
Goods Sold
Goods
Factory Overhead
Job 3
PRIMARY DOCUMENTS USED FOR ACCUMULATING COSTS IN A JOB-

ORDER COSTING SYSTEM
The following are the primary documents that are usually used in a job-
order costing system as defined by Hilton (2017):
➢ A job-order cost sheet is used to accumulate the actual direct

materials, actual direct labor, and applied manufacturing overhead
costs for each job. The recording of costs on this record and in the
general ledger is triggered by various source documents.
➢ Material requisition forms authorize the transfer of direct

materials from the warehouse to production. In many firms, the
requisitions are based on a bill of materials that lists all of the
materials (e.g., parts) needed.
➢ Time tickets are used to record the amount of direct labor worked
on a specific job.
➢ Time card can be a physical piece of paper the employee or

supervisor fills in or a virtual record updated as the employee checks
in and out and enters the job number in a computerized information
system. The accounting department collects these cards or
downloads the information from the timekeeping system.
➢ Manufacturing overhead is entered on the job-order cost sheet in the

form of applied (i.e., estimated) overhead. Source documents, such
as invoices for factory insurance and schedules for factory
depreciation, trigger a general-ledger entry that debits the
Manufacturing Overhead account.
Job Order Cost Sheet
Details about a job are recorded on a job order cost sheet. This document
is designed to collect the costs of materials, labor and factory overhead
applicable to a specific job. The contents and arrangements of cost sheets
differ from one business to another.
Parts of a job order cost sheet:

o The top portion includes a job number, customer name,
quantity, and description of the items to be produced.
o The remainder of the form details actual costs for materials,
labor, and applied overhead
o It might also include a summary of production costs and
other budgeted cost information, especially if such
information has been used to estimate the job’s selling price
or support a bid price.
The set of job order costs sheets for all uncompleted jobs comprises Work-
in-process Inventory subsidiary ledger. Total costs contained in the job
order cost sheets for all uncompleted jobs should reconcile the Work-in-
process Inventory control account in the general ledger. An example of job
order cost sheet is presented below:
MADIG-ON SHOES
JOB ORDER COST SHEET
Job Number: 97384 Job Name: Leather shoes
Customer: Ma’am ME Date started: June 17, 2014
Date completed: July 4, 2014
Direct Materials Direct Labor Applied Overhead

Type Amount Hours Amount Hours Rate Amount
Leather P 2,000 5 P 1,000 5 30 P 150
To illustrate how the transactions are recorded in a job-order costing

system, assume the following data:
The Watson Tool Corporation, which commenced operations on

August 1, employs a job order costing system. Overhead is charged at a
normal rate of P 2.50 per direct labor hour. The actual operations for the
month of August are summarized as follows:
a. Purchases of raw materials on account, 25,000 pcs. @P

1.20/pc
b. Material and labor cost charged to production:
Job No. Units Material Direct labor cost Direct labor hours
101 10,000 P 4,000 P 6,000 3,000
102 8,800 3,600 5,400 2,700
103 16,000 7,000 9,000 4,500
104 8,000 3,200 4,800 2,400
105 20,000 8,000 3,600 1,800

c. Actual overhead costs incurred and paid:

Variable – P 18,500
Fixed – P 15,000
d. Completed jobs: 101, 102, 103, and 104
e. Sales on account – P 105,000. All units produced on Jobs 101,
102, and 103 were sold.
The journals entries for each above transactions are as follows:
a. Raw materials ₱ 30,000

Accounts Payable ₱ 30,000
b. Work-in-process - Job 101 4,000

Job 102 3,600
Job 103 7,000
Job 104 3,200
Job 105 8,000
Raw materials 25,800
Work-in-process - Job 101 6,000

Job 102 5,400
Job 103 9,000
Job 104 4,800
Job 105 3,600
Accrued payroll 28,800

Job 102 6,750
Job 103 11,250
Job 104 6,000
Job 105 4,500
Applied Factory Overhead 36,000
c. Factory overhead control 33,500

Cash 33,500
d. Finished Goods 74,500

Job 102 15,750
Job 103 27,250
Job 104 14,000

Job 1 Job 3
Direct materials ₱ 4,000 Direct materials ₱ 7,000
Direct labor 6,000 Direct labor 9,000
Applied FOH 7,500 ₱ 17,500 Applied FOH 11,250 ₱ 27,250

Job 2 Job 4
Direct materials ₱ 3,600 Direct materials ₱ 3,200
Direct labor 5,400 Direct labor 4,800
Applied FOH 6,750 ₱ 15,750 Applied FOH 6,000 ₱ 14,000
e. Accounts receivable 105,000

Sales 105,000
Cost of goods sold 60,500

Finished goods 60,500

Assessment Prelims
ASSESSMENT
Name: __________________________________ Score: ___________

