Junior Philippine Institute of Accountants and Auditors – United

Cost Accounting and Control

OVERVIEW Beginning merchandise inventory
1. Introduction to Cost Accounting + Total purchases………………
2. Costs – Concepts and Classifications Cost of goods available for sale
3. Cost Accounting Cycle - Ending merchandise inventory
4. Accounting for Materials
5. Accounting for Factory Overhead Manufacturing
6. Accounting for Labor • buying raw materials, labor, and
overhead for further processing
1 INTRODUCTION TO COST ACCOUNTING and subsequent sale
Comparison of Financial, Managerial, and Cost • maintaining three inventory
Accounting
accounts:
Financial Accounting a. Materials inventory
• preparing financial statements for external b. Work in process inventory
users (e.g. stockholders, partners, c. Finished goods inventory
creditors, etc.) Process:
• output from an accounting system, and 1. Cost of materials (direct
represent the enterprise as a whole materials), labor (direct labor), and
• based on historical transaction data, which overhead (factory overhead) items
may be historical, quantitative, monetary,
are transferred to the Work in
and verifiable
• must be supported by evidence Process account.
• requirement of the SEC and BIR 2. After production, the cost of
completed units are transferred to
Managerial Accounting the Finished Goods inventory
• made to cater to the needs of parties account.
within the entity 3. Once sold, these costs are
• designed to tackle individual/divisional transferred to the Cost of Goods Sold
concerns
account.
• data may be
a. Current or forecasted 4. Work in Process inventory,
b. Quantitative or qualitative ending will comprise of units that
c. Monetary or non-monetary have been started but not
d. Futuristic completed
• data must be timely 5. Cost of unused materials for
• not required theperiod comprise the Materials
Note: the measuring based in managerial
Inventory, ending balance.
accounting does not necessarily have to be
restricted to peso. 6. Unsold goods comprise the
1. An economic measure such as pesos ending balance of the Finished
2. Physical measure such as pounds, gallons, Goods inventory.
tons, or units
3. A relationship measure such as rations USES OF COST ACCOUNTING DATA
Cost Accounting Determing Product Costs
• combination of both financial and • computation of unit costs and total
management accounting. product costs
• unit cost helps in:
Merchandising and Manufacturing Operations
a. Determing the selling price of a
product – helps in settling the selling
Merchandising
price.
• buying products for immediate resale b. Meeting competition – detailed
• computation of COGS: information regarding unit costs cam
be used to determine the action to be
taken by the company.

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 Junior Philippine Institute of Accountants and Auditors – United
Cost Accounting and Control
c. Bidding on contracts – must submit • uses several Work in Process Inventory
competitive bids in order to be accounts
awarded manufacturing contracts.
d. Analyzing profitability – enables Major differences between Process and Job
management to determine the order costing
amount of profit.
Process Costing Job Order Costing
For Planning and Control
Homogeneous units Unique jobs are
• Planning: establishing the goals
pass through a series worked on during a
and objectives of the organization of similar processes. time period.
and determining ways to attain
them. Costs are accumulated Costs are accumulated
Three components of Planning: by processing by individual job.
department.
1. Strategic planning - long range goals,
overall direction the company want to go Unit costs are Unit costs are
2. Tactical planning - shorter range goals, computed by dividing determined by
how the company can attain its the individual dividing the total costs
strategicgoals departments’ costs by on the job cost sheet
the equivalent by the number of units
3. Operations planning - day-to-day production. on the job.
implementation of the company’s
settactical plans The cost production The job cost sheet
report provides the provides the details
• Control: monitor the company’s operations detail for the Work in for the Work in
and determining whether the objectives Process account for Process account.
identified in the planning process are each department.
being accomplished.

