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Cost Accounting and Control Module 1 INTRODUCTION TO COST ACCOUNTING AND JOB ORDER COST CYYCLE Definition of Cost Accounting COST ACCOUNTI...

Cost Accounting and Control Module 1 INTRODUCTION TO COST ACCOUNTING AND JOB ORDER COST CYYCLE Definition of Cost Accounting COST ACCOUNTING is the system of recording, classifying, summarizing, analyzing, and interpreting the details of the costs of materials, labor and overhead used in the production of goods and services. Purposes of Cost Accounting 1. It furnishes management with the necessary accounting tools for planning and controlling activities. Cost accounting is necessary in preparing the company’s budget which is the overall financial plan for future activities. 2. It helps management to know the costs to construct, manufacture, sell goods, or render various services. 3. It permits management to make intelligent decisions and evaluate results. Standard costs which are based on the past experiences of the company help in evaluating the results of operation. The actual costs incurred are compared with the standard costs. The differences are then analyzed and necessary actions are taken. Classification of Manufacturing Costs Manufacturing is the process of converting raw materials into finished goods using labor and additional costs or manufacturing overhead. Direct Materials or raw materials. These are materials used in the manufacturing process that become a significant part of the finished goods. Direct Labor. The salaries or wages of employees/laborers who worked directly on the raw materials to produce the finished goods. Manufacturing Overhead or factory overhead or manufacturing expenses. These are costs incurred in the factory which are neither direct materials nor direct labor. Examples are utilities, supplies, etc. Manufacturing overhead is subdivided into (a)indirect materials, (b)indirect labor, and (c)other manufacturing overhead. (a) Indirect Materials. These are materials used in small amounts in the manufacturing process which cannot be traced easily to a specific product. And therefore, it is more practical to group these materials together without charging them to a specific product. (b) Indirect Labor. Wages of factory personnel who do not work directly on the raw materials. 1 (c) Other Manufacturing Overhead. This includes such costs as payroll taxes on factory wages, rent of factory building, insurance on factory buildings and machinery, utilities in the factory, repairs and maintenance of machinery and equipment. Prime Cost. It is the sum of direct materials and direct labor. It reflects the primary sources of costs for units in production. Conversion Cost. It is the total of direct labor and manufacturing overhead. It indicates the cost required to convert the raw materials into finished products. Inventories of a Manufacturing Company Raw Materials Inventory. It reflects the cost of raw materials and factory supplies that will be used in the manufacturing process. Once the raw materials are removed from the storeroom for use in the manufacturing process, they are no longer part of the raw materials inventory but become part of work- in-process inventory. Same with the factory supplies, once they are removed from the storeroom and applied in the manufacturing process they are charged to manufacturing overhead. Work in Process Inventory. It reflects the cost of raw materials, direct labor and manufacturing overhead of goods on which manufacturing has begun but has not been completed as of the end of the accounting period. Finished Goods Inventory. It reflects the cost of goods that have been completed and are ready for sale. It is the Merchandise Inventory account of a merchandising business. System of Cost Accumulation 1. Actual Cost Accumulation (Historical) This system collects the actual amounts of direct materials, direct labor and factory overhead that are incurred for each manufactured product. 2. Standard Cost System (Predetermined) Under this system, costs are determined in advance from analysis and forecasts made before the actual production begins. 3. Normal Cost System. This system is a combination of the actual cost system and standard cost system. Actual amounts of direct materials and direct labor are accumulated, while factory overhead costs are accumulated based on a predetermined rate. Types of Cost Systems 1. Job Order Cost System. This system accumulates costs applied to each job order of similar goods on a specific order for stock or for a customer. Each job order is numbered and a job cost sheet is used to record the cost of direct materials used and the direct labor costs incurred are recorded periodically. When the job is completed the manufacturing overhead applied on the job is estimated and entered on the job cost sheet. When completed, the job cost sheet shows the total costs of the completed job. The total cost per unit is obtained by dividing the total costs by the number of units completed. 