Cost Accounting and Control

CHAPTER 1: Basic Concepts of Cost Accounting

According to Chartered Institute of Management Accountants (CIMA), cost is any amount of expenditure
incurred on or attributable to a specified thing or activity. This cost maybe related to rendering services
for a revenue, acquiring goods or services for resale, manufacturing of products for delivery to ultimate
consumers. These costs may be grouped accordingly to their common characteristics.

Difference between Cost Accounting & Financial Accounting

COST ACCOUNTING FINANCIAL ACCOUNTING
AS TO NATURE
It relates to the different costing methods and It relates to the classifying, recording, and
techniques in accumulating the cost of a product, analyzing of business transactions and events,
process, project or service and also the processes the end product of which are financial
in reducing total costs to improve the profitability statements. The books required to maintain are
of the entity. the general ledgers and special journals.

It considers items with no monetary values like Only items with monetary values are used in
units produced or hours utilized. recording and also it deals with actual data.

The users of cost accounting information are The users of accounting information are the
generally the production managers and senior internal users such as stockholders, officers and
officials of the company. employees and external users such as financial
institutions, creditors, suppliers and government
regulatory bodies.
AS TO OBJECTIVE
The main objective is to determine the cost to Its objective is to reflect the correct financial
produce a unit, process or project or cost to picture/information of the entity to the different
deliver a service. The actual costs incurred is stakeholders.
usually compared with estimates or budgeted
costs to guide the management in making
relevant decisions.
AS TO REPORTS/FINANCIAL STATEMENTS
The reports required by management are the The basic financial statements as the end-product
Cost of Production Report and Statement of Cost of financial accounting are (1) Statement of
of Goods Manufactured and Sold. The Cost of Financial Position or Balance Sheet, (2) Statement
Production Report summarizes the total costs of Comprehensive Income or simply Income
incurred in production like the direct materials, Statement, (3) Statement of Changes in Equity,
direct costs and overhead. There is no standard and (4) Statement of Cash Flows. The accountants
format in presenting the cost information. are guided by International Financial Reporting
Standards in the preparation of financial reports.
CLASSIFICATION OF COSTS

1. By nature of expenses
1.1 Material costs
1.2 Labor costs (Employee)
1.3 Expenses

2. By nature of traceability to a cost object

2.1 Direct costs
2.2 Indirect costs

3. By function
3.1 Production/Project costs.
The elements of product costs in a manufacturing business are the following:

1. Materials. Materials include the raw materials and other factory supplies used in
manufacturing operation. They are classified as:
a) Direct Materials
b) Indirect materials

2. Labor. Labor represents the compensation and other benefits paid to the workers in the
factory. They are classified as:
a) Direct labor
b) Indirect labor
Prime costs – is the sum of direct materials and direct labor.

3. Manufacturing overhead. Manufacturing overhead is an indirect product cost, and it

includes productions costs other than direct materials and direct labor. They include:
Conversion costs = Direct labor + Manufacturing Overhead

3.2 General & Administrative costs

3.3 Selling/marketing/distribution costs

4. By nature of production or operation process

4.1 Joint costs
These are costs incurred in a single process that yields two or more products. They are
production costs (direct materials, direct labor and factory overhead) incurred up to the point
where products are separately identified. Example of joint costs: Cost of dough, labor of
baker, and overhead incurred by a bakeshop.
4.2 Contract costs
Cost of a contract agreed upon between the contractee and the contractor.
4.3 Batch costs
Batch Cost shall be the aggregate cost related to a cost unit which consist of a group of similar
articles or services which maintain its identity throughout one or more stages of production
or operation.
4.4 Operation costs
Operation Cost shall be the cost a specific operation involved in production of goods or
rendering of services.
 4.5 Process costs
Process cost shall be the cost of production or operation process where goods are produced,
or services rendered from a sequence of continuous or repetitive operations or processes
during a period.

