Summary Table of Participation

Alvin Gregorio

Aira Avendaño

Alessandra Sergio

Angelica Rutaquio

Erold Aparece Derramas

Jemy Villamor

Jhazer Gian

Joe Marie Loreto

Maria Erika Albarico

Rechelle Mae Namoco Belo

Renzo Chan
Chapter 1

COST ACCOUNTING
- Is a system that records, summarizes, analyzes, and interpret the details of the costs of materials,
labor, and overhead necessary to produce and sell an article.

THE PURPOSE OF COST ACCOUNTING

 Is our plant operating efficiently and economically?

 Which of our costs are out of line, and how can they be controlled?
 Are our sales prices set realistically in relation to costs?
 What is the unit cost of each type of product being manufactured?

Estimating and Bidding

- A knowledge of the costs of doing business is needed to estimate a job or to bid for jobs or
contracts.

Planning, Budgets, and Control

- Standard cost procedures are helpful in evaluating the results of operations.
- The differences between the two sets of cost figures can be noted and analyzed while there is still
time to take remedial action.
- Once operations begin, cost accounting reveals how efficiently the work is being done, where the
strong and weak spots are, and how to improve performance.

 Should we build a new plant or modernize the old one?

 How far can we go in lowering prices to increase our volume of sales?
 What will be the effect on costs of automating part of our factory operations?

MANUFACTURING COSTS CLASSIFIED

- Is the process of converting materials into finished goods by using labor and incurring other
costs, generally called manufacturing overhead.

Direct Materials
- Direct materials, also called raw materials, are those materials used in the manufacturing process
that become a significant part of the finished goods.
Direct Labor
- The employees who work directly with the raw materials in converting them to finished goods
represent direct labor. In a factory that makes chairs, for example, the salaries of workers who cut
and sand lumber and of those who assemble the parts into finished chairs are considered direct
labor costs.

Manufacturing Overhead
- All costs incurred in the factory that cannot be considered direct materials or direct labor are
classified as manufacturing overhead (sometimes called factory overhead, manufacturing
expenses, or factory burden).

Indirect Materials
- Materials that are used in small amounts in the manufacturing process or that cannot easily be
traced to specific products are called indirect materials.
- Keeping detailed records for minor materials, however, would require a great deal of time and
costs than the results would justify.

Indirect Labor
- The wages of factory personnel who do not work directly on raw materials are called indirect
labor.

Other Manufacturing Overhead

- Includes such costs as payroll taxes on factory wages; rent, depreciation, taxes, and insurance on
factory buildings and machinery; heat, light, and power; repairs and maintenance of machinery
and equipment. Many of these relate to the physical plant (building, machinery, and equipment).

Prime and Conversion Costs

- In cost accounting, the term for the sum of direct materials and direct labor is prime cost. Prime
cost reflects the primary sources of costs for units in production. The total of direct labor and
manufacturing overhead is often called the conversion cost.

INVENTORIES FOR A MANUFACTURING COMPANY

- A manufacturing company has three distinct inventory accounts: Raw Materials Inventory, Work
In Process Inventory, and Finished Goods Inventory.
Raw Materials Inventory
- Reflects the cost of raw materials and factory supplies that will be used in the manufacturing
process. Once direct materials are removed from the storeroom for use in the manufacturing
process, their costs are no longer part of the raw materials inventory.
- Some manufacturing firms may use a separate Supplies Inventory account if the quantities or
value of supplies normally kept on hand are significant enough to justify the additional account.

Work in Process Inventory

- The Work in Process Inventory account reflects the cost of raw materials, direct labor, and
manufacturing overhead of goods on which manufacturing has begun but has not been completed
at the end of the fiscal period.

Finished Goods Inventory

- Reflects the costs of goods that have been completed and are ready for sale.

SYSTEM OF COST ACCUMULATION

- The basic objective of cost accounting is the determination or accumulation of a product's cost for
inventory valuation and income determination.

