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Module 1 Introduction to Cost System converted 2
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Module 1
INTRODUCTION TO THE COST SYSTEM; JOB ORDER COSTING
Introduction
Management needs prompt cost information in the decision making process. In any type of organization, be it business,
political, religious or civic, it is imperative for management to be aware not only of its total costs and expenses, but also of
the specific product, department or activity for which they are incurred, costs per unit and per work unit of its products
and services, respectively, and of whether the amounts incurred are in accordance with the financial plans and standards.
Intended Learning Outcomes
At the end of this module, students are expected to:
1. Define cost accounting
2. Explain the purpose of cost accounting
3. Compare Cost Accounting, Financial Accounting and Management Accounting
4. Describe the uses of cost data.
5. Examine the different classification of cost
6. Describe the cost system
7. Differentiate job order costing from process costing
8. Identify the major source documents for job order costing
9. Demonstrate the accounting procedures necessary in job order costing
10. Illustrate the journal entries under perpetual and periodic inventory methods
COST DEFINED
- The cash or cash equivalent value sacrificed for goods and services that are expected to bring a current or future
benefit to the organization.
- Expired costs are called expenses. In each period, expenses are deducted from revenues in the income statement
to determine the period’’s profit.
- Loss – a cost that expires without producing any revenue benefit.
COST ACCOUNTING DEFINED
- An area of accounting concerned with cost determination and cost control.
- Following the flow of costs in a business entity, from purchase of materials to final conversion of finished goods
into cash or to rendition of services, cost data are accumulated for the purpose of determining costs per unit and
per work unit and estimating appropriate selling price.
- Cost data are analyzed and reported to management to serve as a basis in the decision making process.
PURPOSES OF COST ACCOUNTING
• Cost determination. This refers to accumulation of cost data by products, processes or services to be able to
arrive at unit cost or cost per work unit.
• Cost control. Standards are set for costs per unit and per work unit and are subsequently compared with the
figures per actual operations so that remedial measures may be adopted.
Cost accounting facilitates the performance by management of its planning and control functions. Cost standards are
established for materials, labor and factory overhead based on product design, time and motion studies, and analysis of
factory overhead. These standards subsequently serve as bases in measuring performance and as deterrents to pilferages
and unnecessary wastages of materials and inefficiency of manpower.
Cost Accounting, Financial Accounting and Management Accounting
Cost Accounting Financial Accounting Management Accounting
Supplements financial accounting by
providing breakdown or details for cost
figures contained in all-purpose financial
statements
Concerned with processing historical and
projected economic data of an entity to assist
management in setting up reasonable economic
objectives and in making rational decisions
towards the attainment of these objectives
Cost accounting reports are based on cost
data as accumulated in subsidiary ledgers
for costs and expenses incurred
Financial accounting
reports are derived
from postings to the
general ledger
Information is usually for management
use
Information is for both
internal and external
users
Facilitates management accounting
Differences between Financial accounting and Managerial Accounting
Financial Accounting Managerial Accounting
Users
External persons who make financial
decisions Managers who plan for and control an
organization
Time Focus Historical perspective Future emphasis
Verifiability Emphasis on verifiability Emphasis on relevance for planning and control
Precision versus
timeliness Emphasis on precision Emphasis on timeliness
Subject Primary focus is on the whole organization Focuses on segments of an organization
Requirements Must follow GAAP and prescribed formats Need not follow GAAP or any prescribed
format
PLANNING AND CONTROL
One of the most important functions of cost accounting is the development of information which can be used by
management in planning and controlling operations.
- Planning
o the process of establishing objectives or goals for the firm and determining the means by which the firm
will attain them.
o Cost accounting helps in the development of plans by providing historical costs that serve as basis for
projecting data for planning. Management can analyze trends and relationship among such data as an aid
in estimating future costs and operating results and in making decisions regarding the acquisition of
additional facilities, changes in marketing strategies, and obtaining additional capital.
- Control
o The process of monitoring the company’s operations and determining whether the objectives identified in
the planning process are being accomplished.
