Cost Accounting and

Control 2022

ROMULO M. DAILEG, CPA

Chapter 1 Introduction to Cost Accounting

 Learning Competencies:
 1.Define Cost Accounting and Managerial Accounting
 2.Describe the objective of Cost Accounting and Control
 3. Explain the uses of Cost Accounting data
 4. Describe the recent development in cost accounting
Definition

 Cost Accounting – is the branch of managerial Accounting that is concerned with the
accumulating manufacturing cost for financial reporting and decision making purposes.
 Managerial Accounting – is the branch of accounting that uses both historical and
estimated data in providing information that management uses in conducting daily
operation, in planning future operation, and in developing overall business strategies.
 Merchandising Versus Manufacturing Operation

 In Merchandising entity normally buys a product that is ready for sale when it is received
while manufacturing entity normally buys Materials, Labor, and Factory Overhead in
order to produce a product that is ready for sale.
 Cost of Goods Sold of Merchandising entity

Beginning Merchandise Inventory PXXX

Add: Total Purchases XXX
Total Goods Available For Sale XXX
Less: Ending Merchandise Inventory XXX
Cost of Goods Sold XXX
Cost Flow for Merchandising Entity

Balance Sheet Preparation Transaction Income Statement

Preparation
Cash

Purchases

Plus:
Merchandise
Inventory Beginning

Merchandise Cost of unsold items Cost of Goods Cost of sold items Cost of Goods Sold
Inventory End Available for sale
Cost Flow for a Manufacturing Entity

Balance Sheet Preparation Transaction Income Statement

Preparation
Cash

Purchases of
Materials Labor Factory Overhead
Unused
Materials
Materials Inventory Materials Storage

Unfinished Items
Work in Process Production Process
Inventory, End

Finished Goods Unsold Items Products Sold

Finished Goods Cost of Goods Sold
Inventory, End
Objective of Cost Accounting Data

 Determining product Cost

 Determining the selling price of a product
 Meeting competition
 Bidding on Contracts
 Analyzing Profitability
 Planning and Control
Recent Development in Cost Accounting

 Cost accounting is Experiencing Changes. Manual Bookkeeping reduces because of the

use of computer. The traditional role of cost accounting is to record full product cost for
external reporting. However the use of accounting data for decision making and
performance evaluation has gained importance in recent years.
 Two Basics product costing system
1. Job Order Costing-A system for allocating cost to groups of unique product. It is
applicable to the production of customer specified products.
2. Process Costing – A system applicable to a continuous process of production of the same
or similar goods.
 Major difference between Job Order costing and Process
costing

PROCESS COSTING JOB ORDER COSTING

1. Homogeneous units pass through a series of similar processes. Unique jobs are worked during time period

2. Costs are accumulated by processing department Costs are accumulated by the individual job.

3. Unit costs are computed by dividing the individual processing Unit costs are determined by dividing total costs on the job order
departments’ costs by the equivalent production. sheet by the number of units on the job.
4. The cost of production report provides the detail for the Work in The job cost sheet provides the detail for the work in process
process account for each processing department. account.
END OF CHAPTER 1
CHAPTER 2
COSTS – CONCEPTS AND CLASSIFICATION
Chapter 2 Costs - Concepts and Classifications

 Learning Competencies:
 1. Define Costs
 2. Classify Costs
 3. Use cost formula
Definition

 Costs – cash or cash equivalent value sacrificed for goods and services that are expected
to bring a current or future benefit to the organization.
Classification of Costs

 As to relation to a product
 Manufacturing costs/product costs
1. Direct Materials
2. Direct Labor
3. Factory Overhead
 Non-Manufacturing costs/period costs
1. Marketing or selling expense
2. General or administrative expense
Classification of Costs

 As to variability
 Variable costs
 Fixed costs
 Semi-variable costs
Classification of Costs

 As to relation to manufacturing departments

 Direct departmental costs
 Indirect departmental costs
Classification of Costs

 As to their nature as common or joint

 Common Costs
 Joint costs
Classification of Costs

 As to relation to an accounting period

 Capital expenditures
 Revenue expenditures
Classification of Costs

 Costs for planning, control and analytical processes

 Standard costs
 Opportunity costs
 Differential costs
 Relevant costs
 Out-of-pocket costs
 Sunk costs
 Controllable costs
Manufacturing costs