Instruction: Write in the space provided if the statement is

TRUE/FALSE.
________1. A company that produces sugar will use a job order costing
system to track production costs.
________2. A company that produces sugar will use a process costing

system to track production costs.
________3. A company that manufactures custom bridal gowns will use a

job order costing system to track production costs.
________4. A company that manufactures custom bridal gowns will use a

process costing system to track costs.
________5. A company that manufactures small quantities of

identifiable products will use a job order costing system.
________6. A company that manufactures small quantities of identifiable

products will use a process costing system.
________7. A company that manufactures large quantities of homogenous

goods will use a process costing system.
________8. In an actual job order costing system, factory overhead is

assigned to a job on a periodic basis.
________9. A company that manufactures large quantities of homogenous

goods will use a job order costing system.
________10. Cost flows and physical flows of units are identical.
________11. In an actual job-order costing system, factory overhead is

assigned to a job continuously during the production process.
________12. In a normal job order costing system, actual factory overhead

is applied at the end of the period.

Assessment Prelims
________13. In a normal job order costing system, factory overhead is

applied using actual rates times actual input.

applied using predetermined rates times actual input.

applied using predetermined rates times standard input.
________16. In a standard job order costing system, factory overhead is

applied using predetermined rates times standard input.

applied using actual rates times standard input.

applied using predetermined rates times actual input.
________19. In a job order costing system, costs are accumulated for each
individual job.
________20. When raw materials are placed into production, the

materials inventory account i

Part 6 Accounting using Job-Order Costing
PART VI: MIDTERMS

Accounting using Job-Order
Costing

6 Accounting using Job-Order
Costing
LEARNING
OUTCOMES
LO2. Account
job order costing,
process costing and
joint and by-product
costing.
LEARNING
P
OBJECTIVES roduct costing is the process of tracking
and studying all the various expenses that
1. Distinguish are accrued in the production and sale of a
job-order costing product, from raw materials purchases to
from process costing expenses associated with transporting the final
product to retail establishments. It is widely
2. Implement a regarded as an extremely important component
job-order costing in evaluating and planning overall business
system strategies.
3. Explain why A Product Costing System is a management tool

job-order costing that identifies the actual cost of producing each
uses a normal product. Identifying profit or loss on each
costing rather than product, companies can identify and promote
actual costing profitable products while dropping, redesigning,
or repricing unprofitable products. Some
4. Able to benefits of product costing are:
journalize entries
used to accumulate • Selling profitable products
costs in a job order • Better managing of resources
costing system • Maximizing profits
• Understanding each product’s
5. Know how contribution to the bottom line.
spoilage is treated in
a job-order costing
system

Accounting for Materials in a Job Order Costing
The account debited when materials are purchased is Materials Inventory

and the account credited is Accounts Payable or other appropriate accounts.
The general ledger has a Materials Inventory account. This account is
supported by the materials stock cards which serve as perpetual
inventory records of costs and quantities of unused materials constitute a
subsidiary ledger each type of materials.
When a material is needed to begin a job, a materials requisition form

is prepared so that the material can be released from the warehouse and
sent to the production. This source documents indicates the types and
quantities of materials to be placed into production. Such documents are
usually prenumbered and come in multicopy sets so that completed copies
can be maintained in the warehouse, in the department, and with each job.
MADIG-ON SHOES
MATERIALS REQUISITIONS
Job Number: 97384 Number: 98765
Date: June 17, 2014
Quantity Description Unit Cost Total Cost
55 gallons Polyester Resin P 6.00 P 330,000
Issued by: Carl Bevans
Received by: Kevin Dunn
The flow of direct materials from warehouse to factory is accounted for as

a transfer of cost from Materials Inventory to Work-in-process Inventory.
Accounting for Labor in Job Order Costing
Control over costs in a job order costing system is established through

payroll registers and time records. A labor time record identifies the
employee, the amount of time spent on a particular job, and the labor cost
charged to the jobs. Time records are accumulated for each job to
determine its total direct labor cost.
Transferring employee time record information to the job order cost sheet
requires knowledge of employee labor rates which are found in employee
personal files. Time spent on the job is multiplied by the employee’s wage
rate, and the amounts are summed to find the total direct labor cost for
the period. The summation is recorded on the job order cost sheet. Time
sheet information is also used for payroll preparations.

