CHAPTER 3 COST ACCOUNTING CYCLE LEARNINGS OBJECTIVES Upon completion of this chapter, you should be able to e Understand the cost accounting cycle © Differentiate service, merchandising, and a- manufacturing entities Distinguish between and account for direct and indirect materials and labor as they are used in the production process Prepare the different financial statements for a service entity merchandising entity and manufacturing entity The objective of accounting, in general, is the accumulation of financial information that is useful in making economic decisions. Financial accounting focuses on the gathering of information to be used in the preparation of financial statements that meet the needs of investors, creditors, and other external users of financial information. The statements include a balance sheet, income statement, and statement of cash flows. Although these financial statements are useful to management as well as external users, additional reports, schedules, and analyses are required for internal use in planning and control. Cost accounting provides the additional information required by management, and also provides data necessary for the preparation of external financial statement. For example, cost accounting procedures are necessary for the determination of cost of goods sold on the income statement and the valuation of inventories on the balance sheet. Manufacturing Inventory Accounts Most manufacturing companies use the perpetual inventory approach. In the remaining sections of this book, you are to assume that a company uses the perpetual. inventory system unless otherwise indicated. Accounting for inventories is the more {Hificult part of manufacturing accounting when compared with merchandising accounting. Instead of dealing with one account — Merchandise Inventory — three accounts must be used: Materials Inventory, Work in Process Inventory, and Finished Goods Inventory. 5152 Cost Accounting Materials Inventory * i jal: rol account, is made The’Materials Inventory account, also Materiais Inventory Control a a a is maintained in up of the balances of materials and supplies on hand. This account Bi ms ie much the same way as the Merchandise Inventory account. The mai pee signed. For the merchandisin the way that the costs of items in inventory are assigned. For the merchat Ig company, goods taken out Vhet of inventory are items that have been sold. When a sale is made, an entry is needed to debit Cost of Goods Sold and to credit Merchandise Inventory for the cost of the item. Materials, on the other hand, are usually not purchased for resale but for use in m anufacturing a product. Therefore, an item taken out of Materials Inventory and requisitioned into production is transferred to the Work in Process Inventory account ( not Cost ef Goods Sold). Figure 3-1 Merchandise Inventory vers Materials Inventory Goods costing 45,300 were sold Merchandise Inventory Cost of Goods Sold Balance 1/1 24,600 45,300 ——¥ go1g 45,300 Purchases 53,200 Balance 32,500 Materials costing 45,300 were issued to production “ Materials Inventory Work in Process Balance 1/1 25,100 at. Used . 45,300 Baiance 32,500 Balance 1/1. 24,600 | issued 45,300 Purchases 53,200Chapter 3 Cost Accounting Cycle 53 Work in Process Inventory All manufacturing costs incurred and assigned to products being produced are classified as Work in Process Inventory costs. This inventory account has no counterpart in merchandise accounting. A thorough understanding of the concept of Work in Process Inventory is vital in manufacturing accounting. Figure 3-2 shows the various costs that become part of Work in Process Inventory and the way costs are transferred out of the account. ‘The issuance of materials production, shown in Figure 3-1, begins the production process. These materials must be cut, molded, assembled, or in some other way chahged into a finished product, To make this change, people, machines, and other factory resources (buildings, electricity, supplies, and so on) must be used. All of these costs are manufacturing cost elements (product costs), and all of them enter imto accounting for Work in Process Inventory Direct labor earned by factory employees are also product costs. Since these people werk on specific products, their labor costs are assigned to those products by including the labor peso earned as part of the Werk in Process Inventory account. Overhead costs are product cosis and must be assigned to specific products. Thus, they, too, are included in the Work in Process Inventory account. As discussed earlier, there are many overhead costs to account for on an individual basis. To. reduce the amount.of work needed to assign these costs to products, they are accumulated and accounted for under one account title: Factory Overhead Control. These costs are then assigned to products by using an overhead rate. Using this rate, called -a_ predetermined overhead rate, costs are charged to Work in Process Inventory account. In the example in Figure 3-2, factory overhead costs of P 65,000 were charged to the Work in Process Inventory account. The predetermined’ overliead rate Will be discussed in Chapter 8. As products are completed, they are put into the finished goods storage area. These products now have materials, direct labor, and factory overhead costs assigned td them, When products are completed, their costs no longer belong to work in process. Therefore, when the completed products are sent to the storage area, their costs are transferred from the Work in Process Inventory account to the Finished Goods Inventory. The balance remaining in the Work in Process Inventory account (P 13.500 in Figure 3-2) represents the costs that were assigned to products partly completed and still in process at the end of the period.Bd Cost Accounting Figure 3-2. Ty i ventory ft ig he Work in Process Inventory Account ee were completed and transferred to finished goods inventory Work in Process Inventory Account Finished Goods Inventory Balance 1/1 25,100 ‘ompleted during the period 201,600 Balance 1/1 70,000 Materials 45,300 Completed 2 600 Labor 79.700 Overhead 65,000 Balance 13,500 Finished Goods Inventory The Finished Goods Inventory account, like Materials Inveny characteristics of the Merchandise Inventory account tory, has same i YAN have already seen how costs are moved from the Work in Process Inventory acy Fi area ‘Count to the Finished joods Inventory account. At this Point Finished Goods Inventory takes S the characteristics of Merchandise Inventory. If We compare the Merchandise inven account in Figure 3-1 with the accounting for Finished Goods Inventory in Figure 3. 