MODULE 1 – COST ACCOUNTING FUNDAMENTALS o The desired quality of the product

o The number of personnel to be utilized

What is Cost Accounting?
(laborers and non-laborers)
 Cost accounting Is a discipline that focuses on o The type of materials to be used
techniques or method for determining the cost of o The level of materials inventory to be
a project, process, core services for the purpose maintained in order not to encounter
of planning and controlling activities, improving overstocking or stock-out of materials
quality and efficiency, and for making decisions. o The delivery schedules
 It provides information on a company’s cost on o And other production schedules
and may be used for both internal and external  Once a production plan has been laid out, it
purposes. would be easier for the management to perform
 According to Horngren, Cost Accounting the function of control where actual results are
measures and reports financial and non-financial compared with expected results set by the
information relating to the cost of acquiring or management to allow the management team to
consuming resources in an organization. It make corrective measures on areas where
provides information on a company's cost and significant differences are noted.
may be used for both internal and external  In controlling, responsibility is assigned to
purposes. different departments or group of workers who
 Raiborn states that cost accounting identifies, has control over and accountable for the costs
defines, measures, reports, and analyzes the charged to that department or group. In this
various elements of direct and indirect cost manner, the accountability for costs or
associated with producing and marketing goods production results is easily identified.
and services. It also measures the performance,
product quality, and productivity. Classification of costs

Uses of Cost Data  The costs of an object, product, project or service

represent the cash or cash equivalent of
 Cost accounting information is very useful in resources used in acquiring the goods,
determining product and service costs and in manufacturing a product, and performing a
setting prices for the product and the service. function. It also includes the cost of distributing
 Knowing the costs of a product or service helps the products or services to the ultimate
the management set the selling price enough to consumers. The cash equivalent is used because
recover the cost of production, cost of non-cash assets can be exchanged for the desired
performing a function, distribution, goods or services.
administration and to provide allowance for
Product Cost
reasonable profit. These costs information also
help the management in deciding whether to  Manufacturing cost is the sum of the inputs or
maintain, to reduce or to increase the selling resources used in the conversion of raw materials
price of the product to have a fair competition in into finished product. This type of cost is often
the market. referred to as product cost or inventoriable cost.
 The accumulated costs information is  The product costs include costs of direct
summarized and reported to the management for materials, direct labor, and factory overhead. The
effective planning to attain the company’s goal accumulated cost of direct materials, direct labor,
and objectives. and factory overhead is summarized in a work in
 In manufacturing, if the management has process account.
sufficient information about the cost data, it can  At the end of a period, the cost of completed
prepare a detailed production plan, which usually goods is transferred to the finished goods
includes the following: account. The cost of unfinished goods, on the
o The number of units to be produced other hand, is left in the work in process account,
o The type of manufacturing operations to which is also reported in the balance sheet as
be performed current assets.
  The sold portion of the finished goods is reported supplies used in the factory such as nails,
as expense in the income statement, as cost of screws, washers, glue, sandpaper,
goods sold, while the unsold goods are reported lubricating oil, grease, cleaning materials
in the balance sheet as finished goods. and other materials needed to maintain
 A manufacturing company normally maintains the working area and plant equipment in
three inventory accounts: finished goods, work in a usable and safe condition. The costs of
process, and raw materials. The raw materials indirect materials are relatively small in
inventory represents the unused portion of direct relation to the cost of all other raw
and indirect materials. materials.
 For a retailing or merchandising company (a 2. Labor. Labor represents the compensation and
company engaged in buying goods ready for sale), other benefits paid to the workers in the factory.
product costs include the purchase price of goods They are classified as (a) Direct labor and (b)
bought for resale plus the transportation costs Indirect labor.
and other direct costs incurred in bringing the A. Direct labor – represents
goods to the place of the buyer. compensation and benefits paid to
 For a construction company, the product costs those who physically work on the
include the cost of construction materials, labor conversion of raw materials into a
of carpenters and overhead incurred in finished product and are easily
construction like cost of power, light & water, traceable to a specific process or job
insurance, hospitalization and other health order.
benefits for workers, maintenance of
They include the basic pay, cost of living allowances, 13th
construction equipment, compensation of
month pay, and cash equivalents of non-cash incentives
foremen, cost of constructing temporary house
given on a regular basis.
for the workers and for construction materials,
depreciation of equipment, rentals and other Prime costs = Direct materials + Direct labor
expenses incurred in the construction site.
Conversion costs = Direct labor + Manufacturing
 For a service organization, its product costs are
Overhead
classified either as direct or indirect costs. Their
inventory accounts are usually for supplies like B. Indirect labor – represents wages of
office supplies for accounting firms or law firms, personnel other than the direct
medical supplies for hospitals and medical clinics, laborers, which are necessary to the
cleaning supplies for utility firms and food manufacturing process or service but
supplies for restaurants and bars. The most are not directly related to the actual
significant portion of their costs is labor because conversion of raw materials into a
the workers utilized their own efforts in delivering finished product.
service.
These include the supervisor’s fee, wages paid to other
Elements of Product Costs: Manufacturing Company workers such as janitors, inventory control clerks, guards,
and other personnel in the factory, employee benefits
1. Materials. Materials include the raw materials
such as employer’s share in SSS, PHIC, and HDMF,
and other factory supplies used in manufacturing
vacation and holiday pay, health insurance of workers,
operations. They are classified as either (a) direct
educational benefits, overtime and night premium, cost
materials or (b) indirect materials.
of housing and accommodation for stay-in workers, and
A. Direct materials. Direct materials are
performance bonuses for deserving workers.
those materials traceable to the product
being produced. 3. Manufacturing Overhead. Manufacturing
B. Indirect materials. These are materials overhead is an indirect product cost, and it
necessary in manufacturing operations includes production costs other than direct
but are not directly included in or not a materials and direct labor.
significant part of the product. They
include operating janitorial and factory They include:
 a) Factory supplies such as oil and other cleaning maintenance cost of office equipment,
materials used in the factory depreciation of office furniture and equipment,
b) Wages of supervisors, factory maintenance taxes and licenses, gas and oil expenses, and
personnel, raw materials handlers, and security other expenses in the administrative office.
officers stationed in the factory premises
Direct vs. Indirect Costs
c) Depreciation of factory plant and equipment
d) Insurance and property taxes on factory plant and  Direct Cost. These are costs that can be obviously
equipment and physically traced to a manufacturing process,
e) Maintenance and repairs on factory plant and job, or order, business unit, segment or
equipment department. These costs are often described as
f) Power, light, and water those that would be saved if the segment or
g) Telephone and mailing costs business unit would be discontinued or if the
h) Cost of regulatory compliance such as meeting product would not be manufactured.
factory safety requirements and disposal of waste
materials Direct costs are not only direct materials and direct labor
i) Idle time by factory workers due to machine but it also includes the cost to run a business unit.
breakdowns or new set ups which are They include:
unavoidable in production process. During their
idle time, the workers are not productive a) Salary of auto-mechanics in Automotive Servicing
therefore the cost is spread over the entire Co.
production not to a specific product. b) Salary of a binder in a Printing Company
c) Oil and lubricants in a Trucking Company
Period Costs d) Steel bars used by a Construction Company
 Period costs are operating expenses that are e) Bond papers and telephone expense in a Law
associated with time periods, rather than with Office
the production of goods and services. f) Cost of detergents in a laundry shop
 Period costs are charged directly to expense g) Cost of x-ray, doctor’s fee, laboratory fee &
accounts on the assumption that their benefit is medicine in a hospital.
recognized entirely in the period when the cost is
incurred.  Indirect cost. These are costs related to a
 They are non-manufacturing costs and non- particular cost object but cannot be traced to that
inventoriable costs. cost object in an economically feasible way.

