COST ACCOUNTING

CONTROLLING AND COSTING MATERIALS INVENTORY

I. Costing of Materials Received
A. Freight-in
Example 1
a. Invoice price
X Ᵽ4,500/Ᵽ16,200=0.28%×4,050=1,134/900kgs=1.26+5= 6.26

Y Ᵽ5,400/Ᵽ16,200=0.33%×4,050=1,336.5/1,200kgs=1.11+4.50= 5.61

Z Ᵽ6,300/Ᵽ16,200=0.39%×4,050=1,579.5/1,500kgs=1.05+4.20= 5.25

b. Weight
X 900kgs/3,600kgs=0.25%×4,050=1,012.5/900=1.13+5= 6.13

Y 1,200kgs/3,600kgs=0.33%×4,050=1,336.5/1,200=1.11+4.5= 5.61

Z 1,500kgs/3,600kgs=0.42%×4,050=1,701/1,500=1.13+4.2= 5.33

Example 2
a. Charged directly to the stores account
Stores Ᵽ171, 550
Vouchers Payble Ᵽ171, 550

b. Charged to factory overhead

Factory overhead control Ᵽ175, 550
Vouchers payable Ᵽ175, 550

c. Added to work in process upon issuance of materials using an application rate

Freight in Ᵽ800
Vouchers payable Ᵽ800

Work in process Ᵽ40,000

Stores Ᵽ39,200
Applied freight in Ᵽ800

d. Added to purchases using an application rate.

Freight in Ᵽ3,400
Vouchers payable Ᵽ3,400

Stores Ᵽ170,000
Vouchers payable Ᵽ162,350
Applied freight in Ᵽ7,650

B. Purchase discounts
Example 3
(1) Purchase
Purchase Ᵽ100,000
Accounts Payable Ᵽ100,000

(2) Subsequent payment within the discount period

Accounts Payable Ᵽ100,000
 Cash Ᵽ98,000
Purchase Discounts Ᵽ2,000

(3) Subsequent payment beyond the discount period.

Accounts Payable Ᵽ100,000
Cash Ᵽ100,000

C. Materials handling costs

Example 4
1. Charged to factory overhead
Factory overhead control XXX
Vouchers payable/Sundry credits XXX

