CA Instructional Materials

For
ACCO 20073 COST ACCOUNTING & CONTROL
Compiled by:
Gloria A. Rante, CPA, DBA

James Robert Aguila, CPA, CIMA, MBA (in process)
July 2020
OVERVIEW
This course is designed to orient the students to the cost accounting and cost management
framework of business. Topics discussed are overview of cost accounting; manufacturing cost
accounting cycle; costing methods; job and process cost systems; accounting, planning and
control for materials, labor and overhead; accounting for joint and by-products; and Standard
Costing.
COURSE OUTCOMES
Upon completion of the course, the students will be able to:

a. Have a clear understanding of the concept of cost and cost accounting cycle;
b. Have acquired a thorough knowledge about determining product cost using job order
costing, process costing, Activity Based Costing, Backflush Accounting, Joint-cost and by-
product costing and standard costing;
c. Have equipped themselves with a clear understanding and knowledge about standard
costing, determining and analyzing variances and disposing or accounting of variances
in materials, labor and overhead;
d. Apply knowledge acquired in variance analysis in planning and decision-making; and
e. Have assumed responsibility, integrity, accuracy, timeliness, and neatness in the
preparation, presentation and submission of cost of production reports, statement of cost
of goods manufactured and sold and income statement
The Grading System
Quizzes 50%
Assignments 20%
Departmental Examination 30%
Total 100%
Final Grade = (1st Grading Period + 2nd Grading Period)

2
TABLE OF CONTENTS
Page No.
Title Page I
Introduction Ii
Course Outcomes Iii
Grading System iv
Table of Contents v
Course Materials vi
Module 1 Basic Concepts of Cost Accounting 1
Module 2 Elements of Product Costs 11
Module 3 Job Order Costing System 29
Module 4 Process Costing System 41
Module 5 - Joint & By-Products 53
Module 6 Standard Costing 57
Assessment Materials
Quiz 1 63
Quiz 2 67
Quiz 3 73
Quiz 4 75
Quiz 5 69
Quiz 6 75
References 79
BASIC CONCEPTS OF COST ACCOUNTING
Overview
According to Chartered Institute of Management Accountants ICIMA), cost is any amount

of expenditure incurred on or attributable to a specified thing or activity. This cost maybe
related to rendering services for a revenue, acquiring goods or services for resale,
manufacturing of products for delivery to ultimate consumers. These costs may be
grouped accordingly to their common characteristics.
Module Objectives
After thorough discussion of the topic, the learner will be able to:
Explain the relationship between financial accounting and cost accounting

Identify the different classification of costs
Compare flow of costs in service, trading and manufacturing firms
Distinguish actual costing method from normal costing method
Separate the variable and fixed components of a mixed cost
Prepare cost of goods manufactured and sold in good form including Income
Statement and Balance Sheet of a manufacturing concern
Compare/distinguish income statement of service, trading and manufacturing
terms
Course Materials
Difference between Cost Accounting & Financial Accounting
COST ACCOUNTING FINANCIAL ACCOUNTING
AS TO NATURE
It relates to the different costing methods It relates to the classifying, recording and
and techniques in accumulating the cost of analyzing of business transactions and
a product, process, project or service and events, the end product of which are
also the processes in reducing total costs financial statements. The books required
to improve the profitability of the entity. to maintain are the general journals,
general ledgers and special journals.
It considers items with no monetary values
like units produced or hours utilized. Only items with monetary values are used
in recording and also it deals with actual
It deals with both actual facts and data.
estimated figures and standards.
The users of accounting information are
The users of cost accounting information the internal users such as stockholders,
are generally the production managers officers and employees and external users
2
Module 1 Cost Accounting Concepts & Classification
and senior officials of the company. such as financial institutions, creditors,

suppliers and government regulatory
bodies.
AS TO OBJECTIVE
The main objective is to determine the cost Its objective is to reflect the correct
to produce a unit, process or project or cost financial picture/information of the entity to
to deliver a service. The actual costs the different stakeholders.
incurred is usually compared with
estimates or budgeted costs to guide the
management in making relevant decisions.
AS TO REPORTS/FINANCIAL STATEMENTS
The reports required by management are The basic financial statements as the end
the Cost of Production Report and product of financial accounting are (1)
Statement of Cost of Goods Manufactured Statement of Financial Position or Balance
and Sold. The Cost of Production Report Sheet, (2) Statement of Comprehensive
summarizes the total costs incurred in Income or simply Income Statement, (3)
production like the direct materials, direct Statement of Changes in Equity, and (4)
costs and overhead. There is no standard Statement of Cash Flows. The
format in presenting the cost information accountants are guided by International
Financial Reporting Standards in the
preparation of financial reports.
CLASSIFICATION OF COSTS
1. By nature of expenses
1.1 Material costs
1.2 Labor costs (Employee)
1.3 Expenses
2. By nature of traceability to a cost object

2.1 Direct costs
2.2 Indirect costs
3. By function
3.1 Production/Project costs.
The elements of product costs in a manufacturing business are the following:
1. Materials. Materials include the raw materials and other factory

supplies used in manufacturing operation. They are classified as:
(a) Direct Materials.
(b) Indirect materials
2. Labor. Labor represents the compensation and other benefits paid

to the workers in the factory. They are classified as:
a) Direct labor
b) Indirect labor
Prime costs is the sum of direct materials and direct labor.

3
3. Manufacturing overhead. Manufacturing overhead is an indirect

product cost and it includes productions costs other than direct
materials and direct labor. They include:
Conversion costs = Direct labor + Manufacturing

Overhead
3.2 General & Administrative costs
3.3 Selling/marketing/distribution costs
4. By nature of production or operation process
4.1 Joint costs

These are costs incurred in a single process that yields two or more products.
They are production costs (direct materials, direct labor and factory overhead)
incurred up to the point where products are separately identified. Example of joint
costs: Cost of dough, labor of baker, and overhead incurred by a bakeshop.
4.2 Contract costs
Cost of a contract agreed upon between the contractee and the contractor.
4.3 Batch costs

Batch Cost shall be the aggregate cost related to a cost unit which consist of a
group of similar articles or services which maintain its identity throughout one
or more stages of production or operation.
4.4 Operation costs

Operation Cost shall be the cost a specific operation involved in production of
goods or rendering of services.
4.5 Process costs

Process cost shall be the cost of production or operation process where goods
are produced or services rendered from a sequence of continuous or repetitive
operations or processes during a period.
5. For Decision making purposes
5.1 Controllable costs
Controllable costs are costs that are primarily subject to the influence of a given
responsibility center manager for a given period of time. Examples are:
5.2 Non-controllable costs
These are costs that cannot be controlled or influenced by a responsibility

center manager. Examples are: Cost of renting equipment
4
5.3 Opportunity costs
These are benefits foregone because one course of action is chosen over
another, expressed in other words, these are future cash inflow that will be
sacrificed as a result of a particular management decision. Examples are
5.4 Sunk costs or past costs
These are costs that have already been incurred in the past and will not be
changed or avoided by any decision in the future. It is not relevant in decision
making. Examples are:
5.5 Relevant cost.
This refers to costs that change with each decision that a company makes. It
includes incremental, opportunity and avoidable costs. Examples are: Future
cash flows, avoidable costs,
5.6 Incremental costs.
Where different alternatives are being considered, relevant cost is the

incremental or differential cost between the various alternatives being
considered.
5.7 Period Cost
Period costs are operating expenses that are associated with time
periods, rather than with the production of goods and services.
Period costs are charged directly to expense accounts on the
assumption that their benefit is recognized entirely in the period when
the cost is incurred. They are non-manufacturing costs and non
inventoriable costs. They include:
a) Marketing and Selling Costs.
b) Distribution costs.
c) Administrative Costs.
5.8 Product cost
The product costs include costs of direct materials, direct labor and factory
overhead.
5.9 Avoidable
Avoidable costs are those costs that are avoided by making one choice over
another.
5
5.10 Unavoidable costs
These are the costs not change in the future when a manager makes one
decision versus another. They are costs that will continue to happen.
6. By nature of behavior
6.1 Fixed costs
These are costs that are constant in total within the relevant range of activity
but variable on a per unit basis. These costs do not change as activity
changes. As the activity level increases or decreases, total fixed cost
remains constant but unit cost declines or goes up.
6.2 Variable costs
These are costs that vary in total in direct proportion to changes in the volume of
production. Variable cost is constant amount on a per unit basis as activity
changes within a relevant range. As activity changes, total variable costs
increases or decreases proportionately with the activity change, but unit variable
costs remain the same.
6.3 Mixed costs
These are costs that contain fixed and variable cost.
7. According to time
7.1 Historical costs are actual costs incurred in the past.

7.2 Pre-determined costs are estimated costs.
8. According to planning and control
8.1 Budgeted costs are expected costs to acquire goods or services or to

manufacture products
8.2 Standard costs are predetermined cost of materials, labor and overhead to
product a unit of product.
HIGH-LOW METHOD OF SEPARATING MIXED COSTS

When cost is classified as mixed, it is appropriate to separate the fixed cost from
the variable cost. Variable cost per unit is completed as:
Cost at high level cost at lowest level (within relevant range)

Highest activity lowest activity
Or: Change in total costs / Change in activity level = VC per unit

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Procedures:
1. Select the highest and lowest levels of activity and costs (within relevant
range)
2. Compute the variable cost element
3. Compute the variable cost at the highest and lowest level of activity.
4. Determine the fixed cost at each level of activity.
3 Inventory Accounts in a manufacturing business

1. Finished Goods inventory. Goods ready for sale
2. Work in Process inventory. Unfinished jobs at the end of a period
3. Raw Materials inventory. Unused raw materials at the end of a period
Inventory Systems
1. Perpetual inventory systems. It requires stock card to record the in and out of
inventory. The movement of inventory is recorded in the inventory account
itself.
2. Periodic inventory systems. No stock card is required but a mandatory
physical counting is done at the end of the period.
Inventory Costing Valuation Methods

1. FIFO method
2. Average method
Journalizing Basic Manufacturing Transactions

(Pro-forma entries)
1. Purchase of raw materials
Raw materials 000
Accountns payable or cash 000
2. Issuance of raw materials.