COST ACCOUNTING AND OTHER FIELDS OF STUDY
The recording of the costs of a product or a service is part of financial accounting. The use of cost for valuation of
inventory and cost of goods sold for external reporting is also financial accounting. The use of cost data in choosing
between two or more alternatives is part of managerial accounting. Differential cost analysis is considered by others as a
form of applied microeconomics. Cost accounting provides data for use in decision models for finance, operations
management, and marketing. Cost accounting is also related to motivation and behaviour because it is used in planning
i. Marketing or selling expense –
- Include all costs necessary to secure customer orders and get the finished product or service into the
hands of the customer
- Often referred to as order-getting and order-filling costs.
- Examples:
a. Advertising
b. Shipping
c. Sales travel
d. Sales commissions
e. Sales salaries
ii. General or administrative expense
- Include all executive organizational and clerical expenses that cannot logically be included under
either production or marketing.
- Examples:
a. Executive compensation
b. General accounting
c. Secretarial
d. Public relations
2. Costs classified as to variability
Activity refers to a measure of the organization’s output of products or services. In specifying cost behaviour,
the managerial accountant often limits the description to a specific range of activity. This is called the relevant
range.
a. Variable costs
- Items of cost which vary directly, in total, in relation to volume of production.
- Cost per unit remains constant as volume changes within a relevant range.
- Examples:
a. Direct materials
b. Direct labor
c. Royalties
d. Commission of salesmen
b. Fixed costs
- Items of cost which remain constant in total, irrespective of the volume of production.
- Cost per unit decreases as volume increases, and increases as volume decreases.
- Examples:
a. Salaries of production executives
b. Depreciation of equipment computed on a straight-line basis
c. Periodic rent payments, insurance
c. Semi – variable costs
- Items of cost with fixed and variable components.
- Vary with the level of production, though not in direct relation to it, probably because part of the
cost is fixed while the rest is variable.
- Example:
a. Cost of electricity where there is a basic minimum charge plus a specified cost per
kilowatt hour above the minimum
3. Costs classified as to relation to manufacturing departments
a. Direct departmental charges
- Costs that are immediately charged to the particular manufacturing department(s) that incurred the
costs since the costs can be conveniently identified or associated with the department(s) that
benefited from said costs.
b. Indirect departmental charges
- Costs that are originally charged to some other manufacturing department(s) or account(s) but are
later allocated or transferred to another department(s) that indirectly benefited from said costs.
4. Costs classified to their nature as common or joint
a. Common costs
- Costs of facilities or services employed in two or more accounting periods, operations, commodities
or services.
- Subject to allocation.
b. Joint cost
- Costs of materials, labor and overhead incurred in the manufacture of two or more products at the
same time.
- Major difficulty inherent to joint cost – they are invisible and they are not specifically identifiable
with any of the products being simultaneously produced.
- Subject to allocation.
5. Costs classified as to relation to an accounting period
a. Capital expenditures
- Expenditure intended to benefit more than one accounting period and is recorded as an asset.
- The allocation of the cost to the different periods is
a. Depreciation for fixed tangible assets
b. Amortization for intangible assets
c. Depletion for wasting assets
b. Revenue expenditures
- Expenditure that will benefit current period only and is recorded as expense
6. Costs for planning, control and analytical processes
a. Standard costs
- Predetermined costs for direct materials, direct labor, and factory overhead.
- Established by using information accumulated from past experience and data secured from research
studies.
b. Opportunity costs
- The benefit given up when one alternative is chosen over another.
- Not usually recorded in the accounting system.
- However, it is considered when evaluating alternatives for decision-making.
- If an asset can be used to perform only one function and cannot be sold or used in other ways, the
opportunity cost of that asset is zero.
c. Differential costs
- Cost that is present under one alternative but is absent in whole or in part under another alternative.
- Encompasses both cost increases and cost decreases between alternatives.
d. Relevant costs
- A future cost that change across the alternatives.
- Examples:
a. Cost of goods sold
b. Advertising
c. Commissions
d. Warehouse depreciation
e. Out-of-pocket cost
- Cost that requires the payment of money (or other assets) as a result of their incurrence.
f. Sunk cost
- A cost for which an outlay has already been made and it cannot be changed by present or future
decision.
g. Controllable cost
- A cost is considered to be a controllable cost at a particular level of management if that level has
power to authorize the cost.