3 we will see that the credit side of both accounts is handled in the same. way. Both examples show that when goods or products are sold, the Costs of those meagre moved from the Finished Goods Inventory account to the Cost of Goods Sold account. However, the accounting procedures affecting the debit side aro Finished Goods Inventory account differ from those for the Merchandise Inventory account. In a manufacturing firm salable Products are Produced rather’ the, urchased. All costs debited to the Finished Goods Inventory account represent transfers from the Work in Process Inventory acco period, the balance in the Finished Goods Invento; unt. At the end of ah e ry account is made us eounting of products completed but unsold as of that date. © UP of the costChapter 3 Cost Accounting Cycle 55 Accounting for Finished Goods Inventory Products costing P 240,500 Figure 3-3. were sold during the period Finished Goods Inventory Cost of Goods Sold Balance 1/1 70,000 |Sold 240,500 old 240,500 Completed 201,600 Balance 31,100 For the merchandising concern, the cost of goods sold is computed as follows: Beginning merchandise inventory Plus: Purchases (merchandise) Merchandise available for sale Less: Merchandise inventory end Costof goods sold ‘The amount of purchases represents the cost of the goods which were acquired during the period for resale. Since the manufacturing concem makes rather than buys the product it has available for sale, the term “finished goods inventory” replaces “merchandise inventory” and the term “cost of goods manufactured” replaces “purchases” in determining the cost of goods sold. Beginning finished goods inventory Plus:_Cost of goods manufactured Total goods available for sale Less: Finished goods inventory end Cost.of goods sold eee Regardless of which costing system is used, a cost of goods manufactured (CotGM) statement is prepared to summarize the manufacturing activity of the period, Cost of Goods Manufactured for a manufacturing firm is equivalent to purchases for a merchandising firm, Although it may take different forms, essentially the CofGM Statement is a summary of the direct materials, direct labor, factory overhead, and work-in-place (WP) account.— 56 Cost Accounting NTS OF MANUFACTURING CosT Manufacturing or Production costs are classified into three basic elements; (| materials, (2) dire ) direct ct labor, and (3) factory overhead, Direct materials bags, Materials tha adily identified wi Examples are: sandpaper used in sq chinery. Classified also as ind © part of the finished Product by ‘ant, such as thread, Screws, rj WS, Tivets, bolts, ng Direet labor The cost of labor for those employ manufactured. are classifi ied as direct Ig operators or assembly line workers, called indirect material lubricants used on ma actually becom insignific Is. nding furniture, and rect materials are materials that ils, nMOS costs are relatively ails, and glue, tly on the product © salaries of machine The wages and salaries of employees Who Process but who do ate required for ‘rin hot work directly on he units bein, magmanefatrng considered indirect labor, Examples are: wa inspectors, supervisors, and BES and sal ‘8 Manufactured are - and salari maintenance Personnel, Anes Of department heads, Factory overhead Includes all costs related to the meamufacturing of a py od 0% and direct labor, Examples are: indirect Product rial, cept direct materials i 5 lals, ini manufacturing expenses, such as depreciation ©n the snaitect labor, and other and equipment, supplies, heat, light, Power, maintenance insura, uilding, ache > ce, rent and taxes. Manufacturing Cost Flow : Product costing, inventory Valuation, and Financial reno: Structured flow of manufacturing costs This manus Poti ing = 4ebend pn a defined, Acturing COSt flow aeChapter 3 Cost Accounting Cycle 57 outlined in the discussion of the three manufacturing inventory accounts. Figure 3-4 summarizes the entire cost-flow process as it relates to accounts in the general Jedger. The journal entries to make this cost flow operational will be illustrated in the latter part of this chapter. . Figure 3-4 Manufacturing Cost Flow Materials Inventory Factory Payroll Factory Overhead Control Bal.1/124,000|ssued 45,300 DL 79,700 79,700 Total mfg... 65,900 Purch, 53,200 cost 65,000 Bal. 31,900 Work in Process Inventory Bal. 1/1 25,100 |Completed 201,600 Materials 45,300 Labor 79,700 > OH 65,000 Bal. 13,500 Se Bal. 1/1. 70,000 Sbld 240,500 ——Sekd240,500 ‘ompleted 201,600 Bal. 31,100 trate on the general pattern of manufacturing cost flow, as shown in Meese. The cost flow begins with costs being incurred. Manufacturing costs sat in many ways. They may be cash payments, incurred liabilities, fixed asset depreciation, or expired prepaid expenses. Once these costs have been incurred they are recorded as either direct materials, direct labor, or58 factory overhead cost: to the Work in Proc: assigned to fii In much the Cost Accounting s. As the resources are used up, the company transfers is a ess Inventory account. When production is comp A . nished units are transferred to the Finished Goods ser (cana Same way, costs attached to units sold are transferred toll . — x TO0ds Sold account. Before going on, compare the cost flow as it moves d ne the general ledger ace, ounts in Figure 3-4 with the general pattern shown in Figure 3- 5. Both figures show the same type of cost flow. Figure 3-5 COST FLOW MANUFACTURI G FIRMS Cost ineurrence Expense Category Direct materials } —Work in } process Direct labor ---. —+ Finished —+ Cost of goods sold goods Factory overhead -~ Selling and Administrative ——___, Operating expenses The Manufacturing Statement Financial statements of. manufacturing companies qj 7 merchandising companies Depending onthe nds aie from those of the balance sheet are the same in most Corporation, xan a titles foun on Accounts Receivable, Buildings, Machinery, Accounts Payable © * include Cash, Even the income statements for @ merchandiser and a man ae Capital Stock.) However, a closer look shows that the head Cost of Goods 7 Sees are similar. place of the Purchases account. Also, era Merchandise Ynyeutctured is used in replaced by Finished Goods Inventory, ‘entory account is he key to preparing an income Statement for ; eee Gost of goods sold. The amon ig reteeturing company is to manufacturing statement, the statement of e Cost of p0, Tesult of a ‘special prepared to support the figure on the income Statement, "@"Ufactured, which is Statement of Cost of Goods Ma nufactuy, is ed a The flow of manufacturing