Cost Accounting Reviewer

Accountancy Students’ Scholastic Events and Tutorial Support
School Year: 2021 - 2022

Academic Resources: Reviewer
Cost Accounting and Control (ACMAS 2137)
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INTRODUCTION TO COST ACCOUNTING
Cost Accounting Review Papers
❖ Introduction to Cost Accounting

Financial Management vs. Managerial Accounting vs. Cost Accounting
Financial Managerial
Accounting Accounting
(for inventory (for special
costing purposes reports to
in the FS) management)
Cost
Accounting
(product cost
information)
• Financial Accounting – the branch of accounting that is most concerned with addressing the
needs of the firm as a whole
- Meet external information needs
- Comply with GAAP
• Managerial Accounting – the branch of accounting that is most concerned with addressing the
needs of specific departments of the firm
- Meet internal information needs
- Does not comply with GAAP
• Cost Accounting – the branch of accounting that serves as a bridge between financial and
managerial accounting
- deals with the process of recording and summarizing the amount of
cost that is spent on the company’s activities
- provides the detailed cost data that management needs to control
current operations and plan for the future.
➢ Flow of Manufacturing Costs
Direct
Materials Work in Finished Cost of
Direct Labor Process Goods Goods Sold
Factory (Assets) (Assets) (Expense)
Overhead
____________________________________________________________________________________________
➢ Computation of Cost of Goods Sold and Cost of Goods Manufactured
Direct materials
Raw materials inventory, beg. xxx
Purchases xxx
Cost of Materials Available for Use xxx
Raw materials inventory, end (xxx)
Cost of Materials Used xxx
Indirect materials used (xxx)
Direct Materials Used xxx
Direct Labor xxx
Factory Overhead xxx
Total Manufacturing Cost xxx
Work in Process Inventory, beg xxx
Cost of Goods Put into Process xxx
Work in Process Inventory, end (xxx)
Cost of Goods Manufactured xxx
Finished Goods Inventory, beg xxx
Cost of Goods Available for Sale xxx
Finished Goods Inventory, end (xxx)
Cost of Goods Sold xxx
____________________________________________________________________________________________
COST CONCEPTS AND BEHAVIOR
Basic Cost Terminologies

• Cost – a sacrificed or forgone resource to achieve a specific objective
• Actual cost – a cost that has occurred
• Budgeted cost – a predicted cost
• Cost object – anything for which a cost measurement is desired
Cost Classifications and Types of Cost Included
cost classified as to •Direct Cost

ASSOCIATION WITH
COST OBJECT •Indirect Cost
cost classified as to •Variable Cost

REACTION TO •Fixed Cost
CHANGES IN ACTIVITY •Mixed Cost
classification on the
•Product cost
FINANCIAL •Period cost
STATEMENTS
Cost Classified as to Association with Cost Object

• Direct Cost – can be conveniently and economically traced (tracked) to a
cost object
Note:
- Cost tracing is based on material requisition
A specific cost may be
document, and payroll recapitulation sheet
both a direct cost of one
o Examples: cost of steel, tires, assembly line wages
cost object and an
• Indirect Cost – cannot be conveniently or economically traced
indirect cost of another
(tracked) to a cost object
cost object
- Instead of being traced, these costs are allocated to a
cost object in a rational and systematic manner.
o Examples: electricity, rent, property taxes, plant administration expenses
Factors Affecting Direct/Indirect Cost Classification:

• The materiality of the cost in question
• The available information-gathering technology
• Design of operations
____________________________________________________________________________________________
Cost Classified as to Reaction to Change in Activity

Total Peso Cost per Unit
Change in proportion with

output
Variable Costs Unchanged in relation to output
More output = more cost
Unchanged in relation to output Chang inversely with output

Fixed Costs
*within a relevant range More output = Lower Cost
• Mixed Costs – a mixed cost has both a variable and a fixed component. On a per unit basis, a
mixed cost does not fluctuate proportionately with changes in activity nor does it remain
constant with changes in activity
Semi-variable Cost Step Cost

5 6
4 5
4
3
3
2 2
1 1
0 0
10 20 30 40 10 20 30 40 50 60 70 80 90 100
Variable Costs Fixed Cost Mixed Costs
Separating Mixed Costs:

• To determine variable and fixed predetermined overhead rates, separate mixed costs into
variable and fixed component
𝑦 = 𝑎 + 𝑏𝑋
➢ Formula for straight line:
Where: y = total cost

a = fixed portion of the total cost
b = variable cost
X = activity base to which y is related
____________________________________________________________________________________________
Methods for Separating Mixed Costs:

• High-Low Method
o Use actual observations
o Considers only two data points
▪ Highest and lowest level of activity
o Must disregard outliers when analyzing mixed costs
Equation:
𝑐𝑜𝑠𝑡 𝑜𝑓 ℎ𝑖𝑔ℎ 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑙𝑒𝑣𝑒𝑙 − 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑙𝑜𝑤 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑙𝑒𝑣𝑒𝑙

𝑏=
ℎ𝑖𝑔ℎ 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑙𝑒𝑣𝑒𝑙 − 𝑙𝑜𝑤 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑙𝑒𝑣𝑒𝑙
𝑎 = 𝑦 − 𝑏𝑋
• Least Squares Regression Analysis

o Statistical technique that analyzes the relationship between dependent and
independent variables
▪ Dependent variable : Cost
▪ Independent variables : Activities
o Regression line provides line of best fit for the data
o Used to develop an equation that predict an unknown value of a dependent variable
from the known value of one or more independent variables
Equation:
𝛴𝑥𝑦 − 𝑛(𝑥)(𝑦)
𝑏=
𝛴𝑥 2 − 𝑛(𝑥)2
𝑎 = 𝑦 − 𝑏𝑥
Regression Analysis Assumptions:
▪ Independent variable must be a valid predictor of the dependent variable

*relationship can be tested by determining the coefficient of correlation
▪ Reliable only within the relevant range
▪ Useful only as long as circumstances existing at the time of its development remain
constant
____________________________________________________________________________________________
Cost Classification: According to Presentation on the Financial Statements
Income Statement
Product Cost
• Direct material
Sales Prime Costs
xx • Direct labor
Cost of Goods Sold • Factory overhead Conversion Costs
(xx)
Gross Profit xx
Period Cost
Operating Expenses (xx) • Selling Expense
Net Income xx • General and Administrative Expense
• Product Costs
o Direct material – conveniently and economically traced to cos object
o Direct labor – labor used to manufacture a product or perform a service
- Includes wages paid to direct labor employees, production bonuses, payroll
taxes
o Overhead – indirect production cost
- Includes: indirect materials, indirect labor, other indirect cost (e.g. utilities,
depreciation), fringe benefits (if cannot be easily traced to product), overtime
(due to random scheduling), cost of quality (prevention costs, appraisal costs,
failure costs)
▪ Product costs first appear on the balance sheet in inventory accounts
▪ Transferred to the income statement when product is sold
• Period Costs
o Selling Expense
o General and Administrative Expense
▪ Appear on the income statement when incurred
▪ Expensed when incurred
____________________________________________________________________________________________
JOB ORDER COSTING
❖ METHODS OF PRODUCT COSTING
Cost Accumulation System

Defines • Job Order Costing
- cost object • Process Costing
- method of assigning costs to production
Valuation Method • Actual Cost System

Specifies: • Normal Cost System
- how product costs will be measured • Standard Cost System
• Non-cost system
Cost Accounting System
• Cost System
❖ NON-COST SYSTEM VS. COST SYSTEM
NON-COST SYSTEM COST SYSTEM

• Flow of cost is not accounted for in • Flow of cost is accounted for in detail so
detail that the unit costs and inventory costs
• Periodic Inventory method is used can be promptly determined
• Cost of Goods Manufactured and Sold • The Perpetual Inventory method is
can only be arrived at after an inventory used
taking of raw materials, work in process
and finished goods
*Note: the Cost System shall be used all throughout this course
❖ JOB ORDER COSTING VS. PROCESS COSTING
Job Order Costing Process Costing

• Small quantities • Large quantities
• Batches of identifiable, unique, and • Homogenous units pass through a
tailor-made products series of similar processes
• User-specific services
____________________________________________________________________________________________
• Tracks costs by job • Tracks costs by batch of goods by
department
Job Order Costing Process Costing

• Costs are accumulated by individual job • Costs are accumulated by processing
• Unit costs are determined by dividing department
the total costs on the job cost sheet by • Unit costs are computed by dividing the
the number of units on the job individual departments’ costs by the
• The job cost sheet provides the details equivalent production
for the work in process account • The cost of production report provides
the detail for the Work in Process
account for each department
Examples: Examples:
▪ Boeing (aircraft manufacturing) ▪ Nestle (Milo, Nido, etc.)
▪ EEI Corporation (construction) ▪ Uniliver (Dove, Clear, Rexona, etc.)
▪ Walt Disney Studios (movie production) ▪ Frito Lay (Lays, Cheetos, etc.)
❖ Methods of Valuation
Cost Accumulation
Actual Normal Standard
Systems
Actual Direct Material Actual Direct Material Standard Direct Material
Actual Direct Labor Actual Direct Labor Standard Direct Labor
Actual Overhead Applied Overhead Applied Overhead
Job Order Costing (assigned to job at end using predetermined Using predetermined
of period) rate (s) at completion of rate(s) when goods are
job or end of period completed or at end of
(predetermined rate period (predetermined
times actual input) rate times standard input)
Actual Direct Material Actual Direct Material Standard Direct Material
Actual Direct Labor Actual Direct Labor Standard Direct labor
Actual Overhead Applied Overhead Standard Overhead
Process Costing (assigned using FIFO or Using predetermined using predetermined
weighted average cost rate(s) (Using FIFO or rate(s) (will always be
flow) weighted average cost FIFO)
flow)
____________________________________________________________________________________________
❖ JOB ORDER COST CYCLE – NORMAL COSTING
Procurement Production Warehousing Selling
Job Order Cost Sheet
Work in Process Finished Goods Cost of Goods

