Joacent Brix Tamalla BSA - 2A
Cost accounting & Control
1. Explain the cost accounting cycle.
Cost accounting is the process of collecting information about the costs incurred by a company’s activities, assigning
selected cost to products and services and other cost objects, and evaluating the efficiency of cost usage. The cost accounting
cycle is a process performed during the accounting period in recording data, classifying, determining total cost, determining
product cost, determining selling price, controlling cost and decision making. Cost Accounting Cycle embraces activities
connected with verification and preparation of source of document, their journalizing,
then posting to control accounts and subsidiary ledgers, closing of accounts and presenting results of operations of accounting
period in the form of the income statement. (Tamplin, 2021)
2. Differentiate service, merchandising and manufacturing entities.
As their respective name suggest, the main difference of service, merchandising and manufacturing is their conduct of
operations. Service entities generate profit through rendering services, merchandising companies conducts buy and sell
operations or solely sells physical goods while manufacturing businesses typically manufactures the products they sell and
produce or is in charge of producing the physical goods that they sell to wholesalers or retailers, and sometimes directly to the
consumer. Moreover, these 3 major types of businesses vary on the financial statements they produce. First, one major
difference between service companies and the other two types is that service companies do not have the cost of goods sold
because there is no product being sold. Service firms also do not have inventory, also because no physical product is being sold.
There may be direct costs associated with providing the service, but no physical product. Second, between the manufacturing
and merchandise business, both vary in the accounts of their inventory. Merchandising businesses record their inventories in
one account which is the merchandise inventory account while the manufacturing business has three inventory accounts which
are Work-in-Process Inventory, Materials Inventory and Finished goods Inventory. Third, in relation to what was mentioned
beforehand, these 3 entities also differ in the account titles they used in recording their business transactions. There are
accounts title which can only be found in one certain type of business. Lastly, as stated by Kokemuller, N. (2021), the most
significant difference between a manufacturing company and a merchandising business is that a manufacturer makes goods to
sell and a merchandiser buys or acquires goods for resale. In developing a small business, it is critical to understand whether
your strengths, available resources and environmental factors contribute to a manufacturing or merchandising setup.
In summary, the difference between a service, merchandising and manufacturing entities revolves around their conduct of
operations, accounting of inventories and presentation of financial statements.
3. Distinguish between and account for direct and indirect materials and labor as they are used in the
production process.
Direct materials are those which can easily be measured and traced to the manufacture of a product. Since these costs are
quantifiable based on the product, they have a direct effect on the production cost and therefore on the final cost of the
finished good. A piece of furniture, for example, can be constructed from measurable amounts of timber, padding, and fabric
covers - so these materials are considered to be direct materials. In a shoe manufacturing company, leather and cotton are also
counted as direct materials. Indirect materials Indirect materials, on the other hand, cannot be conveniently identified and
allocated on a per-unit basis. During furniture production, while items such as glue and nails are consumed, they are used in
insignificant quantities in comparison to materials like wood or upholstery. These are, therefore, classified as indirect materials.
Other materials which are consumed but do not form part of the final product, such as cleaning products, also fall under indirect
materials. Indirect materials are usually accounted for in one of the following ways:
• They are included as part of the manufacturing overhead and allocated to the cost of the goods sold using an appropriate
method of allocation.
• They can be charged as an incurred business expense.
Direct Labor
Direct labor is production or services labor that is assigned to a specific product, cost center, or work order. When a business
manufactures products, direct labor is considered to be the labor of the production crew that produces goods, such as machine
operators, assembly line operators, painters, and so forth. When a business provides services, direct labor is considered to be
the labor of those people who provide services directly to customers, such as consultants and lawyers. Generally, a person who
is charging billable time to a customer is working direct labor hours. Direct labor costs are the wages, benefits and insurance
that are paid to the employees who are directly involved in manufacturing and production of goods, for example, workers on
the assembly line or those who use the machinery to use the products.
Indirect Labor
Indirect labor is the labor of those who are not directly involved in the production of the products. An example would be the
security guards, supervisors, and quality assurance workers in the factory. Their wages and benefits would be classified as
indirect labor costs. The difference between direct labor and indirect labor is that only labor involved in the hands-on production
of goods and services is considered to be direct labor. All other labor is, by default, classified as indirect labor. This distinction is
important from an accounting perspective, since the two types of labor are treated differently. Direct labor should vary in
concert with the amount and types of units produced, since this type of labor is considered to be entirely variable. Indirect labor
is much less likely to change with production volume, since it represents the overhead of a business that is needed to support
any level of operations.
