COST ACCOUNTING

INTRODUCTION TO COST ACCOUNTING advertising, & salesperson’s

Definition salaries
Cost Accounting refers to recording, Ø Administrative – Office Supplies,
classifying, and reporting all cost rent of office, & depreciation of
aspects of company performance non-manufacturing equipment
during a particular period of time.
Basic Cost Flow
It is a system that records, summarizes,
DMU Cost of
analyzes, and interprets the details of Work in Finished
DL Process Goods
Goods
the cost of materials, labor and MOH Sold
overhead necessary to produce and
sell an article or a product.
System of Cost Accumulation
Cost accounting is usually considered The basic objective of cost
only as it applies to manufacturing accounting is the determination or
and service organizations as well. accumulation of a product’s cost for
Basic Classification of Costs inventory valuation and income
determination. The following systems
may be used in accumulating a
Financial Cost
Accounting Acctng
Managerial
Accounting
product’s cost:
1. Actual (Historical) Cost System.
Under this system, direct materials,
• PRODUCT COSTS – applied to sold direct labor, and factory overhead
(CGS) and unsold (Inventory) costs are determined as they
Ø Direct Materials Used occur simultaneously with the
Ø Direct Labor manufacturing operation but the
Ø Manufacturing Overhead total of these costs is known only as
v Indirect Labor the operation has been
v Indirect Materials Used completed. An actual cost system
v Rent of Factory
v Depreciation of manufacturing
collects the actual amounts of
equipment direct materials, direct labor, and
factory overhead that are incurred
for each product.
2. Standard (Predetermined) Cost
System. Under this system, costs are
determined in advance from
analysis and forecasts made
before the actual production
• PERIOD COSTS – applies to sold only begins. In a standard cost system,
(OpEx) standard unit costs are computed
Ø Distribution/Selling – freight out, for the direct materials, direct labor,
gasoline & oil, delivery truck and factory overhead; these
repairs, delivery workers’ salaries, amounts rather than the actual
costs are carried to Finished Goods.
3. Normal Cost System. This system is it involves a continuous flow rather
a combination of the actual cost than a series of separate jobs.
system and the standard cost
system. It accumulates only the The most common cost accumulation
actual amounts of direct materials methods or procedures are:
and direct labor costs. Factory 1. Job Order Costing
overhead costs are accumulated 2. Process Costing
on the basis of predetermined
overhead rate. The third method, is a combination of
job order and process costing,
3. Operation Costing/Blended
Method / Hybrid Method

The fourth method was introduced

because of Just-In-Time (JIT)
Philosophy in Production,
4. JIT - Backflush Costing

JOB ORDER COSTING

This method is used when:
1. products are manufactured within
a department or cost center are
heterogeneous or dissimilar
products.
2. they are manufactured
individually or in distinct lots or
batches,
3. each job requiring different
amounts of materials, labor and
overhead.