Two Basic Product-Costing Systems

2 COSTS – CONCEPTS AND CLASSIFICATIONS
Job order costing CLASSIFICATION OF COSTS
• used in businesses that manufacture or sell
unique products / customer-specified COST
products • cash or cash equivalent value sacrificed for
• each job becomes a cost center, and costs goods and services that are expected to
are measured for each completed job bring a current or future benefit to the
rather than for specific time periods organization.
• to get the unit cost, determine the total
manufacturing costs for each job and • are incurred to produce future benefits in a
divide it by the number of good units profit-making firm, future benefits usually
produced for that job mean revenue.
• uses only one Work in Process Inventory
Control account, supported by a subsidiary Expired costs = expenses
ledger Loss – cost that expires without producing any
Process costing revenue benefit
• used by companies that produce large
quantities of similar products, or have a As to relation to a product
continuous production flow a. Manufacturing costs
• costs are accumulated per period of time i. Direct materials - raw materials
• to get unit cost, determine the total thatare put into production and
manufacturing costs per department and transformed into finished products
divide it by the equivalent unit of ii. Direct labor - wages
production. Add all unit costs per paid toworkers engaged
department to get the total unit cost of the directly in production
product.

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 Junior Philippine Institute of Accountants and Auditors – United
Cost Accounting and Control
iii. Factory Overhead - all b. Joint costs - manufacturing costs shared by
other costsnot belonging to two or more products produced atthe same
DM or DL time ; subject to allocation
c. Indirect departmental charges- costs
PRIME COSTS = direct materials + direct that indirectly benefited other departments,
labor
CONVERSION COSTS = direct labor + factory
later allocated
overhead
As to nature
MANUFACTURING COST = prime cost +
factory overhead a. Common costs - costs shared by
two or more accounting periods,
b. Non-manufacturing costs operations, commodities, or
iv. Marketing/selling expense - services;subject to allocation
all costs spent to secure orders b. Joint costs - manufacturing costs
and getthe product to the shared by two or more products
customers produced atthe same time ; subject
v. General/administrative to allocation
expense -executive,
organizational, and clerical Costs for planning, control, and
costs not attributable to analytical processes
marketing or production
a. Standard costs - predetermined
As to variability manufacturing costs based on past
A. Variable costs - cost per unit experience, used as a benchmark to
remains constant as volume controlexpenditures
increases/decreases b. Opportunity costs - benefit given
B. Fixed costs - cost per unit decreases up inchoosing another alternative
asvolume increases, and vice versa c. Differential costs - present under
i. Committed fixed costs - long- one alternative but absent under
termcommitments another
ii. Managed fixed costs - short i. Incremental cost
ii. Decremental cost
term,can be easily modified
d. Relevant cost - future cost that
C. Mixed costs - have both fixed
variesacross alternatives
andvariable components
e. Out-of-pocket cost - requires
i. Semivariable cost - minimum
the payment of cash or other
fee for the service + variable
assets
cost basedon usage
f. Sunk cost - already incurred and
ii. Step costs - costs are acquired
cannotbe recovered
inindivisible portions
g. Controllable cost - management has
As to relation to relation to thepower to authorize the expense
manufacturing departments
a. Direct departmental charges - Methods of Separating Mixed Cost
can beeasily associated with a • Scattergraph
particular manufacturing • High-Low Point
department, charged immediately. Steps:
b. Indirect departmental charges - 1. Identify the highest cost driver (e.g.
costs that indirectly benefited direct labor hours) and corresponding
other departments, later allocated cost.
2. Identify the lowest cost
As to nature driver andcorresponding cost.
a. Common costs - costs shared by two 3. Get the difference between the two
or more accounting periods, cost drivers, and the two costs
operations, commodities, or services; identified.
subject to allocation

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 Junior Philippine Institute of Accountants and Auditors – United
Cost Accounting and Control
4. Divide the difference in cost by the Finished goods Inventory
difference in cost driver to get the • total cost incurred in manufacturing but
variablerate per cost driver. still on hand
5. Use either the highest or lowest
data. Subtract the variable Elements of manufacturing cost: (1) direct
proportion (variable rate x cost materials, (2) direct labor, and (3) factory
driver) from the total cost to arrive overhead
at the fixed cost.
Direct materials used
2.9 SUMMARY OF IMPORTANT Materials Inventory, beg xxx
FORMULAS /FORMULAE Add: Purchases xxx