Materials Sold
Labor
WIP Subsidiary Ledger
JO 11
Factory Overhead,
Control
JO 12
❖ JOB ORDER COSTING PRO-FORMA JOURNAL ENTRIES (Normal Cost System)

Transaction Journal Entries
Purchases of materials Materials xx
Accounts Payable/Cash xx
Purchase returns Accounts Payable/Cash xx

Materials xx
Issuance of materials to production Work in Process xx
Factory Overhead, Control xx Direct Materials
Materials xx Indirect Materials
____________________________________________________________________________________________
Materials returned to the warehouse Materials xx
Work in Process xx
Factory Overhead, Control xx
Factory wages earned Factory Payroll xx Gross Pay
Withholding Taxes Payable xx
SSS Cont. Payable xx
PhilHealth Cont. Payable xx
Pag-ibig Cont. Payable xx
Salaries and Wages Payable xx Net Pay
Employer’s share Factory Overhead, control xx

SSS Cont. Payable xx
PhilHealth Cont. Payable xx
Pag-ibig Cont. Payable xx
Labor charged to production Work in Process xx Direct Labor

Factory Overhead, Control xx Indirect Labor
Factory Payroll xx
Ex.: Cash,
Other actual overhead or indirect cost Factory Overhead, Control xx Accounts Payable,
incurred Various Accounts xx Accumulated
Depreciation etc.
Factory Overhead charged to Work in Process xx
Production Factory Overhead, Control xx Equal to Actual
Cost incurred if
Transfer to Finished Goods Finished Goods xx under Actual Cost
Work in Process xx System
Sale of Finished Goods Accounts Receivable/Cash xx Equal to Applied

Sales xx Overhead if under
Normal Cost
Cost of Goods Sold xx System
Finished Goods xx
____________________________________________________________________________________________
FACTORY OVERHEAD CONTROL (under Normal Cost System)

Transaction Overapplied (applied > actual) Underapplied (applied > actual)
Disposition of If amount is insignificant: If amount is insignificant:
Factory Overhead Factory Overhead, Control xx Cost of Goods Sold xx
variance (under Cost of Goods Sold xx FOHC xx
normal cost
system) If amount is significant: If amount is significant:
Factory Overhead, Control xx Work in Process xx
Work in Process xx Finished Goods xx
Finished Goods xx Cost of Goods Sold xx
Cost of Goods sold xx FOHC xx
Factory Overhead, Control

Actual cost Applied cost
____________________________________________________________________________________________
PROCESS COSTING
❖ Job-Order Costing vs. Process Costing: Similarities and Differences
Job-Order Costing Process Costing

Differences • Used when many • Used when a single
different jobs having product is produced on
different production a continuing basis or for
requirements are a long period of time
worked on each period • Accumulated Cost by
• Accumulate costs by department
individual jobs • Compute unit costs by
• Compute unit costs by department
job on the job cost
sheet
Similarities • Both systems assign material, labor, and overhead costs to
products and they provide a mechanism for computing unit
product costs
• Both systems use the same manufacturing accounts,
including Manufacturing Overhead, Raw Materials, Work in
process, and Finished Goods
• The flow of costs through the manufacturing accounts is
basically the same in both systems
Job-Order Costing vs. Process Costing: Cycle

WAREHOUSING
SELLING
PROCUREMENT
PRODUCTION
Work in
Direct Process
Materials Inventory
Job order
Costing: Costs
Direct Labor are traced and Finished Cost of
applied to Goods
individual job Goods Sold
Inventory
Manufacturing Process
Overhead Costing: Costs
are traced and
applied to
departments
____________________________________________________________________________________________
Process Cost Flow (Journal Entries)
Particulars Debit Credit
Work in Process – Dept. A xx

To record the use of Direct Work in Process – Dept. B xx
Material Raw Materials xx

Work in Process – Dept. B xx
To record direct labor costs
Salaries and Wages Payable xx

To apply overhead to
departments
Manufacturing Overhead xx
To record the transfer of

goods from Department A to
Department B
To record the completion of
goods and their transfer Finished Goods xx
from Department B to Work in Process – Dept. B xx
Finished Goods Inventory
To record the transfer of
Cost of Goods Sold xx
Finished Goods inventory to
Finished Goods xx
Cost of Goods Sold
❖ Process Costing Methods

Weighted Average (WA) Method
• Makes no distinction between work done in prior or current periods
• Blends together units and costs from prior and current periods.
• Determines equivalent units of production for a department by adding together the
number of units transferred out plus the equivalent units in ending Work in in Process
Inventory
____________________________________________________________________________________________
First-In, First-Out, (FIFO) Method

• Generally considered more accurate than the weighted-average method
• Differs from the weighted-average method in two ways:
o The computation of equivalent units
o The way in which the costs of beginning inventory are treated
❖ Cost of Production Report (Comprehensive Illustration Problem)
First Department: Gem Company applies 100% of materials at the start of processing in Dept. 1
Conversion costs are evenly applied. The August data are shown below:
Units in process-Aug 1 Conversion costs 40% complete ……………………………… 7,000

Units transferred out ………………………………………………………………………………….. 18,000
Units completed, still on hand …………………………………………………………………….. 16,000
Units in process, Aug. 31, conversion costs 45% complete ………………………….. 6,000
Work in Process, Aug. 1

Beginning balance:
Material costs …………………………………………………………………………………………….. 24,500
Labor costs …………………………………………………………………………………………………. 11,400
Applied OH …………………………………………………………………………………………………. 9,500
45,400
Cost added in August
Material costs ……………………………………………………………………………………………… 115,500
Labor costs ………………………………………………………………………………………………… 48,700
Applied OH ………………………………………………………………………………………………… 40,500
204,700
Second Department: In Dept. 2, Gem adds all materials at the end of the processing. Conversion costs
are evenly applied. The August data are shown below:
Units in process-Aug 1 Conversion costs 70% complete ……………………………… 5,000

Units transferred out ………………………………………………………………………………….. 17,000
Units completed, still on hand …………………………………………………………………….. 2,000
Units in process, Aug. 31, conversion costs 40% complete ………………………….. 4,000
Work in Process, Aug. 1

From preceding dept…………………………………………………………………………………….. 34,800
Material costs …………………………………………………………………………………………….. 20,000
Labor costs …………………………………………………………………………………………………. 15,500
Applied OH …………………………………………………………………………………………………. 9,700
____________________________________________________________________________________________
117,000
Cost added in August
Material costs ……………………………………………………………………………………………… 56,000
Labor costs ………………………………………………………………………………………………… 47,500
Applied OH ………………………………………………………………………………………………… 30,300
204,700
Weighted Average Method

____________________________________________________________________________________________
____________________________________________________________________________________________
FIFO Method
____________________________________________________________________________________________
ACCOUNTING FOR PRODUCTION LOSSES (JOB ORDER COSTING)
❖ TYPES OF QUALITY COSTS

Prevention Costs – costs incurred to prevent product failure
Appraisal Costs – costs incurred to detect product failure
Failure costs – costs incurred when a product fails
• Internal failure costs : occur during the production process
• External failure costs : occur after the product has been sold
❖ TOTAL QUALITY MANAGEMENT (TQM)

- A company wide approach to quality improvement that seeks to improve quality in all
processes and activities
➢ Common Characteristics of TQM

• The company’s objective for all business activity is to serve its customers
• Top management provides an active leadership role in quality management
• All employees are actively involved in quality improvement
• The company has a system of identifying quality problems, developing solutions, and
settling quality-improvement objectives
• The company places a high value on its employees and provides continuous training as
well as recognition for achievement
Continuous Quality Improvement – presumes that constraints change over time as

techniques, practices, and customers’ needs change
- Requires constant effort of everyone in the company
❖ PRODUCT AND MATERIAL LOSSES (JOB ORDER COSTING)

Accounting for Scrap
- residual material that results from manufacturing a product
- can sometimes be sold for relatively small amounts
- examples: short lengths from woodworking operations, edges from plastic molding
operations, and frayed cloth and end cuts from suit-making operations
Recognizing scrap at the time it is sold

Cash or AR xx
Recognizing scrap at the time of its sale
Scrap revenues xx
(treated as additional revenue)
Cash or AR xx
Scrap Attributable to Specific Job Work in Process Inventory xx
Cash or AR xx
Scrap Common to All Jobs
____________________________________________________________________________________________
Recognizing scrap at the time it is produced

Scrap Inventory xx
Scrap Attributable to a Specific Job Work in Process Inventory xx
Scrap Inventory xx
Scrap common to all jobs Factory Overhead, control xx
Cash or AR xx
When scrap is sold Scrap Inventory xx
Scrap initially treated as attributable to a specific job:
Scrap is sold for more or less than the value Cash or AR xx

Work in Process Inventory xx
for which it is recorded
Scrap Inventory xx
Gist: any difference between the sales price
Scrap initially treated as common to all jobs:
and the recorded value is treated as an
adjustment to the account that was originally Cash or AR xx
credited (WIP or FOC) Factory Overhead, control xx
Scrap Inventory xx
Scrap is reused as direct materials rather than sold as scrap