Costs should be recorded separately

Cost Accumulation Procedures for every job produced. Keeping of
Job order and process costing are the individual records is possible only if the
two most widely used cost various inputs to a job can be easily
accumulation methods, and they identified. Detailed cost record must
have several aspects in common. be kept for each job and updated as
Although, the ultimate cost object in work progresses. Job-order costing is
both of these methods is the unit of applicable to made-to-order work in
product, the two methods differ factories, manufacturers of expensive,
fundamentally in their approach to one of kind items such as building
cost tracing. In job order costing, cost contractors, shipbuilders, and motion
is traced to an individual batch, picture companies, workshops, repair
specific units, lot or contract. In shops, job printers, construction
process costing, cost is traced to a engineers, and service business such
department, operation, or some other as medical, legal, architectural,
subdivision within the factory as long a accounting and consulting firms.
 salaries are fixed payments for
Operation Costing/Blended managerial services. Other terms
Method/Hybrid Method necessary for any discussion of labor
In some manufacturing companies, costs are best defined by equations,
different units have significantly as follows:
different materials costs, but all units
undergo identical conversion in large Gross Earnings = Regular wage +
quantities. In these cases, direct Overtime Premium
materials costs are accumulated 1. Regular Wage = Total hours
using job order costing, and worked (including overtime) x
conversion costs are accumulated Regular hourly rate
using process costing. 2. Overtime Premium = Overtime
hours worked x Extra hourly
Disposition of Over-under applied compensation for overtime
Overhead Account
When factory overhead is over-under Other Additional Compensation
applied and a variance or difference chargeable to Factory Overhead
results, either of the following methods Control:
is acceptable to account for the 1. Overtime premium
difference in closing the account (this 2. Shift premium or differential
is in accordance with the Cost 3. Bonus. Theoretically, a bonus is a
Accounting Standards Board direct cost of production.
requirement): However, because the purpose of
1. If difference is insignificant cost accumulation is the
(immaterial) to Cost of Goods Sold establishment of a standard unit
or Income Summary. The over-or cost, bonuses are charged to
under applied factory overhead factory overhead.
may be debited or credited to 4. Vacation and Holiday Pay
Cost of Goods Sold (most 5. Pensions
common treatment or most 6. Fringe costs. Vacation and
convenient) or Income Summary. pension plans are only two of the
This has no effect on unit cost and most common employee benefits.
treats the entire variance as a Other fringe costs are listed below:
PERIOD EXPENSE. Employer’s share in (not
2. If difference is significant (material) employees’ share):
to Cost of Goods Sold and a. Social Security System
Inventories. The over-under b. PhilHealth Contribution
applied factory overhead may 7. Incentive Plans
be debited or credited to Cost of
Goods Sold and Ending Notes on Scrap:
Inventories (Work-in-Process and Scrap includes:
Finished Goods). This would 1. the filings or excessive trimmings
change cost per unit. of materials after the
manufacturing operations.
Wages 2. defective materials that cannot
Are payments made on an hourly, be returned to vendor or not
daily, or piecework basis, whereas
 suitable for manufacturing Total cost of goods xxxx
operations, and Divide: Good units* xxxx
3. broken parts as a result of an Cost per unit xxxx
employee error or machine *Good units = Total units
breakdowns that causes the
product in a poor-quality • Note: Rework costs will be charged
condition. to manufacturing overhead (MOH)
and will be an actual overhead (OH).
Furthermore, scrap should be treated
as: • The journal entry to record the
1. If the scrap has a salvage value, it incurrence of rework costs is provided
should be collected and placed as follows:
in the storage and available for MOH (Rework costs) xxx
sale to scrap dealers or anybody Raw materials xxx
who are willing to buy. Salaries payable xxx
2. If the scrap is the result if filings, MOH xxx
excessive trimmings or materials
residue, and the costs of scrap • CASE 2: Charged to customer/
cannot be determinable then, “exacting specification”/specific job
the scrap, notwithstanding Total cost of goods xxxx
that they cannot be eliminated in the Rework costs xxxx
production, a record of quality of Cost transferred to FG xxxx
scrap should be maintained. The Divide: Good units xxxx
purpose is to keep track and Cost per unit xxxx
periodically analyze to determine if
some of the waste is due to inefficient • Note: Rework costs will be included
use of materials and if not eliminated, in the costs transferred to FG.
at least minimize.
• The journal entry to record the
Waste as distinguish to scrap materials incurrence of rework costs is provided
refers to any amount of raw materials as follows:
left- over from a production process or MOH (Rework costs) xxx
production cycle for which there is no Raw materials xxx
further use. Waste is not usually salable Salaries payable xxx
at any price and must be discarded. MOH xxx
RESA PINNACLE