Work in process 000
Factory overhead 000
Raw materials 000
3. Return of excess materials to store room

Raw materials 000
Work in process 000
Manufacturing overhead 000
4. Factory labor incurred

Work in process 000
Factory overhead 000
Accountns payable or cash (net) 000
WHT Payable 000
SSS Premium Payable 000
Philhealth payable 000
7
5. Manufacturing overhead incurred

Various accounts 000
6. Applied OH to the job

Work in Process 000
7. Completion of the job

Finished goods 000
Work in process 000
8. Sale of the completed jobs

Cash or Accountns Receivable 000
Sales 000
Statement of Cost of Goods Manufactured and Sold

Name of Company
For the Period ________________
Direct Materials used:

Direct Material, beginning P000
Add: Purchases P000
Freight In 000
Gross Purchases 000
Less: Purchase Discounts 000
Net Purchases 000
Direct Materials Available P000
Less: DM inventory, end 000
Direct Materials used P000
(b) Direct Labor 000

(c) Manufacturing overhead 000
(d) Total Manufacturing costs P000
Add: Work in Process, beg 000
(e) Total cost of goods placed into process P000
Less: Work in Process, End 000
(f) Costs of goods manufactured P000
Add: Finished Goods, beginning 000
(g) Total goods available for sale P000
Less: Finished Goods, end 000
(h) Cost of goods sold P000
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Practical applications.
Instructions: Do the following problems. You are required to pass the solutions in good
form. Use work sheet. Remember, follow the simple rules of using the money columns
correctly, double ruling final figures if necessary, and no entries at the back of your
worksheet. Entries at the back of your worksheet will not be given credit.
Problem 1. During the month of July, the following transactions were completed and
reported by Old Navy Manufacturing Company.
a. Raw materials purchased on account, P240,000

b. Materials requisitioned for the month was P180,000, P12,000 of which
were factory supplies.
c. Factory payroll for the month was P150,000 of which P30,000 was for
indirect laborers.
d. Depreciation on factory plant and equipment for the month is P12, 000.
e. Factory taxes amounted to P1,500.
f. Factory insurance expired amounted to P4,320.
g. Factory utilities for the month amounted to P5,000
Additional information:
a. Actual overhead is charged to production.
b. 75% of the jobs put into process are completed.
c. All beginning inventories plus 75% of the goods completed during the period
were delivered to customers at 50% mark-
on all sales are 30 days.
Inventories reported by the company at the beginning of the month are:

Raw Materials P 80, 000
Work in Process 100,000
Finished Goods 60,000
REQUIRED:
(a) Journal Entries to record the above and post the entries to T-Accounts
(b) Prepare a Statement of Cost of Goods Manufactured and Sold, in good form.
Problem 2. M&M Company had raw materials on hand on January 1 of the current year
of P540,000 and on June 30 of P570,000. Work in process inventory was P600,000 on
January 1 and P440,000 on June 30. The balance of finished goods inventory was
P580,000 on January 1 and P400,000 on June 30. The company purchased materials for
the period amounting to P1,640,000. Of the raw materials issued, 20% are indirect
materials. The labor charges for the period were: direct labor, P840,000; indirect labor,
P180,000; office salaries, P140,000, and sales salaries of P80,000. The total factory
utilities expense incurred for the period was P360,000, repair and maintenance of factory
equipment, P20,000 and depreciation on factory equipment was reported to be P120,000.
The company uses the actual costing method of accumulating costs and it maintains a
35% mark up on costs for establishing its selling price.
Required: Reconstruct the entries related to the above problem.

9
Problem 3. Jansport Manufacturing Company currently uses normal costing method in

accumulating the cost of production. The following data were provided for the current
year:
Factory Labor:
Total Factory payroll P2,700,000
Raw Materials:
Inventory, Jan 1 450,000
Purchases on account 4,500,000
Issuance to production 3,600,000
Factory overhead:
Depreciation 220,000
Maintenance 125,000
Utilities 145,000
Indirect materials 230,000
Miscellaneous overhead 105,000
Indirect labor 600,000
Work in process:
Beginning inventory 720,000
Ending inventory 650,000
Required: Prepare a Statement of cost of Goods Manufactured and Sold in good form.
Problem 4. The following cost information is available from the records of
Johnson Company for the year just ended:
Inventories January 1 December 31

Finished Goods P2,400,000 P2,950,000
Work in process 3,000,000 2,400,000
Raw Materials 4,400,000 2,800,000
Store Supplies 850,000 700,000
Office Supplies 150,000 280,000
Purchases:
Raw Materials P9,000,000
Store Supplies 1,200,000
Office Supplies 850,000
Other costs and expenses:
Salaries & Benefits:
Direct labor P6,500,000
Indirect labor 560,000
Supervision fee 1,250,000
Administrative & selling 2,360,000
Depreciation (60%, factory; 40% adm & Sell) 1,500,000
Rent (60% factory; 40% adm & sell) 1,200,000
Utilities (60% factory; 40% adm & sell) 600,000
Advertising 320,000
Factory supplies used 850,000
Additional information:
The company applies actual overhead to production and sells their
produce at a price to give the company a gross profit rate of 25%.
10
/required: Prepare a Statement of Cost of Goods Manufactured and Sold in good form.
Reading materials:
1. https://www.accountingnotes.net/cost-accounting/cost-
classification/classification-of-costs-5-types-accounting/10178
Cost classification
2. https://icmai.in/upload/Students/CAS-1-24-CASB.pdf
Cost Accounting Standards
3. https://www.yourarticlelibrary.com/cost-accounting/cost/study-notes-on-cost-
concept-and-classification-cost-accounting/74316
4. https://www.playaccounting.com/exp-ca/ca-mcqs/cost-concept-analysis-and-
classifications-mcqs/
5. https://www.playaccounting.com/mcqs/manufacturing-accounts/
6. https://www.playaccounting.com/exp-ca/ca-mcqs/introduction-to-cost-accounting-
mcqs-quiz/
ELEMENTS OF PRODUCT COSTS
Overview
There are three elements of manufacturing costs, and these are the materials, labor and
manufacturing overhead. The flow of costs is generally the same for all costing system.
Module Objectives
Differentiate perpetual inventory and periodic inventory system of handling

inventories
Journalize transactions related to raw materials: purchases, returns to suppliers
and freight under perpetual and periodic inventory system
Differentiate FIFO and average method of inventory valuation
Calculate cost of goods sold under Just in Time (JIT) using back flush
accounting
Know the different types of labor remuneration
Differentiate direct from indirect labor
Compute the correct deductions from payroll like absences,
tardiness, SSS, WHT, Philhealth, and Pag-ibig
Prepare factory payroll
Distribute factory payroll to proper accounts
Journalize factory payroll
Journalize incurrence of various manufacturing overhead
Compute predetermined overhead rate using plant wide rate and departmental
overhead rate
Apply traditional method of allocating overhead
Dispose overhead variance using two assumptions: (a) overhead variance is
immaterial and (b) overhead variance is material
Allocate service costs using direct method, step method and reciprocal method.
Course Materials
The elements of product costs are materials, labor and overhead.

Materials
These are materials used for the purpose of manufacturing a product or

rendering of a service. These are recorded in the books net of trade discounts,
rebates, taxes and duties refundable that can be quantified with reasonable
accuracy. This may include raw materials, factory supplies, cost of packaging
materials, spare parts, and many more.
Module 2. Elements of Product Costs 12
Inventory Stock Card
The stock card is used to record the movement of the inventory. The beginning
balance is entered first under balance column. Entries in this stock card are made
in chronological order (according to date of occurrence). After proper posting has
been made on purchases and issuances, the stock card shows the balance of the
inventory in units and in peso values at a given period.
Item: Raw Material A
Receipts Issuances Balance

Date Units UC Amount Units UC COS Units UC Amount
Materials Requisition Form. This form serves as the basis of recording the issuance of
raw materials. The materials requisition from is properly filled up and approved by the
department head requesting the materials.
MRF No. _____________________ Date_____________________

Job No. to be charged ___________ Department _______________
Items Quantity Units Unit Cost Amount
Requested by: ____________ Received by: ___________
Approved by: ____________ Released by : ___________
Inventory Valuation Methods
The most common methods of valuing raw materials are:

a. FIFO (first in, first out)
b. Simple Average
c. Weighted Average
FIFO. Under FIFO method, raw materials inventory is reported at latest cost while the
Cost of Goods Sold 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.
Average Method. Under the simple average method, the total unit cost is divided by the
total items to arrive at the simple average unit cost. This procedure is repeated every time
raw materials are acquired. Under weighted average method, divide the total costs of raw
materials available by the number of units to arrive at the weighted average per unit.
Example:
Below are transactions regarding Raw Material A of Masagana Company:
July 1 Balance, 500 units @ P10

2 Purchased 1,000 units at P10.50 per unit.
3 Issued 900 units to Dept. 1
5 Purchased 700 units at P10.40 per unit
Solutions: (1) Posting to the materials ledger card.
Item: Raw Materials A FIFO method
Receipts Issuances Balances

Date Units Unit Total Units Unit Total Units Unit Total
Cost Cost Cost Costs Cost Cost
500 10 5,000
Jul 1
2 1,000 10.50 10,500 500 10 5,000

1,000 10.50 10,500
3 500 10 5,000
400 10.50 4,200 600 10.50 6,300
900
5 700 10.40 7,280 600 10.50 6,300

700 10.40 7,280
You have to update the stock card every time the inventory moves. At the end of a given
period, you can easily determine the total inventory end, and the total raw materials issued.
Item: Raw Materials A Simple average method

Date Units Unit Total Units Unit Cost Total Units Unit Total
Cost Cost Costs Cost Cost
500 10 5,000 500 10 5,000
Jul 1
1,500 15,500
2 1,000 10.50 10,500
900 (10+10.50)/2 9,225 600 6,275
3 = 10.25
Under perpetual inventory system, for you to be able to calculate the cost of raw materials
issued, get the simple average unit cost first.
To record the purchases:
Raw materials 10,500

Cash 10,500
To record the issuance:
Work in process 9,225

Raw materials 9,225
Item: Raw Materials A Weighted average method

Date Units Unit Total Units Unit Cost Total Units Unit Total
Cost Cost Costs Cost Cost
500 10 5,000 500 10 5,000
Jul 1
1,500 10.33 15,500
2 1,000 10.50 10,500
900 10.33 9,300 600 10.33 6,200
3
To arrive at the weighted average, divide the total costs of P15,500 by 1,500 units = 10.33
Scrap materials
Scrap materials are defective materials or leftover materials in production. Scrap

includes fillings or excessive trimmings of materials after the manufacturing operations;
defective materials not suitable for manufacturing operations; and broken parts of
materials as a result of employee error or machine breakdown that causes the product in
a poor quality condition. If these materials can be traced to a specific job, the market
value of the scrap materials is debited to Scrap Materials and credited to Work in
Process. If the scrap recovered cannot be traced to a specific job, the market value is
credited to Miscellaneous Revenue instead of Work in Process.
Methods of accounting for scrap materials
1. Reduction of the cost of specific products which were produced
2. Reduction of the cost of production in general
3. Recognizing as other revenue for the market value of the scrap
4. Recognizing as sales revenue for the market value of the scrap
Backflush Accounting
In a traditional normal costing or standard costing, journal entries are required in the same
order from purchase of raw materials, production, completion and sale of the goods. An
alternative approach to this system is the backflush accounting which omits some of the
journal entries relating to the stages from purchasing of raw materials to sale of the goods.
In a JIT system, when materials are purchased, Raw and in Process Inventory account is
maintained which includes only the raw materials purchased. Conversion costs incurred
(labor and overhead) are summarized in a Conversion Costs Control account. The
conversion cost is then charged immediately to cost of sales. In backflush accounting,
there is no work in process or materials inventory accounts.
Illustration. Conversion cost is charged immediately to cost of sales account.
Selected transactions and other information for Greenland Company for January of the
current year:
Inventory balances: January 1 January 31

Raw and in Process P105,000 P115,000
Finished Goods 850,000 870,000
Supplies 100,000 25,000
The RIP and Finished Goods on January 1 and January 31 consisted of the following:
Raw and in Process January 1 January 31

Direct materials P100,500 P108,000
Conversion costs 4,500 7,000
Finished Goods
Direct Materials 420,000 429,000
Conversion costs 430,000 441,000
Transactions for the period:

(a) Direct materials purchased on account, P2,030,000
(b) Factory supplies used, P75,000
(c) Factory payroll for the period, P225,000 of which P125,000 is direct labor.
(d) Other factory overhead costs:

