Module 2
Cost Accounting cycle
Source: 2010 Cost Accounting by Gloria Ardaniel Rante
AGNIÑO, CPA
1. To learn the flow of Manufacturing costs from purchase
of raw materials to the completion of these materials into
a finished product.
2. To learn about how to journalize entries to record
transactions of a manufacturing company under Actual
and Normal method of costing.
3. To know how to prepare Statement of Cost of Goods
Manufactured and Sold
OBJECTIVES
Source: 2010 Cost Accounting by Gloria Ardaniel Rante
A. Inventory Accounts
B. Flow of Manufacturing costs
C. Methods of Accumulating Product Costs
D. Predetermined Overhead Rate
E. Manufacturing Overhead Account
F. Disposition of over or under applied OH
G. Closing Variances
H. Basic Transactions of a manufacturing Company
I. Multiple Overhead rates
J. Departmental Rate and Plant Wide Rate
K. Cost of Goods Manufactured and Sold
Contents
Source: 2010 Cost Accounting by Gloria Ardaniel Rante
• Raw Materials Inventory this account shows the raw materials
available for use in the manufacturing process. It serves as a
controlling account if the company maintains only one account for its
direct and indirect materials. If the company maintains a separate
account for its direct and indirect materials or supplies, the account
may be changed to DIRECT MATERIALS INVENTORY (for direct
materials) and FACTORY SUPPLIES INVENTORY (for indirect
materials) accounts.
• Work In Process Inventory this account represents the costs of
partially completed goods on which production activities have been
started but not yet completed as of a certain period.
• Finished Goods Inventory this is account summarizes the costs
of completed jobs stored in the warehouse ready for delivery to the
customers.
Inventory Accounts
Source: 2010 Cost Accounting by Gloria Ardaniel Rante
Manufacturing costs flow
Source: 2010 Cost Accounting by Gloria Ardaniel Rante
Manufacturing costs flow
Source: 2011 Cost Accounting by Michael R. Kinney & Cedly A. Railborn
A. Purchase of Raw Materials (RM) B. Issuance of Raw Materials (RM)
• Usually use Perpetual Inventory • RM are issued to production on the
System. Purchases and issuance basis of a material requisition
of RM are recorded in the RM form. Cost of RM issued is then
Inventory account transferred to a Work in Process
• Cost of RM includes the invoice (WIP) and Manufacturing
costs plus transportation costs Overhead Account. Journal Entry:
• Journal Entries are: Debit Work in Process
Debit Raw Materials (invoice cost)
Debit Manufacturing overhead
Debit Freight In (Transortation cost)
Credit Accounts Payable or Cash Credit Raw Materials
C. Return of excess Materials to
If the company maintains two (2) separate accounts Storeroom
for direct & indirect materials the entry would be:
Debit Raw Materials
Debit Raw Materials (direct materials)
Debit Factory Supplies (indirect materials) Credit Work in Process
Debit Freight In (Transortation cost) Credit Manufacturing overhead
Credit Accounts Payable or Cash
JE for Direct Materials
Source: 2010 Cost Accounting by Gloria Ardaniel Rante
D. Factory Labor Incurred E. Distribution of Factory Labor
• Compensation of factory workers and • Accountant will segregate the
other workers in the factory like DL and IL costs.
supervisors, janitors, maintenance • The salary of factory workers
personnel and inventory clerks is (direct laborers) is debited to
temporarily accumulated in a Factory WIP account while salary of
payroll account at the time it is incurred indirect laborers (production
whether paid immediately or not. manager, supervisor or
• Compensation normally includes basic foreman, RM inventory clerk,
pay, 13th month pay, cost of living maintenance personnel is
allowance, performance bonuses, and debited to Manufacturing
other form of compensation. overhead (MOH). Entry is/are:
• Journal Entries are:
Debit Factory Payroll (gross) Debit Work in Process
Credit Accrued wages payable or cash (net)
Credit Withholding tax payable
Debit Manufacturing overhead
Credit SSS Premium payable Credit Factory Payroll (gross)
Credit Philhealth payable
Credit Pag-ibig payable
JE for Direct Labor
Source: 2010 Cost Accounting by Gloria Ardaniel Rante
F. Manufacturing Overhead Incurred G. Actual Factory OH Charged to the Job
• Actual MOH cosy incurred in production • At the end of the given period, the actual
is charged to MOH account at the time it PH is transferred to the WIP account if a
is incurred. company adopts the ACTUAL
• Other MOH costs such as expired COSTING SYSTEM of accumulating
insurance & depreciation of factory PPE costs. Entry is/are:
are charged to MOH account only at
YEAR END when adjusting entry is Debit Work in Process
prepared. Credit Manufacturing overhead
• Examples: Repairs & Maintenance,
Depreciation of factory PPE, Insurance,
Property taxes, Indirect labor, Indirect
materials, Factory utilities (light, power,
water, tel), Factory rent, Employer’s
share of SSS, PHIC, HDMF
• Entry is/are:
Debit Manufacturing overhead
Credit Accumulated depreciation
Credit Prepaid Insurance
Credit Cash (for those requiring cash outlay)
Credit Accounts Payable (not paid)
JE for Manufacturing Overhead (MOH)
Source: 2010 Cost Accounting by Gloria Ardaniel Rante
H. Completion of the Job I. Sale of the Completed Job
• On the completion of the • Cost-Plus Pricing method is the most
production process, the common method of setting price for the
accumulated cost of production
job completed. Production cost and
summarized in the WIP account
is transferred to the Finished admin & selling costs plus desired
Goods (FG) account. After profit. Entry is:
posted this entry, any balance • Debit: Accounts Receivables/cash
remaining in the WIP account • Credit: Sales
represents the cost of
• If Perpetual inventory method of
uncompleted jobs during the
period. Entry is/are: handling inventories is adopted by the
FG inventory account the entry is:
Debit Finished Goods
• Debit: Cost of Sales
Credit Work in Process
• Credit: Finished Goods Inventory
JE for Completion of the Job
Source: 2010 Cost Accounting by Gloria Ardaniel Rante
Summary of Flow of Costs
Source: 2010 Cost Accounting by Gloria Ardaniel Rante
• Actual Costing System only very few adopt this method of costing
because the overhead costs cannot be traced easily to individual jobs.