Materials xx
Scrap returned to storeroom Factory Overhead Control xx
Work in process Inventory xx

Reuse of scrap Materials xx
Normal vs. Abnormal Loss

• Normal Loss – expected during production
- Anticipated on all jobs
- Include cost when calculating predetermined overhead application rate
- Include cost less the estimated disposal value
• Abnormal Loss – exceeds what is expected during production
o Period cost – includes cost of abnormal loss less any disposal value
____________________________________________________________________________________________
Accounting for Spoilage or Spoiled Goods

- Goods that have been damaged through imperfect machining or processing
- Spoiled goods cannot be corrected because it is not technically possible or economical to
correct them
Illustrative Problem: Plastico. Inc. manufactures 1,000 custom designed plastic chairs for San
Juan Inc. on Job 876. One hundred (100) chairs are found to be spoiled after their completion.
These 100 chairs are not usable to the customer and are not correctable to an acceptable
condition. Nevertheless, Plastico can sell 100 chairs as seconds to Francis for P50 each. An
additional 100 chairs are manufactured to meet San Juan Inc.’s order Total cost of the Job is
71,500. Plastico normally sells its work at 150% of cost. Prepare necessary journal entries.
Normal Spoilage – Charge to Specific job

- Normal in particular job or due to strict specifications
- Salvage value is removed from WIP
Spoiled goods inventory [100x50] 5,000

Finished Goods Inventory [71.5k-66.5k] 66,500
Work in Process Inventory 71,500
-------------------------------- or -------------------------------------------
Spoiled goods inventory 5,000
Completion of the product To remove estimated disposal value of spoiled goods
from WIP [100 x 50]
Finished Goods Inventory 66,500

Work in process Inventory 66,500
To record the cost of the completed tables
[71.5k-66.5k]
Cash or AR 99,750
Sales [66,500 x 150%] 99,750
Sale of finished goods
Cost of Goods Sold 66,500
Finished Goods 66,500
Cash or AR 5,000
Sale of spoiled goods Spoiled Goods Inventory 5,000
____________________________________________________________________________________________
Normal Spoilage – Charge to All Jobs (internal failure)

- Inherent in the regular manufacturing process; due to internal failure brought by an
employee error or worn-out machinery
- Unrecovered cost of the spoiled goods should be charged to Factory Overhead
Control
- Include the estimated unrecoverable cost when calculating predetermined overhead
application rate
Completion of the product Spoiled Goods Inventory [100 x 50] 5,000

Factory Overhead Control 1,500
FG Inventory [71.5k-5k-1.5k] 65,000
Work in Process 71,500
--------------------------------- or ------------------------------------------
Spoiled Goods Inventory [100 x 50] 5,000

Factory Overhead Control 1,500
To record estimated sales value of spoiled goods and
charged loss to manufacturing overhead control

To record cost of good tables completed [71.5k -6.5k]
Sale of the finished goods Cash/AR 97,500

Sales [65,000 x 150%] 97,500

Sale of the spoiled goods Cash/AR 5,000

Spoiled Goods Inventory 5,000
Abnormal Spoilage
- Loss in excess of the set expectation level or due to extraordinary factors beyond the
control of production mean (ex: flood or earthquake)
- The cost of spoilage is treated as period cost
Completion of the product Spoiled Goods Inventory [100 x 50] 5,000

Loss from abnormal spoilage 1,500
____________________________________________________________________________________________
FG Inventory [71.5k-5k-1.5k] 65,000
--------------------------------- or ------------------------------------------
Spoiled Goods Inventory [100 x 50] 5,000

Loss from abnormal spoilage 1,500
To record estimated sales value of spoiled goods and
charged loss to manufacturing overhead control

To record cost of good tables completed [71.5k -6.5k]
Sale of the finished goods Cash/AR 97,500

Sales [65,000 x 150%] 97,500

Sale of the spoiled goods Cash/AR 5,000

Spoiled Goods Inventory 5,000
Reworking Defective Goods

- Rework is the process of correcting defective units in order to bring them into salable
condition
- For example: defective units of products (such as pagers, computers, and telephones)
detected during or after the production process but before units are shipped to
customers can sometimes be reworked and sold as good products
Illustrative Problem: Plastico. Inc. manufactures 1,000 custom designed plastic chairs for San
Juan Inc. on Job 876. One hundred (100) chairs are found to be defective and they were
reworked to an acceptable condition. Total cost of the job is P 71,500. An additional rework
cost P 2,000 materials and P 500 labor were incurred and P1,500 was applied as overhead to
meet San Juan Inc.’s order. Plastico normally sells its work at 150% of cost
Normal Defective Goods – (Charged to a Specific Job)

- Due to exacting specifications or customer-imposed standards
- The rework costs are charged to Work in Process Inventory account
____________________________________________________________________________________________
WIP Inventory 4,000
Raw materials inventory 2,000
To record cost of rework Factory Payroll or Wages Payable 500
Factory Overhead, Control 1,500
FG Inventory [71,500 + 4,000] 75,500

To record completion
WIP Inventory 75,500
Cash or AR [75,500 x 150%] 113,250
To record the sale Cost of Goods Sold 75,500
Normal Defective Goods – (Charge to All Jobs)

- Not attributable to a specific job; due to internal failure brought about by an
employee error or worn-out machine
- The rework costs are charged to Factory Overhead, and are spread to all jobs
- Include estimated rework cost when calculating predetermined overhead application
rate

To record cost of rework Factory Payroll or Wages Payable 500
FG Inventory 71,500
To record completion WIP Inventory 71,500
Cash or AR [71,500 x 150%] 107,250

To record the sale
Abnormal Defective Goods

- Due to extraordinary factors
- The rework costs are recorded to a loss account (period cost)
Loss from abnormal rework 4,000

To record cost of rework
Factory Payroll or Wages Payable 500
____________________________________________________________________________________________
FG Inventory 71,500
To record completion WIP Inventory 71,500
Cash or AR [71,500 x 150%] 107,250

To record the sale
In a Nutshell: Accounting for Scrap

Scrap is material residue from normal manufacturing operations
• If the value of scrap is immaterial, no record is made until it is sold. The simplest
recording procedure is to credit the proceeds to Scrap Revenue (other income)
• If the value of scrap is material, the proceeds may be credited to Work in Process
(if scrap is attributable to specific job) or to Manufacturing Overhead (if scrap is
common to all jobs)
• For high value scrap, the amount of scrap is recorded to a Scrap Inventory account
▪ Waste as distinguished from scrap materials refers to the amount of raw materials
leftover from a production process for which there is no further use. Waste is not
usually salable at any price and must be discarded.
In a Nutshell: Accounting for Spoilage

Spoiled goods may be sold as seconds. The losses involved may be charged:
• To a particular job when the spoilage is directly related to special processes or when
exacting specifications are required for the job
• To Manufacturing Overhead; spreads the cost over all jobs; this spreads the cost
over all jobs completed during the period
• To a Loss account; if spoilage is abnormal
In a Nutshell: Reworking Defective Goods

Defective goods can be reworked into salable goods. The rework costs may be charged to
manufacturing overhead or added to existing charges against a specific job
• If the rework costs is specific to a job, the cost is charged to Work in Process (added
to the cost of that job)
• If the rework costs are due to normal production process, the cost is charged to
Manufacturing Overhead (Charged to all jobs)
• If the rework cost is abnormal, the rework cost is charged to a Loss account (other
income)
____________________________________________________________________________________________
ACCOUNTING FOR PRODUCTION LOSSES (PRODUCT COSTING)
❖ Spoiled or Lost Units

- Are units that have been damaged or improperly manufactured and cannot be completed as
salable products
➢ Classifications:
• Normal Spoilage/Normal Lost Units – inherent in the manufacturing process,
unavoidable and cannot be eliminated
- Part of production cost
• Abnormal Spoilage/Abnormal Lost Units – results from unusual and nonrecurring
factors, such as fire or water damage; avoidable and controllable
- Treated as a period expense
Quantity Schedule
Actual Units
WIP beg. xx
Started in Process/ Rec’d from previous dept. xx
Total units to account for xx
Transferred out
Work in Process, beg. xx
Place in Process/Rec’d xx EUP = Actual Units x Work Done
WIP, end xx
Normal loss xx EUP = Actual Units x Work Done
Abnormal loss xx (WD depends as to when the lost
Total units accounted for xx units are detected)
❖ Normal Lost Units

Continuous Loss – loss occurs fairly uniformly throughout the process
Discrete Loss – loss occurs at a specific point and is detectable only when a quality check
is performed
▪ Treatment of Neglect – lost units are considered as never having been put into production
regardless of the amount work performed on them
____________________________________________________________________________________________
Cost of Normal Lost Units

Stage of Inspection Work Done
First Department Second Department
Start of the
Zero
production/ Normal
(Theory of Neglect) Unit cost (Preceding
Shrinkage
Department) x
During the Production No cost of lost units
Actual Normal Lost
(Point of Inspection is Zero
Unit
not Identified or (Theory of Neglect)
Continuous Loss)
WD for materials:
Depends on when
materials are added,
(Unit Cost of
During the Production and the inspection
Preceding Dept x
(Point of Inspection is point Unit cost (this dept.)
Actual Normal Lost
identified) x EUP of normal lost
Units) + (Unit cost of
WD for CC: units
this Dept. x EUP of
Depends on the Point
Normal Lost Units)
of Inspection
End of Production
100%
(Discrete Loss)
➢ Allocation of Normal Lost Units

