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46 Cost Accounting
46 Cost Accounting
12.In general, the cost that could usually be most reliably predicted is: ,3. Variable cost per unit.
b. Fixed cost per unit
C. Total variable cost. ‘
d. Total fixed cost.
13. Factory supplies used would be an example of which of the following? Prime cost
Conversion cost
a. Yes Yes
b. Yes N
c. No o
Y
es
d. No N
o
14. For a manufacturing company, which of the following is an example of a period rather than
a product cost?
a. Depreciation of factory equipment.
b. Wages of a salesperson.
C. Wages of machine operators.
d. Insurance on factory equipment. >
15. The variable portion of the semi-variable cost of electricity fora manufacturing plant is a:
Conversion cost Period cost
a. Yes No
b. Yes Yes
c. No Yes
d. No No
16« Indirect costs are also known as; .•
a. Differential costs
b. Common costs
C. Opportunity costs
d. Sunk costs .
20. Which of the following should not be included as manufacturing overhead in the
manufacture of a wooden chair?
a. Glue in the chair
b. The amount paid to the individual who stains the chair
C. The workman’s compensation insurance of the supervisor who oversees production
d. The factory utilities of the department in which production takes place
Cost Accounting
48
Milktopia, Inc, produces and sells milk flavored bubble gum. Over the last five
months Milktopia had the following production costs and production volume..
Mon^ Co^ Volume (in cases)
March P 6,000 12
April 6,659 ■ 14
May 8,370 18
June 8,800 19
July 8,050 17
production?
.a. P 400 c. P 4,800
b. P 1,200 d. P 7,600
5..
Chapter 2 Cost — Concepts and Classification 49
Justine Co. produced 5,500 outdoor chairs for Job Order No. 610. Total material cost was P
51,700. Each chair required 2.2 hours of direct labor at P8.90/ hour, A total of P53,845 of
factory overhead was traced to Order 610.
6. What is the prime cost per unit of this order?
a- P 19.58 c. P 29.37
b. P 28.98 d. P 38.77
7. What is the conversion cost per unit of this order?
a. P 19.58 c. P 29.37
b. P 28.98 d. P 38,77
8. What is the unit cost of this order?
a. P 37.88 • c. P 28.09
b. P 38.77 d. P 36.99
During the month of August, Amer Corporation produced 12,000 units and sold them for P20 per
unit. Total fixed cost for the period were P 154,000, and the operating profit was P 26,000.
9. Based on the foregoing information, the variable cost per unit is
a. P 4.50 c. P6.00
b.PS.OO d.P7.17
Data to be used in applying the high-low method shows the highest cost of P69,000 and the
lowest cost of P52,000. The data show P148,000 as the highest level of sales and P97,000 as the
lowest level.
10. What is the variable cost per peso sales?
a. P 0.33 c. P 0.54
b. P0.47 d.P3,00
Ravena Company manufactures office furniture. During the most productive month of the year,
3,500 desks were manufactured at a total cost of P84,400. In its slowest month, the company
made 1,100 desks at a cost of P46,000.
11. Using the high-low method of cost estimation, the total fixed cost are a.P56,000
c.P17,600
b.P28,400 d.P38,400
c P20.00.
14. Conversion cost per unit is a. P 7.00 b.P 15.00 d. P26.00
15, Cost of goods sold per unit is a. P 7.00 b.P
15:00
c.P 20.00 d.P26.00 ■
16. Gross profit per unit is a. P 11.00 b.P 15.00
c.P 16.00 ..
d. P 24.00
c. P 74,000
17. Operating income is a.P 24,000 b.P 110,000 d. Pl 10,000’
Norman Company produced 1,000 units of a product which was sold at a price of P95.00 each.
Total selling and administrative incurred PHO,000
Direct materials P 25,00
Direct labor Factory overhead 16,00
19,00
18. Conversion cost per unit is a. P 41.00
b.P 44.00
c, P35,00
d, P45,00
19. Cost of goods sold per unit is a. P 41,00
b. P 44.00
c, P35,00
d, P60,00 *
LEARNINGS OBJECTIVES
The objective of accounting, in general, is the accumulation of financial information that is useful
in making economic decisions. Financial accounting focuses on the gathering of information to
be used in the preparation of financial statements that meet the needs of investors, creditors, and
other external users of financial information^ The statements include a balance sheet, income
statement, and statement of cash flows. Although these financial statements are useful to
management as well as external users, additional reports, schedules, and analyses are required for
internal use in planning and control. Cost accounting provides the additional information required
by management, and also provides data necessary' for the preparation of external financial
statement. For example, cost accounting procedures are necessary for the determination of cost of
goods sold on the income statement and the valuation of inventories on the balance sheet.