costs, shown in Figy, S31 th nd Sold basis for accounting for manufacturing costs, In this Process gut 34, provides the ° ‘anufacturingChapter 3 Cost Accounting Cycle 59 costs incurred are considered product costs. They are used to compute ending inventory balances and cost of goods sold. The costs flowing from one account to another during the year have been combined into one number in the illustrations to help show the basic idea. In fact, hundreds of transactions occur during a year, and each transaction affects part of the cost flow process. At the end of the year, the flow of all manufacturing costs incurred during the year is summarized in the statement of cost of goods manufactured and sold. The statement gives the peso amount of costs for products completed and moved to Finished Goods Inventory during the year. The amount for cost of goods manufactured should be the same as the amount transferred from the Work in Process Inventory account to the Finished Goods Inventory account during the year. In the same way, the amount of cost of goods sold should be the same as the amount transferred from the Finished Goods Inventory account to the Cost of Goods Sold account during the year. The statement of cost of goods sold for Figure 3-1 through 3-4 is shown below. Even though this statement is rather complex, it can be pieced together in four steps. The first step is to compute the cost of materials used. Add the materials for the period to the beginning balance in the Materials Inventory account. This subtotal represents the cost of materials available for use during the year. Then subtract the balance of the ending Materials Inventory from the materials available for use. The difference is the cost of materials used during the accounting period. Name of Company Cost of Goods Sold Statement For the year ended December 31, 2019 Direct materials used Materials Inventory, January 1 P 24,600 Add: Purchases 53.200 Total available for use 77,800 Less: Materials Inventory, December 31 32,500 P 45,300 Direct labor 79,700 Factory Overhead 65,000 Total manufacturing costs 190,000 Add: Work in process, January 1 25,100 Cost of goods put into process 215,100 Less: Work in process, December 31 “13.500 Cost of goods manufactured 201,600 Add: Finished goods, January | 70,000 271,600 Total goods available for sale 2 Less: Finished goods, December 31 31'100 Cost of goods sold — normal P 240,500Cost Accounting 60 facturing costs for the Year, The second step is the computation of the total dad ty el fs overhead cost ‘The costs of materials used and direct labor are adde i js is . total manufacturing costs into total applied during the year. The third step charges snnine “Weta Cost of goods manufactured for the year. Add the beginning Work in Process Inventory balance t ‘0 total manufacturing costs for the period to arrive at the total Sost of work in process during the year. From this amount, subtract the ending Work in Process Inventory balance for the year to get the cost of Boods manufactured, The term total manufacturing costs must not be confused with the Cost of goods manufactured. Total manufacturing costs are the total costs for materials used, direct labor, and factory overhead incurred and ol Production durin harged. to an accounting period. ‘Toial Manufacturing costs of P 190,000 incurred during the current yet re added to the beginning balance of the Work in Process Inventory costs of P25 -100 beginning . The costs of two accounting the of goods put into Process during the year.The cost of ill in process (P31,100) are then subtracted. from the total cost of during the year, ‘The Remainder, P201,600.is the cost of (completed) during th Iti 4 Ne year. It is assuy e items in "Y Were completed first, Cost attached os oo Work in Process Inventory are Part of the current Period’s toy Manufactuss iS an they will not become Part of the cost oj 800ds manufactured Ss Cot: accounting period when the Products are Completed, The! until the next computation of the during . balance, by definition, Periods are now being Cost of goods sold fourth step is the manufactured is added to the beginning balance 7 fthe poet The cost of goods Bet the total cost of goods avaiable Sale during tne hed Goods Inventory to sold — normal is then com, Ne peri © Cost of goods Finished Goods. . © total cost of o0ds 1S Cons; g were sold, "dered an PeNse for the period in available for sale, which the related products ‘The ‘Nosled Products Company ig @ smaly manufactures dining tables and chairs. ‘The compen’'Y organized OF wholesale distributors, who in ‘UM Sell them 4a 8 Products ate sold to jobbers company’s manufacturing re nes SE 8S Follow Tetailers, The basic steps in the 1. Lumber is cut to size for table tops, legs, 3 The individual pieces of cut nce !8S, seq 'S, arms, a i" T are pain, ? 3 » and backs, 3, The pests are assembled int whe ang ated in yanarnd Packs lai i Various bright colors. Company. that| | Chapter 3 Cost Accounting Cycle 61 The b current y Statement of Financial Position for the company on January | of the is presented below.. Noeled Products Company Statement of Financial Position January 1, 2019 Assets Liabilities and Stockholders’ Equity Cash P 80,000 Liabilities Po Building 750,000 Machinery & equipment _150,000 Capital stock 980,000 Total liabilities and Total assets 980,000 Stockholders’ equity __P980,000 To make things easy, let us assume that the company for the month of January makes only one style of table and no chairs. The following transactions are completed for January and recorded, in summary form as follows: i. Materials (lumber, paint, screws, lubricants, and solvents) are purchased on account at 2 cost of P 50,000. Materials 50,000 Accounts Payable 50,000 This procedure differs in two ways from the recording of purchases for a n. First, the debit is to a Material Inventory account instead of a Purchases account because the inventory system is perpetual. Second, the inventory account used is a control account. Some companies have hundreds of items in inventory, ‘To keep a separate account for each item in the general ledger would crowd the ledger and make it hard to work with. At the time that entry | is posted to the general ledger, the individual stock cards are also updated. th, direct materials (lumber and paint) costing P 40,000 and cants for machine, and solvents tor cleaning) merchandising 2. During the mon r indirect materials (screws, lubrie costing P 1,900 are issued to the factory. 