They include: They are normally incurred for the benefit of several
segments within the organization. In a manufacturing
a) Marketing and selling costs: These are the costs company, these are overhead costs incurred in the
of getting and filling orders such as cost of process of production.
customer service, cost of documentation, salaries
and commissions of sales personnel, advertising Common and Joint Costs
costs, and other expenses associated with the  Common costs. Common costs are mutually
sale of goods and services. beneficial costs which occur when the same
b) Distribution costs: These are the costs of resource is used in the output of two or more
warehousing, transporting, and delivering a services or products or simply the costs of
product or service to the customer. facilities or services shared by two or more
c) Administrative costs: These are the costs departments or operations. Examples of common
associated with the general administration of the costs are:
organization that cannot be reasonably assigned a) Building repairs and maintenance costs
to either marketing or production such as salaries b) Rent of a building occupied by different
and wages of administrative officers and departments
employees, power and water consumption, c) Power and utilities costs
transportation and representation expenses,
 d) Salaries and wages of personnel serving two or particular amount of money for a specific
more departments purpose.
e) Real estate taxes for land and building
Examples are:
f) Permits and licenses
 Joint costs. These are costs incurred in a single a) Amount of money to spend on Research and
process that yields two or more products. They Development
are production costs (direct materials, direct b) Management development program and
labor, and factory overhead) incurred up to the contributions to charitable institutions
extent where products are separately identified. c) Advertising and promotion
Example: the cost of dough, labor or baker, and overhead Controllable and Non-controllable costs
incurred by a bakeshop
 Controllable costs. These costs are costs primarily
Opportunity and Sunk Costs subject to the influence of a given responsibility
center manager for a given period of time.
 Opportunity costs. These costs represent the
benefits foregone because one course of action is Examples are:
chosen over another.
a) The cost of raw materials used in manufacturing
Examples are: leather products. The production manager has
the ability to control the materials to be used in
a) The rent revenue foregone if a company decides
production by selecting only materials with high
to use a part of a building rather than leasing it.
quality, thus, reducing waste and spoilage.
b) The salary foregone if a student decides to be a
b) Cost of food in the factory canteen. The canteen
full-time student rather than a working student.
manager has the ability to control losses in terms
of spoilage and theft by canteen personnel.
 Sunk costs. These costs are costs that have
already been incurred and will be changed or
 Non-controllable costs. These costs cannot be
avoided by any future decisions. They are past
controlled or influenced by a responsibility center
costs that are unavoidable because they cannot
manager.
be changed no matter what action is taken by the
management. Example:
Examples are: Cost of renting equipment. The owner of equipment has
the control over the amount of rent not the production
a) The acquisition cost of an office equipment
manager.
b) The manufacturing costs of finished goods on
hand. Out of Pocket and Budgeted Costs
Committed and Discretionary Cost  Out of pocket costs. These costs refer to the cash
outlay required to complete a proposed project
 Committed costs. These costs are costs resulting
or to extend an activity undertaken.
from an organization’s structure or use of
 Budgeted costs. These costs refer to planned or
facilities and its basic organization structure.
predetermined costs.
Examples are:
Capital expenditures and Revenue expenditures
a) Property taxes
 Capital expenditures. These are expenditures
b) Depreciation on building & equipment
intended to benefit future periods and are
c) Salaries of management personnel
reported as asset in the balance sheet.
d) Cost of renting facilities
Example are:
 Discretionary costs. These costs are costs
resulting from management decision to spend a a) Cost of overhauling heavy equipment
b) Cost of replacing worn out wall of a building
 Supplies Inventory account for indirect materials
 Revenue expenditures. These are expenditures such as supplies to be used in the production
that benefit only the current period and are including janitorial, operating, and repairs
reported as expense. supplies intended for use in the factory.
2. Work in Process Inventory: This account
represents the costs of partially completed goods
Fixed, Variable, and Mixed Costs on which production activities have been started
but not yet completed as of a certain period.
 Fixed costs. These are costs that are constant in 3. Finished Goods Inventory: This account
total within the relevant range of activity but summarizes the cost of completed jobs stored in
variable on a per unit basis. As the activity level the warehouse ready for delivery to the
increases or decreases, total fixed cost remains customers.
constant but unit cost declines or goes up,
respectively. Raw Materials Inventory System

Examples are: Perpetual Inventory System

a) Depreciation using the straight-line method  The perpetual inventory system requires the need
b) Factory rent & factory taxes to maintain stock cards for each type of raw
c) Factory insurance materials to show the summary of the inflow,
d) Supervision Fee outflow, and balance of raw materials in quantity
e) Wages of indirect laborers and peso amount.
 Under this system, the movement of raw
 Variable cost. These are costs that vary in total in materials is summarized in a Raw Materials
direct proportion to changes in the volume of Inventory Account . This method makes it easier
production. Variable cost is a constant amount on for a company to determine the amount of
a per unit basis as activity changes within a inventory on hand at any given time.
relevant range. As activity changes, total variable  Although the quantity of raw materials is
costs increase or decrease proportionately with available at any time by just referring to the stock
the activity change, but unit variable costs remain card, it is necessary to take physical count of raw
the same. materials at least once a year to confirm the
balance reflected in the material stock cards and
Examples are: in the Raw Materials Inventory account.
a) Direct materials and direct labor Periodic Inventory System
b) Fuel and other factory supplies
c) Overtime premium  Under the periodic inventory system, there is no
d) Materials handling costs need to maintain a stock card for the raw
e) Maintenance costs materials. A physical count is made periodically,
which is near the end of a period to determine
Inventory Accounts the units on hand.
Manufacturing companies maintain three inventory  The latest purchases are normally left in the
accounts, namely: warehouse. The raw materials issued are the
residual amount after deducting the physical
1. Raw Materials Inventory: This account shows the inventory counted from goods available for sale.
raw materials available for use in the
manufacturing process. It serves as the Summary of flow of costs in the inventory system
controlling account if the company maintains only
one account for its direct and indirect materials.
However, if the company maintains a separate
account for its direct and indirect materials or
supplies, the account may be changed to Direct
Materials Inventory for direct materials, Factory
Methods of Accumulating Product Costs