- Example:
a. Entertainment expense would be controllable by a sales manager if he or she had power
to authorize the amount and type of entertainment for customers.
b. On the other hand, depreciation of warehouse facilities would not be controllable by the
sales manager since he or she would have no power to authorize warehouse
construction.
USE OF CONTROLLING AND SUBSIDIARY ACCOUNTS (JOB ORDER) COST SYSTEM
Materials Work in Process Finished Goods
Balances, beg xx
Purchase
returns xx Balance, beg. xx Cost of goods Balance, beg. xx Cost of goods sold xx
Purchases
xx Issuance: Direct materials xx manufactured xx
Cost of goods
manufactured xx Cost of goods
Returns of excess mat. xx Direct mat. xx Direct labor xx Cost of goods returned xx returned to factory xx
Indirect mat. xx
Applied factory
overhead xx
Per materials ledger cards: Per job order cost sheets Per finished goods ledger cards
Received Issued Balance Direct Mat. Cost
Direct Labor
Cost FOH Applied Received Issued Balance
xx xx xx xx xx
xx xx xx xx xx xx xx
(xx) xx xx xx xx xx (xx) xx xx
(xx) xx (xx) xx
Summary
Direct mat. Cost P xx
Payroll Direct labor cost xx
Gross earnings xx Direct labor xx FOH applied xx
Indirect labor xx P xx
Factory overhead
Indirect materials xx Charged to
Indirect labor xx production xx
Others xx
Other controlling accounts
- They may be used under both periodic and perpetual inventory methods because they do not affect the
inventories. They are:
o Factory overhead control
o Selling expenses control
o General and Administrative Expenses Control
o These are supported by subsidiary records or analysis sheets.
Example: The company pays for the following: Factory supplies – P 600; factory repairs – P 500; store supplies – P 300;
and office supplies – P 200.
The journal entry and the corresponding postings to be made on subsidiary records would be as follows:
Subsidiary records Dr. Cr.
Factory Overhead Control 1,100.
Factory supplies P600.
Factory repairs 500.
Selling Expenses Control 300.
Store supplies 300.
General and Adm. Exp. Control 200.
Office supplies 200.
Cash P 1,600.
The footings per subsidiary records must tally with the balances per controlling accounts in the general ledger.
Chart of Accounts, Cost System
- Similar to that under the non-cost system with the exception of the account titles affecting cost of goods
manufactured and cost of goods sold.
- The chart of accounts as given under the non-cost system is revised and is shown below.
CHART OF ACCOUNTS FOR A MANUFACTURING FIRM
Balance Sheet Accounts (10-99)
Assets ( 10-99 )
Current Assets (10-99)
11 Cash in Bank 44 Accumulated Depreciation – Machinery and
Equipment – Factory
12 Cash on Hand 46 Delivery Equipment
13 Petty Cash Fund 46 Accumulated Depreciation – Delivery Equipment
14 Marketable Securities 51 Automobiles
15 Notes Receivable 52 Accumulated Depreciation – Automobiles
15 - 1 Notes Receivable – Discounted 56 Office furniture and fixtures
16 Accounts Receivable 56 Accumulated Depreciation – Office Furniture and
Fixtures
16 - 1 Accounts Receivable – Discounted
20 Finished Goods inventory Intangible Assests (70-79)
21 Work in Process Inventory 71 Goodwill
22 Materials inventory 72 Patents
26 Prepaid Insurance 79 Other Intangible Assets
39 Miscellaneous Prepaid Items
Plant, Property and Equipment (40-69) Other Assets (80-89)
41 Land
42 Buildings Other Assets (90-99)
42 Accumulated Depreciation – Buildings
44 Machinery and Equipment – Factory
Selling Expenses (400-499) 603 Rental Income
401 Selling Expenses Control 604 Commission Income
402 Salaries – Sales Supervision 605 Miscellaneous Income
403 Salaries – Salesgirls
404 Salaries – Clerical Help Other Expense (620-629)
405 Sales Commissions 621 Interest Expense
411 Delivery Expense
416 SSS Contributions Income Deductions (630-639)
417 Medicare Contributions 631 Provisions for Income Tax
418 Pagibig Contributions
419 Employees’ Compensation Premiums Temporary Account
425 Telephone and Telegraph 700 Payroll
426 Light, Power and Water
The Factory Ledger
- When transactions are voluminous and/or the factory is far from the main office, manufacturing transactions are
preferably recorded in a factory journal and posted to the factory ledger.
