Cost Accounting System – Entries

Illustration

To illustrate the flow of costs in a manufacturing enterprise, assume that New Hope Manufacturing
Company begins a new fiscal year with the financial position as shown in the following balance sheet:

During the month of January, New Hope completed the transactions which are summarized, recorded, and posted
to the ledger accounts as follows. The revenue and expense accounts are not closed at the end of January, because
such formal closing, in practice, is usually done only at year end.

Debit Credit Rules

[Link]. Accounts Increase Decrease Balance

1. Assets Debit Credit Debit
2. Liabilities Credit Debit Credit
3. Owner’s Equity – Capital Credit Debit Credit
4. Revenues Credit Debit Credit
5. Expenses Debit Credit Debit

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 General Journal
S.N Transactions Account Title Debit Credit
a. Material purchased and received on account Materials $100,000
$100,000 Accounts Payable $100,000

b. Material requisitioned during the month Work in Process 80,000

For production $80,000 (direct material) FOH 12,000
For Factory Use $12,000 (indirect material) Materials 92,000

c. Total gross payroll is $160,000. Payroll 160,000

Payroll was paid to employees for the month Emp. Income Tax 11.5% 18,400
after deducting 7.5% FICA Tax and 11.5% FICA Tax Payable 7.5% 12,000
Federal Income Tax withheld $129,600 Accrued Payroll 129,600

Payment of accrued payroll Accrued Payroll 129,600

Cash 129,600

d. Distribution of Payroll was Work in Process 65% 104,000

Direct labor 65% FOH Control 15% 24,000
Indirect factory labor 15% Market. Expense Control 13% 20,800
Marketing salaries. 13% Admin. Expense Control 7% 11,200
Administrative 7% Payroll 160,000

e. Additional 10% is recorded for employer’s Factory Overhead Control 80% 12,800
payroll taxes. Marketing Expense Control 13% 2,080
FICA Tax 7.5% Admin. Expense Control 7% 1,120
Federal Unemployment Insurance Tax 0.8% FICA Tax 7.5% 12,000
State Unemployment Insurance Tax 1.7% FUI Tax 0.8% 1,280
SUI Tax 1.7% 2,720

f. Factory Overhead consists of: Factory Overhead Control 9,700

Depreciation $8,500 Accumulated Depreciation 8,500
Prepaid Insurance $1,200 Prepaid Insurance 1,200

FOH is a control ledger that has three Depreciation Expense

subsidiary ledgers: Indirect Material, Accumulated Depreciation
indirect labor and indirect expenses.
Prepaid Insurance
Cash
Under the indirect expenses, Depreciation
and Insurance Expense are further sub- Insurance Expense
subsidiary ledgers therefore they are posted
Prepaid Insurance
in the FOH control account for costing.

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 g. General Factory Overhead Costs $26,340. Factory Overhead Control 26,340
70% of these expenses were paid in cash the Cash 18,438
balance was credited to accounts payable Accounts Payable 7,902

h. Amount Received from customers in Cash 205,000

payment of their accounts $205,000 Accounts Receivable 205,000

i. The following liabilities were paid Accounts Payable 227,000

Accounts payable $227,000 Estimated Income Tax Payable 35,700
Estimated Income Tax $35,700 Cash 262,700

j. Factory Overhead accumulated in the FOH Work in Process 84,840

control account was transferred to Work in FOH Control 84,840
Process account.

k. 63.6% of the work was completed and Finished Goods 320,000

transferred to finished goods. Work in Process 320,000

l. Sales were $384,000, of which 40% was Cash 153,600

paid in cash and balance was charged to Accounts Receivable 230,400
accounts receivable. Sales 384,000
The Cost of Goods sold was 75% of Sales Cost of Goods Sold 288,000
Finished Goods Inventory 288,000

m. Provision for Income Tax $ 26,000 Provision for Income Tax 26,000
Est. Income Tax Payable 26,000

* Federal Insurance Contribution Act (FICA) Tax is mandatory payroll tax in United States that finances Social Security and
Medicare programs through contributions from both employers and employees.

