COST ACCOUNTING

- It is a system that records, summarizes, analyzes and interprets the details of the costs of
materials. Labor and overhead necessary to produce and sell an article
- It is usually considered only as it applies to manufacturing operations and service organizations.
- The main purpose of cost accounting is that it furnishes management with the necessary
accounting tools for planning and controlling activities specifically the gathering, presentation
and analysis of cost data.

Types of Cost Systems

1. Job Order Cost System
1. This is a system of cost accounting that accumulate costs applicable to each specified
job order or lot of similar goods manufactured on a specific order for stock or for a
customer.
2. Process Cost System
2. This is a cost system wherein it accumulates costs without attempting to allocate them
during the accounting period to specific units of goods being manufactured. 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. It is often referred to as average
costing.

JOB ORDER COSTING SYSTEM

 Manufacturing Costs
o Manufacturing is the process of converting materials into finished goods by using labor
and incurring other costs, generally called Manufacturing Overhead.
o The three major manufacturing cost classifications are:
 Direct Materials – those raw materials that are used in manufacturing process
 Direct Labor – those employees or individuals who work directly with the raw
materials in converting them to finished goods.
 Manufacturing Overhead – these are all costs incurred in the factory that cannot
be considered direct materials or direct labor.
 Indirect Materials – materials that are used in small amounts in the
manufacturing process or that cannot easily be traced to specific
products.
 Indirect Labor- wages of factory personnel who do now work directly on
raw materials.
 Other Manufacturing Overhead – includes such costs of payroll taxes,
rent, depreciation, taxes and insurance on factory building and
machinery that are used in the manufacturing process.
o Other classification of manufacturing costs includes:
 Prime Costs
 These are costs which reflects the primary sources of costs for units in
production.
 It is computed by adding the total direct materials and total direct labor
  Conversion Costs
 These are costs which indicated the costs required to convert the raw
materials into finished products
 It is computed by adding total Direct Labor and Total Manufacturing
Overhead

 Manufacturing Inventories
o Raw Materials Inventory
 This inventory account 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 and instead, these costs are
then classified as part of work in process
o Work in Process Inventory
 This 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 period.
o Finished Goods Inventory
 This account reflects the costs of goods that have been completed and are
ready for sale. It corresponds to the merchandise Inventory account in the
Merchandising Business. Any changes in the finished goods inventory are
reflected in the Cost of Goods Sold which is part of the Income Statement.

WORK FLOW FROM A JOB ORDER COST SYSTEM

- The flow of costs through the accounting system parallels the flow of products through the
manufacturing operations.
- These includes the cycle of operations below.
o Procurement – Materials and supplies needed for manufacturing are ordered, received
and stored. Direct and indirect factory labor and services are obtained.
o Production – Materials are transferred from the storeroom to the factory. Labor tools,
machines, power and other costs are applied to complete the product.
o Warehousing – Finished Goods are moved from the factory to the warehouse to be held
until they are sold
o Selling – Customers are found. Merchandise is shipped from the warehouse. Sales to the
customers are recorded.
1. PROCUREMENT PROCESS
 There are certain lists of forms that are needed in this process
o Purchase Request Form –this is a document used when an employee needs to
make a purchase or an order request on behalf of their company in order to
have materials for production
o Purchase Order – this form is used when a purchase request or the request for
goods is approved. This is the also the time for placement of order in the
supplier
o Receiving Report – This form is used after the goods ordered had been received
and brought to the storeroom.

*Journal Entries may include:

Raw Materials Inventory xxx

Accounts Payable xxx

2. PRODUCTION PROCESS
 Materials Requisition Form- materials requisition form, or a material request, is a
document used by the production department to request materials they need to
complete a manufacturing process.
  Employee Time Sheet - spreadsheet for recording how much time an employee spent
working on different tasks. Your employees enter the exact time when they start work
for the day and also their out time – that's when they log out. Then the total time
worked on individual tasks is calculated and it was charged on the production process

*Journal Entries may include:

For Materials used in production

Work in Process Inventory xxx

Raw Materials Inventory xxx

For Labor Costs and Overhead applied in production

Factory Payroll xxx

Withholding Tax Payable xxx
SSS Contributions Payable xxx
Philhealth Contributions Payable xxx
Pag-ibig Contributions Payable xxx
Payroll Payable xxx

Work In Process Inventory xxx

Factory Payroll xxx

Work In Process Inventory xxx

Factory Overhead – Applied xxx

3. WAREHOUSING PROCESS
 This is the time wherein units that are in process are completed and should be
separated from the other units that are still in process. They are put on a warehouse
facility wherein the units stay until they are sold to customers
 *Journal Entries may include:
After jobs/units have been completed

Finished Goods Inventory xxx

Work In Process Inventory xxx

4. SELLING PROCESS
 In this process, this was the time wherein the goods from the warehouse are being sold
to customers.
 It must be noted that this goods/units are not anymore part of the inventory of the
company and therefore it must be eliminated to the finished goods inventory and
classified as cost of goods sold. This cost will then reflect to the statement of Income for
the company
*Journal Entries may include:
After jobs/units have been completed

Cost of Goods Sold xxx

Finished Goods Inventory xxx

COST OF GOODS SOLD STATEMENT

Raw Materials, Beginning xxx
Add: Purchases xxx
Freight In xxx
(Discounts,Returns) (xxx)
Total Materials Available for use xxx
Less: Raw Materials, Ending (xxx)
Total Cost of Materials Used in Production xxx
Add: Direct Labor xxx
Applied Overhead xxx
Total Manufacturing Costs xxx
Add: Work in Process, Beginning xxx
Total Cost of Goods Put into Process xxx
Less: Work In Process, Ending (xxx)
Total Cost of Goods Manufactured xxx
Add: Finished Goods, Beginning xxx
Total Goods Available for Sale xxx
Less: Finished Goods, Ending (xxx)
Cost of Goods Sold xxx
MANUFACTURING OVERHEAD COSTS

