UNIVERSITY OF MINDANAO

College of Accounting Education

Program: BSA, BSIA, BSMA, BSAIS

Physically Distanced but Academically Engaged

Self-Instructional Manual (SIM) for

Self-Directed Learning (SDL)

Course/Subject: ACC 123 – Cost Accounting and Control

Name of Teacher: __________________

Name of Author: YOLANDA S. BARCELONA

THIS SIM/SDL MANUAL IS A DRAFT VERSION ONLY; NOT FOR REPRODUCTION

AND DISTRIBUTION OUTSIDE OF ITS INTENDED USE. THIS IS INTENDED ONLY
FOR THE USE OF THE STUDENTS WHO ARE OFFICIALLY ENROLLED IN THE
COURSE/SUBJECT. EXPECT REVISIONS OF THE MANUAL.

THIS IS NOT FOR COMMERCIAL USE.

 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

TABLE OF CONTENTS
Page No.

Course Outline 5
Course Outline Policy 5
Course Information 10

Big Picture: Week 1-3 Unit Learning Outcomes 11

Big Picture in Focus: Unit Learning Outcome 1 11

Metalanguage 12
Essential Knowledge 12
Self-Help 14
Let’s Check 15
Let’s Analyze 16
In A Nutshell 20
QA List 21
Keywords Index 21

Big Picture in Focus: Unit Learning Outcome 2 22

Metalanguage 22
Essential Knowledge 22
Self-Help 39
Let’s Check 40
Let’s Analyze 41
In A Nutshell 44
QA List 46
Keywords Index 46

Big Picture in Focus: Unit Learning Outcome 3 47

Metalanguage 47
Essential Knowledge 47
Self-Help 51
Let’s Check 51
Let’s Analyze 53
In A Nutshell 56
QA List 58
Keywords Index 58
Course Schedule 59

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Big Picture: Week 4-5 Unit Learning Outcomes 60

Big Picture in Focus: Unit Learning Outcome 1 60

Metalanguage 61
Essential Knowledge 61
Self-Help 65
Let’s Check 66
Let’s Analyze 67
In A Nutshell 68
QA List 69
Keywords Index 69

Big Picture in Focus: Unit Learning Outcome 2 70

Metalanguage 70
Essential Knowledge 70
Self-Help 82
Let’s Check 82
Let’s Analyze 83
In A Nutshell 85
QA List 86
Keywords Index 86

Big Picture in Focus: Unit Learning Outcome 3 87

Metalanguage 87
Essential Knowledge 87
Self-Help 89
Let’s Check 89
Let’s Analyze 90
In A Nutshell 91
QA List 93
Keywords Index 94
Course Schedule 94

Big Picture: Week 6-7 Unit Learning Outcomes 95

Big Picture in Focus: Unit Learning Outcome 1 95

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Metalanguage 95
Essential Knowledge 95
Self-Help 97
Let’s Check 98
Let’s Analyze 100
In A Nutshell 101
QA List 102
Keywords Index 102

Big Picture in Focus: Unit Learning Outcome 2 103

Metalanguage 103
Essential Knowledge 103
Self-Help 108
Let’s Check 108
Let’s Analyze 111
In A Nutshell 111
QA List 112
Keywords Index 112

Big Picture in Focus: Unit Learning Outcome 3 113

Metalanguage 113
Essential Knowledge 113
Self-Help 115
Let’s Check 115
Let’s Analyze 117
In A Nutshell 117
QA List 119
Keywords Index 119
Course Schedule 120

Big Picture: Week 8-9 Unit Learning Outcomes 121

Big Picture in Focus: Unit Learning Outcome 1 121

Metalanguage 121
Essential Knowledge 121
Self-Help 131
Let’s Check 131
Let’s Analyze 133

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

In A Nutshell 134
QA List 136
Keywords Index 136

Big Picture in Focus: Unit Learning Outcome 2 137

Metalanguage 137
Essential Knowledge 137
Self-Help 146
Let’s Check 146
Let’s Analyze 151
In A Nutshell 152
QA List 154
Keywords Index 154

Big Picture in Focus: Unit Learning Outcome 3 155

Metalanguage 155
Essential Knowledge 155
Self-Help 159
Let’s Check 160
Let’s Analyze 161
In A Nutshell 162
QA List 163
Keywords Index 163
Course Schedule 163

Online Code of Conduct 164

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Course Outline : ACC 123– Cost Accounting and Control

Course Coordinator: Yolanda S. Barcelona

Email: [email protected]
Student Consultation: By BlackBoard LMS Message

Phone: (082) 3050645 loc. 137

Effectivity Date: August 17, 2020 (1st term/1st sem)
Mode of Delivery: Blended (On-Line with face to face or virtual sessions)
Time Frame: 54 Hours
Student Workload: Expected Self-Directed Learning
Requisites: ACC 111 Financial Accounting and Reporting
Credit: 3
Attendance Requirements: A minimum of 95% attendance is required at all scheduled
virtual or face to face sessions.

Course Outline Policy

Areas of Concern Details

Contact and Non-contact Hours This 3-unit course self-instructional manual is
designed for blended learning mode of instructional
delivery with scheduled face to face or virtual
sessions. The expected number of hours will be 54
including the face to face or virtual sessions. The
face to face sessions shall include the summative
assessment tasks (exams) since this course is
crucial in the CPA licensure examination (CPALE).

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Assessment Task Submission Submission of assessment tasks shall be on 3rd, 5th,

7th and 9th week of the term. The assessment paper
shall be attached with a cover page indicating the
title of the assessment task (if the task is
performance), the name of the course coordinator,
date of submission and name of the student. The
document should be emailed to the course
coordinator. It is also expected that you already paid
your tuition and other fees before the submission of
the assessment task.

If the assessment task is done in real time through

the features in the Blackboard Learning
Management System, the schedule shall be
arranged ahead of time by the course coordinator.

Since this course is included in the licensure

examination for CPAs, you will be required to take
the Multiple Choice Question exam inside the
University. This should be scheduled ahead of time
by your course coordinator.
This is non-negotiable for all licensure-based
programs.
Turnitin Submission (if To ensure honesty and authenticity, all assessment
necessary) tasks are required to be submitted through Turnitin
with a maximum similarity index of 30% allowed.
This means that if your paper goes beyond 30%, the
students will either opt to redo her/his paper or
explain in writing addressed to the course
coordinator the reasons for the similarity. In
addition, if the paper has reached more than 30%
similarity index, the student may be called for a
disciplinary action in accordance with the
University’s OPM on Intellectual and Academic
Honesty.

Please note that academic dishonesty such as

cheating and commissioning other students or
people to complete the task for you have severe
punishments (reprimand, warning, expulsion).

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Penalties for Late The score for an assessment item submitted after
Assignments/Assessments the designated time on the due date, without an
approved extension of time, will be reduced by 5%
of the possible maximum score for that assessment
item for each day or part day that the assessment
item is late.

However, if the late submission of assessment

paper has a valid reason, a letter of explanation
should be submitted and approved by the course
coordinator. If necessary, you will also be required
to present/attach evidences.
Return of Assignments/ Assessment tasks will be returned to you two (2)
Assessments weeks after the submission. This will be returned by
email or via Blackboard portal.

For group assessment tasks, the course coordinator

will require some or few of the students for online or
virtual sessions to ask clarificatory questions to
validate the originality of the assessment task
submitted and to ensure that all the group members
are involved.
Assignment Resubmission You should request in writing addressed to the
course coordinator his/her intention to resubmit an
assessment task. The resubmission is premised on
the student’s failure to comply with the similarity
index and other reasonable grounds such as
academic literacy standards or other reasonable
circumstances e.g.
illness, accidents financial constraints.
Re-marking of Assessment You should request in writing addressed to the
Papers and Appeal program coordinator your intention to appeal or
contest the score given to an assessment task. The
letter should explicitly explain the reasons/points to
contest the grade. The program coordinator shall
communicate with the students on the approval and
disapproval of the request.

If disapproved by the course coordinator, you can

elevate your case to the program head or the dean

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

with the original letter of request. The final decision

will come from the dean of the college.

Grading System All culled from BlackBoard sessions and traditional

contact
Course discussions/exercises – 30%
1st formative assessment – 10%
2nd formative assessment – 10%
3rd formative assessment – 10%

All culled from on-campus/onsite sessions (TBA):

Final exam – 40%

Submission of the final grades shall follow the usual

University system and procedures.

Preferred Referencing Style Harvard Referencing Style

Student Communication You are required to create a umindanao email

account which is a requirement to access the
BlackBoard portal. Then, the course coordinator
shall enroll the students to have access to the
materials and resources of the course. All
communication formats: chat, submission of
assessment tasks, requests etc. shall be through the
portal and other university recognized platforms.

You can also meet the course coordinator in person

through the scheduled face to face sessions to raise
your issues and concerns.

For students who have not created their student

email, please contact the course coordinator or
program head.

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Contact Details of the Dean Dean Lord Eddie I. Aguilar

Email:
[email protected]
Phone: (082) 305 0645 local 137

Contact Details of the Asst. Asst. Dean Mary Grace S. Sombilon

Dean and Program Heads Email:[email protected]
Phone: (082) 305 0645 local 137

Mr. Devzon U.Porras

PH – BSIA, BSAIS
Email: [email protected]
Phone: (082) 305 0645 local 137

Mr. Jade D. Solaña

PH – BSA, BSMA
Email: [email protected]
Phone: (082) 305 0645 local 137
Students with Special Needs Students with special needs shall communicate with
the course coordinator about the nature of his or her
special needs. Depending on the nature of the need,
the course coordinator with the approval of the
program coordinator may provide alternative
assessment tasks or extension of the deadline of
submission of assessment tasks. However, the
alternative assessment tasks should still be in the
service of achieving the desired course learning
outcomes.
Online Tutorial Registration Through LMS or PM Chats

Library Contact Brigida E. Bacani

Email: [email protected]
0951 3766681

For inquiries, you can email at

[email protected],
[email protected] or chat with us
here http://library.umindanao.edu.ph

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Facebook page: https://www.facebook.com/UM-

Learning-and-Information-Center-Davao-City-
962331877193048/

Well-being Welfare Support Ronadora E. Deala

Help Desk Email: [email protected]
09212122846
GSTC Facilitator
Zerdszen P. Ranises
Email:[email protected]
09058924090

GSTC Facebook Page:

https://www.facebook.com/UM-GSTC-Main-CAE-
111901303784349/?modal=admin_todo_tour

Course Information – see/download course syllabus in the Black Board LMS

CC’s Voice: Hello, Future Accountants! Welcome to this course, ACC 123 –
Cost and Control. This course will surely help you in your journey
to becoming an accountant by learning the basics of cost accounting
principles and other management concepts.

CO : In this course, you will learn the key concepts of cost recognition,
classification, measurement and cost management principles in
planning, implementation, analysis and control. You will also learn
to apply the key concepts in cost accounting in the preparation of
cost of goods manufactured and sold and the preparation of cost of
production report in a job order costing system or process costing
system.

Let us begin!
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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Big Picture

Week 1-3: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to

a. Explain the relationship of cost accounting to financial and management accounting

and its purpose.
b. Discuss the different classification of costs and prepare journal entries to record
transactions relative to Materials, Labor and Overhead.
c. Compare fixed, variable and mixed costs and how to separate mixed costs into their
fixed and variable components using the high-low method, the scatterplot method,
and the method of least squares.
Big Picture in Focus: ULOa. Explain the relationship of cost accounting to
financial and management accounting and its purpose.

Metalanguage

In this section, the most essential terms relevant to the study of cost accounting
system and to demonstrate ULOa will be operationally defined to establish a common
frame of refence on how to use the terms. You will encounter these terms as we go
through the study of cost accounting system. Please refer to these definitions in case you
will encounter difficulty in understanding cost accounting concepts.

1. Cost accounting system – designed to assign costs to individual

services and other cost objects specified by management.

2. Cost accounting - is the field of accounting that measures, records,

information about costs.

3. Financial accounting system – primarily concerned with producing information

for the company’s external information users.

4. Planning – is the detailed formulation of action to achieve a particular end.

5. Controlling – is the monitoring of a plan’s implementation

6. Decision making – is choosing among competing alternatives.

7. Managerial accounting - is the process of analyzing business costs and operations

to prepare internal financial report, records, and account to aid managers' decision
making process in achieving business goals.

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

8. Accounting information system – is one that consists of interrelated manual and

computer parts and uses processes such as collecting, recording, summarizing,
analyzing and managing data to provide information to users.

9. Cost Management system – primarily concerned with producing outputs for internal
information users, using inputs and processes needed to satisfy management
objectives.

10. Operational control system – designed to provide accurate and timely feedback
concerning the performance of managers and others relative to their planning and
control of activities.

Essential Knowledge

To perform the aforesaid big picture (unit learning outcomes) for the first three (3)
weeks of the course, you need to fully understand the following essential knowledge that
will be laid down in the succeeding pages. Please note that you are not limited to
exclusively refer to these resources. Thus, you are expected to utilize other books,
research articles and other resources that are available in the university’s library e.g.
ebrary, search.proquest.com etc.

Cost accounting is a branch of accounting which measures, records, and reports

information regarding costs. It is the field of accounting that apprise management about
the cost of producing certain products or the cost of rendering services.

The difference between cost management system and financial accounting system
lies primarily in its targeted users. Cost management information is for internal users,
whereas financial accounting information is purposely for external users. Cost
management is not bound by the externally imposed rules of financial reporting e.g.
Generally Accepted Accounting Principles (GAAP). It provides more details than financial
accounting.

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

COMPARISON OF FINANCIAL, MANAGERIAL, AND COST ACCOUNTING

Financial Accounting Cost Accounting Management Accounting

⮚ Primarily ⮚ The intersection ⮚ The use of accounting
concerned with between financial information for
financial and managerial external parties,
statements for accounting including investors
external use ⮚ Needed and used and creditors.
(investors, by both financial ⮚ The information may
creditors, and managerial be current or
stockholders, etc.) accounting forecasted,
⮚ Based on ⮚ Provides product quantitative or
historical cost information to qualitative, monetary
transaction data or non-monetary and
external parties
⮚ The information timely.
(stockholders, ⮚ Aids managers in their
may be
creditors, various efforts to improve the
quantitative,
regulatory boards economic
monetary and
for credit and performance of the
verifiable.
investment
⮚ The use of decisions)
firm.
accounting
⮚ Provides product
information for cost information to
external parties, internal parties
including (managers) for

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

investors and planning and

creditors controlling.

The purpose of cost accounting is to help management determine how much is the
manufacturing cost of each product that the company is producing. It aids management
in making decisions concerning its productivity and profitability. It provides information to
management for planning, control and decision. The three major areas of cost accounting
are the following:

a. Planning – this is the process of defining plan of activities which are geared
towards satisfaction of the objectives of the firm. It provides the foundation upon
which the control function operates. It is future oriented and it tries to ensure the
company’s continuity.
b. Control – this refers to functions which are directed to check and ensure that
people's activities are gearing towards getting on the objectives of the firm.
c. Decision making - this is about the assessment of alternative courses of action.
action. The decision may involve commitments that are considered long-term (for
example, buying a new equipment) or short term commitment (for example, to
accept or to reject an order).

Self-Help: You can also refer to the sources below to help you further understand
the lesson:

* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic

Emphasis (7th Ed.) New York: NY: McGraw-Hill Education

* Hansen, D & Mowen, M 2015, Cornerstones of Cost Management (3rd Ed.).

Mason, OH: Cengage Learning

* Horngren, C, Datar, S & Rajan 2011, Cost Accounting: A Managerial Emphasis,

14th Edition Prentice Hall

* Jagolinzer, P 1999, Cost Accounting: An Introduction to Cost Management-South-

Western Educational Publishing

* Lanen, W 2017, Fundamentals of Cost Accounting. 5th Edition. New York, NY:
McGraw- Hill Education

*Vanderbeck, E 2009, Principles of Cost Accounting 15th Edition. Cengage Learnin.

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Let’s Check

Activity 1. Now that you know the most essential terms in the study of cost management
system, let us try to check your understanding of these terms. In the space provided,
write the term/s being asked in the following statements:

_______________1. It refers to the branch of accounting which measures, records, and

reports information concerning costs.

_______________2. It is a branch of accounting which is primarily concerned with the

financial statements intended for external users.

_______________3.It is essentially concerned with producing outputs for internal users,

using inputs and processes needed to achieve management objectives.

_______________4. This refers to a system that is designed to provide correct and timely
feedback about the performance of managers relative to planning and control of activities.

_______________5. This refers to the monitoring if plans are properly implemented.

_______________6. This is the detailed formulation of action to achieve a particular end.

_______________7. It is the process of analyzing business costs and operations to

prepare internal financial report, records, and account to aid managers' decision making
process in achieving business goals.

_______________8. It refers to the process that leads to the selection of an action

among several alternatives.

_______________9. It consists of interrelated manual and computer parts and uses

processes such as collecting, recording, summarizing, analyzing and managing data to
provide information to users.

______________10. This is a system that is designed to assign costs to individual

products and services and other cost objects specified by management.

Let’s Analyze

Activity 1. You are now familiar with the essential terms in the study of cost management
system. Below are some questions for you to answer. Please provide a thorough
explanation for each question.

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

1. What is the role of cost accounting in the economic performance of a company?

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

____________________________________________________________________________

2. Enumerate the three major areas of cost accounting and discuss each.
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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

____________________________________________________________________________

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3. How does Cost accounting differ from Financial and Management Accounting?

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In a Nutshell

Activity 1. Cost and management accounting is concerned with the provision of

information to managers to help them in decision making, planning and control. While,

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

financial accounting is concerned with the provision of information to external users

outside the business.

Based from the definition of the most essential terms in the study of cost and
management accounting and the learning exercises that you have done, please feel free
to write your arguments or lessons learned below. I have indicated my arguments or
lessons learned.

1. Cost accounting and cost management play a vital role in the company’s profit. It
helps management improve its economic performance.

2. Financial accounting reports refer to the whole of the organization, whereas cost
and management accounting focuses on small parts of the organization.

Your Turn

3. ______________________________________________________________________

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4. ______________________________________________________________________

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5. ______________________________________________________________________

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6. ______________________________________________________________________

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7. ______________________________________________________________________

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

______________________________________________________________________
8. ______________________________________________________________________

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9. ______________________________________________________________________

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10. ______________________________________________________________________

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Q & A List

Do you have any question for Clarification?

Questions/Issues Answers
1.
2.
3.
4.
5.
6.
7.
8.
9.
10
11
12.

Keywords Index

Cost information Cost Management Operational control

system system system
Controlling Decision making Planning

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Cost accounting Financial accounting

system
Cost accounting Managerial accounting
system
Big Picture in Focus: ULOb. Discusss the different classification of costs and
prepare journal entries to record transactions relative to Materials, Labor and
Overhead.

Metalanguage

In this section, the most essential terms relevant to the study of classifying costs
and to demonstrate ULOb will be operationally defined to establish a common frame of
refence on how to use the terms. You will encounter these terms as we go through the
study of different cost terminology and the journal entries required in accounting for
Material, Labor and Overhead.

1. Direct costs – are those costs which can be specifically traced to or identified
with a particular product.

2. Indirect costs – are those which cannot be identified with a particular product
and which are incurred for the benefit of all products.

3. Variable costs – are costs that vary/change in total proportion to the related
level of activity or volume.

4. Fixed costs – are costs that do not change in total for a given time period and
not affected by the changes in the related level of activity or volume.