 Actual Costing System. Very few companies adopt MODULE 3 – ACCOUNTING FOR RAW MATERIALS
this method of costing because the overhead
costs cannot be traced easily to individual jobs. Perpetual Materials Inventory System
This method requires that all production
 The perpetual inventory system requires the need
overhead must be available before any cost
to maintain stock cards for each type of materials
allocation can be made to the jobs in process.
to show the summary of the inflow, outflow and
Under this system, the actual costs of direct
balance of raw materials in quantity and in peso
materials used, direct labor, and manufacturing
amount.
overhead incurred in production are charged to
 Under this system, the movement of raw
the job.
materials is summarized in a Raw Materials
Inventory account making it easier for a company
 Normal Costing System. Under this system, the
to determine the amount of inventory on hand at
actual costs of direct materials and direct labor
any given time.
are charged to the job. The manufacturing
 This system however necessitates the physical
overhead applied to production differs from
counting of raw materials at least once a year to
actual costing in the sense that pre-determined
confirm the balance reflected in the material
overhead rate is used in computing for the
stock cards and in the Raw Materials Inventory
amount of overhead charged to the job.
account.
The predetermined overhead rate is the ratio of
Periodic Inventory System
estimated total overhead to the estimated total of cost
driver selected. A company can use one rate (plant-wide)  Under periodic inventory system, there is no need
or several rates (departmental rates). If several rates are to maintain a stock card for the raw materials.
used, the budgeted manufacturing overhead is actually  A physical count is made periodically which is
divided into several cost pools and uses each driver as the near the end of a period to determine the units
denominator in computing for the predetermined on hand.
overhead rate.  The raw materials issued are the residual amount
after deducting the physical inventory counted
Computation of COGS in different types of businesses
from goods available for sale.

Basic Transactions Associated with Raw Materials

(Perpetual Inventory System)

 The cost of raw materials is debited to Raw

Materials Inventory when the materials are
received. This account is debited for the invoice
cost and freight costs chargeable to the
purchaser.
  It is credited for purchase discounts taken and  On the other hand, if the method of accounting
purchase returns and allowances. for inventories is the periodic inventory method,
 Upon receipt of the materials, the inventory clerk the freight cost is charged to a separate account,
updates the inventory ledger card or stock card. Freight In and record only the invoice cost in
After all postings have been made, the balance in Purchases account.
the Raw Materials Inventory account (ledger  When raw materials are issued, separate
balance) should equal the sum of the balances in calculation is made to apportion the freight in
the raw materials ledger card. costs to issued and unissued raw materials. The
amount allocated to the raw materials is debited
to Work in Process account together with the
invoice price.

Basic Transactions Associated with Raw Materials

(Perpetual Inventory System)
Basic Transactions Associated with Raw Materials
Periodic Inventory System (Perpetual Inventory System) (Con.)

Illustration. Dolby Manufacturing Company purchased the

following raw materials from X Company, terms 2/10 ,
n/30.

If the materials purchased are for a specific job, the cost is

charged directly to a work in process account.

Paid P800 for transportation costs of the above

purchased.

Freight In or transportation costs Required: Determined the amount to be charged to Raw

Materials Inventory account under perpetual and periodic
Perpetual Inventory System
inventory system if freight is allocated to be the units
 Freight in or transportation costs of raw materials purchased based on: (a) invoice costs; (b) units
purchased is a product costs. purchased; (c) weighted units
 Under the perpetual inventory system, the freight
(a) Freight is allocated based on invoice costs
is charged to Raw Materials accounts.
 In this case, the total costs of raw materials
purchased include the invoice price plus the
freight.
 In recording the purchase in the inventory stock
card, the freight cost is proportionately assigned
to each material, using different basis like units
purchased, invoice costs or weighted costs
resulting to an adjustment in the unit costs.
 The cost of raw materials issued already includes
part of the freight costs.

Periodic Inventory System

(b) Freight is allocated based on units purchased.
(c) Freight is allocated based on weighted units Scrap Materials

 Scrap materials are defective materials or leftover

materials in production.
 Scrap includes fillings or excessive trimmings of
materials after the manufacturing operation;
defective materials not suitable for
Inventory Stock Card manufacturing operations; and broken parts of
materials as a result of employee error or
 The stock card is to record the movement of the machine breakdown that causes the product in a
inventory. poor quality condition.
 The beginning balanced is entered first under  If these materials can be traced to a specific job,
balance column. the market value of the scrap materials is debited
 Entries in this stock card are made in to Scrap Materials and credited to Work in
chronological order (according to date of Process.
occurrence).  If the scrap recovered cannot be traced to a
 After proper posting has been made on purchases specific job, the market value is credited to
and issuances, the card shows the balance of the Miscellaneous Revenue instead of Work in
inventory in units and in peso values at a given Process.
period.
Methods of accounting for scarp materials
Issuance of Raw Materials
1. Reduction of the cost of specific products which
 Raw materials are transferred from the were produced
warehouse to the production department. 2. Reduction of the cost of production in general
 A material requisition form completed by the 3. Recognizing as other revenue for the market
production supervisor is the basis of the raw value of the scrap
material inventory clerk for the release of the 4. Recognizing as sales revenue for the market value
materials. of the scrap
 A copy of the material requisition form goes to
the accounting department as basis for recording Inventory Valuation Methods
the issuance and for entering the direct material The most common methods of valuing raw materials are:
cost to the individual jobs in process.
 FIFO (first in, first out)
 Average cost
o moving average – perpetual
o weighted average – periodic

FIFO
Materials Requisition Form.
 Under FIFO method, raw materials inventory is
 This form serves as the basis of recording the
reported at latest cost while the raw materials
issuance of raw materials.
issued is reported at earliest cost.
 In a period of rising prices, this method will yield
a higher gross profit because the cost of goods
sold is assigned lower cost.

Illustration: Costing of raw materials inventory, FIFO

Below are transactions regarding one of the raw materials The computation of raw materials available for use, raw
of Moonlight Company: materials used, and raw materials inventory is as follows:

Required:

Post the transactions to Raw Materials Ledger card using The raw materials inventory of 900 units with a total cost
(a) FIFO and (b) Moving Average and Weighted Average of P94,800 is composed of:

Compute the amount of Raw Materials Inventory and

Raw Materials used

Solution: (1) Posting to the materials ledger card.

1. B Moving Average Method (Perpetual Inventory)
1. A FIFO METHOD

Item: Raw Materials A

 Under the moving average method, the total cost

of inventory is divided by the total units to arrive
at the average unit cost.
 This procedure is repeated every time raw
materials are acquired and returned to the
supplier. Cost of raw materials issued is based on
Under FIFO method of costing, stocks acquired earlier are the latest average unit cost.
issued first to production.
  The computation of raw materials available for The Traditional Inventory Model
use, raw materials used and raw materials
 Small and medium scale business have its largest
inventory is as follows:
investment in inventory. But an investment in
inventory is not profitable because peso spent
return nothing until the inventory is sold.
 Business should maintain enough inventories to
meet customer orders, but not so much that
storage costs and inventory investments are
excessive.
 The EOQ model is designed to help the
production manager determines the amount of
stock to be purchased every time an order is
made or to produce with each production run to
minimize total inventory costs.
 EOQ is the order size for an inventory item that
result in the lowest total inventory costs for a
period.
 The lowest total cost for an inventory occurs
when the size of an inventory order is large
enough so that the cost of ordering that quantity
of inventory is equal to the cost of carrying it.
(Heitger, at al)

1. B Weighted Average Method (Periodic)

 Under periodic inventory system, there is no need

to maintain a stock card for the raw materials. 1. Carrying cost which include costs of storage,
 A physical count is made periodically which is insurance, inventory taxes, obsolescence,
near the end of a period to determine the units spoilage and pilferage, opportunity cost of funds
on hand. tied up with the inventory and handling costs.
 A weighted average unit cost is computed based 2. The carrying cost is larger for large amount of
from the raw materials available for use during inventory.
the period. This is used to compute for costing 3. Ordering costs which include costs of placing and
the raw materials issued and raw materials on receiving orders like cost of processing
hand. documents, insurance for shipments, and
 The raw materials on hand and the raw materials unloading costs.
used is computed as follows: 4. The costs of ordering inventory are the same
whether small quantity or big quantity of
inventory is ordered.
5. If small quantity is ordered the ordering cost on
per unit basis is higher whereas, if large quantity
of inventory is ordered, the ordering cost per unit
is lower.
6. The sum of carrying costs and ordering of any
given quantity of inventory is the total cost of
inventory for that order size.