Depreciation P1,450,000
Insurance 45,000
Maintenance 20,000
Utilities 85,000
(e) Material cost component of Finished Goods is backflushed from RIP.
(f) The material component of cost of goods sold is backflushed from Finished
Goods.
(g) Ending balances are established
REQUIRED: Determine the correct cost of sales

Solutions:
Total Materials Conversion
Costs
Raw and in Process, Jan 1 105,000 100,500 4,500
Purchases 2,030,000 2,030,000
Conversion costs 1,900,000 1,900,000
Raw and in Process, Dec. 31 (115,000) (108,000) (7,000)
Goods manufactured (FG) 3,920,000 2,022,500 1.897,500
Finished goods, Jan. 1 850,000 420,000 430,000
Finished goods, Dec 31 (870,000) (429,000) (441,000)
Cost of sales 3,900,000 2,013,500 1,886,500
Reading materials:
1. https://katanamrp.com/blog/raw-materials-inventory-management-guide
2. https://www.purchasecontrol.com/blog/material-requisition/
3. https://accountinginfocus.com/financial-accounting/inventory/weighted-average-
inventory/
4. https://xplaind.com/800619/fifo-method
5. https://www.playaccounting.com/exp-ca/ca-mcqs/material-costing-mcqs/
6. https://www.thebalancesmb.com/just-in-time-jit-inventory-management-393301
7. https://www.ifm.eng.cam.ac.uk/research/dstools/jit-just-in-time-manufacturing/
8. https://corporatefinanceinstitute.com/resources/knowledge/accounting/backflush-costing/
Factory Labor
Factory labor represents the wages of workers in the factory, both direct and
indirect laborers. It includes the regular basic pay; cost of living allowances, 13th month,
and overtime pay excluding premium. 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 items composing labor costs are
in-house laborers, performance bonuses, hospitalization and educational benefits,

share in SSS, Philhealth and pag-ibig, vacation and sick leave pay, pension
costs, and salaries paid to factory workers during their Idle time (time when no orders are
received or when machines are broken down). These types of labor compensation are
classified as indirect labor costs.
The factory payroll is supported by time card, showing the time in and time out of
every factory worker. This is the basis of the payroll department in preparing the payroll.
Since a worker maybe working on different jobs, a time ticket is to be prepared by each
worker showing the particular job he works during the day. This is also the basis of
distributing the payroll.
For the updated table for WHT, SSS, Pag-ibig and Philhealth deductions, please
refer to the website cited below. Read also the latest provisions of PD 442, Labor Code
of the Philippines.
Example:
The following workers of Print & Write Company with their compensation and status are
given below for the period July 16-31, 2020
Name of worker Position Compensation

Grace A Rante Production Manager P50,000/mo.
Butch Vitorio Artist P535/day
Name of Basic OT Gross Pag- Phil SSS WHT Total Net pay
Worker Pay prem Pay ibig health deductions
(half)
Grace Rante 25,000.0 25,000.0 100 550.00 800.00 2,970.75 4,420.75 20,579.25
0 0
Sub total 25,000.0 25,000.0 100 550.00 800.00 2,970.75 4,420.75 20,579.25
0 0
Butch Vitorio 6,955.00 40.13 6,995.13 100 192.50 560.00 0 852.50 6,142.63
Sub total 6,955.00 40.13 6,995.13 100 192.50 560.00 0 852.50 6,142.63
Total 31,955.0 40.13 31,995.1 200 742.50 1,360 2,970.75 5,273.25 26,721.88
0 3
The entry to record the payroll:
Work in process 6,995.13

Factory overhead 25,000.00
Pag-ibig payable 200.00
Philhealth payable 742.50
SSS Payable 1,360.00
WHT payable 2,970.75
Cash or wages payable 26,721.88
Reading Materials:
1. https://www.myaccountingcourse.com/accounting-dictionary/time-ticket
2. https://www.bir.gov.ph/index.php/tax-information/withholding-tax.html
3. https://www.sss.gov.ph/sss/DownloadContent?fileName=2019_Contribution_Schedule.p
df
4. https://www.philhealth.gov.ph/news/2019/new_contri.php#gsc.tab=0
5. https://www.pagibigfund.gov.ph/document/pdf/circulars/provident/HDMF%20Circular%20
No.%20274%20-%20Revised%20Guidelines%20on%20Pag-
IBIG%20Fund%20Membership.pdf
Factory Overhead
Factory or manufacturing overhead is an indirect product cost and it includes
productions costs other than direct materials and direct labor. They include:
(a) Factory supplies such as oil and other cleaning materials used in the factory.
(b) Wages of supervisors, factory maintenance personnel, raw materials
handlers and security officers stationed in the factory premises.
(c) Depreciation of factory plant and equipment
(d) Insurance and property taxes on factory plant and equipment.

(e) Maintenance and repairs on factory plant and equipment
(f) Power, light and water
(g) Telephone and mailing costs
(h) Cost of regulatory compliance such as meeting factory safety requirements
and disposal of waste materials.
(i) Idle time by factory workers due to machine breakdowns or new set ups which
are unavoidable in production process. During their idle time, the workers are
not productive therefore the cost is spread over the entire production not to a
specific product.
Traditional Method Of Allocating Factory/Manufacturing Overhead

Based on direct labor hours or direct labor cost
Example: A manufacturing company produce two products, product 1 and product
2. The following cost information relate to the production of the two products.
Product 1 Product 2 Total

Units to be manufactured 10,000 25,000 35,000
Expected direct labor hours per unit 8 DLH 12 DLH
Total expected direct labor hours 80,000 300,000 380,000
Total annual budgeted overhead costs P1,900,000
Manufacturing OH per DLH P5
Manufacturing OH per unit P40 P60
Total manufacturing OH allocated P400,000 P1,500,000 P1,900,000
Based on machine hours

Using the above example, assume that Product 1 is manufactured in Machining
Department while Product 2 is manufactured in the Finishing Department.
Product 1 Product 2 Total

Units to be manufactured 10,000 25,000 35,000
Budgeted machine hours 20,000 5,000
Total annual budgeted OH costs P1,900,000
Manufacturing OH per MH P76
Manufacturing OH per unit P152 P15.20
Total manufacturing OH allocated P1,520,000 P380,000 P1,900,000
Take note that the amount of overhead allocated to each product is different under
each method.
Activity Based Costing Method (ABC)

Illustration:
Dragon Furniture Company has identified activity centers to which overhead costs
are assigned. The following data are available:
Activity Centers Costs Activity drivers

Utilities P300,000 60,000 machine hours
Scheduling and setup 273,000 780 setups
Material handling 640,000 1,600,000 pounds of mat.
Products A B C
Prime costs P80,000 P80,000 P90,000
Machine hours 30,000 10,000 20,000
Number of setups 130 380 270
Pounds of materials 500,000 300,000 800,000
Number of units produced 40,000 20,000 60,000
Direct labor hours 32,000 18,000 50,000
Required: Determine the production cost per unit using ABC and
traditional method of costing.
(1) ABC method
1ST Step: Determine the pool rates
Utilities P300,000/60,000 P5/mhr

Scheduling & set up P273,000/780 P350/set up
Materials handling P640,000/1,600,000 P.40lbs
2nd step: Allocate the overhead using the pool rates determined above
Activity Prod. A Prod. B Prod. C Total

Utilities:
A 30,000 x 5 P150,000
B 10,000 x 5 P50,000
C 20,000 x 5 P100,000
Total P300,000
Scheduling & Setups:

A 130 x 350 P 45,500
B 380 x 350 P133,000
C 270 x 350 P 94,500
Total P273,000
Material Handling:
A 500,000x 200,000
.40
B 300,000x 120,000
.40
C 800,000 x 320,000
.40
640,000
Total 395,500 303,000 514,500 1,213,000
3rd Step determine the total costs of the job
The Manufacturing cost for each product is computed as:
Cost item A B C
Prime costs P80,000 P80,000 P90,000
Overhead 395,500 303,000 514,500
Total P475,500 P383,000 P604500
Departmental Rate And Plantwide Rate

Departmental rate. One overhead rate per department, so that if there are two or
more processing departments, two or more OH rates are used to apply overhead
to production.
Plant-wide rate. 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:
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:
Budgeted Data Assembly Finishing
Manufacturing overhead P1,890,000 P1,260,000

Direct labor hours 52,000 20,000
Machine hours 15,000 80,000
Actual data:
DM used per unit P120 P50
Direct labor costs per unit 2hrs@ P37.50/hr .75hr@ P37.50/h
Machine time used per unit 30 min. 3 hrs.
Actual production, 25,000 units
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.
Solutions:
(a) Production costs using plant wide rate based on direct labor hours.
Cost Elements Assembly Finishing Total
DM P3,000,000.00 P1,250,000.00 P4,250,000.00

DL 1,875,000.00 703,125.00 2,578,125.00
FOH 2,187,500.00 820,312.50 3,007,812.50
Total costs P7,062,500.00 P2,773,437.50 P9,835,937.50
Determine the overhead rate by summing up the budgeted overhead for the whole
plant then divide it by the budgeted level of activity
Overhead rate = P1,890,000 + P1,260,000 = P43.75/DLH
72,000 DLHs
Overhead Applied:
OH in Assembly 25,000 x 2 x 43.75 = P2,187,500.00
OH in Finishing 25,000 x .75 x = P820,312.50
43.75
(b) Production costs using departmental rates: Assembly Dept. uses DLH while
Finishing dept. uses MH
Cost Elements Assembly Finishing Total
DM costs P3,000,000.00 P1,250,000.00 P4,250,000.00

DL costs 1,875,000.00 703,125.00 2,578,125.00
Overhead* 1,817,500.00 1,181,250.00 2,998,750.00
Total costs P6,692,500.00 P3,134,375.00 P9,826,875.00
Overhead rates
Assembly Finishing
P1,890,000 /52,000 DLH P36.35/DLH
P1,260,000 / 80,000 MH P15.75/MH
Overhead applied
Assembly Finishing
25,000 x 2DLhrs x 36.35 P1,817,500
25,000 x 3 MH x 15.75 P1,181,250
Allocation Of Service Department Costs

Service department costs are costs of departments other than producing
departments like maintenance, human resource, canteen and others.
Methods of Allocating Service Costs to the different producing departments