5. Inventoriable costs – are costs of a product that are presented in the balance
sheet as assets when they are incurred and that become cost of goods sold
only when the product is sold.
6. Period costs - are all costs in the income statement other than cost of goods
sold e.g. selling expenses, advertising expenses

7. Product costs – these costs include direct materials, direct labor and
manufacturing overhead.

8. Mixed Costs – costs having both a fixed component and a variable component

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Essential Knowledge

To perform the aforesaid big picture (unit learning outcomes) for the first three (3)
weeks of the course, you need to fully understand the following essential knowledge that
will be laid down in the succeeding pages. Please note that you are not limited to
exclusively refer to these resources. Thus, you are expected to utilize other books,
research articles and other resources that are available in the university’s library e.g.
ebrary, search.proquest.com etc.

Classification of Costs

Cost behavior refers to how a cost will react to changes in the level of activity. The
most common classifications are: Variable costs, Fixed costs and Mixed Costs.

1. Variable costs vary directly in proportion with the level of activity. Examples of
variable costs are direct materials and power. These costs fluctuate with
operating activity. Total variable cost is linear and unit variable cost is constant.

(Jagolinzer, P 1999, Cost Accounting: An introduction to cost management).

2. Fixed costs such as depreciation and rent remain constant over a wide range
of activity for a specified period.

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 College of Accounting Education
3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

(Jagolinzer, P 1999, Cost Accounting: An introduction to Cost Management).

3. Mixed costs are costs that contain both a variable and fixed component.

4. Other costs:

4.1 Standard Costs are costs that have been established by using information
accumulated from past experience and data secured from research studies.

4.2 Opportunity Costs are costs which will measure the opportunity that is lost
or sacrifice when the choice of one course of action requires that an
alternative course of action be given up.

4.3 Differential Cost is the difference between the cost of two alternative
decisions, or of a change in output level.

4.4 Out of Pocket Cost is a potential future outlay of cash that management
needs to decide whether or not to make.

4.5 Sunk costs are costs that have been created by a decision in the past and
which cannot be changed by any decision that will be made in the future.
Sunk costs are irrelevant for decision-making.

4.6 Relevant costs are those future costs which will be changed by a decision
while irrelevant costs are those costs which will not be affected by a
decision.

4.7 Controllable costs are costs which are subject to regulation by the manager
of the responsibility center.

4.8 Non-controllable costs are those costs which are not within the control of a

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3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

manager.

ELEMENTS OF MANUFACTURING COSTS

Direct Materials
Direct materials are materials which can be directly traced to goods or services
being produced. The cost of these materials can be directly charged to products because
physical observation can be used to measure the quantity consumed by each product.
Materials that become part of a tangible product or that are used in providing a service
are usually classified as direct materials. Examples of direct materials are: steel in an
automobile, wood in a furniture, alcohol in cologne, denim in jeans, braces for correcting
teeth, surgical gauze and anesthesia for an operation, ribbon in a corsage, and food on
an airline are all direct materials.
Direct Labor
Direct labor is a labor that is directly traceable to the goods or services being
produced. This refers to the effort exerted directly to the product/service. Employees who
convert raw materials into a product or who provide a service to customers are classified
as direct labor. Workers on an assembly line at Toyota, a chef in a restaurant, a surgical
nurse for an open-heart operation, and a pilot for Cathay Pacific Air Lines are examples
of direct labor.
Overhead

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All production costs other than direct materials and direct labor are considered
overhead. In a manufacturing firm, overhead is also known as factory burden or
manufacturing overhead. All indirect materials and indirect labor are charged to
manufacturing overhead. Many inputs other than direct labor and direct materials are
needed to produce products. Examples include depreciation on buildings and equipment,
maintenance, supplies, supervision, materials handling, power, property taxes,
landscaping of factory grounds, and plant security. Supplies are generally those materials
necessary for production that do not become part of the finished product or are not used
in providing a service. Dishwasher detergent in a fast-food restaurant and oil for
lubricating production equipment are examples of supplies.
Prime and Conversion Costs
Prime cost is the sum of direct materials cost and direct labor cost. Prime costs
can be traced directly to a specific batch of products and vary directly with the amount of
products produced.
Conversion cost is the sum of direct labor cost and overhead cost. It is the cost
of resources that transform raw materials in production from one physical state to another.
For a manufacturing firm, conversion cost can be interpreted as the cost of converting
raw materials into a final product.
Prime Cost and Conversion Cost

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Flow of Manufacturing Costs

(Vanderbeck, E 2009, Principles of Cost Accounting, 15th Edition)

Production and Non-production Costs

(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

Nonproduction costs are divided into three categories: research and development
costs, marketing (selling) costs, and administrative costs. Because the amount and timing
of the benefits of these costs cannot be reasonably estimated, for external financial
reporting, they are called period costs and cannot be inventoried. Period costs are
expensed in the period in which they are incurred. Thus, none of these costs can be
assigned to products or appear as part of the reported values of inventories on the
balance sheet. Research and development (R&D) costs are expenditures aimed at
developing new products and processes, or at modifying existing products or processes.
Examples of R&D costs include laboratory research aimed at discovery of new
knowledge, searching for applications of new research findings or other knowledge,
conceptual formulation and design of possible product or process alternatives, testing in
search for or evaluation of product or process alternatives, modification of the formulation

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or design of a product or process, and design, construction, and testing of preproduction

prototypes and models.
Those costs necessary to market and distribute a product or service are marketing
(selling) costs. They are often referred to as order-getting and order-filling costs.
Examples of marketing costs include sales personnel salaries and commissions,
advertising, warehousing, shipping, and customer service. The first two items are
examples of order-getting costs; the last three are order-filling costs. The costs associated
with the general administration of the organization are administrative costs. General
administration has the responsibility of ensuring that the various activities of the
organization are properly integrated so the overall mission of the firm is realized. The
president of the firm, for example, is concerned with the efficiency of both marketing and
production as they carry out their respective roles. Proper integration of these two
functions is essential for maximizing the overall profits of a firm.

I. Accounting for Materials

It is important for a company to ensure that materials are properly maintained and
controlled. To have an effective and efficient way of doing this, two basic aspects of
materials control are presented:
(1) the physical control or safeguarding of materials
(2) control over the investment in materials
Physical control protects materials from misuse or misappropriation whereas
Controlling the investment in materials maintains appropriate quantities of materials in
inventory. To avoid theft and misappropriation, it is proper to limit access to materials
storage areas. Only authorized personnel should have access to materials storage
areas. Finished goods should also be safeguarded by ensuring that appropriate
documentation and authorization are in place before releasing it for shipment.
A basic principle of internal control is the segregation of employee duties to
minimize opportunities for misappropriation of assets. With respect to materials control,
the following functions should be segregated: purchasing, receiving, storage, use, and
recording. The independence of personnel assigned to these functions does not eliminate
the danger of misappropriation or misuse because the possibility of collusion still exists.
However, the appropriate segregation of duties limits an individual employee’s
opportunities for misappropriation and concealment. In smaller organizations, it is
frequently not possible to achieve optimum segregation of duties due to the limited
number of employees. Small businesses must therefore rely on specially designed control
procedures to compensate for the lack of independence of assigned functions.

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An effective materials control system requires the accurate recording of the

purchase and issuance of materials. Inventory records should document the inventory
quantities on hand, and cost records should provide the data needed to assign a cost to
inventories for the preparation of financial statements. Periodically, recorded inventories
should be compared with a physical inventory count, and any significant discrepancies
should be investigated.
Maintaining an appropriate level of raw materials inventory is one of the most
important objectives of materials control. An inventory of sufficient size and variety for
efficient operations must be maintained, but the size should not be excessive in relation
to scheduled production needs. Because funds invested in inventories are unavailable for
other uses, management should consider other working capital needs in determining
inventory levels. Management should consider the materials costs of handling, storage,
personal property taxes, and casualty insurance. Also, higher than needed inventory
levels may increase the possibility of loss from the damage, deterioration, or
obsolescence of materials. The planning and control of the materials investment requires
that all of these factors be carefully studied to determine (1) when orders should be
placed and (2) how many units should be ordered.

Order Point
A minimum level of inventory should be determined for each type of raw material,
and inventory records should indicate how much of each type is on hand. A subsidiary
materials ledger, in which a separate account is maintained for each material, is needed.
The point at which an item should be ordered, called the order point, occurs when
the predetermined minimum level of inventory on hand is reached.
Calculating the order point is based on the following data:
1. Usage—the anticipated rate at which the material will be used.
2. Lead time—the estimated time interval between the placement of an order and the
receipt of the material.

3. Safety stock—the estimated minimum level of inventory needed to protect against

stock-outs (running out of stock).

Stock-outs may occur due to inaccurate estimates of usage or lead time or various
other unforeseen events, such as the receipt of damaged or inferior materials from a
supplier or a work stoppage at a supplier’s plant.

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Assume that a company’s expected daily usage of an item of material is 100 lb,
the anticipated lead time is five days, and the desired safety stock is 1,000 lb. The
following calculation shows that the order point is reached when the inventory on hand
reaches 1,500 lb:
100 lb (daily usage) 5 days (lead time) .(100@5)________________ 500 lb
Safety stock required ___________________________________1,000 lb
Order point ____________________________________________ 1,500 lb

If estimates of usage and lead time are accurate, the level of inventory when the
new order is received would be equal to the safety stock of 1,000 lb. If, however, the new
order is delivered three days late, the company would need to issue 300 lb of material
from its safety stock to maintain the production level during the delay.
Economic Order Quantity (EOQ).
The order point establishes the time when an order should be placed, but it does
not indicate the most economical number of units to be ordered. To determine the quantity
to be ordered, the cost of placing an order (order costs) and the cost of carrying inventory
in stock (carrying costs) must be considered.

(Vanderbeck, E 2009, Principles of Cost Accounting, 15th Edition)

Order costs and carrying costs move in opposite directions—annual order costs
decrease when the order size increases, while annual carrying costs increase when the
order size increases. The optimal quantity to order at one time, called the economic order

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quantity, is the order size that minimizes the total order and carrying costs over a period
of time, such as one year
In summary, if the company wants to determine when to order, use the Order Point
Formula whereas use the Economic Order Quantity (EOQ) when determining how many
units are to be ordered.
Formula for calculating EOQ:

Illustrative Problem: Assume that the following data have been determined by analyzing
the factors relevant to materials inventory for South Paint Company:
Number of gallons of material required annually ......................... 10,000
Cost of placing an order ............................................................ Php 10.00
Annual carrying cost per gallon of inventory…............................. Php 0.8

Using the EOQ formula, 500 gallons should be ordered at one time:

Journal Entries:

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Transactions Journal Entries

a. Purchase of raw materials Materials 50,000
Accounts Payable 50,000

b. Raw materials requisitioned Work in Process 50,000

to production Materials 50,000

c. Direct labor cost Work in Process 25,000

Payroll 25,000

d. Manufacturing overhead Factory Overhead 75,000

costs incurred Various Credits 75,000

e. Transfer of factory overhead Work in Process 75,000

costs to work in process Factory Overhead 75,000

f. Completion of all products Finished Goods 150,000

Work in Process 150,000

g. Sale of all products Cost of Goods Sold 150,000

Finished Goods 150,000
II. Accounting for Labor
Factory payroll costs are divided into two categories:
a. direct labor
b. indirect labor
Direct labor, also known as touch labor, represents payroll costs traced directly
to an individual job. Direct labor costs include the wages of machinists, assemblers, and
other workers who physically convert raw materials to finished goods—thus the term
touch.
For example, a painter on the production line at a car factory is a direct laborer.
The cost of direct labor is debited to Work in Process.
Indirect labor consists of labor costs incurred for a variety of jobs related to the
production process but not readily traceable to the individual jobs worked on during the
period. Indirect labor costs include the salaries and wages of the factory superintendent,

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supervisors, janitors, clerks, and factory accountants who support all jobs worked on
during the period.
For example, the plant manager of a car manufacturing facility is an indirect
laborer. Indirect labor costs are charged to Factory Overhead. You may also think of
the distinction between direct labor and indirect labor relative to service firms. For
example, auditors with a public accounting firm would be considered direct labor relative
to the individual jobs that they worked on, whereas the salary of the managing partner
would be indirect labor that should be allocated to all of the clients audited in determining
the total cost of servicing clients. Other examples of indirect labor in an accounting firm
would include the human resources function, the technical support staff, and the
secretarial function.
The accounting system of a manufacturer must include the following procedures
for recording payroll costs:
1. Recording the hours worked or quantity of output by employees in total
and by job, process, or department.
2. Analyzing the hours worked by employees to determine how labor time
is to be charged.
3. Charging payroll costs to jobs, processes, departments, and factory
overhead accounts.
4. Preparing the payroll which involves computing and recording employee
gross deduction, and net earnings.

Payroll Function
The payroll function’s primary responsibility is to compute the employees’ wages
and salaries. It involves combining the daily wages, determining the total earnings, and
computing deductions and withholdings for each employee. The department must
maintain current information concerning regulatory requirements regarding wages and
salaries because a specified amount of the employee’s wages are subject to social
security (FICA) and income tax deductions. Additional deductions, approved by the
employee, can be taken for group insurance premiums, union dues, contributions to a
tax-sheltered annuity, and so on.
Forms used to record earnings information may vary considerably from company
to company; however, all forms possess some common characteristics. The payroll
record shown below for the period ending February 16, provides typical information. It
assembles and summarizes each period’s payroll data and serves as a subsidiary record
for the preparation of a general journal entry.

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Payroll Record

The entry to record the payroll data would be:

1. Payroll ......................................................... 1,840.50
FICA Tax Payable ........................................................ 147.24
Employees Income Tax Payable. ................................. 386.11
Health Insurance Payable. ...... . ................................... 120.00
Employee Receivable ….. . . ......... …............. ............... 50.00
Wages Payable............................................ ….. .….. 1,137.15
To record payroll liability.
2. Wages Payable ................................................. 1,137.15
Cash ................................................................... 1,137.15
To record the payment of net pay to employees.
Illustrative Problem:
The total wages and salaries earned by all employees of Dora Mfg. Co. during the
month of April, as shown in the labor cost summary and the schedule of fixed
administrative and sales salaries, are classified as follows:
Direct labor……………………………………Php312,563
Indirect labor…………………………………….. 81,060
Administrative salaries ………………………….. 70,100
Sales salaries ………………………………………86,250.
Total wages……………………………………Php549,973
======
Journal entries to distribute the wages earned during April:

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Work in Process………………………………. 312,563

Factory Overhead (Indirect labor)……………..81,060
Administrative salaries………………………… 70,100
Sales Salaries ………………………………… 86,250
Payroll 549,973

Illustrative Problem:
An employee earns Php20 per hour for up to 200 units of production per day. An
employee who produces more than 200 units per day receives an additional piece rate of
Php.50 per unit. Assume that an employee worked eight hours per day with the following
unit production for the week. Calculate the earnings for the week.
Day Hours Units Hourly Piece-rate Total
Earnings Earnings Earnings
Monday 8 200 Php160.00 Php160.00
Tuesday 8 175 160.00 160.00
Wednesday 8 225 160.00 Php12.50 172.50
Thursday 8 250 160.00 25.00 185.00
Friday 8 150 160.00 160.00
Total 40 1,000 Php800.00 Php37.50 Php837.50

In summary, prepare journal entries to record the payroll, pay the payroll and distribute
the payroll.
III. Accounting for Overhead
Apply factory overhead using predetermined rates. Factory overhead includes many
different costs, some of which will not be known until the end of the accounting period.
Because it is desirable to know the approximate cost of a job or product soon after its
completion, some method must be established for estimating the amount of factory
overhead that should be applied to the finished product. Through the estimating
procedure, a job or product will be charged an estimated amount of factory overhead
expense as it is worked on. At the end of a period, the actual factory overhead costs
can be compared to the estimated factory overhead applied to jobs. If the company
encounters a difference, it can determine the reasons for the variance and distribute it to
the appropriate accounts.
The flexible budget, which includes the expected departmental factory overhead costs
at given levels of production, is used to establish predetermined factory overhead rates.

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The rates are computed by dividing the budgeted factory overhead cost by the budgeted
production. The budgeted production may be expressed in such terms as machine
hours, direct labor hours, direct labor cost, and units produced:
1. Direct labor cost method formula
Overhead rate = factory overhead cost
direct labor cost

Overhead rate = 100,000

200,000

For example, assume that the budgeted factory overhead cost for Department A
amounts to Php100,000, and the estimated direct labor cost is expected to be
Php200,000. The predetermined overhead rate would be 50% of direct labor dollars
(Php100,000/Php200,000). Also, assume that during the first month of operations, Job
100 incurred Php1,000 for direct materials and Php3,000 for direct labor, and that the job
is completed by the end of the month. Using the predetermined rate to estimate factory
overhead, the total job cost is computed as follows:
Job 100
Direct materials ........................................................... Php1,000
Direct labor. ....................................................................... 3,000
Factory overhead (50% of direct labor) ............................ 1,500
Total cost of completed job. .........................................Php5,500
The direct labor cost method is appropriate in departments that require mostly human
labor and in which the direct labor cost charges are relatively stable from one job to another.
2. Machine hour method
Assume that the factory overhead budget is Php100,000, consisting mostly of
machine-related costs, and it is expected that 10,000 machine hours will be required to
meet production. The predetermined rate would be Php10 per machine hour
(Php100,000/10,000 hours). Assuming that Job 100, now completed, used Php1,000 for
direct materials, Php3,000 for direct labor, and required 300 machine hours, its cost is as
follows:

Job 100

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Direct materials .............................................................Php1,000

Direct labor ........................................................... ............ 3,000
Factory overhead (300 machine hours@ Php10) ............... 3,000
Total cost of completed job .............................................Php7,000

Assume that Job 100, now completed, required Php1,000 for direct materials,
Php3,000 for direct labor, 500 direct labor hours, 75 machine hours, two setups, and two
design changes. The cost of the job would be computed as follows:

Job 100
Direct materials ................................................................................... Php1,000
Direct labor (500 hours).. ........................................................................... 3,000
Factory overhead related to:
Direct labor usage (500 hours@Php3/direct labor hour) ...................... 1,500
Machine usage (75 hours@Php8/machine hour) ..................................... 600
Machine setups (2 setups@Php200/setup) .............................................. 400
Design changes (2 changes@Php400/design change) ............................. 800
Total cost of complete job .................................................................. Php7,300

Illustrative Problem:
Assume that ABC Company uses the machine hour method to apply factory
overhead. Additional data:
Predetermined overhead rate is Php20 per hour
Direct materials used Php3,000
Direct labor 2,200
Direct labor hours 150
Machine hours 175

Required: a. amount charged to Factory overhead

b. total cost of the job
Solution:
Direct materials……………………… . Php 3,000
Direct labor…………………….……… 2,200
Factory overhead:
Machine hours (175 x Php20) …….. 3,500

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Total cost of the job Php 8,700

====

After selecting the overhead application method and computing the predetermined
rate to be used, all jobs or processes should be charged with the estimated overhead
cost rather than the actual factory overhead costs being incurred. The estimated factory
overhead is applied to production by a debit to Work in Process and a credit to an
account entitled Applied Factory Overhead. Use of the separate applied factory
overhead account rather than the credit side of the factory overhead control account
avoids confusing the actual factory overhead charges, which are debited to the factory
overhead control account, with the estimated charges that are debited to work in process.
At the end of a period, the debit balance in Factory Overhead is compared to the credit
balance in Applied Factory Overhead is compared to the credit balance in Applied Factory
Overhead to determine the accuracy of the predetermined rates.