If the raw materials are internally produced, the two costs

associated with these materials are (1) set up costs and
Economic Order Quantity (EOQ)
(2) carrying costs.
Set up costs include costs of preparing equipment and
facilities so they can be used to produce a particular
component.

Examples are wages of idled production workers, cost of

idled production facilities (lost of income) and the costs of
test runs, like labor, materials, and overhead. Carrying cost = Average inventory x carrying cost per unit

Solving for EOQ = 480 / 2 x 1.25

The Economic Order Quantity answers two questions. = P300.00

First, how many units should be ordered? Second, when 5. Total Inventory Costs
should these units be ordered?
Total inventory costs = Carrying costs + ordering costs
The formula to compute EOQ is:
= P300 + P300
2 x annual demand x cost per order
= P600
EOQ =  Annual carrying cost per unit
¿ annual holding cost The Reorder Point

 The assumption that raw materials arrive all at

once is not always true. The timing of purchase is
very critical element of material planning.
 The EOQ model helps the management decide
how much to order at a time. In the above
example, no mentioned is made about possible
delays in the delivery of the materials ordered.
 In materials management, the lead time is very
significant. This is the time span from date an
2 x 4,800 x 30 order is placed to date of actual receipt.
EOQ = 
1.25
= 480  To serve as insurance against possible delay, the
1. How many orders are made each year? company should maintain enough materials
during the waiting period.
4,800 annual requirement  The Reorder Point is the point in time a new
No. of orders = = 10 orders
480 order should be placed.
2. What is the frequency of placing an order?

Time to order = 360 days / 10 = 36 days

This means that the company should make an order of

480 units every 36 days.

3. The cost of ordering

 The company will place an order once the stock
Total ordering = No. of orders per year x cost per order on hand has reached the 200 units’ level.
= 10 x 30  At this level, the company is assured that it has
enough raw materials to use during the 15 days
= P300 lead time.
4. The cost of carrying the inventory
Stock outs and safety stocks

 Raw materials must be properly managed to

avoid stock out or holding of excessive
inventories.
 Stock out occurs when a company does not have
materials to issue when needed and this will
result to disruption of production schedules and
most often, loss of customer if orders are not
delivered on time.
 Manufacturing companies cannot afford to have
excessive inventories of raw materials because it
will increase carrying costs such as storage,
insurance, obsolescence or spoilage.
 Material requirement must be planned, so that,
the right quantity of materials will be ordered at
the right time interval at a very least cost.
 Because of the difficulty to forecast lead time,
manufacturing companies must maintain buffer
stocks or safety stocks above the required
inventory as protection for possible stock outs.
 The safety stock level maybe determines by
considering the maximum daily usage and the
average daily usage.
 Once the safety stock is determined, the reorder
point can be computed as:

 The safety stock is computed as: MODULE 4 – ACCOUNTING FOR FACTORY PAYROLL

FACTORY LABOR

 Wages of workers in the factory, both direct and

indirect laborers.
 Direct labor includes regular basic pay, cost of
living allowances (COLA), 13th month pay, and
overtime pay, excluding premium.
 The reorder point can now be computed as:  Overtime premium is the wage rate paid to
workers for both direct and indirect laborers in
excess of their regular wage rate and is usually
considered as part of indirect labor costs.
 Other indirect labor costs: supervisor’s salary,
fringe benefits like cost of housing and
accommodation for in-house laborers,
performance bonuses, hospitalization and
educational benefits, EMPLOYER’S SHARE in SSS,
PHIC, and HDMF, vacation and sick leave pay,
pension costs, and salaries paid to workers during
 their idle time (no orders or machine
breakdowns)

Time card
Determine the following: a. Amount of labor charged to
 Support the labor charged to the job WIP ; b. Amount of labor charged to FOH.
 Evidence of employee’s presence on the work site
 Reflects official hours of arrival and departure of
each worker. In bigger companies, biometric
system is used.

Time ticket

 Manually prepared by each worker to determine

the type of work and the job worked by each
worker together with the time he started and
stopped working during the day.
 Used as basis for distributing the payroll

Special problems in factory labor

 Piece rate with guaranteed wage

o Some manufacturing companies pay their
workers according to the units they
produced with a guaranteed wage.
o WIP is charged for the number of units  Overtime Pay
produced x piece rate o Overtime pay refers to the additional pay
o If worker incurs less than the guaranteed for work performed in excess of 8 hours a
wage, difference is charged to factory day.
overhead account o As a rule, overtime premium (excess over
basic pay of overtime) is charged to
factory overhead.
o However, when a customer requests for
an overtime to rush his order (or due to
the requirements of a specific job), the
Piece rate with guaranteed wage overtime premium is charged to work-in-
process account together with his basic
Illustration:
pay.
Robinson’s Company’s compensation scheme for its o If overtime resulted from negligence or
factory workers provides a combined maximum poor workmanship on the part of a
guaranteed wage and a piece rate. worker, then the overtime premium
should be charged as a loss.
Each worker is paid P50 per piece with a minimum
guaranteed wage of P2,100 a week (6 work days). In the Philippines: OT premium is:

During the first week of May, the production submitted  Plus 25% of the hourly rate for work performed in
the following output: excess of 8 hours on ordinary day.
 Plus 30% of the hourly rate for work performed in
excess of 8 hours on rest day, special day or
regular holiday.

Overtime Premium

Illustration:
The weekly time tickets indicate the following distribution In the Philippines:
of labor hours for three factory workers who worked on a
 Plus 30% of the daily basic rate or a total of 130%
rush order. During the week, Jobs 01, 02, and 03 were
for work performed on rest day or special day.
worked on by three laborers.
 Plus 50% of the daily basic rate or a total of 150%
for work performed on special day falling on the
employee’s rest day.
 Plus 30% of the daily basic rate or a total of 260%
for work performed on a regular holiday falling on
the employee’s rest day.
Workers are allowed a maximum of 10 hours overtime
per week at 25% overtime. Premium pay is charged to factory overhead.

Required: Determine the amount of labor charged to  Holiday Pay

work in process and manufacturing overhead. o Holiday pay refers to payment of the
regular daily wage for any unworked
regular holiday.