MADIG-ON SHOES
LABOR TIME TICKET
Employee: Xymon Keith
Employee Number: 127 Week ending: June 8, 2012
Job No. Mon Tue Wed Thu Fri Sat Sun Total
97384 8 8 4 8 28
97385 4 8 12
Supervisor: Seth Levine Employee: Xymon Keith
Accounting for Factory Overhead in a Job Order Costing
There are two accounts used for factory overhead; Factory Overhead
Control and Applied Factory Overhead. Factory Overhead Control is used
to accumulate actual overhead incurred, while Applied Factory Overhead
is used to accumulate estimated factory overhead applied to production.
Estimated factory overhead is used even if there is actual factory overhead

because at the time the factory overhead is needed for costing of jobs
completed, the actual overhead is not yet available. The computation of
the cost of each job will be done upon completion of the job and this maybe
during the first week, second week or third week of the month and at this
time the actual overhead is not yet available because some items included
in the actual overhead will be known only at the end of the month.
Accounting for Jobs Completed and Product Sold
When a job is completed, its total cost is transferred through a debit to

Finished Goods Inventory and a credit to Work-in-process Inventory. Job
order cost sheets for completed jobs are removed from the work-in-process
subsidiary ledger and became the subsidiary ledger for the Finished Goods
Inventory for that job is transferred to Cost of Goods Sold. Such a cost
transfer presumes the use of perpetual inventory system, which is common
in a job order costing environment because goods are easily identified and
tracked.

ACCOUNTING FOR PRODUCTION LOSSES IN A JOB ORDER COST

SYSTEM
Production losses in a job order cost system include the cost of materials
scrap, spoiled goods (spoilage) and reworking defective goods.
Management and the entire personnel of an organization should cooperate
to reduce such losses to a minimum. As long as they occur, however, they
must be reported and controlled.
Accounting for Scrap
Scrap includes (1) the fillings or trimmings remaining after processing

materials, (2) defective materials that cannot be used or returned to the
vendor, and (3) broken parts resulting from employee or machine failures.
If scrap has a value, it should be collected and placed in storage for sale to
scrap dealers. If scrap is the result of trimmings, fillings or material residue,
it may not be possible to determine its cost. Nevertheless, a record of the
quantity of the scrap should be kept despite the fact that it cannot be
assigned any cost. The quantities of the scrap should be tracked over time
and should be analysed to determine if some of the waste us due to
inefficient use of the materials and if the inefficiency can be eliminated, at
least in part.
The full amount realized from the sale of scrap and waste can be accounted
for in any one of several ways, as long as the alternative chosen is used
consistently each period. The accounting alternatives are as follows:
1. The amount accumulated is scrap sales can be closed directly to

Income Summary and shown in the income statement under SCRAP
SALES or OTHER INCOME.
2. The amount accumulated can be credited to COST OF GOODS
SOLD. Thereby reducing the total costs charged against revenue
from the period.
3. The amount accumulated can be credited to FACTORY OVEREAD
CONTROL, thereby reducing the cost of factory overhead for the
period.
4. When scrap is directly traceable to an individual job, the amount
realized from the sale of scrap can be treated as a reduction in the
materials cost charged to that job.

Accounting for Spoiled Goods
Spoiled goods are partially or fully completed units that are defective in
some ways. Spoilage can be caused by some action taken by the costumer
or because of an internal failure. The accounting treatment for spoiled foods
depends on the event causing the spoilage.
If spoilage occurs because of some action taken by the customer, it should

not be regarded as a cost of quality. The customer should pay for this kind
of spoilage. The unrecoverable cost of the spoiled goods should be charged
to the job (that is, the salvage value of the spoiled goods should be
removed from the job, but all cost in excess of the salvage value should
remain on the job and be charged to customer.)
If spoilage occurs because of an internal failure, the unrecoverable cost of

the spoiled goods should be charged to Factory Overhead Control and
reported periodically to the management. If the cost of the spoilage is of
magnitude large enough to distort production costs, it should be reported
separately as a loss on the income statement. All production costs
expended on spoiled should be determined and removed from jobs and the
work-in-process ledger account. If spoiled goods have a salvage value, they
should be inventoried at salvage value, and the unrecoverable cost of the
spoiled goods should be charged to Factory Overhead Control.
Accounting for Rework
Rework is the process of correcting defective goods. As with spoilage,

rework can result from either an action taken by the costumer or from
internal quality failures. And as with spoilage, the accounting treatment
depends on the cause of the rework.
If the rework is caused by the customer, the cost of the rework is charged
to the job and recovered through an increase in sales price of the job.
If the rework is the result of internal failure, the cost should be charged to
Factory Overhead Control and periodically reported to management.
Defective goods should be corrected if the cost of the rework is less than
the increase in the net realizable value that will result from the
imperfections depends on whether the expected benefit therefrom exceeds
the incremental cost arising from processing.