Stage of Inspection
Absorbing Units
Start/During End
FIFO Method:
• In Process beg. (finished and transferred) xx
• Started/Received (finished and transferred) xx xx
• Completed and On Hand xx xx
• In process, end xx
Weighted Average Method:

• Finished and transferred xx xx
• Completed and On Hand xx xx
• In process, end xx
Notes:
• Normal losses are treated as product costs
• General rule: the cost of normal losses should be assigned to good units that have
passed the inspection point during the current period
____________________________________________________________________________________________
❖ Abnormal Lost Units
Cost of Normal Lost Units

Stage of Inspection Work Done Second
First Department
Department
Zero
Since the lost units were Unit cost from
discovered at the start of Preceding
Start of Production the production, then they No cost of lost units Department x
will be removed from the Actual Abnormal
actual production and will Loss
never be process
It depends on the point (UC from Prec.

of inspection or what Dept. x Actual
Unit cost this
particular percentage Abnormal Loss) +
During the Production Department x EUP of
abnormal loss (UC of this dept. x
Abnormal Loss
happened EUP of Abnormal
Loss)
100% (UC from the

Because they are already Preceding
completed when they Unit cost this Department x
End of Production were discovered Department x EUP of Actual Abnormal
Abnormal Loss Loss) + (UC of this
Department x EUP
of Abnormal Loss)
❖ Accounting for Increase in Units

• The addition of materials in subsequent department/s may result in an increase in the
number of physical units
• When there is an increase in units during production, the total costs is spread among the
larger number of units to produce lover average unit costs
____________________________________________________________________________________________
JOINT PRODUCTS
Review Papers
❖ Joint Products
• Joint products – are the primary outputs of a joint process; each has substantial revenue
generating ability
• Split-off point – the point at which all joint products are recognized and separately
identifiable
• Separable costs – cost beyond the split-off point
➢ Allocation of Joint Costs to Joint Products

Ex.
Total Joint cost P100,000
Production in units
Product X 15,000 units
Product Y 8,000 units
Product Z 2,000 units
Material content per unit (QM): Weight factor assigned per unit (WF/SM):
Product X 10 grams Product X 1 point
Product Y 20 grams Product Y 4 points
Product Z 95 grams Product Z 1.5 points
Selling price at split-off point per unit (MVSP): Selling price at completed state (NRV):
Product X P 4.00 Product X P 6.00
Product Y P 11.00 Product Y P 15.00
Product Z P 26.00 Product Z P 18.00
A. Quantity Method (QM)

Total
Joint Production Joint Cost
Grams/unit Weight in Ratio Unit Cost
Product (units) Allocated
Grams
X 15,000 10 150,000 30% 30,000 2.00
Y 8,000 20 160,000 32% 32,000 4.00
Z 2,000 95 190,000 38% 38,000 19.00
Total 500,000 100% 100,000
*This method ignores the market value of the products involved. This is normally used by industrial engineers
using some scientific basis such as tons, quartz, or any other basis
____________________________________________________________________________________________
B. Average Unit Cost Method (AUCM)
Production Joint Cost
Joint Product Ratio Unit Cost
(units) Allocated
Product X 15,000 60% 60,000 4.00
Product Y 8,000 32% 32,000 4.00
Product Z 2,000 8% 8,000 4.00
25,000 100% 100,000
*It is assumed that the product is homogenous, and one product does not require more or less cost than any
other product in the group. The disadvantage of this method is that the physical units used for allocating joint
costs may have no relationship to the revenue producing capacity of the individual products
C. Weighted Factors or Survey Method (WF/SM)

Total
Joint Production Joint Costs
Points Weighted Ratio Unit Cost
Product (units) Allocated
Units
X 15,000 1 15,000 30% 30,000 2.00
Y 8,000 4 32,000 64% 64,000 8.00
Z 2,000 1.5 3,000 6% 6,000 3.00
25,000 50,000 100% 100,000
*Weighted factors are assigned to each unit based on size, difficulty of manufacture, technological
engineering, etc. Finished products are multiplied by the weight factor.
D. Gross Market Value Method or Relative Sales Value

• Market value at split-off point (MVSP) (if the problem is silent, use this)
Selling Gross
Joint Production Joint Cost
Price at Market Ratio Unit Cost
Products (units) Allocated
Split-off Value
X 15,000 4.00 60,000 30% 30,000 2.00
Y 8,000 11.00 88,000 44% 44,000 5.50
Z 2,000 26.00 52,000 26% 26,000 13.00
200,000 100% 100,000
• Net Realizable Value Method (NRV)

Additional Info:
Subsequent costs
Product X P 29,000 Product Y P 11,000 Product Z P 6,000
Ultimate Ultimate (Less)

Joint Joint Cost *Total
Sold (units) Selling Market Separable NRV Ratio Unit Cost
Products Allocated Cost
Price Value Cost
X 15,000 6 90,000 (29,000) 61,000 30.50% 30,500 59,500 3.96667
Y 8,000 15 120,000 (11,000) 109,000 54.50% 54,500 65,500 8.18750
Z 2,000 18 36,000 (6,000) 30,000 15% 15,000 21,000 10.5000
246,000 200,000 100% 100,000 146,000
____________________________________________________________________________________________
*Total Cost = Joint Cost Allocated + Separable Cost
➢ Cost of Ending Inventory
Cost of Ending Inventory = Ending Inventory (units) x Cost per unit
❖ By-products – are those that come out incidental to the joint products
➢ Method of Allocating Joint Cost to By-Product
1) No Joint Cost Allocated to by Product : No cost of production is assigned to them. Any revenue
resulting from sales of by-product is credited to income or to cost of the main product. In some
cases, costs subsequent to split-off point may be offset against the by-product revenue For
inventory costing, an independent value may be assigned to the by-product. The net revenue from
the sale of the by-product may be shown in the income statement in the four following ways:
A. Deduction From Production of Main Product
B. Deduction From Cost of Sales of Main Product
C. Other Income
D. Additional Sales Revenue
Ex:
The following has been taken from the record of Maya Company covering its operations for
the month of November:
Main Product:
Sales 42,000 units @ P20
Beginning Inventory 0
Total Production Cost (50,000 units)
Materials 210,000
Labor 160,000
Applied Overhead 80,000
Selling Expenses 190,000
By-Product
Sales 29,000 units @ P1.10
Beginning Inventory 0
Total Production Cost (30,000 units)
Subsequent costs P0.10 per unit
Required: Income statement showing in tabular form the presentation of the net revenue
from the sale of by-product if treated as (a) deduction from cost production, (b) deduction
from cost of sale, (c) other income, (d) additional sales revenue
____________________________________________________________________________________________
a b c d
Deduction Deduction Other Add'l
Prod Cost COS Income Sales Rev
Sales:
Main Product 840,000 840,000 840,000 840,000
By-Product (1.10-.10) 29,000
Total
Sales 840,000 840,000 840,000 869,000
Cost of Sales:
Production Costs 450,000 450,000 450,000 450,000
Less: Net Rev from by-product 29,000
Net Production Costs 421,000 450,000 450,000 450,000
Less: Inventory-end* 72,000 72,000 72,000 72,000
Cost of Sales-Gross 349,000 378,000 378,000 378,000
Less:Net Rev from by-product 29,000
Cost of Sales-Net* 349,000 349,000 378,000 378,000
Gross Profit on Sales 491,000 491,000 462,000 491,000
Selling & General Expenses 190,000 190,000 190,000 190,000
Operating Income 301,000 301,000 272,000 301,000
Other Income
Net Revenue from sale of by-product 29,000
Income before income tax 301,000 301,000 301,000 301,000
*Note: Units unsold = 50,000 (Production) – 42,000 (Sales) = 8,000 on-hand

Production cost = (210,000 + 160,000 = 80,000) = 450,000/50,000 units = 9 per unit
Ending inventory = 8,000 units x P9 = P72,000
2) By-Products are assigned on inventory cost at the time they are produced : If any value is
assigned to the by-products, the market value of the by-products is first estimated. In addition,
the cost of further processing, marketing, and administering the by-product must also be
estimated. If the by-products can be sold in their original form at the split-off point, there are no
processing cost. In this case, only marketing and administration costs associated with placing the
by-products on the market are deducted from the market value. A percentage of the selling price
may be used to estimate the marketing and administration costs.
____________________________________________________________________________________________
Particulars Debit Credit

a. To record estimated net-market value of by-product at split-off point:
By-Product Inventory xxx
Work in Process - Main Product xxx
b. To record additional processing costs incurred:

Raw materials xxx
Factory Payroll xxx
Applied Factory Overhead xxx
c To record estimated selling & general expenses applicable to by-product

Selling Expense Control xxx
General Expense Control xxx
d To record sale of by-products

Cash or Accounts Receivable xxx
By-Products Inventory xxx
• Reversal Cost Method: sometimes called normal net profit method

: is a procedure of pro-rating the joint cost to 2 or more products by
the process of elimination
: this method reduces the manufacturing costs of the main product by
deducting the estimated net market value of the by-product
prevailing at the time the by-product is recovered
The estimated net market value or joint cost assignable to the by-product is obtained by
working back from the estimated gross market value as follows:
Estimated sales value of by product xxx

Less: Estimated normal profit xxx
Estimated selling & gen. exp xxx xxx
Estimated total manufacturing costs xxx
Less: Subsequent cost (or costs after separation) xxx
Estimated manufacturing costs before separation xxx
____________________________________________________________________________________________
Main Product By-Product # 1 By-Product # 2