4. Make a pro-forma financial statement for a service, merchandising and manufacturing entities.
Service Entities:
a) Balance Sheet
Name of the Entity
Statement of Financial Position
As of December 31, 20A
Assets
Current Assets:
Cash in Bank
Accounts Receivable
Estimated Uncollectible Accounts
Prepaid Insurance
Store Supplies Inventory
Total Current Assets
Non-Current Assets
Property and Equipment:
Shop and Equipment
Accumulated Depreciation
Total Non-Current Assets
Total Assets
Liabilities
Current Liabilities:
Accounts Payable-Trade
Unearned Service Income
Utilities Payable
Salaries Payable
Rent Payable
Total Current Liabilities
Owner’s Equity
Owner, Capital
Total Liabilities and Owner’s Equity
B. Statement of Changes in Owner’s Equity
Name of the Entity
Statement of Changes in Owner’s Equity
For the Month Ended Dec. 31, 20A
Owner, Capital- January 1, 20A
Add: Additional Investment
Profit
Total
Less; Withdrawal
Owner, Capital- January 31, 20A
C. Income Statement
Name of the Entity
Statement of Financial Performance
For the Month Ended Dec. 31, 20A
Service Income
Less:
Operating Expenses
Insurance Expenses
Rent Expenses
Salaries Expenses
Shop Supplies Expenses
Utilities Expenses
Taxes and Licenses
Depreciation Expenses
Uncollectible Expenses
Profit/Loss
D. Statement of Cash Flows
Name of the Entity
Statement of Cash Flows
For the Month Ended Dec. 31, 20A
Cash Flows from Operating Activities
Cash Inflows:
Rendering of Service xx
Collections from Customers xx
Unearned Service Income xx xx
Cash Outflows:
Net Cash Provided (Used) by operating activities
Cash Flows from Investing Activities
Cash Inflows:
Cash Outflows:
Net Cash Provided (Used) by investing activities
Cash Flows from Financing Activities
Cash Inflows:
Cash Outflows:
Net Cash Provided (Used) by financing activities
Net Increase (Decrease) in Cash
Add: Cash Balance at the beginning of the period
Cash balance at the end of the period
Merchandising Activities:
A. Balance sheet
Name of the Entity
Statement of Financial Position
As of December 31, 20A
Assets
Current Assets:
Cash in Bank
Accounts Receivable
Estimated Uncollectible Accounts
Merchandise Inventory
Total Current Assets
Non-Current Assets
Property and Equipment:
Transportation Equipment
Accumulated Depreciation
Total Non-Current Assets
Total Assets
Liabilities
Current Liabilities:
Accounts Payable-Trade
Utilities Payable
Salaries Payable
Rent Payable
Total Current Liabilities
Owner’s Equity
Owner, Capital
Total Liabilities and Owner’s Equity
B. Statement of Changes in Owner’s Equity
Name of the Entity
Statement of Changes in Owner’s Equity
For the Month Ended Dec. 31, 20A
Owner, Capital- January 1, 20A
Add: Additional Investment
Profit
Total
Less; Withdrawal
Owner, Capital- January 31, 20A
C. Statement of Financial performance
Name of the Entity
Statement of Financial Performance
For the Month Ended Dec. 31, 20A
Net Sales:
Gross Sales
Less: Sales Discount
Sales Returns & Allowances
Net sales
Cost of Goods Sold:
Merchandise Inventory, Jan. 1
Purchases
Less: Purchase Discounts
Purchases Returns & Allowances
Net Purchases
Add: Freight in
Delivered Cost of Purchases
Cost Of Goods Available for Sale
Less: Merchandise Inventory, Dec. 31
Cost of Goods Sold
Gross Profit
Operating Expenses
Freight Out
Rent Expenses
Salaries Expenses
Utilities Expenses
Taxes and Licenses
Depreciation Expenses
Profit/Loss for the month
Manufacturing Entity
A. Statement of Comprehensive Income
Brix Product Company
Statement of Comprehensive Income
For the month ended January 31, 2019
Sales
P 86,240
Less: Cost of Goods Sold (Schedule 1)
62,075
Gross Profit
24,165
Less: Selling and Administrative Expenses
Selling and administrative salaries
P 9,000
Depreciation – Building
375
Heat, Light and Power
300
Miscellaneous
1,500 11,175
Net Income P 12,990
Noeled Product Company
Cost of Goods Sold Statement
For the month ended January 31, 2019
Direct material used:
Purchases P 50,000
Less: Material, 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 Good Manufactured and Sold – normal
61,600
Add: Under-applied factory overhead
475
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
Account Receivable 31,240
Finished Goods 15,400
Materials 8,100
Total current assets 199,740
Plant and Equipment
Building P 750,000
Less: Accumulated Depr’n 3,750 746,250
150,000
2,500
Machinery & Equipment
Less: Accumulated Depr’n 147,500 893,750
Total Assets P 1,013,490