To illustrate the use of a predetermined overhead rate, assume that a company has
estimated a rate of Php5 per direct labor hour and that production jobs actually required
1,000 direct labor hours to complete. Using the direct labor hour method, we see that
Php5,000 of estimated factory overhead cost would be applied to all jobs worked on
during the period as follows:
(a) Work in Process ........................................ 5,000
Applied Factory Overhead ............................... 5,000
Applied factory overhead to jobs (1,000 hours @ Php5).
Also assume that the actual factory overhead for the period was Php5,500, recorded as
follows:
(b) Factory Overhead ....................................... 5,500
Accounts Payable ..................................... 5,500

At the end of the period, the applied factory overhead account is closed to the factory
overhead control account:

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(c) Applied Factory Overhead ............................... 5,000

Factory Overhead ..................................... 5,000
Closed applied factory overhead account to control account.
After the previous entries are posted, if a balance (debit or credit) remains in the
factory overhead control account, it indicates that the actual factory overhead incurred
did not equal the estimated factory overhead applied to jobs:

The remaining debit balance of Php500 in Factory Overhead indicates that a

smaller amount of overhead was applied to production than was actually incurred during
the period. The debit balance indicates that the factory overhead costs were under-
applied or under-absorbed. In other words, the work in process account and the
individual jobs worked on were undercharged for the costs of factory overhead incurred
in the accounting period.
Probable causes for the under-application could include: (1) a lower level of operating
capacity was achieved than was budgeted for when the predetermined rate was
established or (2) the actual factory overhead expenses were more than budgeted for the
operating level achieved. If, on the other hand, a credit balance remains in Factory
Overhead after the applied factory overhead account is closed to the control account, the
credit balance would represent over-applied or over-absorbed factory overhead. This
means that more overhead was applied to production than was actually incurred in the
period. To begin each new month with a zero balance in Factory Overhead, the debit or
credit balance in the account is usually transferred to an account entitled Under- and
Over-applied Factory Overhead, as follows:
(d) Under- and Over-applied Factory Overhead ............... 500
Factory Overhead ....................................... 500
Closed debit balance (under-applied) in factory overhead control account.

The special account, Under- and Over-applied Factory Overhead, will

accumulate the month-to-month differences. At the end of the year, the balance
of the under- and over-applied account will be closed to Cost of Goods Sold.

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Self-Help: You can also refer to the sources below to help you further understand
the lesson:
* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A
Strategic Emphasis (7th Ed.) New York: NY: McGraw-Hill Education

* Hansen, D & Mowen, M 2015, Cornerstones of Cost Management (3rd Ed.).

Mason, OH: Cengage Learning

* Horngren, C, Datar, S & Rajan 2011, Cost Accounting: A Managerial

Emphasis, 14th Edition Prentice Hall

* Jagolinzer, P 1999, Cost Accounting: An Introduction to Cost Management-

South- Western Educational Publishing

* Lanen, W 2017, Fundamentals of Cost Accounting. 5th Edition. New York,

NY: McGraw- Hill Education

*Vanderbeck, E 2009, Principles of Cost Accounting 15th Edition. Cengage

Learnin.

Let’s Check

Activity 1. Instruction: Please select the best answer under each item.

1. Direct materials and direct labor are considered to be:

a. Selling expenses
b. Prime costs
c. Administrative expenses
d. Conversion costs

2. Depreciation on factory buildings and equipment is classified as:

a. Selling expense
b. Direct labor
c. Factory overhead
d. Administrative expense

3. The following statement that best describes a fixed cost is:

a. It may change in total when such change depends on production within the relevant
range

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b. It increases on a per-unit basis as production increases

c. It decreases on a per-unit basis as production increases
d. It may change inn total when such change is related to changes in production

4. The term conversion costs refer to:

a. Costs that are associated with marketing, shipping, warehousing, and billing
activities
b. The sum of direct labor and direct labor costs
c. Manufacturing costs incurred to produce units of output
d. The sum of direct labor costs and all factory overhead costs.

5. A typical marketing expense is:

a. Freight out
b. Indirect labor
c. Audit fees
d. Direct labor

6. An expense that is likely to contain both fixed and variable components is:
a. Security guard wages
b. Supplies
c. Heat, light and power
d. Small tools

7. The term variable costs refer to:

a. All costs whose total amounts change in proportion to changes in activity within a
relevant range
b. All costs that are likely to respond to the amount of attention devoted to them by
a specified manager
c. All costs that are associated with marketing, shipping, warehousing, and billing
activities
d. All costs that do not change in total for a given period and relevant range, but
become progressively smaller on a per-unit basis as volume increases.

8. A factory overhead costs:

a. Is a direct cost
b. Is a prime cost
c. Can be a variable cost or a fixed cost
d. Can only be a fixed cost

9. Prime cost and conversion cost share what common element of total cost?
a. Direct labor
b. Commercial expense
c. Variable overhead

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d. Fixed overhead

10. Factory overhead includes:

a. Indirect materials but not indirect labor
b. Indirect labor but not indirect materials
c. Prime costs
d. All manufacturing costs, except direct materials and direct labor

Let’s Analyze
Activity 1. The different cost terminology have greatly contributed as foundations of the
basic knowledge in cost accounting. At this point, you will be required to answer the
following questions.

Problem 1.
Company A has developed the following data to assist in controlling one of its inventory
items:

Economic order quantity 1000 liters

Average daily use 100 liters
Maximum daily use 120 liters
Working days per year 250 days
Safety stock 140 liters
Cost of carrying inventory Php1.00 per liter per year
Lead time 7 working days

Required: Compute the following:

(1) Order point

(2) Average inventory
(3) Maximum inventory assuming normal lead time and usage
(4) Cost of placing one order

Problem 2:

On January 1, the ledger of the Vovin Furniture Company contained, among other
accounts, the following: Finished Goods, Php25,000; Work in Process, Php30,000;
Materials, Php15,000. During January, the following transactions were completed:

(a) Materials were purchased at a cost of Php28,000.

(b) Direct materials in the amount of Php21,000 were issued from the storeroom.
(c) Storeroom requisitions for indirect materials and supplies amounted to Php3,200.

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(d) The total payroll for January amounted to Php31,000, including marketing salaries
of Php7,500 and administrative salaries of Php5,500. Labor time tickets show that
Php15,500 of the labor cost was direct labor.
(e) Various factory overhead costs were incurred for Php12,000 on account.
(f) Total factory overhead is charged to the work in process account.
(g) Cost of production completed in January totaled Php58,000, and finished goods in
the shipping room on January 31 totaled Php18,000.
(h) Customers to whom shipments were made during the month were billed for
Php88,000. (Also record entry for cost of goods sold.)

Required: Prepare journal entries for the transactions, including the recording, payment,
and distribution of the payroll.

Problem 3.

Divoc Corp. estimates that its production for the coming year will be 10,000 widgets, which
is 80% of normal capacity, with the following unit costs: materials, Php40; direct labor,
Php60. Direct labor is paid at the rate of Php24 per hour. The widget shaper, the most
expensive piece of machinery, must be run for 20 minutes to produce one widget. Total
estimated overhead is expected to consist of Php400,000 for variable overhead and
Php400,000 for fixed overhead.

Required: Compute the overhead rate for each of the following bases, using the expected
actual capacity activity level:

(1) physical output

(2) materials cost
(3) direct labor cost
(4) direct labor hours
(5) machine hours

______________________________________________________________________

______________________________________________________________________

______________________________________________________________________

______________________________________________________________________

______________________________________________________________________

______________________________________________________________________

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______________________________________________________________________

______________________________________________________________________

______________________________________________________________________

______________________________________________________________________

______________________________________________________________________

______________________________________________________________________

______________________________________________________________________

______________________________________________________________________

______________________________________________________________________

______________________________________________________________________

______________________________________________________________________

______________________________________________________________________

______________________________________________________________________

In a Nutshell
Activity 1. Principles of cost accounting have been developed to enable
manufacturers to process the many different costs associated with manufacturing and to
provide built-in control features. The information produced by a cost accounting system
provides a basis for determining product costs and selling prices, and it helps
management to plan and control operations.

Based from the definition of the most essential terms in the study of cost
accounting and the learning exercises that you have done, please feel free to write your
arguments or lessons learned below. I have indicated my arguments or lessons learned.

1. Cost accounting procedures provide the means to determine product costs that
enable the preparation of meaningful financial statements and other reports
needed to manage a business.

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Phone No.: (082)300-5456 Local 137

2. All three elements of manufacturing cost flow through the Work- in- Process
Inventory account.
3. The cost of direct materials and direct labor used in production are charged
(debited) directly to Work in Process while all other factory costs , e.g. indirect
labor, indirect materials, and other factory expenses are charged to the Factory
Overhead account and later transferred to Work in Process.

Your Turn

4.___________________________________________________________________

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6.____________________________________________________________________

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7.____________________________________________________________________

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8.____________________________________________________________________

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Phone No.: (082)300-5456 Local 137

______________________________________________________________________

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9.____________________________________________________________________

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10.___________________________________________________________________

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Q & A List

Do you have any question for Clarification?

Questions/Issues Answers
1.
2.
3.
4.
5.
6.
7.
8.
9.
10
11

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12.

Keywords Index

Controllable costs Fixed cost Order point Relevant

costs
Conversion costs Inventoriable costs Out-of-pocket Safety stock
Lead time costs Sunk costs
Usage
Direct cost Mixed costs Period costs Variable costs
Economic order Non-controllable costs Prime costs Work in
quantity process
Factory overhead Opportunity costs Product costs

Big Picture in Focus: ULOc. Compare fixed, variable and mixed costs and
explain how to separate mixed costs into their fixed and variable components
using the high-low method, the scatterplot method, and the method of least
squares.

Metalanguage and Essential Knowledge

Below are the essential terms that you are going to encounter in the pursuit of
ULOc: Understand fixed, variable and mixed costs and how to separate mixed costs into
their fixed and variable components using the high-low method, the scatterplot method,
and the method of least squares. Again, you are advised to frequently refer to these
definitions to help you understand the succeeding topics. I would like to highly recommend
that you refresh your knowledge about ULOa and ULOb to understand further ULOc.

1. Identifying Cost Behavior Patterns. Direct materials and direct labor are classified
as variable costs. Variable costs are costs that vary in direct proportion to volume
changes. In contrast are those costs that remain the same in total when production
levels increase or decrease. These unchanging costs are referred to as fixed costs.
Semi-variable costs, also called mixed costs, have characteristics of both variable
and fixed costs.

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2. Three methods of separating mixed costs into their fixed and variable components:

2.1 High-low method

The high-low method compares a high production volume and its related
cost to a low production volume with its related cost.
Example: Assume that the following overhead costs were incurred at two
different levels of production.

Depreciation (fixed) Php2,000 Php 2,000

Electricity costs (semi-variable) 3,000 5,000
Factory supplies (variable) 1,000 2,000
______ ______
Total cost………………… …..…… Php 6,000 Php 9,000
======= ======

Calculation for the Variable Cost:

Units Produced Electricity Costs
High volume 2,000 Php5,000
Low volume 1,000 3,000
--------------- -------------
Change 1,000 Php 2,000
====== =======

Formula for the computation of variable cost per unit:

Variable cost per unit = Change in costs

-------------------------
Change in units

Variable cost per unit = Php2,000

---------
1,000
Variable cost per unit = Php2

Calculation for Fixed Costs:

1,000 units 2,000 units

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Total cost -------------------------------------------Php 3,000 Php5,000

Variable cost ($2 @ 1,000 units) ----------------Php 2,000
Variable cost ($2 @ 2,000 units) ------------------------------. 4,000
-----------
Fixed costs (remainder)………………………Php1,000 Php 1,000
====== ======
2.2 Scattergraph Method

(Vanderbeck, E 2009, Principles of Cost Accounting, 15th Edition)

The scattergraph method estimates a straight line along which the semi-variable
costs will fall. The cost being analyzed is plotted on the y-axis of the graph, and the
activity level, such as the number of units produced, is plotted on the x-axis. After the
past observations of cost and production data are plotted on graph paper, a line is drawn
by visual inspection representing the trend shown by most of the data points. Usually an
equal number of data points fall above and below the line. The point where the straight
line intersects the y-axis represents the total fixed costs. The variable cost per unit is
computed by subtracting fixed costs from total costs at any point on the graph and then
dividing by the activity level for that point read from the x-axis.

2.3 Least–Squares Regression Method

Formula: Y=a + bX

where: X- activity level

Y- the total semi-variable cost
a- total fixed cost
b – the variable cost per unit
n- number of items

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Month Units Electricity

Produced Costs
X Y X2 XY
July 1,600 4,500 2,560,000 7,200,000
August 1,000 3,000 1,000,000 3,000,000
September 1,800 4,600 3,240,000 8,280,000
October 2,000 5,000 4,000,000 10,000,000
November 1,500 4,050 2,250,000 6,075,000
December 1,200 3,350 1,440,000 4,020,000
Ʃx: 9,100 Ʃy: 24,500 Ʃx2:14,490,000 Ʃxy: 38,575,000

Y=a + bx

b = nƩXY- (ƩX)(ƩY)
--------------------
nƩX2 – (ƩX)2

b = (6)(38,575,000)-(9,100)(24,500)
(6)(14,490,000)-(9,100)2

b = 231,450,000-222,950,000
86,940,000-82,810,000

b = 8,500,000
4,130,000

b = 2.0581 (variable cost per unit)

a = (ƩY)-(ƩX)
n
a = 24,500-(2.0581)(9,100)
6

a = 24,500-18,728.71
6
a = 5,771.29
6
a = 961.88 (fixed cost)

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Y = a + bX
Y = 961.88 + 2.0581

Self-Help: You can also refer to the sources below to help you further understand
the lesson:
* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A
Strategic Emphasis (7th Ed.) New York: NY: McGraw-Hill Education

* Hansen, D & Mowen, M 2015, Cornerstones of Cost Management (3rd Ed.).

Mason, OH: Cengage Learning

* Horngren, C, Datar, S & Rajan 2011, Cost Accounting: A Managerial

Emphasis, 14th Edition Prentice Hall

* Jagolinzer, P 1999, Cost Accounting: An Introduction to Cost Management-

South- Western Educational Publishing

* Lanen, W 2017, Fundamentals of Cost Accounting. 5th Edition. New York,

NY: McGraw- Hill Education

*Vanderbeck, E 2009, Principles of Cost Accounting 15th Edition. Cengage

Learnin.

Let’s Check

Activity 1. Choose the best answer on the following questions and for questions that
require calculations, please show your solution.

1. The following relationships pertain to a year's budgeted activity for Bibs Company:

High Low
Direct labor hours 400,000 300,000
Total costs Php154,000 Php129,000

What are the budgeted fixed costs for the year?

a. Php100,000
b. Php25,000
c. Php54,000
d Php75,000

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2. A company allocates its variable factory overhead based on direct labor hours.
During the past three months, the actual direct labor hours and the total factory
overhead allocated were as follows:
October November December
Direct labor hours 2,500 3,000 5,000
Total factory
overhead allocated Php80,000 Php75,000 Php100,000

Based upon this information, the estimated variable cost per direct labor hour
was:
a. Php.125
b. Php12.50
c. Php.08
d. Php8

3. The technique that can be used to determine the variable and fixed portions of a
company’s costs is:
a. Scatter-graph method
b. Poisson analysis
c. Linear programming
d. Game theory
4. As a result of analyzing the relationship of total factory overhead to changes in
machine hours, the following relationship was found:

Y= Php1,000 + Php2 X
The Y in the equation is an estimate of:
a. total factory overhead
b. total fixed costs
c. total machine costs
d. total variable costs

5. As a result of analyzing the relationship of total factory overhead to changes in

machine hours, the following relationship was found:

Y= Php1,000 + Php2 X

The Php2 in the equation is an estimate of:

a. fixed costs per machine hour
b. total fixed costs
c. variable costs per machine hour
d. total variable cost

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6. Maintenance expenses of a company are to be analyzed for purposes of constructing

a flexible budget. Examination of past records disclosed the following costs and
volume measures:

High Low
Cost per month Php39,200 Php32,000
Machine hours 24,000 15,000

Using the high-low method of analysis, the estimated variable cost per machine
hour is:
a. Php12.50
b. Php0.80
c. Php0.08
d. Php1.25

7. In the high-low method, two points chosen from the scatter-graph are the high and
low points with respect to activity level. These two points are then used to compute
the intercept and the slope of the line on which they lie.
a. True
b. False

8. Variable costs are those that change in total as activity usage changes.
a. True
b. False

9. Fixed costs are those that do not change in total as activity output changes.
a. True
b. False

10. Mixed costs the costs that have both a variable and a fixed component.
a. True
b. False

Let’s Analyze

Activity 1. In this part, you are once again required to answer the following questions
below:

Problem 1:

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High and Low Points Method. A controller is interested in analyzing the fixed and variable
costs of indirect labor as related to direct labor hours. The following data have been
accumulated:

Indirect Direct Labor

Month Labor Cost Hours
March Php2,880 425
April 3,256 545
May 2,820 440
June 3,225 560
July 3,200 540
August 3,200 495

Required: Determine the amount of the fixed portion of indirect labor expense and the
variable rate for indirect labor expense, using the high and low points method. (Round
the variable rate to three decimal places and the fixed cost to the nearest whole number.)

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Phone No.: (082)300-5456 Local 137

______________________________________________________________________

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Problem 2:

Method of Least Squares. The management of Vidco Inc. would like to separate the fixed
and variable components of electricity as measured against machine hours in one of its
plants. Data collected over the most recent six months follow:

Electricity Machine
Month Cost Hours
January Php1,100 4,500
February 1,110 4,700
March 1,050 4,100
April 1,200 5,000
May 1,060 4,000
June 1,120 4,600

Required: Using the method of least squares, compute the fixed cost and the variable
cost rate for electricity expense. (Round estimates to the nearest peso.)

______________________________________________________________________

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Phone No.: (082)300-5456 Local 137

______________________________________________________________________

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In a Nutshell

Activity 1. Cost behavior is the general term for describing how cost changes when the
level of output changes. A cost that does not change as output changes is a fixed cost.
A variable cost, on the other hand, changes in proportion to changes in output. Output is
the result of activities and can therefore be measured by activity drivers.

In this part, you will be required to draw conclusions, perspectives, arguments and
ideas from the unit lesson. I will supply the first item and you will continue the rest.

1. Cost behavior is the way in which a cost changes in relation to changes in activity
output. The time horizon is important in determining cost behavior because costs can
change from fixed to variable, depending on whether the decision takes place over the
short run or the long run.

2.____________________________________________________________________

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3.____________________________________________________________________

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4.____________________________________________________________________
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5.____________________________________________________________________

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6.____________________________________________________________________

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7.____________________________________________________________________

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8.____________________________________________________________________

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3F, Business & Engineering Building
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Phone No.: (082)300-5456 Local 137

9.____________________________________________________________________

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10.___________________________________________________________________

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______________________________________________________________________

Q & A List

Do you have any question for Clarification?

Questions/Issues Answers
1.
2.
3.
4.
5.
6.
7.
8.
9.
10

Keywords Index

Activity level Direct labor hours Semi-variable

costs
Cost behavior Factory overhead Total factory
overhead
Direct costs High low method Total fixed costs
Direct labor Least squares method Total variable
costs

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Direct labor costs Machine hours Variable cost

per unit

Course Schedule

This section calendars all the activities and exercises, including readings and lectures, as
well as time for making assignments and doing other requirements.