Total variable costs = variable cost per Total available for use xxx
unit x total output
Less:Materials Inventory, end xxx xxx
Total cost = total variable cost + total fixed
cost Direct labor xxx
Variable rate = highest point cost – lowest Factory overhead xxx
point cost highest output – lowest output Total Manufacturing costs xxx
Fixed cost = total cost at highest – (variable
rate x output at highest point) Add: Work in Process, beg xxx
Fixed cost = total cost at lowest – (variable
Total Cost of goods put into process xxx
rate x output at lowest point)
Least square method variable cost Less: Work in Process, end xxx

- Formula for projecting total cost: Total cost of goods manufactures xxx
Y = FC + VX Add: Finished goods, beginning xxx
Total goods available for sale xxx
Where:
Y = Total cost COST OF GOODS SOLD xxx
V = Variable rate per unit X = Level of
activity
FC = Fixed cost ILLUSTRATION 1 COST ACCUMULATION

❖ Method of least square Equations The following data are available for three
companies at the end of their fiscal years:
to be used:
1. Y = a + bx Company Alpha:
2. ∑Y = na + b∑x
Finished goods, April 1 400,000
3. ∑XY = ∑xa + b∑x2
Cost of goods manufactured 2,600,000
Sales 3,500,000
Where:
Gross profit on sales 35%
X = Cost driver data Y = Cost data
Finished goods inventory, April
30 ?

3 COSTS ACCOUNTING CYCLE Company Chi:

Gross profit 264,000
Materials Inventory Cost of goods manufactured 612,000
• cost of all materials purchased and on Finished goods, January 1 34,000
hand Finished goods, December 31 26,000
Work in process, January 1 18,000
Work in process Inventory
Work in process, December 31 12,000
• costs for goods in production but not yet
completed Sales ?

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 Junior Philippine Institute of Accountants and Auditors – United
Cost Accounting and Control
Required: Determine the amounts indicated by the 3. Two-bin method – used for materials that
question marks. are considered inexpensive and/or nonessential.
First bin. Used between the time an order
ILLUSTRATION 2 COST ACCUMULATION is received and the next order is placed
Second bin. Used between the ordering
Cost of Goods Manufactured; Prime and and delivery, plus additional units of safety
Conversion Costs. Wyoming Company's stock
purchases of materials during June totaled
4. Automatic order system – an order is
$25,000, and the cost of goods sold for June was
$130,000. Factory overhead was 200% of direct automatically placed when the level of inventory
labor cost. Other information pertaining to reaches a predetermined order point quantity.
Wyoming Company's inventories and production 5. ABC plan – method used by companies
for June is as follows: with a large number of materials, each one having
different value.

Inventories Beginning Ending MATERIAL CONTROL

Finished goods P42,500 P39,000 1. Physical Control of Materials
Work in process 15,500 17,000 • Limited Access
Materials 5,000 8,500 • Segregation of Duties
• Accuracy in recording
4 ACCOUNTING FOR MATERIALS 2.Control of the Investment in Materials
ACCOUNTING BY THE PERIODIC • Order Point
INVENTORY SYSTEM a. Usage – anticipated rate at which the
materials will be used
Purchases of Direct and indirect Materials
• “Purchases” account if there is beginning b. Lead time – estimated time interval
balance “Materials Inventory - Beginning” between the placement of an order and
• Added to the materials inventory -
receipt of the material
beginning = to materials available for use.
c. Safety stock – estimated minimum
ACCOUNTING BY THE PERPETUAL INVENTORY level of inventory needed to protect
SYSTEM
against running out of stock
Purchases of Direct and indirect Materials
• “Materials Inventory” • Economic Order Quantity – Optimal
• The beginning materials inventory is the quantity to order at one time. To
balance of the materials inventory at the determine this, the cost of placing an
end of the previous period. order (order costs) and the cost of
o Credit Materials Inventory for the carrying inventory in stock (carrying
cost of direct materials, and Debit costs) should be considered.
to Work in Process Inventory
EOQ =
• Issuance of Indirect materials, debited to
where: C= cost of placing an order
the Factory Overhead Control account
N= no. of units required annually
COMMONLY USED CONTROL PROCEDURES K= annual carrying cost per unit of
inventory
1. Order cycling – method where materials on
Ordering Cost=
hand are reviewed on a regular or periodic
cycle.
where: C= cost of placing an order
2. Min-max method – based on the assumption EOQ= economic order quantity
that materials inventory have minimum and N= no. of units required annually
maximum levels. OC= Ordering cost