ASSESSMENT
Name: __________________________________ Score: ___________

I. Instruction: Encircle the letter of the correct answer
1. The cost sheets for incomplete jobs at the end of the period comprise
the subsidiary ledger for
a. Finished Goods Inventory c. Raw Materials Inventory
b. Work in Process Inventory d. Supplies Inventory
2. In job order costing, payroll taxes paid by the employer for factory
employees are commonly accounted for as
a. Direct labor cost c. manufacturing overhead cost
b. Indirect labor cost d. administrative cost
3. Overhead is applied to jobs in a job order costing system
a. At the end of a period
b. As jobs are completed
c. At the end of a period or as jobs are completed, whichever is
earlier
d. At the end of a period or as jobs are completed, whichever is
later
4. The __________ provides management with an historical summation
of total costs for a given product.
a. Job order cost sheet c. employee time sheet
b. Material requisition form d. bill of lading
5. Which of the following journal entries records the accrual of the cost
of indirect labor used in production?
DEBIT CREDIT
a. Work in Process Inventory Wages Payable
b. Work in Process Inventory Manufacturing Overhead
c. Manufacturing Overhead Work in Process Inventory
d. Manufacturing Overhead Wages Payable
6. Under normal circumstances the Work in Process account used in a
job costing system:
a. Will include charges for direct labor, direct materials, and
applied overhead.
b. Will include only charges for direct materials and applied
overhead. The labor is charged to expense as incurred.
c. Will include charges for direct labor, direct materials, applied
overhead.
d. Will include only charges for direct labor and direct materials.
7. Which of the following statements concerning job costing systems is

Assessment Midterms
incorrect?
a. Cost drivers are those items which cause actual overhead to
exceed applied overhead
b. Job costing systems are appropriate to both manufacturing
and businesses
c. Traditionally, direct labor has been a very popular overhead
application base
d. In a service business, indirect costs of providing a service are
treated as overhead and applied in a manner similar to that for
factory overhead.
8. Which of the following documents is used to specify the type and
quantify of materials drawn from the storeroom, and identifies the
job to which the costs of the materials are to be charged?
a. Job Cost Sheet c. Bill of Materials
b. Material Requisition Form d. Purchase Order
9. In normal historical job order costing, the entry to record actual
factory overhead is represented by which of the following?
DEBIT CREDIT
a. Actual FOH Work in Process - Actual
b. Actual FOH Miscellaneous Accounts - Actual
c. WIP - Applied Actual FOH
d. WIP - Actual Actual FOH
10. Job order costing is
a. A cost flow assumption
b. A cost accumulation method
c. An inventory valuation method
d. An input measurement basis
II. Problems
1. The MKE Co. had the following inventories on August 1 of the current
year.
Finished goods P 250,000

Work-in-process 185,000
Materials 220,000
The work-in-process controls two jobs:
Job 401 Job 402

Materials P 30,000 P 56,000
Labor 25,000 30,000
Factory Overhead 20,000 24,000

Assessment Midterms
The following information pertains to August operations:

a. Materials purchased on account, P 280,000.
b. Materials issued for production, P 250,000. Of this amount, P 30,000
was for indirect materials; the difference was distributed. P 55,000
to Job 401; P 70,000 to Job 402; and P 95,000 to Job 403.
c. Materials returned to the warehouse from the factory, P 8,000, of
which P 3,000 was for indirect materials, the balance from Job 403.
d. Materials returned to vendor, P 10,000.
e. Payroll after deducting P 30,250 for withholding taxed, P 16,000 for
SSS premiums, P 3,750 for PhilHealth and P 12,000 for Pag-IBIG,
was P 338,000. The payroll due to employees was paid during the
month.
f. The payroll was distributed as follows: P 104,000 to Job 401; P
125,000 to Job 402; P 105,000 to Job 403 and the balance represents
to indirect labor.
g. The share of the employer for payroll was recorded – P20,000 for
SSS premiums; P 3,750 for PhilHealth contributions and P 12,000 for
Pag-IBIB funds.
h. Factory overhead, other than previously mentioned, amounted to P
150,000. Included in this figure was P 30,000 for depreciation of
factory building and equipment and P 9,500 for expired insurance on
the factory. The remaining overhead was remain unpaid at the end
of August.
i. Factory overhead was applied to production at the rate of 80% of
direct labor cost.
j. Jobs 401 and 402 were completed and transferred to the finished
goods warehouse.
k. Jobs 401 was shipped and billed at a gross profit of 40% of cost of
goods sold.
l. Cash collections from accounts receivable during August were P
35,000.
Required: Prepare the journal entries to record the above

transactions and a cost of goods sold statement.
2. RAINBOW Corp. uses a job order costing system. On September 1,

the company had the following account balances:
Raw materials inventory P 166,200

Work-in-process inventory 528,150
Cost of goods sold 2,366,000
Work-in-process inventory is the control account for the job cost

subsidiary ledger. On September 1, there were three accounts in the
job cost ledger with the following balances:

Assessment Midterms
Job 75 P 296,600
Job 78 158,400
Job 82 73,150
The following transactions occurred during September:
Sept. 01 Purchased P 470,000 of raw materials on account.