Ledger Accounts

Factory Overhead Control Account

b. Indirect Material $12,000 j. Work in Process 84,840
d. Indirect Labor 24,000
e. Employer Taxes 12,800
f. Indirect Expenses 9,700
g. General FOH Costs 26,340
$84,840 $84,840

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 Work in Process Account
Opening WIP Inv. $234,300 k. Finished Goods 320,000
b. Direct Material 80,000
d. Direct Labor 104,000 Ending Balance 183,140
j. Factory Overhead 84,400
$503,140 $503,140

• After passing entries in general journal, all the entries are posted into ledger accounts.
• The trial balance is prepared.
• Adjusting entries are passed
• Adjusted trial balance is prepared
• For reporting financial statements are prepared – Income Statement and Balance Sheet.

Reporting the Results of Operations

Income Statement:
The following statement shows the revenues and expenses of New Hope Manufacturing Company for the
month of January: In the income statement the cost of goods sold is shown as one figure. Although
this procedure is followed in published reports. Additional information is necessary for interna
uses, therefore a supporting schedule of the cost of goods sold is usually produced. Illustration of
CGS for New Hope is as follows.

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Balance Sheet
The balance sheet complements the income statement. Neither Statement alone offers a
sufficiently clear picture of the status and progress of a company. The following balance sheet
shows the financial position of New Hope Manufacturing Company at the end of January:

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 Cost Accounting Cycle – Entries

Practice Problems

1. Journal entries for the cost accounting cycle

The following transactions pertain to manufacturing operations:

(a) Materials were issued as follows: direct. $24,500; indirect. $4,500.
(b) A payroll of $44,000 was recorded. Income tax withheld, $7,000: FICA tax rate 7.5%.
(c) The payroll consisted of $30,000 direct labor. $6,000 indirect factory labor and
$8,000 sales salaries. State unemployment insurance is 5.4%. and federal is 0.8%.
The employer's FICA tax rate was 7.5%.
(d) Miscellaneous factory expenses incurred will require cash expenditure of $7,500.
(e) Factory overhead of S22,932 was charged to production.
(f) Cost of production completed during the period totaled $60,000.
(g) Materials purchased totaled $50,000.
(h) Goods costing $20,000 were shipped to customers at a sales price of $26,000.

Required: Prepare journal entries for the above transactions.

2. Journal Entries for the Cost Accounting Cycle.

Selected transactions of the Romer Company for February are as follows:

(a) Materials requisitioned: $18,500 for production and $2,800 for indirect use.
(b) Work completed and transferred to finished goods amounted to $51,800.
(c) Materials purchased and received, $32,000.
(d) The payroll, after deducting 7.5% FICA tax, 17.5% federal income tax, and 5% state
income tax, was $35,000. The wages due to the employees were paid.
(e) Of the total payroll, 55% was direct labor, 18% indirect factory labor, 17% marketing
salaries, and 10% administrative salaries.
(f) An additional 13.7% is entered for employer's payroll taxes, representing 7.5% FICA
tax, federal unemployment tax, and 5.4% state unemployment tax. Payroll taxes related
to factory production are charged to the factory overhead control account.
(g) Other factory overhead consisted of $9,450 depreciation on the factory building and
equipment, $600 expired insurance, and $1 ,250 other unpaid bills.
(h) Factory overhead of $28,150 was charged to production.
(i) Sales on account totaled $92,120, with a markup of 40% on the cost of goods sold.
(j) Cash collections from accounts receivable totaled $76,000.

Required: Prepare journal entries for these transactions.

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3. Journal Entries for the Cost Accounting Cycle

Multi Electro Incorporated completed the following transactions during February:

(a) Direct materials of $120,000 were purchased on terms of n/30.
(b) Total gross payroll was $90,000, With employee payroll deductions recorded at
these rates: 7.5% of gross earnings for FICA tax; 17.5% of gross earnings for
income tax. The payroll consisted of $45,000 direct labor. $9,000 indirect factory
labor, $15,000 sales salaries, and $21,000 administrative salaries„
(c) Indirect factory materials and supplies amounting to $26,250 were purchased; on
terms 2/10, n/30.
(d) Employer payroll tax expense includes state unemployment tax, 3.1%; federal
unemployment tax, 0.8%. FICA tax, 7.5%.
(e) Analysis of the materials requisitioned reveals:
Production orders $60,000
Indirect factory materials and supplies 15,000
Shipping supplies 4,500
(f) Defective shipping supplies of $900 were returned to the vender.
(g) Accounts payable totaling $142,500, including the accrued payroll, were paid.
(h) Depreciation of $1,000 was recorded on the factory machinery.
(i) Sundry factory expenses of $6,900 were recorded as liabilities.
(j) Actual factory overhead of $38,056 was applied to production.
(k) Goods completed with a total cost of $[Link] were transferred to fir-ushed goods
(l) Sales were $150,000 and cost $96,000 to produce.

Required: Prepare journal entries to record the transactions.

4. Cost Accounting Cycle Entries in T Accounts

Dekker Company charges the total actual factory overhead to Work in Process.
Following are selected account balances for September:

September 1 September 30
Finished Goods $34,000 $30,000
Work in Process 7,000 ?
Materials and Supplies 20,000 15,000
Accrued Payroll 13,000 9,000
Accounts Receivable 54,000 22,000
Accounts Payable 18,000 6,000
Sales 500,000

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Additional information:
(a) All sales are on account.
(b) The accounts payable are used for the purchase of materials and supplies only.
(c) Dekker's markup is 30% of sales.
(d) Work in process at the end of September had $2,000 of materials,
$6,000 of direct labor, and $3,000 of factory overhead charged to it.
(e) Actual factory overhead costs for September were:
(f) Materials and supplies purchased on account, $65,000.

Required: Determine the following:

(1) Materials issued to production.
(2) Direct labor.
(3) Total factory overhead.
(4) Cost of goods manufactured.
(5) Cost of goods sold
(6) Payment of accounts payable.
(7) Collection of accounts receivable.
(8) Payment of payroll.

Hint :
*To determine the required amounts T accounts can be used. One is attempted as sample
Materials Account
Opening Balance 20,000 Material issued to production 70,000
Purchases 65,000 Ending Balance 15,000
85,000

*Now calculate CGS by using 30% mark up on sales of $500,000

CGS 100 384,615
Mark-up 30 115,385
Sales 130 500,000

Divide sales by 130 and multiply by 100 to get CGS and 30 to get mark-up or gross
profit.
*Using reverse method find CGS, then cost of goods manufactured and total factory cost.
*Now using the proportion of direct labor and FOH in WIP ending inventory (Direct labor is
double the FOH) find direct labor and FOH in the CGS statement to get the answers to these
questions.

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5. The Cost Accounting Cycle

Montana Company's January 1 account balances are:

Debits Credits
Cash $20,000 Accounts Payable $15,500
Accounts Receivable 25,000 Accrued Payroll 2,250
Finished Goods 9,500 Accumulated Depreciation 10,000
Work in Process 4,500 Common Stock 60,000
Materials 10,000 Retained Earnings 21,250
Machinery 40,000

During January, the following transactions were completed:

(a) Materials purchased on account, $92,000.
(b) Miscellaneous factory overhead incurred on account, $18,500
(c) Labor accumulated and distributed using a payroll account, was consumed as follows:
for direct production, $60,500; indirect labor $12 500; sales salaries $8,000;
administrative salaries, $5,000. 9.5% of the wages are withheld for income tax. The
state and federal unemployment tax rates are 2.7% and .8%, respectively; the employer
and employee FICA tax rate is 7.5% each. The total accrued payroll was paid.
(d) Materials were consumed as follows: direct materials, $82,500; indirect materials,
$8,300.
(e) Factory overhead charged to production was $47,330.
( f) Work finished and placed in stock cost $188,000.
(g) All but $12,000 of the finished goods were sold terms 2/10, n/60. The markup
was 30% above production cost. The sales and the receivable are recorded in the
gross amount.
(h) Of the total accounts receivable 80% was collected,
(i) A liability was recorded for various marketing and administrative expenses totaling
$30,000. Of this amount, 60% was marketing and 40% was administrative.
(j) The check register showed payments of $104,000 for liabilities other than payrolls.

Required: Prepare journal entries in general journal.

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