Carrying Cost=

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 Junior Philippine Institute of Accountants and Auditors – United
Cost Accounting and Control
where: K= annual carrying cost per unit of 1. If the scrap recovered can be traced to a
inventory specific job
Scrap/Scrap materials xxx
Work in process xxx
SPOILED UNITS, DEFECTIVE UNITS, SCRAP
MATERIAL, AND WASTE MATERIAL IN A JOB 2. If the scrap recovered are not traceable
ORDER COST SYSTEM to a specific job
Spoiled unites – units that do not meet Scrap/Scrap materials xxx
production standards and are either sold for their Miscellaneous Income xxx
salvage value or discarded.
FOR WASTE MATERIAL
Defective units – do not meet production 1. If the cost of disposing is allocated to all jobs
standards and must be processed further in order Factory overhead control xxx
to be salable as good units or as irregulars. Accounts payable xxx
Scrap material – left over from the production
2. If the cost of disposing is allocated to specific
process that cannot be put back into production
for the same purpose, but may usable for a job
different purpose. Work In process inventory – (Job #) xxx
Accounts payable xxx
Waste materials – left over from the production
process that has no further use or resale value and
may require cost for their disposal. ILLUSTRATION 3 ACCOUNTING FOR MATERIALS

Warner Co. uses 6,000 units of material per year

FOR SPOILED MATERIALS at a cost of P4 per unit. Carrying costs are
1. Charged to the specific job estimated to be P1.125 per unit per year, and
order costs amount to P60 per order. As an
incentive to its customers, Warner will extend
Spoiled goods xxx quantity discounts according to the following
Work in process xxx schedule:
2. Charged to all production Minimum List Net
Order Price Discount Price
Spoiled goods (invty @SV) xxx 500 P4 2% P3.92
Factory overhead control (loss) xxx 1,000 4 4 3.84
Work in process xxx 2,000 4 6 3.76
Required:
FOR DEFECTIVE MATERIALS
1. Charged to the specific job a. Determine the economic order quantity
(ignoring quantity discounts) and the total
Work in process xxx annual order cost, carrying cost, and
Materials xxx materials costs at EOQ (considering quantity
Payroll xxx discounts).
Factory overhead applied xxx
b. Compute the annual order cost, carrying
2. Charged to all production cost, materials cost, and total cost at each
discount level. (Round to the nearest dollar.)
Factory overhead control xxx
c. Identify the order size, choosing from one
Materials xxx
of the three discount levels, that will
Payroll xxx
minimize the total cost
Factory overhead applied xxx

FOR SCRAP MATERIAL

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 Junior Philippine Institute of Accountants and Auditors – United
Cost Accounting and Control
ILLUSTRATION 4 ACCOUNTING FOR MATERIALS Budgeting Factory Overhead cost – are
management operating plans expressed in
Jefferson & Sons Inc. would like to determine the quantitative terms, such as units of production
safety stock to maintain for a product so that the and related cost
lowest combination of stock out cost and carrying
cost would result. Each stock out will cost P100; FACTORS TO BE CONSIDERED IN COMPUTING
the carrying cost for each safety stock unit will be FACTORY OVERHEAD RATE
P2; the product will be ordered ten times a year.
The following probabilities of running out of stock 1. BASE AMOUNT TO BE USED
during an order period are associated with
various safety stock levels: a. The simplest base is Physical Count or
Units of Production.
Safety Stock Probability of Stock out
Level
FOH Rate = Factory Overhead
Estimated Direct Labor Hours
25 50%
50 25% b. Direct Materials Cost – it is
75 10% commonly used as a base or
100 5% denominator in the computation of
predetermined factory overhead
rate.
Required: Determine the combined stock out and
safety stock carrying cost associated with each
level and the recommended level of safety stock. FOH RATE = Estimated Factory Overhead
x 100
Estimated Direct Materials
5 ACCOUNTING FOR FACTORY OVERHEAD Cost