This method requires that all production overhead must be available
before any cost allocation can be made to the jobs in process. Under
this system, the actual costs of direct materials used, direct labor and
manufacturing overhead incurred in production are charged to the
job.
• Normal Costing System the actual costs of DM and DL are charged
to the job. The MOH applied to the production differs from actual
costing in the sense that a pre-determined overhead rate is used in
computing for the amount of OH charged to the job. The
Predetermined OH rate is the ratio of estimated total OH to the
estimated total of cost driver selected. The company can use one rate
(plant-wide) or several rates (department rates). If several rates are
used, the budgeted MOH is actually divided into several cost pools
and uses each driver as the denominator in computing for the
predetermined OH rate.
Methods of Accumulating Product Costs
Source: 2010 Cost Accounting by Gloria Ardaniel Rante
• Predetermined OH rate is a Illustration:
budgeted and constant
charge per unit of activity. Let us assume that the budgeted annual
The activity chosen is called OH is composed of:
the OH allocation Base or Fixed cost: P1,000,000.00
Cost Driver. Examples of Variable cost: P40.00 per DL hours
activity bases are as follows: Budgeted annual DL hours: 125,000
• Physical output
What is the Predetermined OH rate?
• Direct labor costs
• Direct labor hours Predetermined P1,000,000 + (125,000 x 40)
• Material costs overhead rate = 125,000
• Machine hours
• Activities
Predetermined
Predetermined Budgeted manufacturing overhead overhead rate = P48 per DHL
overhead rate = Budgeted production activity
Predetermined Overhead Rate
Source: 2010 Cost Accounting by Gloria Ardaniel Rante
• Normally, OH cost charged to jobs is estimated using a
predetermined rate because it is impractical to trace OH to
specific jobs.
• MOH account is used to record the actual OH incurred and the
amount of OH applied to the job. MOH account is debited
when OH is incurred.
• The amount of OH applied to the job is calculated using the
predetermined OH rate multiplied by the actual level of
activity. The amount will be credited to MOH account.
• If MOH Total debits > Total credits = Under applied
• If MOH Total debits < Total credits = Over applied
• Five commonly used bases in determining predetermined OH
rates are: (1) Units produced, (2) Direct labor hours, (3) Direct
labor costs, (4) Machine hours, (5) Machine costs
Manufacturing Overhead Account
Source: 2010 Cost Accounting by Gloria Ardaniel Rante
• Actual OH is rarely equal to Applied OH to the job
process.
• At the end of accounting period, Actual OH and Applied
OH are compared to evaluate the appropriateness of the
predetermined OH rate.
• If Actual OH > Applied OH = Under applied (Unfavorable)
• If Actual OH < Applied OH = Over applied (Favorable)
• If the amount of variance is immaterial, that is, the
variance is so small that the difference is not expected to
affect management’s decision, the variance is closed to
Cost of Goods Sold (COGS).
• However, if the variance is material, the variance are
prorated based on the associated to their respective cost
accounts.
Disposition of Over or Under Applied Overhead
Source: 2010 Cost Accounting by Gloria Ardaniel Rante
Closing Variances
Source: 2010 Cost Accounting by Gloria Ardaniel Rante
Basic Transactions (Actual Costing method)
Source: 2010 Cost Accounting by Gloria Ardaniel Rante
Basic Transactions (Actual Costing method)
Source: 2010 Cost Accounting by Gloria Ardaniel Rante
Basic Transactions (Actual Costing method)
Source: 2010 Cost Accounting by Gloria Ardaniel Rante
Actual level of activity utilized for actual output x predetermined OH rate
Basic Transactions (Actual Costing method)
Source: 2010 Cost Accounting by Gloria Ardaniel Rante
Multiple Overhead Rates
Source: 2010 Cost Accounting by Gloria Ardaniel Rante
Department rate (one overhead rate per department)
• Manufacturing companies usually has two or more
production departments that convert the RM into a
finished products.
• Department rates is recommended to allow each
department to select the most appropriate measure of
activity relative to its operations.
Plant-wide rate (one rate for all departments)
• One overhead rate is chosen by a company for the
allocation of manufacturing overhead to a different jobs
Departmental Rate and Plant-wide Rate
Source: 2010 Cost Accounting by Gloria Ardaniel Rante
Departmental Rate and Plant-wide Rate
Source: 2010 Cost Accounting by Gloria Ardaniel Rante
Cost of Goods Manufactured and Sold
Source: 2010 Cost Accounting by Gloria Ardaniel Rante
The End