Direct method allocates service costs directly to production department only
and does not consider services provided
Step method or sequential allocation method allocates service costs step by
step. The service departments are first ranked according to the amount of service
rendered and received. .
Algebraic or simultaneous or reciprocal method.
Illustration: Direct method, Step method and Algebraic method of allocating

service department costs.
Mahogany Manufacturing Company has four departments. Two producing
departments, Assembly and Finishing, and two service departments, Cafeteria and
Maintenance. The overhead cost of Cafeteria is allocated based on number of
employees while the overhead cost of Maintenance is allocated based on estimated
factory overhead. Assembly department used direct labor hours and finishing
department used machine hours as bases in computing for predetermined
overhead rates.
Service Departments Producing Departments
Cafeteria Maintenance Assembly Finishing
Est. Dept OH P250,000 P150,000 P100,000 P60,000
Est. DLH 200,000 100,000
Est. MH 150,000 250,000
# of 100 20 1,500 1,000
employees
Required: Allocate the service departments costs using direct method, sequential or
step method starting with cafeteria and algebraic method
Solutions: Direct Method
Cafeteria Maintena Assembl Finishing

nce y
Estimated Dept OH costs P250,000 P150,000 P100,000 P60,000
Cafeteria costs: (250,000)
Assembly: 15/25 x 250,000 150,000
Finishing: 10/25 x 250,000 100,000
Maintenance Costs:
Assembly: 10/16 x 150,000 (150,000) 93,750
Finishing: (6/16 x 250,000) 56,250
Total estimated factory overhead 343,750 216,250
Divide by 200,000 250,000
Manufacturing overhead rate P1.71875 .865/MH
Sequential or Step Method
Cafeteria Maintena Assembl Finishing

nce y
Estimated overhead costs 250,000 150,000 100,000 60,000
Cafeteria costs: (250,000)
Maintenance = 20/2520x250,000 2,000
148,800
Assembly=1,500/2520x250,000
Finishing = 1,000/2520 x 99,200
250,000
Maintenance costs: 152,000
Assembly = 10/16 x 152,000 95,000
Finishing = 6/16 x 152,000 57,000
(152,000)
Total 343,800 216,200
Divide by 200,000 250,000
Manufacturing OH rate 1.72 .8648
Algebraic Method of simultaneous method

Service Departments Producing Departments
Cafeteria Maintenance Assembly Finishing
Est. FOH P250,000 P150,000 P100,000 P60,000
No of employees 100 20 1,500 1,000
Services Provided by:
Cafeteria - 20/2520=.8 59.52% 39.68%
%
Maintenance 250/410=61 - 24% 15%
%
1st step: Set up the Cost formula

Cafeteria costs = P250,000 + 61%M
Maintenance = P150,000 + .8%C
costs
2nd step: Compute for the new value of each service department
Cafeteria costs = P250,000 + 61%(P150,000+.8%C)
= 250,000 + 91,500+.00488%C
= P343,175
Maintenance = P150,000 + (.8% x 343,175)

costs
= P152,745
3rd step. Allocate the service costs to the producing departments
Allocation Assembly Finishing

Cafeteria costs:
Assembly: 59.52% x 343,175 P204,258
Finishing: 39.68% x 343,175 136,172
Maintenance costs:
Assembly: 24% x 152,745 36,659
Finishing: 15% x 152,745 22,912
Total allocated service costs P240,917 P159,084
APPLICATIONS:
Instructions: Submit solutions to the following problems in good form using

worksheet.
Problem 1. Below are transactions of Puregold Company regarding its raw materials
for the first month of its operation.
1. Purchased raw materials on account, 5,000 units @ P100 on account.
The company also paid freight of P10,000 for the shipment.
2. Recorded requisition for the month, 75% of the total raw materials
available for use, of which, 10% is indirect materials.
3. Excess materials return to the storeroom: direct materials, P5,100 of
which and indirect materials, P800.
4. Materials returned to the vendor two days after the purchase, 40 units,
due to defective quality
5. Purchase raw materials intended specifically for a particular job,
P50,000, on account.
6. Purchased raw materials , 1,000 @ 105 on account, terms: n/30. Paid
freight of P2,000.
7. Issued to production department 1,500 units of which 80% is direct
materials.
Required: Give the journal entries to record the above transactions
Problem 2. FAB Manufacturing Company had the following purchases and usage
of materials X for the month of August:
Units Unit Cost

Inventory, 8/1 5,000 P2.00
Purchases:
8/7 6,000 2.50
12 8,000 2.30
15 9,000 2.25
22 10,000 2.40
29 10,000 2.35
Issuance:
8/7 9,000
14 9,000
21 9,000
28 9,000
Required: Compute for raw materials usage and inventory using FIFO periodic.
Problem 3. Sharp Enterprises operates its factory on a two-shift basis and pays a
late shift differential above the regular wage rate of P67 per hour. The company
also pays a premium for overtime work. During the year, work occurred in the
following categories:
Number of hours worked during the regular shift 10,000
Number of overtime hours for regular shift workers 300
Number of hours worked during the late shift 6,000
Required: Determine the amount of total payroll and distribute the total payroll to
Work in process and factory overhead. (Please refer to PD442 for the late shift
premium and overtime rate)
Problem 3. Below are balances and information taken from the records of Bulls
Company for the last quarter of the current year:
Inventories: October 1
Raw Materials P134,000
Finished goods 594,600
Cost of goods sold 10,800,000
Manufacturing overhead 4,200,000 debit
4,600,000credit
Supplementary data:
(1) During the period, purchases of raw materials totaled

P1,093,400 while physical count of raw materials revealed
that P250,000 were unused.
(2) 39,800 direct labor hours were utilized distributed as follows:

(a) 25,000 hours worked on regular time at P67 per hr.
(b) 14,000 hours worked at the late shift
(c) 800 hours work on overtime, all on regular shift.
(c) Overhead is charged to production at 80% of direct labor

costs.
(d) Actual overhead incurred were P1,420,000. Overhead

variance is closed to all accounts with overhead elements
only at the end of the year
(e) At the end of the year, records show that work in process
increased by P80,000 while Finished Goods decreased by
P150,000.
Required:
1. Determine the total factory payroll for the period, refer
to PD 442 for the late shift and overtime premium.
2. Determine the total factory costs.
Problem 4. Rocky Tailoring has three departments: design, machine sewing, and
beading. The design department overhead consists of computers and software for
computer-assisted design. The machine sewing department overhead consists of
thread, sewing machines, and small tools. The beading department has very little
overhead, just thread and some glue and all departments are assigned a share of
utilities, rent, and others. Information on estimated overhead and direct labor hours
for the year by department are as follows
Estimated Overhead Estimated DLH

Design department P110, 000 4,000
Sewing department 84,000 14,000
Beading department 6,000 2,000
Rocky Tailoring has just accepted a contract for forty new tutus for the nutcracker
ballet. The costs are direct materials, P30, 000; direct labor: 25 hrs. At P25 per hr.
of Design works, 320 hours of sewing time at P15 per hour and 200 hours of beading
at P20 per hr. Rocky Tailoring uses plant wide rate based on direct labor hours for
overhead application and charges customers at cost plus 30%.
REQUIRED:
a) Compute for the pre-determined overhead rate
b) Compute for the total overhead applied to the job
c) Determine the total cost of the job
d) Determine the billing price
Problem 5. GAR Company has two producing departments and two service
departments. The producing departments, Assembly & Finishing receive services
from Personnel and Administration. Personnel keep all employee records and
handles payroll; Administration handles all other administrative tasks. Each service
department provides services to the other service department as well as to the two
operating departments. Data for the most recent month follow:
Department Direct Costs # of employees

Personnel P 200,000 10
Administration 500,000 30
Assembly 1,800,000 100
Finishing 3,000,000 300
Total P5,500,000 440
GAR Company allocates Administration costs based on direct costs of the

departments and Personnel costs based on the number of employees. Start with the
department that serves the most other service departments.
Required: Allocate the service costs using

a. Direct method
b. Step method
c. Algebraic method
Problem 6. The Accountant of Camera Film Company has established the following
activity cost of pools and cost drivers:
Activity Budgete Cost driver Budgeted Pool rate

d level
OH
Machine set ups P200,000 No. of set ups 100 P2,000/set up
Materials hand P100,000 Weight of Raw Mat 50,000 lbs. P2/lb.
Hazardous waste Weight of Hazardous
control P50,000 chemical used 10,000 lbs. P5/lb.
Quality control P75,000 Number of inspections 1,000 P75/inspection
Other overhead P200,000 Machine hours 20,000 hrs. P10/m hr.
costs
An order for 2,000 boxes of film development chemicals has the following production
requirements:
Machine set ups 4
Raw materials 10,000 pounds
Hazardous materials 2,000 pounds
Inspections 20
Machine hours 500
Direct manufacturing cost actually incurred to produce 2,000 boxes are Direct
materials of P425,000 and direct labor of P400,000.
Before the company adopts the ABC approach of costing, the traditional approach of
allocating overhead, which is based on machine hours, is being used.
Required:
a. Determine the amount of overhead applied to each box of chemical under ABC
and traditional costing
b. Determine the manufacturing cost per box under ABC and traditional method.
Reading Materials:
1. https://www.accountingcoach.com/manufacturing-overhead/explanation
2. https://www.accountingcoach.com/manufacturing-overhead/quiz
3. https://www.accountingcoach.com/manufacturing-overhead/explanation/2
4. https://tools.mheducation.ca/college/larson10/student/olc/10fal_mc_22.html
5. https://opentextbc.ca/principlesofaccountingv2openstax/chapter/describe-
and-identify-the-three-major-components-of-product-costs-under-job-order-
costing/
Job Order Costing
Overview
Module Objectives
After this chapter, the learner will be able to:
Describe cost systems and the flow of costs in a job order system.
Apply overhead to each job using departmental rate or plant-wide rate
Distinguish between over-applied overhead from under-applied overhead
Allocate product costs to each job or batch according the method of
accumulating costs using actual, normal, and standard costing.
Journalize the flow of costs
Post entries to the general journal and job cost sheets
Account for production losses (Generally anticipated to occur in all jobs and
specific to a job)
Prepare Statement of Cost of Goods in Manufactured and Sold
Course Materials
Cost Accounting cycle in job order costing system
The job order costing system is used when various jobs are produced that are different
from each other and each job has a significant cost. To illustrate the accounting for job
order costing system, assume the following:
At the beginning of the year, Primer Manufacturing Company had the following balances
in its inventory accounts:
Raw materials P100,000

Finished goods 720,000
The work in process subsidiary ledger shows the following balances:
Job No. Materials Labor Overhead
500 P22,000 P48,000 P72,000

600 15,000 30,000 45,000
Total P37,000 P78,000 P117,000

30
Module 3 Job Order Costing System
The finished goods inventory contains Job 400 with a total cost of P320,000 and Job 300
with a total cost of P400,000.
Summary of transactions for the 3-months ended March 31, of the current year are given
below:
a. Raw materials purchased on cash, P450,000.
b. Materials issued to production, P400,000, distributed as follows:
Job. 500 (20%), Job 600 (25%), Job 700 (30%), Job 800(15%) and the balance
represent factory supplies consumed.
c. Labor costs for the period:
Direct labor P200,000 distributed as follows: Job 500 (25%); Job 600 (30%); Job
700(20%) and the balance to Job 800
Indirect labor P75,000
Selling and administrative expenses P125,000.
d. Administrative expenses and Manufacturing overhead incurred other than indirect

materials and indirect labor follows:
Factory insurance expired P30,000

Factory rent 60,000
Factory maintenance 12,000
Office equipment maintenance 5,000
Electricity costs, 60% to factory, 40% to
selling and administration 60,000
Taxes & Licenses, 60% to factory, 40%
to selling & administration 20,000
Miscellaneous factory costs 20,000
e. Actual costing: Actual Overhead was applied to production on the basis of direct labor
costs.
f. Only Job No. 700 is unfinished at the end of the period.
g. Job. 600 is in the warehouse and all others were sold at production cost plus 40%
mark-up on a 30-day term.
Required:
a. Give all the entries required to record the above
b. Post directly to the general ledger accounts and to individual job cost sheet and
determine the balances of the following accounts at the end of the quarter:
- Raw Materials inventory
- Work in process inventory
- Finished goods inventory
c. Prepare a formal statement of Cost of Goods manufactured and Sold
31
Solutions:
(a) Journalizing transactions actual costing
Date Particulars Debit Credit

a) Raw Materials 450,000
Cash 450,000
b) Work in Process 360,000

Manufacturing overhead 40,000
Raw materials 400,000
Issuance of RM
c) Work in process 200,000