40,000 1,900 Work in Proc Factory Overhead Comrol Materials 41,900Cost Accounting “62 i indirect mater; This entry shows that P40,000 of direct materials and pauaes in : an were issued, The debit to the Work in Process account : pede materials issued to production. Such costs can be ee y ayn Jot orders. As the direct materials costs are charged to work in Process, the amounts for individual jobs are entered on the job order cost sheets. Indirect materials are debited to the Factory Overhead Control account. 3. Total payroll for the month amounted laborers working on the product; P 7,0 and administrative employees, The en employees (ignoring to P36,000, consisting of P20,000 earned by 00 for factory supervision; P 9,000 for sales try to record the payroll and the payment to payroll deductions) would be: Payroll 36,000 Accrued Payroll 36,000 Accrued Payroll 36,000 Cash ; 36,000 Recording labor costs for g company requi : i The first labor cost entry re Deval abies ee soarpleaes second entry records the payment of ‘the Payroll liability est, Bae he fiat entry. The third entry (No. 4) is now needed to account Teens ts. The P36,000 debited to the Payroll account must be Properly for labor costs. accounts, Gross direct labor costs are debien to Work in proved '9 the production indirect labor costs (factory Supervision) are debited n Process account, and total Payroll is credited to show that the total accona > Factory Overhead Control. production accounts. Ount thas been distributed to the @ manufacturin, ‘cords the total 4. The entry to record the distributi . Work in Process "0M OF classifi Cation of the payroll would be: Factory Overhead Control 20,000 Pm Selling and Administrative F, 7,000 Payroll ‘Xpense Contro} 9,000 ork in es le the salaries ON the 10 no work directly on the Product, are V28°S Of the fa oduct are charged a Sales salaries and administrative dl TY Supervisor, wl Administrative Expense 36,000 Salar} Factory Oo ontrol- Control, laties are gy eon ‘aniChapter 3 Cost Accounting Cycle 63 5. Depreciation expense for the building is 6% per year. The office occupies one-tenth of the total building, and the factory operation is in the other nine- tenths. The depreciation expense for one month is recorded as follows: Factory Overhead Control 3,375 Selling and Administrative Expense Control 375 Accumulated Depreciation ~ Building 3,750 Depreciation for the portion of the building used for factory operations = 750,000 x 6% x 1/12 x 9/10; for the portion used by the office 750,000 x 6% x 1/12 x 1/10 6. Depreciation expense for machinery and equipment is 20% per year. All machinery and equipment is used in the factory for production purposes, so the depreciation expense is charged to Factory Overhead Control. Factory Overhead Control 2,500 Accumulated Depreciation - Mach. & Equipt. 2,500 7. The cost of heat, light, and power for the month was P3,000. Factory Overhead Control 2,700 Selling and Administrative Expense Control 300 Accounts Payable 3,000 The cost of heat, light, and power charged to Factory Overhead Control = 3,000 x 9/10 and charged to Selling and Administrative Expense = 3,000 x 1/10 8. Miscellaneous expenses for telephone, office supplies, travel, and rental of office furniture and equipment totaled P1,500 * Selling and Administrative Expense Control 1,500 Accounts Payable 1,500Cost Accounting 64 ing nization, but fe Many other expenses may be incurred bya Se See the month, Purposes of simplicity, it is assumed there are no other 4 ie accounts, the facts fier posting the joumal entries to the appropriate ledg: the next pa e) overhead account will reflect the following debits (as shown on the next pag Transaction Description Amount 2) Indirect materials 1,900 (4) Indirect labor 7,000 (5) Depreciation of building 3,375 (©) Depreciation of machinery and equipment 2,500 O) Heat, light, and power 2.700 Total P17,47 14. Factory overhead is charged to production at 85% Of direct labor cost: Work in Process 17,000 Factory Overhead Applica 17,000 The three elements of. manufacturing cost — di overhead ~ are now accumulated in Work in are as follows: irect mater ials, direct labor, and factory Process, and the debits in the account Transaction Transaction Athount (2) Direct materials ani (4) Direct labor P 40,000 (9) Factory overhead a Total P-77,000 15. Assuming that all goods started in Process have been f ara entry is recorded: inished, the following , Finished Goods . Work in Process 77,000 a 77,000 Assuming that 1,000 tables Were produced durin; the . The unit cost for each clement of manufacturing rca calent cost is 7 ee computation on the next page, Is calculated as in thChapter 3 Cost Accounting Cycle 65 Units Unit Total Produced Cost Direct materials P 40,000 1,000 P 40.00 Direct labor 20,000 1,000 20.00 Factory overhead 17,000 1,000 17.00 277,009 P_77..00 If the same type of table is produced in future periods, the unit costs of those periods can be compared with the unit costs determined above, and any difference can be analyzed so that management might take appropriate action. The unit cost also serves as a basis for establishing the selling price of the tables. After considering the anticipated selling and administrative expenses, a selling price can be established that should provide a reasonable profit. If management determines that a 40% gross profit percentage is necessary to cover the product's share of selling and administrative expenses and earn a satisfactory profit, the selling price per unit, rounded to the nearest cent, would be computed as follows: Manufacturing cost Gross profit (40%) Selling Price ‘To continue with the example, assume that the following transactions take place in January in addition to those already recorded 11. Costs of materials, utilities, and selling and administrative expenses paid amounted to P 34,000 Accounts Payable 34,000 Cash 34,000 12, 800 tables are sold to jobbers at a net price of P86,240 Accounts Receivable 86,240 Sales 86,240 Cost of Goods Sold 61,600 Finished Goods 61,600—_, 66 Cost Accounting 13. Cash totaling P55,000 is collected on accounts receivable Cash Accounts Receivable 55,000 55,000 The accounts in the general edger will Teflect the entries as follows: Cash Accounts Receivable Beg. 80,000 |3) 36,000 (12) 86,240 (1b) 55,000 (3) 55,000 11) 34,000 31,240 65,000 Materials Work in Process qa) 50,000 7) 41,500 (2) 40,000 ({L0) 77,000 8,100 (4) 20,000 ©) 17,000 Finished Goods Buildin (10) 77,000 {12) 61,600 Bes. 750.099 | 15,400 Accum. Depreciation-Buildin, — Accum. Depreciation-Building (S) 3,750 *n = Mach. & Equi —_—— eee Ty Stouts Payable : 34,000 } 50,000 3,000 (8) 1,500 20,500Chapter 3 Cost Accounting Cycle 67 Acerited Payroll Capital Stock _- 6) 36,000 I» 