MANAGERIAL

ACCOUNTING
Prepared By: Christopher Jamil SP Marasigan
Reference: Copyright© 2018 John Wiley and Son, Inc
MOTIVATION
• PICTURE A PICTURE B
 WHAT I LEARNED
Job Order Costing Work in Process Account Process Costing
Job Cost Sheet Document used Process Cost Sheet
Number of Work in Process
Unit cost computation
Determination of total
manufacturing cost
 Basic overview of flow of costs in a manufacturing setting for
production of a fire truck.

ILLUSTRATION 2.3
Flow of costs in job order costing

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Accumulating Manufacturing Costs
• Remember: Focus on the following:

• Raw Materials

• Factory Labor

• Manufacturing Overhead

• Note: Materials and Labor have its direct and indirect cost
• The total manufacturing overhead is the indirect cost + other factory overhead
How To Journalize the Raw Materials
• Remember the ruling in journalizing the purchased Raw Materials
• Debit is used when there is an increase in Assets
• Credit is used when there is a decrease in assets such as cash
• Credit is used when there is an increase in liabilities as accounts payable

Direction: Apply the above ruling on the problem.

RJAM purchased 3, 000 wood (Stock No. AA21341) at P. 150.00 per piece and
4,000 sand paper at P. 25 per piece.

Debit Raw Materials Inventory P. 550, 000

Credit Cash P. 550, 000
How to Journalize Factory Labor Costs
• Remember the ruling in journalizing factory labor

• Debit the Factory Labor

• Credit the Gross earnings of workers (factory wages payable)
• Credit the payroll taxes in the gross earnings (employer payroll taxes payable)
• Credit Fringe benefits (sick and vacation pay, pensions) shouldered by the employer

Direction: Apply the above ruling on the problem.

• RJAM incurs P. 28, 000 labor cost of that amount P. 5, 000 relates to payroll taxes payable. No fringe
benefits were recorded.

• Debit Factory Labor P. 28, 000

• Credit employer payroll taxes payable P. 5, 000
• factory wages payable P. 23, 000
How to Journalize Manufacturing Overhead Costs
• Debit Manufacturing Overhead
• Credit cost related to the manufacturing operations (except the indirect cost)

• Assume that the cost for the month are the following:
• Utilities payable P. 1, 000 - Y
• Accumulated depreciation-Building (HR) P. 20, 000 N
• Accumulated depreciation- Building (O) P. 10, 000 Y
• Property taxes payable P. 9, 000 Y
• Accounts payable(repairs of machines) P. 5, 000 Y
• Determine the total Manufacturing overhead
• Debit Manufacturing Overhead P. 25, 000
• Credit
 DO IT! 1 Accumulating Manufacturing Costs
During the current month, Ringling Company incurs the following
manufacturing costs:
a) Raw material purchases of $4,200 on account.
Dr. Raw Materials Inventory $ 4, 200
Cr. Accounts Payable $ 4, 200
b) Factory labor of $18,000. Of that amount, $15,000 relates to wages
payable and $3,000 relates to payroll taxes payable.
Dr. Factory Labor $ 18, 000
Cr. Employer payroll taxes payable $ 3, 000

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factory wages payable $ 15, 000
Copyright ©2018 John Wiley & Son, Inc. 9
 DO IT! 1 Accumulating Manufacturing Costs
During the current month, Ringling Company incurs the following
manufacturing costs:
c) Factory utilities of $2,200 are payable, prepaid factory insurance of
$1,800 has expired, and depreciation on the factory building is $3,500.
Prepare journal entries for each type of manufacturing cost.