Defective Goods Notes on Spoiled Goods/Spoilage in

• Components of rework cost: Job-Order Costing:
1. Direct material Spoiled goods or spoilage differ from
2. Direct labor scrap, in the manner that they are
3. Manufacturing overhead either partially or fully completed unit.
For reason of being spoilage, they
• CASE 1: If the rework costs are cannot be corrected either because
charged to the entity/to all it is not technically possible to correct
production/internal failure. them or it is not economical to correct
them. For instance, a glass molded
with different design cannot be
correctable since it will not be • The journal entry to record the
technically feasible because by incurrence of loss is provided as
changing it would distort the original follows:
form or by changing the design to its Spoiled goods (NRV) xxx
original form would cost more than WIP xxx
the benefit to be derived.
Journal Entries Cost Flow
Spoiled Goods Accounting for Materials
NRV of spoiled xxxx Upon Purchase: (Direct materials &
Cost of spoiled (xxxx) Indirect materials)
Loss xxxx Materials (or Stores Control) xx
Accounts Payable xx
Total units xxxx
Spoiled units (xxxx) Issued to
Good units xxxx production/Requisitioned/Materials
used/Applied to Production:
• CASE 1: If the rework costs are Work-in-process (DM) xx
charged to the entity/to all Factory Overhead Control or Actual FOH (IM) xx
production/internal failure. Materials (or Stores Control) xx
Total Cost of Goods* xxxx Upon Payment:
Cost of Spoiled (xxxx) Accounts payable xx
Cost transferred to FG xxxx Cash xx
Divide: Good units xxxx
Cost per unit xxxx Accounting for Labor: (ignore
* include allowance to cost employer’s share in payroll taxes)
Labor Incurrence: (Factory Labor:
• Note: Loss will be charged to Direct & Indirect Labor, Sales and
manufacturing overhead (MOH) and admin. Salaries):
will be an actual overhead (OH). Payroll xx
Withholding tax payable xx
• The journal entry to record the SSS Premiums payable xx
incurrence of loss is provided as PhilHealth Premiums payable xx
follows: Accrued payroll xx
Spoiled goods (NRV) xxx
MOH (Loss) xxx Labor Distribution/Labor applied to
WIP xxx production:
Work-in-process (DL) xx
• CASE 2: Charged to customer/ Factory Overhead Control or Actual FOH (IL) xx
“exacting specification”/specific job Sale salaries xx
Total Cost of Goods xxxx General & administrative expenses xx
NRV of Spoiled (xxxx) Payroll xx
Cost transferred to FG xxxx
Divide: Good units xxxx Payment of Payroll:
Cost per unit xxxx Accrued payroll xx
Cash xx
• Note: Loss will be included in the
costs transferred to FG.
Accounting for Factory Overhead:
Incurrence of FOH:
Work-in-process (DL) xx
Cash, A/P, Accum. Dep, Prep. Exp xx

FOH Applied to production:

Work-in-process (DL) xx
Applied Factory Overhead (FOH Rate* x Activity) xx

*Budgeted FOH Rates:

𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐹𝑂𝐻
= % 𝑥 𝐴𝑐𝑡𝑢𝑎𝑙 𝐷𝑀
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐷𝑀

𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐹𝑂𝐻
= % 𝑥 𝐴𝑐𝑡𝑢𝑎𝑙 𝐷𝐿 𝐶𝑜𝑠𝑡
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐷𝐿 𝐶𝑜𝑠𝑡

𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐹𝑂𝐻
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐷𝐿𝐻/𝑁𝑜𝑟𝑚𝑎𝑙 𝑜𝑟 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦 − 𝐷𝐿𝐻
= 𝑃/𝐷𝐿𝐻 𝑥 𝐴𝑐𝑡𝑢𝑎𝑙 𝐷𝐿𝐻

𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐹𝑂𝐻
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑀𝐻/𝑁𝑜𝑟𝑚𝑎𝑙 𝑜𝑟 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦 − 𝑀𝐻
= 𝑃/𝑀𝐻 𝑥 𝐴𝑐𝑡𝑢𝑎𝑙 𝑀𝐻

𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝐹𝑂𝐻
𝐵𝑢𝑑𝑔𝑒𝑡𝑒𝑑 𝑢𝑛𝑖𝑡𝑠 𝑜𝑓 𝑝𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑜𝑛 𝑜𝑟 𝑁𝑜𝑟𝑚𝑎𝑙 𝑆𝑡𝑎𝑛𝑑𝑎𝑟𝑑 𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦 − 𝑈𝑛𝑖𝑡𝑠
= 𝑃/𝐴𝑐𝑡𝑢𝑎𝑙 𝑈𝑛𝑖𝑡 𝑃𝑟𝑜𝑑𝑢𝑐𝑒𝑑 𝑥 𝐴𝑐𝑡𝑢𝑎𝑙 𝑈𝑛𝑖𝑡 𝑃𝑟𝑜𝑑𝑢𝑐𝑒𝑑

Disposition of
Overapplied/Underapplies Overhead
(entries may vary based on company
policy):
Applied Factory Overhead xx
Overhead* Applied FOH (CGS/IS, WP, FG) xx
Factory Overhead Control xx
*debit if underapplied FOH