- Applied Manufacturing Overhead costs are segregated from the actual recorded costs by
recording them in the job cost sheets under the applied manufacturing overhead column

- While material and labor costs can be determined as soon as the job is finished, Manufacturing
Overhead Costs are not readily available. Accordingly, predetermined overhead rate are used
to estimate the manufacturing overhead costs

- The primary purpose of using a predetermined overhead rate is to charge a fair share of
overhead costs to each job. A number of bases for determining overhead rates may be used to
compute an overhead application rate. These are:
o Percentage of Direct Labor Costs
o Direct Labor Hours
o Percentage of Direct Material Costs
o Machine Hours
o Units of Production
*Journal Entries may include:
Charging of Manufacturing Overhead Applied

Work in Process Inventory xxx

Manufacturing Overhead Control xxx

- Upon computing the Actual Manufacturing Overhead costs, the amount will never equal the
amount of overhead applied at the end of the period except for coincidence. The following will
result if the actual is not the same as the applied overhead:
o Overapplied Overhead – results when Actual Overhead costs is lower than the Applied
Overhead Costs
o Underapplied Overhead – results when Actual Overhead costs is higher than the
Applied Overhead Costs
*Journal Entries may include:
For Under Applied Overhead
Underapplied Mfg. Overhead xxx
Manufacturing Overhead Control xxx

For Over Applied Overhead

Manufacturing Overhead Control xxx
Overapplied Mfg. Overhead xxx

*Disposition of Underapplied/Over applied Overhead

o It Depends on the Materiality
 If the underapplied/over applied overhead is material, then it must be closed
allocated proportionately to:
 Work In Process Inventory
 Finished Goods Inventory
  Cost of Goods Sold
Journal Entries may include:
For Under Applied Overhead
Work In Process Inventory xxx
Finished Goods Inventory xxx
Cost of Goods Sold xxx
Under Applied Mfg. Overhead xxx

For Over Applied Overhead

Over Applied Mfg. Overhead xxx
Work in Process Inventory xxx
Finished Goods Inventory xxx
Cost of Goods Sold xxx

 If the underapplied/ over applied overhead is not material, then it must be

closed only to COSTS OF GOODS SOLD
Journal Entries may include:
For Under Applied Overhead
Cost of Goods Sold xxx
Under Applied Mfg. Overhead xxx

For Over Applied Overhead

Over Applied Mfg. Overhead xxx
Cost of Goods Sold xxx

PRODUCTION LOSSES

- NORMAL LOSS–these are losses expected during production

o 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 Abnormal spoilage
 Period cost - includes cost of abnormal loss less any disposal value
-
- SCRAP – it is a residue in the manufacturing process
o If the scrap is immaterial, the NRV of the scrap is recognized when sold as Scrap
Revenue.
Journal Entry
 Cash/AR xxx
Scrap Revenue xxx
o If the scrap is material and the scrap is recognized when SOLD.
Journal Entry
 Specific to job
 Cash/AR xxx
Work-in-process xxx
 Anticipated on all jobs
 Cash/AR xxx
Factory overhead control xxx

o If the scrap is material and the scrap is recognized when PRODUCED.

Journal Entry i
 Specific to job
 Scrap inventory xxx
Work-in-process xxx
 Anticipated on all jobs
 Scrap inventory xxx
Factory overhead control xxx
o If the scrap is material and the scrap is recognized when PRODUCED.
Journal Entry when sold
 Specific to job
 Cash/AR xxx
Scrap inventory xxx
 Anticipated on all jobs
 Cash/AR xxx
Scrap inventory xxx

o If the scrap is material and the scrap is recognized when PRODUCED.

 When the scrap was sold for more than or less than its NRV, any difference
between the proceeds and amount recorded will be an adjustment of the
account that originally recorded (WIP or FOH).

- SPOILAGE- these are costs in the production process that cannot be economically reworked
o If the spoilage occurs because of some actions made by customers to change the
specifications of the job, the job bears the cost of the spoilage.
 The spoilage is attributable to a specific job and shall be recognized at its
estimated disposal value.
 Journal Entry
 Spoiled goods inventory xxx
Work-in-process xxx

o If the spoilage occurs during the production cycle due to

internal failure such as employee’s error or worn out machinery, the cost of the spoiled
goods will be charged against WIP.
 The disposal value of the spoiled goods will be recognized as spoiled goods
inventory and the loss shall be charge against FOH.
Journal Entry
 Spoiled goods inventory (net disposal value) xxx
Factory overhead control (loss) xxx
Work-in-process (cost) xxx

- REWORKED UNITS – Units that failed to meet production standards but can be brought up to
standards by adding more materials, labor and overhead.
o The additional cost required to bring the goods up to standard are called rework costs.

 If the defective goods is attributable to specific job, the entry to record the
rework costs is:
Journal Entry
 Work-in-process xxx
Raw materials xxx
Salaries payable xxx
FOH – Applied xxx

 If the defective goods is attributable to all jobs, the entry to record the rework
costs is:
Journal Entry
 Factory overhead control xxx
Raw materials xxx
Salaries payable xxx
FOH – Applied xxx

*EFFECTS OF PRODUCTION LOSSES

o Specific to job
 Unit cost will change

o Anticipated on all jobs

 Unit cost will NOT change