36,000 Ba. 980,000 Factory Overhead Control Selling and Adm. Exp, Control @) 1,900 (4) 9,000 (4) 7,000 (5) 375 (6) 3,375 oO 300 6 2,500 @) 1,500 Q 2,700 17,475 | 11,175 Payroll, Cost of Goods Sold 6) 36,000 | (4) 36,000 (12) «61,600 Sales Factory Overhead Applied (12) 86,240 (9) | 17,000 Now let us compare the factory overhead of the two statements, the cost of goods sold'statement on page 52 for Figure 3-1 through 3-4 and the statement of cost of goods sold for the illustrative problem which is shown on page 61. The factory overhead of the statement on page 61 is total actual factory overhead incurred for the period, while the factory overhead of the statement on page 71 is applied at 85% of direct labor cost. The predetermined overhead rate (85% of direct labor cost) was used to apply overhead to production. Two overhead accounts are used in the illustrative ‘problem: Factory Overhead Control and Factory Overhead Applied. Factory Overhead Control was used to accumulate all actual factory overhead costs. The estimated amount charged to production was credited to Factory Overhead Applied, After determining the balance of each general ledger account, a trial balance is prepared to prove the equality of the debits and credits,fe Cost Accounting Noeled Products Company Trial B January 3 Cash Ounts Receivable 8.100 750,000 P 150,000 He Expense ( ‘on ene —_ P 1,109,990 — From the trial balance, financial st atement » financial sty IS ate prepared ted as follows. Noeled Products Company Statement of Com, wehensive Inc For the month ended January 32018 . 9 Cost of Goods Sold (Schedule 1) Gross Profit Less: Selling and Administrative Ey, Selling and administrative Depreciation — Building Heat, Light and Power Miscellaneous Net Income Penses salariesChapter 3 Cost Accounting Cycle 69 Schedule 1 Noeled Products Company Cost of Goods Sold Statement For the month ended January 31, 2019 Direct materials used: Purchases P 50,000 Less: Materials, January 31. P 8,100 Indirect materials 1,900 10.000 P 40,000 Direct labor 20,000 Factory overhead 17,000 Total manufacturing costs/Cost of goods manufactured 77,000 Less: Finished Goods, January 31 15,400 Cost of Goods Manufactured and Sold — normal 61,600 Add: Under-applied factory overhead __ 495, Cost of goods sold — actual P__62,075 Noeled Products Company Statement of Financial Position January 31, 2019 ASSETS Current Assets Cash P 65,000 Accounts Receivable 31,240 Finished Goods 15,400 Materials 8.100 Total current assets 119,740 Plant and Equipment Building P 750,000 Less: Accumulated Depr’n —3,150 746,250 Machinery & Equipment 150,000 Less: Accumulated Depr’n 2,500 147,500 893,750 Total Assets P_1.013,49070 Cost Accounting Liabilities and Stockholders’ Equity Current Liabilities Accounts Payable Stockholders’ Equity Capital Stock Retained Earnings Total Liabilities and Stockholders’ Equity The produced/completed will give the cost to P 20,500 P 980,000 __ 12,990 992,990 P_1,013,490 cost of goods manufactured/completed divided by the number of units manufacture per unit of the product, which is equivalent to purchase price for a merchandising concern, The format of the income from that for a merchandiser. the cost of goods sold is usuall sold statement, which is also the general procedi Statement for a manufacturer is to a decrease in not significantly different In the income statement ofa manufacturing concem ly shown as one figure, supported by the cost of goods lure in a published report. the Factory Overhead Control In our example the factory TY Overhead applied (P17,000), which is considered Sold. An increase ie 5 factory overhead control Account is less than the facto, ve ott However, if the We have is overapplied factory overhead whic! effect is a decrease in the o assume, in our example, that the company account at the end of the year, so no en company is closing the facto; account at the end of each mon: th, the followi month, ae Factory overhead. applied Underapplied factory overhead Factory overhead. contro] At the end of the year, the total underapp]i account is closed to Cost of Goods So} 1c applied overhead is significant, then the Sold account, Finished Goods account, the balances at the end of the period, ° h is consi ‘ost Of goods sold thereby j -_ q JS closing it 1s made at "Y Overhead contr ie (or account, TY Overhead applied, then what ered favorable because the ‘asing the gross Profit. We “ nderapplied/overapplied Of the month. If the ctory fa FI ny Will be pe Overhead applied © at the end of the 47,000 475 17,475 net Hi 2 eet/oVverapptied overhead amount is F tat Of the under/over- Ad Work in prt’ to th © Cost of Goods Ces: : SS account, according toChapter 3 Cost Accounting Cycle 11 From the cost of goods sold statement, the following different equations are derived: 1. Materials, beg. Total materials Materials used + = availablefor = = + Purchases use Materials, end 2. WP, beg. Total cost of Cost of goods + = goods put into = manufactured Total mfg. cost process + WP, end 3. FG, beg. Total goods Cost of goods + = available for = sold Cost of goods sale + manufactured FG, end The following formulas are also of importance with regards to the costs of goods sold statement. 1. Prime cost = direct materials used + direct labor cost. 2. Conversion cost = direct labor cost + factory overhead 3. Total manufacturing cost = direct mat used + direct labor cost + factory OH Merchandising Companies compared to Manufacturers Retailer companies purchase finished goods in saleable form, ready for sale to clients, Usually these finished goods require no additional processing. Sometimes little, if any, conversion before being sold to consumers. Example of retail companies are SHOEMART (SM), ROBINSON’S, AND RUSTAN’S. The retailers usually sell the products in the same form as when acquired if ever, what is added is the packaging, Manufacturers, like SAN MIGUEL CORPORATION, ASIA BREWERY, AND WESTINGHOSE convert the raw materials purchased,. into finished goods by adding labor and overhead. Upon completion the finished goods are stored in the warehouse /and or displayed until sold. The cost accumulation begins when raw materials are placed into production. As work progresses on a product, the costs are accumulated in ‘the firm’s accounting books. At the point of sale, these products will flow from the inventory account to the Cost of Goods sold to the statement of comprehensive income. The output of manufacturers are the products sold by the retail companies.Cost Accounting Manufacturers compared to Service companies A manufacturer accounts for production using three inventory