In the Philippines, holiday pay is:

 For any unworked regular holiday, 100% of the

employee’s daily wage rate (Basic pay + COLA).
 For work performed on a regular holiday, plus
100% or a total of 200% of the employee’s daily
wage rate (Basic pay + COLA)

Holiday and vacation pay are charged to factory

overhead.

 Fringe Benefits
o Fringe benefits are benefits that
The OT premium is charged to Direct Labor because the employers provide to employees in
job is a rush order. addition to normal salaries or wages.
Examples of fringe benefits are
hospitalization, insurance programs,
 Night Shift differential retirement plans, paid holidays and stock
o In the Philippines, Night shift differential options etc.
refers to the additional compensation for Most of the companies treat labor fringe benefits as
work performed from 10:00 O’clock in indirect labor and, therefore, include them in
the evening to 6:00 O’clock in the manufacturing overhead costs.
morning.
o Night shift differential: Plus 10% of the  Idle time
hourly rate for work between 10:00 o Idle time results when employees have
O’clock in the evening and 6:00 O’clock in no work to perform but are still paid for
the morning. their time. For example, when a new job
o Night shift differential is charged to is being set up for production, some
factory overhead. workers may temporarily have nothing to
do.
 Premium Pay o If their idleness is normal for the
o Premium pay refers to the additional production process and cannot be
payment for work within 8 hours on rest avoided, the cost of idle time should be
days or special days. charged to factory overhead control.
 o If the cost of idle time was due to
negligence or inefficiency, it should be
charged to a loss account.

Illustration:

The normal weekly working hours of a worker are 48 and

he is paid @ P8 per hour.

If he remains idle for 6 hours due to power failure, then

the cost of 42 hours would be treated as direct labor cost
and the cost of 6 hours (idle time) would be treated as
indirect labor cost and included in manufacturing
overhead cost.

DEDUCTIONS FROM EMPLOYEE’S EARNINGS

 Income taxes. The EMPLOYER must withhold

income taxes from the employee’s salaries and
wages. Withholding tax payable is based on a
table issued by the BIR and remitted monthly
(Form 1601C). Employer is the collection agent Sss computation:
and issues Form 2316 to employee. SSS Premium

 Social Security System Contributions. Employer All actual remuneration for employment, including the
must deduct a certain amount from the mandated cost of living allowance. This means all regular
employee’s salaries during the month in and supplementary income received by the employee.
accordance with the table issued by the SSS. EE’s
PHIC computation:
share is for the protection of the employee and
their families in case of disability, sickness, old PHIC (Philhealth) Premium
age, and death. Employer also pays its share.
Basic Monthly Compensation regularly paid for service
Remittance is made monthly in accordance with
rendered by the employee
the SSS number of the employer.
 Philippine Health Insurance Corporation (PHIC) HDMF computation:
Contributions. An amount representing health
HDMF (Pag-ibig Fund) Premium
insurance is automatically deducted from
employee who are members of SSS. EE and ER Basic Monthly Salary plus mandated cost of living
pay equal share monthly based on EE’s salary and allowance (maximum of Php 5,000)
in accordance with a table issued by the PHIC.
Remittance is made monthly. The maximum monthly compensation to be used in
computing employees and employer contributions shall
 PAG-IBIG Fund or Home Development Mutual not be more than Php 5,000.00. Provided, that this
Fund (HDMF). Both employee and employer maximum maybe fixed from time to time by the Board of
contribute a certain percentage. Trustees through rules and regulations adopted by it,
taking into consideration actuarial calculations and rates
of benefits.
 Computation of wtax will be:

Illustration: Weekly salary

For instance, employee’s weekly taxable earnings for the

payroll period is P10,000.00. For illustration, assume that
the non-taxable deductions would amount to the
following: SSS (P363.30), Philhealth (P125.00), and HDMF
(P100.00). Hence, the total for non-taxable deductions
will be P588.30.

We revert to the formula from above to compute for the

Withholding tax computation withholding tax. Taxable earnings of P10,000.00 less non-
 The computation of the WTAX depends whether taxable deductions of P588.30 results to P9,411.70. Now,
the employee is paid daily, weekly, semi-monthly based on the new tax table under weekly wages, the
or monthly. compensation range will be covered by column number 3.
 Formula of taxable income for wtax: Taxable Computation of wtax will be:
earnings – Nontaxable deductions
 Taxable earnings: Basic Pay + Overtime Pay +
Night Differential - Late and Undertime -
Absences + Taxable Allowances +/- Salary
Adjustments
 Non-taxable deductions: SSS contribution + Illustration: Semi-monthly salary
PhilHealth contribution + Pag-IBIG contribution
(all are EE’s share only) Let's say an employee’s semi-monthly basic salary is
 Once taxable income is determined, withholding P10,000, plus overtime amount of P1,000 less absences of
tax can be computed. P500 and additional salary adjustment amounting to
P500. This would amount to total taxable earnings for the
payroll period of P11,000.00. Assume that for illustration,
the non-taxable deductions, on the other hand, would be
SSS (P290.65), Philhealth (P137.50), and HDMF (P50.00).
Hence, the total for non-taxable deductions will be
P478.15.

Based on the table above, taxable earnings of P11,000.00

Illustration: Daily salary
less non-taxable deductions of P478.15 taxable income
Employee’s daily taxable earnings for the payroll period is will be P10,521.85. Now, based on the new tax table
P2,500.00. For illustration, assume that the non-taxable under semi-monthly, the compensation range will be
deductions would be SSS (P90.80), Philhealth (P68.75), covered by column number 2.
and HDMF (P100.00). Hence, the total non-taxable
Computation of wtax will be:
deductions will be P259.55.

Taxable earnings of P2,500 less non-taxable deductions of

P259.55 results to a taxable income of P2,240.45. Now,
based on the new tax table under daily wages, the
compensation range will be covered by column number 4
(the P2,192.00 - P5,478.00 range). Illustration: factory payroll with gov contri and wht
Illustration: The following pertains to the factory payroll Computation for WHT based on net taxable income (gross
of ABC, Co. for the month ended March 31, 2021: taxable less nontaxable deductions – EE’s share only). Use
monthly WHT table since payroll is monthly.

Compute for Net Pay.

Compute for Net Pay. Prepare journal entries for charging

to WIP and MFOH.

Required: Compute for the following:

a) Compute for the SSS, PHIC, HDMF, and WHT of

each employee.
b) Prepare journal entries for factory payroll and
charging to WIP and MFOH.

SOLUTION:

Computation for HDMF and PHIC. PHIC is based on

monthly salary and HDMF is based on monthly salary +
COLA. Remember the rates for HDMF and PHIC.

Compute for Net Pay. Prepare journal entries for

charging to WIP and MFOH.

Computation for SSS is based on gross compensation

income. Use the table for SSS. Employer’s share is both
regular and EC.
Prepare journal entry for the employer’s share in the
government contributions.

