Chapter two

2. Cost determination: The costing of resource inputs

2.1 Materials
The term “materials" generally used in manufacturing concern refers to raw materials used for
production, sub-assemblies and fabricated parts. These materials will be, directly or indirectly,
entered in to the production of the final product. Thus, proper accounting and control over
materials are required for effective & efficient materials management.
Concepts and Objectives of Materials Control
Materials cost constitute the major part of the total cost of production in manufacturing firms.
Therefore, proper accounting for and control over materials purchase, consumption, and
inventories are important for effective management of a business. Basically, materials control
aims at efficient purchasing, & receiving of materials, their Storing and efficient Use, or
Consumption.
In general, the following are the objectives in a good system of materials control.
In short, control over materials enables us to achieve the five R's.
1. Right quantity materials 4. At the right place
2. Right Quality materials 5. From right suppliers
3. At the right time
2.1.1 Accounting for stock (inventory) movements
The most important steps in materials purchasing and receiving procedures are summarized
below:
1. Purchase Requisition
The purchase requisition is properly approved, or authorized, written request for materials.
Usually, purchase requisitions are prepared by the storekeepers for regular store items, which are
below, or approaching the minimum level of stock. The purchase of specialized materials may be
requested by production of user departments.
Purchasing requisition serves three general purposes:
i) It automatically starts the purchasing process and informs the purchasing department
of the need for the purchase of materials.
ii) It fixes the responsibility of the department making the purchase requisition
iii) It can be used for future reference.

2. Purchase order
After receiving requisition, the purchasing department places an order with a supplier. For
routine purchases, the order is placed with established suppliers. In other cases, the purchasing
department may ask from bids or send out request for price quotation before placing the order.
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Purchase order should clearly state the materials required and the price: and provide information
such as delivery period and the department for whom in the materials is purchased. Purchase
order may be prepared in several copies depending on the need of the firm. The original copy
however is sent to the supplier: Second copy to accounting department: third copy to store: and
so on.
While the PO process for your company may be unique in some ways, there are 7 elements of
the workflow that are common to most, if not all, purchase order processes:
1. Purchase order creation 4. Binding contract
2. Approval 5. Goods delivery
3. Dispatch 6. Three way match and 7. Closure
7 steps of the purchase order process
1. Order creation
The first step in the PO process is to create a purchase request. At this point, you’ll need to know
what is being purchased, the priority level of the requisition, your budget, when the product or
service is needed, who needs to approve the order, and the suppliers.
2. Approval
After the order has been created, the next step in the process is to get approval of the purchase
requisition. In some cases, this approval may be verbal or sent as an email. In other companies,
more formal actions, such as completing paperwork, may be required. The level of approvals
depends on the purchase amount, company policies or guidelines, and the requirements of the
supplier.
3. Dispatch
After the requisition is approved, the PO is sent to the selected vendors. The vendors then submit
bids based on the POs. The bids are approved based on price, quality, support, service, schedule,
and other factors relevant to your business.
4. Binding contract
After the bid is accepted, the company and the vendor must agree to a contract. The contract
typically includes terms and conditions relevant to the purchase, such as what support comes
with the item being purchased or how to handle any disputes.

5. Goods delivery
The supplier will then produce and deliver the items being purchased based on the outlined
schedule and shipping requirements. Your company will verify quality and match the goods
received against the expected goods. Typically, the supplier will send the purchasing company
an invoice that outlines the price and payment terms.
6. Three -way match

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 After the goods received are approved, the purchasing company will then match the purchase
order with the PO and invoice from the supplier. Companies should check to ensure that all
charges are accurate.
7. Closure
After the three-way match is approved, the purchase order is closed out.

3. Receiving Materials
The receiving department performs the function of unloading and unpacking materials which are
received by an organization. Materials are inspected and inspection report is prepared, indicating
the items accepted and rejected, with reason. Receiving report is prepared by the receiving
department. Receiving report may be prepared in several copies, one going to each department
interested in the arrival of materials, including stories, purchasing department, and accounting
department.
4. Preparing and Recoding the Voucher:
After the receiving report is received, the purchasing unit compares the supplier's invoice with
the purchase order and receiving report to make sure that:
 Goods ordered have been received in good condition and those listed on the invoice.
 Terms, unit prices, shipping charges, and other details agree with order specifications.
 Computations are correct.
Then the purchase of materials is recorded as follows:
Raw materials-----------------------------------------------xxx
Vouchers payable ---------------------------------------xxx
The above entry is recorded in a voucher register, and the voucher is sent to the treasurer’s office,
the voucher is filed in the unpaid vouchers file according to the last date on which the discount
may be taken.
5. Paying the voucher
A check is prepared for the net amount. The check is then recorded in the check register. The
employee marks the voucher “paid "by using a rubber stamp and enters the check is mailed to the
supplier, and the voucher is returned to the voucher clerk.