02 Issued P 475,000 of raw materials as follows: Job 75 –
P 21,900; Job 78 – P 113,900; Job 82 – P 198,300; Job
86 – P128,100; indirect materials of P 12,800.
15 Prepared and paid the factory payroll for September 1-
15 in the amount of P 184,250. Analysis of the payroll
reveals the following information as to where labor effort
was devoted:
Job 75 2,215 hours P 22,150

Job 78 5,580 hours 55,800
Job 82 6,075 hours 60,750
Job 86 2,770 hours 27,700
Indirect wages 17,850
16 RAINBOW applies manufacturing overhead to jobs at a

rate of P 7.50 per direct labor hour each time the labor
is made.
16 Job 75 was completed and accepted by the customer and
billed at a selling price of cost plus 25%.
20 Paid the following monthly factory bills: utilities – P
8,600; rent – P 19,150; and accounts payable (accrued
in August) of P 45,500.
30 Recorded additional factory overhead costs as follows:
depreciation P 103,250; expired prepaid insurance P
17,550; and accrued taxes and licenses P 6,500.
30 Recorded the gross salaries and wages for the factory
payroll for September 16-30 of P 178,600. Analysis of
the payroll follows:
Job 78 4,420 hours P 44,200

Job 82 5,825 hours 58,250
Job 86 5,990 hours 59,900
Indirect wages 16,250
Required: Prepare journal entries for the transactions for

September. Prepare a T-account to determine the cost of each job.

Part 7 Concepts and Principles of Process Costing System
PART VII: MIDTERMS

Concepts and Principles of
Process Costing System

7 Concepts and Principles of

Process Costing Systems
LEARNING
OUTCOMES
LO2. Account
job order costing,
process costing and
joint and by-product
costing.
LEARNING
OBJECTIVE
o ftentimes the production of manufactured
products is easily divisible into specific
jobs, and the job costing method illustra-
ted in the previous chapter is appropriate.
1. Differentiate However, the job order costing method does not
process costing from work well when the production cycle involves a
job order costing continuous flow of raw materials through
various processing departments, and the
2. Know the five finished output is characterized as homogenous
steps in a process units, each displaying the same basic
costing system to characteristics.
assign costs to units
completed and to For example, does anyone really know which
units in ending work- barrel of oil was used to produce the last tank of
in-process gasoline you purchased for your vehicle?
Obviously, the crude oil was pumped from the
3. Know how ground, transported, put through a refinery,
equivalent units of transported to a storage tank, etc. The
production, unit molecules of oil were stirred, cracked, blended,
costs, and inventory and converted many times so that it is no longer
values determined possible to trace your tank of gasoline back to
using weighted any specific barrel of oil. The gasoline was not
average and FIFO produced as a specific job; it was the result of a
method “process.” The physical nature of these
“processes” makes it hard to identify and
associate specific units of direct labor and direct
material with the final output.
Now, if you were in charge of a refinery, how would you associate the cost
of the barrels of crude oil with the gallons of finished gasoline? Logic will
tell you to develop a mathematical approach that would divide the total
cost of all oil and allocate it in some proportion to all gallons of gasoline.
This is the essence of “process costing.”
Process Costing is the methodology used to allocate the total costs of

production to homogenous units produced via a continuous process that
usually involves multiple steps or departments. It refers to a product
costing procedure whereby products are assigned costs by departments or
processes. Cost accumulation and unit cost computation are by
departments or processes. It is used when products are manufactured
under conditions of continuous processing or under mass production
methods where the products manufactured within a department are
homogenous. Each unit of product or service within the same category is
identical or nearly so. Product or services in process cost system
environment have two dominant characteristics:
1) Products or services are identical or similar and are produced or

provided on a continuous basis.
2) Products or services receive substantially identical amounts of
materials, labor, and overhead.
Cost flows under process costing are similar to those under job-order
costing. Raw materials are purchased and debited to raw materials account.
Direct materials used in the production, direct labor and applied overhead
are changed to work in process account. In a production process with
several processes, there is a work-in-process account for each department
or process. Goods completed in one department are transferred out to the
next department. When units are completed in the final department or
process, their cost is credited to Work-in-process and debited to Finished
Goods. This cost flow is represented below:

1st process
Materials Used
Direct Labor 2nd process
Applied Factory overhead
3rd process
Finished Goods
Cost of Goods Sold
Input Costs Assigned to Products Input Costs Assigned to Products
The big difference between job costing and process costing arises in the
work in process “units.” Under job order costing the costs are captured for
each job. Under process costing, costs are captured for each process or
department. Process costing entails handing off accumulated costs from
one department to the next. With a job costing system, the costs of each
job were tabulated on some form of job cost sheet. A similar tabulation of
costs is needed for process costing, but with emphasis on costs by
department. The cost report that is prepared for each department is termed
a cost of production report.