Dr. Manufacturing Overhead $ 7, 500

Cr. Utilities payable $ 2, 200
Factory Insurance 1, 800

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Accumulated Depreciation
Copyright ©2018 John Wiley & Son, Inc.
3, 500 10
 Assigning Manufacturing Costs
Assigning manufacturing costs to work in process
results in the following entries.
1. Debit made to Work in Process Inventory
2. Credit made to
a. Raw Materials Inventory
b. Factory Labor
c. Manufacturing Overhead

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 ILLUSTRATION 2.4
Job cost sheet

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 Raw Material Costs
a. Assigned to a job when materials are issued in
response to requests.
b. Materials requisition slip
 Written authorization for issuing raw materials
 May be directly issued to use on a job - direct
materials (charged to Work in Process Inventory)
 May be considered indirect materials – charged to
Manufacturing Overhead

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ILLUSTRATION 2.5
Materials requisition slip

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Raw Material Costs
Illustration: RJAM incurs 1, 000 woods and 1, 500 sand paper to finish the order,
the entry is:
Jan. 31 Work in Process Inventory P. 150, 000
Manufacturing Overhead 37, 500
Raw Materials Inventory P. 187, 500

Raw Materials Inventory Work in Process Inventory

P. 550, 000 30,000 24,000
P. 150, 000

Manufacturing Overhead

P. 37, 500
15
 Factory Labor Costs
a. Assigned to jobs on basis of time tickets
b. Time tickets are prepared when work is performed
c. Time tickets indicate:
 Employee
 Hours worked
 Account and job charged
 Total labor cost

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 Factory Labor Costs ILLUSTRATION 2.7
Time ticket

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Factory Labor Costs
Illustration: Considering that the total factory labor cost is P 123, 000 for direct
and P. 35, 000 for indirect, respectively, the entry is :

Jan. 31 Work in Process Inventory P. 123, 000

Manufacturing Overhead 35, 000
Factory Labor P. 158, 000

Factory Labor Work in Process Inventory

550, 000 24,000
P. 150, 000
123, 000
Manufacturing Overhead
P. 37, 500
35, 000

18
 Predetermined Overhead Rate
Manufacturing Overhead Costs
a. Relates to production operations as a whole
b. Cannot be assigned to specific jobs based on actual
costs incurred
c. Companies assign to work in process and to specific
jobs on an estimated basis through use of a …

Predetermined Overhead Rate

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 Predetermined Overhead Rate
a. Based on relationship between estimated annual
overhead costs and expected annual operating
activity.
b. Expressed in terms of an activity base such as:
 Direct labor costs
 Direct labor hours
 Machine hours
 Any other measure that will provide an equitable
basis for applying overhead costs to jobs

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 Predetermined Overhead Rate
a. Established at beginning of year
b. Small companies often use a single, company-wide
predetermined rate
c. Large companies often use a different rate for each
department and each department may have a
different activity base
d. Formula for computing the predetermined rate
overhead rate is:
ILLUSTRATION 2.9

Estimated Annual ÷ Estimated Annual = Predetermined

Overhead Costs Operating Activity Overhead Rate

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 Predetermined Overhead Rate
Illustration: RJAM uses direct labor cost as the activity base.
Assuming that the company expects annual overhead costs to be
P. 560,000 and direct labor costs for the year to be P.700,000
compute the overhead rate.
ILLUSTRATION 2.11

Estimated Annual Estimated Annual =

÷ Operating Predetermined
Overhead Costs Activity Overhead Rate
$280,000 ÷ $350,000 = 80%
80%
P. P.

This means that for every peso of direct labor, RJAM will
assign of manufacturing overhead to a job.