Activity Date Where to submit

Orientation Blackboard LMS
Let’s Check Activities Blackboard LMS
Let’s Analyze Activities Blackboard LMS
In a Nutshell Blackboard LMS
Questions & Answers Blackboard LMS-Forum
Let’s Check Activities Blackboard LMS
Let’s Analyze Activities Blackboard LMS
Let’s Analyze Activities Blackboard LMS
In a Nutshell Blackboard LMS
Questions and Answers Blackboard LMS-Forum
Let’s Check Activities Blackboard LMS
Let’s Analyze Activities Blackboard LMS
First Formative Assessment Blackboard LMS

Big Picture
Week 4-5: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to

a. Discuss the cost concepts used in product and service costing.

b. Explain the cost flows associated with job order costing, identify the different
source documents used and prepare the necessary journal entries relative to job-
order costing transactions.

c. Analyze how spoilage is treated in a job-order costing system.

Big Picture in Focus: ULOa. Discuss the cost concepts in product and
service costing.

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Metalanguage

In this section, the most essential terms relevant to the study of cost concepts and
to demonstrate ULOa will be operationally defined to establish a common frame of
refence. You will encounter these terms as we go through the study of cost accounting.

1. Service Firms – are firms whose service are characterized by its intangible nature
and cannot be inventoried.

2. Manufacturing Firms – are firms that use raw materials to make a finished good

3. Cost accounting system – designed to assign costs to individual products and

services and other cost objects specified by management.

4. Cost of goods sold - is the cost of the product transferred to the income statement
when inventory is sold

5. Product costs for a manufacturing firm include only the costs necessary to complete
the product: direct materials, direct labor, and factory overhead.

6. Cost – is the cash or noncash assets sacrificed for goods and services that are
expected to bring a current or future benefit to the organization.

7. Expenses – is the cash used by a business in their effort to generate revenue

8. Cost object – is any item, such as products, customers, departments, projects, for
which costs are measured and assigned.

9. Indirect costs – are costs that cannot be traced easily and accurately to a cost object.

10. Direct costs – are those costs that can be traced easily and accurately to a cost
object

11. Direct tracing - is the process of identifying and assigning costs to a cost object that
are specifically or physically associated with the cost object.

12. Drivers – are factors that cause changes in resource usage, activity usage, costs,
and revenues.

13. Driver tracing – is the use of drivers to assign costs to cost objects.

14. Allocation – refers to the assignment of indirect costs to cost objects.

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15. Cost driver – is any factor that causes a change in the cost of an activity.

16. Normal activity level – is the average activity usage that a firm experiences in the
long term

17. Expected activity level – is the production level the firm expects to attain for the
coming year

Essential Knowledge

Accurate information about the cost of products and services is important in each
management function: strategic management, planning and decision making,
management and operational control, and financial statement preparation. Cost
accounting systems differ significantly between firms that manufacture products and
merchandising firms that resell those products. Merchandising firms include both retailers,
which sell the final product to the consumer, and wholesalers, which distribute the product
to retailers. Service firms often have little or no inventory, so their costing systems are
relatively simple.
Product inventory for both manufacturing and merchandising firms is treated as an
asset on their balance sheets.

Cost Assignment Method

(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

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A major feature of the operational model of the cost accounting system is the
cost assignment process. The major objective of the cost accounting system is the
assignment of costs to cost objects. This assignment process is achieved by three
subprocesses: direct tracing, driver tracing, and allocation. Allocation is the least accurate
and least desirable approach, and generally, a cost accounting system should be
designed to minimize allocations. Understanding the assignment process is fundamental
to understanding cost management systems.

Given the characteristics of a firm’s production process, it is time to set up the

system to be used in generating appropriate cost information. In general, the cost
accounting system is used to satisfy the needs for cost accumulation, cost measurement,
and cost assignment. Cost accumulation is the recognition and recording of costs. Cost
measurement involves determining the dollar amounts of direct materials, direct labor,
and overhead used in production. Cost assignment is the association of production costs
with the units produced.

Relationship of Cost Accumulation, Cost Measurement, and Cost Assignment

(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

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Cost Accumulation

Cost accumulation refers to the recognition and recording of costs. The cost
accountant needs to develop source documents that keep track of costs as they occur. A
source document describes a transaction. Data from these source documents can then
be recorded in a database. The recording of data in a database allows accountants and
managers the flexibility to analyze subsets of the data as needed to aid in management
decision making. The cost accountant can also use the database to see that the relevant
costs are recorded in the general ledger and posted to appropriate accounts for purposes
of external financial reporting.

Well-designed source documents can supply information in a flexible way. In

other words, the information can be used for multiple purposes. For example, the sales
receipt written up or input by a clerk when a customer buys merchandise lists the date,
the items purchased, the quantities, the prices, the sales tax paid, and the total dollar
amount received. Just this one source document can be used in determining sales
revenue for the month, the sales by each product, the tax owed to the state, and the cash
received or the accounts receivable recorded. Similarly, employees often fill in labor time
tickets, indicating which jobs they worked on, on what date, and for how long. Data from
the labor time ticket can be used in determining direct labor cost used in production, the
amount to pay the worker, the degree of productivity improvement achieved over time,
and the amount to budget for direct labor for an upcoming job.

Cost Measurement

Accumulating costs simply means that costs are recorded for use. We must
classify or organize these costs in a meaningful way and then associate these costs with
the units produced. Cost measurement refers to classifying the costs; it consists of
determining the dollar amounts of direct materials, direct labor, and overhead used in
production. The dollar amounts may be the actual amounts expended for the
manufacturing inputs or they may be estimated amounts. Often, bills for overhead items
arrive after the unit cost must be calculated; therefore, estimated amounts are used to
ensure timeliness of cost information and to control costs.

The two commonly used ways to measure the costs associated with production
are actual costing and normal costing. Actual costing requires the firm to use the actual
cost of all resources used in production to determine unit cost. While intuitively
reasonable, this method has drawbacks, as we shall see. The second method, normal
costing, requires the firm to apply actual costs of direct materials and direct labor to units
produced, but to apply overhead based on a predetermined estimate.

Actual versus Normal Costing

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An actual cost system uses actual costs for direct materials, direct labor, and
overhead to determine unit cost. In practice, strict actual cost systems are rarely used
because they cannot provide accurate unit cost information on a timely basis. Per-unit
computation of the direct materials and direct labor costs is not the source of the difficulty.
Direct materials and direct labor can be traced to units produced. The main problem with
using actual costs for calculation of unit cost is with manufacturing overhead. Many
overhead costs are not incurred uniformly throughout the year. Thus, they can differ
significantly from one period to the next. For example, a factory located in the Northeast
may incur higher utilities costs in the winter as it heats the factory. Even if the factory
always produced 10,000 units a month, the per-unit overhead cost in December would
be higher than the per-unit overhead cost in June. As a result, one unit of product costs
more in one month than another, even though the units are identical, and the production
process is the same. The difference in the per-unit overhead cost is due to overhead
costs that were incurred nonuniformly.

Normal costing solves this problem associated with actual costing. A cost
system that measures overhead costs on a predetermined basis and uses actual costs
for direct materials and direct labor is called a normal costing system. Predetermined
overhead or activity rates are calculated at the beginning of the year and are used to
apply overhead to production as the year goes on. Any difference between actual and
applied overhead is handled as an overhead variance. Virtually all firms assign overhead
to production on a predetermined basis. A job-order costing system that uses actual costs
for direct materials and direct labor and estimated costs for overhead is called a normal
job-order costing system.

Cost Assignment

Once costs have been accumulated and measured, they are assigned to units
of product manufactured or units of service delivered. Unit costs are important for a wide
variety of purposes. For example, bidding is a common requirement in markets for custom
homes and industrial buildings. It is virtually impossible to submit a meaningful bid without
knowing the costs associated with the units to be produced. Product cost information is
vital in a number of other areas as well. Decisions concerning product design and
introduction of new products are affected by expected unit costs. Decisions to make or
buy a product, to accept or reject a special order, or to keep or drop a product line require
unit cost information. The unit cost is the total product cost associated with the units
produced divided by the number of units produced. For example, if a toy company
manufactures 100,000 tricycles and the total cost of direct materials, direct labor, and
overhead for these tricycles is Php1,500,000, then the cost per tricycle is Php15
(Php1,500,000/100,000).

53
 College of Accounting Education
3F, Business & Engineering Building
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Phone No.: (082)300-5456 Local 137

Self-Help: You can also refer to the sources below to help you further understand
the lesson:
* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A
Strategic Emphasis (7th Ed.) New York: NY: McGraw-Hill Education

* Hansen, D & Mowen, M 2015, Cornerstones of Cost Management (3rd Ed.).

Mason, OH: Cengage Learning

* Horngren, C, Datar, S & Rajan 2011, Cost Accounting: A Managerial

Emphasis, 14th Edition Prentice Hall

* Jagolinzer, P 1999, Cost Accounting: An Introduction to Cost Management-

South- Western Educational Publishing

* Lanen, W 2017, Fundamentals of Cost Accounting. 5th Edition. New York,

NY: McGraw-Hill Education

*Vanderbeck, E 2009, Principles of Cost Accounting 15th Edition. Cengage

Learning.

Let’s Check

Activity 1. Let us try to check your understanding of the following cost concepts.
Choose the best answer from the given items.

1. Cost and management accounting provide product/service cost information as well

as information for internal decision making.
a. True
b. False
2. Cost accounting is directed toward the needs of regulatory agencies.
a. True
b. False
3. In a normal job order costing system, factory overhead is applied using
predetermined rates times actual input.
a. True
b. False
4. In an actual cost system, factory overhead is assigned directly to products and
services.
a. True

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b. False
5. In a normal cost system, factory overhead is assigned directly to products and
services.
a. True
b. False
6. In a normal cost system, factory overhead is assigned to an overhead control account
and then allocated to products and services.
a. True
b. False
7. Expected capacity is a long-run measure of activity.
a. True
b. False
8. Normal capacity considers present and future production levels and cyclical
fluctuations.
a. True
b. False
9. Direct tracing is the process of identifying and assigning costs to a cost object that
are specifically or physically associated with the cost object.
a. True
b. False
10. Cost object is any item, such as products, customers, departments, projects, for
which costs are measured and assigned.
a. True
b. False

Let’s Analyze

Activity 1. Since you are now familiar with the essential terms in the study of cost
concepts, I will require you to elaborate your answers on the following questions.

1. Why is actual costing rarely used for product costing?

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______________________________________________________________________

______________________________________________________________________

______________________________________________________________________

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Phone No.: (082)300-5456 Local 137

____________________________________________________________

____________________________________________________________

2. Define the following terms: expected actual activity, normal activity, practical activity,
and theoretical activity.
_________________________________________________________
____________________________________________________________

____________________________________________________________

____________________________________________________________

____________________________________________________________

____________________________________________________________

3. What is cost measurement? Cost accumulation? What is the difference between the
two?
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___________________________________________________________

___________________________________________________________

In a Nutshell

In this portion of the unit, you will be required to state your arguments or
synthesis relevant to the topics presented. I will supply the first two items and you will
continue the rest.

1. The cost accounting system is set up to serve the company’s needs for cost
accumulation, cost measurement, and cost assignment.

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Phone No.: (082)300-5456 Local 137

2. In general, normal costing is preferred to actual costing in determining unit production

costs. In normal costing, actual prime costs are assigned to units, but overhead is
applied based on a predetermined rate.

Your turn
3.____________________________________________________________________

4.____________________________________________________________________

5.____________________________________________________________________

6.____________________________________________________________________

7.____________________________________________________________________

8.____________________________________________________________________

9.____________________________________________________________________

10.___________________________________________________________________

Q & A List

Do you have any question for Clarification?

Questions/Issues Answers
1.
2.
3.
4.
5.
6.
7.
8.
9.
10

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Phone No.: (082)300-5456 Local 137

Keywords Index

Allocation Cost driver Direct tracing Indirect costs

Cost Cost measurement Drive tracing Manufacturing
firms
Cost accounting Cost object Drivers Normal
system activity level
Cost accumulation Cost of goods sold Expected Product costs
activity level
Cost assignment Direct costs Expenses Service firms
Big Picture in Focus: ULOb. Explain the cost flows associated with job-order
costing, identify the different source documents used and prepare the necessary
journal entries relative to job-order costing transactions.

Metalanguage and Essential Knowledge

Management accountants use two basic types of costing systems to assign

costs to products or services:

In a Job-order costing, cost is accumulated per job. Each job uses different
amounts of resources. The product or service is often a single unit. Examples of job-order
processes include printing, construction, furniture making, automobile repair, and
beautician services.

Since cost accumulation refers to the recognition and recording of costs, the cost
accountant needs to develop source documents that keep track of costs as they occur. A
source document describes a transaction. Data from these source documents can then
be recorded in a database. The recording of data in a database allows accountants and
managers the flexibility to analyze subsets of the data as needed to aid in management
decision making. The cost accountant can also use the database to see that the relevant

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Phone No.: (082)300-5456 Local 137

costs are recorded in the general ledger and posted to appropriate accounts for purposes
of external financial reporting. Well-designed source documents can supply information
in a flexible way. In other words, the information can be used for multiple purposes. For
example, the sales receipt written up or input by a clerk when a customer buys
merchandise lists the date, the items purchased, the quantities, the prices, the sales tax
paid, and the total dollar amount received. Just this one source document can be used in
determining sales revenue for the month, the sales by each product, the tax owed to the
state, and the cash received or the accounts receivable recorded.

A source document is an original record (such as a labor time card on which an

employee’s work hours are recorded) that supports journal entries in an accounting
system. A job-cost record, also called a job-cost sheet, records and accumulates all the
costs assigned to a specific job, starting when work begins.

The document that identifies each job and accumulates its manufacturing costs
is the job-order cost sheet. An examplel is shown below. Each job-order cost sheet has a
job-order number that identifies the new job.

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The Job-Order Cost Sheet

(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

A job-order costing system must have the capability to identify the quantity of
direct materials, direct labor, and overhead consumed by each job. In other words,
documentation and procedures are needed to associate the manufacturing inputs used
by a job with the job itself. This need is satisfied through the use of materials requisitions

The cost of direct materials is assigned to a job by the use of a source document
known as a materials requisition form, an example below. Notice that the form asks for
the description, quantity, and unit cost of the direct materials issued and, most importantly,
for the job number. Using this form, the cost accounting department can enter the total
cost of direct materials directly onto the job-order cost sheet.

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Materials Requisition Form

(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

The materials requisition form may also have other data items such as
requisition number, date, and signature. These data items are useful for maintaining
proper control over a firm’s inventory of direct materials. The signature, for example,
transfers responsibility for the materials from the storage area to the person receiving the
materials, usually a production supervisor.

Direct labor also must be associated with each particular job. The means by
which direct labor costs are assigned to individual jobs is the source document known as
a time ticket (see below). When an employee works on a particular job, he fills out a time
ticket that identifies his name, wage rate, hours worked, and job number. These time
tickets are collected daily and transferred to the cost accounting department, where the
information is used to post the cost of direct labor to individual jobs. Time tickets are used
only for direct laborers. Since indirect labor is common to all jobs, these costs belong to
overhead and are allocated using the predetermined overhead rate.

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Time Ticket

(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

Jobs are assigned overhead costs with the predetermined overhead rate.
Typically, direct labor hours is the measure used to calculate overhead. For example,
assume a firm has estimated overhead costs for the coming year of Php900,000 and
expected activity is 90,000 direct labor hours. The predetermined overhead rate is
Php900,000/90,000 direct labor hours = Php10 per direct labor hour. Since the number
of direct labor hours charged to a job is known from time tickets, the assignment of
overhead costs to jobs is simple once the predetermined rate has been computed. For
example, an employee worked a total of eight hours on Job 16. From this time ticket,
overhead totaling Php80 (Php10 × 8 hours) would be assigned to Job 16. What if
overhead is assigned to jobs based on something other than direct labor hours? Then the
other driver must be accounted for as well. That is, the actual amount used of the other
driver (for example,machine hours) must be collected and posted to the job cost sheets.
Employees must create a source document that will track the machine hours used by
each job. A machine time ticket could easily accommodate this need.

Accounting for Direct Materials

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There is no beginning inventories when the company is just beginning its

business. Assuming that Company B produces the 30 signs in January and retain a
supply of direct materials on hand at the beginning of February, Cocomart purchases, on
account, Php2,500 of direct materials.

This purchase is recorded as follows:

1. Materials Inventory 2,500

Accounts Payable 2,500

Materials Inventory is an inventory account. It is also the controlling account for

all raw materials. When materials are purchased, the cost of these materials “flows” into
the materials inventory account.

For example, from January 2 to January 19, the production supervisor used
three requisition forms to remove Php1,000 of direct materials from the storeroom. From
January 20 to January 31, two additional requisition forms for Php500 of direct materials
were used. The first three forms revealed that the direct materials were used for Job 101;
the last two requisitions were for Job 102. Thus, for January, the cost sheet for Job 101
would have a total of Php1,000 in direct materials posted, and the cost sheet for Job 102
would have a total of Php500 in direct materials posted.

In addition, the following entry would be made:

2. Work-in-Process Inventory 1,500

Materials Inventory 1,500

This second entry shows the direct materials flowing from the storeroom to work
in process. All such flows are summarized in the work-in-process inventory account as
well as being posted individually to the respective jobs.

Work-in-Process Inventory is a controlling account, and the job cost sheets are
the subsidiary accounts. Notice that the source document that drives the direct materials
cost flows is the materials requisition form.

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Summary of Direct Materials Cost Flows

(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

Accounting for Direct Labor Cost

Since two jobs were in progress during January, time tickets filled out by direct
laborers must be sorted by each job. Once the sorting is completed, the hours worked
and the wage rate of each employee are used to assign the direct labor cost to each job.
For Job 101, the time tickets showed 60 hours at an average wage rate of Php10 per
hour, for a total direct labor cost of Php600. For Job 102, the total was Php250, based on
25 hours at an average hourly wage of Php10.

In addition to the postings to each job’s cost sheet, the following summary entry would be
made:

3. Work-in-Process Inventory 850

Wages Payable 850

The summary of the direct labor cost flows is given below. Notice that the direct
labor costs assigned to the two jobs exactly equal the total assigned to Work-in Process
Inventory. Note also that the time tickets filled out by the individual laborers are the source
of information for posting the labor cost flows. Remember that the labor cost flows reflect
only direct labor cost. Indirect labor is assigned as part of overhead.

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Phone No.: (082)300-5456 Local 137

Summary of Direct Labor Cost Flows

(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

Accounting for Overhead

Under a normal costing approach, actual overhead costs are never assigned to
jobs. Overhead is applied to each individual job using a predetermined overhead rate.

Even with this system, however, a company must still account for actual overhead
costs incurred. Thus, we will first describe how to account for applied overhead and then
discuss accounting for actual overhead.

Accounting for Overhead Application

Let us assume that Mr. A has estimated overhead costs for the year at Php9,600.
Additionally, since he expects business to increase throughout the year as he becomes
established, he estimates 2,400 total direct labor hours. Accordingly, the predetermined
overhead rate is as follows:

Overhead rate Php9,600/2,400 = Php4 per direct labor hour

Overhead costs flow into Work-in-Process Inventory via the predetermined rate.
Since direct labor hours are used to assign overhead into production, the time tickets
serve as the source documents for assigning overhead to individual jobs and to the
controlling work-in-process inventory account.

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For Job 101, with a total of 60 hours worked, the amount of overhead cost posted is
Php240 (Php4 × 60). For Job 102, the overhead cost is Php100 (Php4 × 25). A summary
entry reflects a total of Php340 (i.e., all overhead applied to jobs worked on during
January) in applied overhead.

4. Work-in-Process Inventory 340

Overhead Control 340

The credit balance in the overhead control account equals the total applied overhead
at a given point in time. In normal costing, only applied overhead ever enters the work in-
process inventory account.