FACTORY OVERHEAD c. Direct Labor Cost – if it can establish that

• all costs that are incurred and not Direct there is a direct relationship between labor cost
Materials and Direct Labor. and factory overhead. This base is more reliable
than Material Cost
Example:
Estimated Factory Overhead
FOH Rate = Percentage of Direct Materials Cost FOH Rate = x 100
Estimated Direct Labor Cost
Indirect Materials and Indirect Labour, Heat,
Light and Power for the Factory, Rent on Facility
Building, Dep’n of Factory Building and Factory Estimated Factory Overhead
Equipment, and Maintenance of the Latter. FOH Rate = x 100
Estimated Direct Labor Cost
They are divided in Three Categories as to their
behaviour in production
d. Machine Hours – it occurs in a company
1. Variable Overhead – cost that varies in that is automated so that the majority of the
direct proportion to the level of production. overhead cost consists of depreciation on
Variable cost per unit remains constant as the factory equipment.
production either increases or decreases.

2. Fixed overhead – remains constant with Estimated Factory Overhead

the relevant range regardless of the level of FOH Rate =
production. The greater the number of units Estimated Machine Hours
produced the lower the fixed cost per unit.

3. Mixed overhead – it is neither wholly, fixed Estimated Factory Overhead

or variable in nature but has the FOH Rate =
characteristics of both. Mixed cost must Machine Hours
ultimately separate if it is variable or mixed.

e. Direct Material Cost – in this case direct

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Cost Accounting and Control
materials are a very large part of the total might result in a stoppage of
cost. It is not appropriate when more than production within or not within the
one product is manufactured by a company. control of the management.
• functions 24 hours a day, 7 days a
week, 52 weeks a year.
Estimated Factory Overhead
FOH Rate = Practical Capacity
Estimated Unit of Production • provides allowance for circumstances
that might result in stoppage of
production.
Estimated Factory Overhead
FOH Rate = Expected actual capacity
Unit of Production • a capacity concept based on a short-
range outlook which is only feasible for
2. METHODS OF ALLOCATING SERVICE firms with products that are seasonal.
DEPARTMENT COST TO PRODUCING Normal Capacity
DEPARTMENTS • consider the utilization of the plant
a. Direct Method – The most commonly facilities to meet commercial demands
used method. It allocates each service served over a period long enough to level
department's total cost directly to the out the peaks and valleys which come in
producing department. It ignores seasonal and cyclical variations.
services rendered by one service • commonly used in the computation of
department to another. Overhead rates.
b. Step Method – it is also called a
sequential method. This method METHODS OF ACCUMULATION OF FACTORY
recognizes the services rendered by OVERHEAD COST
one service department to another. It
Non-Controlling account system – it is an
is more complicated because it
account for which each kind of overhead to their
requires a sequence of allocation. It
nature is opened in the general ledger and
typically starts with the department
charges to which account are made upon the
that has the greater service rendered
incurrence of the expense.
and ends with the one with the least
services rendered. Once a services Controlling Account System – An “Overhead
department’s costs are allocated, no Control” account is opened in a general ledger
subsequent services are allocated to wherein the overhead incurred are charged; a
it. subsidiary ledger is maintained to show detail
c. Algebraic Method – it is called the the nature and account of the expense.
reciprocal method. It allocates cost by
explicitly including the mutual FACTORY OVERHEAD VARIANCE
services rendered among all The difference between the actual factory
departments.
overhead and the applied factory overhead.
CAPACITY PRODUCTION • Under-applied Overhead – Actual
Theoretical, Maximum or ideal capacity FOH is more than Applied FOH
• it is a capacity that can produce at full • Over-applied Overhead – actual is less
speed without interruptions. than applied.
• gives no allowance for human capacity
to achieve the maximum nor due
allowance for any circumstances that

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 Junior Philippine Institute of Accountants and Auditors – United
Cost Accounting and Control
ACCOUNTING FOR OVERHEAD
FORMULAS:
VARIANCE
SPENDING VARIANCE
a. Variance should be deferred rather than
disposed of immediately. Actual FOH xxx
b. If variance is immaterial, it is closed to Less Budgeted allowance
COGS : based on capacity
used xxx
c. If variance is material, it is distributed to COGS,
Fixed FOH xxx
FG inventory, WIP inventory. Variable FOH xxx xxx
Spending Variance xxx
CAUSES OF VARIANCE