Characteristics of Process Costing
• Cost data are accumulated and reported by departments or

processes for a period of time.
• A cost of production report is used to collect, summarize, and
compute total and unit costs. This is subsidiary record for work in
process.
• Production in process at the end of the period is stated in terms of
equivalent units of production.
• Costs of completed units of a department are transferred to the next
processing department in order to arrive at the total costs of the
finished products during a period. At the same time, costs are
assigned to units still in process.
• The procedures of process costing are designed to:
1. Accumulate materials, labor, and factory overhead costs by
departments
2. Determine a unit cost for each department
3. Transfer costs from one department to the next and to finished
goods
4. Assign costs to the inventory of work still in process
Cost of Production Report
This is the most convenient vehicle for accumulating costs of each

department for a particular period. It is also the only source of summary
journal entries at the end of the month. Its main purpose is to determine
periodic total and unit costs. A production reports provides information
about the physical units processed in the department and also about the
manufacturing costs associated with them. Thus, a production report is
divided into a unity information section and a cost information section. In
general, a cost production report would show the following:
1. Total and unit costs transferred to it from a preceding department

2. Materials, labor and factory overhead added by the department
3. Unit cost added by the department
4. Total and unit cost accumulated by the end of operations in the
department
5. The cost of beginning and ending work in process inventories
6. Cost transferred to a succeeding department or to a finished goods
storeroom

Method of Costing Inventory under Process Costing System
The two methods of accounting for cost flows in process costing are the (1)
weighted average method, and (2) FIFO method. These methods relate to
the manner in which cost flows are assumed to occur in the product
process. The difference between the two lies solely in the treatment of the
work performed in the prior period on the beginning work-in-process
inventory method. Under the average method, the units and costs from the
current period are combined with the units and costs from the prior period.
In contrast, FIFO method assumes that work performed in the last period
on beginning work-in-process inventory is not commingled with the current
period work.
(1) Weighted Average Method (AVERAGE METHOD)
The weighted average costing method treats the beginning inventory

costs and the accompanying equivalent output as if they belong to the
current period. This is done for costs by adding the manufacturing costs
incurred during the current period. The total cost is treated as if it were the
current period’s total manufacturing costs.
This method assume that units processed in any one costing period
absorb the same amount of materials, labor and overhead and therefore
acquire the same unit cost. Beginning work in process merged with these
started in process during a period to arrive a representative average unit
cost.
(2) FIFO Method
The FIFO method assumes that units in process at the beginning are
to be completed ahead of these that were started in process during the
period. The equivalent units and manufacturing costs of beginning work in
process are excluded from the current period unit cost calculation.
This method recognizes that the work and costs carried over from
the prior period legitimately belong to that period. Only the costs incurred
this period is allocated between finished goods and ending work in process.

STEPS IN THE PREPARATION OF COST PRODUCTION REPORT
1. Summarize the flow of Physical units
Physical units refer to the total units that are to be considered in

the department or process, no matter their stage of completion at
the beginning and end of the month. It comprises of:
1. Total units to account for
Beginning inventory + Units started (transferred in)

during the period
2. Total units accounted for
Units completed and transferred + Ending Inventory
2. Compute Equivalent units of production (EUP) per cost

component
One feature of process costing scenarios is that inventory is usually

produced in a continuous process. Production does not start and stop
just because a calendar page is being flipped. It is very likely that
goods will be in various stages of production within each department
at the end of each accounting period. How are the costs incurred to
be allocated between work in process versus finished goods?
To deal with the aforementioned question, accountants have devised

the concept of an equivalent unit. An equivalent unit is a physical
unit expressed in terms of a finished unit. As a simple example, ten
units in process that are 30% complete equates to three equivalent
units of output. None of the ten units are complete; merely the
equivalent amount of work necessary to complete three units is said
to be performed.
Equivalent units of production are the complete units that could

have been produced given the total amount of manufacturing effort
expended during the period. It measures the amount of work
done in each production phase in terms of fully processed
units during a given period. It is the amount of resources that is
required to complete one unit of a product with respect to the cost
element being considered. This is used to determine the cost per
unit of the completed product in a process costing.

There is a need to calculate equivalent units because of a department

usually has some partially completed units in its beginning and ending
inventory. The objective of equivalent units is to allocate materials,
labor and overhead costs to finished goods, ending work in process, and
possibly lost units. The number of physical units is multiplied by the
percentage of completion to calculate equivalent units. The stage or
percentage of completion is the average percentage of work completed on
a unit of product at any point in time. The basic idea of equivalent units of
production is illustrated below:
Two completed products are equivalent to one completed

product.
So, 10,000 units 70% complete are equivalent to 7,000

complete units.
The equivalent units of production under two methods can be

computed as follows:
a. Average Method
Units completed and transferred

+ (Ending inventory x % complete)
b. FIFO Method
(Beginning inventory x % not complete at start

of the period)
+ Units started and completed
+ (Ending inventory x % complete)
• The FIFO equivalent units can also be computed by subtracting the

equivalent units in the beginning work in process inventory that had
been produced in the previous period from the weighted average
EUP.
Weighted average EUP
Less: Beginning work in process EUP
= FIFO EUP