Accounting for Actual Overhead Costs

To illustrate how actual overhead costs are recorded, assume that Silver Company
incurred the following indirect costs for the month of January:

Lease payment Php 200

Utilities 50
Depreciation –Equipment 100
Indirect labor 65
_______
Total Overhead costs Php 415
As indicated earlier, actual overhead costs never enter the work-in-process
inventory account. The usual procedure is to record actual overhead costs on the debit
side of the overhead control account.

For example, the actual overhead costs would be recorded as follows:

5. Overhead Control 415

Lease Payable 200
Utilities Payable 50
Accumulated Depreciation – equipment 100
Wages Payable 65

Thus, the amount of the debit side of Overhead Control gives the total actual
overhead costs at a given point in time. Since actual overhead costs are on the debit side
of this account and applied overhead costs are on the credit side, the balance in Overhead

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Control is the overhead variance at a given point in time. For Silver Company at the end
of January, the actual overhead of Php415 and applied overhead of Php340 produce
under applied overhead variance of Php 75 (Php415-340)

The flow of overhead costs is summarized in below. To apply overhead to work in-
process inventory, a company needs information from the time tickets and a
predetermined overhead rate based on direct labor hours.

Summary of Overhead Cost Flows

(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

Accounting for Finished Goods Inventory

When a job is completed, the columns for direct materials, direct labor, and applied
overhead are totaled. These totals are then transferred to another section of the cost
sheet where they are summed to yield the manufacturing cost of the job. This job cost
sheet is then transferred to a finished goods inventory file. Simultaneously, the costs of

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the completed job are transferred from the work-in-process inventory account to the
finished goods inventory account.

For example, assume that Job 101 was completed in January with the completed
job order cost sheet (shown below). Since Job 101 is completed, the total manufacturing
costs of Php1,840 must be transferred from the work-in-process inventory account to the
finished goods inventory account. This transfer is described by the following entry:

6. Finished Goods Inventory 1,840

Work-in-Process Inventory 1,840

Completed Job-Order Cost Sheet

(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

Summary of Finished Goods Cost Flow

(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

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Accounting for Cost of Goods Sold

In a job-order firm, units can be produced for a particular customer or they can be
produced with the expectation of selling the units as market conditions warrant. When the
job is shipped to the customer, the cost of the finished job becomes the cost of the goods
sold.

When Job 101 is shipped, the following entries would be made. (Recall that the
selling price is 150 percent of manufacturing cost.)

7a. Cost of Goods Sold 1,840

Finished Goods Inventory 1,840

7b. Accounts Receivable 2,760

Sales Revenue 2,760

In addition to these entries, a statement of cost of goods sold usually is prepared

at the end of each reporting period (e.g., monthly and quarterly).

Typically, the overhead variance is not material and is therefore closed to the cost of
goods sold account. Cost of goods sold before adjustment for an overhead variance is
called normal cost of goods sold. After adjustment for the period’s overhead variance
takes place, the result is called the adjusted cost of goods sold. It is this latter figure that
appears as an expense on the income statement.

However, closing the overhead variance to the cost of goods sold account is not done
until the end of the year. Variances are expected each month because of non-uniform
production and non-uniform actual overhead costs. As the year unfolds, these monthly
variances should, by and large, offset each other so that the year-end variance is small.

Nonetheless, to illustrate how the year-end overhead variance would be treated, we will
close out the overhead variance experienced by Silver Company in January. Closing the
under-applied overhead to cost of goods sold requires the following entry:

8. Cost of Goods Sold 75

Overhead Control 75

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(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

SUMMARY OF MANUFACTURING COST FLOWS

(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

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Self-Help: You can also refer to the sources below to help you further understand
the lesson:

* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A

Strategic Emphasis (7th Ed.) New York: NY: McGraw-Hill Education

* Hansen, D & Mowen, M 2015, Cornerstones of Cost Management (3rd Ed.).

Mason, OH: Cengage Learning

* Horngren, C, Datar, S & Rajan 2011, Cost Accounting: A Managerial

Emphasis, 14th Edition Prentice Hall

* Jagolinzer, P 1999, Cost Accounting: An Introduction to Cost Management-

South-Western Educational Publishing

* Lanen, W 2017, Fundamentals of Cost Accounting. 5th Edition. New York,

NY: McGraw- Hill Education

*Vanderbeck, E 2009, Principles of Cost Accounting 15th Edition. Cengage

Learning.

Let’s Check

Activity 1. Please fill in the blanks with the correct term/s on the following statements.

1. A company that manufactures custom bridal gowns will use a _______________

costing system to track production costs.

2. In a normal job order costing system, factory overhead is applied using ___________
rates times ________ input.

3. When a job is begun, the first document in the job order process is the
____________________.

4. When raw materials are placed into production, the ______________________

account is debited

5. When indirect materials are added to a job, the __________________________

account is debited.

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6. When manufacturing overhead is applied to a job in process, the

__________________ is debited

7. The document that contains all information about the costs of a specific job is a
___________________.

8. When production is completed on a job, finished goods are transferred to the

____________________________ account.

9. When indirect labor is recorded for a job in process, ___________________________

is debited.

10. When manufacturing overhead is applied to a job in process, the _______________

account is credited.

Let’s Analyze

Activity 1. At this juncture, you have already known the cost flows associated with
job-order costing system, I will require you to provide the necessary calculations of
the following questions.
1. Venus Company estimated that Dept. B’s overhead amounted to Php450,000 for
the period based on an estimated volume of 200,000 direct labor hours. At the end
of the period, the Factory Overhead Control account for Dept. B had a balance of
Php300,000; actual direct labor hours were 150,000. Compute for the over or
under-applied overhead for the period.
(2 points)

2. Danbam Corporation has a job order cost system. The following debits (credits)
appeared in Work in Process for the month of August:

August 1,
balance……………………………………………………………….Php 10,000
August 31, direct materials…………………..…………………………………
30,000
August 31, direct labor………………………………………………………….
20,000

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August 31, factory overhead……………………………………………………

25,000
August 31, to finished goods …………………………………………………
(75,000)

Danbam Corporation applies overhead to production at a predetermined rate of

50% based on the direct labor cost. Job 1, the only job still in process at the end of August,
has been charged with factory overhead of Php 2,000. What was the amount of direct
materials charged to Job 1? (3 points)

3. Limin Furniture produces special-order furnitures. The company uses job order
costing for pricing and cost accumulation purposes. The following costs were incurred
on two recent jobs:

Cost Item Job 1 Job 2

Direct materials:
Issued ………………………………………………Php6,000 Php7,500
Returned ……………………………………………….. 500 0
Indirect Materials used…………………………………..400 300
Direct labor……………………………………………Php 8,500 Php 14,500
Direct labor rate…………………………………….Php 8.50 per Php10 per hour
Overhead application rate…………………..Php 10 per direct labor hour Php15 per direct labor hour

The company adds a 40% markup on cost in determining the amount to charge for
each job. Please prepare a schedule showing the cost and the amount to be charged to
each job. (5 points)

4. The following completed cost sheets were prepared for three jobs that were in
production during July in the Special Order Division of Blackboard Company:

Job 1 Job 2 Job 3

Direct materials Php 5,000 Php 1,700 Php 3,100
Direct labor 8,200 6,300 7,200
Applied factory overhead 5,900 4,475 5,120
Allowance for commercial expenses and profit 10,050 6,738 8,210

On July 1, Job 1 was 75% complete as to materials, labor and overhead. It was
finished during the month. The other jobs were started and finished during the month.
Jobs 1 and 3 were sold on acocunt at the end of the month.

Please prepare general journal entries to be record in July to accumulatet these job costs
for Work in Process as well as for Finished Goods and for the sale of the two jobs. (10
points)

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5. Vico Inc. produces customized vans in a job order shop. On August 1, the following
balances appear in the inventory records: (25 points)

Finished goods Php 169,000

Work in process 298,000
Materials 73,000

The amount in Finished Goods represents Php91,000 recorded for Van 10 and Php68,000
recorded for Van 11. The Work in Process account represents the three vans in process, as follows:
Van 12 Van 13 Van 14
Factory overhead Php65,000 Php40,000 Php 15,000
Dirct labor 50,000 30,000 10,000
Direct materials 16,000 6,000 4,000

The following transactions occurred during August:

(a) Purchased materials on account, Php70,000.
(b) Requisitioned Php50,000 of materials from inventory: Php14,000 applied to Van
13, Php15,000 to Van 14, and Php15,000 to Van 15, a new order; the balance
was for indirect materials.
(c) Recorded the liability for the payroll and the labor cost distribution in a single entry:
total payroll, Php198,750. Of the payroll cost, 10% applied to Van 12, 20% to Van
13, 35% to Van 14, 30% to Van 15, and the remainder to indirect labor.
(d) Paid the payroll.
(e) Applied factory overhead at the rate of 150% of direct labor cost.
(f) Completed Vans 12 and 13.
(g) Sold Vans 10, 11, and 13 at 50% over manufacturing costs.

Required: Prepare general journal entries to record these transactions.

In a Nutshell

Activity 1. Product costing is the process of accumulating, classifying, and assigning

direct materials, direct labor, and factory overhead costs to products or services. In this
activity, you will be required to draw conclusions or perspectives from the study of job
order costing system. I will supply the first two items and you will continue the rest.

1. Job costing uses several accounts to control the product cost flows. Direct
materials costs are debited to the Materials Inventory account at time of purchase
and debited to the Work-inProcess Inventory account when production requests
materials.
2. Direct labor costs are debited to the Work-in-Process Inventory account when they
are incurred.

Your turn ____________________________________________________________

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3._______________________________________________________________

_______________________________________________________________

4. ________________________________________________________________

________________________________________________________________

Q & A List

Do you have any question for Clarification?

Questions/Issues Answers
1.
2.
3.
4.
5.
6.
7.
8.
9.
10
11
12.

Keywords Index

Finished goods Time ticket

inventory
Job order cost sheet Work in process
Job order costing
system
Materials inventory
Overhead control

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Big Picture in Focus: ULOc. Analyze how spoilage is treated in a job-order

costing system.

Metalanguage

In manufacturing products, we cannot assume that all units produced are good units.
There are times that errors are made. Sometimes defective units are produced and are
either thrown away or reworked and sold. At this point, we will teach you on how to
account for those manufacturing costs associated with defective units. Below are the
terms you should be familiar with to be able to fully understand on how to treat spoilage
in a job-order costing system.

1. Spoilage – units of production whether fully or partially completed that do not meet
the specifications required by customers for good units and that are discarded or sold
at reduced prices.
2. Rework – units of production that do not meet the specifications of required by
customers but that are subsequently repaired and sold as good finished units.
3. Scrap – is residual material that results from manufacturing a product and can be sold
for relatively small amounts.
4. Normal spoilage – is spoilage inherent in a particular production process.
5. Abnormal spoilage - is spoilage that is not inherent in a particular production process
and would not arise under efficient operating conditions

Essential Knowledge

Spoilage refers to units of production whether fully or partially completed that do

not meet the specifications required by customers for good units and that are discarded
or sold at reduced prices. There are two types of spoilage, normal and abnormal. When
you say normal, the spoilage occurs and is considered a normal part of production and
product costs. The cost of normal spoilage is absorbed by the cost of good units
produced. It becomes part of the product costs.
Abnormal spoilage on the other hand, refers to spoilage that is not part of the
process and its cost is charged as a loss to operations.

To understand this distinction, let’s look at an example. Petra, Inc., manufactures cabinets
on a job-order basis. Job 98-12 calls for 100 units with the following costs.

Direct materials Php2,000

Direct labor (100 hours) 1,000

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Overhead is applied at the rate of 150 percent of direct labor costs. At the end of
the job, 100 units are produced. However, three of the cabinets required rework due to
improper installation of shelving. The rework involved six extra direct labor hours and an
additional Php50 of material. How is the rework accounted for? It depends on the reason
for the defective work.
If the defective work was a consequence of the demanding nature of this particular job,
then rework is assigned to the job, as follows.

Direct materials Php2,050

Direct labor 1,060
Overhead 1,590
------------
Total job cost Php4,700
======
Unit job cost Php 47
======

On the other hand, suppose that the defective work was a consequence of
assigning new, untrained labor to the job. Defects are expected in that case, and the
rework is not assigned to the job but instead to overhead control. The costs are assigned
as follows.

Job 12 Debited to Overhead Control

___________________________________________________________________

Direct materials Php2,000 Direct materials Php 50

Direct labor 1,000 Direct labor 60
Overhead 1,500 Overhead 90
--------- ------------
Total job cost Php4,500 Total Php200
===== =====
Unit job cost Php 45

The costs of spoiled units that cannot be reworked are similarly charged to the job if
caused by the demands of the job, and to overhead control if not.

77
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3F, Business & Engineering Building
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Phone No.: (082)300-5456 Local 137

Self-Help: You can also refer to the sources below to help you further understand
the lesson:
* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A
Strategic Emphasis (7th Ed.) New York: NY: McGraw-Hill Education

* Hansen, D & Mowen, M 2015, Cornerstones of Cost Management (3rd Ed.).

Mason, OH: Cengage Learning

* Horngren, C, Datar, S & Rajan 2011, Cost Accounting: A Managerial

Emphasis, 14th Edition Prentice Hall

* Jagolinzer, P 1999, Cost Accounting: An Introduction to Cost Management-

South- Western Educational Publishing

* Lanen, W 2017, Fundamentals of Cost Accounting. 5th Edition. New York,

NY: McGraw- Hill Education

*Vanderbeck, E 2009, Principles of Cost Accounting 15th Edition. Cengage

Learning.

Let’s Check

Activity 1. Please choose the best answer on the following questions.

1. If a normal loss is anticipated on a specific job, the overhead application rate should
include an amount for the cost of defective units less disposal value.
a. True
b. False
2. If a normal loss is anticipated on all jobs, the overhead application rate should include
an amount for the cost of defective units less disposal value.
a. True
b. False
3. Normal spoilage is considered a period cost.
a. True
b. False
4. Abnormal spoilage is considered a period cost.
a. True
b. False
5. The journal entry to record normal spoilage specifically identified with a particular job

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includes a debit to Work in Process.

a. True
b. False
6. The journal entry to record normal spoilage specifically identified with a particular job
includes a credit to Work in Process.
c. True
d. False

7. Spoilage occurring on specific jobs should be considered in computing

predetermined factory overhead rates.
a. True
b. False
8. If a substandard product cannot be reworked, it is known as spoilage.
a. True
b. False
9. If a substandard product can be reworked, it is known as defect.
a. True
b. False
10. A unit that is rejected at a quality control inspection unit, but that can be reworked
and sold, is referred to as an abnormal unit.
a. True
b. False

Let’s Analyze

Activity 1. At this point, you are required to elaborate thoroughly your answer on the
questions below:

1. In manufacturing its products for the month of May 2020, Dora Corporation
incurred normal spoilage of P6,000 and abnormal spoilage of P2,000. Compute
for the spoilage cost that Dora should charge as inventoriable for the month of May
2020.
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________

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2. A Company produces custom framing. The trainee assigned to cut the mat entered
the mat dimensions incorrectly into the computer. The mat was unusable and had
to be discarded; another mat was cut to the correct dimensions. How is the cost of
the spoiled mat handled?
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________

3. Company B produces custom framing. For this job, the dimensions of the picture
were such that the computer-controlled, mat-cutting device could not be used.
Company B warned the customer that this was a particularly difficult job, and its
normal price would be increased to reflect its difficulty. Company B cut the mat by
hand, but the cut was not as straight as it should have been. So the first mat was
thrown and cut another one. How is the cost of the spoiled mat handled?
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________

In a Nutshell

Activity 1. In this part, you will be required to draw conclusions, perspectives,

arguments and ideas from the unit lesson. I will supply the first item and you will
continue the rest.

1. The cost of normal spoilage is included in the cost of the good units completed
whereas the cost of abnormal spoilage is charged to Overhead Control.

Your turn______________________________________________________

2. _______________________________________________________________
_______________________________________________________________

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_______________________________________________________________

3. _______________________________________________________________
_______________________________________________________________
_______________________________________________________________

4. _______________________________________________________________
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________

5. _______________________________________________________________
_______________________________________________________________
_______________________________________________________________
_______________________________________________________________

Q & A List

Do you have any question for Clarification?

Questions/Issues Answers
1.
2.
3.
4.
5.
6.
7.
8.
9.
10
11
12.

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Keywords Index

Abnormal spoilage Spoilage

Normal spoilage
Overhead control
Rework
Scrap

Course Schedule

This section calendars all the activities and exercises, including readings and lectures, as
well as time for making assignments and doing other requirements.

Activity Date Where to submit

Orientation Blackboard LMS
Let’s Check Activities Blackboard LMS
Let’s Analyze Activities Blackboard LMS
In a Nutshell Blackboard LMS
Questions & Answers Blackboard LMS-Forum
Let’s Check Activities Blackboard LMS
Let’s Analyze Activities Blackboard LMS
Let’s Analyze Activities Blackboard LMS
In a Nutshell Blackboard LMS
Questions and Answers Blackboard LMS-Forum
Let’s Check Activities Blackboard LMS
Let’s Analyze Activities Blackboard LMS
First Formative Assessment Blackboard LMS

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Big Picture

Week 6-7: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to

a. Identify the split-off point in a joint cost situation and distinguish joint products from
byproducts.

b. Explain the appropriate methods for the allocation of joint costs to joint products.

c. Prepare the different income statements showing the revenue/net revenue from by-
products.

Big Picture in Focus: ULOa. Identify the split-off point in a joint cost situation
and distinguish joint products from byproducts.

Metalanguage

1. Joint costs - are the costs of a production process that yields multiple products
simultaneously.
2. Joint products – are two or more products produced simultaneously by the same
process. It becomes separate and identifiable at the split-off point.
3. The split-off point - is the juncture in a joint production process when two or more
products become separately identifiable.
4. Separable costs - are all costs—manufacturing, marketing, distribution, and so
on—incurred beyond the split-off point that are assignable to each of the specific
products identified at the split-off point.
5. By-product is a secondary product recovered in the course of manufacturing a
primary product.

Essential Knowledge

Many manufacturing plants yield more than one product from a joint manufacturing
process. For example, the petroleum industry processes crude oil into multiple products:
gasoline, naphtha, kerosene, fuel oils, and residual heavy oils. Similarly, the
semiconductor industry processes silicon wafers into a variety of computer memory chips
with different speeds, temperature tolerances, and life expectancies. Beef and hides are
products linked in the meatpacking process; neither of these items can be produced

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without producing the other. Other industries that yield joint products include lumber
production, food processing, soap making, grain milling, dairy farming, and fishing.
Joint products and by-products are derived from processing a single input or a
common set of inputs. Joint products are products from the same production process that
have relatively substantial sales values. Products whose total sales values are minor in
comparison to the sales value of the joint products are classified as by-products.
Joint products and by-products both start their manufacturing life as part of the
same raw material. Until a certain point in the production process, no distinction can be
made between the products. The point in a joint production process at which individual
products can be identified for the first time is called the split-off point. Thereafter,
separate production processes can be applied to the individual products. At the split-off
point, joint products or by-products might be salable or require further processing to be
salable, depending on their nature.

* Horngren, C, Datar, S & Rajan 2011, Cost Accounting: A Managerial Emphasis, 14 th Edition

The distinction between main products and by-products rests solely on the relative
importance of their sales value. A by-product is a secondary product recovered in the
course of manufacturing a primary product. It is a product whose total sales value is
relatively minor.