accounts 1, (D materials i nventory (2) work in process inventory (3) finished goods inv AN acerual accounting System is essential so that total tra utulated as goods flow through the manufacturing pr the units are transferred to Finished Goods Inventory. Uj other hand, most service fi te jobs). Because sery ices amely entory, production costs can be ocess Upon completion, pon the sale we transfer to mms need only to track their generally cannot be stored, financial positi be the accounting for audit firms an law Although there are diffe service firms, each type can NSE Management and cost accounting concepts and techniques in different ways, Managers in all fj i evaluating performance, and decisi ki reduce costs without sacrificing qua lity, Basically the accountin 2 for merchandisin, . . The main difference is the accounting fee cos oe firms is the same. merchandising, we use Purchases (Periodic inventory system) Old For i Inventory(perpetual inventory System) to record acquisition ay or Merchan ise To determine the cost of goods we Simply multiply the ne bee et chandise for sale acquisition cost (purchase price) imi er of units sold by the COST FLOW - MANUFACTURID G FIRMS Expense Category — Work in — Finisheg Process, Factory overhead Bo0ds —+ Cost of goods sold «Fac Selling and Administrative oo Operating expensesve Chapter 3 Cost Accounting Cycle 73 COST FLOW - MERCHANDISING FIRM Cost incurrence Expense category Finished goods Cost of goods sold Selling and Administrative + Operating expense COST FLOW - SERVICE FIRM Expense category Direct labor -- } } Cost of services } Factory overhead} Selling and Administrative ________, Operating expense ILLUSTRATIVE PROBLEM FOR A SERVICE FIRM The Magic Glass is engaged in cleaning glass walls and windows of high rise buildings, ‘The company incurs service overhead of P 200,000 per month. Magic Glass has 50 workers who work 200 hours each per month. In addition they spend P180,000 on gasoline for their trucks. Advertising and other marketing expenses amount to P115,000. Administrative costs are P 150,000 per month. The workers are paid P150 per hour . Revenues for the month amounted to P 4,450,000. All purchases, labor costs and revenues are on cash basis. The following transactions take place during January, 2019 - Purchased direct materials P325,000 . Incurred and paid labor costs - direct labor costs 1,500,000 . Supervisory labor 50,000 4. Incurred and paid other service overhead costs 200,000 5. Paid gasoline for the trucks 180,000 6. Paid advertising and other marketing expenses 115,000 7. Paid administrative expenses. 150,000 8. All jobs were completed and collected 4,450,000Cost Accounting 74 Requirements | Prepare journal entries ; . 2.Prepare the Statement of Comprehensive Incom SOLUTION Journal entries 1. Purchases 325,000 Cash 7 ~. 325,000 Purchase of materials 2.Direct labor 1,500,000 Service overhead 50,000 Cash 1,550,000 Payment of labor costs 3.Service overhead 200,000 Cash 200,000 Overhead cost incurred 4.Gasoline expense 180.0 Cash oe Gasoline expense paid 180,000 5 Selling Expenses 115,000 Cash , Advertising and other marketing expenses pag 115-000 6.Administrative Expenses 150,009 Cash a Administrative expenses paid 150,000 7.Cash Revenues 4,450,000 Cash received from clients 4,450,000Chapter 3 Cost Accounting Cycle 75 2. Statement of Comprehensive Income Magic Glass Statement of Comprehensive Income For the month of January, 2019 Revenues P 4,450,000 Cost of providing services Materials P 325,000 Labor 1,500,000 Service overhead 250,000 Gasoline 180,000 2,255,000 Gross profit 2,195,000 Operating expenses Administrative 150,000 Selling 115,000 _265.000 Net Income P.1,930,006 Cost Accounting PROBLEMS MS Problem 1 List the items given below (1-15) and for each item indicate the appropriate letter or letters, the schedule and/or financial statement (s) in which the item will appear. The Schedule and financial statements are Prepared on a yearly basis. A. Cost of goods sold statement B. Statement of Comprehensive Income C. | Statement of Financial Position The following items are fo, Direct labor Raw materials inventory , January | Work in process inventory, December 31 Finished goods inventory, January 1 Factory overhead applied Depreciation on office equipment Work in process inventory, January 1 Finished goods inventory, December 31 Cost of goods manufactured 10. Cost of goods available for sale 11. Cost of materials purchased 12. Accumulated depreciation — 13, Direct materials used 14. Total manufacturing cost 15. Factory machinery und in its ledger and accompanying data PSN AVaAyNe Office equipment Problem 2 Marvin Manufacturing Company year ended December 31, 2019, Raw Materials Inventory, January 1 Purchases y has developed the following information for the P 175,000 Raw Materials Inventory, December 3] 250,000 Direct Labor 125,000 Factory Overhead (120% of direct labor cost) 270,000 Work in Process Inventory, January 1 . Work in Process Inventory, December 3] 90,000 Finished Goods Inventory, January 1 120,000 Finished Goods Inventory, December 3 100,000 80,000 Required: Cost of goods sold statement ;Chapter 3. Cost Accounting Cycle 77 Problem 3 Donna Company submits the following data for May, 2019 Direct labor cost P 160,000 Cost of goods sold 550,000 Factory ovethead - applied at 150% of direct labor costs. Inventories May 31, 2019 Finished goods ~ P122,000 Work in process 124,000 Materials 124,000 115,000 Required: Cost of goods sold statement. Problem 4 Ram Company completed the following transactions for October, 2019 a) Purchased on account direct materials of P180,009, 1, ob b) The factory payroll was recorded. Direct labor P60,000; indirect labor ,0P20,000. Employee payroll deductions were recorded as follows: Withholding taxes P 11,200 SSS Premiums 2,400 Phil Health Contributions 375 Pag-ibig Funds Contribution 1,620 ©) Indirect materials of P20,000 were purchased. 4) Employer payroll tax expense is recorded as follows: SSS Premiums P 3,600 Phil Health Contributions 375 Pag-ibig Funds Contributions pt 1,620 ape ) Materials issued: direct materials - P 120,000; indirect materials - P10,000. = UN) Defective materials P5,000-were returned to vendors. 8) Accounts payable totaling P148,300, including accrued payroll, were paid. ‘VI h) Sundry factory expenses of P24,900 were recorded as liabilities. ) Factory overhead was charged to production at 120% of direct labor costs. ). Goods completed with a total cost of P180,000 were transferred to finished hiBesty goods, k) Sales were P210,000 and cost P 140,000 to produce. Requirements: : 1. Entries to record the transactions given above. 