Balance 32,500
Chapter 3 Cost Accounting Cycle 54
Materials costing
45,300 were issued to
production
Balance 32,500
55 Cost Accounting
The issuance of materials production, shown in Figure 3-1, begins the production process.
These materials must be cut, molded, assembled, or in some other way changed into a finished
product. To make this change, people, machines, and other factory resources (buildings,
electricity, supplies, and so on) must be used. All of these costs are manufacturing cost elements
(product costs), and all of them enter into accounting for Work in Process Inventory
Direct labor earned by factory employees are also product costs. Since these people work on
specific products, their labor costs arc assigned to those products by including the labor peso
earned as part of the Work in Process Inventory account.
Overhead costs are product costs and must be assigned to specific products. Thus, they, too,
are included in the Work in Process Inventory account. As discussed earlier, there are many
overhead costs to account for on an individual basis. To reduce the amount, of work needed to
assign these costs to products, they are accumulated and accounted for under one account title:
Factory Overhead Control. These costs are then assigned to products by using an overhead rate.
Using this rate, called -a predetermined overhead rate, costs are charged to Work in Process
Inventory account. In the example in Figure 3-2, factory overhead costs of P 65,000 were
charged to the Work in Process Inventory account. The predetermined overhead rate will be
discussed in Chapter 8.
As products are completed, they are put into the finished goods storage area. These products
now have materials, direct labor, and factoiy overhead costs assigned to them. When products
are completed, their costs no longer belong to work in process. Therefore, when the completed
products are sent to the storage area, their costs are transferred from the Work in Process
Inventory account to the Finished Goods Inventory. The balance remaining in the Work in
Process Inventory account (P 13,500 in Figure 3-2) represents the costs that were assigned to
products partly completed and still in process at the end of the period.
Chapter 3 Cost Accounting Cycle 56
Figure 3-2. The Work in Process Inventory Account
Products costing P201,600
were completed and
transferred to finished goods
inventory
Overhead 65,000
Balance 13,500
Completed during
the period 201,600
Balance 31,100
For the merchandising concern, the cost of goods sold is computed as follows:
Beginning merchandise inventory Plus: Purchases (merchandise)
Merchandise available for sale Less: Merchandise inventory end Cost of
goods sold
The amount of purchases represents the cost of the goods which were acquired during the
period for resale. Since the manufacturing concern makes rather than buys the product it has
available for sale, the term “finished goods inventory” replaces “merchandise inventory” and
the term “cost of goods manufactured” replaces “purchases” in determining the cost of goods
sold.
Direct materials
The cost of material which become part of the product being manufactured and which can be
readily identified with a certain product. Examples are: lumber used in making furniture, fabric
used in the production of clothing, crude oil used to make gasoline and leather used to make
shoes and bags,
Materials that cannot be readily identified with any particular item manufactured are called
indirect materials. Examples are: sandpaper used in sanding furniture, and lubricants used on
machinery. Classified also as indirect materials are materials that actually become part of the
finished product but whose costs are relatively insignificant, such as thread, screws, rivets, bolts,
nails, and glue.
Direct labor*
The cost of labor for those employees who work directly on the product manufactured: are
classified as direct labor. Examples are: salaries of machine operators or assembly line workers.
The wages and salaries of employees who are required for the manufacturing process but who
do not work directly on the units being manufactured are considered indirect labor. Examples
are: wages and salaries of department beads, inspectors, supervisors, and maintenance personnel.
Factory overhead
Includes all costs related to the manufacturing of a product except direct materials and direct
labor. Examples are; indirect materials, indirect labor, and other manufacturing expenses, such
as depreciation on the factory building, machinery and equipment, supplies, heat, light, power,
maintenance, insurance, rent and taxes.
outlined in the discussion of the three manufacturing inventory accounts. Figure 3-4
summarizes the entire cost-flow process as it relates to accounts in the general ledger. The
journal entries to make this cost flow operational will be illustrated in the latter part of this
chapter.
tompleted 201,600
Bal. 31,100
Here we concentrate on the general pattern of manufacturing cost flow, as shown in Figure 3-5 .
The cost flow begins with costs being incurred. Manufacturing costs start in many ways. They
Chapter 3 Cost Accounting Cycle 58
may be cash payments, incurred liabilities, fixed asset depreciation, or expired prepaid expenses.