Cost before separation xxx
Market value of by-products xxx xxx
Less: Estimated profit xxx xxx
Selling & general expenses xxx xxx xxx xxx
Balance xxx xxx
Deduct: Subsequent costs xxx xxx
Joint cost assignable to by-products xxx xxx xxx
Joint cost assignable to main product xxx
Add: Subsequent costs xxx xxx xxx
Total Production Costs xxx xxx xxx
Divided by: Total
Production in units xxx xxx xxx
Cost per unit xxx xxx xxx
____________________________________________________________________________________________
ACCOUNTING FOR LABOR
❖ Labor Cost
- Comprises more than the wages that wages that have been paid to an employee, it also
includes fringe benefits such as employer’s share on SSS, PhilHealth and Pag-ibig, Vacation
Leave, and Holiday Pay and etc.
LABOR COST
Direct Labor Cost Indirect Labor Cost

- amount of wages paid to the workers - amount of the wages paid to the employees whose
who are directly engaged in the work is not directly related to the production of
manufacturing operations goods and the performance of services
- economically traceable to specific - must be allocated
product
Labor Cost Control – refers to keeping track of labor costs in total and per unit, comparing them
with predetermined figures and adopting prompt remedial measures in case there are variances
Labor cost control requires:

1. Production planning
2. Use of labor standards and budgets
3. Labor performance reports
4. Appropriate compensation including wage incentive systems
Phases in accounting for labor:

1. Timekeeping : determination of total number of hours worked by an employee and
how it is accounted for
2. Financial Accounting : payroll preparation
3. Cost Accounting : allocation of the payroll charges to the different jobs,
departments, or to overhead based on the nature of work done by the employees
Forms Used in Controlling Labor Cost:

• Clock Card (or time card) – shows the time an employee reports for work and goes out
and is used in payroll preparation
• Time Ticket (or job ticket) – shows the number of hours a worker devotes to a certain
job during a day
____________________________________________________________________________________________
• Daily Time Reports – shows how a worker spends the total number of hours timed-in
for a day
• Payroll Sheet – shows how the employees’ net pay are arrived at.
• Employees’ Earnings Record – it shows the periodic and accumulated earnings of each
employee aside from the payroll deductions made
1. Timekeeping Phase
Procedures Forms Used
01 Accumulation of the total number of Clock card
hours worked by each employee (time card)
02 Determination how the labor hours Time tickets
were spent (job tickets)
2. Financial Accounting Phase

03 Payroll preparation and the keeping of
records of employee’s earnings, Payroll sheet
deductions, payment of salaries
Payroll Sheet (Example)
Notes:
▪ In this illustration the following information is used
Deductions:
Income tax 15% Employees are paid one and a half
SSS 6% times the regular rate for hours
PhilHealth 1.5% worked in excess of 40. The rate for
Pag – ibig 1.5% hours worked on Sunday is twice
Union dues P100/employee the regular rate
____________________________________________________________________________________________
Gross Earnings of Employees

• Wages – gross earnings of an employee who is paid by the hour for only the actual
hours worked
• Salaries – gross earnings of an employee who is paid a flat amount per week or month
regardless of the hours worked in a period
• Gross earnings – the amount compensation of an employee and includes regular pay
and overtime premiums
Payroll Deductions
• *Employee’s income tax - the amount of tax to be withheld each period
• *Social Security System Contributions – levied against both the employer and the
employee
• *PhilHealth Contributions – levied against both the employer and employee in equal
amounts
• *Pag-ibig Contributions – levied against both the employer and employee in equal
amounts
*if rates not given refer to respective contribution tables
*50% employee’s share and 50% employer’s share
3. Cost Accounting Phase

04 Allocation of payroll charges to the Daily time report
different jobs, departments or to
overhead based on the nature of work Job Time Recapitulation
done by the employees Sheet
Flow of Costs
____________________________________________________________________________________________
Charging of Labor Cost to Production (Pro-forma Journal Entries)
Factory Payroll xx Gross Pay

SSS Contributions Payable xx
PhilHealth Contributions Payable xx Employees’
Record payroll Contributions
Pag-ibig Contributions Payable xx
Withholding Tax Payable xx
Cash / Salaries Payable / Payroll Payable xx Net Pay
Salaries Payable xx
Cash xx
If vouchers system is used:

Payment of payroll Payroll Payable xx
Vouchers Payable xx
Vouchers Payable xx
Cash in Bank xx

Record employer’s share
PhilHealth Contributions Payable xx
Work in Process Inventory xx Direct Labor

To charge labor cost to
Factory Overhead Control xx
production
Factory Payroll xx Indirect Labor

PhilHealth Contributions Payable xx
To record remittance
Withholding Tax Payable xx
Cash xx
____________________________________________________________________________________________
If charged to specific job (job is taken as a rush order):
Work in Process xx
Factory Payroll xx
To charge premium pay and
overtime to production If charged to all jobs (due to internal failure):
Factory Payroll xx
Classification for Labor:

1. Direct Labor
2. Indirect Labor
3. Labor Overhead
• Waiting time or idle time
• Make-up pay
• Overtime premium
• Shift premium
• Employers’ contribution for SSS, PhilHealth, Pag-ibig
❖ DOLE Pay Rules

Minimum Wage Order : all workers paid by results, including homeworkers and those
who are paid on piece rate, takay, pakyaw or task basis, shall receive not less than the
prescribed minimum wage rates under the Regional Wage Orders for normal working
hours which shall not exceed eight (8) hours a day, or a proportion thereof
Minimum Wage Rate (Region XI) : P381.00 – P396.00
Premium Pay : refer to the additional compensation for work performed with in eight
(8) hours on non-working days (such as rest day and special days) as required by law.
For worked performed on Rate Pay Based on Daily Rate

Rest days 130%
Special days 130%
Rest day & Special day 150%
Regular Holiday 200%
Regular & Rest day 260% (200% x 130%)
____________________________________________________________________________________________
ACCOUNTING FOR MATERIALS
❖ Materials Accounting
- The materials accounting system must be integrated with the general ledger
- “Materials” account is supported by a subsidiary stores or materials ledger in which there is
an individual account for each item
• Flow of materials – the order that materials are issued for use
in the factory Note: The flow of materials does
• Flow of costs – the order in which unit costs are assigned to not dictate the flow of costs
materials
❖ Inventory Costing Methods

First-In, First-Out Method (FIFO) : assumes that materials used in production are costed at the
prices paid for the oldest materials and the ending inventory is costed at the prices paid for
the most recent purchases
Purchase Units Unit cost Total

date cost
12/01 xx xx xx
12/31 xx xx xx
Ending xx aa
Inventory
Computation of Ending Inventory (shortcut) Computation of COGS:

Beg. inventory (units) xx Inventory, beg. xx
Purchases (units) xx Purchases, net of purchase return xx
Goods Available for Sale xx Goods available for sale xx
Sold (units) (xx) Inventory, end (aa)
Ending Inventory (units) xx Cost of Goods Sold bb
Multiply: Unit cost (may vary) xx
Cost of Ending units xx
Last-In, First-Out Method (LIFO) : under this PAS 2, paragraph 25:

method, the last materials purchased (the most The standard does not permit anymore the use
recent) are the first materials to be used, and the of the last in, first out (LIFO) as an alternative
materials on hand are assumed to be the first one formula in measuring cost of inventories
purchased
____________________________________________________________________________________________
Moving Average Method : materials issued, and the ending inventory are costed at the
average price; A new weighted average unit cost is computed AFTER every purchase and
purchase return
Date Units Unit cost Total cost

1/1 Balance xx xx xx
1/8 Sale (xx) xx (xx)
Balance xx xx xx Computation for Cost of Goods Sold:
1/12 Purchase xx xx xx Jan. 8 Sale xx
Balance xx new bal. xx Jan. 30 Sale Return (xx)
Cost of goods sold xx
1/20 Purchase return (xx) xx (xx)
Balance xx new bal. xx
1/30 Sales return xx xx xx
Ending Bal xx xx xx
❖ Lower of Cost or Net Realizable Value (LCNRV)

- Materials is not written down below cost if the finished goods in which they will be
incorporated are expected to be sold at or above cost
- When a decline in price of materials indicates that the cost of finished goods exceeds NRV,
the materials are written down to NRV
Computation for Net Realizable Value:

Estimated selling price xx
Less: Estimated cost of disposal (and completion) xx
Net realizable value (NRV) xx
Determining LCNRV:
Total NRV LCNRV
Cost
Product A xx xx xx
Product B xx xx xx
aa bb cc
❖ Accounting Procedures
- The purpose of materials accounting is to provide a summary from the general ledger of the
total cost of materials purchased and used in manufacturing
- All materials issued during the month and materials returned to stock are recorded on a
summary of materials issued and returned form
____________________________________________________________________________________________
Journal Entries:
Transactions Journal Entries
Purchase of materials Raw Materials Inventory xx
Accounts Payable xx
Return to vendors Accounts Payable xx

Raw Materials Inventory xx
Freight cost Raw Materials Inventory/Freight In/

Cash xx
Direct Materials
Issuance of materials to production Work in Process Inventory xx
Factory Overhead, Control xx Indirect Materials
Raw Materials Inventory xx
Returns to the stockroom Raw Materials Inventory xx

Work in Process Inventory (1DM) xx
Factory Overhead, Control (2IM) xx
1
DM: Direct Materials
2
IM: Indirect Materials
____________________________________________________________________________________________
JUST IN TIME SYSTEM AND BACKFLUSH ACCOUNTING
❖ Production Systems
Push Manufacturing Systems
- Produce in anticipation of customer orders
- Store raw material, work in process, and finished goods inventory
Pull Manufacturing Systems (JIT)