o This requires the use of reciprocal accounts General Ledger (for the factory) and Factory Ledger (for the
main office) when a transaction affects accounts found in both books.
- Factory Ledger – refers to the book of final entry for manufacturing operations, or
o the account title used by main office in recording transactions affecting accounts found in both the books
of the factory and the main office.
- The accounts carried on factory books are those used in recording manufacturing operations.
- Factory fixed asset accounts – may either be in the books of the factory or the main office.
o If the problem is silent, they are assumed to be on factory books.
o The accounts that must be on books of the factory are:
▪ Materials
▪ Work in Process
▪ Finished Goods
▪ Plant, Property and Equipment
▪ Accumulated Depreciation
▪ Applied Factory Overhead
▪ Factory Overhead Control
▪ Factory Overhead Variance
▪ General ledger
o The factory may have its own petty cash fund so that this account may also be found on its books
- All functions other than manufacturing are taken care of by main office so that
o Disbursements
o collections
o sales and the corresponding expenses
involved are recorded on the main office books.
Transfer Voucher
- an intra-company form used to inform the factory when transactions are entered into by the main office but the
same affect manufacturing accounts
- Example
o The main office buys machinery for the factory for P 30,000. Factory fixed assets are carried on factory
books.
▪ a transfer voucher is prepared by the main office informing the latter of the transaction and to the effect
that the factory ledger is debited by the main office for P 30,000.
▪ Based on this, the entries on both books are:
Main Office Books Factory Books
Factory ledger P 30,000 Machinery P 30,
Vouchers Payable P 30,000 General Ledger P 30,
o The factory effects delivery of goods costing P 50,000 to customers based on sales orders issued by the
main office.
▪ Factory issues a transfer voucher informing the main office of such delivery and debits the account
general ledger.
▪ Entries would be as follows:
Main Office Books Factory Books
Cost of Goods Sold P 50,000 General Ledger P 50,
Factory Ledger P 50,000 Finished Goods P 50,
- To facilitate the recording of similar transactions, it would be advisable to determine first what entry should be
made assuming there is only one journal to be used. If one of the accounts involved is on the other book, then,
the reciprocal accounts are used.
- Factory Ledger account – appears on main office books
o Usually has a debit balance
- General ledger account – on factory books
o Usually has a credit balance
- Prior to preparation of financial statements, a work sheet is prepared to combine the accounts and on this work
sheet, the inter-office accounts are eliminated by a working paper entry.
o Assuming that the adjusted balance of the inter-office accounts is P 36,000, the elimination per working
paper entry would be as follows:
General Ledger P 36,
Factory Ledger P 36,
JOB ORDER COSTING AND PROCESS COSTING
As stated earlier, cost accumulation may be by products, departments or processes.
In other words, it may be by job order costing or by process costing.
Job order costing
- A system for allocating costs to groups of unique product.
- Applicable to the production of customer specified products such as the manufacture of special machines.
- Each job becomes a cost center for which costs are accumulated.
- A subsidiary record (job cost sheet) is needed to keep track of all unfinished job (work in process) and finished
jobs (finished goods)
- Examples:
o Houses
o Boats
o Pianos
o Radios
o Television sets
o Automobiles
o Doors
o Furniture
Process costing
- Refers to the costing procedure whereby costs are accumulated by departments or processes.
- Each processing department becomes a cost center.
– Adopted for products manufactured under conditions of continuous processing so that they are not distinguishable
from one another (or are homogeneous).