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Joint costs include all manufacturing costs incurred prior to the split-off point
(including direct materials, direct labor, and factory overhead). For financial reporting
purposes, these costs are allocated among the joint products. Additional costs incurred
after the split-off point that can be identified directly with individual products are called
additional processing costs or separable costs.
Other outputs of joint production include scrap, waste, spoilage and defective units.
Scrap is the residue from a production process that has little or no recovery value. Waste,
such as chemical waste, is a residual material that has no recovery value and must be
disposed of by the firm as required. In addition to waste and scrap, some products do not
meet quality standards and can be reworked for resale. Spoiled units are not reworked
for economic reasons. Defective units are reworked to become salable units.

Self-Help: You can also refer to the sources below to help you further understand
the lesson:

Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic

Emphasis (7th Ed.) New York: NY: McGraw-Hill Education

Hansen, D & Mowen, M 2015, Cornerstones of Cost Management (3rd Ed.).

Mason, OH: Cengage Learning

Horngren, C, Datar, S & Rajan 2011, Cost Accounting: A Managerial Emphasis,

14th Edition Prentice Hall

Jagolinzer, P 1999, Cost Accounting: An Introduction to Cost Management-

South-Western Educational Publishing

Lanen, W 2017, Fundamentals of Cost Accounting. 5th Edition. New York,

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NY: McGraw-Hill Education

*Vanderbeck, E 2009, Principles of Cost Accounting 15th Edition. Cengage

Learning.

Let’s Check

Activity 1. Instruction. Choose the best answer on the following questions.

1. The following statement that best describes a by-product is:

a. a product that usually produces a small amount of revenue when
compared to the main product's revenue
b. a product that does not bear any portion of the joint processing costs
c. a product that is produced from material that would otherwise be
scrap
d. a product that has a lower selling price than the main product

2. The characteristic that is most often used to distinguish a product as either a joint
product or a by-product is the:
a. amount of labor used in processing the product
b. amount of separable product costs that are incurred in processing
c. amount (i.e., weight, inches, etc.) of the product produced in the
manufacturing process
d. relative sales value of the products produced in the process

3. The allocation of joint costs to individual products is useful primarily for purposes
of:
a. determining whether to produce one of the joint products
b. inventory costing
c. determining the best market price
d. deciding whether to sell at the split-off point

4. In a joint production process, a by-product is also described as:

a. a simultaneously produced product of relatively low value
b. a form of main product with controllable production proportions
c. waste
d. products of low value recovered at the end of a production process

5. Costs to be incurred after the split-off point are most useful for:
a. adjusting inequities in the joint cost allocation procedure

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b. determining the levels of joint production

c. assessing the desirability of further processing
d. setting the mix of output products

6. If a company obtains two salable products from the refining of one ore, the refining
process should be accounted for as a(n):
a. reduction process
b. depletion process
c. mixed cost process
d. joint process

7. The assignment of raw material costs to the major end products resulting from
refining a barrel of crude oil is best described as:
a. joint costing
b. differential costing
c. incremental costing
d. variable costing
8. The following components of production that can be allocated as joint costs
when a single manufacturing process produces several salable products
are:
a. indirect production costs only
b. materials, labor, and overhead
c. materials and labor only
d. labor and overhead only

9. Relative sales value at split-off is used to allocate:

Cost Beyond
Split-Off Joint Costs
A. yesno
B. no yes
C. no no
D. sometimes never

10. The point in a joint production process at which individual products can be
identified for the first time is called:

a. Additional processing point

b. Split-off point

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c. Order Point
d. Production point

Let’s Analyze

Activity 1. Getting acquainted with the essential terms in the study of joint cost, I will
require you to answer the following questions.

1. Mel Corporation manufactures liquid chemicals X and Y from a joint process. Joint
costs are allocated on the basis of relative market value at split-off. It costs Php5,000
to process 500 gallons of Product X and 1,000 gallons of Product Y to the split-off
point. The market value at split-off is Php10 per gallon for Product X and Php15 for
Product Y. Product Y requires an additional process beyond split-off at a cost of Php5
per gallon before it can be sold. What is Mel’s cost to produce 1,000 gallons of
Product Y? (5 points)

2. Happy Corp. manufactures Products A, B, C, and D from a joint process. Additional

information is as follows:

Market If Processed Further

Units Value at Additional Market
Product Produced Split-Off Costs Value
A 6,000Php 80,000Php 7,500Php
90,000
B 5,000 60,000 6,000 70,000
C 4,000 40,000 4,000 50,000
D 3,000 20,000 2,500
30,000
18,000Php 200,000Php 20,000Php 240,000

Assuming that total joint costs of Php160,000 were allocated using the market
value at split-off approach, what joint costs were allocated to each product?
(10 points)

3. Best Co. manufactures Products A and B from a joint process. Market value at split-
off was Php 600,000 for 10,000 units of A, and Php200,000 for 15,000 units of B.
Using the market value at split-off approach, joint costs properly allocated to A were
Php140,000. Compute for the total joint costs of Best Company. (5 points)

4. The Coco Corporation manufactures two products out of a joint process—X and Y.
The joint (common) costs incurred are Php250,000 for a standard production run that

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generates 120,000 gallons of X and 80,000 gallons of Y. X sells for Php2.00 per
gallon, while Y sells for Php3.25 per gallon. If there are no additional processing costs
incurred after the split-off point, what is the amount of joint cost of each production
run allocated to Product X? (5 points)

In a Nutshell

Activity 1. In this part, you will be required to draw conclusions, perspectives,

arguments and ideas from the unit lesson. I will supply the first two items and you will
continue the rest.

1. A joint cost is the cost of a single production process that yields multiple products
simultaneously.
2. The split-off point is the juncture in a joint production process when the
products become separately identifiable.
Your turn

1. ________________________________________________________________
________________________________________________________________
________________________________________________________________

2. ________________________________________________________________
________________________________________________________________
________________________________________________________________

3. ________________________________________________________________
________________________________________________________________
________________________________________________________________

4. ________________________________________________________________
________________________________________________________________
________________________________________________________________

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Q & A List

Do you have any question for Clarification?

Questions/Issues Answers
1.
2.
3.
4.
5.
6.
7.
8.
9.
10
11
12.

Keywords Index

By-products Split-off point

Joint costs
Joint products
Sales value
Separable costs

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Big Picture in Focus: ULOb. Explain the appropriate methods of the

allocation of joint costs to joint products.

Metalanguage and Essential Knowledge

Accounting for Joint Product Costs

The allocation of costs must be done for financial reporting purposes—to value
inventory carried on the balance sheet and to determine income. The following are the
methods of allocating joint costs. These methods include the:

1. physical units method,

2. the weighted average method,
3. the sales-value-at-splitoff method,
4. the net realizable value method,
5. the constant gross margin percentage method.
Under the physical units method, joint costs are distributed to products on the
basis of some physical measure. These physical measure may be expressed in units
such as pounds, tons, gallons, board feet, atomic weight, or heat units.

For example, suppose that a sawmill processes logs into four grades of lumber totaling
3,000,000 board feet as follows.

Total joint cost is Php186,000. Using the physical units method, how much joint
cost is allocated to each grade of lumber? First, we find the proportion of the total units
for each grade; then, we assign each grade its proportion of joint cost.

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Solution:

First and second: 450,000/3,000,000 = .15 x 186,000 = 27,900

No. 1 common: 1,200,000/3,000,000=.40 x 186,000 =74,400
No. 2 common: 600,000/3,000,000=.20 x 186,000= 37,200
No. 3 common: 750,000/3,000,000 = .25 x 186,000 = 46,500
-------------
Total 186,000
======

You could also calculate the average unit cost of Php0.062

(Php186,000/3,000,000) and multiply it by the board feet for each grade: 450,000 x .062
= 27,900.

The physical units method may be used in any industry that processes joint
products of differing grades (e.g., flour milling, tobacco, and lumber).

Another method to allocate joint cost is the Weighted Average Method wherein
weight factors can be assigned. These weight factors may include such diverse elements
as amount of material used, difficulty to manufacture, time consumed, difference in type
of labor used, and size of unit. These factors and their relative weights are usually
combined in a single value, which we might call the weight factor.

For example, suppose that a peach-canning factory purchases Php5,000 of

peaches; grades them into fancy, choice, standard, and pie quality; and then cans each
grade. The following data on grade, number of cases, and weight factor apply.

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By multiplying the number of cases by the weight factor, we obtain the weighted number
of cases. Then, the physical units method can be applied as the percentage of weighted cases for
each grade is obtained and multiplied by the joint cost to yield the allocated joint cost.

Solution:

Fancy 100 x 1.30 = 130; 130/600 = .21667 x 5,000 = 1,083

Choice 120 x 1.10 = 132; 132/600 = .22000 x 5,000 = 1,100
Standard 303 x 1.00 = 303; 303/600 = 50.500 x 5,000 = 2,525
Pie 70 x .50 = 35; 35/600 = 5.833 x 5,000 = 292
-------------
Total 5,000
======

Sales-Value-at-Split-Off Method

The sales-value-at-split-off method allocates joint cost based on each product’s

proportionate share of market or sales value at the split-off point (note: we use market
value and sales value interchangeably). Under this method, the higher the sales value,
the greater the share of joint cost charged against the product. As long as the prices at
split-off are stable, or the fluctuations in prices of the various products are synchronized
(not necessarily in amount, but in the rate of change), their respective allocated costs
remain constant.

Using the same example of lumber mill costs given in the preceding discussion of
the physical units method, the joint cost of Php186,000 is distributed to the various grades
on the basis of their market value at split-off.

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Solution:

First and second 450,000/1000=450 x 300 =135,000; 135,000/500,100 =.2699 x 186,000= 50,201

No.1 common 1,200,000/1000=1,200 x 200=240,000; 240,000/500,100 = .4799 x 186,000=89,261

No.2 common 600,000/1000=600 x 121=72,600; 72,600/500,100 = .1452 x 186,000 = 27,007

No. 3 common 750,000/1000 =750 x 70=52,500/500,100 = .1050 x 186,000 = 19,530

----------

Total Php 185,999

Note that joint cost is allocated on the basis of each product’s share of hypothetical sales
value. Thus, Alpha receives 40 percent of the joint cost (Php2,300) because it accounts
for 40 percent of the hypothetical sales value. The net realizable value method is
particularly useful when one or more products cannot be sold at the split-off point but
must be processed further. Constant Gross

Net Realizable Value Method

When sales value is used to allocate joint costs, we are talking about sales value
at the splitoff point. However, on occasion, there is no ready sales price for the individual
products at the split-off point. In this case, the net realizable value method can be used.
First, we obtain a hypothetical sales value for each joint product by subtracting all
separable (or further) processing costs from the eventual sales value. This approximates
the sales value at split-off. Then, the net realizable value method can be used to prorate
the joint costs based on each product’s share of hypothetical sales value.

Suppose that Company Y manufactures two products, Alpha and Beta, from a
joint process. One production run costs Php5,750 and results in 1,000 gallons of Alpha
and 3,000 gallons of Beta. Neither product is salable at split-off, but must be further

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processed such that the separable cost for Alpha is Php1 per gallon and for Beta is Php2
per gallon. The eventual sales price for Alpha is Php5 and for Beta, Php4. Joint cost
allocation using the net realizable value method is as follows:

Solution:

Alpha 5-1 = 4 x 1,000 = 4,000; 4,000/10,000 = .40 x 5,750 = 2,300

Beta 4-2 = 2 x 3,000 = 6,000; 6,000/10,000 = .60 x 5,750 = 3,450
------
Total 5,750
====

Note that joint cost is allocated on the basis of each product’s share of hypothetical
sales value. Thus, Alpha receives 40 percent of the joint cost (Php2,300) because it
accounts for 40 percent of the hypothetical sales value. The net realizable value method
is particularly useful when one or more products cannot be sold at the split-off point but
must be processed further.

Constant Gross Margin Percentage Method

The net realizable value method is easy to apply. However, it assigns all profit to
the hypothetical sales value. In other words, the further processing costs are assumed to
have no profit value even though they are critical to selling the products. The constant
gross margin percentage method corrects for this by recognizing that costs incurred after
the split-off point are part of the cost total on which profit is expected to be earned, and it
allocates joint cost such that the gross margin percentage is the same for each product.
Using the data for Alpha and Beta, we can allocate the Php5,750 joint cost using the
constant gross margin percentage method.

First, total revenues and costs are calculated to determine overall gross margin and the
gross margin percentage. Then, revenues for the individual products are adjusted for

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gross margin, separable costs are deducted, and the resulting figure is the allocated joint
cost.

Joint production processes result in the output of two or more products that are
produced simultaneously. Joint or main products have relatively significant sales value.
By-products have relatively less significant sales value. Joint costs must be allocated to
the individual products for purposes of financial reporting. Several methods have been
developed to allocate joint costs. These include the physical units method, the weighted
average method, the sales-value-at-split-off method, the net realizable value method, and
the constant gross margin method.

Self-Help: You can also refer to the sources below to help you further understand
the lesson:
* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic
Emphasis (7th Ed.) New York: NY: McGraw-Hill Education

* Hansen, D & Mowen, M 2015, Cornerstones of Cost Management (3rd Ed.).

Mason, OH: Cengage Learning

* Horngren, C, Datar, S & Rajan 2011, Cost Accounting: A Managerial Emphasis,

14th Edition Prentice Hall

* Jagolinzer, P 1999, Cost Accounting: An Introduction to Cost Management-

South- Western Educational Publishing

* Lanen, W 2017, Fundamentals of Cost Accounting. 5 th Edition. New York, NY:

McGraw-Hill Education

*Vanderbeck, E 2009, Principles of Cost Accounting 15th Edition. Cengage

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Learning.

Let’s Check
Activity 1. Please answer the following questions. Choose the best anwer.

1. The method used for the allocation of joint costs to products is important:
a. only in the minds of accountants
b. because profits will be affected when ending inventories change from the
beginning of the period
c. because its validity for justifying prices before regulatory authorities is
unquestioned
d. because profit margins differ when the relative sales value method is
used

2. All of the following are methods of costing by-products except the:

a. market value method
b. recognition of net revenue method
c. recognition of gross revenue method
d. average unit cost method

3. All of the following are methods of allocating joint production costs except the:
a. market value method
b. quantitative unit method
c. average unit cost method
d. recognition of net revenue method

4. If a company obtains two salable products from the refining of one ore, the refining
process should be accounted for as a(n):
a. reduction process
b. depletion process
c. mixed cost process
d. joint process

5. The following is acceptable regarding the allocation of joint product costs to a by-
product:
None Allocated Some Portion Allocated
a. not acceptable not acceptable
b. acceptable acceptable
c. acceptable not acceptable
d. sometimes acceptable never acceptable

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6. Company Kim manufactures Products WX and YZ using a joint process. The joint
processing costs are Php10,000. Products WX and YZ can be sold at split-off for
Php12,000 and Php8,000 respectively. After split-off, Product WX is processed
further at a cost of Php5,000 and sold for Php21,000, whereas Product YZ is sold
without further processing. If the company uses the market value method for
allocating joint costs, the joint cost allocated to WX is:
a. Php4,000
b. Php5,000
c. Php6,000
d. Php6,667

7. The Camp Corporation manufactures two products out of a joint process—

Coma and Ultra. The joint costs incurred are Php250,000 for a standard
production that generates 120,000 gallons of Coma and 80,000 gallons of
Ultra. Coma sells for Php2.00 per gallon, while Ultra sells for Php3.25 per
gallon. If there are no additional processing costs incurred after the split-
off point, the amount of joint cost of each production allocated to Coma by
the quantitative unit method is:
a. Php100,000
b. Php120,000
c. Php130,000
d. Php150,000

8. Company A produces three main joint products and one by-product. The by-
product's relative market value is quite low compared to that of the main products.
The preferable accounting for the by-product's net realizable value is as:
a. an addition to the revenues of the other products allocated on
their respective net realizable values
b. revenue in the period in which it is sold
c. a reduction in the joint cost to be allocated to the three main
products
d. a separate net realizable value upon which to allocate some
of the joint costs

9. Bett Co. manufactures Products A and B from a joint process. Market value at split-
off was Php700,000 for 10,000 units of A, and Php300,000 for 15,000 units of B.
Using the market value at split-off approach, joint costs properly allocated to A
were Php140,000. Total joint costs were:
a. Php98,000
b. Php200,000
c. Php233,333
d. Php350,000

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10. Company ABC processes raw material into products V1, V2, and V3. Each ton of
raw material produces five units of V1, two units of V2, and three units of V3. Joint
processing costs to the split-off point are Php15 per ton. Further processing results
in the following per unit figures:

V1 V2 V3
Additional processing costs per unit Php28 Php30 Ph25
Selling price per unit 30 35 35

If joint costs are allocated by the net realizable value of finished product, what
proportion of joint costs should be allocated to V1?
a. 20%
b. 30%
c. 33 1/3%
d. 50%

Let’s Analyze
Activity 1. Getting acquainted with the essential terms in the study of the different
appropriate methods for the allocation of joint costs to joint products, I will require you to
provide an answer to the following questions.

1. Minnie Oil Co. produces three joint products: gasoline, kerosene, and naphtha.
Total joint production cost for November was Php59,500. The units produced and
unit sales prices at the split-off point were:

Product Units Unit Sales Price

Gasoline 10,000 Php5
Kerosene 15,000 4
Naphtha 20,000 3

In determining costs by the weighted average method, each unit is weighted as follows:

Product Per Unit Weighting

Gasoline 10.3
Kerosene 5
Naphtha 3

Required: Allocate the production cost, using:

(1) The market value method

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(2) The weighted average method

In a Nutshell

Activity 1. In this part, you will be required to draw conclusions, perspectives, arguments
and ideas from the unit lesson. I will supply the first item and you will continue the rest.

1. The sales value at split-off method is preferable when market prices exist at split-
off because using revenues is consistent with the benefits-received criterion;
further, the method does not anticipate subsequent management decisions on
further processing and is simple.

Your turn
2.
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
3.
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
4.
________________________________________________________________
________________________________________________________________
________________________________________________________________
________________________________________________________________
5.
________________________________________________________________

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________________________________________________________________
________________________________________________________________
________________________________________________________________

Q & A List

Do you have any question for Clarification?

Questions/Issues Answers
1.
2.
3.
4.
5.
6.
7.
8.
9.
10
11
12.

Keywords Index

Cost allocation Sales- value-at-split-off

method
Gross margin Weight factor
percentage method
Net realizable value
method
Physical units method
Processing costs

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Big Picture in Focus: ULOc. Prepare the different income statements

showing the revenue/net revenue from by-products.

Metalanguage and Essential Knowledge

Accounting for Byproducts

Typically, by-products are not allocated any of the joint product costs. Instead,
byproduct sales are listed as an additional sales revenue on the income statement, or
they are treated as a deduction from the cost of goods sold and as other income.