• Spending Variance – due to expense IDLE CAPACITY VARIANCE

factor.
Budgeted allowance based on
• Idle Capacity or Volume Variance – due capacity used xxx
to the difference in volume and activity Less:
factors FOH applied xxx

Idle Capacity Variance xxx

ACTIVITY BASED COSTING
• Also known as “transaction costing” APPLIED FOH
• Overhead costs that are caused by
activities are raced to individual product units FOH = Actual x Estimated FOH/Estimated Base
on the basis of frequency of consumption of
6 ACCOUNTING FOR LABOR
overhead resources by each product.
• Simple concept which can provide Labor
accurate information about a particular • the physical or mental effort expended
product's consumption of overhead resources. in manufacturing a product labor cost is
the price paid for using human resources
• Approximation of user’s fee.
Factory labor – the compensation paid to
User’s Fee – refers to the process of charging for
employees who engage in production
services consumed by users of the service. related activities

Wages – Principal labor cost paid to production

FIVE STEPS IN APPLYING ACTIVITY BASED workers; Payments are made on an
COSTING (ABC) hourly/daily/piecework basis
1. Assemble similar actions into activity Salaries – Are fixed payments made regularly
centers. for managerial or clerical services
2. Classify cost by activity center and by
type of expense TWO DIVISIONS OF FACTORY PAYROLL
COSTS
3. Select cost drivers
4. Compute a cost function to associate costs
and cost drivers with resource use. DIRECT LABOR: Represents payroll costs that
are allocated directly to the product
5. Assign cost to the cost objectives.
WIP xxx
PAYROLL xxx

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 Junior Philippine Institute of Accountants and Auditors – United
Cost Accounting and Control
INDIRECT LABOR: labor costs that are Employees Earning Records: Includes historical
either considered "too remote" or "too and current record
insignificant" to be charged directly to the
product. Payroll Summaries: Summarizes payroll
obligations
FOH -C. xxx
PAYROLL xxx ALLOCATION OF LABOR HOURS

Regular time - charged to WIP

WAGE PLANS Overtime pay - normally part of FOH but can be
charged as direct labor if the job is rushed
HOURLY-RATE PLAN Overtime premium - always charged to FOH
• Rate per hour x number of hours used
• does not provide incentive for the CLASSIFICATION FOR LABOR
employee to produce more or a high level
of productivity 1. Direct Labor - represents payroll costs that
• employees are paid for merely being on are traceable to individual jobs worked on during
the job the period. Direct labor costs are debited to the
Work in Process account.
PECE RATE PLAN: (QTY PRODUCED x Examples: machine operators, painters,
RATE PER PIECE) assemblers, factory workers
• provides incentives for employees to 2. Indirect Labor - cost of work not directly
produce more traceable to the production of the product but is
• might sacrifice the quality of the product still related to the production process. Indirect
labor costs are charged to factory overhead.
MODIFIED WAGE PLAN Examples: janitors, production supervisor,
inventory clerks, cost accountant
• Minimum hourly wage + (Qty
exceeding quota x Rate per piece) 3. Labor Overhead
• combined feature of hourly rate and • Waiting Time or Idle Time – cost of non-
piece rate plan productive direct labor hours due to a lack
of work, delayed materials due to
CONTROLLING LABOR COST scheduling, machine malfunction, and
machine set-up.
Time Keeping Department: Accounts for the • Make-up Pay - "piecework" rate;
time spent by the employer in the factory additional pay to minimum wage
employees if they produced more.
Clock Cards: Determine the time spent in the • Overtime Premium – represents amount
paid when a worker works beyond normal
company
working hours.
• Shift Premium - extra pay to work during
Time Ticker: Determine the distribution of hours less desirable evening shift (2 p.m. to 10
p.m.) or night shift (10 p.m. to 6 a.m.)
Production Reports: Report the number of
products produced

Payroll Department: compute each employee's

gross earnings, deduction, and net earnings to
be paid by employees

Payroll Records: Reports the labor cost

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