- Examples:
o Beverages
o Flour
o Chemicals
o Minerals
- Cost accumulation is done on cost of production reports (or departmental cost sheets)
The differences between job order costing and process costing may be summarized as follows:
Job order costing Process Costing
Nature of products:
Heterogeneous Homogeneous
o Indirect labor – refers to cost of manpower which cannot be identified as pertaining to a
particular product.
▪ Examples: salaries and wages of forement, timekeepers and utility men.
o Factory supplies
o Depreciation of factory building
o Factory insurance
Note: Distinctions between direct and indirect materials and between direct and indirect labor are not observed in process
costing inasmuch as under the latter, costs accumulation is by departments or processes and not by products or jobs.
THE JOB ORDER COST SHEET
- The subsidiary record for “work in process” so that for all postings to the latter, corresponding postings must also
be made to the corresponding cost sheets
- Forms of Cost sheets – cost sheets may vary in form depending on desired additional information such as the
items, quantity and unit cost of material, number of labor hours, bases used in charging overhead and the
departments in which the different cost items are charged.
- When overhead is charged to jobs upon completion, there exists a difference between work in process per general
and the total of the accumulated costs per cost sheets. This difference is equal to the amount of overhead not so
applied on the cost sheets yet.
MAJOR SOURCE DOCUMENTS FOR JOB ORDER COSTING
1. Job order cost sheet
a. These records accumulate product costs of specific units or small batches of units for both product
costing and control purposes.
b. The file of job order cost sheets for uncompleted jobs serves as a perpetual book inventory and the
subsidiary ledger for Work in Process Control.
O MANUFACTURING CORP.
Cost Sheet
Order No. 171
For: Juan Medalla
Product: Computer tables
Specification: Formica finish
And with provision for upright CPU
Quantity: 20
Date Ordered: 1/10/13 Date Wanted: 2/20/
Date Started: 1/15/13 Date Completed: 2/18/
DIRECT MATERIALS COST DIRECT LABOR
COSTS
FACTORY
OVEREHAD
APPLIED
Date Req Amount Date Amount Date
Jan. 15 510 P 20,000 Jan. 15- 22 5,500 Feb.
18
Direct
labor cost
x 80% =
P 21,
27 687 2,600 23 - 31 4,
Feb. 10 921 3,500 Feb. 1- 7 7,
Feb. 15 982 5,000 8 - 15 5,
16 - 18 3,
Total P 31,100 P 26,410 P 21,
Summary on Job No. 171
Direct materials cost P 31,
Direct labor cost 26,
Factory overhead applied 21,
Total factory cost P 78, 638
Gross profit (P 78,638 x 40%) 31,
Selling price P 110,
LIGAYA MANUFACTURERS, INC..
Cost Sheet
Order No. 555
For: Singalong Furniture
Product: Rocking Chais
Specification: Narra withs long arm rest
Quantity: 10 units
Date Ordered: May 11, 2013 Date Wanted: June 16, 1997
Date Started: May 16,2013 Date Completed: June 12, 1997
DIRECT MATERIALS COST DIRECT LABOR
COSTS
Date Dept Amount Date Amount No. of Hrs. Amou nt
May 16 Carpentry P 5,000 5/16- 22 Carpentry 96
54 P 2, 1,
####### 360
####### 2,
26 Carpentry 2,000 22 - 28 Carpentry
June 5 Varnishing 1,500 5/29 to
####### 6/
Carpentry 10
6/5- 11 Finishing 80
Total P 8,500 240 7,790P
SUMMARY
Direct materials cost P 8,
Direct labor costs 7,
Factory overhead applied
Carpentry: Direct labor hours of 160x10 P 1,
Varnishing: Direct labor hours of 80 x 15 1,200 2,
Total factory costs @ P 1,904 P 19,
Gross profit (30% x P 19,090) 5,
Selling price @ P 2,481 P 24,
Req. No
####### 234
####### 311
####### 336
Example of a Job order cost sheet:
Job Cost Sheet
Job Number Description
Date Started Date Completed
Direct Materials
Date Requisition No. Quantity Unit Price Cost
Direct Labor
Date Time Card No. Hours Rate Cost
Factory Overhead
Date Activity Base Quantity Application Rate Cost
Cost Summary
Direct Materials
Direct Labor
Factory Overhead
Total Cost
2. Materials stock card
a. These records are the perpetual book inventory of costs and quantities of materials on hand
b. The file of materials stock cards for unused materials is the subsidiary ledger for Materials Control.