1. As an additional sales revenue

Sales

Main Product Php400,000

By-product 10,000
--------- Php410,000
Less: Cost of goods sold
Direct Materials 120,000
Direct Labor 100,000
Factory Overhead 80,000
-----------
Total Manufacturing cost 300,000
Less: Inventory, Jan. 31 60,000 240,000
-----------
Gross profit 170,000
Less: Selling and administrative expenses 80,000
-----------
Net Income Php 90,000
=======

2. As a deduction from the cost of goods sold

Sales Php400,000

Less: Cost of goods sold

Direct Materials 120,000
Direct Labor 100,000
Factory Overhead 80,000
-----------

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Total Manufacturing cost 300,000

Less: Inventory, Jan. 31 60,000
-----------
Cost of goods sold 240,000
Less: Revenue from by-product 10,000 230,000
------------ ---------------
Gross profit 170,000
Less: Selling and administrative expenses 80,000
-----------
Net Income Php 90,000
=======

3. As other income
Sales Php400,000

Less: Cost of goods sold

Direct Materials 120,000
Direct Labor 100,000
Factory Overhead 80,000
-----------
Total Manufacturing cost 300,000
Less: Inventory, Jan. 31 60,000 240,000
----------- ------------
Gross Profit 160,000

Less: Selling and administrative expenses 80,000

Add: Revenue from by-product 10,000
-----------
Net Income Php 90,000
=======

Self-Help: You can also refer to the sources below to help you further understand
the lesson:
* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic
Emphasis (7th Ed.) New York: NY: McGraw-Hill Education

* Hansen, D & Mowen, M 2015, Cornerstones of Cost Management (3rd Ed.).

Mason, OH: Cengage Learning

* Horngren, C, Datar, S & Rajan 2011, Cost Accounting: A Managerial Emphasis,

14th Edition Prentice Hall

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* Jagolinzer, P 1999, Cost Accounting: An Introduction to Cost Management-

South- Western Educational Publishing

* Lanen, W 2017, Fundamentals of Cost Accounting. 5 th Edition. New York, NY:

McGraw- Hill Education

* Vanderbeck, E 2009, Principles of Cost Accounting 15th Edition. Cengage

Learning.

Let’s Check
Activity 1. Please choose the best answer on the following questions.

1. Reporting revenue from by-product sales on the income statement as

additional sales revenue:
a. allocates costs to by-products on the basis of quantities
produced
b. reduces the main product cost by the estimated market value of
the by-product
c. credits main product costs only when the by-product is used in
further production
d. overstates ending inventory costs of the main product
2. When a company produces two different products through a common
production process, the factor that determines whether the two products are
joint products or one main product and one by-product is the:
a. management policy about individual products
b. potential marketability for individual products
c. relative sales value of individual products
d. amount of work done in the production of individual products
3. The main purpose of allocating the joint cost of a processing center to
various products is to:
a. record accurate cost of sales by product line
b. submit a correct standard product cost for comparative analysi
c. find reliable processing cost variances by product
d. establish inventory cost assigned to unsold units
4. A product is considered a by-product when it:
a. has a lower market valfue than the main product
b. is produced from waste
c. normally generates a smaller amount of revenue than the main
product

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d. is produced along with main products but its sales value does not
cover its production cost
5. X Company manufactures two products, A and B,which can be sold at split-
off point or needs further processing and eventually sold as a very good
quality items. What is the basis of the decision to sell these products at split-
off point or needs further processing?
a. allocation of the joint cost using an equitable and rational
allocation basis
b. assumption that the joint cost must be allocatd using a quantitative
or physical unit method
c. assumption that the joint cost is irredlevant
d. allocation of the joint cost using the sales value or market value
method
6. A separable cost is also known as a:
a. cost incurred after split-off point
b. cost incurred before split-off point
c. cost incurred on by-priduct
d. cost incurrred on main product
7. It is the point where two or more products come out and can be identified
separately.
a. joint point
b. change point
c. split-off point
d. break-even point
8. This method uses measurement units such as tons, gallons, kilograms,
pounds, and feet to apportion joint cost :
a. market value method
b. average unit cost method
c. weighted averge method
d. quantitative unit method
9. This is a cost incurred to produce two or more products in a common
production process:
a. mixed cost
b. basic cost
c. joint cost
d. direct cost
10. The quantitative unit method of joint cost allocation is known as:
a. physical unit method
b. joint product method
c. direct [roduct method
d. by-product method

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Let’s Analyze
Activity 1. Getting acquainted with the different presentation of by-products in the income
statements, I will require you to provide an answer to the item below:

1. Glad Company produces tea bags. As part of the manufacturing process, the tea
leaves are separated from the stalks and stems. The tea leaves are sold as the
main product, while the stalks and stems are sold as the by-product for use in
nursery mulch. During August, the company processed 25,000 boxes of tea bags
at a unit cost of Php.75. Beginning inventory consisted of 2,000 boxes at a unit
cost of Php.70 per box. During August, 20,000 boxes were sold for Php1.75 each.
The company also sold 500 pounds of stalks and stems at a total price of Php850.
Marketing and administrative expenses amounted to Php12,000.

Required: Prepare an income statement showing the operating income for August,
assuming that the revenue from the company's by-product sales is deducted from
the production costs. (Show unit costs for the ending inventory using the average
cost method rounded to three decimal places.)

In a Nutshell

Activity 1. In this part, you will be required to draw conclusions, perspectives,

arguments and ideas from the unit lesson. I will supply the first two items and you will
continue the rest.

1. If by-products make a large contribution to the firm's revenue and, as a result,

affect the unit cost of the major product, the inventories should be recorded.
2. The production method recognizes byproducts in financial statements at the time
of production, whereas the sales method recognizes byproducts in financial
statements at the time of sale.

Your Turn

3.

____________________________________________________________________

____________________________________________________________________

____________________________________________________________________

4.

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____________________________________________________________________

____________________________________________________________________

____________________________________________________________________

5.

____________________________________________________________________

____________________________________________________________________

____________________________________________________________________

6.

____________________________________________________________________

____________________________________________________________________

____________________________________________________________________

Q & A List

Do you have any question for Clarification?

Questions/Issues Answers
1.
2.
3.
4.
5.
6.
7.
8.
9.
10
11
12.

Keywords Index

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Administrative Factory overhead

expenses
By-product Main product
Cost of goods sold Manufacturing costs
Direct labor Sales revenue
Direct materials Selling expenses

COURSE SCHEDULE

This section calendars all the activities and exercises, including readings and lectures, as
well as time for making assignments and doing other requirements.

Activity Date Where to submit

Orientation Blackboard LMS
Let’s Check Activities Blackboard LMS
Let’s Analyze Activities Blackboard LMS
In a Nutshell Blackboard LMS
Questions & Answers Blackboard LMS-Forum
Let’s Check Activities Blackboard LMS
Let’s Analyze Activities Blackboard LMS
Let’s Analyze Activities Blackboard LMS
In a Nutshell Blackboard LMS
Questions and Answers Blackboard LMS-Forum
Let’s Check Activities Blackboard LMS
Let’s Analyze Activities Blackboard LMS
First Formative Assessment Blackboard LMS

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Big Picture
Week 8-9: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to
a. Discuss the basic characteristics of process costing, including cost flows,
journal entries, and the preparation of the production cost report.
b. Prepare a departmental production report using the FIFO method and
weighted average method.
c. Explain how spoilage is treated in a process costing system.

Big Picture in Focus: ULOa. Discuss the basic characteristics of process

costing, including cost flows, journal entries, and the preparation of the
production cost report.

Metalanguage and Essential Knowledge

1. Process Costing - is a special branch of costing commonly used by the

manufacturing industries which process involves the continuous production of
products.

2. Production report – the document that summarizes the manufacturing activity

that takes place in a process department over a given period of time.

3. Process- is a series of activities (operations) that are linked to perform a specific

objective.

4. Equivalent units – are the units in production multiplied by the percentage of

those units that are complete (100 percent) or those that are in process.

Cost Flows
The cost flows for a process-costing system are similar to those for a job-order
costing system. The primary difference is that a job-order costing system accumulates
manufacturing costs by job, and a process-costing system accumulates manufacturing
costs by process. See below for the difference.

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(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

A job-order costing system assigns manufacturing costs to jobs and transfers

these costs directly to the finished goods account when the job is completed whereas in
a process-costing system, when units are finished for a process, manufacturing costs are
transferred from one process department’s account to the next. The last process transfers
the costs to Finished Goods.
In a process-costing system, each process is a subsidiary account of the work-in
process control account. In the previous lesson regarding job-order costing system, each
job is a subsidiary account of the work-in-process control account. A process-costing

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system is a simpler and less expensive system to operate than a job-order costing
system. Another reason that a process-costing system is simpler is that laborers tend to
specialize in particular processes. Although time tickets are still used to track direct labor
hours of any particular laborer, there is no need to allocate them to various processes.
Below illustrates the cost flows in a process-costing system.
For example, the journal entries for the tableting department.
1. Work in Process—Tableting 600
Work in Process—Mixing 600
To transfer goods to tableting.

2. Work in Process—Tableting 400

Materials 100 Payroll 125
Overhead Control 175
To record additional manufacturing costs.

3. Work in Process—Bottling 800

Work in Process—Tableting 800
To transfer goods to bottling.

When goods are completed in one process, they are transferred with their costs to
the subsequent process.

For example, mixing transferred Php600 of its costs to tableting, and tableting
(after further processing) transferred Php800 of costs to bottling. A cost transferred from
a prior process to a subsequent process is referred to as a transferred-in cost. These
transferred-in costs are (from the viewpoint of the process receiving them) a type of
direct materials cost. This is true because the subsequent process receives a partially
completed unit that must be subjected to additional manufacturing activity, which
includes more direct labor, more overhead, and, in some cases, additional direct
materials.

For example, the second journal entry for the tableting department reveals that Php400
of additional manufacturing costs was added after receiving the transferred-in goods
from mixing. Thus, while mixing sees the active and inert powders as a combination of
direct materials, direct labor, and overhead costs, tableting sees only the powder—a
direct material, costing Php600.

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Comparison Using Work-in Process Accounts

(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

Illustrative Problem:

Happy Corporation uses process costing in its two production departments. A separate
work in process account is kept in the general ledger for each production department.
The following data relate to operations for the month of June:

Beginning Added
Inventory During March
Direct materials cost: Department A Php 4,000 Php24,000
Department B 2,000 19,000
Direct labor cost: Department A 5,000 39,000
Department B 3,500 34,000
Applied overhead: Department A 11,000 89,000
Department B 3,500 34,000

During June, 40,000 units with a cost of Php5 each were transferred from Department A
to Department B, and 35,000 units with a cost of Php9 each were transferred from
Department B to finished goods inventory.

Required: Prepare the appropriate general journal entries to record the cost charged to
the producing departments during June and the cost of units transferred from Department
A to Department B and Department B to finished goods inventory.
SOLUTION

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Work in Process — Department A 24,000

Work in Process — Department B 19,000
Materials 43,000

Work in Process — Department A 39,000

Work in Process — Department B 34,000
Payroll 73,000

Work in Process — Department A 89,000

Work in Process — Department B 34,000
Applied Factory Overhead 123,000

Work in Process — Department B 200,000

Work in Process — Department A 200,000

Finished Goods Inventory 315,000

Work in Process — Department B 315,000

The Cost Production Report

In process-costing systems, costs are accumulated by process department for a
period of time. The production report is the document that summarizes the manufacturing
activity that takes place in a process department over a given period of time. The
production report also serves as a source document for transferring costs from the work-
in-process account of one department to the work-in-process account of the next
department. In the department that handles the final stage of processing, the production
report serves as a source document for transferring costs from the work-in-process
account to the finished goods account. A production report provides information about the
physical units processed in a department and also about the manufacturing costs
associated with them. Thus, a production report is divided into a unit information section
and a cost information section. The unit information section has two major subdivisions:
(1) units to account for and (2) units accounted for. Similarly, the cost information section
has two major subdivisions: (1) costs to account for and (2) costs accounted for.
In summary, a production report traces the flow of units through a department,
identifies the costs charged to the department, shows the computation of unit costs, and
reveals the disposition of the department’s costs for the reporting period.

An equivalent unit of production is an expression of the amount of work done by a

manufacturer on units of output that are partially completed at the end of an accounting
period.

Illustrative Problem:

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Unit Information Section

1. Units to account for:
Units in process, beg. (40% complete) 5,000
Units started 20,000
---------
Total units 25,000 units
==========
2. Units accounted for:
Units completed 18,000
Units in process, end (80%) completed 7,000
------------
Total units 25,000 units
======
Cost Information Section
1. Cost to account for:
FIFO Costing Method
Star Company Mixing Department Production and Cost Data: October

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(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

Physical Flow Schedule: Mixing Department

(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

Equivalent Units of Production: FIFO Method

(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

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Star Company Mixing Department Production Report for October (FIFO Method) Unit
Information

(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

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WEIGHTED AVERAGE COSTING METHOD

Physical Flow Schedule: Mixing Department

(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

Equivalent Units of Production: Weighted Average Method

(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

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Star Company Mixing Department Production Report for October (Weighted Average
Method) Unit Information

(Hansen, M. Mowen, M & Guan, L 2007, Cost Management: Accounting and Control, 6th Edition)

The use of process costing is complicated by the presence of beginning or ending

work-in-process inventories. When work-in-process inventories are present, equivalent
units must be used to measure output. Also, with beginning work-in-process inventories,
we must decide what to do with prior-period work and prior-period costs. Two methods
were described for dealing with beginning work-in-process inventories: the FIFO method
and the weighted average method. The FIFO approach is theoretically appealing because
it follows the process-costing principle: a period’s unit cost is computed by dividing the
costs of the period by the output of the period. To accomplish this, prior-period work and
costs must be excluded. This work and its costs must be tracked separately, creating
some complexity in the approach. The weighted average approach is less complicated
but poses some problems when control and accuracy issues are important.

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Self-Help: You can also refer to the sources below to help you further understand
the lesson:
* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic
Emphasis (7th Ed.) New York: NY: McGraw-Hill Education

* Hansen, D & Mowen, M 2015, Cornerstones of Cost Management (3rd Ed.).

Mason, OH: Cengage Learning

* Horngren, C, Datar, S & Rajan 2011, Cost Accounting: A Managerial Emphasis,

14th Edition Prentice Hall

* Jagolinzer, P 1999, Cost Accounting: An Introduction to Cost Management-

South- Western Educational Publishing

* Lanen, W 2017, Fundamentals of Cost Accounting. 5 th Edition. New York, NY:

McGraw- Hill Education

*Vanderbeck, E 2009, Principles of Cost Accounting 15 th Edition. Cengage

Learning

Let’s Check
Activity 1. Please choose the best answer on the following questions.

1. An equivalent unit of material means:

a. material and labor cost
b. the amount of material cost necessary to complete one unit of
production
c. a unit of work in process inventory
d. the amount of material cost necessary to start a unit of
production into work in process

2. On a cost of production report the following items are included, except:

a. work in process—beginning inventory
b. cumulative costs through the end of departmental production
c. finished goods—ending inventory
d. materials used in the department

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3. One of the characteristics of a process costing system:

a. Costs are accumulated by order
b. It is used by a company manufacturing custom machinery
c. It requires a lot more detailed accounting than does a job order system
d. Work in process inventory is restated in terms of completed units.

4. Assuming that a company has no beginning work in process inventory and the
ending work in process inventory is 50% complete as to conversion costs, the
number of equivalent units as to conversion costs would be:
a. less than the units completed
b. more than the units completed
c. less than the units placed in process
d. the same as the units completed

5. What is the first step in applying the average cost method?

a. add the beginning work in process costs to the current period’s production costs
b. divide the current period’s production costs by the equivalent units
c. subtract the beginning work in process costs from the current period’s
production costs
d. a and b

6. The beginning work in process as to conversion costs was 60% complete and the
ending work in process as to conversion costs was 45%. The amount of the
conversion cost included in the ending work in process (using the average cost
method) is determined by multiplying the average unit conversion costs by what
percentage of the total units in ending work in process?
a. 60%
b. 55%
c. 45%
d. 50%

7. Assuming that company Y reports two different unit costs for goods transferred to
the next department, it is reasonable to assume that :
a. the department accounts for lost units at the end of the process
b. a FIFO costing method I used
c. lost unit costs are computed separately
d. an average costing method is used

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8. To compute equivalent units of production using the FIFO method of process

costing, the work for the period must be broken down to units which were:
a. started and completed during the period
b. completed during the period and units in ending inventory
c. competed from beginning inventory, started and completed during the month,
and units in ending inventory
d. started during the period and units transferred out during the period

9. FIFO method of process costing will produce the same cost of goods manufactured
amount as the average cost method when there is no beginning inventory.
a. True
b. False

10. The FIFO method of process costing differs from that of the average cost method
because it considers the stage of completion of beginning work in
in process in computing equivalent units of production, whereas the average cost
method does not consider the stage of completion of beginning work in process.
a. True
b. False

Let’s Analyze
Activity 1. Getting acquainted with the basic characteristics of process costing, I will
require you to answer the following questions.

1. Harana Company uses process costing to account for the costs of its only product, X.
Production takes place in two departments—Sanding and Polishing. On December
31, the inventory for Product X was as follows:

No unused materials
Work in process—
Sanding Department 700 units (3/4 complete as to labor)
Work in process—
Polishing Department 900 units (1/2 complete as to materials and
3/4 complete as to direct labor)
Finished Goods 500 units

Required:

(1) Compute the equivalent units of materials in all inventories combined at

December 31.
(2) Compute the equivalent units of the Sanding Department's direct labor in all

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inventories at December 31.

2. Karren Beach Products reports the following data for the first department in its
production process:

In a Nutshell

Activity 1. In this part, you will be required to draw conclusions, perspectives,

arguments and ideas from the unit lesson. I will supply the first item and you will
continue the rest.

1. The weighted-average method is most appropriate to use when work-in-process is

relatively small, or its direct material costs , conversion costs and inventory levels are
stable whereas FIFO method is used when direct material costs, conversion costs, or
inventory levels fluctuate significantly.

Your turn

2.__________________________________________________________________

_________________________________________________________

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_________________________________________________________

_________________________________________________________

_________________________________________________________

_________________________________________________________

_________________________________________________________

_________________________________________________________

_________________________________________________________

_________________________________________________________

_________________________________________________________

_________________________________________________________

_________________________________________________________

_________________________________________________________

_________________________________________________________

_________________________________________________________

_________________________________________________________

_________________________________________________________

_________________________________________________________

_________________________________________________________

_________________________________________________________

_________________________________________________________

_________________________________________________________

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Q & A List

Do you have any question for Clarification?

Questions/Issues Answers
1.
2.
3.
4.
5.
6.
7.
8.
9.
10
11
12.

Keywords Index

Cost flow Job order costing Weighted

average
method
Cost information Physical flow
section
Cost production report Process
Equivalent units Process costing
First in first out method Unit information section

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Big Picture in Focus: ULOb. Prepare a departmental production cost report

using the FIFO method and Weighted average method.

Metalanguage and Essential Knowledge

Cost Production Report
Under the process costing system the production cost report is prepared at the
end of each period for each production process or department. This document
summarizes the number of physical units and equivalent units of a department, the costs
incurred during the period, and the costs assigned to both units completed and transferred
out and ending work-in-process inventories.
There are five steps in process costing:
1. Analyze the physical flow of production units
2. Calculate equivalent units for each manufacturing cost element (materials, labor
and overhead)
3. Determine total costs for each manufacturing cost element
4. Compute cost per equivalent unit for each manufacturing cost element
5. Assign total manufacturing costs to units completed and ending Work in Process
(WIP)

Step 1: You analyze the physical flow of production units. Determine the number of units
on hand in beginning work-in-process, the number of units started into production (or
received from a prior department), the number of units completed, and the number of
units in ending work-in-process inventory. The analysis of physical units includes
accounting for both input and output units. Input units include beginning work-in-process
inventory and all units that enter a production department during an accounting period.
Output units include units that are complete and transferred out from a production
department and units in the ending work-in-process inventory.