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Predetermined Overhead Rate
Illustration: RJAM applies manufacturing overhead to work in
process when it assigns direct labor costs. Calculate the
amount of applied overhead assuming direct labor costs were
P. 123 ,000.
The following entry records this application.
Jan. 31 Work in Process Inventory P. 98, 400
Manufacturing Overhead P. 98, 400

23
 Under- or Overapplied Manufacturing
Overhead
A debit balance in manufacturing overhead means
that overhead is underapplied
A credit balance in manufacturing overhead means
that overhead is overapplied

ILLUSTRATION 2.18
Under- and overapplied overhead

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 Under- or Overapplied Manufacturing
Overhead
Any Year-End Balance in manufacturing overhead is
eliminated by adjusting cost of goods sold.
Underapplied overhead is debited to COGS
Overapplied overhead is credited to COGS

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Under- or Overapplied Manufacturing
Overhead Manufacturing Overhead
P. 25, 000 Applied
37, 500
Incurred 35, 000
P. 97, 500 P. 98, 400
Adjusting entry:

Dr. Manufacturing Overhead P. 900

Cr. Cost of Good Sold P. 900

26
 Summary of Job Order Cost Flows
ILLUSTRATION 2.16
Materials Flow of documents in a
job order cost system
Requisition
Slips

Labor Time Job Cost

Tickets Sheet

The job cost sheet summarizes the cost of

Predetermined jobs completed and not completed at the
Overhead Rate end of the accounting period. Jobs
completed are transferred to finished
goods to await sale.

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 When the finished goods are already sold
• Debit: Cash (if cash is received),
Accounts Receivable (if on credit, sent an invoice)
Notes Receivable (received a promissory note)
Credit: Sales Revenue

• Debit: Cost of Good Sold (cost incurred in producing the product)

• Credit: Finished Goods Inventory
Cost of Goods Manufactured
• Beginning WIP
• Direct Materials
• Direct Labor
• Manufacturing Overhead (Applied)
Total Manufacturing Cost
Total cost of work in Process (Beginning WIP + Manufacturing Cost)
Less, Ending WIP
Cost of Goods Manufactured
 Job Order Costing for Service Companies
• For supplies used in the project (this is raw materials in Manufacturing)
Remember:
In Job Order Costing in Manufacturing, it used Work In Process for direct materials but in
Job Order Costing in Service, it used Service Contract in Process.
In Job Order Costing in Manufacturing for indirect materials, it used Manufacturing
overhead but in Service it used Operating Overhead.
Note:
Supplies is used as the materials for Service
Service salaries and wages is utilized as the factory labor for Service.
When the job is completed, the entry is:
Cost of completed Service Contracts
Service Contract in Process
Steps in Understanding Job Order Cost
• Step 1: Be familiar to the term:
- Raw Materials (Direct and Indirect)
- Factory Labor (Direct and Indirect)
- Manufacturing Overhead (Indirect Cost, Other Factory Overhead)

Step 2: Transferring of manufacturing cost (RM,FL,MO) to the work in process inventory

Step 3: Determine the Predetermined Overhead Rate

Step 4: Add the amount on the transferred RM, FL, and MO to determine the total manufacturing
cost
Step 5: Total manufacturing cost/ unit sold= unit price
Acquisition of Raw Materials
• Purchased P. 100, 000 worth of wood and P 50, 000 value of
nails on account.

• Ruling:
• Debit- The one you purchased
• Credit: how it is being paid

• Debit: Raw Materials Inventory P. 150, 000

• Credit: Accounts Payable P. 150, 000
Determine the Factory Labor
• Considering that the total factory labor cost is P 33, 000: P. 28, 000 related to
wages payable and P. 5, 000 as the employer payroll taxes payable. What will be
the entry?
• Remember:
• Debit: Factory Labor
• Credit: wages payable
• Employer payroll taxes payable

Debit: Factory Labor P. 33, 000

Credit: wages payable P. 28, 000
employer payroll taxes payable P. 5, 000
Manufacturing Overhead (Other Factory
Overhead)
• Insurance
• Rent
• Depreciation (provided it is in the production)
• Repairs (Accounts payable)
• Utilities
• Property taxes
Determine the Manufacturing overhead (OFO)
• Rent expense P. 5, 000 Y
• Utilities expense P. 10, 000 Y
• Accumulated depreciation-HR building P. 75, 000 N
• Repairs of machineries(accounts payable) P. 35, 000 Y
• Property taxes P. 25, 000 Y
• wages payable P. 21, 000 N
• Electric Saw P. 15, 000 N

• Manufacturing Overhead= P. 75, 000

Ruling in Transferring

• Debit: Work in Process for Direct

• Manufacturing overhead for Indirect
Credit: Raw Materials Inventory/ Factory Labor
 Transferring of Raw Materials to Work in
Process
• RJAM transferred P. 85, 000 worth of Raw Materials. P. 55, 000 is used as the
direct materials while the remaining P. 30, 000 were utilized as indirect
materials. What will be the entry?

