Cost Accounting Controlling and Costing Materials Inventory
Cost Accounting Controlling and Costing Materials Inventory
Example 1
A delivery for XYZ Trading is accompanied by an invoice indicating the
following:
Description Weight Unit Cost Amount
Materials X 900 kgs. P5 4,500
Materials Y 1,200 kgs. 4.50 5,400
Materials Z 1,500 kgs. 4.20 6,300
Subtotal 16,200
Freight charges 4,050
Total 20,250
Determine the adjusted unit cost for each item if freight-in is to be added to
the cost of materials purchased based on:
a. Invoice price b. Weight
Example 2
The Tab Co’s budget for the first half of the year contains the following
estimates:
Estimated material purchases P 3,000,000
Estimated freight-in 60,000
Estimated material issuances 2,400,000
The following selected transactions were incurred during the month of March:
March 4- Purchased materials from Sun-X Company, P170,000.
March 5- Received a bill from JRS, P3,400 for freight on materials purchased
on March 4.
March 6- Issued direct materials to production, P40,000 (at invoice price of
March 4)
Required:
Prepare the entries in general form to record all the three transactions above
using each of the methods applicable for freight-in as follows:
a. Charged directly to the stores account
b. Charged to factory overhead
c. Added to work in process upon issuance of materials using an application
rate
d. Added to purchases using an application rate.
B. Purchase discounts
Materials are recorded at net of purchase discount allowable whether taken or
not. Purchase discount forfeited will be recorded as other expenses.
Example 3
Materials are purchased at a list price of P100,000 subject to the terms of 10,
5, 2/10, n/30. Prepare journal entries to record the (1) purchase, (2)
subsequent payment within the discount period, and (3) subsequent payment
beyond the discount period.
C. Materials handling costs - the term material handling costs refers to the expense
involved in purchasing, receiving, storing and issuing materials.
1. treated as factory overhead account
Factory overhead control XXX
Vouchers payable/Sundry credits XXX
Example 4
Mintu Industries had the following estimates for the current year:
Purchasing department costs P 400,000
Receiving department costs 250,000
Warehousing department costs 550,000
Purchases 4,800,000
Material issuances 4,000,000
During the month of August, records show the following actual costs:
Purchasing department costs 32,500
Receiving department costs 18,900
Warehousing department costs 44,300
Purchases (at net invoice costs) 390,000
Materials issuances (at net invoice costs) 310,000
The Material Handling costs account is maintained in the books.
Required:
Prepare summary entries in general journal form to record for the month of
August using each of the following methods of treating material handling
costs:
1. Charged to factory overhead
2. Added to cost of purchases (using a single application rate)
3. Added to cost of materials issued (using a single application rate)
Example 5
Un-Unnoy Co had the following materials purchases and issues for a specific inventory
item:
Balance on hand, August 1 700 units @ P10
300 units @ P11
Purchases:
August 3 1,200 units @ P12
August 22 1,000 units @ P14
August 25 excess materials from
Aug. 14 issues 120 units
Issues to production:
August 14 800 units
August 16 returns to vendor from
Aug. 3 purchase 200 units
August 20 600 units
Required:
Compute the cost of materials used for the month, and the cost assigned to the
August 31 inventory under each of the following perpetual inventory costing methods:
a. First in, first out b. Last in , first out c. Moving average
COST ACCOUNTING
INVENTORY VALUATION
Net Realizable value – the estimated selling price in the ordinary course of business
less the estimated cost of completion and the estimated cost necessary to make the
sale.
2. A valuation account is set up to reduce the total value of the inventory to net
realizable value. The individual materials ledger cards are not changed and continue to
reflect cost.
Entry:
Loss on Inventory Write-down XXX
Allowance for Inventory Write-down XXX
(to record loss resulting from decline in NRV of inventory)
- addition to cost of goods sold
Sample problem:
Year 1 Year 2 Year 3 Year 4
Inventory at cost 100,000 100,000 120,000 125,000
Inventory at NRV 80,000 95,000 125,000 140,000
Inventory Shortage – missing materials were being charged out on a requisition on the
closing date
Materials ledger card
Received Issued Balance
XX
XX (XX)
2. Prepare entry to adjust the accounts for the net shortage or overage
Entries:
Manufacturing overhead control XXX
Materials XXX
(to record the net shortage)
Materials XXX
Manufacturing overhead control XXX
(to record the net overage)
Sample Problem:
Year 1 Year 2
Inventory based on Physical count 10,000 12,000
Inventory at general ledger 12,000 11,000
Cash or AR XX
Stores-Scrap XX
V. Wast materials defined. Raw materials remaining from the production cycle
but not usable for any purpose.
VI. Spoiled goods are units that do not meet production standards and are sold
for their salvage value (or market value). When spoiled goods are discovered,
they are taken out of production and no further work is performed on them.
When the job was completed, inspection rejected 1,500 pairs which were sold
for P13 each.
Required:
1. Entries if the loss is to be charged to Job No. 072.
2. Entries if the loss is to be charged to all production of the period.
3. Entries if the loss is to be charged to Job No. 072 to the extent of only
1,250 pieces, the 250 pieces being considered abnormal loss.
Example 7
Unique Fabricators in producing Job No. 143 which called for 3,800 prices
Style No. 55 incurred at cost as follows:
Materials P 21 per piece
Labor 16 per piece
Factory overhead 12 per piece (includes P.80 allowance
for spoiled goods)
When the job was completed, inspection rejected 300 pieces which were sold
for P23 each.
Required:
1. Entries if the loss is to be charged to Job No. 143.
2. Entries if the loss is to be charged to all production of the period.
3. Entries if the loss is to be charged to Job No. 143 to the extent of only 250
pieces, the 50 pieces being considered abnormal loss.
VIII. Defective goods. A product that does not meet quality control standards and
needs to be reworked to be salable as either irregular or a good product.
IX. Accounting for defective goods
DEFECTIVE GOODS
NORMAL ABNORMAL
Example 8
Arts Products Company manufactured among other items, a unique pincer. One
order Job No. 742, requiring delivery of 4,000 pincers shows the following cost per unit:
Materials P 7
Labor 4
Factory overhead applied (based
On labor cost, includes an
Allowance of P.60 for rework
Costs) 5.60
Final inspection revealed that 550 units were improperly machine. These units
were uncoupled, properly machined, and reassembled. Cost of correcting the defective
pincers consisted of materials costing P2,420 and labor cost of P1,320. Overhead is
likewise applied based on labor cost.
Required: Entries to record all cost related to the completion of the order-
1. When the specific job is charged with the rework costs.
2. When the cost of correcting defective units is applied to all jobs.
3.When the specific job is charged with the cost of rework for 400 pincers, and the
excess of 150 pincers being considered abnormal.
Example 9
During the month of March, Job No. 210 for 4,000 kitchen knives were completed at
the following costs per unit:
Materials costs P 5
Direct labor costs 4
Factory overhead (includes an allowance
Of P1.20 for rework cost) 6
Final inspection disclosed that 200 knives are defective and which were reworked at a
material cost of P600; direct labor cost of P480 and overhead at the predetermined rate
based direct labor cost.
Required: Entries to record all cost related to the completion of the order-
1. When the specific job is charged with the rework costs.
2. When the cost of correcting defective units is applied to all jobs.
3.When the specific job is charged with the cost of rework for 120 units, and the excess
of 80 units being considered abnormal.