Batch 2024 - Cost Accounting

BATCH 2021: COST ACCOUNTING AND CONTROL
SAN BEDA UNIVERSITY - BS ACCOUNTANCY

Ora et Labora
PROFESSOR: Sir Jayson Chio
OUTLINE
I. INTRODUCTION TO COST ACCOUNTING
II. THE COST AND MANAGEMENT ACCOUNTING FRAMEWORK
III. JOB ORDER COSTING
IV. MATERIALS
V. LABOR
VI. OVERHEAD
I. INTRODUCTION TO COST ACCOUNTING
COST ACCOUNTING DEFINED COST ACCOUNTING SYSTEM
A specialized field of accounting emphasizes the Accumulates the product costs, originating with
determination and control of costs. inventory and ending with the cost of goods sold.
A system that records, summarizes, analyzes and Consists of accounts for the various manufacturing
interprets the information of material cost, labor and costs.
overhead essential to produce and sell a product or
service. Uses the perpetual inventory system.
A branch of accounting concerned with

accumulating costs for financial reporting and
decision-making purposes.
COMPARISON OF FINANCIAL, MANAGERIAL, AND COST ACCOUNTING
FINANCIAL ACCOUNTING MANAGERIAL ACCOUNTING COST ACCOUNTING
It is the use of accounting It focuses on the needs of parties It is the intersection between
information for reporting to within the organization financial and managerial
external parties, including accounting.
investors and creditors. Managerial accounting
information commonly Cost accounting information is
It is primarily concerned with addresses individual or needed and used by both
financial statements for divisional concerns rather than financial and managerial
external use by those who supply those of the enterprise as a whole accounting.
funds to the entity and other
persons who may have vested Information may be current or It provides product cost
interest in the financial operations forecasted information to BOTH external and
of the firm internal parties.
Timely the data are futuristic
Based on historical transaction
data. Some of the costs are not
recorded on the accounting books
Information may be historical, of the organization
quantitative, monetary and
verifiable.
1 | Cost Accounting and Control | CALUB, CASALLAS, PINGOL, SANCHEZ, UNCIANO| BATCH 2021
BASIC PRODUCT-COSTING SYSTEMS
JOB ORDER COSTING PROCESS COSTING HYBRID COSTING
Provides a separate record for the Accumulates the cost for each Incorporates both JOB ORDER
cost of each quantity of product department or process. COSTING and PROCESS
that passes through the factory. COSTING
Accumulates the cost for each
Costs are assigned to each job or department or process. Operation Costing - a hybrid
to each batch or goods. costing system often used in
Emphasizes a weekly or monthly repetitive manufacturing where
Used by companies that produce time period finished products have common,
one-of-a-kind, unique as well as distinguishing
customized or special order Used by companies that produce characteristics.
products. similar goods and pass through
a continuous production process.
It uses just one Work in Process
Inventory Control Account in the It uses several Works in Process
General Ledger. Inventory Accounts (one for each
department or work center in the
The job cost sheet provides the manufacturing process)
details for the Work in Process
Account. The cost of production report
provides the detail for the Work in
Process Account for each
department.
Example: Companies producing

paint, oil and gas, automobiles,
bricks, or soft drinks
USES OF COST INFORMATION

1. Determining the selling price of a product
2. Meeting Competition
3. Bidding on Contracts
4. Analyzing Profitability
5.
MERCHANDISING vs. MANUFACTURING
JOB ORDER COSTING PROCESS COSTING
1. Nature Buy and Sell Produce and Sell
2. Inventory Merchandise Inventory (Ready for Raw Materials, Work in Process,

sale) Finished Goods
3. Cost of Goods Sold Purchase price and incidental Purchase price of materials, labor
expenses cost and overhead cost.
PLANNING AND CONTROL

PLANNING Process of establishing objectives or goals for the firm and determining the means by
which the firm will attain them.
It is essential to good management because it provides a means of coordinating all of
the operations of a firm.
Development of plans by providing historical costs that serve as basis for projecting
data for planning.
Strategic Planning Long range goals
Objective to determine the overall

direction of the company.
Tactical Planning Shorter range of plans
Emphasizes plans to achieve the strategic

goals.
Operations Planning Day-to-day implementation of tactical

plans.
Emphasizes the coordination of the major

factors of production (materials, labor and
facilities)
CONTROL Process of monitoring the company’s operations.
Determine whether the objectives identified in the planning process are being
accomplished.
COST OF GOODS SOLD STATEMENTS
FOR MERCHANDISING:
Beginning Inventory xxx
Purchases xxx
Freight-In xxx
Purchase Returns (xxx)
Purchase Discounts (xxx)
Net Purchase xxx
Goods Available for Sale xxx
Ending Inventory (xxx)
COST OF GOODS SOLD XXX
FOR MANUFACTURING:
Beginning Raw Materials xxx
Purchases (Raw Materials) xxx
Freight-In xxx
Purchase Returns (xxx)
Purchase Discounts (xxx)
Net Purchase xxx
Total Materials Available for Sale xxx
Ending Raw Materials (xxx)
Raw Materials Used XXX
Direct Labor Cost XXX
Factory Overhead XXX
TOTAL MANUFACTURING COST XXX
Beginning Work-In-Process xxx
Total Work-In-Process XXX
Ending Work-In-Process (xxx)
COST OF GOODS MANUFACTURED XXX
Beginning Finished Goods xxx
Total Goods Available for Sale XXX
Ending Inventory (xxx)
COST OF GOODS SOLD XXX
II. THE COST AND MANAGEMENT ACCOUNTING FRAMEWORK
MANUFACTURING COSTS/PRODUCT COSTS/INVENTORIABLE COSTS

DIRECT MATERIALS DIRECT LABOR FACTORY OVERHEAD
Those that can be traced to the Represent the amount paid as A varied collection of
finished product. wages to those working directly production-related costs that
on the product. CANNOT BE practically or
Examples: conveniently traced directly to end
● Iron ore for steel This includes: products.
● Sheet steel for ● Machine operators
automobiles ● Maintenance workers These include indirect materials
● Flour for bread ● Managers and supervisors and indirect labor.
● Wood for tables and chairs ● Support personnel
● People who handle, Examples of Indirect Materials:
inspect and store ● Nails
materials ● Rivets
● Lubricants
Payroll related costs, such as ● Small tools/supplies
payroll taxes, group insurance,
sick pay, vacation and holiday pay Examples of Indirect Labor:
and other fringe benefits can be ● Lift-truck driver’s wages
considered as part of direct labor ● Maintenance and
costs, but are INCLUDED AS Inspection Labor
FACTORY OVERHEAD. ● Engineering Labor
● Machine Helpers
● Supervisors
Examples of other indirect factory

costs:
● Building maintenance
● Machinery and tool
maintenance
● Property taxes
● Property insurance
● Pension costs
NON-MANUFACTURING COSTS/PERIOD COSTS

MARKETING/SELLING EXPENSES ADMINISTRATIVE/GENERAL EXPENSES
Often referred to as order-getting and order-filling Include all executive, organizational and clerical
costs. Expenses related to selling of goods to expenses that CANNOT be included under either
customers. production or marketing.
Examples include advertising, shipping, sales travel, Examples include executive compensation, general
sales commissions, sales salaries, and expenses accounting, secretarial, public relations and other
associated with finished goods warehouses. expenses that are related to the general
administration of the organization as a whole.
COST CLASSIFIED AS TO VARIABILITY