3. Compute total Cost to account for
Cost in beginning inventory + Cost of current period
4. Compute Unit cost per equivalent unit per cost component
a. Average Method
Cost in beginning inventory + Cost of Current period

Equivalent units of production (EUP) for component
b. FIFO Method
Cost of current period

EUP for component
5. Assign cost to inventories
a. Average Method
Transferred: Units transferred x Cost per EUP for

each component
Ending inventory: EUP for each x Cost per EUP for

component each component
b. FIFO Method
Transferred: Beginning inventory costs

+ EUP of beginning inventory x Cost per EUP for
each component
+ Units started and x Cost per EUP for
completed each component
Ending inventory: EUP for each x Cost per EUP for

component each component

The steps in the preparation of the Cost of Production Report can

be summarized as follows: ☺
To account for: Beg. Invty. + Started

Physical units
Accounted for: Completed & + End.
Transferred Invty.
Equivalent units of production = Physical Units x % of completion
Beginning inventory costs

Costs to account for
Current period costs
Costs to account for

Unit cost = EUP
Completed & transferred units

Assign costs to
Ending work-in-process inventory

Illustration:
Cathleen Company started producing a product that is processed in two

departments – Melting & Mixing Department, and Molding & Cutting
Department. All materials are added at the beginning of the process in the
Melting and Mixing Department. Subsequently, the individual products are
cut into lengths and followed by packaging to be transferred into the
finished goods warehouse. Labor and overhead are added continuously
throughout the process.
Cathleen was puzzled how she was going to determine the value of the
products in the work in process and finished goods inventories. The
valuation of the products would affect both the cost of goods sold and the
inventory balances of her company. She asks her best friend Christian, a
CPA, to help her determine the value of the products in the work in process
inventory and finished goods inventories for financial statement
presentation purposes.
Cathleen has provided Christian the following information for its Melting &
Mixing Department:
Units:
Beg. Invty. (40% complete as to labor and overhead) 25,000
Started during the period 510,000
Completed and transferred to Molding & Cutting Dept. 523,000
End. Invty. (80% complete as to labor and overhead) 12,000
Cost of beginning inventory:
Direct materials P 42,650
Direct labor 4,113
Overhead 18,365
Current period costs:
Direct materials P 433,500
Direct labor 75,777
Overhead 263,913
From the given information above, the cost of production report for the
Melting and Mixing Department using the weighted average and FIFO
method:

Weighted Average Method
Megan Company
Cost of Production Report - Melting & Mixing Department
June 30, 2010
Physical Equivalent units of production
units Materials Labor Overhead

Units to account for:
Beginning inventory 25,000
Started 510,000
535,000
Units accounted for:
Completed & Transferred 523,000 523,000 523,000 523,000
Ending inventory 12,000 12,000 9,600 9,600
535,000 535,000 532,600 532,600
Materials Labor Overhead Total

Cost to account for:
Beginning inventory ₱ 42,650 ₱ 4,113 ₱ 18,365 ₱65,128
Current costs 433,500 75,777 263,913 773,190
476,150 79,890 282,278 ₱838,318
Unit cost/Cost per EUP ₱ 0.89 ₱0.15 ₱ 0.53 ₱1.57
Assign costs to:

(1.57 x
Completed &Transferred 523,000) ₱821,110
Ending Inventory ₱ 10,680 ₱ 1,440 ₱ 5,088 17,208
₱838,318

FIFO Method
Megan Company
Cost of Production Report - Melting & Mixing Department
June 30, 2010
Physical Equivalent units of production

units Materials Labor Overhead
Units to account for:
Beginning inventory 25,000
Started 510,000
535,000
Units accounted for:
Beg. Invty. Completed 25,000 - 15,000 15,000
Started & Completed 498,000 498,000 498,000 498,000
Completed & Transferred 523,000
Ending inventory 12,000 12,000 9,600 9,600
535,000 510,000 522,600 522,600
Beg. Invty Materials Labor Overhead Total

Cost to account for:
Beginning inventory ₱65,128 - - - ₱ 65,128
Current costs - 433,500 75,777 263,913 773,190
65,128 433,500 75,777 263,913 ₱838,318
Unit cost/Cost per EUP ₱0.85 ₱0.15 ₱0.51 ₱1.50
Assign costs to:

Beg. Invty. Completed ₱ 65,128 - ₱ 2,175 ₱ 7,575 ₱ 74,878
Started & Completed (1.50 x 498,000) 747,000
Completed & Transferred ₱ 821,878
Ending Inventory ₱ 10,200 ₱1,392 ₱ 4,848 16,440
₱ 838,318

From the cost of production report (weighted average and FIFO), we can
summarize the journal entries for the Melting and Mixing Dept. of Jessevie
Company:
a. To record issuance of materials to production
WIP inventory – Melting & Mixing P433,500

Raw materials
P433,500
b. To record accrue salaries for direct labor
WIP inventory – Melting & Mixing 75,777

Accrued salaries payable 75,777
c. To apply overhead costs to production

Applied factory overhead 263,913
d. To transfer cost of completed units to Molding Dept.