2. Added to cost of purchases (using a single application rate)

Materials handling costs XXX
Vouchers payable/Sundry credits XXX

Stores (cost plus MHC) XXX

Vouchers payable XXX
Applied materials handling costs XXX

3. Added to cost of materials issued (using a single application rate)

Materials handling costs XXX
Vouchers payable/Sundry credits XXX

Work in process-mat. (cost + MHC) XXX

Stores XXX
Applied material handling costs XXX

II.Costing of Materials Issued

Example 5
A. First in, first out
Date Received Issued Balance
Beginning - - 700×Ᵽ10= Ᵽ7000
Balance 300×Ᵽ11= Ᵽ3300 B. Last in ,
August 3 1200×Ᵽ12= Ᵽ14400 - 700×Ᵽ10= Ᵽ7000 first out
300×Ᵽ11= Ᵽ3300
DATE PURCHASES ISSUED BALANCE
1200×Ᵽ12= Ᵽ14400
Beginning
August 14 700×Ᵽ10=
- Ᵽ7000 700×Ᵽ10= -Ᵽ7000 700×Ᵽ10=
200×Ᵽ11= Ᵽ7000
Ᵽ2200
Balance 300×Ᵽ11= Ᵽ3300 300×Ᵽ11=
100×Ᵽ11= Ᵽ1100 1200×Ᵽ12= Ᵽ3300
Ᵽ14400
August
August 16 3 1200×Ᵽ12=Ᵽ1440
- 200×Ᵽ12= Ᵽ2400 2200×Ᵽ11.23=24700
200×Ᵽ11=Ᵽ2200
0 1400×Ᵽ12= Ᵽ16800
August
August 2014 - - 800×Ᵽ12=Ᵽ9600 1400×Ᵽ10.79=Ᵽ15100
200×Ᵽ11=Ᵽ2200
August 16 - 200×Ᵽ12=Ᵽ2400
400×Ᵽ12= 1600×Ᵽ10.94=Ᵽ17500
Ᵽ4800 1000×Ᵽ12= Ᵽ12000
August
August 2220 -
1000×Ᵽ14= Ᵽ14000 600×Ᵽ12=Ᵽ7200
- 1000×Ᵽ10.30=Ᵽ10300
1000×Ᵽ12= Ᵽ12000
August 22 1000×Ᵽ14=Ᵽ1400 - 1000×Ᵽ14=
2000×Ᵽ12.15=Ᵽ24300
Ᵽ14000
August 25 0
120×Ᵽ11= Ᵽ1320 - 120×Ᵽ11= Ᵽ1320
August 25 120×Ᵽ12=Ᵽ1440 - 1000×Ᵽ12=
2120×Ᵽ12.14=Ᵽ25740
Ᵽ12000
1000×Ᵽ14= Ᵽ14000 Ᵽ27,320
C. Moving
average
 DATE RECEIVED ISSUED BALANCE
Beginning - - 700×Ᵽ10=Ᵽ7000
Balance 300×Ᵽ11=Ᵽ3300
August 3 1200×Ᵽ12=Ᵽ14400 - 2200×Ᵽ11.227=Ᵽ24699.40
August 14 - 800×Ᵽ11.227=Ᵽ8981.60 1400×Ᵽ11.227=Ᵽ15717.80
August 16 - 200×Ᵽ11.227=Ᵽ2245.40 1600×Ᵽ11.227=Ᵽ17963.20
August 20 - 600×Ᵽ11.227=Ᵽ6736.20 1000×Ᵽ11.227=Ᵽ11227.00
August 22 1000×Ᵽ14=Ᵽ14000 - 2000×Ᵽ12.6135=Ᵽ25227.00
August 25 120×Ᵽ11.227=Ᵽ1347.2 2120×Ᵽ12.535=Ᵽ26574.24
4

COST ACCOUNTING
INVENTORY VALUATION

Valuation at Cost or Net Realizable Value, Whichever is Lower (PAS No. 2)

Lower of Cost or Net Realizable Value by Item
Assume the following data of X Company:

Description Quantity Cost/unit NRV/unit Lower of cost

or NRV
Material A 50 100 95 5,000
Material B 30 110 120 3,600
Inventory valuation 8,600

Lower of total cost or total NRV

Description Quantity Cost/unit NRV/unit Total cost Total NRV

Material A 50 100 95 5,000 4,750

Material B 30 110 120 3,300 3,600
8,800 8,350

Inventory valuation 8,350

Sample problem:
Required: Record any adjustment for the inventory in each year.
Year 1:
Inventory @ Cost Ᵽ100,000 Loss on Inventory Write-down Ᵽ20,000
Inventory @ NRV (80,000) Allowance for Inventory Write-down Ᵽ20,000
Ᵽ20,000 *To record loss resulting from decline in NRV of inventory

Year 2:
Inventory @ Cost Ᵽ100,000 Loss on Inventory Write-down Ᵽ5,000
Inventory @ NRV (95,000) Allowance for Inventory Write-down Ᵽ5,000
Ᵽ5,000 *To record loss resulting from decline in NRV of inventory

Year 3:
Inventory @ Cost Ᵽ120,000 Loss on Inventory Write-down Ᵽ5,000
Inventory @ NRV (125,000) Allowance for Inventory Write-down Ᵽ5,000
Ᵽ5,000 *To record loss resulting from decline in NRV of inventory
Year 4:
Inventory @ Cost Ᵽ125,000 Loss on Inventory Write-down Ᵽ15,000
Inventory @ NRV (140,000) Allowance for Inventory Write-down Ᵽ15,000
Ᵽ15,000 * To record loss resulting from decline in NRV of inventory

Year 1 and Year 2:

Year 1 Ᵽ20,000 Allowance for Inventory Write-down Ᵽ15,000
Year 2 (5,000) Recovery for Inventory Write-down Ᵽ15,000
Ᵽ15,000 *To record recovery resulting from adjustment of allowance
account

Year 2 and Year 3:

Year 2 Ᵽ5,000
Year 3 (5,000) No Entry
Ᵽ0

Year 3 and Year 4:

Year 3 Ᵽ5,000 Allowance for Inventory Write-down Ᵽ10,000
Year 24 (15,000) Recovery for Inventory Write-down Ᵽ10,000
Ᵽ(10,000) *To record recovery resulting from adjustment of allowance
account

Adjustment of Inventory Shortage or Overage

Sample Problem:
Record the net shortage or overage for each year.
Year 1:
Inventory Based on General Ledger Ᵽ12,000
Inventory Based on Physical Count (10,000)
Ᵽ2,000

Materials Ᵽ2,000
Manufacturing Overhead Control Ᵽ2,000
*To record the net overage

Year 2:
Inventory Based on General Ledger Ᵽ11,000
Inventory Based on Physical Count (12,000)
Ᵽ(1,000)

Manufacturing Overhead Control Ᵽ1,000

Materials Ᵽ1,000
*To record the net shortage

Example 6
1. Entries if the loss is to be charged to Job No. 07
Spoiled Goods Inventory Ᵽ19,500
Work in Process – Materials Ᵽ10,725
Work in Process – Payroll Ᵽ5,850
Work in Process – Applied FOH Ᵽ2,925
 2. Entries if the loss is to be charged to all production of the period.
Spoiled Goods Inventory Ᵽ19,500
Manufacturing Overhead Control Ᵽ12,000
Work in Process – Materials Ᵽ16,500
Work in Process – Payroll Ᵽ9,000
Work in Process – Applied FOH Ᵽ6,000
3. Entries if the loss is to be charged to Job No. 072 to the extent of only 1,250 pieces, the
250 pieces being considered abnormal loss.
Loss from Abnormal Spoilage Ᵽ3,250
Work in Process – Materials Ᵽ1,787.5
Work in Process – Payroll Ᵽ975
Work in Process – Applied FOH Ᵽ487.5

Example 7
1. Entries if the loss is to be charged to Job No. 143.
Spoiled Goods Inventory Ᵽ6,900
Work in Process – Materials Ᵽ3.036
Work in Process – Payroll Ᵽ2,277
Work in Process – Applied FOH Ᵽ1,587

2. Entries if the loss is to be charged to all production of the period.

Spoiled Goods Inventory Ᵽ6,900
Manufacturing Overhead Ᵽ7,800
Work in Process – Materials Ᵽ6,300
Work in Process – Labor Ᵽ4,800
Work in Process – Factory Overhead Ᵽ3,600

3. Entries if the loss is to be charged to Job No. 143 to the extent of only 250 pieces, the 50
pieces being considered abnormal loss.
Loss from Abnormal Spoilage Ᵽ1,150
Work in Process – Materials Ᵽ506
Work in Process – Payroll Ᵽ379.5
Work in Process – Applied FOH Ᵽ264.5

Example 8
1. When the specific job is charged with the rework costs.
Work in Process Inventory Ᵽ6,420
Materials Ᵽ2,420
Factory Payroll Ᵽ1,320
Factory Overhead Applied Ᵽ2,750

2. When the cost of correcting defective units is applied to all jobs.

Factory Overhead Control Ᵽ6,820
Materials Ᵽ2,420
Factory payroll Ᵽ1,320
Applied Overhead Ᵽ3,080

3. When the specific job is charged with the cost of rework for 400 pincers, and the excess of
150 pincers being considered abnormal.
Work in Process Inventory Ᵽ4,720
Materials Ᵽ1,760
Factory Payroll Ᵽ960
 Factory Overhead Applied Ᵽ2,000

Example 9
1. When the specific job is charged with the rework costs.
Work in Process Inventory Ᵽ1,656
Materials Ᵽ480
Factory Payroll Ᵽ600
Factory Overhead Applied Ᵽ576

2. When the cost of correcting defective units is applied to all jobs.

Factory Overhead Control Ᵽ1,800
Materials Ᵽ486
Factory payroll Ᵽ600
Applied Overhead Ᵽ720

3. When the specific job is charged with the cost of rework for 120 units, and the excess of 80
units being considered abnormal.
Work in Process Inventory Ᵽ994
Materials Ᵽ288
Factory Payroll Ᵽ360
Factory Overhead Applied Ᵽ346