 Direct materials – materials that become part of finished product and can be directly
traced to specific product units.
 Direct Labor – labor costs for specific work performed on products that can be directly
traced to end products.
 Factory Overhead – varied collection of production of production-related costs that cannot
be directly traced to end products such as:
 Indirect materials - nails, screws, bolts and/or other small materials used
 Indirect labor costs – ex. Maintenance labor, labor of supervisors and inspectors
 Other indirect costs – ex. Maintenance costs, property taxes, rent expense, utility expense
Non-manufacturing costs

 Marketing or selling expenses – include all costs necessary to secure customer orders and
get finished product or service into the hands of customer.
 Ex. Advertising, shipping, sales commissions
 Administrative or general expenses – include all executive, organizational, and clerical
expenses that cannot be logically be included under either production or marketing.
 Ex. Executive compensation, general accounting, public relations
Costs as to variability

 Fixed costs – items of costs which remain constant in total, irrespective of the volume of
production.
 Ex. Depreciation computed on a straight line method, rent payments, insurance

 Variable costs – are those in which total costs changes in direct proportion to changes in
volume, or output, within the relevant range, while unit costs remains constant.
 Ex. Direct materials, Direct labor

 Semi-Variable/ Mixed Costs – items of costs with fixed and variable components
Mixed Costs

 Items of costs with fixed and variable components.

 Mixed costs vary with the level of production, though
not in direct relation to it, probably because part of the
cost is fixed while the rest is variable.
 Example: Cost of electricity where there is a basic minimum
charge plus specified cost per kilowatt hour above the
minimum.
 Mixed Costs

There are different methods of separating mixed costs into

fixed and variable components:
1. High-low point
2. Least square method
3. Scattergraph
Summary of electricity cost and direct labor
hours
Month Direct labor hours Cost of electricity
January 28,000 625
February 24,000 565
March 30,000 630
April 33,000 640
May 38,000 685
June 34,000 640
July 35,000 655
August 40,000 700
September 42,000 715
October 47,000 730
November 41,000 700
December 32,000 630
 Direct labor
Cost
hours
Highest month (Oct.) 47,000 730
Lowest month (Feb.) 24,000 565
Difference 23,000 165

Variable rate per direct labor hour = P165

23000 hours

P.0072/direct labor
=
hour
  Fixed cost can be computed from either the high or low data.

HIGH LOW

Total cost of electricity P 730 P565

Less: Variable proportion

(P.0072 x 47,000) 338

(P.0072 x 24,000) 173

Monthly fixed cost P 392 P 392

The formula for projecting the monthly cost of electricity
based on the data would be:
Y = FC + VX
 Y = Total cost
 FC = Fixed costs
 V = Variable cost per unit
X = Activity level

Total cost = Fixed costs + (Variable cost per unit x Activity level)
Common Cost vs Joint Cost

 Common cost – costs of facilities or services employed in two or more accounting

periods, operation, commodities or services.
 Joint cost – costs of materials, labor and overhead incurred in the manufacture of two or
more products at the same time.
Capital expenditure vs. Revenue expenditure

 Capital expenditure – expenditure intended to benefit more than one accounting periods
and is recorded as asset

 Revenue expenditure – expenditure that will benefit current period only and recorded as
expense
Direct vs Indirect departmental charges

 Direct departmental charges - costs that are immediately charged to the particular
manufacturing department(s) that incurred the costs since the costs can be conveniently
identified with the departments that benefited from said costs.]

 Indirect departmental charges – costs that are originally charged to some other
manufacturing department(s) or account(s) but are later allocated to another department(s)
that indirectly benefited from said costs.+
Costs for planning, control and analytical processes

 Standard costs – predetermined costs for direct materials, direct labor, and factory
overhead.

 Opportunity costs – the benefit given up when one alternative is chosen over another

 Differential cost – cost that is present under one alternative but is absent in whole or in
part under another alternative.
Costs for planning, control and analytical processes

 Relevant cost – a future cost that changes across the alternatives.

 Out-of-pocket cost – cost that requires the payment of money (or other assets) as a result
of their incurrence.