- Produce as needed
- Minimal storage
❖ JIT Manufacturing
JIT Manufacturing attempts to:
- Acquire components and produce inventory units only as they are needed
- Minimize product defects
- Reduce cycle/setup times for acquisition and production
• Kanban – a card indicating a work center’s need for additional components
Supplier Relationships
- Limited number of certified vendors who can provide quality and reliability
- Vendors become “partners”
- Considers:
o Reliability and responsiveness
o Delivery performance
____________________________________________________________________________________________
o Service
o Environmental policies
o Human resources qualifications
o Research and development strength
o Production capacity
Product Design:
o Fewest number of parts
o Standardized parts
o Minimize production steps
o Quality designed into product
o Minimal engineering changes
o Recyclability of the product
Product Processing:
• Reduce machine setup time
o Perform setup while machine is running
o Eliminate all unnecessary movements by workers and/or materials
o Use setup teams
• Continuous quality
o Ensure vendor quality at point of purchase
o Monitor worker and machine quality
• Standardizing work
o Standard procedures
o Without variation
o On time
o Every time
JIT Plants
• Minimize material handling time, lead time, movement of goods
• Use manufacturing cells which allow for visual controls, greater teamwork, quick exchange of
vital information
• Reduce storage
• Increase throughput
• Develop multiskilled workers
• Use automation (programed factory equipment)
JIT support systems

• Six-sigma method
• Internet business model
• Supply-chain management
• Business-to-business e-commerce
o Transactional
____________________________________________________________________________________________
o Information sharing
o Collaborative
Logistic support
• Open buying on the Internet
• Focused factory arrangements for vendors
o Connect vendors closely to production operations
o May involve relocation or plant modernization by vendors as well as financial assistance
from manufacturer
Benefits of JIT Manufacturing System

• Manufacturing activities are significantly reduced or eliminated
• Product quality and faster delivery are enhanced
• Inventory storage costs are reduced or eliminated
• Production cost savings are realized through improved flow of processing goods
• Specific causes or rework, scrap, and waste are reduced if not totally eliminated
• Materials and work in process are eliminated
Accounting Implications of JIT

Backflush Costing – is the accounting system used by JIT systems
- It is streamlined cost accounting method that speeds up, simplifies, and
minimizes accounting effort in an environment that minimizes inventory
balances, requires few allocations, uses standards costs, and has few
variances from standard
Stage 1: Stage 2: Stage 3: Stage 4:

Purchase of Raw Production Completion of Sale of Finished
Materials Resulting in WIP Units of Product Goods
*the aforementioned stages represent trigger points or a stage at which the journal entries are made in the
accounting system
Traditional vs. Backflush Accounting Systems (Pro-forma Journal Entries)

Backflush System
Transaction Traditional System (Trigger Points: Purchase of Mat.,
Completion of FG, Sale of FG)
Raw Materials Inv. xx Raw and In Process Inv. xx
Purchase of raw
Accounts Payable xx Accounts Payable xx
materials
Work in Process xx
DM issued to production Raw Materials xx No entry
Conversion cost incurred Work in Process xx Conversion costs, control xx

____________________________________________________________________________________________
FO, Control xx Various Accounts xx
Various accounts xx
Transfer of factory Work in Process xx

No entry
overhead cost to WIP FO, applied xx
Finished Goods xx
Completion of all Finished Goods xx
Raw and In Process Inv. xx
products Work in Process xx
Applied Conversion costs xx
Cost of Goods Sold xx Applied CC xx

Finished Goods xx COGS xx
Sale of all products
CC Control xx
FO applied *15,000 Applied CC xx

COGS *5,000 COGS xx
Underapplied
FO Control *20,000 CC Control xx
*Applied = 15,000 (cr. FOA); Actual = 20,000 (dr. FOC)
Backflush Accounting (Pro-forma Journal Entries)

Transaction Trigger points: Trigger Points:
Purchase of Materials; Sale of FG Completion of FG; Sale of FG
Purchase of materials Accounts Payable xx No entry
CC Control xx CC Control xx
CC cost incurred Various Accounts xx Various Accounts xx

FG Inventory xx
Completion of all
No entry Accounts Payable xx
products
CC, applied xx
FG Inventory xx COGS xx
COGS xx FG Inventory xx
Sale of all products Raw and In Process xx
CC, applied xx
CC, applied xx Applied CC xx

COGS xx COGS xx
underapplied
CC, control xx CC control xx
____________________________________________________________________________________________
PURCHASING, STORING, AND ISSUING MATERIALS
❖ Effective Internal Control System for Materials

➢ Materials Control
Physical Control or Safeguarding of Materials
• Limited access to materials storage areas
• Segregation of duties
• Accuracy in recording
Control Over the Investment in Materials
• Maintaining the appropriate level of raw materials is one of the most important
objectives of materials control
• Inventory of sufficient size and diversity must be maintained
• Management must determine other working capital needs in determining
inventory levels
• Adequate planning and control is required (Reorder Point & EOQ)
❖ Order Point [When orders should be placed?]

- is a point at which an item should be ordered
▪ A minimum level of inventory should be determined for each type of raw material,
and inventory records should indicate the cost and quantity of items on hand
▪ Reorder point is reached when the available quantity is just equal to the
foreseeable needs
The following items need to be taken into consideration when ordering:

• Usage – anticipated rate at which the material will be used
• Lead time – estimated time interval between the placement of an order and the
receipt of the material ordered
• Safety stock – estimated minimum level of inventory needed to protect against
stockouts
Equations and Calculations:
𝑰 + 𝑸𝑫 = 𝑳𝑻𝑸 + 𝑺𝑺𝑸
Where: I - inventory balance on hand

QD - quantities due in from orders previously placed
LTQ - lead time quantity
SSQ - safety stock quantity
Calculation for Reorder Point

Usage xx Calculation for Safety Stock
Multiplied by: Lead Time xx Normal Usage for Time Delay xx
Normal Usage for Normal Lead Time xx Add: Usage Variation xx
Add: Safety Stock xx Safety Stock xx
Reorder Point xx
____________________________________________________________________________________________
❖ Economic Order Quantity (EOQ) [How many units should be ordered?]

- The optimal quantity to order at one time
- Minimizes the total order and carrying costs over a period of time
Items to be considered:
• Ordering costs – may include the salaries and wages of purchasing personnel,
communication costs, and materials accounting and record keeping
• Carrying costs – are the costs that a company may incur in storing materials; may
include materials storage and handling costs, interest, insurance, and property taxes,
loss due to theft, deterioration, or obsolescence, and records and supplies associated
with carrying inventory
Equations and Calculations:

𝟐𝑨𝑶
𝑬𝑶𝑸 = √
𝑪
where:
EOQ - Economic Order Quantity
A - Annual requirements
O - Ordering costs
C – Carrying costs
Calculation for Carrying Cost

Calculation for Ordering Cost *Average Inventory xx
Cost per order xx Multiplied by: Carrying Cost per Unit xx
Multiplied by: No. of Orders xx Carrying Cost xx
Ordering Cost xx
*Ave. Inventory = (1/2 EOQ) + Safety Stock
Alternative Calculations: Tabular Form:
➢ Material Control Procedures
Purchase Receipt Storage Issuance

____________________________________________________________________________________________
Key Principles of Internal Control (Material Procurement)

▪ When the order point is reached, the procurement process begins
▪ Requests for purchases must be made only by authorized persons
▪ Purchase orders must be properly approved
▪ All materials received must be carefully counted and inspected
▪ Payment should be made only upon proper approval
▪ Purchasing responsibilities should involve a number of persons, so that the risk of fraud or
error is reduced
▪ Supporting documents are essential to maintain control during the procurement process
Five commonly used control procedures:

1. Order Cycling : materials are viewed on a regular cycle, and orders are placed to maintain a
desired inventory level
2. Min-max Method : minimum and maximum inventory levels are determined; reordering is
done when the minimum level is reached
3. Two-bin Method : used for inexpensive item; when the first bin is empty, and order is placed;
the second bin provides coverage until the order is received
4. ABC plan (A items: most expensive; B items: moderately priced; C items: inexpensive items) :
used with a wide variety of items having different values; the more expensive items receive
more frequent review and closer monitoring
5. Automatic Order System : an order is automatically placed when the inventory reaches a
predetermined level; this system works best when used with a computer
Materials Control Personnel
• Purchasing Agent – buy raw materials
• Receiving Clerk - responsible for the receipt of incoming shipments
• Storeroom Keeper – in charge of the materials after they have been received
• Production Department Supervisor – responsible for the operational function within the
department
❖ Materials Procurement
Important Documents
• Bill of Materials – a list of all materials needed on the job and the date they will be needed
- Prepared by the Production Manager
• Purchase Requisition – form used by Storeroom Supervisor to notify the purchasing agent that
materials be order (when materials reach reorder point)
• Purchase Order – a written authorization to the supplier to ship the specified material
- Prepared by the Purchasing Agent
- Prepared in 5 copies (For Suppliers, Storeroom, Receiving Department,
Purchasing Department [2 copies])
____________________________________________________________________________________________
• Receiving Report – the form that the Receiving Clerk uses to count and identify the materials
received
- Copies are distributed to: Purchasing Department, Storeroom, Receiving
Clerk
• Debit Memorandum – a notice to the vendor of a deduction from the invoice for the cost of
the returned materials
- Prepared by the Purchasing Agent
❖ Storage and Issuance of Materials
Receiving Production
Vendor Warehouse
Department Department
Deliver the Inspect and verify Protect materials Request Materials