FIXED COST
- Items of cost which REMAIN CONSTANT IN TOTAL, irrespective of the volume of production.
- It is NOT RELATED TO ACTIVITY WITHIN THE RELEVANT RANGE.
TWO CATEGORIES OF FIXED COST
a. Committed fixed costs
- Costs that represent relatively LONG TERM COMMITMENTS on the part of the management
as a result of a past decision
- Examples: depreciation on equipment
b. Managed fixed costs
- Cost that are incurred on a SHORT TERM BASIS and can be more easily modified in
response to changes in management objective
- Examples: advertising, research and development and costs of training of employees.
TABLE OF FIXED COST
Activity Fixed Cost per unit Total Fixed Cost
1 ₱1,500 ₱1,500
2 750 1,500
5 300 1,500
10 150 1,500
20 75 1,500
30 50 1,500
- The fixed cost per unit WILL DECREASE as the volume or units of production INCREASES and
vice versa
VARIABLE COST
- Items of cost which VARY DIRECTLY IN TOTAL in relation to volume of production
- Examples: direct materials, direct labor, royalties and commission of salesmen
SAMPLE TABLE OF VARIABLE COST
1 ₱100 ₱100
10 100 1,000
20 100 2,000
30 100 3,500
- Total variable cost INCREASES OR DECREASES PROPORTIONATELY with the activity, but the
variable cost per unit REMAINS THE SAME
MIXED COST
- Items of cost with FIXED AND VARIABLE COMPONENTS
TWO TYPES OF MIXED COST
a. Semi-variable Cost
- The fixed portion of a semi-variable cost usually represents a MINIMUM FEE for making a
particular item or service available.
- Example
● Cost of electricity where there is a basic minimum charge plus a specified cost per
kilowatt hour above the minimum
● Cost charged for using a cell phone under a plan
b. Step Costs
- The fixed portion CHANGES ABRUPTLY AT VARIOUS ACTIVITY LEVELS
- Example
● Supervisor’s salary
○ Assume one supervisor with a salary of P30,000 is needed for every 10 workers
○ If 15 workers are used, two supervisors (P60,000 in total) will be needed
METHODS FOR COST BEHAVIOR ANALYSIS

1. High Low Method
2. Least Square Method (Regression)
FORMULAS:
Equation 1 Y = FC + VX
or simply:
y = a + bx
Equation 2 ∑y = na + b∑x
Equation 3 ∑xy = ∑xa + b∑x2
Notes:
y - Total Cost → Dependent Variable
FC/a - Fixed Cost → Intercept
V/b - Variable Cost Per Unit → Slope
x - Activity Level → Independent Variable
n - Number of Samples (e.g. months)
Example:
Month Units Produced Production Cost
April 500 4,000
May 700 5,250
June 900 6,000
July 600 4,750
August 800 5,500
September 550 4,250
1. High-Low Method
I. Solve for the b = Cost of the Highest Activity Level - Cost of the Lowest Activity Level
Variable Highest Activity Level - Lowest Activity Level
Cost Per
Unit (b) **Highest Activity Level: 900
**Lowest Activity Level: 500
b = 6,000 - 4,000
900 - 500
b = 2,000
400
b=5
II. Solve for the Use Equation 1: y = a + bx

Fixed Cost
(a)
Highest Activity Level Lowest Activity Level
6,000 = a + 5(900) 4,000 = a + 5(500)

6,000 = a + 4,500 4,000 = a + 2,500
6,000 - 4,500 = a 4,000 - 2,500 = a
1,500 = a 1,500 = a
a = 1,500
EQUATION FOR
THE HIGH-LOW y = 1,500 + 5x
METHOD
2. Least Square Method (Regression)
SOLVE FOR THE VARIABLE COST PER UNIT (b)

I. Regression Table
n x y xy x2
April 500 4,000 2,000,000 250,000
May 700 5,250 3,675,000 490,000
June 900 6,000 5,400,000 810,000
July 600 4,750 2,850,000 360,000
August 800 5,500 4,400,000 640,000
September 550 4,250 2,337,500 302,500
∑ 4,050 29,750 20,662,500 2,852,500
II. Divide the Sum of the Units Produced (∑x) to the Number of Months (n)
= 4,050/6
= 675
III. Multiply the value (from step II) to Equation 2

675 [29,750 = 6a +b (4,050)] 675
20,081,250 = 4,050a + b (2,733,750) → NEW EQUATION 2
IV. Solve for b (variable cost per unit)
***(Equation 3 minus New Equation 2)
Equation 3: 20,662,500 = 4,050a + b (2,852,500)
Equation 2 (New): 20,081,250 = 4,050a + b (2,733,750)
581,250 = b (118,750)
b = 4.89473
b = 4.89
SOLVE FOR THE FIXED COST (a)

Use Equation 2: 29,750 = 6a + b (4,050)
29,750 = 6a + 4.89473 (4,050)
29,750 = 6a + 19,823.68
29,750 - 19,823.68 = 6a
9,926.32 = 6a
1,654.39 = a
EQUATION FOR LEAST SQUARE METHOD y = 1,654.39 + 4.89x

(REGRESSION)
Sample Questions:
1. Using high low method, compute the variable cost per unit: ₱5
2. Using high low method, what is the monthly cost formula for the company: y = 1,500 + 5x
3. Using regression (least square method), compute the monthly fixed cost: ₱1,654.39
4. Using the high low method, what is the production cost if the units produced was 750
Equation for high low method: y = 1,500 + 5x
y = 1,500 + 5(750)
y = 1,500 + 3,750
y = 5,250
III. JOB ORDER COSTING
JOB ORDER COSTING

- It keeps the cost of various jobs or contracts separate during their manufacture or construction.
- This method is applicable to job order work in factories, workshops, and repair shops, as well as to
work by builders, construction engineers, shipbuilders, and printers.
- The cost unit is the job, the work order, or the contract; the records will show the cost of each.
MAJOR SOURCE DOCUMENTS FOR JOB ORDER COSTING
A document that lists the total cost for a single job.
Designed to collect the costs of materials, labor and factory

overhead applicable to a specific job.
Each cost sheet is given a job number which is placed on

each material requisition and labor time ticket used in
JOB ORDER COST SHEET connection with the job.
These records accumulate product costs of specific units or

small batches of units for both product costing and control
purposes.
The file of job-order sheets for uncompleted jobs serves as

a perpetual book inventory and the subsidiary ledger for
Work in Process Control.
These records are the perpetual book inventory of costs and

quantities of materials on hand.
MATERIALS STOCK CARD
The file of materials stock cards for unused materials is the
subsidiary ledger for Materials Control.
These records are the perpetual book inventory of costs and

quantities of completed goods held for sale.
FINISHED GOODS STOCK CARD
The file of finished goods stock cards for unsold goods is
the subsidiary ledger of Finished Goods Control.
These records accumulate detailed manufacturing overhead

costs by department.
FACTORY OVERHEAD CONTROL COST
RECORD The file of these records for the accounting period is the
subsidiary ledger for Factory Overhead Control.
As the source documents for charging costs to jobs and

MATERIALS REQUISITION, TIME TICKET AND departments.
CLOCK CARD
To aid in fixing responsibility for control and usage of
materials and labor.
ACCOUNTING PROCEDURES FOR MATERIALS

1. Recording the purchase of materials
a. Entry to record the purchase of materials:
Materials xxxx
Accounts Payable xxxx
***An entry is made on the stock card under the RECEIVED section
b. Entry to record the return of materials to vendor:

Materials xxxx
***An entry is made on the stock card under the RECEIVED section
enclosed in parenthesis to indicate reduction in quantity.
MATERIALS
DEBIT CREDIT
● Beginning Inventory ● Cost of direct materials issued

● Purchase of Materials ● Cost of indirect materials issued
● Freight-in ● Cost of materials returned to suppliers
● Cost of excess materials
● Returned from factory
2. Recording the issuance of materials

- When a job is started, the materials needed for the job are issued based on the materials
requisitions prepared by the employees.
- A copy of the requisition is given to the storekeeper, which will serve as the basis for the
materials to be issued.
- Work in Process
● Controlling account used to record the flow of the elements of cost through the factory
during a given period.
WORK IN PROCESS
DEBIT CREDIT
● Beginning Inventory ● Cost of materials, labor and factory

● Cost of DIRECT MATERIALS issued to overhead applied to JOBS
production COMPLETED during the period
● Cost of DIRECT LABOR ● Cost of DIRECT MATERIALS
● Amount of OVERHEAD APPLIED to RETURNED to the warehouse
production
a. Entry to record the issuance of direct materials:

Work in Process xxxx
Materials xxxx
***An entry is made on the stock card under the ISSUED section and also
on the cost sheet - Materials
b. Entry to record the issuance of indirect materials:

Factory overhead control xxxx
Materials xxxx
***An entry is made on the stock card under the ISSUED section and also
on the overhead analysis sheet
ACCOUNTING PROCEDURES FOR LABOR

- In most factories, clock cards/time records are used to record the days or hours worked by each
employee.
- Clock cards/time records are used as the basis in computing the gross earnings of employees who are
paid hourly wages.
- Time tickets for various jobs are sorted, priced and summarized, and the time ticket hours should be
reconciled with the clock card hours.
1. Entry to record the payroll and the incurrence of liability:

Payroll xxxx
Withholding Tax Payable xxxx
SSS Premium Payable xxxx
PhilHealth Contribution Payable xxxx
Accrued Factory Payroll xxxx
2. Entry to record the distribution of payroll:

Payroll xxxx
3. Entry to record the payment of payroll:

Accrued Factory Payroll xxxx
Cash xxxx
- The Work in Process account is used to charge the jobs with the direct labor cost.
- Factory overhead control is charged for the indirect labor cost incurred
PAYROLL
DEBIT CREDIT
● Total wages/salaries EARNED BY ● Recording the distribution of payroll

FACTORY PERSONNEL during the
payroll period
● Recording the payroll and the
incurrence of liability
ACCRUED FACTORY PAYROLL
DEBIT CREDIT
● Recording the payment of the payroll ● Balancing Beginning

● Recording the payroll and the
incurrence of liability
ACCOUNTING PROCEDURES FOR FACTORY OVERHEAD

- Factory/Manufacturing Overhead
● Controlling account for accumulating the indirect charges incurred in production.
FACTORY OVERHEAD FACTORY OVERHEAD OVER/UNDER APPLIED
CONTROL APPLIED OVERHEAD
Accumulate actual overhead Accumulate estimated factory Difference between the actual
incurred overhead applied to production. overhead incurred and the applied
overhead.
Predetermined rate is used and it
is computed using any of the
following:
● Units of Production
● Direct Material Cost
● Direct Labor Hours
● Direct Labor Cost
● Machine Hours
- As items in the factory overhead control account are incurred, the Factory Overhead Control account
is DEBITED.
MANUFACTURING OVERHEAD CONTROL

DEBIT CREDIT
● Cost of INDIRECT MATERIALS and ● CLOSING OF THE BOOKS, at the end

supplies issued from the warehouse of the accounting period
● Cost of INDIRECT LABOR
● Cost of OTHER INDIRECT EXPENSES
incurred by the company
MANUFACTURING OVERHEAD APPLIED

DEBIT CREDIT
● CLOSING OF THE BOOKS, at the end ● Cost of overhead allocated to

of the accounting period production and computed by
multiplying the actual factor being used
during the period by the
PREDETERMINED RATE
OVER/UNDER APPLIED OVERHEAD

DEBIT CREDIT
● Actual Overhead > Applied Overhead ● Actual Overhead < Applied Overhead
(Underapplied Overhead) (Overapplied Overhead)
1. Entry for the applied factory overhead

Applied Factory Overhead xxxx
2. Closing entry of the Factory Overhead Control account and the Factory Overhead account (to
be done MONTHLY)
a. End of the month
Factory Overhead Applied xxxx
Under/Over-applied overhead xxxx
b. End of the year

Cost of Goods Sold xxxx
Under/Over-applied overhead xxxx
3. Closing is to be done YEARLY (End of the year):

ACCOUNTING PROCEDURES FOR FINISHED GOODS

1. Entry to record the cost of the jobs completed:
Finished Goods xxxx
2. Entry when the finished goods are delivered to customers:

Accounts Receivable xxxx
Sales xxxx
Finished Goods xxxx
3. Entry when a job is delivered directly to a customer, entries may be merged into one:
- Finished Goods
● Controlling account used to record the flow of the cost of goods completed and transferred to
the finished goods storeroom during the period
FINISHED GOODS
DEBIT CREDIT
● Beginning Inventory ● Cost of finished goods SOLD during

● Factory cost of job order completed the period
● Cost of goods RETURNED BY THE
CUSTOMER
- Cost of Goods Sold

● Account used to accumulate the cost of finished goods disposed through sale to customers
COST OF GOODS SOLD

DEBIT CREDIT
● Cost of finished goods DISPOSED ● Cost of finished goods RETURNED

THROUGH SALE to customers BY CUSTOMERS
● Adjustment for UNDER-APPLIED ● Adjustment of OVERAPPLIED
FACTORY OVERHEAD FACTORY OVERHEAD
● Balance of the account at the END OF
THE PERIOD at the same time
DEBITING INCOME SUMMARY
IV. MATERIALS
SYSTEM OF ACCOUNTING FOR MATERIALS ISSUED TO PRODUCTION AND ENDING MATERIALS

INVENTORY
PERIODIC INVENTORY SYSTEM PERPETUAL INVENTORY SYSTEM
The purchase of direct and indirect materials is The purchase of direct and indirect materials
recorded in account: Purchases is recorded in account: Materials Inventory
Ending Materials Inventory is determined by a Both the cost of materials and ending
PHYSICAL COUNT OF THE MATERIALS ON materials inventory CAN BE DIRECTLY
HAND AT THE END OF THE PERIOD ASCERTAINED AFTER EACH
TRANSACTIONS
COMMONLY USED CONTROL PROCEDURES

ORDER CYCLING Materials on hand are reviewed on a REGULAR or PERIODIC
CYCLE.
The cycle length will differ according to the type of material being
reviewed.
Essential or important materials will have a shorter review cycle

than less important items.
MIN-MAX METHOD Based on the assumption that materials inventory have minimum
and maximum levels.
Minimum quantity will represent the order point.
When the inventory reaches the minimum level, an order is placed

to increase the inventory to the maximum level.
TWO-BIN METHOD Used for materials that are considered inexpensive and/or
nonessential.
There are divided into two separate bins:

● FIRST BIN - contains the quantity of materials that will be
used between the time an order is received and the next
order
● SECOND BIN - contains the quantity of materials that will
be used between the ordering and delivery, plus additional
units of safety stock.
AUTOMATIC ORDER SYSTEM Used by most companies that are computerized.
An order is automatically placed when the level of inventory

reaches a predetermined order point quantity.
ABC PLAN Used by companies with a large number of materials, EACH ONE
HAVING A DIFFERENT VALUE
This method is a systematic way of grouping materials into

SEPARATE CLASSIFICATION and determining the degree of
control that ech group requires.
MATERIAL CONTROL
Physical Control of Materials
1. Limited Access - only AUTHORIZED PERSONNEL should have access to materials storage area.
2. Segregation of Duties - the following functions should be segregated to MINIMIZE OPPORTUNITIES
for misappropriation of inventories.
3. Accuracy in Recording - inventory records should permit the determination of inventory quantities on
hand upon request, and cost records should provide the data for the valuation of inventories for the
preparation of financial statements.
Controlling the Investment in Materials

1. Order Point - the point at which an item should be ordered, which occurs when the predetermined
minimum level of inventory on hand is reached.
a. Usage - the anticipated rate at which the materials will be used.
b. Lead time - the estimated time interval between the placement of an order and receipt of the
material.
c. Safety stock - the estimated minimum level of inventory needed to protect against running out
of stock
Formula for Order Point: Daily Usage x Lead Time

Formula for Reorder Point: (Daily Usage x Lead Time) + Safety Stock
EXAMPLE
The expected daily usage of an item of material is 500 units, the anticipated lead time is 10 days, and
estimated safety stock is 1,200 units.
Order Point
Order Point = 500 units x 10 days
= 5,000 units
Reorder Point
Reorder Point = (500 units x 10 days) + 1,200 units
= 6,200 units
2. Economic Order Quantity (EOQ) - the purchase order which results in the minimum total inventory
cost.
Factors to be considered in determining Factors to be considered in determining

ORDERING COSTS CARRYING COSTS
1. Salaries and wages of employees 1. Materials storage and handling costs

engaged in purchasing, receiving and 2. Interest, insurance, and property taxes
inspecting materials 3. Loss due to theft, deterioration, or
2. Communication costs associated with obsolescence
ordering, such as telephone, postage and 4. Records and supplies associated with the
forms of stationery carrying of inventories
3. Materials accounting and record keeping
METHODS OF COMPUTING ECONOMIC ORDER QUANTITY (EOQ)

SAMPLE PROBLEM
D Company buys a material for ₱20 per unit. The total annual needs are 6,000 units, with a carrying cost of
₱2.00 per unit and order cost of ₱15.00
Number of units required annually 6,000 units
Carrying Cost ₱2.00
Ordering Cost ₱15.00
1. FORMULA METHOD
2𝐶𝑁
EOQ =
𝐾
EOQ - Economic Order Quantity

C - Cost of placing an order/Ordering Cost
N - Number of units required annually
K - Carrying Cost per Unit of Inventory
EOQ
2(15)(6,000)
=
2
180,000
=
2
= 90, 000
EOQ = 300 units
Annual ordering cost

Annual ordering cost 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑎𝑛𝑛𝑢𝑎𝑙𝑙𝑦
= × 𝑂𝑟𝑑𝑒𝑟𝑖𝑛𝑔 𝐶𝑜𝑠𝑡
𝐸𝑂𝑄
6,000
= x 15
300
Annual ordering cost = ₱300.00
Annual carrying cost

Annual carrying cost 𝐸𝑂𝑄
= × 𝐶𝑎𝑟𝑟𝑦𝑖𝑛𝑔 𝐶𝑜𝑠𝑡
2
300
= x2
2
Annual ordering cost = ₱300.00
Average Inventory
Average Inventory 𝐸𝑂𝑄
=
2
300
=
2
Average Inventory = 150 units
Number of Orders in a Year

Number of Orders 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑎𝑛𝑛𝑢𝑎𝑙𝑙𝑦
=
𝐸𝑂𝑄
6,000
=
300
Number of Orders = 20 orders
2. TABULAR METHOD
Formulas for the Tabular Method
Order Size Number of units per order
Number of Orders 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 𝑟𝑒𝑞𝑢𝑖𝑟𝑒𝑑 𝑎𝑛𝑛𝑢𝑎𝑙𝑙𝑦

𝑂𝑟𝑑𝑒𝑟 𝑆𝑖𝑧𝑒
Total Order Cost Number of Orders x Ordering Cost
Average Inventory 𝑂𝑟𝑑𝑒𝑟 𝑆𝑖𝑧𝑒

2
Total Carrying Cost Average Inventory x Carrying Cost
Total Order & Carrying Cost Total Order Cost + Total Carrying Cost
***Assume that the following order sizes are: 100 units, 200 units, 600 units, 1,200 units and 1,500 units
Order Size No. of Orders Total Order Average Total Carrying Total Order &
Cost Inventory Cost Carrying Cost
100 60 ₱900.00 50 ₱100.00 ₱1,000.00
200 30 450.00 100 200.00 650.00
600 10 150.00 300 600.00 750.00
1,200 5 75.00 600 1,200.00 1,275.00
1,500 4 60.00 750 1,500.00 1,560.00

**The GREATER the inventory on hand → the GREATER the total carrying cost, but LESSER the total ordering cost
METHODS OF COSTING MATERIALS

EXAMPLE:
August 1 Beginning Balance 1,600 units at ₱6.00
August 5 Purchased 400 units at ₱7.00
August 16 Issued 800 units
August 27 Issued 1,000 units
1. First-In, First-Out - inventories are stated in terms of the most recent costs and expense is charged
with the earliest cost incurred.
Date Received Issued Balance
August 1 1,600 at ₱6.00 9,600.00
August 5 400 at ₱7.00 1,600 at ₱6.00 9,600.00

400 at ₱7.00 2,800.00
August 9 400 at ₱8.00 1,600 at ₱6.00 9,600.00

400 at ₱7.00 2,800.00
400 at ₱8.00 3,200.00
August 16 800 at ₱6.00 800 at ₱6.00 4,800.00

400 at ₱7.00 2,800.00
400 at ₱8.00 3,200.00
August 24 600 at ₱9.00 800 at ₱6.00 4,800.00

400 at ₱7.00 2,800.00
400 at ₱8.00 3,200.00
600 at ₱9.00 5,400.00
August 27 800 at ₱6.00 200 at ₱7.00 1,400.00

200 at ₱7.00 400 at ₱8.00 3,200.00
600 at ₱9.00 5,400.00
COST OF MATERIALS ISSUED
800 at ₱6.00 4,800.00
800 at ₱6.00 4,800.00
200 at ₱7.00 1,400.00
TOTAL 1,800 units 11,000.00
ENDING INVENTORY (AUG 31)
200 at ₱7.00 1,400.00
400 at ₱8.00 3,200.00
600 at ₱9.00 5,400.00
TOTAL 1,200 units 10,000.00
2. Average
a. Weighted Average Method - used for PERIODIC INVENTORY SYSTEM; this method is
based on the assumption that units issued should be charged at an average cost.
1,600 at ₱6.00 9,600.00
400 at ₱7.00 2,800.00
400 at ₱8.00 3,200.00
600 at ₱9.00 5,400.00
TOTAL 3,000 units 21,000.00
Weighted Average Unit Cost 21,000