Description
Location in
Storeroom
Maximum Minimum Stores Ledger Acct. No.
Date Received Issued Balance
Qty.
Unit
Price Amt. Qty. Unit Price Amt. Qty.
Unit
Price Amt.
3. Finished Goods Stockcard
a. These records are the perpetual book inventory of costs and quantities of completed goods held for sale.
b. The file of finished goods stock cards for unsold goods is the subsidiary ledger of Finished Goods
Control
4. Factory overhead control cost record
a. These records accumulate detailed manufacturing overhead costs by department
b. The file of these records for the accounting period is the subsidiary ledger for Factory Overhead Control
5. Materials requisition, time ticket and Clock card
a. As the source documents for charging costs to jobs and department
b. To aid in fixing responsibility for control and usage of materials and labor
basis for the materials to be issued. The job order number is shown on the materials requisition together
with the specifics on type and quantity of materials required by each job. The quantity, unit cost, and total
cost of each of the materials are entered on the issued section of the stock card.
Entries: Issuance of Direct materials
Work in process xxx
Materials xxx
To record the issuance of direct materials
- An entry is made on the stock card under the Issued section and also on the cost sheet –
Materials.
Entry: Issuance of Indirect Materials
Factory overhead control xxx
Materials xxx
To record the issuance of indirect materials
- An entry is made on the stock card under the Issued section and also on the overhead analysis
sheet.
The material control account may be summarized as follows:
MATERIALS
Inventory beginning Cost of direct materials issued
Purchase of materials Cost of indirect materials issued
Freight-in Cost of materials returned to supplier
Cost of excess materials returned from factory
- The balance of the Materials account represents the Materials inventory at the end of the period under
consideration.
- The amount should be equal to the total of the balances of all the material stock cards.
ACCOUNTING PROCEDURES FOR LABOR
The accounting procedures for labor may be divided into two distinct phases:
1. Collection of payroll data, computation of earnings, calculation of payroll taxes, and payment of wages
2. Distribution and allocation of labor costs to jobs, departments, and other cost classifications.
Clock cards/time records
- Used to record the days or hours worked by each employee.
- Used as the basis in computing the gross earnings of employees who are paid hourly wages.
Time tickets
- Prepared for each worker to determine the time spent for each job as basis in determining the amount to be
charged to direct labor cost and indirect labor cost.
- For various jobs, they are sorted, priced and summarized , and the time ticket hours should be reconciled with the
clock card hours.
- At regular intervals, usually daily or weekly, the labor time and labor cost for each job are entered on the
job order cost sheets. For each payroll period – weekly, every two weeks, or monthly – the summary of
employees’ earnings and the liability for payment is journalized and posted to the general ledger.
- Entry : Payroll and incurrence of liability
Payroll xxx
Withholding Tax Payable xxx
SSS Premium Payable xxx
PhilHealth Contribution Payable xxx
Pag-ibig Funds Contributions Payable xxx
Vouchers Payable xxx
- Entry: Payment of Payroll
Vouchers Payable xxx
Cash xxx
- The Work in Process account is used to charge the jobs with the direct labor cost.
- Factory overhead control is charged for the indirect labor cost incurred.
- Tax withheld is computed based on the table provided by the Bureau of Internal Revenue.
- For the SSS Premiums and Medicare Contributions, the table is provided by the Social Security System.