5. For Decision making purposes

5.1 Controllable costs
Controllable costs are costs that are primarily subject to the influence of a given responsibility
center manager for a given period of time.
5.2 Non-controllable costs
These are costs that cannot be controlled or influenced by a responsibility center manager.
Example: Cost of renting equipment
5.3 Opportunity costs
These are benefits foregone because one course of action is chosen over another, expressed
in other words, these are future cash inflow that will be sacrificed as a result of a particular
management decision.
5.4 Sunk costs or past costs
These are costs that have already been incurred in the past and will not be changed or avoided
by any decision in the future. It is not relevant in decision making.
5.5 Relevant cost
This refers to costs that change with each decision that a company makes. It includes
incremental, opportunity and avoidable costs. Examples are: Future cash flows, avoidable
costs,
5.6 Incremental costs
Where different alternatives are being considered, relevant cost is the incremental or
differential cost between the various alternatives being considered.
5.7 Period Cost
Period costs are operating expenses that are associated with time periods, rather than with
the production of goods and services. Period costs are charged directly to expense accounts
on the assumption that their benefit is recognized entirely in the period when the cost is
incurred. They are non-manufacturing costs and non-inventoriable costs. They include:
a) Marketing and Selling Costs
b) Distribution costs
c) Administrative Costs
5.8 Product cost
The product costs include costs of direct materials, direct labor and factory overhead.
5.9 Avoidable
Avoidable costs are those costs that are avoided by making one choice over another.
5.10 Unavoidable costs
These are the costs not change in the future when a manager makes one decision versus
another. They are costs that will continue to happen.

6. By nature of behavior
6.1 Fixed costs
These are costs that are constant in total within the relevant range of activity but variable on
a per unit basis. These costs do not change as activity changes. As the activity level increases
or decreases, total fixed cost remains constant but unit cost declines or goes up.
 6.2 Variable costs.
These are costs that vary in total in direct proportion to changes in the volume of production.
Variable cost is constant amount on a per unit basis as activity changes within a relevant
range. As activity changes, total variable costs increase or decreases proportionately with the
activity change, but unit variable costs remain the same.
6.3 Mixed costs.
These are costs that contain fixed and variable cost.

7. According to time
7.1 Historical costs are actual costs incurred in the past.
7.2 Pre-determined costs are estimated costs.

8. According to planning and control

8.1 Budgeted costs are expected costs to acquire goods or services or to manufacture products
8.2 Standard costs are predetermined cost of materials, labor and overhead to produce a unit of
product.

HIGH-LOW METHOD OF SEPARATING MIXED COSTS

When cost is classified as mixed, it is appropriate to separate the fixed cost from the variable cost. Variable
cost per unit is completed as:

Cost at high level - cost at lowest level (within relevant range)

Highest activity - lowest activity
or
Change in total costs / Change in activity level = VC per unit

Procedures:
1. Select the highest and lowest levels of activity and costs (within relevant range)
2. Compute the variable cost element
3. Compute the variable cost at the highest and lowest level of activity.
4. Determine the fixed cost at each level of activity.

3 Inventory Accounts in a manufacturing business

1. Finished Goods inventory. Goods ready for sale
2. Work in Process inventory. Unfinished jobs at the end of a period
3. Raw Materials inventory. Unused raw materials at the end of a period

Inventory Systems
1. Perpetual inventory systems. It requires stock card to record the in and out of inventory. The
movement of inventory is recorded in the inventory account itself.
2. Periodic inventory systems. No stock card is required but a mandatory physical counting is done
at the end of the period.

Inventory Costing Valuation Methods

1. FIFO method
2. Average method
SAMPLE JOURNALIZING ENTRIES

1. Purchase of raw materials

Raw materials xxx
Accounts Payable / Cash xxx

2. Issuance of raw materials

Work In Process xxx
Factory Overhead xxx
Raw materials xxx

3. Return of excess materials to store room

Raw materials xxx
Work In Process xxx
Factory Overhead xxx

4. Factory labor incurred

Work In Process xxx
Factory Overhead xxx
Accounts Payable / Cash (net) xxx
WHT Payable xxx
SSS Premium Payable xxx
Phil health Payable xxx

5. Manufacturing overhead incurred

Manufacturing Overhead xxx
Various accounts xxx

6. Applied Overhead (OH) to the job

Work In Process xxx
Factory Overhead xxx

7. Completion of the job

Finished goods xxx
Work In Process xxx

8. Sale of the completed jobs

Cash / Accounts Receivable xxx
Sales xxx
 Name of Company
Statement of Cost of Goods Manufactured and Sold
For the Period ____________