Debit: Work in Process P. 55, 000

Manufacturing overhead 30, 000
Credit: Raw Materials Inv. P. 85, 000
Assigning of Factory Labor cost on the Work in
Process
• Considering that RJAM uses P. 45, 000 as its factory cost,
wherein its direct cost is P. 30, 000 and the remaining as
the indirect cost. Determine the entry.

• Debit: Work in Process P. 30, 000

• Manufacturing overhead 15, 000
Credit: Factory Labor P. 45, 000
Determine the Predetermined Overhead Rate
(POHR)
• Estimated annual overhead cost/ Estimated annual
labor(operating activity)

Supposed that RJAM annual overhead cost is P. 550, 000

and its annual estimated labor cost is P. 950, 000. What
will be the POHR?
POHR= 58%
 Manufacturing Overhead

• ActualApplied
OFO= P. 75, 000
IM= P. 30, 000
IL= P. 15, 000
P. 120, 000 DL x POHR
(P. 30, 000 x 0.58)= P. 17, 400
P. 102, 600
Under and Overapplied
• Under= Actual is > (mas mataas) Applied
• Over= Actual is < (Mas mababa) Applied
Adjusting entry in Underapplied or Overapplied
• Ruling

• The entry for underapplied: Dr. COGS

Cr. Manufacturing overhead

• The entry for overapplied: Dr. Manufacturing overhead

• Cr. COGS
Entries for Selling
• Debit: Accounts Receivable (on account)
• Credit: Sales

Dr. Cost of Good Sold

Cr. Finished Goods Inventory
 WHAT I HAVE LEARNED
• Terms to Ponder

• Raw Materials Inventory

• Direct Labor
• Manufacturing Overhead

• Work in Process
 Job Order Cost and Process Cost Flow
Job Order Cost Flow

Work in Process
Direct Materials
Inventory
Direct Labor Finished Goods Cost of Goods
Job No. 101
Manufacturing Inventory Sold
Job No. 102
Overhead
Job No. 103

Process Cost Flow

Direct
Materials Work in Work in
Finished Goods Cost of Goods
Direct Labor Process Process
Inventory Sold
Manufacturing Department A Department B
Overhead

ILLUSTRATION 3.3
Job order cost and process cost flow

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 Production Cost Report
A production cost report is the
Key document used to understand activities
Prepared for each department and shows
Production Quantity and Cost data
Four steps in preparation:
Step 1: Compute physical unit flow
Step 2: Compute equivalent units of production
Step 3: Compute unit production costs
Step 4: Prepare a cost reconciliation schedule
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 Comprehensive Example FIFO ILLUSTRATION 3A.3
Unit and cost data—Mixing
Department

Assembly Department
Units
Work in process, June 1 100,000
Direct materials: 100% complete
Conversion costs: 70% complete
Units started into production during June 800,000
Units completed and transferred out to Baking Department 700,000
Work in process, June 30 200,000
Direct materials: 100% complete
Conversion costs: 60% complete
Costs
Work in process, June 1
Direct materials: 100% complete $ 50,000
Conversion costs: 70% complete 35,000
Cost of work in process, June 1 $ 85,000
Costs incurred during production in June
Direct materials $400,000
Conversion costs 170,000
Costs incurred in June $570,000