Once these costs have been incurred they are recorded ‘as either direct materials, direct labor, or
factory overhead costs. As the resources are used up, the company transfers its osU to the Work
in Process Inventory' account. When production is comp e e , co assigned to finished units are
transferred to the Finished Goods Inventory accr^n . In much the same way, costs attached to
units sold are transferred to t e o o Goods Sold account. Before going on, compare the cost flow
as it rough the general ledger accounts in Figure 3-4 with the general pattern shown in Figure J-
5. Both figures show the same type of cost flow.
Figure 3-5
COST FLOW ■ MANUFACTURING FIRMS
Cost incurrence Expense Category.
Direct materials-----------}
sold. The costs flowing from one account to anotlier during the year have been combined into
one number in the illustrations to help show the basic idea. In fact, hundreds of transactions
occur during a year, and each transaction affects part of the cost flow process. At the end of the
year, the flow of all manufacturing costs incurred during the year is summarized in the statement
of cost of goods manufactured and sold. The statement gives the peso amount of costs for
products completed and moved to Finished Goods Inventory during the year. The amount for
cost of goods manufactured should be the same as the amount transferred from the Work in
Process Inventoiy account to the Finished Goods Inventory account during the year. In the same
way, the amount of cost of goods sold should be the same as the amount transferred, ifom the
Finished Goods Inventory account to the Cost of Goods Sold account during the year.
The statement of cost of goods sold for Figure 3-1 through 3-4 is shown below. Even though this
statement is rather complex, it can be pieced together in four steps. The first step is to compute
the cost of materials used. Add the materials for the period to the beginning balance in the
Materials Inventory account. This subtotal represents the cost of materials available for use
during the year. Then subtract the balance of the ending Materials Inventory from the materials
available for use. The difference is the cost of materials used during the accounting period.
Name of Company
Cost of Goods Sold Statement
For the year ended December 31,2019
Direct materials used
Materials Inventoiy, January 1 P 24,600
Add: Purchases 53,200
Total available for use 77,800
Less: Materials Inventoiy, December 31 32,500 P 45,300
Direct labor 79,70
Factory Overhead 065,00
Total manufacturing costs 0
190,000
Add: Work in process, January 1 . 25400
Cost of goods put into process 215,100
Less: Work in process, December 31
Cost of goods manufactured 201,600
Add: Finished goods, January 1 70.00
Total goods available for sale 0
271,600
Less: Finished goods, December 31 31.10
Cost of goods sold - normal 0
■ P 240.500
The second step is the computation of the total manufacturing costs
Tlie costs of materials used and direct labor are added to total factory overhead costs applied
during the year. Tlie third step charges total manufacturing costs into total cost of goods
manufactured for the year. Add the beginning Work in Process Inventory' balance to total
Chapter 3 Cost Accounting Cycle 60
manufacturing costs for the period to arrive at the total cost of work in process during the year.
From this amount, subtract the ending Work in Process Inventoiy balance for the year to get the
cost of goods manufactured. The term total manufacturing costs must not be confused with the
cost of goods manufactured. Total manufacturing costs are the total costs for materials used,
direct labor, and factory overhead incurred and charged to production during an accounting
period. Total manufacturing costs of P 190,000 incurred during the current year are added to the
beginning balance of the Work in Process Inventory costs of P 25,100. The P25,100 beginning
balance, by definition, are costs from an earlier period. The costs of two accounting periods are
now being mixed to arrive afthe total cost of goods put into process during the year.The cost of
ending products still in process (P31,100) are then subtracted from the total cost of goods put
into process during the year. The remainder, P201,600,is the cost of goods manufactured
(completed) during the year. It is assumed that the items in beginning inventory were completed
first. Cost attached to the ending Work in Process Inventory are part of the current period’s total
manufacturing costs. But they will not become part of the cost of goods manufactured until the
next accounting period when the products are completed. The fourth step is the computation of
the cost of goods sold during the year. The cost of goods manufactured is added to the beginning
balance of the Finished Goods Inventory to get the total cost of goods available for sale during
the period. The cost of goods sold - normal is then computed by subtracting the ending balance
in Finished Goods Inventory (cost of goods completed but unsold) from the total cost of goods
available for sale. Cost of goods sold is considered an expense for the period in which the related
products were sold.
The beginning Statement of Financial Position Jor the company on January 1 of the current
year is presented below..