Cash or accrued payroll 200,000

Selling & Adm. Expenses 125,000
Cash or accrued payroll 200,000
d) Manufacturing overhead 170,000

Selling & Administrative expenses 37,000
Cash 207,000
e) Work in process 285,000

f) Finished Goods 860,000

g) Accounts Receivable 1,742,300

Sales 1,742,300
Cost of sales 1,244,500

Finished Goods 1,2244,500
(b) Posting to the General Ledger and Job Cost Sheets
Raw Materials Inventory
Debit Credit Balance

Beg 100,000
Purchases 450,000 550,000
Issuance 400,000 150,000
32
Work in Process
Beg 232,000
Materials 360,000 592,000
Labor 200,000 792,000
Overhead 285,000 1,077,000
Completion 860,000 217,000
Finished Goods
Beg 720,000
Completed 860,000 1,580,000
Sold 1,244,500 335,500
Manufacturing overhead
Indirect mat. 40,000 40,000
Indirect labor 75,000 115,000
Insurance 30,000 145,000
Rent 60,000 205,000
Maintenance 12,000 217,000
Electricity 36,000 253,000
Taxes 12,000 265,000
Misc. factory costs 20,000 285,000
Total OH applied 285,000 0
Job Cost Sheets

Job 500: completed and sold
Materials Labor Overhead Total
Beg. bal P22,000 P48,000 P72,000 P142,000
Additions: 80,000 50,000 71,250 201,250
Total 343,250
Job 600: Completed and in the warehouse

Beg. bal P15,000 P30,000 P45,000 P90,000
Additions: 100,000 60,000 85,500 245,500
Total P335,500
33
Job 700: unfinished

Incurred: 120,000 40,000 57,000 P217,000
Job 800: completed and sold

Incurred 60,000 50,000 71,250 P181,250
Allocation of actual overhead based on direct labor costs:

Jobs in process Allocation Allocated
amount
Job 500 50/200 * 285,000 P71,250
Job 600 60/200 * 285,000 85,500
Job 700 40/200 * 285,000 57,000
Job 800 50/200 *285,000 71,250
Total P285,000
(c) Statement of Cost of Goods Manufactured
Primer Manufacturing Company

For the period ended March 31, 2019
Work in process beginning P232,000

Add: Direct Materials P360,000
Direct labor 200,000
Total factory costs 845,000
Total cost of goods put into process P1,077,000
Less: Work in process end 217,000
Cost of goods manufactured P860,000
Add: Finished goods, beg 720,000
Cost of goods available for sale P1,580,000
Less: Finished goods, end 335,500
Cost of sales 1,244,500
34
PRODUCTION LOSSES IN JOB ORDER
In the process of production, some goods may be defective which require

additional reworking to make them good units and some may be spoiled. Spoiled units
cannot be reworked but they can be disposed of a very minimal market value
Spoilage is normally anticipated to occur
Spoilage maybe normally anticipated to occur in the production. In this situation,

manufacturing companies include an allowance for spoilage in the computation of pre-
determined overhead rate. The pro-forma entry to record the discovery of spoilage is:
Spoiled goods (MV of spoiled units) 000

Manufacturing overhead (unrecovered 000
costs)
Finished goods (good units) 000
Work in process 000
If production results to defective work, the entry would be:
Manufacturing overhead (cost of rework) 000

Raw materials 000
Accrued wages 000
Manufacturing overhead (applied) 000
Spoilage specifically identified with a particular job
If spoilage and defects are occasionally experienced in production process, then

the allowance for spoilage should not be included in the computation of
predetermined overhead rate.
Illustration: Belro Company accepted a job for 1,000 pieces of computer bags.
The manufacturing cost per unit of computer bag is as follows: Materials, P300;
direct labor (2.0 hours at P48.00 per hour), P96.00 plus overhead. At inspection,
50 pieces are spoiled which can be sold at P200 per piece.
35
Production
Units Cost
Production cost per unit 1,000 P476,000
Mat 300
DL 96
OH 80
Total 376
Spoiled (50) (23,800)

Good 950 P452,200
The entry to record the cost of production, assuming the spoilage is normal:

Materials 300,000
Factory payroll 96,000
Manufacturing OH 80,000
WIP 1,000 x 476
MOH 1,000 x 2 x 40
To record the discovery of bad units:
Spoiled Goods 10,000

Spoiled G 50 x 200
MOH 50 x 276
Units spoiled 50
X production cost per unit P476
Total production cost of spoiled unit P23,800
Recoverable amount (50 x 200) 10,000
Unrecovered cost P13,800
The market value of the spoiled units is debited to Spoiled Goods

inventory account while the unrecovered cost is debited to
Manufacturing overhead.
Sometimes, a customer may change the specifications of a job order causing for
during the process, the customer will shoulder the cost of reworking in case of
defective jobs, or shoulder the lost in case of spoilage. Using the same problem
36
To record the cost of production:

Materials 300,000
Factory payroll 96,000
WIP 1,000 x 476
MOH 1,000 x 2 x 40=80,000
To record the discovery of the spoiled units:
Spoiled goods 10,000

The market value of the spoiled goods is debited to Spoiled Goods Inventory account
while the unrecovered cost of the spoiled units remains with the job, and it is absorbed by
the customer.
If such action of the customer results to a defective work, the customer is charged
with the cost of reworking. The cost of rework is then charged to work in process
account. Assume that the cost to rework the 50 units follows:
Labor (50 pieces x 30 min/60 min x 48) 1,200

Overhead (25 hrs x 40) 1,000

Accrued Payroll 1,200
The cost of reworking the 50 units is charged to work in process account.
Defective job is normal in any production process.
In this situation, the cost of reworking the defective units is charged to

manufacturing overhead account. The entry to record the cost of rework is:

Accrued Payroll 1,200
37
APPLICATIONS:
Problem 1. BJ Manufacturing Company uses Job Order Costing system to accumulate

production costs. At the beginning of the year, the balances of the inventory accounts are
as follows:
Raw Materials Inventory P168,000

Work in Process Inventory 210,000
P105,000
105,000
Finished Goods Inventory 182,000
P 85,000
97,000
The summaries of transactions for the year are as follows:
(a) Raw Materials costing P826,000 were purchased on account.
(b) Materials issued to production, P785,000 distributed as follows:
Job 101 P180,000 Job 103 P150,000

Job 102 P125,000 Job 104 P205,000
Indirect balance Job 105 P95,000
(c) Heat, light and power, factory plant, for the year was P116,000.
(d) Depreciation for factory plant for the year, P190,000
(e) Marketing and administrative expenses, P250,000
(f) Production wages for the year was P1,250,000 of which 20% is for indirect laborers.
The direct wages were distributed as:
Job 101, 15%; Job 102, 20%; Job 103, 25%; Job 104, 30%; Job 105, 10%;
(g) -ibig were based on the latest

contributions mandated by law.
*
(h) 80% of direct labor cost was applied as overhead to the jobs.
(i) Advertising costs for the year was P56,000
(j) Expired insurance was P50,000 of which, 80% is for the factory.
(k) The finished goods stock at the beginning of the year were sold on account at cost
plus 40% mark up
(l) Miscellaneous factory overhead costs incurred were P500,000.

38
(m) Job 105 was unfinished at the end of the year. Jobs 103 and 104 were delivered to
the customer at cost plus 40% mark up on cost.
Required:
(1) Prepare T accounts for the following: Raw Materials Inventory, Work in Process
Inventory, Finished Goods Inventory, Manufacturing Overhead, Cost of goods sold
and Sales. Enter the beginning balances.
(2) Enter the transactions for the year directly to the T-Accounts
(3) Prepare job cost sheets for the jobs in process
(4) Determine the balances of the three inventory accounts at the end of the year
(5) Prepare a Statement of Costs of Goods Manufactured
Problem 2. The Best Manufacturing Company uses standard costs with its job order cost
accounting system. During the third quarter of 2013, an order of 4,000 units of Product
Echo (Job. 3-3003) was accepted from a longtime customer. The standard cost to
produce a unit is given below:
Direct materials 3.0 lbs at P8.00 per pound

Direct labor 2 hours at P18 per hour
Overhead 2 hours (variable P6; Fixed P10)
Overhead is applied to production on the basis of direct labor hours. Normal capacity for
the quarter was 9,000 direct labor hours.
During the quarter, the following transactions related to the job occurred:
a. Purchased 12,400 pounds of raw materials on account at P7.20 per pound

b. Issued 12,400 pounds of raw materials to production
c. Incurred 7,600 hours of direct labor at P18.40 per hour
d. Manufacturing overhead incurred for the quarter totaled P135,300.
e. Applied overhead to production.
f. Transferred completed jobs to Finished Goods.
g. Billed the customer at cost plus 60% mark-up on cost.
REQUIRED: Journal entries to record the above.
Problem 3. Sunshine Manufacturing Company uses a job order cost system in its two
producing departments, Assembly and Finishing. The company projected the following
production data for the current year:
Assembly Finishing
Direct labor hours 80,000 28,000
Machine hours 25,000 75,000
Manufacturing OH P960,000 P600,000
Two jobs are in process at the beginning of the year and three more were started during
the 6-months period ended June 30.
39
Sunshine Company applies overhead in the Assembly department based on direct labor
hours and based on machine hours in the Finishing department. Below is the summary
of cost incurred for each job and their status at the end of June. Direct labor cost is P5.50
per hour.
Job Job Job Job Delta Job Echo

Alpha Beta Charlie
Bal. 1/1 P35,000 P50,000
Assembly
Department:
DL hrs 8,000 14,000 9,000 6,000 4,000
Mach hrs 1,500 2,500 3,000 2,800 3,200
Materials P25,000 P30,000 P40,000 P50,000 P25,000
Finishing
Department:
DL Hrs 1,800 2,000 3,500 3,200 2,800
Mach hrs 6,500 11,000 10,000 7,500 3,000
Materials P12,000 P25,000 P30,000 P2,000 P5,000
Job Sold Sold Sold Completed incomplete
Status & on hand
Required: Determine the following:

1) Predetermined OH rate
2) Amount of overhead applied to each job
3) Total manufacturing costs per job
4) Gross profit per job assuming a markup on cost of 40%
Problem 4. Evergreen Manufacturing Company started 1,500 units in process on job

order #2003. The prime cost placed in process consisted of P300,000 and P180,000 for
materials and direct labor, respectively, and a predetermined rate was used to charge
factory overhead to production at 133-1/3% of direct labor cost. Upon completion of the
job order, 100 units were rejected for failure to meet strict quality control requirements.
The company bills customers at 50% above cost but sells rejected units at only 1/3 of
production cost.
REQUIRED: Give the entries to record the following:

1) The cost of production
2) To record the completion of the job assuming the rejected units is ascribed to a
company failure which is normal.
Problem 5. Blims Manufacturing Company manufactures different office furniture and

accounts for costs using the Job Order Costing System. During the 3rd quarter of the
current year, 500 tables (Job Order No. 6-210) are ordered by an international firm. The
costs incurred on this job are:
40
Direct Materials P1,250 per unit