materials based on the materials needed for
the Purchase Order received from the Issue materials to production using
vendor production based the Material
on the Material Requisition Form
Issue Receiving Requisition Form
Report
Key Principles of Internal Control (Storing and Issuing Materials)
▪ Admittance to the storage area is restricted
▪ Materials ledger cards, covering all receipts and issues, are maintained
▪ Each type of material is clearly identified, stored, and protected while in storage
▪ Materials are issued only upon proper written authorization
▪ The accounting system permits a periodic check of the materials ledger against the balance
of the Raw Materials account
▪ Several different persons are involved in storage and issuance operations
Important Documents
• Materials Requisition Form – prepared by the factory personnel authorized to withdraw
materials from the storeroom
• Materials Ledger Card – a subsidiary ledger which verified against the Materials account in
the general ledger
• Materials Requisition Journal – a special journal where the journal entries are recorded to
reflect the issuance of materials to production
• Job Order Cost Sheet (under Job Order Costing) – accumulates the costs charged to a specific
job
• Departmental Overhead Analysis Sheet – a sheet where all indirect manufacturing expenses,
including indirect materials, are posted
____________________________________________________________________________________________
• Returned Materials Report – a form to be filled up by the department that originally
requisitioned the materials returned to the storeroom
____________________________________________________________________________________________
FACTORY OVERHEAD
❖ Factory Overhead
- Generally defined as those costs that are not conveniently identified with particular order or
units of products (indirect materials, indirect labor, and other indirect costs)
Examples:
Indirect Materials Indirect Labor Other Indirect Costs
• Factory supplies • Factory supervisors • Employee fringe

• Cleaning supplies • Factory clerical workers benefits
• Small tools • Factory payroll clerk • Employer contributions
• Packaging materials • Receiving clerk • Factory utilities
• Storeroom supervisors • Rent - factory bldg. Or
• Purchasing clerks equipment
• Overtime premium • Depreciation - factory
(charge to all jobs) bldg. Or equipment
• Repairs & maintennace
ACCOUNTING FOR FACTORY OVERHEAD

A. Cost Behavior
• Variable costs – costs that vary in proportion to
volume changes
• Fixed costs – remain constant within relevant Accounting for Factory Overhead
range Outline
• Mixed costs – have characteristics of both fixed
and variable costs 1. Identify cost behavior patterns
Methods to use in separating Variable and 2. Budget factory overhead costs
fixed costs: 3. Accumulate actual overhead
▪ High-Low Method costs
▪ Least Square Regression Analysis 4. Apply factory overhead
estimates to production
B. Budgeting Factory Overhead Costs 5. Calculate and analyze
- Budgets are management’s operating plans differences between actual
expressed in quantitative terms and applied factory overhead
- Costs are segregated into fixed and variable
components
- Budgets can be prepared for different levels of production (flexible budget)
- Valuable management tool for planning and controlling costs
____________________________________________________________________________________________
C. Accounting for Actual Overhead Costs

- Entries are made in the general journal for indirect materials and indirect labor from
the summary of materials issued and the labor cost summary
- Other factory overhead expenses are recorded in the general ledger from the invoices
and schedules for fixed costs
- A factory overhead subsidiary ledger may be used if the number of factory overhead
accounts become too large
Journal Entry to Record Actual Overhead:

*Various accounts xx
*e.g. materials, payroll, acc. Dep, etc.
D. Apply factory overhead estimates to production

• Predetermined Overhead Rate
- Allows overhead to be assigned during the period, fulfilling the matching
principle
- Adjusts for variations not related to activity
- Compensates for fluctuations in activity level that do not affect fixed overhead
- Allows managers to be aware of product, product line, customer, and vendor
profitability
Journal Entry to Record Applied Overhead Charged to Production:
Work in process xx
*FOH, Control/Applied FOH xx
*Applied FOH = Predetermined OH Rate x Actual Activity Level
To Compute for the Predetermined OH Rate:
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑂𝐻
𝑃𝑟𝑒𝑑𝑒𝑡𝑒𝑟𝑚𝑖𝑛𝑒𝑑 𝑂𝐻 𝑅𝑎𝑡𝑒 =
∗ 𝑉𝑜𝑙𝑢𝑚𝑒 𝑜𝑓 𝐴𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝐿𝑒𝑣𝑒𝑙
Types of Overhead Rate Bases (*Volume of Activity Level):

• Units of production
• Direct Labor Hours Predetermined OH Rate:
• Direct Labor cost
• Plant-wide rate
• Machine Hours • Departmental rates
• Direct Materials Cost • Activity rates (ABC)
• Activities (ex. No. of set ups, no. of order etc.)
____________________________________________________________________________________________
Capacity Measures of Volume:
Theoretical capacity
- all production factors are operating perfectly
- Disregards:
▪ machinery breakdown
▪ holiday downtime
- Results in:
▪ significant underapplied overhead
▪ lowest product cost
Practical capacity
- Theoretical capacity reduced by ongoing, regular operating interruptions
(holidays, downtime, and start-up time)
- Usually results in:
▪ Underapplied overhead
▪ Low product cost
Normal capacity
- Considers:
▪ Historical production level
▪ Estimated future production level
▪ Cyclical fluctuations
- Attainable level of activity
- When normal capacity is greater than expected capacity, may result in:
▪ Underapplied overhead
▪ Higher product cost
Expected Annual Capacity

- Anticipated activity level for the upcoming period based on projected product
demand
- Determined during the budget process
- Should closely reflect actual costs
- Results in:
▪ immaterial overapplied or underapplied overhead
▪ Highest product cost
Predetermined OH Rate:
Plantwide Overhead Rate – a single overhead rate used throughout an entire factory
Direct labor has often been used as the allocation base for the ff reasons:
▪ Direct labor information was already being recorded
▪ Direct labor was a large component of product costs
▪ Managers believed direct labor and overhead costs were highly
correlated
____________________________________________________________________________________________
Departmental Overhead Rates

- Factory overhead is budgeted for each department
- Departmentalized overhead rates are for producing departments only; hence
OH for service department is to be allocated to producing departments
- The allocation base depends on the nature of work performed in each
department (ex.: Machining Department: Machine Hours; Assembly
Department: Labor Hours)
Classification of Departments:
• Producing Department – manufactures the product by changing the form or
material or by assembling parts
Examples:
▪ Cutting ▪ Machining
▪ Assembly ▪ Cooking
▪ Upholstery ▪ Brewing
▪ Finishing
▪ Distilling
• Service Department – contributes in an indirect way to the manufacture of the

product
Examples:
▪ Shipping
▪ Medical
▪ Production
Control
▪ Personnel
▪ Maintenance
▪ Cafeteria
▪ General Factory Cost Pool
____________________________________________________________________________________________
Allocation Methods (See: 9.1_Factory Overhead File for Illustrative Problem):

• Direct Method - under this method, the costs of each service department are
allocated only to producing
departments Step Method Allocation Priority:
• Step Method – this method allocates 1. Service Department serving the most
service department costs to all service other service departments
2. If two or more are equal (as to 1st
departments as well as producing
priority), allocate first the service
departments
department with the highest cost or
• Simultaneous Method - provides a most direct cost
way to adjust for reciprocal services
provided among the service departments; are described by an algebraic
equation
Advantages of Departmentalization:
▪ Improve product costing – allows different departments to have different OH
rates
▪ Facilitates responsibility accounting and control of overhead cost
E. Calculate and analyze differences between actual and applied factory overhead
Disposing of Overhead Differences
o If immaterial:
▪ Cost of Goods Sold
o If material:
Prorate to:
▪ Work in Process
▪ Finished Goods
▪ Cost of Goods Sold
o If overhead is underapplied, the adjusting entry:

▪ Increases COGS
▪ Decreases Net Income
o If overhead is overapplied, the adjusting entry:

▪ Decreases COGS
▪ Increases Net Income
____________________________________________________________________________________________
Accounting for Overhead Differences (under Normal Cost System):

Transaction Overapplied (applied > actual) Underapplied (applied < actual)
Disposition of If amount is insignificant: If amount is insignificant:
Factory Overhead FOH, Control xx Cost of Goods Sold xx
Differences Cost of Goods Sold xx FOH, Control xx
If amount is significant: If amount is significant:

FOH, Control xx WIP Inventory xx
WIP Inventory xx FG Inventory xx
FG Inventory xx COGS xx
COGS xx FOH, Control xx
Review: Pro-forma Journal Entry (for Factory Overhead):

Transaction Journal Entry
Actual Overhead Incurred Factory Overhead, Control xx
Various Accounts xx
Overhead Applied to Production Work in Process xx

Review: T-Account (Factory Overhead):

Factory Overhead, Control
Actual OH Applied OH
____________________________________________________________________________________________
FACTORY OVERHEAD
Review Papers
____________________________________________________________________________________________
Direct Method
Machinery Assembly Total

Factory Administration (Estimated Labor Hours) 2,000 1,600 3,600
Building and Grounds (Square Footage) 1,900 3,200 5,100
Machinery Assembly
Department's Overhead Costs ₱ 416,000 ₱ 380,000
Allocation of Service Departments' OH:
Factory Administration
M: (129,000*(2000/3600) ₱ 71,667
A: (129,000*(1600/3600) ₱ 57,333
Building and Grounds
M: (105,000*(1,900/5100) 39,118
A: (105,000*(3200/5100) 65,882
Allocated Costs 110,785 123,215
Total Costs ₱ 526,785 ₱ 503,215
Machine hours 30,000 22,800
Factory overhead rates ₱ 17.55950 ₱ 22.07083
Step Method
Estimated Labor Hours Square Footage
Building and Grounds 1,100 Machinery 1,900
Machinery 2,000 Assembly 3,200
Assembly 1,600 Total 5,100
Total 4,700
Allocation of Service Departments' Costs