MODULE 5 – MANUFACTURING OVERHEAD ACCOUNT

Predetermined overhead rate

 In a normal cost system of accumulating product

costs, the overhead is charged to Work in Process
using a predetermined overhead rate.
 Pre-determined overhead rate = budgeted and
constant charge per unit of activity. The activity
chosen is called the Overhead Allocation Base or
Cost Driver.
Commonly used activity bases: therefore, the cost is spread over the entire
production cost not to a specific product.
 Physical output
 Direct labor costs To record incurrence of factory overhead, the following
 Direct labor hours entry is made:
 Materials costs
 Machine hours
 Activities

FORMULA FOR PRE-DETERMINED OVERHEAD RATE

Illustration:

Assume that the budgeted annual overhead is composed

of: Fixed Cost, P1,000,000 and variable cost is P40 per
direct labor hours. The budgeted direct labor hours are
P125,000. The cost driver used by the entity for the pre-
determined overhead rate is direct labor hour.

Pre-determined overhead rate is computed as:

Incurrence of actual overhead

Factory overhead includes the following:

a) Factory supplies
b) Wages of supervisors, factory maintenance
personnel, raw materials handlers/ stockman,
factory security men
c) Factory overtime, shift, and night premium
d) Employer’s share in SSS, PHIC, and HDMF
e) Factory power, light, and water
f) Insurance of factory plant and workers
g) Depreciation of factory plant and equipment DISPOSITION OF OVER AND UNDER APPLIED OVERHEAD
h) Telephone and mailing costs
i) Costs of regulatory compliance such as meeting  Under Normal Costing system, actual overhead
factory safety requirements and disposal of waste rarely equal the amount of overhead of overhead
materials applied to the jobs in process.
j) Idle time by factory workers due to machine  At the end of the accounting period, actual and
breakdowns or new set-ups which are applied are compared to evaluate the
unavoidable in production process. During their appropriateness of the predetermined overhead
idle time, the workers are not productive; rate.
  If actual > applied, variance is unfavorable (under- Assume the following data for the period just ended
applied or under-absorbed overhead). before closing the overhead variance:
 If actual < applied, variance is favorable (over-
applied or over-absorbed overhead).

OH VARIANCE IS INSIGNIFICANT

 If variance is insignificant (variance is small that

difference is not expected to affect
management’s decision), variance is closed to
COGS.

Example: Under-applied overhead

Required:

Compute for the applied factory overhead during the

period. Compute for the overhead variance if actual
overhead 1,400,000.

Prepare the journal entry to close the overhead variance

if the (1) OH variance is significant and (2) OH variance is
insignificant

SOLUTION: OH variance is significant

Example: Over-applied overhead

Entry to close the variance IF SIGNIFICANT:

OH variance is significant

 If OH variance is significant, the over or under-

applied overhead is closed to Finished Goods,
Cost of Sales, and Work in Process, in accordance
with the overhead component of each account.

Illustration:
 takes three processes to complete. The following data
related to the job are as follows:

Balances of FG, COGS, and WIP after the closing entry:

The order was completed as scheduled.

IF OH VARIANCE IS NOT SIGNIFICANT
Required:

1. Determine the total costs of the job.

2. If Tiger Manufacturing Company’s policy of billing
is production cost plus 50%, how much is the
total billing price of the job?

SOLUTION: TOTAL COST OF THE JOB

Finished Goods Inventory and WIP inventory remain at

643,800 and 321,900, respectively.

MULTIPLE OVERHEAD RATES Departmental rate and plantwide rate

 If normal costing is used, the company may use  Manufacturing companies normally has two or
different cost drivers in determining overhead more production departments that convert the
rate. raw materials into a finished product.
 The production technology may differ in each
Illustration: Tiger Manufacturing Company accepted an department so that one department maybe
from TJ Ramos for 2,500 units of kitchen gadget that highly automated using machines in its operation
 while the other utilizes mostly manpower.
Because of this, the use of departmental rates
(one overhead rate per department) is
recommended to allow each department to
select the most appropriate measure of activity
relative to its operation.
 If only one overhead rate is chosen by a company
for the allocation of manufacturing overhead to
different jobs, that overhead rate is called plant
wide rate.

Illustration: Job costing using plant-wide rate and

departmental rate
SOLUTION: Departmental rate
Sunflower Manufacturing Company has two producing
departments: Assembly and Finishing Department.
Assembly Department has significant amount of labor
related overhead and it uses direct labor hours as the cost
driver while Finishing Department has significant amount
of machine-related overhead and it uses machine hours
as the cost driver.

The following data are available for Sunflower

Manufacturing Company for the year just ended:

Required: Determine the total cost of producing the

25,000 units assuming (a) plant-wide rate based on direct
labor hours and (b) department rates.

SOLUTION: PLANT-WIDE RATE

MODULE 6 – JOB ORDER COSTING

Nature of Job Order Costing System

 With a job order cost system, costs are

accumulated by jobs or lot making it easier to
 determine the total costs of manufacturing a job Illustration 1: Job costing – (a) actual costing; (b) normal
as a basis of setting the desired selling price. costing
 As job is performed, the costs of direct materials
At the beginning of the year, Primer Manufacturing
and direct labor are traced to the individual jobs
Company had the following balances in its inventory
in process while the cost of overhead is allocated
accounts:
based on the most appropriate method.
 Each job is prepared by batch or by order in
accordance with customers’ specification. The
cost of materials used, labor incurred and
overhead applied is summarized in a Work in
Process Account while maintaining a Job Cost
Sheet for each job. The work in process subsidiary ledger shows the following
 The job costs sheet serves as the subsidiary balances:
ledger for the jobs in process. Posting to the job
cost sheets are periodically compared with the
balance of the Work in Process account to ensure
that the two are balanced.

Source Documents

Job Cost Sheet. The job cost sheet shows the total cost  The finished goods inventory contains Job 400
incurred to manufacture a particular order and it contains with a total cost of P320,000 and Job 300 with a
the following: total cost of P400,000.
a. Job Number  Summary of transaction for the 3-months ended
b. Job Description March 31, of the current year are given below:
c. Name and address of customer
d. Date ordered and date of delivery a. Raw materials purchased on cash, P450,000.
e. Direct materials section showing b. Materials issued to production, P400,000,
a. description of materials used distributed as follows:
b. quantity of materials used  Job. 500 (20%), Job. 600 (25%), Job. 700
c. cost of materials (30%), Job. 800 (15%) and the balance
f. Direct labor section showing represent factory supplies consumed.
a. the no. of hours worked c. Labor costs for the period:
b. the rate per hour  Direct labor – P200,000 distributed as
c. the total cost of direct labor follows: Job 500(25%); Job 600(30%); Job
g. Overhead section 700(20%) and the balance to Job 800
 Indirect labor – P75,000
The job cost sheet may also include the budgeted cost of
 Selling and administrative expenses –
materials, labor and overhead to make it easier for the
P125,000.
production manager to compare the actual results with
the established standard cost for effective control.

Materials Requisition Slip

 A Material Requisition Slip supports the materials d. Administrative expenses and Manufacturing
issued to production. This form shows the overhead incurred other than indirect materials
description, the quantity and the unit cost of and indirect labor follows:
materials issued to a particular job.
 For proper internal control, no material should be
issued from the stockroom unless the proper
authority approves the release of materials
through a material requisition form.
Additional information:

a. Actual costing: Actual Overhead was applied to

production on the basis of direct labor costs.
b. Normal costing: Overhead is applied to the job
(based on direct labor costs) and the overhead
variance is closed to cost of sales.
c. Only Job No. 700 is unfinished at the end of the
period. Job. 600 is in the warehouse and all
others were sold to production costs plus 40%
mark-up on a 30-day term.