Direct Labor 5 hours per unit @ P48.00 per hr
Manufacturing overhead P50 per direct labor hour
Final inspection revealed that 100 tables are defective and these can be reworked
requiring 2 hours a unit in addition to overhead. The 500 units are delivered and billed the
customer at cost plus 40%.
REQUIRED:
1. Give the entries to record the above assuming that the defective job is due to
customer specification.
2. Determine the manufacturing cost per unit.
Reading Materials:
Notes on job order:

https://www.cerritos.edu/dljohnson/_includes/docs/ACCT_102_Lecture_Notes_Chapter_
15.pdf
https://www.accountingtools.com/articles/job-order-costing-system.html
Simple Job costing, examples, practical problems and solutions:

https://www.playaccounting.com/exp-ca/ca-exp/job-costing-examples-practical-
problems-and-solutions/
Characteristics of job order costing:

https://courses.lumenlearning.com/sac-managacct/part/job-order-cost-system/
Accounting for actual and applied overhead:

https://www.principlesofaccounting.com/chapter-19/accounting-overhead/
Job order costing cycle Examples, practical problems and solutions

https://www.playaccounting.com/exp-ca/ca-exp/job-order-costing-examples-practical-
problems-and-solutions/
Process Costing
Overview
In a process costing system, the cost of production is accumulated by departments or
processes. The output of one department is the input of the next processing
department. The products produced under process costing are in large volumes and
the manufacturing costs incurred are accounted by departments rather than specific
product as in job order. Examples of manufacturing companies that uses process
costing are San Miguel Corporations, Coca-Cola Bottling Company, Philippine Refining
Company and many more.
Module Objectives
After thorough discussion of the topics, the learner will be able to:
Described the flow of costs in a process costing system

Explain how equivalent units of production (EUP) is calculated under average and
FIFO method
Prepare journal entries to record the flow of costs in process costing systems with
sequential production departments
Prepare cost of production report even and uneven application of cost, first and
then subsequent process or department, with and without loss units both normal
and abnormal
Journalize typical transactions and prepare statement of cost of goods
manufactured and sold
Course Materials
Distinction between Job Order and Process Costing
In many ways, job order and process costing are similar. The same accounts are used in
summarizing the cost of production and both have the same objective, to assign costs to
the units produced.
Below are distinct characteristics of job order and process costing:
Features Job Order Cost System Process Cost System
Usage Used by companies producing Used by companies that

small number of products in produced large volume of
batches identical products in a
continuous flow
WIP account One for multiple jobs one for each department
42
Module 4 Process Costing System
Documents used
Job cost sheets Cost of production report
Determination of Each job Each period through series

total manufacturing of manufacturing processes
costs or departments
Unit cost Cost of each job/units produced Total manufacturing

computation for the job costs/units produced
THE CONVERSION PROCESS
Either actual or normal costing system may be used in process costing. The flow of costs
in job order and process costing are similar. All raw materials are debited to Raw materials
Inventory when purchased, when issued, it is debited to Work in Process. Materials may
be issued to production at different stages. It may be added at the beginning of the
process, during the process or at the end of the process. In process cost system, fewer
requisitions are generally required than in job order cost system, because the materials
are used for processes rather than for specific jobs.
For labor, time tickets are used in determining the cost of labor assignable to the
production department while manufacturing overhead incurred is recorded also in the
same manner as in job order.
When materials are processed in two or more departments before they become finished
products the costs transferred from a prior department are called Transferred in Costs.
These transferred in costs are treated as raw material costs in the viewpoint of the
receiving department. The following entry is made to record the cost transferred in to the
department.
Work in Process (receiving dept.) 000

Work in Process (previous dept.) 000
In addition to the transferred in costs, the receiving department may incur additional
materials, labor and overhead and they are recorded in the same manner as in the
previous department.
First In First Out (FIFO) And Weighted Average Method
There are two methods used to determine the flow of costs to the work in process
inventory account, the FIFO and Weighted Average methods. The FIFO method assumes
that units in the beginning inventory are completed first, before any units are started in the
process resulting to the accounting of units in the beginning inventory separate from the
newly started units. The Weighted average method averages the cost of units in the
beginning inventory with the cost of units that were started during the period. The cost of
production report is the key document used in a process cost system. This report also
gives the accountant information on what to record in the books.
43
The five (5) steps to be followed in the preparation of a Cost of Production Report are:
Step 1. Calculate the total units to account
Prepare a quantity schedule (the physical flow of units) to determine the total units
to be accounted for. These units are then accounted by the output of the period, which
consists of units transferred out, units in process at the end of the period and units spoiled
or lost during the process
Step 2. Compute the equivalent units of production
Equivalent units of production are an approximation of the number of whole units of output
that could have been produced during the period. EUPs are calculated by multiplying the
number of actual but incomplete units produced by the degree of completion or work done
during the period. It measures the work done during a period, expressed in fully
completed units.
Weighted Average method is used to determine an average cost per unit of inventory.
The number of units in the beginning inventory together with the manufacturing costs
attached to it is merged with the current period output and manufacturing costs.
FIFO Method: The beginning inventory is accounted separate from the current
production. This method assumes that units in beginning work in process are completed
first, before any new units are started. Thus, the completed & transferred has two
categories:
1. Work in process beginning completed during the period, and

2. Units just started and completed during the period
In computing for the equivalent units of production, the work done on beginning inventory
in the prior period is kept separate from the work done in the current period.
Step 3. Find the total costs to account
The total costs to account include the balance of Work in Process at the beginning plus
all current costs added during the period.
Step 4. Compute the unit cost per EUP
Unit production costs are costs expressed in terms of equivalent units of production. When
equivalent units of production (EUP) are different each in each cost element, then three
unit costs must be computed for Materials, Labor and Overhead.
WA: IP beg. Cost + Added Costs / EUP
FIFO: Added Costs during the period/EUP

44
Step 5. Assign costs to inventories.
Assign the total production costs to units completed and in process at the end of a period
by multiplying the EUP per cost element by the UC per cost element.
For clearer understanding of the WA and FIFO methods, read:

https://spreadsheetsforbusiness.com/process-costing-weighted-average-vs-fifo/
Illustration. Cost of Production Report 2 departments
A Cost of Production Report is a mandatory reportorial requirement of a manufacturing

company. This report should contain heading which comprise of (1) Name of the
Company, (2) Title of the Report, and (3) Date covered by the report.
To illustrate, assume the following:
In the Forming Department, materials are added when the process is 20% complete while
in the Finishing Department is added when the process is 80% complete. Work in
process on Jan. 1 is 40% converted in the Forming and 60% converted in the Finishing
Department. Work in process on June 30 is 25% converted in the Forming Dept. and
30% converted in the Finishing Dept. Conversion costs are added evenly throughout the
process.
The following costs information follows:
COSTS
Forming Dept. Units Materials CC Transferred
in
WP, 1/1 3,000 P75,000 P21,250
Started 22,000
Completed 20,000
Costs added P700,000 425,000
Finishing Dept.
WP, 1/1 5,000 0 P72,500 P177,500
Started 20,000
Completed 21,000
Costs Added P231,000 P384,000 ?
45
Saturn Manufacturing Company

Cost of Production Report
June 30, 2019
Forming Department
Flow of Units & EUP:

EUP
Units Materials CC
WP, Jan. 1 3,000
Started 22,000
Units to account 25,000
Finished & transferred 20,000 20,000 20,000
WP, June 30 5,000 5,000 1,250
Units as accounted 25,000 25,000 21,250
Total costs to account:

Work in process, beginning:
Materials P75,000
Conversion costs P21,250 P96,250
Costs added during the period:
Materials P700,000
Conversion costs 425,000 1,125,000
Total costs to account 1,221,250
Unit Cost per EUP P775,000/25,000 P446,250/21,250

= P31 = P21
Assignment of Costs:
Finished & transferred (20,000 x 52) P1,040,000
Work in Process, June 30:
Materials (5,000 x 31) P155,000
Conversion costs (1,250 x 21) 26,250 181,250
Total costs as accounted P1,221,250
Finishing Department
EUP
Flow of Units: Units Materials CC
WP, Jan. 1 5,000
Transferred in 20,000
F&T 21,000 21,000 21,000

WP, June 30 4,000 4,000 1,200
Units as accounted 25,000 25,000 22,200
46

Work in process, beginning:
Materials 0
Conversion costs P72,500
Transferred in P177,500 250,000
Costs added during the period:
Materials P231,000
Conversion costs P384,000
Transferred In P1,040,000 1,655,000
Total costs to account P1,905,000
Cost per EUP:

Materials P231,000 / 25,000 P9.24
Conversion costs P456,500 / 22,200 20.563
Transferred in (P177,500 + 1,040,000)/ 25,000 48.70
Total unit cost P78.503
Assignment of Costs:
Finished & Transferred (21,000 x 78.503) P1,648,563
Work in process, end:
Materials (4,000 c 9.24) P36,960
CC (1,200 x 20.563) 24,676
Transferred in (4,000 x 48.70) 194,800 256,436
For more information about the preparation of a cost of production report, read
https://xplaind.com/287240/process-costing-fifo
STANDARD COSTING IN PROCESS COST
Manufacturing companies normally sets standard cost once a production process

is established, making it possible to determine the cost of activity at the start of the period.
The equivalent units of production are determined in the same manner as in FIFO method
of costing. The only difference is, unit cost is no longer computed for each element
because the standard unit cost is used.
Pro-forma entries under standard costing:
(1) Issuance of materials:
Work in process 000

Material Quantity variance 000
Material price variance
Raw Materials 000
a) The amount debited to work in process is computed as:
EUP for materials x Std Qty required per unit x SP
b) The amount credited to Raw Materials is equal to:

Actual quantity issued x Actual price
47
c) If AQ issued differs from SQ required, the variance is

debited or credited to Material Quantity Variance.
d) If AP differs from SP, the variance is debited or credited to

Material Price variance
(2) Recording factory payroll
Work in process 000

Factory Payroll 000
Labor efficiency variance 000
Labor rate variance 000
a) The amount debited to work in process is computed as:

EUP for labor x SH required per unit x standard rate
b) The amount credited to Factory Payroll is equal to

AH utilized x Actual rate
c) If AH utilized differs from SH required, the variance is
debited or credited to
Labor Efficiency Variance.
d) If AR differs from SR, the variance is debited or credited

to :
Labor Rate variance
(3) Applied overhead to production
Work in process 000

(a) The amount debited to work in process is computed as:

EUP for OH x SH required per unit x OH rate
(b) The amount credited to Manufacturing overhead is equal to

SH x Overhead rate
Illustration: Cost of Production Report using Standard Cost
KFC Manufacturing Company uses the standard costing method for its process-costing
and provides the following standard cost for the month of July of the current year: Direct
materials, P6; Conversion costs, P3. All materials are added at the start of the process
while conversion costs are added evenly throughout the process.
During July, the cost accountant of KFC provided you the following production data:
Units:
In process, beginning 3,000, 60% converted
In process, end 5,000, 50% converted
48
Units started 20,000

Units completed and transferred 18,000
Costs:
In process, beginning
Materials ?
Conversion costs ?
Costs added in July
Materials P125,000
Conversion costs 57,000
REQUIRED: Determine the following