 Sunk cost – A cost for which an outlay has already been made and it cannot be changed
by present or future decision
CHAPTER 3
COST ACCOUNTING CYCLE
Chapter 3 Cost Accounting Cycle

 Learning Competencies
 Learn the parts of Cost of Goods Sold Statement
 Prepare a Cost of Goods Sold Statement
Manufacturing Inventory Account

 Material Inventory Control Account is made up of the balances of material and supplies
on hand.
 Merchandise Inventory VS. Material inventory
Merchandise Inventory vs Materials Inventory

Goods costing 45,300 were sold

Merchandise Inventory Cost of Goods Sold

Balance 1/1 24,600 Sold 45,300 Sold 45,300

Purchases 53,200

Balance 32,500

Materials costing 45,300 were issued to

production

Materials Inventory Work in Process

Balance 1/1 24,600 Issued 45,300 Balance 1/1 25,100

Purchases 53,200 Materials Used 45,300

Balance 32,500
Work in Process Inventory

Products costing P201,600 were

completed and transferred to finished
goods inventory
Work in Process Inventory
Finished Goods Inventory
Balance 1/1 25,100 Completed during the
period 201,600 Balance 1/1 70,000
Materials 45,300
Completed 201,600
Labor 79,700

Overhead 65,000

Balance 13,500
Finished Goods Inventory

Products costing P240,500 were sold

during the period

Finished Goods Inventory

Cost of Goods Sold
Balance 1/1 70,000 Completed during the
period 240,500 Sold 240,500
Completed 201,600

Balance 31,100
Element of Manufacturing Cost

 Direct Materials- which become part of the product cost which can be easily identified
with a certain product. Material that cannot easily identified are called Indirect Materials
which can be part of Factory Overhead.
 Direct labor- the cost of labor for those employees who work directly on the product
manufactured. The cost of labor for those employees who do not directly work on the
product produce are called Indirect Labor which can be part of Factory Overhead.
 Factory Overhead- Includes all cost related to manufacturing of a product except Direct
labor and Direct Materials.
Cost of Goods Sold of a Manufacturing Entity
Materials Inventory Beginning PXXX

Add: Purchases (net) XXX

Total material available for use XXX

Less: Material Inventory Ending XXX

Direct Material Used XXX

Direct Labor XXX

Factory Overhead XXX

Total Manufacturing Cost XXX

Add: Work in Process Inventory, Beg XXX

Total Goods put into Process XXX

Less: Work in Process Inventory, end XXX

Cost of Goods Manufactured XXX

Add: Finished Goods Inventory, Beg XXX

Total Goods available for Sale XXX

Less: Finished Goods Inventory, End XXX

Cost of Goods Sold XXX

 Example:
For September, the Norman Company had the following information.
Inventories September 1 September 30

Material P 48,000 P 40,000

Work in process 24,000 16,000

Finished Goods 72,000 80,000

Material purchased P112,000

Direct Labor( at a uniform rate P 80,000

of P6.40/hour)
Marketing &administrative 10% of sales
expenses
Sales 400,000

Factory Overhead is applied at

P8 per direct labor hour
 Required:
1. Total Manufacturing cost
2. Cost of goods Manufactured
3. Cost of Goods sold
4. Net Income before tax
Solution: Cost of Goods sold
Materials Inventory Beginning P48,000

Add: Purchases (net) 112,000

Total material available for use 160,000

Less: Material Inventory Ending 40,000

Direct Material Used 120,000

Direct Labor 80,000

Factory Overhead 100,000

Total Manufacturing Cost 300,000

Add: Work in Process Inventory, Beg 24,000

Total Goods put into Process 324,000

Less: Work in Process Inventory, end 16,000

Cost of Goods Manufactured 308,000

Add: Finished Goods Inventory, Beg 72,000

Total Goods available for Sale 380,000

Less: Finished Goods Inventory, End 80,000

Cost of Goods Sold 300,000

Income Statement Solution

 Sales 400,000
Less: Cost of goods Sold 300,000
Gross Income 100,000
Less: Marketing & administrative Expenses 40,000
Net Income 60,000
Job Order Costing

 Learning Competencies
1. Define job Cost sheet
2. Discuss source document for Job Order Costing
3. Discuss Accounting for Materials, Labor and Factory Overhead
Job Cost Sheet

 Job Cost sheet- is designed to

collect the cost of material, labor
and factory overhead applicable to
specific product.
Major Source Documents for Job Order Costing

 Job-order Cost Sheet

 Material Stockcard
 Finished goods stockcard
 Factory overhead control cost record
 Materials requisition, Time ticket and Clock Card
Accounting For Materials

 In practice all materials and supplies in one control account, Material and stores.
Procedures that affect the materials account
Accounting for Materials

To record purchase of materials

Materials xxxx An entry is made on the stock card under “Received Section”.