2.1.2 Accounting for materials returned

Occasionally, damaged or defective materials received. These items are usually returned to the
supplier immediately. A note of the return is made on the receiving clerk' copy of the purchase
order and on the receiving repot. The purchasing agent then prepares a debit memorandum. A
debit memorandum is a notice to the vendor (means suppler) of a reduction from the invoice for
the cost of the returned materials. Then the following entry is recorded.
Example
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 A furniture manufacturer has issued a debit memorandum to a supplier for materials returned
costing $3000. The entry to record this transaction in the book of the buyer is
Vouchers payable -----------------------------3000
Purchase returns and allowances ------------3000
A credit memorandum is a notice to the supplier of an addition to the invoice a supplier ships more
materials than were ordered. In this case, if the buyer needs the excess materials, they will be kept
by issuing credit memorandum for additional cost. The accounting entry is shown below:
Raw materials ----------------------------xxx
Vouchers payable ----------------------------------xxx
Illustration:-The following are transactions of ABC manufacturing company for the month of
June 2005. Record in general journal form those transactions that require entries.
June 2 Purchase requisition 201 for 2000 units of materials k-70 is prepared by the storeroom
clerk. The material is to be ordered from Family International at a cost of $8.00 per
unit. Terms 2/10, n/60.
June 4. Purchase order 79 is completed for the materials specified on purchase requisition 201
16 Materials ordered on purchase order 79 are received. Of the 2000 units received, 100
units are rejected because they have imperfections and are immediately returned.
Receiving report 95 is prepared. The purchase invoice is included in the carton, dated
May 16.
17 A debit memorandum to Family International for materials returned is prepared
17 Materials received yesterday from Family International (except those returned) are
transferred to the storeroom and entered in the materials ledger.
25 A check to Family international for the amount due, within discount, is prepared and
mailed.
Solution
June 2 No entry is made when materials requisition is issued (prepared). It initiates the
purchasing procedures.
4 No entry is made when purchase order is place with supplier.
16 No entry is made when receiving report is prepared
16 Raw materials (2000 x 8) --------------------- 16,000
Vouchers payable (Family international) --------------------16,000
17 Vouchers payable (Family International) ------------------800
Purchase Returns & Allowances --------------------------------800
17 No journal entry is made when materials are received by the storekeeper. Rather materials
ledger card and other necessary documents are updated.
25 Vouchers payable (Family International) ---------------------15,200
Purchase Discounts -----------------------------------------------304
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 Cash ------------------------------------------------------------- 14896
2.1.3. Storing and Issuing Materials
2.1.4 Storage of Materials
Two types of control are made in store, one is physical control of materials and the second is
accounting control.
a) Physical control of materials involves restricting admission to the storeroom area only for
authorized personnel. If the store room is open to everybody, materials may be stolen.
b) Accounting control of materials involves maintaining the necessary records for the materials;
one important record is materials ledger. The materials ledger and bin tag are shown below.
2.1.5 Issuance (Use)of Materials
Materials requisition is prepared by production (using) departments in order receive materials from
the store. No material is issued without a materials requisition. Materials requisition is prepared by
department head or job supervisor.
Materials requisition shows the quantity materials number, description, and job number to which
the materials are charged (for direct materials) or department (for indirect materials)
Up on receipt of materials requisition, the storeroom supervisor issues the materials and makes the
necessary notations or the requisition. The storeroom clerk enters the unit price and computers and
enters the total amount.
The Journal entry is as follows:
Work in process -------------------------------------xxx
MOH control ---------------------------------------xxx
Raw materials ----------------------------------xxx
Note that materials Requisition Journal is a special journal used in a job-cost system.
2.1.6 Return of Materials to storeroom
Sometimes materials that have been issued are returned to the storeroom. This may be due to
requisitioning too many materials, withdrawing the wrong materials, or some other reasons. Then
the cost clerk will make the following entry and post to job cost sheet and/or department overhead
analysis sheet.
Raw materials --------------------------------------xxx
Work in process -----------------------------------------xxx
MOH-----------------------------------------------------xxx
Inventory Control
Inventory management refers to the planning, organizing, and controlling activities to ensure that
inventories are kept at levels which provide maximum services at minimum cost. The main
objective of inventory control is to ensure that stock outs do not occur and that surplus stocks
are not accumulated and carried. Inventory management includes management of finished
goods, work-in-process, and raw materials.
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In controlling inventories or stock levels are established for standardized materials which are
regularly used by the firm so that inventory holding can be controlled. Control of raw materials
requires the purchasing department to determine the reorder point and reorder quantity.
Reorder quantity: - refers the quantity to be covered in a single purchase order.
Reorder point (or the level): - is the level at which store-keeper initiates purchase requisitions for
new supplies of materials. to determine reorder quantity and reorder level the following variables
are important.
Lead time: refers to the amount of time it takes for the materials to be delivered from the supplier.
Usage is also used to determine the reorder quantity. Usage represents the consumption patterns.
safety stock (if any). Safety stock is the minimum level of material that should be on hand to
ensure that the company does not run out of materials.
 Determining the Recorder point
In order to determine the reorder point, we need to have the lead time, usage and safety stock (if
any). Safety stock is the minimum level of material that should be on hand to ensure that the
company does not run out of materials.
Example:- Assume that XYZ manufacturing wants to have at least 180 units on hand at all
times. The factory uses 10 units every day. It takes fifteen days to receive an order. The reorder
point is
Lead time usage (10x 15 days) ------------------------- 150 units
Add, Safety Stock------------------------------------------180
Reorder point ----------------------------------------------330 units
The reorder point represents the inventory level at which a new purchase order must be issued.
According to the above example, a new purchase order is placed when the quantities of raw
materials on hand reached 330 units. If the new purchase order is processed as expected within
15 days, the inventory reaches the safety stock of 180 units when the new units arrive at the
premise of the factory.
Another problem is determining how much to order at a time (Economic order Quantity). EOQ
refers to the level of inventory at which the total cost of inventory comprising ordering cost and
carrying cost. To determine this quantity, it is necessary to consider the costs of placing an order
and the costs of carrying items in the store. If the frequency of ordering materials is increasing,
the cost of order will be higher and vice versa. Holding many items involve higher holding costs.
Determining an optimum level involves two types of cost such as ordering cost and carrying
cost. The EOQ is that inventory level that minimizes the total of ordering and carrying cost.
Some examples of order costs are:
1. Costs of maintaining the purchasing department
2. Costs of operating the receiving department
3. Clerical costs of processing an order.
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The costs of holding items in the inventory includes:
1. Costs of handling and storing materials
2. Costs of operating the receiving department
3. Clerical costs of processing an order
4. Clerical costs of maintaining inventory records
In order to determine the quantity that should be ordered at a time, the following formula is used.