(1) Cost of work in process beginning
(2) Total material variance and total labor variance
Solutions:
EUP
Units: Mat CC
In process, beg. 3,000
Started in process 20,000
Total 23,000
Finished & Transferred:
In process, beg 3,000 - 1,200
Started & completed 15,000 15,000 15,000
Total 18,000
Work in Process, end 5,000 5,000 2,500
Total units as accounted 23,000 20,000 18,700
(1) Cost of work in process beginning

In process, beg :
Materials (3,000 x 100% x 6) P18,000
CC (3,000 x 60% x 3) 5,400
Total cost of work in process, beg P23,400
(2) Computation of variances

Materials CC Total
Actual costs P125,000 P57,000 P182,000
Total Standard Costs:
EUP 20,000 18,700
x unit cost 6 3
Total Standard costs P120,000 P56,100 P176,100
Variance 5,000 900 5,900
LOST/SPOILED UNITS
Continuous Loss
The input in a manufacturing process may result to a lower output due to evaporation or
shrinkage, which are inherent in the production process. The costs of normal loss due to
shrinkage or evaporation are accounted using the method of neglect. The decrease in
49
the units resulting to loss or spoilage is not included in EUP computation. The effect of
this method increases the cost per EUP.
Discrete Loss
Discrete loss is assumed to occur at a specific point, normally when quality check is made
at inspection point. Some production losses may be due to errors in the production
process thus resulting to units that are rejected for failure to meet quality standards. These
spoiled units are included in EUP computation because the percentage of work done on
these units can be clearly identified. The accounting for the cost of the spoiled units
depends on whether the loss is considered normal or abnormal.
How do lost units affect the equivalent units of production?
Type of Loss Effect on EUP Treatment of Cost

Continuous NO EUP NO cost is assigned to these
Normal units. The remaining good
units absorb the cost of lost
units.
Discrete, end of Compute EUP according to % Cost of lost units is assigned

the process, of work done only to completed units.
Normal
Discrete, during Consider the timing of lost Cost of lost/spoiled units is

the process units: allocated to units F&T and
Normal a) If IP, end has passed IP, end in accordance with
the inspection point, their EUP.
these units are already
good units
b) If IP, end has not
passed the inspection
point yet, then these
units are not The cost of lost/spoiled units
considered good units. is absorbed by completed
units only.
Abnormal loss Compute EUP according to % The cost is charged to Loss

of work done. from spoilage account which
is a period cost.
Illustration. Lost units discovered at inspection point, end of the process.
The production records of Department 1 of XXX Manufacturing Company are provided

below:
Units:
IP, beg 10,000, 25%
IP, end 15,000, 80%
50
Completed & transferred 61,000

Costs:
IP, beg:
Materials P220,000
Added during the period:
Materials P1,480,000
Cost per EUP:
Materials P20
Conversion costs 12
XXX Manufacturing Company uses FIFO method of process costing and adds materials
at the beginning of the process. Inspection is done at the end of the process and normal
spoilage is 10% of completed and transferred to the next department.
Required:
1) Determine the EUP
2) Determine the total cost to account
3) Allocate the total cost to finished and transferred, in process at the end and
abnormal spoilage
Solutions:
1) EUP computation
The EUP computation is summarized as follows:

EUP
Flow of Units Materials CC
IP, beg, 25% 10,000
F&T: IP, beg 10,000 0 7,500

51,000 51,000 51,000
Started/completed
IP, end, 80% 15,000 15,000 12,000
Spoiled units: Normal 8,000 6,100 6,100
Abnormal 1,900 1,900
As accounted 84,000 74,000 78,500
2) Total costs to account

IP, beg costs P250,000
Added costs:
Materials 1,480,000
Total costs to account P2,672,000
51
3) Allocation of costs
Cost of IP, beg P250,000

Materials costs (51,000 x 20) 1,020,000
Conversion costs (51,000+7,500)x 12 702,000
Cost of normal spoilage (6,100 x 32) 195,200
Total costs allocated to F & T P2,167,200
IP, end:
Materials (15,000x 20) P300,000
Conversion costs (12,000 x 12) 144,000 444,000
Spoiled units (1,900 x 32) 60,800
APPLICATIONS
Instructions. Submit your solutions in good form. Place all solutions

in a worksheet
Problem 1. Colgate Palmolive Philippines employs a process cost system in the

manufacture of toothpaste. Two departments are involved in the process: Department 1
and Department 2. No lost units are discovered in both departments. Below are the data
in the Department 2 for the months of June and July:
June July
In process at the beginning 3,600 ?
Materials 60% ?
Conversion costs 33 1/3% ?
Transferred in from Department 1 9,000 7,500
In process at the end 2.400 2,700
Materials 50% 33 1/3%
Conversion costs 25% 16 2/3%
Costs of in process, beginning:

Costs from Department 1 P12,330 ?
Materials 4,050 ?
Conversion costs 2,160 ?
Transferred in costs from Department 1 8,460 P9,675
Materials costs added 14,784 11,730
Conversion costs added 2,592 3,384
REQUIRED: Prepare a cost of production report for the months of June and July using:
(1) FIFO method and (2) WA method.
Problem 2. Starlight Manufacturing Company uses two types of materials in its processing
operation and adds these materials as follows:
52
4 pounds of Material X at the start of the process and two pounds of Material Y
when the process is 50% complete. Conversion costs are incurred uniformly throughout
the process.
At 50% stage of completion, inspection occurs and any spoiled units are scrapped.
5% of the units processed up to inspection point are considered normal.
The following data pertains to August operation of Starlight Company.
In process, Aug 1 18,000 units, 75% complete

In process, Aug 31 6,000 units, 25% complete
Units completed & transferred 73,800 units
Unit costs:
Material X P6.00 per pound
Material Y P4.00 per pound
Conversion costs per EUP P8.00
REQUIRED: Prepare a cost of production report
Reading Materials:
https://www.cliffsnotes.com/study-guides/accounting/accounting-principles-ii/traditional-
cost-systems/process-cost-system
https://courses.lumenlearning.com/sac-managacct/chapter/the-cost-production-report/
http://simplestudies.com/description_of_process_costing_in_accounting.html/page/2
https://www.opencostaccounting.org/toc/chapter6/
https://www.accountingnotes.net/cost-accounting/process-costing/process-costing-
features-objects-and-procedure-cost-accounting/15094
53
54
Process Costing
Module Objectives
Distinguish joint products from by-products
Allocate the joint costs using different methods
Determine inventoriable costs and cost of goods sold
Identify which products need to undergo additional processing
Account for by-products
Course Materials
NATURE OF JOINT PROCESS
Joint processes are production processes in which the creation of one product also creates other
products. It is a process in which one input yields multiple outputs. Joint production processes are
common in the food manufacturing industry like San Miguel Foods Corporation, personal beauty
& wellness industry like Palmolive Philippines, Inc. and many more.
METHODS OF ALLOCATING JOINT COSTS
from joint processing costs is inseparable from that of every other product. When produced
simultaneously, joint products and by-products do not have traceable, individual costs. Therefore,
the allocation of joint production costs is necessary. The common methods of allocating joint
costs are:
A. Physical measure
Average unit cost (based on units produced)
Weighted average method (based on weight factors)
B. Market Value method
Sales value method (Sales value at split-off point)
Net realizable value method (at split off point).
Net Realizable Value of the product is equal to:

54
Module 5 Accounting for Joint Products & By-Products
Final sales value less separable costs and

Costs necessary to dispose of the products such as distribution and selling
costs.
Hypothetical market value method or Approximated Net Realizable value method
C. Constant Margin Approach
This method yields the same gross profit rate for all the products. The procedures in
allocating joint costs using this method follow:
1. Compute the overall gross margin percentage:
Total sales (all products) P000

Less: Total costs (joint costs + separable costs) 000
Gross margin P000
Gross margin rate = gross margin / total sales
2. Determine the cost of a product:
Sales value of a product P000

* cost ratio 0%
Total cost of product P000
Less: Separable costs 000
Allocated joint costs P000
TOTAL MANUFACTURING COST OF EACH PRODUCT
Total Manufacturing Costs (MC)
Allocated joint costs P000

Add: Separable costs 000
Total manufacturing costs P000
Divide by units produced xxx
MC per unit P0
Work in Process-P Three 950,000
In joint process, the total costs to manufacture a product comprise of:

Allocated joint costs + additional processing costs
SELL OR PROCESS FURTHER
The decision to incur additional costs for further processing should be based on the
incremental operating income attainable beyond the split-off point. The incremental operating
income or differential income is the difference between incremental sales revenue and
incremental costs or additional processing costs. If incremental revenue or differential revenue
is greater than incremental costs, process further the products.
55
Incremental Sales = Final Sales Ssales at split off

Incremental income = Incremental Sales Incremental cots
METHODS OF ACCOUNTING BY PRODUCTS
The common practice is to make no allocation of the joint processing costs to the by-
products, the secondary products with very minimal value. By-products are accounted in the
books in either of the two methods:
(1) Net realizable value method. This method requires that a by-product inventory
account is used to summarize the sales value of the by-product minus all costs related
to processing, storing and disposing. The net realizable value then is used to reduce
the joint costs of the main products, thus, work in process inventory is credited. If the
by-product is sold, Cash or Accounts Receivable is debited and by-product is credited.
In cases where the costs related to processing, storing and disposing is greater than
the sales value of the by-product, any loss is added to the cost of the main products.
(2) Realizable value method. This method recognizes the value of the by-product only
when they are sold. The sales value of the by-product less related costs to process
and to dispose is presented as (1) sales revenue by product; (2) as other income;
(3) as a reduction from cost of goods sold; and (4) as reduction from cost of goods
manufactured.
Applications:
Problem 1. Sheryl Company incurred P100,000 to manufacture the following products in a joint
process:
Units Weight SP per
Product Produced Per unit unit
A 1,000 4 lbs. P10
B 2,000 3 lbs. P20
C 3,000 2 lbs. P20
D 4,000 1 lb. P10
REQUIRED:
1. Allocate the joint cost using the sales value method & weighted average as the basis.
2. Determine the value of ending inventory of C assuming that 500 units are on hand at the end
of a period under each two methods.
Problem 2. Lucky Company produces two rice-based instant noodles-Lucky Him (tiny noodles)
and Lucky Her (large noodles) from common inputs, flour and spices. A waste product results
from the joint process which is sold to cattle ranchers at P10 per ton. The revenue from the sale
of by-product is treated as other sales revenue. At split off point, the main products can be sold
to companies who package and sell them under their own branch names. With the rising
popularity of noodles as a meal, Lucky Company add bits of preprocessed vegetables to Lucky
Him and Lucky Her, package them, and sell them under the brand names Nissins and Ramens.
56
Joint Costs Lucky Him Lucky Her