Weighted Average Method:
WIP inventory – Molding & Cutting 821,110

FIFO Method:
WIP inventory – Molding & Cutting 821,878


REFERENCES
Bragg, Steven. (2018). “Advantages of Cost Accounting”:

https://www.accountingtools.com/articles/the-advantages-of-cost-
accounting.html- retrieved: July 8, 2019
De Leon, Norma; Ellery De Leon; and Guillermo De Leon. (2019). “Cost Accounting
and Control”: GIC Enterprise & Co., Inc. Sampaloc, Manila
Guerrero, Pedro. (2018). “Cost Accounting- Principles and Procedural Applications”:

GIC Enterprise & Co., Inc. Sampaloc, Manila
La Marco, Nicky. (2019). “Cost Accounting Practices in the Service Industry”:

https://smallbusiness.chron.com/cost-accounting-practices-service-
industry-42794.html- retrieved: July 8, 2019
Rante, Gloria. (2016). “Cost Accounting”:Millennium Books, Inc., Mandaluyong City,

Philippines
Top Accounting Degrees (2022). “What is the purpose of cost accounting”:

https://www.topaccountingdegrees.org/faq/what-is-the-purpose-of-cost-
accounting/
Lanen, William; Anderson, Shannon; & Maher, Michael. (2017). “Fundamentals of

Cost Accounting”: McGraw-Hill Education, 2 Penn Plaza, New York

NOTES


Cost Accounting and Control Midterms - Edited

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Cost Accounting and Control Midterms - Edited

Uploaded by

Copyright:

Available Formats

OBE-Based

For Internal Use Only

Burauen Community College

Written and Designed by:

Burauen Community College

Introduction to Cost Accounting 9

Part 2 Cost: Concepts and Classification 19

Cost Behavior: Analysis and Use 29

Concepts and Principles of Job-Order 58

Have you ever been into a factory where a large number of

Cost Accounting and Control ‖ Cadion 8

LO1. Utilize costs and

Cost Accounting is a field of accounting that measure, records, and

WHAT IS THE PURPOSE OF COST ACCOUNTING?

• Quantify Productivity - The first important purpose of cost accounting

• Help With Decisions - Other than productivity, according to Forbes,

• Minimize Production Costs – Cost minimization is a basic rule used

• Sustainability Efforts - Finally, this profession also deals with the

Cost Accounting and Control ‖ Cadion 10

translation, they are researching ways that facilitate lower or non-

• Some other important purposes of cost accounting include the

RELATIONSHIP OF FINANCIAL ACCOUNTNG, MANAGEMENT

Cost accounting provides information relating to cost of acquiring and

financial information relating to the costs of acquiring or using resources in the

Cost Accounting and Control ‖ Cadion 11

statements. Financial accounting reports are derived from posting to the

Cost accounting information addresses the demands of both financial

Financial Accounting Managerial Accounting

Cost Accounting Data Base

One area in which managerial and financial accounting overlap is in

Cost Accounting and Control ‖ Cadion 12

WHAT IS COST MANAGEMENT?

Cost management is the process of planning and controlling the costs

Cost management is said to be a more comprehensive concept than cost

Cost Accounting and Control ‖ Cadion 13

Name: __________________________________ Score: ___________

Instruction: Encircle the letter of the correct answer.

1. Cost Accounting is directed toward the needs of

A. Regulatory agencies C. External users

2. Broadly speaking, cost accounting can be defined as a(n)

A. External reporting system that is based on activity-based costs.

3. Cost accounting provides all, EXCEPT:

A. Information for management accounting and financial accounting.

4. Cost accounting is necessitated by

A. The high degree of conversion found in certain businesses.

Cost Accounting and Control ‖ Cadion 14

6. Cost accounting and management accounting

A. Require an entirely separate group of accounts than financial

7. In comparing financial and management accounting, which of the

A. historical, precise, useful

8. Which of the following topics is more concerned to management

A. Generally Accepted Accounting Principles

9. The process of ___________ causes the need for cost accounting.

A. Conversion B. Sales C. Controlling D. Allocating

10. Which of the following statements is false?

A. I only B. II only C. Both I and II D. Neither I nor II

11. Which of the following statements is true?

A. Management accounting is a subset of cost accounting.

Cost Accounting and Control ‖ Cadion 15

D. Financial accounting is a subset of cost accounting.

12. The person most likely to use management accounting information is a

A. Banker evaluating a credit application

13. Management accounting is considered successful when it:

Name: ________________________ Score: _

Name: ________________________ Score: _