2. Process Cost System or Average Costing. This system accumulates costs without allocating them to specific units of goods being manufactured. At the end of the period, the average cost per unit is determined by dividing the total costs accumulated by the number of units produced. This system is used 2 in cement manufacturing or flour mills, in which the production is continuous , standardized, and the product remains the same from day to day. 3. Dual System. This system is used when a company makes standard parts continuously and then incorporate these parts into finished goods built for a customer’s specification. The costs of the parts are accumulated and determined under the process cost system and the costs of the finished goods as per customer’s order are determined under the job order system. JOB ORDER COST CYCLE Work Flow 1. Procurement. Materials and factory supplies needed are ordered, received, and stored. Direct and indirect labor services are computed. 2. Production. Materials are transferred from the storeroom to the factory. Labor (direct and indirect), machines, tools, power, and other costs used to complete the product are applied. 3. Warehousing. Finished goods are transferred from the factory to the warehouse until they are sold. 4. Selling. Finished goods/merchandise are shipped to the customer/s. Sales is computed and recorded. Cost Flow 1. Procurement. Purchases of materials, labor and overhead are recorded as debits to Materials, Payroll and Factory Overhead. Purchase of Raw Materials Materials Phpxxx Vouchers Payable Phpxxx To record raw materials purchased during the month. Factory Payroll Factory Payroll xxx Withholding taxes payable xxx SSS contribution payable xxx Pag-Ibig contribution payable xxx Philhealth contribution payable xxx Salaries and Wages Payable xxx To record factory payroll for the month. Manufacturing Overhead Control Manufacturing Overhead Control xxx Vouchers Payable xxx To record overhead costs during the month. 3 2. Production. Costs of materials, labor, and overhead transferred into production are debited to Work in Process. Work in Process xxx Manufacturing Overhead Control xxx Materials xxx To record cost of materials used during the month. Work in Process xxx Manufacturing Overhead Control xxx Factory Payroll xxx To record the costs of labor charged to productions during the month. Work in Process xxx Manufacturing Overhead Control xxx To record overhead applied to jobs. Note: Manufacturing Overhead Control account may have a balance after posting the account. A debit balance of the account is called under-applied overhead. This means that less overhead was applied to jobs than the actual cost incurred. If the applied overhead is greater than the actual cost incurred, Manufacturing Overhead Control account will have a credit balance which is called over-applied overhead. The over-applied overhead or under-applied overhead is adjusted to Cost of Goods Sold account, or pro-rated to Work in Process, Finished Goods, and Cost of Goods Sold. 3. Warehousing. During the month some jobs are completed and transferred to the finished goods warehouse. This is recorded by a debit to Finished Goods and credit to Work in Process. Finished Goods xxx Work in Process xxx To record cost of jobs completed during the month. 4. Selling. Finished goods sold to various customers are recorded as debit to cost of goods sold and credit to finished goods. Cost of Goods Sold xxx Finished Goods xxx To record cost of goods sold during the month. 4 Financial Statements (Format) Statement of Cost of Goods Manufactured Direct Materials Materials Inventory, beginning Phpxxx Materials Purchases xxx Total Materials Available xxx Less: Materials Inventory, end xxx Total Materials Used xxx Less: Indirect Materials Used xxx Direct Materials Used Phpxxx Direct Labor xxx Manufacturing Overhead Applied xxx Total Manufacturing Cost Phpxxx Add: Work in Process, beginning xxx Total Cost of Goods Placed in Process xxx Less: Work in Process, end xxx Total Cost of Goods Manufactured Phpxxx Statement of Comprehensive Income Sales Phpxxx Cost of Goods Sold Finished Goods Inventory, beginning Phpxxx Add: Cost of Goods Manufactured xxx Total Goods Available for Sale Phpxxx Less: Finished Goods Inventory, end xxx Gross Profit on Sales xxx Less: Operating Expenses (itemized) xxx Income Before Income Taxes xxx Provision for Income Taxes xxx Comprehensive Income Phpxxx Exercises as Illustration 1. ABC Corp. manufactures plastic coated metal clips. During the period, the following costs were incurred: Wages: Machine Operators Php300,000 Maintenance Workers 50,000 Factory Foreman 100,000 Materials Used: Metal Wire Php600,000 Lubricant for oiling the machine 15,000 Plastic coating 450,000 Required: Compute the amount of direct labor, direct materials, and factory overhead. 5 2. DEF Co. manufactures machines as per customer orders and specifications. The following data were available: Beginning Ending Materials inventory Php52,500 Php35,000 Work in process 10,200 15,250 Finished goods inventory 9,000 7,000 Required: Compute the amount of cost of goods manufactured. 3. The following information was taken from the records of DEF Co.: Increase in materials inventory Php17,000 Decrease in finished goods inventory 28,000 Raw materials purchased 450,000 Direct labor payroll 250,000 Factory overhead 290,000 Freight out 50,000 There is no work in process at the beginning of the period. Required: Compute the cost of goods sold. 6