Direct Materials used:

Direct Material, beginning xxx
Add: Purchases xxx
Freight In xxx
Gross Purchases xxx
Less: Purchase Discounts xxx
Net Purchases xxx
Direct Materials Available xxx
Less: DM inventory, end xxx
Direct Materials used xxx

(b) Direct Labor xxx

(c) Manufacturing Overhead xxx
(d) Total Manufacturing Costs xxx
Add: Work In Process, beg xxx
(e) Total cost of goods placed into process xxx
Less: Work In Process, end xxx
(f) Costs of Goods Manufactured xxx
Add: Finished Goods, beg xxx
(g) Total goods available for sale xxx
Less: Finished Goods, end xxx
(h) Cost of Goods Sold xxx
Problem 1
During the month of July, the following transactions were completed and reported by Old Navy Manufacturing Company.
a. Raw materials purchased on account, P240,000
b. Materials requisitioned for the month was P180,000, P12,000 of which were factory supplies.
c. Factory payroll for the month was P150,000 of which P30,000 was for indirect laborers.
d. Depreciation on factory plant and equipment for the month is P12,000.
e. Factory taxes amounted to P1,500.
f. Factory insurance expired amounted to P4,320.
g. Factory utilities for the month amounted to P5,000

Additional information:
a. Actual overhead is charged to production.
b. 75% of the jobs put into process are completed.
c. All beginning inventories plus 75% of the goods completed during the period were delivered to customers
at 50% mark-up on cost. The company's terms on all sales are 30 days.

Inventories reported by the company at the beginning of the month are:

Raw Materials 80,000
Work In Process 100,000
Finished Goods 60,000

REQUIRED:
(a) Journal Entries to record the above and post the entries to T-Accounts
(b) Prepare a Statement of Cost of Goods Manufactured and Sold, in good form.

Journal Entries

a. Raw materials purchased on account, P240,000

Raw Materials 240,000

Accounts Payable 240,000

b. Materials requisitioned for the month was P180,000, P12,000 of which were factory supplies.

Work In Process 168,000

Factory Overhead 12,000
Raw Materials 180,000

c. Factory payroll for the month was P150,000 of which P30,000 was for indirect laborers.

Work In Process 120,000

Factory Overhead 30,000
Cash 150,000

d. Depreciation on factory plant and equipment for the month is P12,000.

e. Factory taxes amounted to P1,500.
f. Factory insurance expired amounted to P4,320.
g. Factory utilities for the month amounted to P5,000

Factory Overhead 22,820

Accumulated Depreciation 12,000
Taxes Payable 1,500
Prepaid Insurance 4,320
Utilities Payable 5,000
Add Info: Actual overhead is charged to production.

Work in Process 64,820

Factory Overhead 64,820
*Add all the Factory Overhead (12,000 + 30,000 + 22,820)

Add Info: 75% of the jobs put into process are completed.

Finished Goods 264,615

Work in Process 264,615
*Add all work in process then multiply by 75% (168,000 + 120,000 + 64,820 = 352,820 x 75%)

Add Info: All beginning inventories plus 75% of the goods completed during the period were delivered to customers
at 50% mark-up on cost. The company's terms on all sales are 30 days.

Old Navy Manufacturing Company

Statement of Cost of Goods Manufactured and Sold
For the Month of July

Raw Materials used:

Raw Material, beginning 80,000.00
Add: Purchases 240,000.00
Freight In -
Gross Purchases 240,000.00
Less: Purchase Discounts -
Net Purchases 240,000.00
Raw Materials Available 320,000.00
Less: DM inventory, end 140,000.00
Raw Materials used 180,000.00