Required: Manufacturing overhead

a. Give all the entries required to record the above

b. Post directly to the general ledger accounts and Indirect mat.
to individual job cost sheet and determine the
balances of the following accounts at the end of Indirect labor
the quarter:
Insurance
a. Raw materials inventory
b. Work in process inventory Rent
c. Finished goods inventory
Maintenance
c. Prepare a formal statement of Cost of Goods
manufactured and Sold Electricity
(a) Journalizing transaction – actual costing Taxes
Page 1 Misc. factory costs

Total OH applied (actual)

Allocation of actual overhead based on direct labor cost:

Jobs 300 and 400 are already completed at the beginning
of the year and sold as of March 31 with total cost of
400,000 and 32 0,000, respectively.

Job 500: completed and sold

Materials Labor Overhea Total

d
Beg. Bal P22,000 P48,000 P72,000 P142,000
Additions 80,000 50,000 711,250 201,250 (b) Posting to the General Ledger and Job Cost Sheet
Total 343,250 Raw Materials Inventory
(343,250)
To FG 0 DEBIT CREDIT BALANCE
BEG 100,000
PURCHASES 450,000 550,000
Job 600: Completed and in the warehouse (ending FG
ISSUANCE 400,000 150,000
Inventory)

Materials Labor Overhea Total Work in Process

d
Beg. Bal P15,000 P30,000 P45,000 P90,000 DEBIT CREDIT BALANCE
Additions 100,000 60,000 85,500 245,500 Beginning 232,000
Total 335,500 Materials 360,000 592,000
(335,500) Labor 200,000 792,000
To FG 0 Overhead 285,000 1,077,000
Completion 860,000 217,000

Job 700: unfinished (ending WIP inventory)

Finished Goods
Materials Labor Overhea Total
d DEBIT CREDIT BALANCE
Incurred 120,000 40,000 57,000 217,000 Beginning 720,000
Completed 860,000 1,580,000
Sold 1,244,500 335,500
Job 800: completed and sold

Materials Labor Overhea Total

d
Incurred 60,000 50,000 71,250 181,250
TO FG (181,250)
Page 2 (c) Statement of Cost of Goods Manufactured
Normal Costing

The only difference between the actual costing method

and normal costing method is that, in normal costing
method, the overhead applied to the job is based on a
predetermined amount instead of the actual overhead
incurred. This method of applying overhead may result to
the recognition of overhead variance. At the end of a
period, the actual overhead incurred is compared with
the overhead applied to production. If actual overhead is
greater than applied overhead, the variance is
unfavorable.

Since the budgeted overhead and budgeted direct labor

costs are not given, the predetermined overhead rate
therefore is computed based on the ledger balances of
However, if the actual overhead is lesser than applied overhead and labor account at the beginning of the
overhead, the variance is favorable. period:

Allocation of applied overhead based on direct labor

costs:

Using the problem above, the journal entries under

normal costing are similar to actual costing except for the
application of overhead to the jobs in process. The
process journal entries under normal costing appears on
the other page:
Jobs 300 and 400 are already completed at the beginning
of the year and sold as of March 31 with total cost of
400,000 and 320,000, respectively.

Job 500: completed and sold

Materials Labor Overhea Total

d
Beg. Bal P22,000 P48,000 P72,000 P142,000
Additions 80,000 50,000 75,000 205,000
Total 347,000
(347,000)
To FG 0

Job 600: Completed and in the warehouse (ending FG

Inventory)

Materials Labor Overhea Total

d Information No. 2 states that if normal costing is used,
Beg. Bal P15,000 P30,000 P45,000 P90,000 overhead is applied based on direct labor costs and the
Additions 100,000 60,000 90,000 250,000 overhead variance is closed to cost of sales.
Total 340,000
(340,000)  Allocation of actual overhead based on direct
To FG 0 labor costs:

Job 700: unfinished (ending WIP inventory)

Materials Labor Overhea Total

d
Incurred 120,000 40,000 60,000 220,000

 Manufacturing overhead
Job 800: completed and sold

Materials Labor Overhea Total

d
Incurred 60,000 50,000 75,000 185,000
TO FG (185,000)

Page 2
 Accounting for Production Losses in a Job Order Costing
System

 In a job order costing system, production losses

 The manufacturing overhead account resulted to
that happens in the manufacturing process
a credit balance of P15,000 because the applied
includes cost of scrap materials, spoiled goods
overhead is greater than the actual overhead
(spoilage) and reworking defective goods. In most
incurred. The variance is then closed to cost of
cases, these losses originated from lack of quality
sales.
control and should be prevented if not eliminated
(b) Posting to the General Ledger and Job Cost Sheet at all.
 A cost accounting system must be designed to
Raw Materials Inventory record these losses, so that the unit cost figures
DEBIT CREDIT BALANCE will be as accurate as possible. The accounting
Beginning 100,000 technique varies according to the type of loss
Purchases 450,000 550,000 involved.
Issuance 400,000 150,000
Accounting for Scrap

 Scrap is the residue of the manufacturing process.

Work in Process
These are materials left over when making a
DEBIT CREDIT BALANCE product.
Beginning 232,000
Examples are sawdust and discarded end piece in a
Materials 360,000 592,000
sawmill operations. Others scrap materials are paper,
Labor 200,000 792,000
Overhead 300,000 1,092,000 wood or metal shavings, and cloth remnants.
Completion 872,000 220,000 The accounting procedures for scrap will depend on the
following:
Finished Goods 1. When should the value of scrap be recognized in
DEBIT CREDIT BALANCE the accounting records at the time scrap is
Beginning 720,000 produced or at the time scrap is sold?
Completed 872,000 1,592,000 2. How should revenues from scrap be accounted
Sold 1,252,000 340,000 for?

Recognizing Scrap at the Time of its Sale – Value is low

or immaterial

To illustrate the procedures, assume that Tan Lumber

Company accumulates sawdust and that the scrap from a
job has a net sales value of P2,000.

 If the value of scrap is low or immaterial, the

simplest accounting is to make a notation of the
quality of scrap returned to the storeroom and to
record the scrap sales by the following entry:

MODULE 7 – ACCOUNTING FOR PRODUCTION LOSSES – Recognizing Scrap at the Time of its Sale – Value is
JOB ORDER material
  When the value of scrap is material and the scrap accounting period. Some companies delay sales
is sold quickly after it is produced, the accounting of scrap until its market price is attractive
depends on whether the scrap is attributable to a
At the time its production, scrap materials returned to
specific job or common to all jobs.
storeroom is recorded as follows:
Scrap Attributable to a Specific Job

 Sometimes it is possible to determine the specific

job from which the scrap accumulated.
 If so, the proceeds from the sale are deducted
from the cost of materials that have been
charged to that job.
 The debit is to Cash or Accounts Receivable as
before, but the credit is to Work in Process, as
shown to the next slide:

The credit amount is also recorded in the job cost sheet Entries must also be made on the job cost sheet if Work
under the Materials column in parenthesis to indicate in Process is credited or on the overhead analysis sheet if
that the cost reduction is an offset against previous Manufacturing Overhead Control is credited
charges. When the scrap is sold, the journal entry is:
Scrap Common to All Jobs

If the scrap cannot be identified with a specific job, the

proceeds from the sale is credited to Manufacturing
Overhead Control to reduce product costs as shown
below: Sometimes scrap is sold for more or for less than the
value at which it is recorded.