1. Actual Cost System (Historical). - are determined as they occur simultaneously with the
manufacturing operation but the total of these costs is known only after the operation has
been completed.
2. Standard Cost System (Predetermined). - In a standard cost system, standard unit costs
are computed for the direct materials, direct labor and factory overhead.
3. Normal Cost System. - This system is a combination of the ac- tual cost system and the
standard cost system. This system ac- cumulates only the actual amounts of direct
material and direct labor costs. Factory overhead costs are accumulated on the ba sis of a
predetermined rate.

CHART OF COSTS FOR A MANUFACTURING COMPANY

Total Costs
Distribution Administration
Manufacturing Costs
Costs Costs
Direct Manufacturing
Direct Material Delivery Sales
Labor Overhead
Raw Materials Factory Indirect Labor Freight Out Advertising Compensation &
Semi-finished payroll Indirect Depreciation Salespeople’s Benefits
 salaries
material Gasoline and Sample
Office Supplies
Rent Oil Travel
Rent
Light & water Truck Repairs Depreciation
part Depreciation
Taxes & Delivery Rent
Finish part for Communication
Licenses workers Communication
assembling Travel
Depreciation Salaries Sales Sample
Taxes & Licenses
Repairs Worker cost Taxes and
Insurance
Insurance Insurance Licenses
Insurance
Prime Cost
Conversion Cost

TYPES OF COST SYSTEMS

- The job order cost system has been developed for the first type of operation, and the process cost
system for the second.

Job Order Cost System

- The job order cost system accumulates costs applicable to each specified job order or lot of
similar goods manufactured on a specific order for stock or for a customer.
- The job order cost system b open for the first type of operation, and the process cost system for
the second.

Job Order Cost System

- The job order cost system accumulates costs applicable to each specified job order or lot of
similar goods manufactured on a specific order for stock or for a customer.
- The job order cost system is often used by manufacturers, such as a furniture manufacturer,

Process Cost System

- At the end of the fiscal period, the average cost per unit is determined by dividing the total
number of units produced into the total cost accumulated.
- If the process cost system is used, the goods manufactured must be similar in nature so that an
average coat will be meaningful.
- If the process cost system is used, the goods manufactured must be similar in nature so that an
average coat will be meaningful.
- The process cost system is commonly used in such manufacturing operations as cement plants
and flour mills, in which the production process is standardized and continuous and the product
remains essentially the same from day to day.
Dual Systems
- Some manufacturers use both the job order cost system and the process cost system.

INTRODUCTION TO THE JOB ORDER COST CYCLE - NORMAL COSTING

- As discussed earlier, total manufacturing cost consists of three elements: direct materials, direct
labor, and manufacturing overhead. The flow of these costs through the accounting system
parallels the flow of products through the manufacturing operations.

WORK FLOW
- The steps in a typical cycle of operations of a firm using Job Order Cost System are outlined
below:

1. Procurement: Materials and supplies needed for manufacturing are Ordered, received, and
stored. Direct and indirect factory labor and Services are obtained.
2. Production: Materials are transferred from the storeroom to the factory. Labor tools,
machines, power, and other costs are applied to complete the product.
3. Warehousing: Finished goods are moved from the factory to the ware- house to be held until
they are sold.
4. Selling: Customers are found. Merchandise is shipped from the ware- house. Sales to
customers are recorded.

RECORDING COSTS AS INCURRED

1. Procurement: Accounts must be provided to record the purchase of materials, labor, and
overhead. These costs will later be charged to production. Typical general ledger account titles
and numbers used for this purpose are Materials 121, Factory Payroll 500, and Manufacturing
Overhead Control 501.
2. Production: An account is required to gather procurement costs as they become chargeable to
manufacturing operations. This account is Work in Process 122.
3. Warehousing: An account must be set up to record the cost of goods that have completed
manufacturing process. This account is Finished Goods 126.
4. Selling: The cost of the completed goods that have been sold must be recorded. An account, Cost
of Goods Sold 415, is provided in the general ledger for this purpose. Other general ledger
accounts, Ac counts Receivable 111 and Sales 401, are used for recording the sale to the customer
and the credit to income at the selling price.