(b) Direct Labor 120,000.00

(c) Manufacturing Overhead (-12,000) 52,820.00
(d) Total Manufacturing Costs 352,820.00
Add: Work in Process, beg 100,000.00
(e) Total cost of goods placed into process 452,820.00
Less: Work in Process, end 113,205.00
(f) Costs of Goods Manufactured (75% of e) 339,615.00
Add: Finished Goods, beg 60,000.00
(g) Total goods available for sale 399,615.00
Less: Finished Goods, end 84,903.75
(h) Cost of Goods Sold (60,000 + (f x 75%)) 314,711.25
Problem 2
M&M Company had raw materials on hand on January 1 of the current year of P540,000 and on June 30 of P570,000. Work in
process inventory was P600,000 on January 1 and P440,000 on June 30. The balance of finished goods inventory was P580,000
on January 1 and P400,000 on June 30. The company purchased materials for the period amounting to P1,640,000. Of the raw
materials issued, 20% are indirect materials. The labor charges for the period were: direct labor, P840,000; indirect labor,
P180,000; office salaries, P140,000, and sales salaries of P80,000. The total factory utilities expense incurred for the period
was P360,000, repair and maintenance of factory equipment, P20,000 and depreciation on factory equipment was reported
to be P120,000. The company uses the actual costing method of accumulating costs and it maintains a 35% mark up on costs
for establishing its selling price.

Entries

Raw Materials 1,640,000 RM, beg 540,000

Cash 1,640,000 Purchases 1,640,000
RM, available 2,180,000
Work In Process (1,610,000 x 80%) 1,288,000 RM, end 570,000
Factory Overhead (1,610,000 x 20%) 322,000 RM used 1,610,000
Raw Materials 1,610,000 *Compute first for materials issued

Work In Process 840,000

Factory Overhead 180,000
Factory Payroll 1,020,000 Indirect Materials 322,000
Indirect Labor 180,000
Office Salaries 140,000 Other FOH 500,000
Sales Salaries 80,000 Total FOH 1,002,000
Cash 220,000

Factory Overhead 500,000

Utilities Payable 360,000 Direct Materials 1,288,000
R&M Expense 20,000 Direct Labor 840,000
Accumulated Depreciation 120,000 FOH 1,002,000
Total MC 3,130,000
Work In Process 1,002,000
Factory Overhead 1,002,000
Problem 3
Justin Manufacturing Company wants to develop a cost estimating equation for its month cost of electricity.
It has the following data.

Month Electricity Costs Direct Labor Hours

January 13,500 3,000
February 15,000 3,400
March 17,000 4,000
April 14,500 3,200

Separate the fixed and variable cost using High Low Method.

Highest Cost 17,000

Lowest Cost 13,500

Highest Activity 4,000

Lowest Activity 3,000

17,000 - 13,500
4,000 - 3,000

3,500
1,000

Variable Cost / Unit = 3.50

To check, use the highest and lowest activity.

Month Electricity Costs DL Hours VC FC FC/unit
January 13,500 3000 10,500 3,000 1.00
(3.50 x 3000) (13,500 -10,500) (3,000 ÷ 3,000)
March 17,000 4000 14,000 3,000 0.75
(3.50 x 4,000) (17,000-14,000) (3,000 ÷ 4,000)

Variable Cost = Variable Cost/Unit x Direct Labor Hours (Activity)

(Directly proportional; constant per unit; varies in total)

Fixed Cost = Total Cost – Variable Cost

Total Cost = Fixed Cost + Variable Cost

Fixed Cost/Unit = Fixed Cost ÷ DL Hours (Activity)

TC = Fixed Cost + Variable Cost/Unit (Volume)

TC = P3,000 + 3.50x
Problem 4
The following information was available about supplies cost for the first three months of the year.

Month Production Supplies Cost

January 2,800 12,740
February 6,400 28,400
March 2,400 10,800

Highest Cost 28,400

Lowest Cost 10,800

Highest Activity 6,400

Lowest Activity 2,400

28,400 - 10,800
6,400 - 2,400

17,600
4,000

Variable Cost / Unit = 4.40

Month Supplies Cost Production VC FC FC/unit

February 28,400 6,400 28,160.00 240 0.04
March 10,800 2,400 10,560.00 240 0.10
22,240 5,000 22,000.00 240

TC = 240 + 4.40x
TC = 240 + 4.40 (5,000)
TC = 240 + 22,000
TC = 22,240 (Supplies Cost at 5,000 units of production)