EOQ =

Were
√ 2 DC
H

EOQ = Economic order quantity

D = Annual requirements (demand)
C = Ordering cost per unit
H = Holding cost per unit
Example
ABC printing has determined that the cost to place an order for papers is Br. 10 and the cost to
carry this item in inventory is Br. 0.8 per dozen. 10,000 dozen of papers are required for
production each year, what is the economic order quantity?
Solution

EOQ =
√ 2 x 10,000 x 10
0.8

=500 dozens of papers per order is the economic order quantity

2.2. Accounting for labor Cost
Labor cost is an important element of costs, it constitutes a significant portion of total cost of
production. This it is important to establish an efficient system of labor control and selecting the
most appropriate method of remunerating them. The productivity of all other resources is linked
to the productivity of employees. Assets cannot operate by themselves.
2.2.1. Type of labor costs
Labor costs are composed of direct and indirect payments to workers and other personnel
engaged in manufacturing activities. In other words, labor costs represent the costs of purchasing
the labor hours and employee's services. Thus, labor costs are classified as direct labor indirect
labor.
1. Direct labor: - is the personnel who work directly with the raw materials in converting
them to finished goods. In other words, direct labor is the time spent by a work,
identifiable with the particular job or a process.

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 2. Indirect labor: -is the wage of factory personnel who do not work directly on raw
materials. Indirect labor does not directly spend time on a particular job or product. The
distinction between direct labor and indirect labor is based on the convenience of linking
the time spent on a particular job or product. Although indirect workers spend time on
work of general nature, they also equally support production activities
2.2. [Link] of labor remuneration methods
The remuneration of employees is a reward of services rendered by him. It is an agreement
among employer and employee. For remuneration, B.K. Bhar has rightly point out that,
"Remuneration is the reward for labor and services, whereas incentive is the stimulation of
effort and effusiveness by offering monetary inducement or extra facilities."
A. Normal Remuneration Method
It has already been stated that labor is one of the main elements of production. The success of
a business organization is based on the efficiency of labor. There are several methods of
wage payment. These are differing from each organization to another organization. The
methods of wage payment are as follows:
1. Time Rate Method: This method is very popular method of payment of wages. Under
this method, the payment is made on the basis of time devoted by worker in the factory.
It is an oldest form of wage payment. In this method wages are calculated as follows:
Wages = Hours Worked x Rate per Hour
2. Piece Rate Method: In this method, wages are paid on the basis of units produced by
the workers. The rate of payment is determined by production department. Under this
method, wages of workers are calculated by following formula:
Total Wages = No. of Units Produced x Rate Per Unit
Illustration: From the following information, calculate total wages by piece rate method and
time rate method.
Standard Hours 60
Actual Hours Worked 50
No. of Unit Produced 500
Rate per Hour Br.20
Rate per unit produced Br.5
Solution:
The total wages paid to workers is calculated as follows:
 Time Rate Method
Formula = Actual Hours Worked x Rate per Hour = 50 x Br. 20 = Br. 1,000
 Piece Rate Method:
Formula = No. of Unit Produced X Rate per unit produced = 500XBr.5=2500
B. Incentive Wages Method
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 Generally, incentive may be deemed as an extra payment paid by employer to
worker/employees for his additional efficiency. The main objective of an incentive plan to
induce a worker to produce more to earn higher wages. Incentive plans increase the
efficiency and capacity of workers
2.3. Accounting for Factory Over Head Costs
Overhead refers to any cost which is not directly attributable to a particular unit. In other
words, overheads are real costs and represent spending on resources or services which benefit
all units of products and services. Overhead costs are costs common to more than one unit
cannot be linked to a particular unit.
Factory overhead
Factory overhead is the aggregate of indirect costs associated with manufacturing activities,
Factory overhead is also called factory burden, manufacturing overhead, manufacturing
expresses, or indirect manufacturing costs.
Factory overhead includes:
 Factory rent, lighting a heating
 Depreciation repairs and maintenance
 Salaries and related costs of production management
 Wages of indirect costs of production management
 Indirect materials and etc
In general, factory overhead costs are classified into three. There are:
1. Indirect labor
2. Indirect materials
3. Other factory overhead
In order to record the entry is:
Manufacturing overhead control -----------------------------xxx
Various accounts -----------------------------------------------xxx
Setting Overhead Rates
Manufacturing overhead costs are not directly traceable to a unit of output. Instead, these costs
are accumulated during the year and charged to jobs or products at the end of the year. However,
management cannot wait until the end of the year, or month to find out how much particular job
costs. Cost date are most useful when they are immediately available then they can be used to
evaluate efficiency, to suggest changes in procedures, and to help setting profitable selling
prices. The cost accountant is usually expected to report the total setting profitable selling prices.
The cost accountant is usually expected to report the total cost of a job as soon as its finished. At
this time the actual total overhead costs are available, as they would be the end of a fiscal
period. Thus, the accountant has to devise a method of estimating overhead costs applicable of

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the completed jobs. This is achieved by establishing a predetermined overhead rate, or
predetermined overhead application rate.
Predetermined overhead application rate refers to the rate determined before the commencement
of the period during which the same would be used.
Types of overhead rate bases
The overhead rate is calculated with reference to the amount of overhead provided in the budget
and a predetermined volume of production in terms of the base which will be used as
denominator. The base should be the best available of the cause-and-effect relationships
between overhead costs and cost drivers.
Overhead rate = Estimated manufacturing overhead during the year
Estimated activity base
Activity base may be any one of the six bases mentioned below:
1. Units of production 4. Prime cost
2. Direct material cost 5. Direct labor hours
3. Direct labor cost 6. Machine hours

Illustration
A summary of the budget data for Abdi manufacturer for the year ended December 31, 2019 is
given below:
Budgeted Manufacturing overhead costs during the year = $ 600,000
" Units of production = 30,000 units
" Direct labor costs = $400,000
" Direct labor hours = 240,000 hours
" Direct material costs = $ 360,000
" Machine hours = 350,000 hours
Required: Determine overhead application rate under each of the following bases:
a) Units of production
b) Direct material cost
c) Direct labor cost
d) Prime cost
e) Direct labor hours
f) Machine hours