= 3,000
= ₱7.00
COST OF MATERIALS ISSUED = 1,800 units x ₱7.00
= ₱12,600.00
ENDING INVENTORY = 1,200 units x ₱7.00
= ₱8,400.00
b. Moving Average Method - used for PERPETUAL INVENTORY SYSTEM; this method is
calculated after each new purchase, and this amount is used to cost each subsequent
issuance until another purchase is made.
Date Received Issued Balance
August 1 1,600 at ₱6.00 9,600.00

August 5 400 at ₱7.00 400 at ₱7.00 2,800.00
2,000 at ₱6.20 12,400.00

August 9 400 at ₱8.00 400 at ₱8.00 3,200.00
2,400 at ₱6.50 15,600.00

August 16 800 at ₱6.50 (800 at ₱6.50) (5,200.00)
1,600 at ₱6.50 10,400.00

August 24 600 at ₱9.00 600 at ₱9.00 5,400.00
2,200 at ₱7.18 15,800.00
August 27 1,000 at ₱7.18 (1,000 at ₱7.18) (7,180.00)
August 31 (end) 1,200 at ₱7.18 8,620.00
COST OF MATERIALS ISSUED:
800 at ₱6.50 5,200.00
1,000 at ₱7.18 7,180.00
TOTAL 1,800 units 12,380.00
FREIGHT-IN
1. Direct Charging ● Freight incurred on the purchase of raw materials is
ADDED TO THE INVOICE PRICE.
● Account DEBITED for the freight is MATERIALS.
If two or more materials are purchased and delivered at the

same time, the freight must be allocated using the following
methods:
Relative Peso Value Method Relative Weight Method
Freight is allocated on the Freight is allocated on the

basis of the PESO VALUE of basis of the WEIGHT of the
the items purchased. items purchased.
EXAMPLE:
An invoice for X, Y, and Z is received from Heavyweight Co. Invoice totals are X - ₱125,000; Y -
₱75,000; Z - ₱100,000. The freight charges on this shipment of 18,000 pounds total ₱7,500. Weights
for the respective materials are 10,000, 6,000 and 7,500 pounds.
Formula for Cost per 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑎 𝑃𝑟𝑜𝑑𝑢𝑐𝑡

Pound 𝑊𝑒𝑖𝑔ℎ𝑡
Formula for Percentage 𝐹𝑟𝑒𝑖𝑔ℎ𝑡 𝐶ℎ𝑎𝑟𝑔𝑒

𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑎𝑙𝑙 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑠
Formula for Freight Per 𝐹𝑟𝑒𝑖𝑔ℎ𝑡 𝐶ℎ𝑎𝑟𝑔𝑒

Pound 𝑇𝑜𝑡𝑎𝑙 𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝑎𝑙𝑙 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑠
Relative Peso Value Method

Product Invoice Percentage Share in Freight Total Cost Cost Per Pound
X 125,000.00 2.50% 3,125.00 128,125.00 12.81
Y 75,000.00 2.50% 1,875.00 76,875.00 12.81
Z 100,000.00 2.50% 2,500.00 102,500.00 13.67
300,000.00 7,500.00 307,500.00
Computation for the Percentage:

7,500
= = 2.50%
300,000
Relative Weight Method

Product Weight Freight per Share in Freight Total Cost Cost Per Pound
Pound
X 10,000 0.3191 3,191.49 128,191.49 12.82
Y 6,000 0.3191 1,914.89 75,914.89 12.82
Z 7,500 0.3191 2,393.62 102,393.62 13.65
23,500 7,500.00 307,500.00
Computation for Freight Per Pound:
7,500
= 0.3191489362
23,500
JOURNAL ENTRY:
Materials 307,500
Accounts Payable 307,500
2. Indirect Charging Freight incurred on the purchase of raw materials is charged to

FACTORY OVERHEAD CONTROL account
JOURNAL ENTRY:
Materials 300,000
Factory Overhead Control 7,500
Accounts Payable 307,500
SPOILED UNITS, DEFECTIVE UNITS, SCRAP MATERIAL AND WASTE MATERIAL IN A JOB ORDER
COST SYSTEM
SPOILED UNITS These are units that do not meet production standards and are either sold
for their salvage value or discarded.
These units are taken out of the production and no further work is
performed on them, when they are discovered.
Entry to charged to the SPECIFIC JOB
Spoiled Goods xxxx
Entry to charged to ALL PRODUCTION

Spoiled Goods xxxx
Factory Overhead Control xxxx
DEFECTIVE UNITS These are units that do not meet production standards and must be
processed further in order to be salable as good units or as irregular.
Entry to charged to the SPECIFIC JOB

Materials xxxx
Payroll xxxx
Entry to charged to ALL PRODUCTION

Materials xxxx
Payroll xxxx
SCRAP MATERIAL These are left over from the production process that cannot be put back
into production for the same purpose.
Scrap recovered CAN BE TRACED to a specific job

Scrap/Scrap Materials xxxx
Scrap recovered are NOT TRACEABLE to a specific job

Miscellaneous Income xxxx
Scrap recovered FROM FACTORY SUPPLIES

WASTE MATERIALS These are left over from the production process that has no further use or
resale value and may require cost for their disposal.
Waste exceeding a specified normal level (based on past experience)

indicates INEFFICIENCIES in the production process and signals
management to take corrective action.
Allocated to ALL JOBS

Allocated to a SPECIFIC JOBS

Work in Process - (Job Number) xxxx
EXAMPLE #1 - Job 1234 called for the making of 5,000 units, with these unit costs:
Direct Materials ₱20.00
Direct Labor 15.00
Factory Overhead (allowance 10.00

₱1.00 for spoiled work)
TOTAL ₱45.00
1. When the order was completed, 250 rejected units were sold for ₱18.00 each.
ENTRIES:
a. Charged to SPECIFIC:
Work in Process 220,000
Materials 100,000
Payroll 75,000
Factory Overhead Applied 45,000
Solutions:
Materials = 5,000 x 20
Labor = 5,000 x 15
Overhead = 5,000 x 9
Spoiled Goods 4,500
Solutions:
Spoiled = 250 x 18
Finished Goods 215,500
Solutions:
Finished Goods = 220,000 - 4,500
b. Charged to ALL PRODUCTION:

Materials 100,000
Payroll 75,000
Solutions:
Materials = 5,000 x 20
Labor = 5,000 x 15
Overhead = 5,000 x 10
Spoiled Goods 4,500
Solutions:
Work in Process = 250 x 45
Spoiled = 250 x 18
Solutions:
Finished Goods = 220,000 - 11,250
2. 300 units were found to be defective and required the following additional costs: Materials -
₱4,000; Labor - ₱3,500; Overhead - ₱2,500
ENTRIES:
a. Charged to SPECIFIC:
Materials 100,000
Payroll 75,000
Materials 4,000
Payroll 3,500

Materials 100,000
Payroll 75,000
Materials 4,000
Payroll 3,500
EXAMPLE #2:
Strong Company is a manufacturer of sports apparels. During the month, the company cut and assembled
10,000 sports jackets. One hundred of the jackets did not meet specifications and were considered “seconds.”
Seconds are sold for ₱1,000.00 per jacket, whereas first quality jackets sell for ₱2,500.00. During the month,
Work in Process was charged for ₱3,600,000 of materials, ₱4,000,000 of labor and factory overhead is
applied at 120% of direct labor (including allowance of 20% of direct labor for spoiled units)
a. Charged to a SPECIFIC JOB:

Work in Process 11,600,000
Materials 3,600,000
Payroll 4,000,000
Factory Overhead Applied 4,000,000
Solutions:
Work in Process = 3,600,000 + 4,000,000 + 4,000,000
Spoiled Goods 100,000
Solutions:
Spoiled = 100 x 1,000
Finished Goods 11,500,000
Solutions:
Finished Goods = 11,600,000 - 100,000

Materials 3,600,000
Payroll 4,000,000
Factory Overhead Applied 4,800,000
Solutions:
Overhead = 4,000,000 x 120%
Work in Process = 3,600,000 + 4,000,000 + 4,800,000
Spoiled Goods 100,000
Solutions:
Spoiled
= 100 x 1,000
Unit Cost - Materials

= 3,600,000/10,000 sports jackets
= 360
Unit Cost - Labor

= 4,000,000/10,000 sports jackets
= 400
Unit Cost - Overhead
= 4,800,000/10,000 sports jacket
= 480
Total Unit Cost

= 360 + 400 + 480
= 1,240
Work in Process
= 100 x 1,240
Finished Goods 12,276,000
Solutions:
Finished Goods = 12,400,000 - 124,000
c. UNIT COST for both a (specific job) and b (all production):

𝐶𝑜𝑠𝑡 𝑜𝑓 𝑢𝑛𝑖𝑡𝑠 (𝑟𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑏𝑎𝑙𝑎𝑛𝑐𝑒)
Formula:
𝑅𝑒𝑚𝑎𝑖𝑛𝑖𝑛𝑔 𝑈𝑛𝑖𝑡𝑠
Charged to a Specific Job Charged to all production
11,500,000 12,276,000
= =
(10,000 − 100) (10,000 − 100)
= ₱1,161.62 = ₱1,240.00
V. LABOR
LABOR The compensation paid to employees who engage in production

related activities represents FACTORY LABOR.
Difference between Wages and Salaries

Wages Salaries
This is the principal labor cost, These are FIXED payments

which is paid to production made regularly for managerial
workers. or clerical services.
Payments are made on
HOURLY, DAILY or
PIECEWORK BASIS
Gross earnings - the compensation of an employee and includes

regular pay and overtime premiums.
PROCEDURES FOR RECORDING PAYROLL COSTS

1. Recording the numbers of hours used in total and by job
2. Recording the quantity produced by the workers
3. Analyzing the hours used by employees to determine how time is to be charged
4. Allocation of payroll costs to jobs and factory overhead accounts
5. Preparation of the payroll
WAGE PLANS
The plan, established by management, is approved by the union and should comply with regulations of
government agencies.
HOURLY-RATE PLANS Wages are calculated by multiplying the rate per hour by the
number of hours worked.
Does not provide the incentive for the employee to achieve a high
level of productivity.
Merely “being on the job”
PIECE-RATE PLANS Wages are calculated by multiplying the employee’s output by

the rate (unit cost) per piece.
This provides an incentive for the employee to produce more.
The employee might sacrifice the quality of an item, in order to

maximize their earnings.
MODIFIED WAGE PLANS Features both hourly-rate and piece-rate plans.
Example - setting a minimum hourly wage that will be paid by the

company even if an established quota (number of outputs) is not
attained by an employee.
If the established quota is exceeded → additional payment per

piece would be added to the minimum wage level.
CONTROLLING LABOR COST

Maintaining labor records is the responsibility of the time-keeping and payroll departments.
● Time-keeping department - accounts for the time spent by the employees in the factory. (e.g. clock
cards, time tickets, production reports)
● Payroll department - computes each employee’s gross earnings, amount of withholdings and
deductions, and net earnings to be paid to the employee. (e.g. payroll records, employee’s earning
records, payroll summaries)
ACCOUNTING FOR LABOR COST
Time ticket Shows the employee’s starting and stopping time on each
job, the rate of pay and the amount of earnings
Individual Production Reports These are used, instead of time tickets, when labor costs
are calculated using piece rates
Labor Cost Summary This is used as the source for making a general journal entry
to distribute payroll to appropriate accounts.
Posted on the control accounts: Work in Process and
Factory Overhead in general ledger
Overtime May be CHARGED TO JOBS, TO FACTORY OVERHEAD,

or allocated PARTLY TO JOBS and PARTLY TO
OVERHEAD
Overtime Pay Extra pay wherein an employee works beyond the regularly
scheduled time but the employee is paid at the regular
hourly rate
Charged to WORK IN PROCESS account
Overtime Premium Additional rate earned when it is allowed for extra hours
worked
Charged to FACTORY OVERHEAD CONTROL account
Note: If the job contract stipulated that it was a rush

contract, it would be appropriate to charge the premium pay
to the Work in Process account, instead charging to the
Factory Overhead account
EXAMPLE:
An employee regularly earns ₱50 per hour for 40 hours in a week. Assuming the employee works 12 hours on
Monday and Wednesday and overtime premium is one and a half times the regular rate. The employee’s
earnings would be:
Regular Pay (40 hrs x ₱50) ₱2,000.00
Overtime Pay (8 hrs x ₱50) 400.00
Overtime Premium (8 hrs x (₱50/2) 200.00
TOTAL EARNINGS (weekly) ₱2,600.00
***Assuming the overtime is double-times the regular rate

Regular Pay (40 hrs x ₱50) ₱2,000.00
Overtime Pay (8 hrs x ₱50) 400.00
Overtime Premium (8 hrs x (₱50) 400.00
TOTAL EARNINGS (weekly) ₱2,800.00
EMPLOYER’S PAYROLL TAXES
Employers are responsible for periodically reporting and paying the taxes to the appropriate government
agencies.
SSS Contribution Benefits: pension upon retirement, salary, educational loan,

maternity leave, housing loan and sometimes calamity loan
Levied against both the employer and the employee
PhilHealth Contribution Benefits: when employee is hospitalized
Levied against both the employer and the employee in equal

amounts
Pag-ibig Funds Contribution Benefits: educational loan, salary loan, housing loan
Levied against both the employer and the employee in equal

amounts
Employee’s income tax The amount of tax to be withheld each period depends on the
(Withholding tax) following:
● Amount of the employee’s earnings
● Frequency of the payroll period
● Classification of the taxpayer and number of qualified
dependents
CLASSIFICATION FOR LABOR

Direct Labor Labor identified with particular products which is considered feasible to be
measured and charged to specific production order
Indirect Labor Labor identified with particular products but which is not considered
feasible to measure and charge to a specific production order
Labor expected for the benefit of production in general and not identified
with particular products.
Labor Overhead a. Waiting time/Idle time - cost of non-productive hours of direct

labor caused by lack of work, waiting for materials delays from
scheduling, machine breakdown and machine set-up.
EXAMPLE: A laborer regularly earns ₱50 for 40 hours in a week, but

was idle for 5 hours.
Work in Process (35hrs x ₱50) 1,750
Factory Overhead Control - Idle time (5hrs x ₱50) 250
Accrued Payroll 2,000
b. Make-up Pay - an employer will pay a minimum wage to an

employee, but an employee can earn more if they produce more.
The difference between the guaranteed pay and the actual pay is
charged to FACTORY OVERHEAD CONTROL.
EXAMPLE: A laborer is paid ₱20 per unit and was able to produce
120 units during the week. His weekly guaranteed pay is ₱2,500.
Work in Process (120 units x ₱20) 2,400
Factory Overhead Control - Make-up Pay 100
***From the previous example, assuming that the weekly

guaranteed pay is ₱2,000
Work in Process (120 units x ₱20) 2,400
c. Overtime Premium - represents amount paid, in excess of regular

