Cost Accounting and Control Indirect Labor

- employees who work on tasks that contribute to

Cost Accounting the company's performance outside of producing
➢ a discipline that focuses on techniques or products and services
methods for determining the cost of a product, Factory Overhead
process, or services for the purpose of planning and - All costs related to the manufacture of a product
controlling activities, improving quality and efficiency, except direct materials and direct labor
and making decisions
➢ used by shareholders and top management to Merchandisers
come up with a plan ➢ Purchased finished goods for resale or goods in
➢ According to Horngren, it measures and reports the marketable form to RESELL to the customers
financial and non-financial information relating to the Retailing
cost of acquiring or consuming resources in an ➢ Sells products to individuals for consumption
organization Trading
➢ provide information for the company's cost used ➢ Purchase goods from manufacturers to sell to
for internal and external purposes retailers
Retailing/Trading
Uses of Cost Data ➢ includes the purchase price of goods and
➢ Determining/settling prices of products and transportation cost
services Construction
➢ cost data is vital, it could make or break a ➢ includes the cost of:
company 1. Construction materials
➢ Knowing the cost helps the management in 2. Labor of carpenters
setting the selling price enough to recover the cost 3. Overhead incurred in construction
Construction Overhead:
Classification of Cost 1. Utilities
Product/Manufacturing/Factory Cost 2. Insurance
➢ referred to inventoriable cost 3. Hospitalization - other health benefits for the
➢ in a manufacturing company, these cost is workers
associated with the conversion of raw materials into 4. Maintenance
finished products 5. Compensation of foreman
➢ product cost of completed units is called finished 6. Cost of construction of temporary house
goods inventory materials
➢ product cost of partially completed units is called 7. Depreciation of equipment
work-in-process inventory 8. Rentals

Elements of Manufacturing Cost Different Costs:

Direct Materials Prime Cost
- traceable to the product ➢ sum of direct materials and direct labor
Indirect Material Manufacturing Overhead
- Materials and supplies necessary for the ➢ production costs other than direct materials and
manufacturing process either cannot be readily
identified with any particular manufactured item or labor. Includes:
have a relatively insignificant cost. 1. Factory supplies - cleaning materials
Direct Labor 2. Wages of supervisors, factory maintenance,
- wages paid to those physical workers directly handlers, and security personnel
involved in the manufacturing of a product 3. Depreciation of equipment and facilities
- basic pay, cost of living allowance, 13th month pay 4. Utilities - telephone costs
5. Insurance and property taxes
6. Cost of regulatory compliance for safety
Conversion/Processing Cost Note: Product costs are recorded on the balance
➢ sum of labor and manufacturing overhead sheet as an asset, but when the goods are ultimately
Period Cost sold, product costs are transferred to the income
➢ operating expenses that are associated with statement as a deduction from the revenue as the
time periods rather than production of goods. cost of goods sold
➢ Non-inventoriable
Period Cost Includes: Common Cost
1. Selling Expenses ➢ mutually beneficial cost that occurs when the
2. General Administrative Expenses same resources are used in the output of two or more
3. Interest Expense services/products, cost of facilities/services shared by
4. Income tax Expenses two or more department
Marketing/Selling Cost ➢ building repair and maintenance, utilities,
➢ cost of getting and filling orders personnel costs, etc shared by two or more users
Includes: Joint Cost
1. salary/commission of personnel ➢ incurred in a single process where two or more
2. Advertising separate products are produced
3. Cost of customer service ➢ production cost, materials, labor, and overhead
Distribution Cost incurred up to the point where products are produced
➢ cost incurred by the company or the distributor in ➢ cost of dough + labor of baker + overhead
managing and transferring the goods and services incurred in production of bread
from the company location to the location of the Opportunity Cost
customer and thus successfully fulfilling the order. ➢ represents the benefit foregone because one
Includes: course of action is chosen over another
1. Warehousing Sunk Cost
2. Transporting ➢ already been incurred and will not changed or
3. Delivering products/services avoided by any future decision
Administrative Cost ➢ acquisition cost of office equipment
➢ associated with the general administration of the ➢ manufacturing cost of finished goods on hand
organization Committed Cost
➢ office furniture/equipment, taxes, license ➢ results from an organization's ownership or use
Capital Expenditure of facilities and its basic organizational structure
➢ intended to benefit future period ➢ property taxes, depreciation, salaries, rent
➢ recorded as an asset Discretionary Cost
➢ cost of overhauling equipment, cost of repainting ➢ a cost resulting from management's decision to
the building spend a particular amount of money for a purpose
Revenue Expenditure ➢ not essential for the operation
➢ intended to benefit the current period ➢ advertising, research and development
➢ reported as an expense Controllable Cost
➢ ordinary repairs and maintenance of heavy ➢ Costs that are primarily subject to the influence of
equipment a given responsibility center manager for a given
Direct Cost period of time
➢ obviously and physically traced to a Non-Controllable Cost
manufacturing process, product, etc. ➢ costs that cannot be controlled/influenced by a
➢ also includes the cost to run a business unit responsibility center manager
Indirect Cost Out-of-Pocket Cost
➢ related to a particular cost object but cannot be ➢ cash outlay required to complete a proposed
traced in an economically feasible way project or to extend an activity already undertaken
➢ includes manufacturing overhead cost incurred in Budgeted Cost
production ➢ planned/predetermined cost
Fixed Cost
➢ costs that are constant in total within the Variable cost at highest/lowest level of activity
relevant range of account but variable on a per unit Highest level x VC per unit = VC at highest
basis Lowest level x VC per unit = VC at lowest
➢ as the activity level increase/decrease, total
fixed cost remains constant but fixed costs per unit Fixed Cost at each level of activity:
declines or go up Highest Cost x VC at highest
➢ rent, taxes, insurance, depreciation Lowest Cost x VC at lowest
Variable Cost Example:
➢ cost that varies in total direct proportion to
Month Machine Hours Utility Cost
changes in the volume of production
➢ as activity changes, total variable cost change, March 1,900 27,000
but unit variable cost remains the same <lowest>
➢ direct materials/labor
November 4,700 62,000
Mixed/Semi Variable Cost
<highest>
➢ cost that has both fixed and variable component
➢ light and power, maintenance and repair of Procedure:
machinery, water expenses 1. Get the difference
Conversion Cost Month Machine Hours Utility Cost
➢ include direct labor and manufacturing
overhead, representing the expenses incurred to March 1,900 27,000
convert raw materials into finished goods. <lowest>