2. Statement of cost of goods sold.Rie 78 Cost Accounting Problem 5 : it ined the following account balances: en aad contained thi ig accoun Poe = 0,00 Accounts Receivable $ Sone Finished Goods 18,000-/ Work in Process , : 50,000 ~ Materials Accounts Payable 10,000 Accrued Payroll 8,000 Common Stock 200,000 Retained Eamings During January, a) Materials purchased on account, P 200,000, | b) Factory overhead ii 45,000 | | 2019, the following transactions were completed, rect labor - and _administ P30,000; ‘sales salaries - P25,000;) I were as follows: | P140,000; indirect Iabor = Deductions from payroll | : ies Fis. rative salaries P15,000 Withholding taxes P SSS Premiums fea Phil Health Contributions is Pag-ibig Funds pana d) P175,000 was paid for Payroll 2 €) Computation of employer's Payrolll tax is ag follows: ‘actor ine we . SSS Premiums P8s00 Pillns Administrative Phil Health 600 a P 750 Pag-ibig Fund 5,100; aa 150 f) Materials issued: direct materi als - P185,009, 5 450 2) Factory overhead was charged to Potent ae 79.00, hh) Work finished and placed in Stock -P419,999, itect labor cost, i) Cost of goods sold - P385,000. Th, j) Cash collected from custo) k) Payments for liabilities Markup was mers, P405,99. 0% of cost, amounted to p 220,000, Other than Payroll. |Chapter 3 Cost Accounting Cycle 79 Requirements for Problem 5 1. Journal entries to record the above transactions. 2. Cost of Goods Sold Statement for January, 2019. 3. Statement of Comprehensive Income for January, 2019 4. Statement of Financial Position as of January 31, 2019. Problem 6 A manufacturing company shows the following amounts in the cost of goods sold statement and the statement of comprehensive income for the year 2019 January 1.2019 — December 31, 2019 Materials P 100,000 P 150,000 Work in process 87,000 Finished goods 80,000 Materials used 590,000 Cost of goods sold 750,000 Cost of goods manufactured 300,000 Total manufacturing costs 790,000 Required: 1. Work in process, January 1, 2019 2. Finished goods, December 31, 2019 3. Amount of materials purchased in 2019 Problem 7 . Madelyn Company manufactures unique, custom-made furniture. The company uses 1 job order system and applies overhead to production on the basis of direct labor cost. In computing a predetermined overhead rate for the year 2019, the company estimated manufacturing overhead to be P26 million and direct labor costs to be P20 million. Actual costs incurred during 2019 Direct materials used P 30,000,000 Direct labor cost incurred 18,000,000 Insurance — factory equipment 500,000 Indirect labor 7,500,000 Factory maintenance 2,000,000 Rent - factory building 11,000,000 Depreciation — factory equipment 2,000,000a 80 Cost Accounting Instructions - Answer each of the following 5 }- Why is Madelyn Company using a job order cost system? n what basis does the company allocate its manufacturing overhead? Compute the predetermined overhead rate for 2019. 3. Compute the amount of th 2. under- or over applied overhead for 2019, 4. Determine the cost of goods sold given the following data January 1, 2019 December 31, 2019 Work in process P 3,000,000 P 4,000,000 Finished goods 13,000,000 11,000,000 Problem 8 leer : ~The controller was able to connie nine month peri ng September 30 were P 1,250,000. The company’s suppliers indicated that merchandise Costing P500,000 was delivered for the period. The company’s statement indicated that the ending inventory for the previous eccounting period- was. P26g 0. 1 s reimbursed by its j - The company was insurance company for P200,000 wi : the fire. Insurance companies pay 89 orth of inventory destroyed by % of the cost for a n casu: i Were no other inventories on hand, talty of this nature, ‘There Required 1.Estimate the cost of. 800d for this periog 2.Amount of loss to th he companyChapter 3 Cost Accounting Cycle 81 MULTIPLE CHOICE l. wn Cost of goods sold is a. An expense b. A period cost. c. Is an asset. d. None of the above. . For a manufacturing company, the cost of goods available for sale during a given accounting period is a. The beginning inventory of finished goods. b.. The cost of goods manufactured during the period. c. The sum of the above. d. None of the above Which of the following would not be classified as manufacturing overhead? a. Indirect labor b, Direct materials c. Insurance on factory building d. Indirect materials . The wage of a timekeeper in the factory would be classified as a, prime cost b. direct labor c. indirect labor d. administrative expense As current technology changes manufacturing processes, it is likely that direct a. labor will increase b. labor will decrease c. materials will increase d. materials will decrease . Sales commissions are classified as a. prime costs b. period costs c. product costs 4d, indirect laborCost Accounting 82 e matching Principle, 7. For inventoriable costs to become expenses under th a. the product must be finished an an =a percentage of completion st - the product must be expensed ba: i ©. the product to which they attach must be sold 4. all accounts payable must be settled 84 manufacturin; 4 a current asset on the balance sheet + Cost of goods manufactured in a manufacturing company is analogous to a. Ending inventory in a merchandising company Beginning inventory in a merchandising company c. Cost of goods available for sale ina merchandising company . Cost of goods Purchased in g merchandising company 10. If the amount of “Cost of foods manufactureg> during a period exceeds te paar ota for the period, then & Ending work in py ° ine Seater than °F equal to the amount of the beginning work in process invento ‘q ~b. Ending work in i . Process inventory. © AMOunt of the beginning workia . Ending work in process j Iu 4. Ending work in han. that of eoods Manufactured, Process inventory, © amount of beginning work it 11. When incurred, f ‘Actory labor Cos a. Work in Process b. Factory Wages Ex, ©. Factory Labor d. Payroll StS are debited to ‘Pense : 12. A company is More like} Se aj s Jol a. itmanufactures a large Volume oF 7 order cost SYstem if b. its production ig Continuoys ilar Products c. it manufactures Product. d. it uses a period invento, : . Unique gy . "Y S¥stem recteistiggChapter 3 Cost Accounting Cycle 83 13. Which of the following is the most appropriate for evaluating the performance of manufacturing department manager? a. Costs controllable by the manager concerned b. Cost of goods manufactured c. Direct material cost d, Total manufacturing cist 14. The most complex cost system is found in a, Service oranizations