Input Physical units

Work-in-process inventory, beg 10,000
Units started 40,000
Total units to account for 50,000

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Phone No.: (082)300-5456 Local 137

======

Output Physical Units

Units completed and transferred out during the month 44,000
Work –in-process inventory, end 6,000
Total units accounted for 50,000
======
Step 2: In this step, you calculate the equivalent units for each manufacturing cost
element. The purpose of calculating equivalent units of production for direct materials,
direct labor, and factory overhead is to measure the total work expended on production
during an accounting period. The partially complete physical units are converted into the
equivalent number of whole units.

* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic Emphasis, 7 th Ed

Step 3: You determine the total costs for each manufacturing cost element. The total
manufacturing costs for each cost element (materials, labor, and overhead) include the
current costs incurred and the costs of the units in work-in-process beginning inventory.
The amount of these costs is obtained from material requisitions, labor time cards, and
factory overhead allocation sheets. The total manufacturing cost for each cost element is
also called total cost to account for. Be sure that the total cost determined in this step
must agree with the total cost assigned in step five.

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* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management : A Strategic Emphasis, 7th Ed

Step 4: The purpose of computing direct materials, direct labor, and factory overhead
costs per equivalent unit of production is to have a proper product costing and income
determination for an accounting period, which includes both complete and incomplete
units.

* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic Emphasis, 7 th Ed

Step 5: This is the last step wherein you assign total manufacturing costs to units
completed and ending work-in- process. The objective of the production cost report is to
assign total manufacturing costs incurred to the units completed during the period and
the units that are still in process at the end of the period. The total costs assigned in step
five should equal the total costs to be accounted for in step three.

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* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic Emphasis, 7th Ed

PRODUCTION COST REPORT

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* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic Emphasis, 7 th Ed

FIFO Costing Method

The process-costing principle requires that the costs of the period be divided by
the output of the period. Thus, theoretically, only current-period costs and current-period
output should be used to compute current-period unit costs. The first-in, first-out (FIFO)
costing method attempts to follow this theoretical guideline.

Under the FIFO costing method, the equivalent units and manufacturing costs in
beginning work in process are excluded from the current-period unit cost calculation.
Thus, the FIFO method recognizes that the work and costs carried over from the
prior period legitimately belong to that prior period.
Since FIFO excludes prior-period work and costs, we need to create two
categories of completed units. FIFO assumes that units in beginning work in process are
completed first, before any new units are started.
Thus, one category of completed units is that of beginning work-in-process units.
The second category is for those units started and completed during the current period.
These two categories of completed units are needed in the FIFO method so that each
category can be costed correctly. For the units started and completed, the unit cost is
obtained by dividing total current manufacturing costs by the current-period equivalent
output. However, for the beginning work-in-process units, the total associated
manufacturing costs are the sum of the prior-period costs plus the costs incurred in the
current period to finish the units. Thus, the unit cost is this total cost divided by the units
in beginning work in process.
Illustrative Problem:
Dalitay Tool Company manufactures a product in two departments, Shaping and
Assembly. The product is cut out of sheet metal, bent to shape, and painted in the
Shaping Department. Then, it is transferred to the Assembly Department where
component parts purchased from outside vendors are added to the unit. A process cost
system with a FIFO cost flow assumption is used to account for work in process
inventories. Data related to November operations in the Assembly Department follow:

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Dalitay Tool Company

Assembly Department
Cost of Production Report
For November, 2019

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Weighted average method

Illustrative Problem:

Cove Corporation manufactures a product in three departments. The product is cut out
of lumber in the Cutting Department, then transferred to the Planing Department where it
is shaped and certain parts purchased from outside vendors are added to the unit, and
finally transferred to the Finishing Department where it is primed, painted, and packaged.
Since only one product is manufactured by the company, a process cost system is used.
The company adopted the average cost flow assumption to account for its work in process
inventories. Data related to September operations in the Planing Department follow:

Units in beginning inventory 3,000

Units received from the Cutting Department this period 7,500
Units transferred to Finishing Department this period 8,500
Units in ending inventory (75% materials, 50% labor and overhead) 2,000

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Beginning Added
Costs charged to the department: Inventory This Period
Costs from the preceding department Php15,500 Php63,250
Materials 7,800 20,700
Direct labor 3,200 16,750
Factory overhead 9,975 39,900

Required: Prepare a September cost of production report for the Planing Department.

Cove Corporation
Planing Department
Cost of Production Report
For September, 2019

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Self-Help: You can also refer to the sources below to help you further understand
the lesson:
* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic
Emphasis (7th Ed.) New York: NY: McGraw-Hill Education

* Hansen, D & Mowen, M 2015, Cornerstones of Cost Management (3rd Ed.).

Mason, OH: Cengage Learning

* Horngren, C, Datar, S & Rajan 2011, Cost Accounting: A Managerial Emphasis,

14th Edition Prentice Hall

* Jagolinzer, P 1999, Cost Accounting: An Introduction to Cost Management-

South- Western Educational Publishing

* Lanen, W 2017, Fundamentals of Cost Accounting. 5th Edition. New York, NY:
McGraw- Hill Education

*Vanderbeck, E 2009, Principles of Cost Accounting 15 th Edition. Cengage

Learning

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Let’s Check
Activity 1. Please answer the following questions. Show your calculations.

1. Department A is the first stage of Tine Company's production cycle. The following
information is available for conversion costs for the month of April:
Units
Beginning work in process (60% complete) 20,000
Started in April 340,000
Completed in April and transferred to Department B 320,000
Ending work in process (40% complete) 40,000

Using the FIFO method, the equivalent units for the conversion cost are:

a. 336,000
b. 360,000
c. 324,000
d. 320,000

2. The Aper Company computed the physical flow of units for Department A for the
month of April as follows:

Units completed:
From work in process on April 1 10,000
From April production 30,000
Total 40,000

Materials are added at the beginning of the process. Units of work in process at
April 30 were 8,000. The work in process at April 1 was 80% complete as to
conversion costs, and the work in process at April 30 was 60% complete as to
conversion costs. What are the equivalent units of production for the month of April
using the FIFO method?

Materials Conversion Costs

a. 48,000 48,000
b. 40,000 47,600
c. 36,800 38,000
d. 38,000 36,800

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3. Cord Company computed the flow of physical units completed for Department M
for the month of March as follows:

Units completed:
From work in process on March 1 15,000
From March production 45,000
Total 60,000

Materials are added at the beginning of the process. The 12,000 units of work in
process at March 31 were 80% complete as to conversion costs. The work in
process at March 1 was 60% complete as to conversion costs. Using the FIFO
method, the equivalent units for March conversion costs were:
a. 60,600
b. 55,200
c. 57,000
d. 54,600

4. Season Co. adds materials at the beginning of the process in Department P. The
following information pertains to Department P's work in process during May:
Units
Work in process on May 1
(60% complete as to conversion cost) 3,000
Started in May 25,000
Completed in May 20,000
Work in process on May 31
(75% complete as to conversion cost) 8,000

Under the average costing method, the equivalent units for conversion cost are:
a. 26,000
b. 25,000
c. 24,000
d. 21,800

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5. During March, Z Company's Department Y equivalent unit product costs,

computed under the average cost method, were as follows:

Materials Php1
Conversion 3
Transferred-in 5

Materials are introduced at the end of the process in Department Y. There

were 4,000 units (40% complete as to conversion costs) in work in process
at March 31. The total costs assigned to the March 31 work in process
inventory should be:
a. . Php36,000
b. Php28,800
c. Php27,200
d. Php24,800

6.

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7. Darao Processing Co. uses the average costing method and reported a beginning
inventory of 5,000 units that were 20% complete with respect to materials in one
department. During the month, 11,000 units were started; 8,000 units were
finished; ending inventory amounted to 8,000 units that were 60% complete with
respect to materials. Total materials cost during the period for work in process
should be spread over:

a. 7,200 units
b. 12,800 units
c. 11,200 units
d. 13,200 units

8. Dader Corporation's production cycle starts in the Mixing Department. The

following information is available for April:

Units
Work in process, April 1 (50% complete) 40,000
Started in April 240,000
Work in process, April 30 (60% complete) 25,000

Materials are added at the beginning of the process in the Mixing

Department. Using the average cost method, what are the equivalent units
of production for the month of April?

Materials Conversion
A. 255,000 255,000
B. 270,000 280,000
C. 280,000 270,000
D. 305,000 275,000

9. Information concerning Department A of Gardo Company for June is as follows:

Materials
Units Costs
Beginning work in process 17,000 Php12,800
Started in June 82,000 69,700
Units completed 85,000
Ending work in process 14,000

All materials are added at the beginning of the process. Using the average cost
method, the cost per equivalent unit for materials is:

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a. Php0.825
b. Php0.833
c. Php0.85
d. Php0.97

10. Coode Manufacturing has three producing departments in its factory. The ending
inventory in the Milling Department consisted of 3,000 units. These units were
60% complete with respect to labor and factory overhead. Materials are applied
at the end of the milling process. Unit costs for the complete process in the Milling
Department are: materials, Php1; labor, Php2; and factory overhead, Php3. The
appropriate unit cost for each unit in the ending inventory is:
a. Php2
b. Php5
c. Php3
d. Php6

Let’s Analyze
Activity 1. At this point in time, you are now familiar with the preparation of the cost
production report. Please provide an answer to the following questions.

1. Handsome Tool Company manufactures a product in two departments, Shaping

and Assembly. The product is cut out of sheet metal, bent to shape, and painted
in the Shaping Department. Then, it is transferred to the Assembly Department
where component parts purchased from outside vendors are added to the unit. A
process cost system with a FIFO cost flow assumption is used to account for work
in process inventories. Data related to September operations in the Assembly
Department follow:

Units in beginning inventory (90% materials, 80% labor and overhead) 1,000
Units received from the Shaping Department this period 3,000
Units transferred to Finished Goods Inventory this period 2,800
Units in ending inventory (50% materials, 40% labor and overhead) 1,200

Beginning Added
Costs charged to the department: Inventory This Period
Costs from the preceding department Php23,600 Php29,250
Materials 7,700 13,375
Direct labor 3,500 9,672
Factory overhead 4,900 16,616

Required: Prepare a September cost of production report on a FIFO basis for the

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Assembly Department.

2. Corte Corporation manufactures a product that is processed in two departments:

Mixing and Cooking. At the beginning and end of October, there were no
inventories of unfinished work. During the month of October, 50,000 units of this
product were completed. Materials used during the month amounted to
Php28,000, of which one half were used in the Mixing Department and one half
were used in the Cooking Department. Direct labor wages totaled Php60,000, with
Php40,000 applicable to Mixing and Php20,000 to Cooking. The amounts for direct
factory overhead incurred for each department and for general factory overhead
apportioned to each department were:

Mixing Cooking
Department Department
Factory overhead incurred Php7,500 Php9,000
General factory overhead apportioned 5,000 6,000

Required: Prepare a partial cost of production report, showing the total cost to be accounted
for in each department.

In a Nutshell

Activity 1. In this part, you will be required to draw conclusions, perspectives, arguments
and ideas from the unit lesson. I will supply the first item and you will continue the rest.

1. The two methods of preparing the departmental production cost report in process
costing are the weighted-average method and first-in, first-out (FIFO) method. The
weighted-average method includes costs incurred in both current and prior periods
that are shown as the beginning work-in-process inventory of this period. The FIFO
method includes only costs incurred during the current period in calculating unit cost

Your turn

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Q & A List

Do you have any question for Clarification?

Questions/Issues Answers
1.
2.
3.
4.
5.
6.
7.
8.
9.
10
11

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12.

Keywords Index

Cost flow Job order costing Weighted

average
method
Cost information Physical flow
section
Cost production report Process
Equivalent units Process costing
First in first out method Unit information section

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Big Picture in Focus: ULOc. Explain how spoilage is treated in a process costing
system.

Metalanguage and Essential Knowledge

There are two types of spoilage—normal and abnormal. Normal spoilage occurs
under normal operating conditions. It is uncontrollable in the short term and is considered
a part of product cost. That is, the costs of lost units are absorbed by the good units
produced. Abnormal spoilage exceeds expected losses under efficient operating
conditions and is charged as a loss to operations in the period detected.

Two approaches are used to account for normal spoilage in process costing
systems. The first approach is to count the number of spoiled units, prepare a separate
equivalent unit computation with the cost per unit of the spoiled goods, and then allocate
the cost to the good units produced.

The second approach is to omit the spoiled units in computing the equivalent units
of production; the spoilage cost is thus included as part of total manufacturing costs. The
first approach provides more accurate product costs because it computes the costs
associated with normal spoilage and spreads them over the good units produced. The
second approach is less accurate because it spreads the costs of normal spoilage over
all units—good completed units, units in ending work-in-process inventory, and abnormal
spoiled units.

Weighted Average Method

Following the five-step procedure described earlier, we just need to add normal spoilage
and abnormal spoilage components in the calculations. Please see calculations below.

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* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic Emphasis 7 th Ed

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Phone No.: (082)300-5456 Local 137

* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic Emphasis 7th Ed

FIFO method

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* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic Emphasis 7th Ed

146
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3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic Emphasis 7 th Ed

Self-Help: You can also refer to the sources below to help you further understand
the lesson:

* Blocher, E, Cokins, G, Juras, P & Stout, D 2016, Cost Management: A Strategic

Emphasis (7th Ed.) New York: NY: McGraw-Hill Education

* Hansen, D & Mowen, M 2015, Cornerstones of Cost Management (3rd Ed.). Mason, OH:
Cengage Learning

* Horngren, C, Datar, S & Rajan 2011, Cost Accounting: A Managerial Emphasis, 14 th

147
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3F, Business & Engineering Building
Matina, Davao City
Phone No.: (082)300-5456 Local 137

Edition Prentice Hall

* Jagolinzer, P 1999, Cost Accounting: An Introduction to Cost Management-South-

Western Educational Publishing

* Lanen, W 2017, Fundamentals of Cost Accounting. 5th Edition. New York, NY: McGraw-
Hill Education

*Vanderbeck, E 2009, Principles of Cost Accounting 15th Edition. Cengage Learnin

Let’s Check
Activity 1. Please answer the following questions..

1. Which one of the following is an exampole of spoilage?

a. Short lenghts from wood work
b. Defective aluminum cans recycled by manufacturer
c. Detection of defective pieces before shipment
d. All of above

2. The units of normal spoilage are divided to total completed units

a. Normal spoilage rates
b. Abnormal spoilage rates
c. Normal scrap rates
d. Abnormal scrap rates

3. An amount of spoilage that is not natural in a specific production process is

catergorized as:
a. Normal scrap
b. Normal spoilage
c. Abnormal spoilage
d. Weighted spoilage

4. The sum of beginning work in process inventory units and started units is
subtracted from the sum of ending work in process inventory units and transferred
out units of goods to calculate
a. Gross weighted spoilage
b. Inventoriable spoilage
c. Partial spoilage
d. Total spoilage

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5. The production units that do not meet customer specification, but can be sold to
othe customers as finished goods
a. Reduced work
b. Spoilage
c. Rework
d. scrap

6. An example of rework is
a. Short lenghts from wood work
b. Defective aluminum cans recycled by manufacturer
c. Detection of defective pieces before shipment
d. All of above

7. The normal spoilage is subtracted from total spoilage to include

a. Abnormal spoilage
b. Gross weighted spoilage
c. Inventoriable spoilage
d. Partial spoilage

8. If the beginning work in process inventory units are 2,600, units started are 9,000
ending work in process units are 2,300 and the completed good units are 8,000
then total spoilage will be
a. 1,200 units
b. 990 units
c. 1100 units
d. 1000 units

9. The residual material which results from manufaturing products is called

a. Reduced work
b. Spoilage
c. Rework
d. Scrap

10. The costing which explains how and when scrap affects the operting income of a
company
a. Inventory costing
b. Conversion costing
c. Normal scrap costing
d. Abnormal scrap costing

Let’s Analyze

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Activity 1. At this point in time, you are now familiar with how spoilage is treated in a
process costing system. Please provide an answer to the problem below.
1. Leny Corporation produces a product through a continuous process in two
departments. Materials in this department are added at the beginning of the process.
The production and cost data were taken from Department B during the month of
August 2019.

Production data:
Received from Dept. A 70,000 units
Completed and transferred 50,000 units
In process, end (50% complete) 5,000 units
Lost 5,000 units

Cost data:
Received from Dept. A P460,000
Materials 75,000
Labor 21,875
Overhead 143,750

Required: Cost of Production Report under the following assumptions:

a. Lost units, normal, discovered at the beginning
b. Lost units, normal discovered at the end

In a Nutshell
Activity 1. In this part, you will be required to draw conclusions, perspectives,
arguments and ideas from the unit lesson. I will supply the first item and you will
continue the rest.

1. The treatment of spoilage as abnormal is more in keeping with an emphasis on total

quality management where there is no tolerance allowed for waste. At a minimum, the
product cost of spoiled goods is tracked in a separate account

Your turn

2.

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_____________________________________________________________________

_____________________________________________________________________

3.
_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

4.
_____________________________________________________________________

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_____________________________________________________________________

5.
_____________________________________________________________________

_____________________________________________________________________

_____________________________________________________________________

Q & A List

Do you have any question for Clarification?

Questions/Issues Answers
1.
2.
3.
4.
5.
6.

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7.
8.
9.
10
11
12.

Keywords Index

Abnormal spoilage Production quantity

information
Cost assignment Unit cost determination
First in first out method Weighted average
method
Normal spoilage
Process costing

COURSE SCHEDULE
This section calendars all the activities and exercises, including readings and lectures, as
well as time for making assignments and doing other requirements.

Activity Date Where to submit

Orientation Blackboard LMS
Let’s Check Activities Blackboard LMS
Let’s Analyze Activities Blackboard LMS
In a Nutshell Blackboard LMS
Questions & Answers Blackboard LMS-Forum
Let’s Check Activities Blackboard LMS
Let’s Analyze Activities Blackboard LMS
Let’s Analyze Activities Blackboard LMS
In a Nutshell Blackboard LMS
Questions and Answers Blackboard LMS-Forum
Let’s Check Activities Blackboard LMS
Let’s Analyze Activities Blackboard LMS
First Formative Assessment Blackboard LMS

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Online Code of Conduct

1. Students are expected to abide by and honor code of conduct, and thus everyone
and all are exhorted to exercise self-management and self-regulation.
2. All studentss are guided by professional conduct as learners in attending On-Line
Blended Delivery (OBD) course. Any breach and violation shall be dealt with properly
under existing guidelines, specifically in Section 7 (Student Discipline) in the Student
Handbook.
3. Professional conduct refers to the embodiment and exercise of the University’s Core
Values, specifically in the adherence to intellectual honesty and integrity; academic
excellence by giving due diligence in virtual class participation in all lectures and
activities, as well as fidelity in doing and submitting performance tasks and
assignments; personal discipline in complying with all deadlines; and observance of
data privacy.
4. Plagiarism is a serious intellectual crime and shall be dealt with accordingly. The
University shall institute monitoring mechanisms online to detect and penalize
plagiarism.
5. Students shall independently and honestly take examinations and do assignments,
unless collaboration is clearly required or permitted. Students shall not resort to
dishonesty to improve the result of their assessments (e.g. examinations,
assignments).
6. Students shall not allow anyone else to access their personal LMS account. Students
shall not post or share their answers, assignment or examinations to others to further
academic fraudulence online.
7. By enrolling in OBD course, students agree and abide by all the provisions of the
Online Code of Conduct, as well as all the requirements and protocols in handling
online courses.

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Course prepared by:

YOLANDA S. BARCELONA
Author

Course reviewed by:

DEVZON U.PORRAS JADE D. SOLAÑA

PH-BSAIS/BSIA PH-BSA/BSMA

Approved by:

LORD EDDIE I. AGUILAR

Dean

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