Costs of flour and spices P1,200,000
Production in tons 5,000 tons of BP 50,000 100,000
Sales in tons 50,000 100,000
Selling price per ton P20 P30
Separable costs of processing 50,000 tons of P240,000
Lucky Him into 60,000 tons of Nissins
Separable costs of processing 100,000 tons of P840,000
Lucky Her into 120,000 tons of Ramens
Nissins Ramens
Production in tons 60,000 120,000
Selling price per ton P36 P50
REQUIRED:
1. Allocate the joint costs using sales value method.
2. Compute the gross profit if (a) main products are sold at split off point and (b) main
products are processed further to become Nissins and Ramens.
57
Standard Costing
Overview:
Definition and objectives of standard costing
Uses and limitations of standard costing
Determination and setting up of standards
Variance analysis & disposition variances using 2-way variance method
Formula Quicknotes
Module Objectives:
Name and define the types of standards and uses of standards
Calculate variances for materials, labor and overhead (using two-way approach)
Journalize disposition of materials, labor and overhead variance
Journalize transactions under standard costing
Course Materials:
DEFINITION AND OBJECTIVES OF STANDARD COSTING
Standards function In businesses,

managers set an acceptable level of performance for every aspect of operation, especially
in the provision of products and services. At the end of each period, managers would want
to know how the actual results fared against the standards set, and whether corrective
actions are necessary. A reasonably prudent management will strive to ensure that overall
product quality is high while keeping costs under control. To do this, management needs
a mechanism to generate actual cost and standard cost reports and to analyze the
deviations from the expected results (standards).
Standard costing is a system of setting standard costs, accumulating and summarizing

actual costs, and highlighting deviations from the pre-determined standard costs, or
variances. Although standard costing is applicable for both manufacturing and service
enterprises, our discussions will focus on its application in manufacturing environment.
Standard costing can also be used in conjunction with either job order or process costing
accumulation systems.
When a standard costing system is in use, it does not mean that there is no need for actual
costs. Actual costs should likewise be recorded and accumulated and should be made
available for comparison with the standard costs to determine deviations.
Standard cost is defined as a pre-determined unit cost of a product or service for the
purposes of cost control. Standards are set for all cost components direct materials,
direct labor, and factory overhead.
Variances are the deviation of actual costs from the budgeted (standard) costs for each
cost component direct materials, direct labor, and factory overhead. These variances
are monetary amounts and are reported as either favorable (when the actual costs are
58
Module 6 Standard Costing
USES AND LIMITATIONS OF STANDARD COSTING
Standard costing has the following objectives:

simplify bookkeeping and reduce clerical costs;
facilitate management planning;
instilling a culture of cost-consciousness among the employees
contribute to management control by providing basis for evaluation and cost
control; and
highlight variances in line with management by exception principle.
Management by exception a practice of focusing management attention on areas that

are not operating as expected.
Standard costing has the following limitations:

standard costs are mainly based on estimates and when cost components
fluctuate wildly during the period, there is a need to revise standard costs
previously set;
setting up standard costs in certain industries may be overly complex, especially
when it involves multiple products requiring different raw materials, time-motion
studies, multiple stages of manufacturing, etc.;
the standards set must be challenging enough to control costs yet should also be
attainable; extremely rigid standards that are very difficult, if not impossible to
attain may cause demotivation among employees and they may even resort to
extremely lax standards that are
very easy to attain will not achieve the purpose of controlling costs;
fixing responsibilities among managers who own variances is difficult and may be
highly political.
DETERMINATION AND SETTING UP OF STANDARDS
In small organizations, the top management may be directly involved in setting up the
standards. However, in larger organizations, the responsibility of setting up costs is
delegated to cross-functional teams within the organization.
The following are the two standards used:
Quantity standards specify how much of an input should be used for each unit of
product or service; and
Cost (price) standards specify how much should each unit of product or service
cost.
The standard cost for each cost element is equal to Quantity standard multiplied by the
Cost standard.
59
Material standards may be jointly formulated by the product engineers and the plant
manager (quantity) and the purchasing and accounting departments (cost).
Labor standards may be jointly formulated by the product engineers and the plant
manager (time) and the HR and accounting departments (rate).
Overhead standards may be jointly formulated by the plant managers (activity) and the
accounting department (rate).
VARIANCE ANALYSIS & DISPOSITION VARIANCES USING 2-WAY VARIANCE

METHOD
Accounting for Materials
Materials Purchase Variance

Upon purchase, the raw materials are recorded at standard cost. There are no
complications when the material is purchased at standard cost. When there is a difference
between the actual cost and the standard cost, the difference is accounted for as a
variance. The variances are calculated and isolated at the time of purchase.
Illustrative example:
Suppose that the standard cost of raw material is P100/kg. The company purchased 1,000
kilograms of the said raw material under the following assumptions:
a. When the actual cost per kilogram is P98 (Favorable variance).
Description Debit Credit

Raw Materials (at standard cost) 100,000
Accounts Payable (at actual cost) 98,000
Materials Purchase Variance 2,000
To record purchase of materials at standard
cost
b. When the actual cost per kilogram is P105 (Unfavorable variance).

Raw Materials (at standard cost) 100,000
Materials Purchase Variance 5,000
Accounts Payable (at actual cost) 105,000
To record purchase of materials at standard
cost
As noted above, a favorable variance is denoted by a credit; whereas an unfavorable

variance is denoted by a debit.
60
Materials Usage Variance

Upon issuance to production, raw materials are recorded at standard cost based on the
standard quantity. The difference between the actual quantity issued to production and
the budgeted quantity is accounted for as a variance.
Suppose that a material has a standard cost of P100/kg. and one batch of a certain product
requires 500 kgs. of the said material. The accounting for issuance of material to
production follows:
a. When 495 kgs. is issued to production (Favorable variance)

Work-in-process inventory (at std. qty x std. cost) 50,000
Raw Materials (at actual qty. x std. cost) 47,500
Materials Usage Variance 2,500
To record usage of materials at standard cost
b. When 510 kgs. is issued to production (Unfavorable variance)

Work-in-process inventory (at std. qty x std. cost) 50,000
Materials Usage Variance 1,000
Raw Materials (at actual qty. x std. cost) 51,000
To record usage of materials at standard cost
Accounting for Labor
Direct labor hours rendered are recorded at standard hours allowed for the output x
standard rate. Any difference between the actual rate and the standard rate is recorded
as direct labor rate variance. Any difference between the actual hours rendered and
standard hours allowed for the output is recorded as direct labor efficiency variance.
Direct labor rate variance is computed as the difference between the actual labor rate and
the standard labor rate, multiplied by the actual hours rendered.
Direct labor efficiency variance is computed as the difference between the actual hours
rendered and the standard labor hours allowed for the output, multiplied by the standard
labor rate.
Suppose that the standard direct labor rate is P5/hour and the standard direct labor hours
to produce a single unit of product is 2 hours.
61
A batch of 10,000 units of the said product was produced using 18,000 hours at
P5.20/hour.

Work-in-process inventory (at std. hrs. x std. rate) 100,000
[10,000 units x 2 hrs./unit x P5/hr.]
Labor Rate Variance [actual hrs. x (actual rate std. 3,600
rate)]
[18,000 hrs. x (P5.20/hr. P5/hr.)]
Labor Efficiency Variance [(actual hrs. std. 10,000
hrs. allowed) x std. rate)]
[18,000 hrs. (10,000 hrs. x 2hrs/unit) x P5)
Factory Payroll (at actual cost) 93,600
[18,000 hours x P5.20/hr.]
To record direct labor at standard cost
Accounting for Overhead
In developing overhead application rates, a company must specify an operating level or

capacity. Remember that rates are computed by dividing the budgeted overhead costs by
the production capacity. Measures of capacity could be theoretical, practical, normal, or
expected.
Theoretical capacity or ideal capacity is based on optimum level of performance

based on all factors operating perfectly. It disregards realities such as machine
breakdowns, holidays, and idle time.
Practical capacity is the level of production that can be achieved during regular
working hours, with allowance for machine breakdowns, holidays, and idle time.
Normal capacity is the average level of production over the long run.
Expected capacity is the anticipated level of production for the next period.
Firms usually use normal or expected capacity in planning for overhead costs. Usually,
firms compute overhead rates separately for fixed and variable costs.
To aid managers in computing overhead rates, a flexible budget is prepared. It presents

expected overhead costs based on cost behavior (fixed or variable) at different activity
levels. Fixed overhead costs remain constant within the relevant range of activity while
variable overhead costs change in relation to changes in the level of activity. For planning
purposes, capacity is stated as a single level of activity.
The following are the overhead variances analyzed in a standard costing system.
Budget variance is the difference between the actual overhead costs incurred
during the period and the budgeted overhead costs based on the flexible budget.
This variance is a measure of how well managers control costs and hence, is also
62
called controllable variance. Causes of budget variances are attributable to the

monetary amount spent (spending) and the efficiency of the operations (efficiency).
Thus, budget variance could be further analyzed into spending and efficiency
variances, but for the purpose of discussion, we will be analyzing total budget
variance only.
Volume variance is the difference between the total budgeted overhead and the
overhead applied to production. Alternatively, it could be expressed as the
difference between the denominator level of activity and the standard hours
allowed for the output of the period, multiplied by the fixed portion of the
predetermined overhead rate. This variance is a measure of capacity utilization
so
called noncontrollable variance.
Formula Quicknotes
A = actual
S = standard
Materials Price Variance = (AP - SP) x AQ

Materials Usage Variance = (AQ - SQ) x SP
Labor Rate Variance = (AR SR) x AH
Labor Efficiency Variance = (AH SH) x SR
Overhead Budget Variance = Actual OH incurred [Fixed OH + (SH x VOHr/hr.)]
Overhead Volume Variance = [Fixed OH + (SH x VOHr/hr.)] Applied OH

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For

ACCO 20073 COST ACCOUNTING & CONTROL

Gloria A. Rante, CPA, DBA

Upon completion of the course, the students will be able to:

Final Grade = (1st Grading Period + 2nd Grading Period)

According to Chartered Institute of Management Accountants ICIMA), cost is any amount

Explain the relationship between financial accounting and cost accounting

and senior officials of the company. such as financial institutions, creditors,

2. By nature of traceability to a cost object

1. Materials. Materials include the raw materials and other factory

2. Labor. Labor represents the compensation and other benefits paid

Prime costs is the sum of direct materials and direct labor.

3. Manufacturing overhead. Manufacturing overhead is an indirect

Conversion costs = Direct labor + Manufacturing

4. By nature of production or operation process

4.1 Joint costs

4.3 Batch costs

4.4 Operation costs

4.5 Process costs

5. For Decision making purposes

5.1 Controllable costs

These are costs that cannot be controlled or influenced by a responsibility

5.3 Opportunity costs

5.4 Sunk costs or past costs

5.5 Relevant cost.

5.6 Incremental costs.

Where different alternatives are being considered, relevant cost is the

5.7 Period Cost

5.8 Product cost

5.10 Unavoidable costs

6.1 Fixed costs

6.2 Variable costs

These are costs that contain fixed and variable cost.

7.1 Historical costs are actual costs incurred in the past.

8. According to planning and control

8.1 Budgeted costs are expected costs to acquire goods or services or to

HIGH-LOW METHOD OF SEPARATING MIXED COSTS

Cost at high level cost at lowest level (within relevant range)

Or: Change in total costs / Change in activity level = VC per unit

3 Inventory Accounts in a manufacturing business

Inventory Costing Valuation Methods

Journalizing Basic Manufacturing Transactions

2. Issuance of raw materials.

3. Return of excess materials to store room

4. Factory labor incurred

5. Manufacturing overhead incurred

6. Applied OH to the job

7. Completion of the job

8. Sale of the completed jobs

Statement of Cost of Goods Manufactured and Sold

Direct Materials used:

(b) Direct Labor 000

a. Raw materials purchased on account, P240,000

Inventories reported by the company at the beginning of the month are:

Required: Reconstruct the entries related to the above problem.

MRF No. _ Date_

Requested by: __ Received by: _

Approved by: __ Released by : _