Cash/Accounts Payable xxxx

To record issuance of direct materials

Work in process xxxx An entry is made on the stock card under “Issued Section” and
also on the cost sheet “ Direct Materials”
Materials xxxx

To record issuance of indirect materials

Factory overhead control xxxx An entry is made on the stock card under “Issued Section” and
also on the overhead analysis sheet.
Materials xxxx
Material Stock Card

Description _____________________ Location in Storeroom______

Maximum ____ Minimum _____ Stores Ledger Acct. No. ____

Date Received Issued Balance

Unit Unit Unit

Qty. Amt. Qty. Amt. Qty. Amt.
Price Price Price
Material Requisition

Materials Requistion

Date _____________ No. ____

To _____________

Quantity Description Unit Price Amount

Accounting for Labor

Employee Name ________________ Date ___________________

Employee Number ______________ Department ____________

Time Started Time Stopped Job number Time Ticket

 Accounting for Labor

To record the payroll and the incurrence of liability To record issuance of direct materials

Payroll xxxx Work in process xxxx

Withholding tax Payable xxxx Materials xxxx
SSS Premium Payable xxxx
PhilHealth Contribution Payable xxxx
Accrued Factory Payable xxxx

To record distribution of payroll

Work in process xxxx

Factory Overhead Control xxxx
Payroll xxxx
Accounting For Factory Overhead

 In practice there are two account used.

 Factory Overhead control – is used to accumulate actual overhead incurred.
 Factory Overhead applied – is used to accumulate estimated factory overhead applied to production.
In this case a Predetermined rate is used and this is computed using the following as a base.
1. unit of production
2. Direct material cost
3. Direct labor hours
4. Direct Labor cost
5. Machines Hours
 The applied factory overhead entered on the job order cost sheet for each job . The entry
is
Debit Work in Process PXXX
Credit Applied Factory overhead PXXX
 Manufacturing Overhead Control

1. Cost of indirect materials and supplies issued from the 1. Total debit footing at the end of the accounting period
warehouse at the same time crediting materials when closing the books
2. Cost of indirect labor at the same time crediting
payroll
3. Cost of indirect expense purchase from outsiders
4. Cost of other indirect expense incurred by the
company
 Manufacturing Overhead Applied

1. Total credit footing at the end of the accounting period 1. Cost of overhead allocated to production and
when closing the books computed by multiplying the actual factor being used
during the period by the predetermined overhead rate,
at the same time debiting work in process.
 Over/Under Applied Overhead

1. Difference between the actual manufacturing 1. Difference between the actual manufacturing
overhead and the applied overhead and the applied overhead and the applied overhead and the applied
overhead when the actual is more than the applied overhead when the applied is more than the actual
 The Variance over or under applied overhead is computed as follows:
Actual Factory Overhead PXXX
Less: Applied Factory Overhead XXX
Variance XXX
If actual Is greater than applied, the variance is called Under applied( unfavorable) and this is taken
as an addition to the cost of good sold.
If Applied is greater than actual the variance is called Over applied( Favorable)and this is taken as
deduction from the cost of good sold.
 WORK IN PROCESS

1. Cost of the beginning Inventory 1. Cost of materials, labor, factory overhead applied to
the jobs completed during the period at the same time
2. Cost of direct materials issued to production at the crediting finished goods
same time crediting materials
2. Cost of direct material returned to the warehouse at
3. Cost of direct labor applied to production during the the same time crediting materials.
period at the same time crediting payroll account

4. Amount of overhead applied to production at the same

time crediting applied overhead
 FINISHED GOODS

1. Cost of the beginning Inventory 1. Cost of finished goods sold during the period at the
same time debiting cost of goods sold
2. Factory cost of job order completed at the same time
crediting work in process

3. Cost goods returned by the customer at the same time

crediting cost of goods sold
 COST OF GOODS SOLD

1. Cost of finished goods disposed through sale to 1. Cost of finished goods returned by customers at the
customers at the same time crediting finished goods same time debiting the finished goods account.