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Units of production
Units of production result in a meaningful rate only if the manufacturing process is simple and
only if one type or a few very similar types of goods are produced.
Rate = Estimated Manufacturing Overhead
Estimated units of production
= 600,000 = $ 20 /unit
30,000
The rate implies that if one unit is produced, the overhead applied (charged) to this unit is $20.
If a job of 100 units is produced, the overhead applied to the job would be $2000 (i.e., $20 x
100 units= $2000)
b) Direct Material cost
Under this method, the overhead application rate is expressed as a percentage of direct material
costs. Rate = Estimated Manufacturing Overhead
Estimated Direct material costs
= 600,000
360,000
= 1.67 or 167% of direct maternal costs
If direct materials consumed of job No. 15 totaled $22,000, the overhead applied to this job
would be $36,740 (i.e 167%22000: 36,740)
Direct material cost is more appropriate when each article manufactured must require
approximately the same amount of materials, or usage must distribute uniformly thought out
the manufacturing process.
However, in practice, most overhead costs have little relationship to materials used. As a result,
it is likely to give totally inaccurate results.

a) Direct labor hours:

This method assumes that overhead costs tend to vary with the number of hours of direct labor
used:
Rate= Estimated Manufacturing Overhead
Estimated Direct labor hours
= 600,000
240,000
= 250% of direct labor hours, or
= $2.50 direct labor hour.
If a job required 100 direct labor hours is completed, the overhead applied to job would be
$25000 (i.e $2.50 x 100 hours = $2500)

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 The direct labor hour basis is more appropriate if labor operations are the major part of the
production process.
Applying manufacturing overhead
In the preceding discussion, the methods of determining overhead application rate were
introduced. However, accounting for applied overhead was not introduced. Thus, this topic is
intended to introduce how manufacturing overhead is applied to jobs or products, how to record
in the accounting records, and how to treat the difference between actual manufacturing
overhead and applied manufacturing overhead.
In general, the following procedures are used to apply manufacturing overhead to jobs or
products.
Step 1. Select the application base (bases described earlier)
Step 2. Prepare a factory overhead budget for the planning period. The two key items are
(a) Budgeted total overhead and
(b) Budgeted total volume of the application base.
Step 3 Compute the overhead application rate by dividing the budgeted total overhead cost by
the budgeted total volume of the application base.

Step 4 Obtain the actual application base (such as machine hours) for the period.

Step5 Apply the overhead to the jobs by multiplying the overhead application rate by the actual
application base data.

Step 6 prepare the necessary entry to the applied factory overhead by the following entry
Work in process---------------------------xxx
Manufacturing applied -----------------------------xxx

Step 7 At the end of the period, account for any difference between the amount of overhead
actually incurred and overhead applied to products.
 Example Suppose that a company budgeted its factory overhead for the fourth coming year
as $900,000. Assume that manufacturing overhead is applied to products on the basis of
machine hours of 600,000 hours. Assume further that a job cost sheet for job 243 included
the following information:

Actual direct materials cost ----------------------------$ 2500

Actual direct labor cost --------------------------------- 3000
Actual machine hours ----------------------------------- 2000 hours
Required
A. Determine the overhead application rate
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 B. Compute the applied overhead to job 243
C. Prepare the entry to record applied overhead to job 243
D. Determine the total manufacturing costs of job 243.
Solution
a. Overhead application rate = Estimated Manufacturing Overhead
Budgeted machine hours
= 900,000
600,000
= $ 1.51 machine hour
b. Applied overhead = overhead rate x Actual activity base
= 1.50 x 2000
= $ 3000
c. Entry
Work in process ------------------------------------3000
Manufacturing overhead applied----------------------------3000
d. Actual direct material cost -------------------------------$ 2500
Actual direct labor cost ------------------------------------- 3000
Applied manufacturing overhead ---------------------------3000
Total manufacturing or production costs (Job 243) … $ 7500
Note that the applied manufacturing overhead is posted to job cost sheet.
Some accountants prefer to credit special departmental overhead applied account, instead of
directly crediting manufacturing overhead control account. i.e.
Work in process ………………………. 3000
Manufacturing overhead applied ………………. 3000
Then manufacturing overhead applied account is closed to manufacturing overhead control
account as follows:
Manufacturing overhead applied ………… 3000
Manufacturing overhead control ……………………. 3000