Procurement - Production - Warehousing - Selling

Materials 121 Work In Process 122 Finished Goods 126 Cost of Goods Sold 415
Factory Payroll 500

Manufacturing
Overhead Control 501
MATCHING COST FLOW AND WORK FLOW
1. Procurement: Purchases of materials, labor, and overhead are re- corded as debits to Materials,
Factory Payroll and Manufacturing Overhead Control. As these costs are used, or applied, in
factory operations, they are credited to these accounts and transferred to production.
2. Production: Costs of materials, labor, and overhead transferred into production are debited to
Work in Process. As goods are finished and moved from the factory, their total cost is removed
from the Work in Process account by a credit entry and charged (debited) to Finished Goods.
3. Warehousing: The cost of finished goods transferred from Work in Process is recorded as a debit
to Finished Goods. The cost of merchandise shipped from the warehouse to customers is credited
to Finished Goods and charged (debited) to Cost of Goods Sold.
4. Selling: As indicated above, as finished goods are sold and shipped from the warehouse, their
cost is debited to Cost of Goods Sold. At the end of the accounting period, this account is closed
by crediting cost of Goods Sold and debiting Income Summary 399.

Procurement - Production - Warehousing - Selling

Material 121 Work In Process 122 Finished Goods 126 Cost of Goods Sold 415
In Out In Out In Out In Out
Factory Payroll 500
In Out
Manufacturing
Overhead Control 501
In Out

Chart of Accounts
- 121 Material
- 122 Work In Process
- 126 Finished Goods
- 415 Cost of Good Sold
- 500 Factory Payroll
- 501 Manufacturing Overhead Control

Beginning Balances

121 Material ₱ 50,000

122 Work In Process 40,000
126 Finished Goods 30,000

Procurement - Production - Warehousing - Selling

Material 121 Work In Process 122 Finished Goods 126 Cost of Goods Sold 415
Bal. Bal. Bal.
 ₱50,000 ₱40,000 ₱30,000
Factory Payroll 500
Material Overhead
Control 501

Raw Materials Purchased

Additional raw materials were purchased during the month of June at a cost of P86,900. The
purchase is debited to the asset account, Materials. This entry is shown in general journal form
below for illustrative purposes. The transaction would normally be entered in a special journal,
such as the voucher register.

2018 (A)
June 30 Material 121 ₱86,900
Vouchers Payable 201 ₱86,900
To record cost of raw materials purchased during the month.

Raw Materials Used

- During the month, raw materials costing P90, 400 were used as follows:

Direct Materials, chargeable to ₱84,600

Work in Process
Indirect Materials, chargeable to ₱5,800
Manufacturing Overhead
Control
Total ₱90,400

2018 (B)
June 30 Work In Process 122 ₱84,000
Material Overhead Control 501 ₱5,800
Material 121 ₱90,400
To record cost of raw materials used during the month.

Procurement - Production - Warehousing - Selling

Material 121 Work In Process 122 Finished Goods 126 Cost of Goods Sold 415
Bal. Bal.
₱50,000 (B) ₱40,000 Bal.
(A) ₱90,400 (B) ₱30,000
₱86,900 ₱84,600
Factory Payroll 500
Material Overhead
Control 501
(B)
₱5,800
Factory Wages Earned
- During the month, wages and salaries totaling P102,300 were earned by the factory employees
and charged from the factory payroll register to the Factory Payroll account, as shown below.

2018 (C)
June 30 Factory Payroll 500 ₱102,300
Withholding Taxes Payable 212 ₱1,300
SSS Contribution Payable 210 ₱200
Pag-Ibig Contribution Payable 211 ₱300
Salaries and Wages Payable 202 ₱100,500
To record factory payroll for the month.

Procurement - Production - Warehousing - Selling

Material 121 Work In Process 122 Finished Goods 126 Cost of Goods Sold 415
Bal. Bal.
₱50,000 (B) ₱40,000 Bal.
(A) ₱90,400 (B) ₱30,000
₱86,900 ₱84,600
Factory Payroll 500
(C)
₱102,300
Material Overhead
Control 501
(B)
₱5,800

Labor Charged to Production

- An analysis of the records indicates that labor costs of P102,300 should be allocated as follows:

Direct Materials, chargeable to ₱66,500

Work in Process
Indirect Materials, chargeable to ₱35,800
Manufacturing Overhead
Control
Total ₱102,300

The required transfer of labor costs is shown in general journal form shown below.