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 Production Cost Report
Compute the Physical Unit Flow (Step 1)
Physical units - actual units to be accounted for
during a period, regardless of work performed
Total units to be accounted for - units started (or
transferred) into production during period + units
in production at beginning of period
Total units accounted for - units transferred out
during period + units in process at end of period

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 Compute Physical Unit Flow (1) ILLUSTRATION 3A.4
Physical unit flow—Mixing
Department

Mixing Department
Physical Units
Units to be accounted for
Work in process, June 1
Started (transferred) into production
Total units
Units to be accounted
Completed and transferred out
Work in process, June 30
Total units

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 Compute Physical Unit Flow (1) ILLUSTRATION 3A.5
Physical unit flow (FIFO)—
Mixing Department

Mixing Department
Physical Units
Units to be accounted for
Work in process, June 1
Started (transferred) into production
Total units
Units to be accounted
Completed and transferred out
Work in process, June 1
Started and completed
Work in process, June 30
Total units

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 Equivalent Units of Production (2)
Equivalent Units for Materials
Kellogg adds materials at beginning of the process. 100% of
materials costs has been incurred on ending WIP.
Mixing Department—Materials
Materials
Physical Added Equivalent
Production Data Units This Period Units
Work in process, June 1 100,000 0%
Started and completed 600,000 100%
Work in process, June 30 200,000 100%
Total 900,000

ILLUSTRATION 3A.6
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 Equivalent Units of Production (2)
Equivalent Units for Conversion Costs
The Mixing Department required 30,000 equivalent units (100,000
units x 30%) of conversion costs to complete the beginning
inventory. In addition, 200,000 units of ending work in process
were 60 percent complete in terms of conversion costs.
Mixing Department—Conversion Costs
Physical Word Added Equivalent
Production Data Units This Period Units
Work in process, June 1 100,000 30%
Started and completed 600,000 100%
Work in process, June 30 200,000 60%
Total 900,000

ILLUSTRATION 3A.7
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 Compute Unit Production Costs (3)
Under the FIFO method, the unit costs of production are
based entirely on the production costs incurred during
the month.
Direct materials
Conversion costs
Total

ILLUSTRATION 3A.8
Costs incurred during production in June

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 Compute Unit Production Costs (3)
Compute unit cost for the following:

Total Materials Equivalent Units of Unit Materials

Cost + Materials = Cost
$400,000 + 800,000 = $0.50
Total Conversion Equivalent Units of Unit Conversion
Cost + Conversion Costs = Cost
$170,000 + 750,000 = $0.227
Total Materials Unit Conversion Manufacturing
Cost + Cost = Cost per Unit
$0.50 + $0.227 = $0.727
ILLUSTRATION 3A.9
Unit cost formulas and computations—Mixing Department Copyright ©2018 John Wiley & Son, Inc.
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 Prepare Cost Reconciliation Schedule (4)
Kellogg is now ready to determine the cost of goods
transferred out of the Mixing Department to the Baking
Department and the costs in ending work in process. The
total costs charged to the Mixing Department in June are
as follows.
Costs to be accounted for
Work in process, June 1
Started into production
Total costs
ILLUSTRATION 3A.10
Costs charges to Mixing Department

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 Prepare Cost Reconciliation Schedule (4)
ILLUSTRATION 3A.11
Mixing Department
Cost Reconciliation Schedule
Costs accounted for
Transferred out
Work in process, June 1
Costs to complete beginning work in process
Conversion costs (30,000 × $0.227)
Total costs
Units started and completed (600,000 × $0.727)
Total costs transferred out
Work in process, June 30
Materials (200,000 × $0.50)
Conversion costs (120,000 × $0.227)
Total costs

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 Preparing the Production Cost Report
Internal document for management that shows
production quantity and cost data for a
production department
Provides a basis for evaluating productivity of a
department
Managers can use cost data to assess whether unit
costs and total costs are reasonable
Top management can also judge whether current
performance is meeting planned objectives
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 ILLUSTRATION 3A.12

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