rate, to employees working in excess of 8 hours in a day, or working
during holidays or their rest day.
EXAMPLE: Assume that the laborer worked for 50 hours during the
week and he was paid a time and a half
Work in Process (50 hours x ₱50) 2,500
Factory Overhead Control (10 hours x ₱25) 250
Note: If overtime results from the requirements of a SPECIFIC JOB

and not from random scheduling the overtime premium should be
charged to the WORK IN PROCESS account
d. Shift Premium/Shift Differential - extra pay to work during less

desirable evening shift or night shift; charged to FACTORY
OVERHEAD CONTROL
EXAMPLE: There are two laborers: one laborer works from 9:00
am-6:00 pm (with 1 hour break) and is paid ₱10.00 per hour; the
other laborer works from 8:00 pm-5:00am (with 1 hour break) and is
paid ₱12.00 per hour
Work in Process (40 hours x ₱10.00) 400
Factory Overhead Control 80
Accrued Payroll (40 hours x ₱12.00) 480
Solutions:
First Laborer (9:00am-6:00pm)
= 40 hours x ₱10.00
= ₱400.00
Second Laborer (8:00pm-5:00am)
= 40 hours x ₱12.00
= ₱480.00
Shift Premium/Shift Differential

= ₱480.00 - ₱400.00
= ₱80.00
e. Employer’s payroll taxes - amounts remitted to different

government agencies
VI. OVERHEAD
FACTORY OVERHEAD
These are costs that incurred in the factory that are not direct materials or direct labor.
EXAMPLES OF FACTORY OVERHEAD:

● Indirect materials
● Indirect Labor
● Rent on Factory Building
● Depreciation on Factory Building and Factory Equipment
● Maintenance of Factory Building and Factory Equipment
VARIABLE FACTORY These are factory overhead costs that VARY in direct proportion
OVERHEAD COSTS to the level of production, within the relevant range.
Variable cost per unit remains constant → Total cost varies either
increases or decreases
FIXED FACTORY OVERHEAD These are factory overhead costs that REMAIN CONSTANT
COSTS within the relevant range regardless of the varying levels of
production.
Variable cost per unit varies → Total cost remains constant
MIXED FACTORY OVERHEAD These are factory overhead costs that are NEITHER WHOLLY
COSTS FIXED NOR WHOLLY VARIABLE IN NATURE.
Have both characteristics.
Must ultimately be seperated into their fixed and variable

components for purposes of planning and control.
FACTORS TO BE CONSIDERED IN THE COMPUTATION OF OVERHEAD RATE

1. BASE TO BE USED/PLANT WIDE OR BLANKET RATE
DIRECT LABOR HOURS Direct relationship between factory overhead and direct labor
hours.
This base may be used also if there is a great disparity in hourly
wage rates.
FORMULA:
Factory Overhead 𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝐹𝑎𝑐𝑡𝑜𝑟𝑦 𝑂𝑣𝑒𝑟ℎ𝑒𝑎𝑑
Rate =
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝐷𝑖𝑟𝑒𝑐𝑡 𝐿𝑎𝑏𝑜𝑟 𝐻𝑜𝑢𝑟𝑠
= Factory overhead rate/direct labor hour
DIRECT LABOR COST Direct relationship between factory overhead and labor cost.
FORMULA:
Rate =
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝐷𝑖𝑟𝑒𝑐𝑡 𝐿𝑎𝑏𝑜𝑟 𝐶𝑜𝑠𝑡
x 100
= Percentage of direct labor cost
MACHINE HOURS Direct relationship between factory overhead and machine hours.
FORMULA:
Rate =
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑀𝑎𝑐ℎ𝑖𝑛𝑒 𝐻𝑜𝑢𝑟𝑠
= Factory overhead rate/machine hour
DIRECT MATERIAL COST Direct relationship between factory overhead and material cost.
FORMULA:
Rate =
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝐷𝑖𝑟𝑒𝑐𝑡 𝑀𝑎𝑡𝑒𝑟𝑖𝑎𝑙 𝐶𝑜𝑠𝑡
x 100
= Percentage of direct material cost
UNITS OF PRODUCTION This base is appropriate when a company or department

manufactures only one product.
FORMULA:
Rate =
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑈𝑛𝑖𝑡𝑠 𝑜𝑓 𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛
= Factory overhead rate/unit of production
EXAMPLE:
The Denmark Company estimates its factory overhead for the next period at ₱1,200,000. It is estimated that
30,000 units will be produced at a material cost of ₱1,000,000 and will require 50,000 direct labor hours at an
estimated cost of ₱800,000. The machines will run about 300,000 hours.
Direct Labor Hours Direct Labor Cost
1,200,000 1,200,000
= = x 100
50,000 𝑑𝑖𝑟𝑒𝑐𝑡 𝑙𝑎𝑏𝑜𝑟 ℎ𝑜𝑢𝑟𝑠 800,000
= ₱24.00/direct labor hour = 150% of direct labor cost
Machine Hours Direct Material Cost
1,200,000 1,200,000
= = x 100
300,000 𝑚𝑎𝑐ℎ𝑖𝑛𝑒 ℎ𝑜𝑢𝑟𝑠 1,000,000
= ₱4.00/machine hour = 120% of direct material cost
Unit of Production
1,200,000
=
30,000 𝑢𝑛𝑖𝑡𝑠
= ₱40.00/unit
2. DEPARTMENTALIZED OVERHEAD RATE

PRODUCING DEPARTMENTS SERVICE DEPARTMENTS
These include the production lines,which are the These include such activities as maintenance,
cost-accumulation centers in which work is personnel, employee services, and the provision of
performed directly on the goods being produced. heat, power and light, which are necessary for the
entire factory
Methods of Allocating Service Department Cost to Producing Departments

EXAMPLE:
Thermal Corporation has two producing departments and two service departments labeled P1, P2, S1 and
S2, respectively. Direct costs for each department and the proportion of services costs used by various
departments are as follows:
Cost Center Direct Costs Proportion of services used by:
S1 S2 P1 P2
P1 ₱90,000
P2 60,000
S1 20,000 - 0.80 0.10 0.10
S2 32,000 0.20 - 0.50 0.30
a. Direct Method
● This is the most widely used method
● This method ignores any service rendered by one service department to another.
● Allocates each service department’s total cost directly to the producing departments.
ILLUSTRATION:
P1 P2 S1 S2
Direct Costs 90,000.00 60,000.00 20,000.00 32,000.00
Allocated Factory Overhead:
S1 10,000.00 10,000.00 (20,000.00)
S2 20,000.00 12,000.00 (32,000.00)
Total Factory Overhead ₱120,000.00 ₱82,000.00
Base ₱50.00/MHrs ₱20.00/DLHrs
Factory Overhead Rate ₱2.40/MHr ₱4.10/DLHr
SOLUTIONS:
S1 S2
P1: P1:
20,000 𝑥 10 32,000 𝑥 50
= =
20 80
= 10,000.00 = 20,000.00
P2: P2:
20,000 𝑥 10 32,000 𝑥 30
= =
20 80
= 10,000.00 = 12,000.00
b. Step Method
● Also called a sequential method of allocation.
● This method recognizes services rendered by service departments to other service
departments
● This method is more complicated because it requires a sequence of allocation.
ILLUSTRATION:
P1 P2 S1 S2
Direct Costs 90,000.00 60,000.00 20,000.00 32,000.00
S1 2,000.00 2,000.00 (20,000.00) 16,000.00
S2 30,000.00 18,000.00 (48,000.00)
SOLUTIONS:
S1 S2
P1: P1:
20,000 𝑥 10 48,000 𝑥 50
= =
100 80
= 2,000.00 = 30,000.00
P2: P2:
20,000 𝑥 10 48,000 𝑥 30
= =
100 80
= 2,000.00 = 18,000.00
S2:
20,000 𝑥 80
=
100
= 16,000.00
c. Algebraic Method
● Also called a reciprocal method.
● This method allocates costs by explicitly including the mutual services rendered among all
departments.
ILLUSTRATION:
P1 P2 S1 S2
Direct Costs 90,000.00 60,000.00 20,000.00 32,000.00
S1 3,142.86 3,142.86 (31,428.57) 25,142.86
S2 28,571.43 17,142.86 11,428.57 (57,142.86)
ALGEBRAIC EQUATIONS:
S1 = 20,000 + 0.20 (S2)
S2 = 32,000 + 0.80 (S1)
SUBSTITUTION:
S1 = 20,000 + 0.20 (32,000 + 0.80 (S1))