2018 (D)
June 30 Work In Process 122 ₱66,500
Manufacturing Overhead 501 ₱35,800
 Control
Factory Payroll 121 ₱102,300
To record costs of labor charged to productions during the month.

Procurement - Production - Warehousing - Selling

Material 121 Work In Process 122 Finished Goods 126 Cost of Goods Sold 415
Bal.
Bal. ₱40,000
₱50,000 (B) (B) Bal.
(A) ₱90,400 ₱84,600 ₱30,000
₱86,900 (D)
₱66,500
Factory Payroll 500
(C) (D)
₱102,300 ₱102,300
Material Overhead
Control 501
(B) (D)
₱5,800 ₱35,800

Manufacturing Overhead Costs

- In addition to the indirect materials (B) and indirect labor (D), other over- head costs, such as
utilities, insurance, and depreciation, totaling P23,500 were incurred during the month. The entry
to record these costs is shown below:

2018 (E)
June 30 Manufacturing Overhead 501 ₱23,500
Control
Vouchers Payable and other XXX ₱23,500
accounts
To record other overhead costs incurred during the month.

Procurement - Production - Warehousing - Selling

Material 121 Work In Process 122 Finished Goods 126 Cost of Goods Sold 415
Bal.
Bal. ₱40,000
₱50,000 (B) (B) Bal.
(A) ₱90,400 ₱84,600 ₱30,000
₱86,900 (D)
₱66,500
Factory Payroll 500
(C) (D)
₱102,300 ₱102,300
Material Overhead
 Control 501
(B)
₱5,800
(D)
₱35,800
(E)
₱23,500

Manufacturing Overhead Applied to Products

- It is estimated that 80 percent of the direct labor cost is chargeable to jobs worked on during the
month of June.

2018 (F)
June 30 Work In Process 122 ₱53,200
Manufacturing Overhead 501 ₱53,200
Control
To record overhead applied to jobs (P66,500 x 80%)
- After the transfer, the Manufacturing Overhead Control account will have balance. A debit
balance means that less overhead was applied to jobs than the actual cost incurred. This is called
under-applied overhead. If the applied overhead is greater than the actual costs incurred,
Manufacturing Overhead Control account will have a credit balance. This is called over-applied
overhead At the end of the year, the over-applied or under applied overhead is usually adjusted to
Cost of Goods Sold account or Pro-rated to Work in Process, Finished Goods, and Cost of Goods
Sold.

Procurement - Production - Warehousing - Selling

Material 121 Work In Process 122 Finished Goods 126 Cost of Goods Sold 415
Bal.
₱40,000
Bal. (B)
₱50,000 (B) ₱84,600 Bal.
(A) ₱90,400 (D) ₱30,000
₱86,900 ₱66,500
(F)
₱53,200
Factory Payroll 500
(C) (D)
₱102,300 ₱102,300
Material Overhead
Control 501
(B)
₱5,800
(D) (F)
₱35,800 ₱53,200
(E)
₱23,500
Transfer of Finished Goods
- During the month, some jobs were completed and transferred to the finished goods warehouse.
These jobs cost P225,100. This flow of goods is recorded by a debit to Finished Goods 126 and a
credit to Work in Process 122 as shown below.

2018 (G)
June 30 Finished Goods 126 ₱225,100
Work In Process 122 ₱225,100
To record cost of jobs completed during the month.