Any difference between the sales price and the recorded

value is treated as an adjustment to the account that was
originally credited (Work in Process or Manufacturing
The credit to Manufacturing Overhead Control account is Overhead Control).
also recorded in the overhead analysis sheet as an entry For example, if the scrap in our illustration is sold at
in parenthesis. P1,500, the entry to record the sale would be as follows:
Recognizing Scrap at the Time of its Production

 In the proceeding example, the scrap materials

returned to storeroom is assumed to have been
sold quickly and hence is not assigned an
inventory cost figure.
 Sometimes, the value of scrap is material, and the
time between storing it and selling or reusing it Reusable scrap
can be long.
 Scrap is sometimes reused as direct materials
 In these situations, the company inventories rather than sold as scrap.
scrap at a conservative estimate of its realizable
 In this case, Materials account is debited at its
value so that the production costs and related
estimated net realizable value when returned to
scrap revenues are recognize in the same
storeroom and then credited when the scrap is
 reused. For example, the entries when the scrap Suppose that ten tables are spoiled because the lumber
generated is common to all jobs are: used was improperly cured. These spoiled tables may be
sold as seconds at its net disposal value of P3,000 each (a
loss of P2,280 per table)

The journal entries under the two assumptions are

presented in the next page

Spoilage Attributable to a Specific Job (Due to Customers

Specifications)

If spoilage occurs because of some actions made by

customers to change the specification of a particular job,
Waste distinguished from the group materials refers to bears the cost of the spoilage reduced by the disposal
the amount of raw materials left over from a production value of the spoilage.
process for which there is no further use. Waste is not The loss on the spoilage goods is left as part of the total
usually saleable at any price and must be discarded. cost of a specific job. The journal entries are as follows:
Accounting for Spoiled Goods

 Goods have been damage through imperfect

machining or processing, are called spoiled goods.
 Spoiling usually occurs in batches or in unusual
cases, while scrap is unavailable and recurs
constantly in specific manufacturing process
 Spoiled goods cannot be corrected either because
it is not technically possible or economical to
correct them.

For example, a spoiled glass molded with different design

cannot be corrected because changing the design to its
original form would cost more than the benefit to be
derived.
If Job 888 is sold with a 30% mark up on cost. The entry to
 The basic accounting problem in accounting for
record the sale to the customers would be:
spoiled goods is how the loss due to spoilage
should be charged.
 The loss may be charged to a particular job from
which the spoiled goods were recovered. Or the
loss may be charged to all the jobs worked on
during the period.

Illustration 9-1

Assume that Job 888 calls for the production of 200

painted office tables. These tables were put into
production and costs accumulated to date are as follows:

When the spoiled goods are subsequently sold, the entry

would be:
 The comparison of the accounting treatment of spoilage
on Job 888 is presented in the illustration 9-2 on the next
Spoilage Common to All Jobs (Due to Internal Failure)
page.
 If Spoilage occurs during the production cycle due
to internal failure such as employee’s error or
worn-out machinery, the estimated disposal or
sales value of the Spoiled Goods Inventory and
any loss should be charged to Manufacturing
Overhead Control.

Entry would include a credit to work-in-process in a unit

cost, inclusive of allowance for spoiled work, if any.

For spoilage for a specific job, unit cost should not include
the allowance for spoiled work.

The following are the required journal entries:

Illustration: With allowance for spoilage

Harper Co.’s Job 501 for the manufacture of 2,200 coats,

which was completed during August at the unit costs
presented below. Final inspection of Job 501 disclosed
200 spoiled coats which were sold to a jobber for P6,000.

Direct materials: …………………………………………. P20

Direct labor:………………………………………………... 18

Factory overhead (includes an allowance

Of P1 for spoiled work)………………………………………18

56
Assume that the good units are delivered to customers at
130% of cost. The entry to record sale is: What would be the unit cost of the good coats produced
on Job 501 assuming (a) spoilage is charged to all
production and (b) spoilage is charged to a specific job
(customer specifications)?

SOLUTION: Charged to all production

Observe that when spoilage is the result of internal

failure, sales, and profits are lesser when the spoilage
results from internal failure.
SOLUTION: Charged to specific job

 The additional cost of materials, labor and

overhead are entered on the job cost sheet for
that job. The final unit cost will reflect both
regular and rework costs.
 The ten tables reworked are now good tables.
The entry to record the transfer to the warehouse
is:

Accounting for Defective Goods Assume that all of the tables are sold at 130% of cost. The
entries to record the sale are:
 Units of production that fail to meet production
standards but that can be brought up to standard
by adding more materials, labor, and overhead
are generally referred to as defective goods. The
additional cost required to bring these goods up
to standard are called rework cost.
 Rework costs again may either be charged to a
specific job or to all the jobs.

ACCOUNTING FOR DEFECTIVE GOODS

Assume that Job 888 calls for the production of 200 Rework Cost Charged to All Jobs
painted office tables. These tables were put into
When rework is not attributable to a specific job, the cost
production and costs accumulated to date are as follows:
of the rework are charged to manufacturing overhead
and spread through overhead allocation, over all the jobs.

Assume that the ten spoiled tables are reworked. The

additional cost of reworking the tables equal P9,500
Since the rework costs was charged to Manufacturing
(comprising P2,000 direct materials, P3,000 direct labor,
Overhead Control, the total cost of Job 888 does not
and P4,500 manufacturing overhead.)
increase, the cost remains at P1,056,000 see illustration
Rework Cost Charged to a Specific Job 9-1.

If the rework Is normal and occurs because of the The entry to record the total costs of Job 888 is:
requirements of a specific job, the rework cost are
charged in the usual manner to the rework job. The
journal entry is:
If the 200 tables are sold after the reworking of the 10 Summary of Accounting Procedures for Production
tables at 130% of cost, the entry is: Losses

Scrap is material residue for normal manufacturing

corporations.

 If the value of scrap is immaterial, no record is

made until it is sold. The simplest recording
procedure is to credit the proceeds to Scrap
Revenue (other income).
 If the value of scrap is material, the proceeds may
be credited to Work in Process (if the scrap is
attributable to specific job) or to Manufacturing
Illustration 9-4 Overhead (if scrap is common to all jobs).
 For high value scrap, the amount of scrap is
recorded to an Scrap Inventory Account.

Spoiled goods may be sold as seconds. The losses

involved may be charged:

 To Manufacturing Overhead; this spreads the cost

over all jobs completed during the period.
 To a particular job when the spoilage are required
for the process or when exacting specifications
are required for the job.

Defective goods can be reworked into salable goods. The

rework costs may be to manufacturing overhead or
added to existing charges against a specific job.

 If the rework costs are due to normal production

process, the cost is charged to manufacturing
overhead.
 If the rework costs are unusual and identifiable to
a specific job, they should be added to the cost of
that job.