- The clearing account for the total wages due to the factory personnel is the payroll account summarized as
follows:
PAYROLL
Total wages and salaries earned by factory personnel
during the payroll period
Total payroll during the payroll period at the same time
debiting work in process for direct labor and overhead for
indirect labor
- The account used to accumulate the liability for payroll or factory overhead is the Accrued Factory Payroll
summarized as follows:
ACCRUED FACTORY PAYROLL
Total amount of wages paid to factory personnel at the
time crediting accounts payable or cash
Balancing beginning
Total amount of wages and salaries due to factory
personnel at the same time debiting payroll
ACCOUNTING FOR FACTORY OVERHEAD
- There are two accounts used:
o Factory overhead control – used to accumulate actual overhead incurred
o Factory overhead applied – used to accumulate estimated factory overhead applied to production
▪ A predetermined rate is used ad this is computed using any of the following as a base:
- Units of production
- Direct materials cost
- Direct labor hours
- Direct labor cost
- Machine hours
▪ A predetermined factory overhead rate computed may be used for all departments in the company
(blanket rate) or a rate may be computed for each department to fit the nature of the operations of
the department (departmentalized rate)
Why do we need to use estimated factory overhead (factory overhead applied)?
- Because a the time the overhead is needed for costing of jobs completed, the actual overhead is not yet available
(actual will be known only at the end of the month).
- The computation of the cost of each job will be done upon the completion of the job and this may be during the
first week, second week, or third week of the month, and at this time, the actual overhead is not yet available
because of the items included in the actual overhead will be known only at the end of the month.
- As items in the factory overhead control account are incurred, the Factory Overhead Control account is debited.
Entry: Applied factory overhead entered on the job order cost sheet
Work in process xxx
Applied Factory Overhead xxx
- Some actual overhead costs, such as indirect materials, indirect labor and payroll taxes are debited to Factory
Overhead Control as they are incurred.
- Other overhead costs, such as depreciation and expired insurance are debited to Factory Overhead Control when
adjusting entries are recorded.
Factory Overhead Variance P 240
Factory Overhead Control P 240
• In the given example, Actual Factory overhead exceeds applied overhead so that the variance
is a debit ( underapplied, underabsorbed, or unfavourable).
• When Actual Overhead is more than Applied overhead, the variance must be a debit
(underapplied, underabsorbed or unfavourable).
• When Actual Overhead is less than Applied overhead, the variance must be a credit
(overapplied, overabsorbed or favourable).
• Factory Overhead Variance- preferably used so that both overapplied and underapplied
variances may be posted to the same ledger page.
• Instead of crediting “Applied Factory Overhead” in charging overhead to production, the
credit may be to “Factory Overhead Control”. This practice eliminates the need to close the
former to the latter.
o Disposition of Factory Overhead Variances.
▪ Factory overhead, in general, is treated as a period cost and is closed to cost of goods sold or to income
and expense summary.
• However, when it is significant in amount, it implies an error in costing or that a wrong
overhead rate was used. In this case, the variance is treated as an adjustment to cost of goods
sold and the inventories of finished goods and work in process.
▪ In the example given in the preceding section, the variance is closed to cost of goods sold as follows:
Cost of Goods Sold P 240
Factory Overhead Variance P 240
▪ Based on the given entry, an unfavourable variance increases cost of goods sold and a favourable variance
reduces the same.
Income Statement with Factory Overhead Variance – Illustration
Golden Manufacturing Co.
Income Statement
For the Year Ended December 31, 2013
Sales P 250,
Less – Cost of Goods Sold
Manufacturing costs:
Direct materials cost P 75,
Direct labor cost 55,
Factory overhead applied 55,000 P 185,
Work in process, Jan. 1 33,
Work in process, Dec. 31 (45,000)
Cost of Goods Manufactured P 173,
Finished Goods, Jan. 1 29,
Finished Goods, Dec. 31 (22,000)
Cost of goods sold, normal P 180,
Underapplied factory overhead 240
Cost of goods sold, actual 180,
Gross profit on sales 69,
Less: Operating expenses 55,
Net income 14,
In the foregoing illustration, cost of goods sold prior to adjustment for factory overhead variance is described as
normal, that is, based on what has been estimated or planned.
Work in process - a controlling account used to record the flow of the elements of cost through the factory during a
given period
- Used to accumulate during the month the total cost of materials placed in process, labor used and factory
overhead applied.
- Amounts entered on the cost sheet should equal the amounts debited to the work in process account during the
month.
- As jobs are completed, the cost sheets for the corresponding jobs are totalled and the amount is now transferred to
the finished goods account.