Liabilities
Capital stock
Total liabilities and
Stockholders’ equity
980,000
To make things easy, let us assume that the company for the month of January makes only one
style of table and no chairs, The following transactions are completed for January and recorded,
in summary form as follows:
1. Materials (lumber, paint, screws, lubricants, and solvents) are purchased on account at a
cost of P 50,000.
Materials 50,000
Accounts Payable 50,000
This procedure differs in two ways from the recording of purchases for, a merchandising firm.
First, the debit is to a Material Inventory account instead of a Purchases account because the
inventory system is perpetual. Second, the inventory account used is a control account. Some
companies have hundreds of items in inventory. To keep a separate account for each item in the
general ledger would crowd the ledger and make it hard to work with. At the time that entry 1 is
posted to the general ledger, the individual stock cards are also updated.
2. During the month, direct materials (lumber and paint) costing P 40,000 and. indirect
materials (screws, lubricants for machine, and solvents for cleaning) costing P 1,900 are
issued to the factory.
3. Total payroll for the month amounted to P36,000, consisting of P20,000 earned by laborers
working on the product; P 7,000 for factory supervision; P 9,000 for sales and administrative
employees. The entry to record the payroll and the payment to employees (ignoring payroll
deductions) would be:
Payroll 36,000
Accrued Payroll 36,000
A ccrued Payroll 36,000
Cash 36,000
Recording labor costs for a manufacturing company requires three journal entries. The first labor
cost entry records the total payroll liability of the company. The second entry records the
63 Cost Accounting
payment of the payroll liability established in the first entry. The third entry (No. 4) is now
needed to account properly for labor costs. The P36,000 debited to the Payroll account must be
moved to the production accounts. Gross direct labor costs are debited to Work in Process
account, and total indirect labor costs (factory supervision) are debited to Factory^ Overhead
Control. Payroll is credited to show that the total account has been distributed to the production
accounts.
4. The entry to record the distribution or classification of the payroll would be: Work in
Process 20,000
Factory Overhead Control 7,000
Selling and Administrative Expense Control 9,000
Payroll 36,000
The wages earned by laborers working directly on the product are charged to Work in
Process, while the salaries and wages of the factory supervisor, who do no work directly
on the product, are charged to Factory Overhead Control. Sales salaries and administrative
salaries are charged to Selling and Administrative Expense Control.
5. Depreciation expense for the building is 6% per year. The office occupies one-tenth of
the total building, and the factory operation is in the other nine- tenths. The depreciation
expense for one month is recorded as follows:
Depreciation for the portion of the building used for factory operations = 750,000 X
6% X 1/12 X 9/10; for the portion used by the office- 750,000 x 6% X 1/12x1/10
6. Depreciation expense for machinery and equipment is 20% per year. All machinery and
equipment is used in the factory for production purposes, so the depreciation expense is
charged to Factory Overhead Control.
7. The cost of heat, light, and power for the month was P3,000.
8. Miscellaneous expenses for telephone, office supplies, travel, and rental of office furniture
and equipment totaled Pl,500
The three elements of manufacturing cost - direct materials, direct labor, and factory overhead
— are now accumulated in Work in Process, and the debits in the account are as follows:
P 77.000
77,000
77,000
Finished Goods
Work in Process
Assuming that 1,000 tables were produced during the month, the unit cost is P77.00. The unit
cost for each element of manufacturing cost is calculated as in the computation on the next page.
Units Unit Co^
Total Produced
Direct materials P 40,000 1,000 P 40.00
Direct labor 20,000 1,000 20.0
Factory overhead 11000 1,000 0 17.0
0
Chapter 3 Cost Accounting Cycle 66
P 7-7.000 P
77 .00
If the same type of table is produced in future periods, the unit costs of those periods can be
compared with the unit costs determined above, and any difference can be analyzed so that
management might take appropriate action. The unit cost also serves as a basis for establishing
the selling price of the tables. After considering the anticipated selling and administrative
expenses, a selling price can be established that should provide a reasonable profit. If
management determines that a 40% gross profit percentage is necessary to cover the product’s
share of selling and administrative expenses and earn a satisfactory profit, the selling price per
unit, rounded to the nearest cent, would be computed as follows:
Manufacturing cost P 77.00
Gross profit (40%) 30.80
Selling Price P107.80
To continue with the example, assume that the following transactions take place in January in
addition to those already recorded.
11. Costs of materials, utilities, and selling and administrative expenses paid amounted to P
34,000
Accounts Payable 34,000
Cash 34,000
12. 800 tables are sold to jobbers at a net price of P86,240
Accounts Receivable . Sales 86,240
86,240