Allocated Cost
Department Cost
Factory Admin. B&G Machinery Assembly
Factory Administration ₱ 129,000 ₱ 129,000.00 ₱ 30,191 ₱ 54,894 ₱ 43,915
(1,100/4,700) (2,000/4,700) (1,600/4,700)
Building and Grounds 105,000 135,191 50,365 84,826

(105,000+30191) (1,900/5,100) (3,200/5,100)
₱ 234,000.00 ₱ 105,259.00 ₱ 128,741.00
Computation of Total Overhead Costs and Unit Costs

Machinery Assembly
Department's Overhead Costs ₱ 416,000 ₱ 380,000
Allocated Costs 105,259 128,741
Total Costs ₱ 521,259 ₱ 508,741
____________________________________________________________________________________________
Reciprocal Method
Computation of Percentages
For Factory Administration For Building and Grounds
(Basis of All.: Estimated Labor Hours): (Basis of All .: Square Footage)
ELH % SF %
Building Grounds 1,100 0.23 Factory Administration 1,200 0.19
Machinery 2,000 0.43 Machinery 1,900 0.30
Assembly 1,600 0.34 Assembly 3,200 0.51
Total 4,700 1.00 Total 6,300 1.00
Calculation Calculation
= + 𝐵 𝐵= +
= + ( + ) 𝐵= + ( )
= + + 𝐵= +
1 − = + = 𝟐
=
0

Factory Administration Allocations: Building and Grounds Allocations:
B & G (155,757 * 0.23) 35,824 FA (140,824 * 0.19) 26,757
Machinery (155,757 * 0.43) 66,976 Machinery (140,824 * 0.30) 42,247
Assembly (155,757 * 0.34) 52,957 Assembly (140,824 * 0.51) 71,820

Factory Admin. B &G Machinery Assembly
Department's Overhead Costs ₱ 129,000 ₱ 105,000 ₱ 416,000 ₱ 380,000
Allocation:
Factory Administration - 155,757 35,824 66,976 52,957
Buidling and Grounds 26,757 - 140,824 42,247 71,820
Allocated Costs - 129,000 - 105,000 109,223 124,777
Total Costs ₱ - ₱ - ₱ 525,223 ₱ 504,777
____________________________________________________________________________________________
____________________________________________________________________________________________
Direct Method
Machinery Assembly Packaging Total

Maintenance (Services Provided by Maintenance) 32% 26% 28% 86%
Storeroom (Number of Requisitions) 3,500 6,000 4,100 13,600
Allocation of Factory Overhead, Computation of Total Overhead, Factory Overhead Rates

Machinery Assembly Packaging
Department's Overhead Costs ₱ 600,000 ₱ 892,000 ₱ 436,000
Allocation of Service Departments' OH:
Maintenance
M: (250,000*(32/86)) ₱ 93,023
A: (250,000*(26/86)) 75,581
P: (250,000*(28/86)) 81,395
Storeroom
M: (180,000*(3500/13600)) 46,324
A: (180,000*(6000/13600)) 79,412
P: (180,000*(4100/13600)) 54,265
Allocated Costs 139,347 154,993 135,660
Total Costs ₱ 739,347 ₱ 1,046,993.00 ₱ 571,660
Machine hours 20,000 36,000 18,000
Factory overhead rates ₱ 36.96735 ₱ 29.08314 ₱ 31.75889
Step Method
Service Provided By Maintenance Number of Requisitions
Storeroom 14% Machinery 3,500
Machinery 32% Assembly 6,000
Assembly 26% Packaging 4,100
Packaging 28% Total 13,600
Total 100%

Allocated Cost
Department Cost
Factory Admin. B& G Machinery Assembly Packaging
Maintenance 250,000 ₱ 250,000.00 ₱ 35,000 ₱ 80,000 ₱ 65,000 ₱ 70,000
(14/100) (32/100) (26/100) (28/100)
Storeroom 180,000 215,000 55,331 94,853 64,816

(180,000+35,000) (3500/13600) (6000/13600) (4100/13600)
₱ 430,000.00 ₱ 135,331 ₱ 159,853 ₱ 134,816

Machinery Assembly Packaging
Department's Overhead Costs ₱ 600,000 ₱ 892,000 ₱ 436,000
Allocated Costs 135,331 159,853 ₱ 134,816
Total Costs ₱ 735,331 ₱ 1,051,853 ₱ 570,816
Machine hours 20,000 36,000 18,000
____________________________________________________________________________________________
Reciprocal Method
Computation of Percentages
For Maintenance Allocation For Storeroom Allocation (Basis
(Basis of All.: Services Provided by Maintenance): of All.: No. of Requisitions)
SPM Decimal NoR %
Storeroom 14% 0.14 Maintenance 400 0.03
Machinery 32% 0.32 Machinery 3,500 0.25
Assembly 26% 0.26 Assembly 6,000 0.43
Packaging 28% 0.28 Packaging 4100 0.29
Total 100% 1.00 Total 14,000 0.71
Calculation Calculation
= + = +
= + ( + ) = + ( )
= + + = +
− = + 𝑺= 𝟐
= 𝟐

Maintenance Allocations Storeroom Allocations
Storeroom (256,477*0.14) 35,907 Maintenance (215,907*0.03) 6,477
Machinery (256,477*0.32) 82,073 Machinery (215,907*0.25) 53,977
Assembly (256,477*0.26) 66,684 Assembly (215,907*0.43) 92,840
Packaging (256,477*0.28) 71,814 Packaging (215,907*0.29) 62,613

Maintenance Storeroom Machinery Assembly Packaging
Department's Overhead Costs ₱ 250,000 ₱ 180,000 ₱ 600,000 ₱ 892,000 436,000
Allocation:
Maintenance - 256,477 35,907 82,073 66,684 71,814
Storeroom 6,477 - 215,907 53,977 92,840 62,613
Allocated Costs - 250,000 - 180,000 136,050 159,524 134,427
Total Costs ₱ - ₱ - ₱ 736,050 ₱ 1,051,524 570,427
Machine hours 20,000 36,000 18,000

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Accountancy Students’ Scholastic Events and Tutorial Support

School Year: 2021 - 2022

❖ Introduction to Cost Accounting

➢ Flow of Manufacturing Costs

➢ Computation of Cost of Goods Sold and Cost of Goods Manufactured

Basic Cost Terminologies

Cost Classifications and Types of Cost Included

cost classified as to •Direct Cost

cost classified as to •Variable Cost

Cost Classified as to Association with Cost Object

Factors Affecting Direct/Indirect Cost Classification:

Cost Classified as to Reaction to Change in Activity

Change in proportion with

Unchanged in relation to output Chang inversely with output

Semi-variable Cost Step Cost

Variable Costs Fixed Cost Mixed Costs

Separating Mixed Costs:

Where: y = total cost

Methods for Separating Mixed Costs:

𝑐𝑜𝑠𝑡 𝑜𝑓 ℎ𝑖𝑔ℎ 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑙𝑒𝑣𝑒𝑙 − 𝑐𝑜𝑠𝑡 𝑜𝑓 𝑙𝑜𝑤 𝑎𝑐𝑡𝑖𝑣𝑖𝑡𝑦 𝑙𝑒𝑣𝑒𝑙

• Least Squares Regression Analysis

Regression Analysis Assumptions:

▪ Independent variable must be a valid predictor of the dependent variable

Cost Classification: According to Presentation on the Financial Statements

❖ METHODS OF PRODUCT COSTING

Cost Accumulation System

Valuation Method • Actual Cost System

❖ NON-COST SYSTEM VS. COST SYSTEM

NON-COST SYSTEM COST SYSTEM

❖ JOB ORDER COSTING VS. PROCESS COSTING

Job Order Costing Process Costing

Job Order Costing Process Costing

❖ JOB ORDER COST CYCLE – NORMAL COSTING

Procurement Production Warehousing Selling

Job Order Cost Sheet

Work in Process Finished Goods Cost of Goods

❖ JOB ORDER COSTING PRO-FORMA JOURNAL ENTRIES (Normal Cost System)

Purchase returns Accounts Payable/Cash xx

Employer’s share Factory Overhead, control xx

Labor charged to production Work in Process xx Direct Labor

Sale of Finished Goods Accounts Receivable/Cash xx Equal to Applied

FACTORY OVERHEAD CONTROL (under Normal Cost System)

Factory Overhead, Control

❖ Job-Order Costing vs. Process Costing: Similarities and Differences

Job-Order Costing Process Costing

Job-Order Costing vs. Process Costing: Cycle

Process Cost Flow (Journal Entries)

Particulars Debit Credit

Work in Process – Dept. A xx

Work in Process – Dept. A xx

Work in Process – Dept. A xx

To record the transfer of

❖ Process Costing Methods

First-In, First-Out, (FIFO) Method

❖ Cost of Production Report (Comprehensive Illustration Problem)

Units in process-Aug 1 Conversion costs 40% complete ……………………………… 7,000

Work in Process, Aug. 1

Units in process-Aug 1 Conversion costs 70% complete ……………………………… 5,000

Work in Process, Aug. 1

Weighted Average Method

❖ TYPES OF QUALITY COSTS

❖ TOTAL QUALITY MANAGEMENT (TQM)

➢ Common Characteristics of TQM