S1 = 20,000 + 6,400 + 0.16 (S1)
S1 - 0.16(S1) = 26,400
0.84 (S1) / 0.84 = 26,400/0.84
S1 = 31,428.57143
S1 = 31,428.57
S2 = 32,000 + 0.80 (31,428.57143)

S2 = 32,000 + 25,142.857144
S2 = 57,142.86
CAPACITY PRODUCTION
THEORETICAL, MAXIMUM OR A capacity to produce at full speed without interruptions.
IDEAL CAPACITY
It gives no allowance for human capacity to achieve the maximum
nore due allowance for any circumstances that might result to
stoppage of production within or not within the control of
management.
PRACTICAL CAPACITY A capacity of production that provides allowance for

circumstances that might result to stoppage of production.
EXPECTED ACTUAL CAPACITY A capacity concept based on a short range outlook which is
feasible only for firms
NORMAL CAPACITY A capacity of production taking into consideration the utilization of

the plant facilities to meet commercial
METHOD OF ACCUMULATION OF FACTORY OVERHEAD COSTS

NON-CONTROLLING ACCOUNT An account for each kind of overhead expense according to their
SYSTEM nature is opened in the ledger.
Charges to such account are made upon incurrence of the

expense.
CONTROLLING ACCOUNT An Overhead Control account is opened in the general ledger

SYSTEM wherein the overhead incurred are charged.
A subsidiary ledger is maintained to show in detail the nature and

account of the expense.
ACTUAL OVERHEAD COSTS These are usually incurred daily and recorded periodically in the
general and subsidiary ledgers.
Computation of overhead chargeable to individual cost sheets - (FACTORY OVERHEAD APPLIED)

COMPUTATION FOR FACTORY OVERHEAD APPLIED:
Actual Factor incurred per cost sheet x Predetermined Overhead Rate
Factory overhead variance

● Difference between the actual factory overhead (Factory Overhead Control account) and overhead
charged to production (Factory Overhead Applied account)
Causes of the manufacturing overhead variance
● Spending Variance - the variance due to expense factors
● Idle Capacity or Volume Variance - the variance due to difference in volume and activity factors
1. Spending Variance
Actual Factory Overhead Incurred ₱xxx
Less: Budget allowed based on capacity use:
Fixed Factory Overhead ₱xxx
Variable Factory Overhead xxx xxx
Spending Variance ₱xxx
2. Idle Capacity or Volume Variance

Budget allowed based on capacity use ₱xxx
Less: Factory Overhead Applied xxx
Idle Capacity Variance ₱xxx
EXAMPLE:
The David Corporation made the following data available from its accounting records and reports:
Budgeted Factory Overhead ₱300,000
Budgeted Direct Labor Hours 100,000 hours
Variable Factory Overhead Rate ₱1.00/DLHr
Actual Factory Overhead ₱350,000
Actual Direct Labor Hours Used 110,000 hours
1. Spending Variance
Actual Factory Overhead Incurred ₱350,000.00
Less: Budget allowed based on capacity use:
Fixed Factory Overhead ₱200,000.00
Variable Factory Overhead 110,000.00 310,000.00
Spending Variance ₱40,000.00
2. Idle Capacity or Volume Variance

Budget allowed based on capacity use ₱310,000.00
Less: Factory Overhead Applied (110,000 x ₱3.00) 330,000.00
Idle Capacity Variance (₱20,000.00)
SOLUTION:
Factory Overhead Rate ₱300,000
=
100,000 𝑑𝑖𝑟𝑒𝑐𝑡 𝑙𝑎𝑏𝑜𝑟 ℎ𝑜𝑢𝑟𝑠
= ₱3.00/DLHr
Variable Overhead Cost = 100,000 hours x ₱1.00

= ₱100,000.00
Total Per Hour
Fixed Overhead ₱200,000.00 ₱2.00
Variable Overhead 100,000.00 1.00
TOTAL ₱300,000.00 ₱3.00

Batch 2024 - Cost Accounting

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BATCH 2021: COST ACCOUNTING AND CONTROL

SAN BEDA UNIVERSITY - BS ACCOUNTANCY

I. INTRODUCTION TO COST ACCOUNTING

COST ACCOUNTING DEFINED COST ACCOUNTING SYSTEM

A branch of accounting concerned with

Example: Companies producing

USES OF COST INFORMATION

1. Nature Buy and Sell Produce and Sell

2. Inventory Merchandise Inventory (Ready for Raw Materials, Work in Process,

PLANNING AND CONTROL

Strategic Planning Long range goals

Objective to determine the overall

Tactical Planning Shorter range of plans

Emphasizes plans to achieve the strategic

Operations Planning Day-to-day implementation of tactical

Emphasizes the coordination of the major

CONTROL Process of monitoring the company’s operations.

COST OF GOODS SOLD STATEMENTS

Beginning Inventory xxx

Purchase Returns (xxx)

Purchase Discounts (xxx)

Net Purchase xxx

Goods Available for Sale xxx

Ending Inventory (xxx)

COST OF GOODS SOLD XXX

Beginning Raw Materials xxx

Purchases (Raw Materials) xxx

Purchase Returns (xxx)

Purchase Discounts (xxx)

Net Purchase xxx

Total Materials Available for Sale xxx

Ending Raw Materials (xxx)

Raw Materials Used XXX

Direct Labor Cost XXX

Factory Overhead XXX

TOTAL MANUFACTURING COST XXX

Beginning Work-In-Process xxx

Total Work-In-Process XXX

Ending Work-In-Process (xxx)

COST OF GOODS MANUFACTURED XXX

Beginning Finished Goods xxx

Total Goods Available for Sale XXX

Ending Inventory (xxx)

COST OF GOODS SOLD XXX

II. THE COST AND MANAGEMENT ACCOUNTING FRAMEWORK

MANUFACTURING COSTS/PRODUCT COSTS/INVENTORIABLE COSTS

Examples of other indirect factory

NON-MANUFACTURING COSTS/PERIOD COSTS

COST CLASSIFIED AS TO VARIABILITY

METHODS FOR COST BEHAVIOR ANALYSIS

Equation 3 ∑xy = ∑xa + b∑x2

Month Units Produced Production Cost

April 500 4,000

May 700 5,250

June 900 6,000

July 600 4,750

August 800 5,500

September 550 4,250

II. Solve for the Use Equation 1: y = a + bx