Procurement - Production - Warehousing - Selling

Material 121 Work In Process 122 Finished Goods 126 Cost of Goods Sold 415
Bal.
₱40,000
Bal. (B) Bal.
₱50,000 (B) ₱84,600 (G) ₱30,000
(A) ₱90,400 (D) ₱225,100 (G)
₱86,900 ₱66,500 ₱225,100
(F)
₱53,200
Factory Payroll 500
(C) (D)
₱102,300 ₱102,300
Material Overhead
Control 501
(B)
₱5,800
(D) (F)
₱35,800 ₱53,200
(E)
₱23,500

Sale of Finished Goods

- During the month, finished goods costing P221,500 were sold to various customers. The entry to
record this flow is as follows:

2018 (H)
June 30 Cost of Goods Sold 415 ₱225,100
Finished Goods 126 ₱225,100
To record cost of goods sold during the month.
 Procurement - Production - Warehousing - Selling
Material 121 Work In Process 122 Finished Goods 126 Cost of Goods Sold 415
Bal.
₱40,000
(B) Bal.
Bal.
₱84,600 ₱30,000
₱50,000 (B) (G) (H) (H)
(D) (G)
(A) ₱90,400 ₱225,100 ₱225,100 ₱225,100
₱66,500 ₱225,100
₱86,900
(F) 33,600
₱53,200
19,200
Factory Payroll 500
(C) (D)
₱102,300 ₱102,300
Material Overhead
Control 501
(B)
₱5,800
(D)
(F)
₱35,800
₱53,200
(E)
₱23,500
11,900

The following should be noted in the T-accounts:

(1) Entries B, D, and F appear as credits representing the flow of costs out of Materials 121, Factory
Payroll 500, and Manufacturing Overhead 501 and as debits representing the flow of costs into Work in
Process 122.
(2) Entry G shows the flow of costs out of Work in Process 122 into Finished Goods 126.
(3) Entry H represents a cost flow out of Finished Goods 126 into Cost of Goods Sold 415.
Also note the closing balances in the three inventory accounts.

121 Material ₱ 46,500

122 Work In Process 19,200
126 Finished Goods 33,600
The handling of the under applied overhead represented by the balance of Manufacturing Overhead
Control 501 (11,900 Dr.) will be explained in Chapter 6.

FINANCIAL STATEMENTS
- The results of operations of a manufacturing firm are reported in the conventional financial
statements – the statement of cost of goods manufactured (with schedule of manufacturing
overhead, which shows details of individual overhead items), the statement of comprehensive
income and the statement of financial position.
JenJen Printers, Inc.
Schedule of Manufacturing Overhead
Month Ended June 30, 2018

Actual Overhead Costs

Incurred
Indirect Materials ₱5,800
Indirect Labor 35,800
Payroll Taxes Expenses 9,145
Depreciation - Building 2,250
Depreciation – Equipment 3,400
Repair and Maintenance 2,500
Light and Water 4,200
Insurance 970
Taxes and Licenses 620
Other Taxes 415
Total Actual Overhead Costs
₱65,100
Incurred
Less: Under applied Overhead 11,900
Manufacturing Overhead
₱53,000
Applied

Jenden Printers, Inc.

Statement of Cost of Goods Manufactured
Month Ended June 30, 2018

Direct Materials
Materials Inventory, June 1 ₱50,000
Materials Purchases 86,900

Total Materials Available 136,900

Less Materials Inventory, June 46,500
30

Total Materials Used 90,400

Less Indirect Materials Used 5,800
Direct Materials Used ₱84,600
Direct Labor 86,500
Manufacturing Overhead 53,200
Applied

Total Manufacturing Cost ₱204,300

Add Work in Process Inventory, 40,00
 June 1

Total Costs of Goods Placed in ₱244,300

Process
Less Work in Process Inventory, 19,200
June 30

Cost of Goods Manufactured ₱225,100

JenJen Printers, Inc.

Statement of Comprehensive Income
Month Ended June 30, 2018

Revenue
Sales ₱305,000
Cost of Goods Sold
Finished Goods Inventory, June ₱30,00
1
Add Cost of Goods 225,100
Manufactured

Total Goods Available for Sale 225,100

Less Finished Goods Inventory, 33,600
June 30
Cost of Goods Sold 225,100

Gross Profit on Sale 83,500

Operating Expenses
Selling Expenses ₱20,00
General Expenses 15,000
Total Operating Expenses 35,000

Income Before Income Taxes 48,000

Provision for Income Taxes 14,550

Comprehensive Income ₱33,950