b. Manufacturing firms c. Merchandising organizations d. Government organizations 15. The term relevant range as used in cost accounting means the range over which a. Costs may fluctuate b. Relevant costs are incurred c. Production may change d. Cost relationship are validCost Accou Ating 84 MULTIPLE-CHOICE - PROBLEMS AN UIPLE-CHOICE - PROBLEMS A ite is 80% For Cromwell Company, the predetermined 2000 af factors labor Pat During the month, Cromwell incurs P210,0 bor. . Actual P200,000 is direct labor and P10,000 is indirect labor. . Was P200, 000. The amount of overhead debited to Work in should be: Of direct Ig COStS, of why Overhead incum Process Inventoyy a. P 200,000 b.P 144,000 ©. P 168,000 4. P 160,000 The following information was taken from Jetic Company's accounting records for the year ended December 31, 2019, Increase in raw materials inventory P 25,000 “crease in finished goods inventory 45,000 ‘aw materials Purchased 450,000 Direct labor payrol} 200,000 Factory overhead 300,000 2. There was no Work-in-process inventory at the beginn:, eat. ‘erie’s 2019 cost of woods soi jenny SSinning oF end of they a. P 950,000 b. P925,000 ©. P970,000 d. P975,000 Items 3 through 5 are bi ased on Company's manufacturin the following ; . 8 Operations, = 'nformation Pertaining to Glen Inventories Direct materials SI/I9 3/31/19 SAN9 Work-in-process P 36,000 P 30,000 Finished goods 18,009, 12,000 Additional information for the Month of March 30 54,009 72,000 Direct materials Purchased 16 Direct labor payrol| P 84,000 Direct labor rate per hour 60°00 Factory overhead rate/direcg labor hou, . 7.50. 10,00Chapter 3 Cost Accounting Cycle 85 3. For the month of March 2019, prime cost was a. P 90,000 b. P120,000 c. P144,000 d. 150,000 4. For the month of March 2019, conversion cost was a. P 90,000 b. P140,000 c. P144,000 d. P170,000 5. For the month of March 2019, cost of goods manufactured was a. P218,000 b. P224,000 c. 230,000 d. 236,000 Items 6 to 8 are based on the following data of Matatag Company for the month of March 2019: March 1 March 31 Materials P 40,000 —P 50,000 Work in process 25,000 35,000 Finished goods 60,000 70,000 March 1 to 31, 2019 Direct labor cost 120,000 Factory overhead applied 108,000 Cost of goods sold 378,000 6. The total amount of direct materials purchased during March was: a. P 50,000 b. P170,000 c. P180,000 d. P220,000Cost Account, 86 : vas: + The cost of goods manufactured during March, 2019 w a. P378,000 b. P388,000 ©. 398,000 d. P428,000 Some selected sales and cost data for Alcid Manufacturing Company are ive below: Direct materials used P 100,090 Direct labor 150,000 Factory Overhead (49% Variable) 75,000 Selling and administrative expenses (50% direct, 60% Variable) 120,000 8. Prime Cost was: & P 175,000 b. P 250,000 © P 130,000 a. P 225,000 + Conversion cost was: a. P 150,000 b. P 225,000 cP 250,000 d. P 270,000 10. Direct cost was: a. P 225,000 b. P 250.000 ¢. P310,000 d. P 325,000 11. Indirect cost Was: a. P 75,000 b. P135,000 ce. P 195,000 d. P325,000Chapter 3 Cost Accounting Cycle 87 12. Product cost was: a. P 135,000 b. P250,000 c. P325,000 d. P370,000 13. Variable cost was: a. P-250,000 b. P-280,000 c. P 352,000 d. P 370,000 During 2019, there was no change in either materials or the WP inventories. However, FG, which had a beginning balance of P25,000, increased by P 15,000. 14. If the manufacturing costs incurred totaled P 600,000 during 2019, the goods available for sale must have been: a. P 585,000 - b. P 600,000 c. P 610,000 d. P 625,000 During the month of May, 2019, Candace Mfg. Co. incurred P 30,000, P 40,000, and P 20,000 of materials, labor and factory overhead costs respectively. 15. If the CoGM was P 95,000 in total and the ending inventory was P 15,000, the beginning inventory of work in process must have been a. P 10,000 b. P 20,000 c. P110,000 d. P 25,000 ‘The Lion Company's cost of goods manufactured was P120,000 when its sales were P 360,000 and its gross margin was P220,000. 16. If the ending inventory of FG was P 30,000, the beginning inventory of finished goods must have been: a. P 10,000 b. P 50,000 c. P130,000 d. P150,00088 Cost Accounting The gross 1 700,000, 17 i ; was P 325,000 when sales yy ThoFG iment ws 60 800s he ventnend was essa + The cost of goods manufactured was a. P300,000 b. P350,000 Cc. P230,000 d. P375,000 During the month of January, FC labor cost was 60% of prime cost. 18. Iftotal mfg, costs during ‘January wore P 85,000, the factory overhead Was: a. P 24,000 b. P 25,000 Cc. P 49,000 d. P 60,000 0's direct labor cost totaled P 36,000, and dia 19. If purchases of raw materials were P100,000 for the year, direct labor costs was sald Or theyear eas dco ea 200,000, the cast of son a. P 435,000 b. P 445,000 ©. P 465,000 d. P 475,000 During the month of March, 2019, Nape Co, used March 31, 2016, Nape's. direct mater ue 00,000 of direct materials. a at March 1, 2019. Yentory was P 50,000 more than it 20, Direct material purchases during the Di month of Mareh 2019 amounted to: b. P 250,000 c. P 300,000 d. P 350,000 -Chapter 3 Cost Accounting Cycle 21.Calculate the manufacturing overhead incurred for F&B Co. Direct labor cost incurred P 250 Direct materials used 110 Beginning work in process 50 Ending work in process 300 Finished goods completed 170 a. P 60 b. P 410 c. P 560 d. P 580 vo 8 . Determine the sales for the year. Gross profit P 280,000 Ending inventory 120,000 Goods available for sale 180,000 . P 300,000 ' . P 340,000 P 400,000 . P 460,000 aecp Given the following information: Finished goods beginning P 26,000 Finished goods ending 37,000 Cost of goods manufactured 127,000 23. What is the cost of goods sold? a. P 115,500 b. P 116,000 c. P 153,000 d. P 190,500 Uniflo Manufacturing Company developed the following data for the current year. Work in process inventory, January P 40,000 Direct materials used 24,000 | Actual factory overhead 48,000 ‘Applied factory overhead 36,000 Cost of goods manufactured 44,000 Total manufacturing costs 120,00090 Cost Accounting 24. Uniflo Company's direct labor cost for the year is a. PI2,000 b. P60,000 ©. P36,000 d. P48,000 The following data relate to Maxine Manufacturing Company for the period: Direct labor P 2,400 Factory overhead 1,700 Work in process inventory, beginning 11,000 Work in process inventory, end 5,000 Cost of goods manufactured 16,000 Sales 50,000 Finished goods inventory, beginning ' 9,000 Finished goods inventory, end 8,000 Total selling, general, and administrative costs 14,000 25. The amount of direct materials put into Production during the pe a. P 6,700 b. P5,600 ec. P4800 a. P5,900 riod