2. Adjustment for under-applied factory overhead 2. Adjustment of over-applied factory overhead

3. Balance of the account at the end of the period at the

same time debiting income summary
Chapter 4 Process Costing

 Learning Competencies:
• Define Process Costing
• Discuss characteristic of process costing
• Explain the Cost of Production Report
• Describe the product flow
• Explain methods of costing
Define Process Costing

 Process Costing – is a method of accumulating and assigning cost to units of production

in companies producing large quantities of homogenous product
Characteristic of Process Costing for product cost

 Processing Department is any work center where work is performed and where material,
labor and factory overhead cost are added.

Process A

Materials Process B
Labor
Factory OH

Process C F. Goods COGS

WP-Dept. A WP-Dept. B WP-Dept. C Finished Goods COGS

xx xx xx xx xx xx xx xx xx
Product Flow

 Product flow can through a factory in three different ways.

1. Sequential Product flow – Where all units go through all department in the same order.

WP-Cutting Dept.

Mat. WP-Assembly Dept.

Labor
FOH
Labor Finished Goods
FOH
Product Flow

2. Parallel is where not all units go through all departments. Some units go through one
department while other units go through other departments, in a parallel fashion.

WP-Cutting

Mat. WP-Sanding
Labor
FOH
Labor WP-Assembly
FOH

Mat.
WP-Melting Labor
FOH
Mat. WP-Casting Finished Goods
Labor
FOH
Labor
FOH
Product Flow

 Selective- The product moves to the different departments within the factory defending
upon the desired final product.
WP-Butchering

Mat. WP-Packaging
Labor
FOH
Finished Goods

WP-Smoking Mat.
Labor
FOH
Labor
FOH

WP-Grinding

Labor
FOH
Procedures: Direct Materials, Direct Laborand Factory Overhead

 Direct Materials
The entry to record the issuance of direct material by department 1 during the period as follows:
Work in Process Inventory Dept. 1 PXXX
Material Inventory PXXX
 Direct Labor
One journal entry at the end of the month for each department;
Work in Process Inventory Dept. 1,2,3 PXXX
Payroll PXXX
 Factory Overhead
Work In Process Inventory Dept. 1,2,3 PXXX
Factory Overhead Applied Pxxx
Cost Accumulation

 Cost Accumulation is usually simpler in a process costing . The reason is that cost only
need to be identified with a few processing department.
 A separate work in process account is maintained for each processing department,
Material, labor and Factory Overhead are entered directly into each department work in
process account.
 EQUIVALENT UNITS OF PRODUCTION – consist of completed units and the
equivalent in terms of completed units, partially completed Units. It refers to the total
equivalent units used to compute unit cost in a process costing system.
Methods of costing under Process Costing

1. FIFO METHOD- Under this method there is assumed flow of manufacturing operation
and as considered that those units which are placed into process are presumed to be the
first ones completed and those that are first completed are those are the ones transferred
out.
2. AVERAGE METHOD- under this method there is no assumed flow of manufacturing
operation. It involves the merging of the departmental cost, by element of the initial work
in process inventory with the cost incurred in the current moth and securing a
representative average units cost by dividing the total element of cost by the equivalent of
production based upon the sum of the units in the initial work in process inventory and the
units placed into production.
The Cost of Production Report

 Cost Production Report- is an analysis of the activity in the department or cost center
Steps in Cost of Production Report
1. Quantity Schedule – The purpose of quantity schedule is to show the flow of units through department. The schedule shows
the number of unit to be accounted for in a department and it shows how those units have been accounted for:
Units to be accounted for:
Work in Process beginning Pxxx
Units Started xxx
Total units to be account For Pxxx
Units accounted For
Finished and TransferredPxxx
Work in Process Ending xxx
units accounted for Pxxx
Cost of Production Report

2. Calculate the Equivalent units and units cost- The concept of Equivalent is basic to process
costing.
Equivalent unit cost = Cost added during the period divided by the
equivalent Units.
3. Determined the cost to be accounted for
4. Account for all cost