Entry: Transfer from Work in process to Finished Goods account
Finished Goods xxx
Work in process xxx
,
WORK IN PROCESS
- Cost of beginning inventory
- Cost of direct materials issued to production at the
same time crediting materials
- Cost of materials, labor and factory overhead applied
to jobs completed during the period at the same time
debiting finished good
- Cost of direct labor applied to production during the
period at the same time crediting the payroll account
- Cost of direct materials returned to the warehouse at
the same time debiting materials
- Amount of overhead applied to production at the same
time crediting applied overhead
- Entry: When the finished goods are delivered to customers
Accounts receivable xxx
Sales xxx
Cost of Goods Sold xxx
Finished Goods xxx
Finished goods – a controlling account used to record the flow of the cost of goods completed and transferred to the
finished goods storeroom during the period.
FINISHED GOODS
- Cost of inventory at the beginning - Cost of finished goods sold during the period at
the same tie debiting cost of goods sold
- Factory cost of job order completed at the same
time crediting work in process
- Cost of goods returned by the customer at the
same time crediting cost of goods sold
Cost of Goods Sold – an account used to accumulate he cost of finished goods disposed through sale to customers.
COST OF GOODS SOLD
- Cost of finished goods disposed through sale to
customers at the same time crediting finished
goods
- Cost of finished goods returned by customers at
the same time debiting the finished goods
account
- Adjustment for under applied factory overhead - Adjustment of over applied factory overhead
- Balance of the account at the end of the period at
the same time debiting income summary
ILLUSTRATION:
The following information is provided by Bacolor Corp. For 2014:
2014
a. Direct materials issued:
Job order No. 14 ................................................ P 9,
15 ................................................. 12,
16 ................................................. 8,
P 29,
b. Direct labor costs:
Job order No. 14 ................................................ P 3,
15 ............................................... 5,
16 ............................................... 3,
P 12,
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Module 1 Introduction to Cost System converted 2
Course: Management Accounting (BSMA 101)
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University: Batangas State University
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Module 1
INTRODUCTION TO THE COST SYSTEM; JOB ORDER COSTING
Introduction
Management needs prompt cost information in the decision making process. In any type of organization, be it business,
political, religious or civic, it is imperative for management to be aware not only of its total costs and expenses, but also of
the specific product, department or activity for which they are incurred, costs per unit and per work unit of its products
and services, respectively, and of whether the amounts incurred are in accordance with the financial plans and standards.
Intended Learning Outcomes
At the end of this module, students are expected to:
1. Define cost accounting
2. Explain the purpose of cost accounting
3. Compare Cost Accounting, Financial Accounting and Management Accounting
4. Describe the uses of cost data.
5. Examine the different classification of cost
6. Describe the cost system
7. Differentiate job order costing from process costing
8. Identify the major source documents for job order costing
9. Demonstrate the accounting procedures necessary in job order costing
10. Illustrate the journal entries under perpetual and periodic inventory methods
COST DEFINED
- The cash or cash equivalent value sacrificed for goods and services that are expected to bring a current or future
benefit to the organization.
- Expired costs are called expenses. In each period, expenses are deducted from revenues in the income statement
to determine the period’’s profit.
- Loss – a cost that expires without producing any revenue benefit.
COST ACCOUNTING DEFINED
- An area of accounting concerned with cost determination and cost control.
- Following the flow of costs in a business entity, from purchase of materials to final conversion of finished goods
into cash or to rendition of services, cost data are accumulated for the purpose of determining costs per unit and
per work unit and estimating appropriate selling price.
- Cost data are analyzed and reported to management to serve as a basis in the decision making process.
PURPOSES OF COST ACCOUNTING
• Cost determination. This refers to accumulation of cost data by products, processes or services to be able to
arrive at unit cost or cost per work unit.
• Cost control. Standards are set for costs per unit and per work unit and are subsequently compared with the
figures per actual operations so that remedial measures may be adopted.
Cost accounting facilitates the performance by management of its planning and control functions. Cost standards are
established for materials, labor and factory overhead based on product design, time and motion studies, and analysis of
factory overhead. These standards subsequently serve as bases in measuring performance and as deterrents to pilferages
and unnecessary wastages of materials and inefficiency of manpower.
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