November 4,700 62,000

<highest>
Separating Mixed Costs
High-Low-Method Difference 2,800 35,000
➢ when a cost is classified as mixed, it is 2. Compute for variable cost element
appropriate to separate the fixed cost from the VC /hr = change in cost/change in machine hrs.
variable cost. = 35,000/2,800
1. The procedure starts with selecting the highest = P12.50 per machine hr.
and lowest levels of activity in a given set of data 3. Compute the variable cost
within the relevant range. Highest Level: 4,700 x 12.50 =58,750
2. Then determine the changes in activity and cost Lowest level: 1,900 x 12.50 = 23, 750
by subtracting low values from high values 4. Determine fixed cost
-These changes are used to calculate the variable Highest: P62,000 - 58,750 = P3,250
unit cost Lowest: P27,000 - 23,750 = P3,250
3. This value is then multiplied by the activity level
to determine the amount of total variable cost Methods of Accumulating
contained in the mixed cost at either a high or low a. Actual Cost System
level of activity ➢ actual cost of direct materials and labor is
4. The fixed proportion of the mixed cost is accumulated in a work-in-process account
calculated by subtracting the total variable cost ➢ various overhead incurred are accumulated in
from the total mixed cost a manufacturing overhead account and then
charged to the work-in-process account at the end
Variable cost (VC) per unit is computed as: of accounting period
Cost at the highest level - Cost at the lowest level ➢ requires all production overhead must be
Highest Activity - Lowest Activity available before any cost, allocation can be made
Or to product/jobs
Change in the total cost b. Normal Cost System
Change in activity level
 ➢ cost of actual direct materials/labor is
Budgeted 52,000 hrs 20,000 hrs.
summarized in a work-in-process account Direct Labor
➢ the actual overhead incurred is accumulated in hrs.
a manufacturing overhead account but the amount
of overhead applied to work-in-process is based on Budgeted 15,000 hrs 80,000 hrs.
a predetermined rate which is the ratio of the machine time
estimated total of the overhead allocation base or Prime cost
simply the base incurred:
Example: Materials P 120 per unit P 50 per unit
➢ In a labor-intensive company, direct labor hours Direct Labor 2.0 hrs per unit .75 hr. per
are most likely to be chosen as the base. In this at 37.50 per hr. unit
system, factory overhead may be applied as soon at 37.50 per
hr
as the necessary data are available like the
predetermined rate at the base Machine time 30 mins. per 3 hrs. per
Pre-determined overhead rate is calculated as used unit unit
FOH Rate = Estimated Factory Overhead
Estimated Level of Activity Annual 25,000 units
Production
Manufacturing overhead applied to production
is computed as: Required:
Actual level of activity x Predetermined OH rate
1. Determine the total cost of producing 25,000 units
Two Types of Computing Rate assuming:
Departmental Rate a. Plantwide rate based on direct labor hrs. is used
➢ uses multiple rates and provides more accurate b. Departmental rate is used
product costing considering that manufacturing
overhead incurred includes various manufacturing Solution:
cost that varies greatly in their relationship to the a. Plantwide Rate
production process OH Rate = 3,150,000 / 70,000 DL hrs.
➢ allow each department to select most Budgeted OH of assembly + Budgeted OH of
appropriate measure of activity relative to its finishing
operation (Annual Production x Direct Labor of Assembly) +
➢ a highly automated department most likely Budgeted Direct Labor hrs of finishing
choose direct labor as the base = 45 per DLH

Plantwide Rate Assembly Finishing Total

➢ if a company chooses only one overhead rate for
the allocation of manufacturing overhead to the Materials P 3,000,000 P 1,250,000 P 4,250,000
different products (A Materials x (F Materials
Annual Prod.) x Annual
Prod.)
Illustration:
​ Sunflower company has 2 producing
departments: Assembly (labor related overhead; Direct 1,875,000 703,125 2,578,125
Labor (Annual prod. (Annual
direct labor hrs. As cost driver) and Finishing x DL hr/unit x prod. x DL
(machine related overhead; machine hrs. as base). DL/hr) hr/unit x
DL/hr)

Assembly Finishing Overhead 2,250,000 843,750 3,093,750

(Annual prod. (Annual
Budgeted OH P 1,890,000 P 1,260,000 x DL hr/unit x prod. x DL
OH Rate) hr/unit x OH
 Rate)

Total 7,125,000 2,796,875 9,921,875

a. Departmental Rate
Assembly Finishing

P 1,890,000 / 36.35 DL hr
52,000 DL hrs.
(Budgeted OH /
Budgeted DL
hrs)

P 1,260,000 / 15.75 / M hr
80,000 M hrs
(Budgeted OH /
Budgeted
machine time)

➢ The amount of overhead-applied using

department rate is computed as follows:
Assembly Department:
Overhead Rate x Actual Direct Labor hrs. Utilized
36.35 x 50,000 DL hrs. = P1,817,500
(Annual prod. x DL hrs/unit)

Finishing Department:
Overhead Rate x Actual Machine hrs. Utilized
15.75 x 75,000 M hr = P 1,181,250
(Annual prod. x Machine time used in Finishing)