Over Applied or Under Applied Overhead

Actual manufacturing overhead costs have been debited to MOH control account, and the same
account has been credited from the manufacturing overhead applied to jobs or products. At the
end of the period, MOH control account may have debit or credit balance. A credit balance in
the account implies over applied manufacturing overhead. In other words, over applied overhead
occurs when applied overhead is greater than actual manufacturing overhead. If actual
manufacturing overhead, on the other hand, exceeds applied overhead, the difference is called

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under applied overhead. In other words, under applied overhead is said to exist if MOH
control account has debit balance.
Problems of overhead application
When FOH control Account is over Applied WIP, FG, and CGS as the same time increases but if
FOH control account is under applied it is vice versa. To eliminate the above problems there are
three types of adjustments.
The next question is how to treat under applied or over applied overhead. The treatment depends
on whether the objective is to prepare interim or annual financial statements. The manner of
treating under applied or over applied overhead varies, depending on whether the intention is for
interim or annual report
1. Monthly procedures (Interim Reporting)
The balance of MOH control account is closed to over “applied or under applied manufacturing
overhead” account at the end of the month.
Under applied overhead is closed as follows:
Under applied manufacturing overhead ………………. xxx
Manufacturing overhead control ………………………. xxx
Over applied overhead is closed as follows:
Manufacturing overhead control ………………… xxx
Over applied manufacturing overhead …………………… xxx
The under applied or over applied manufacturing overhead is not closed monthly. The amount
of under applied is considered a deferred charge and is shown under prepaid expenses on the
interim balance sheet as a deferred credit.
Note that the amount of under applied or over applied overhead does not appear in the interim
income statement. The statement of cost of goods manufactured shows direct materials used,
direct labor, and manufacturing overhead applied.
2. End-of-year procedures
The balance of under applied or over applied manufacturing overhead represents a difference
between overhead costs applied to goods worked on during the year and the actual overhead
costs that were incurred in producing these goods. There are two ways of treating under applied
or over applied overhead at the end of the year.
a) Immediate write off method
If the amount of under applied or over applied overhead is small, it is regarded as an adjustment
to Cost of Goods sold (i.e., written-off against cost of goods sold account).
Example
Assume that factory overhead incurred is $800.000 and that factory overhead applied is
$750.000. The difference is under applied of $50.000. The closing entry is:
Cost of Goods sold ……………………. 50.000
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 Manufacturing overhead control ………50.000
If the difference were over applied, the closing entry would be:
Manufacturing overhead control ………… 50.000
Cost of Goods sold …………………………50.000
b) Perorations Method
If the amount of under applied or over applied overhead is considered to be material, it is divided
among Cost of Goods Sold. Work in Process, and Finished Goods Inventory.

Example Assume that factory overhead incurred is $900.000 and that factory overhead applied is
$1,200,000. The difference is considered to the material. Assume further that the ending
balances (before prorating) were as follows:
Cost of goods sold ………………….. $1,000,000
Work in Process …………………….. 400,000
Finished goods ……………………… 600,000
Required
1. Compute under applied or over applied overhead at year end.
2. Prorate under applied or over applied overhead among the three balances.
3. Prepare the closing entry to record the prorated amount assuming that applied overhead was
recorded in manufacturing overhead control account.
4. Compute the new balances of the account after proration.
Solution
1. Over applied overhead:
Factory overhead applied …………………………….. $1,200,000
Less Factory overhead incurred ………………………. 900.000
Over applied overhead ………………………………… $ 300.000
2. Proration of over applied overhead is shown below:
1,000,000 x 300,000
Cost of Goods Sold = = $ 150.000
2,000,000
400,000 x 300,000
Work in Process = = 60,000
2,000,000
600,000 x 300,000
Finished Goods = = 90,000
2,000,000
3. Manufacturing overhead control ……………… 300,000
Cost of Goods sold ……………………………… 150,000
Work in Process ………………………………… 60,000
Finished Goods …………………………………. 90,000
4. The balance of the three accounts after proration are computed below.
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 Cost of Goods sold = 1,000,000 - $150,000 = $850,000
Work in Process = 400,000 - 60,000 = 340,000
Finished Goods = 600,000 - 90,000 = 510,000
2.4. Recording of costs and schedule of costs of products.
1. Recording of raw material purchase.
Raw material-------------------xx
Cash/account payable----------------xx
2. Recording of raw material used in to production.
Work-in-process inventory-----------------xx
Raw material------------------------------------xx
3. Recording of labor cost incurred in production.
Work-in-process inventory--------------------xx
Salary/ wage payable----------------------------xx
4. Recording of actual manufacturing overhead cost.
Manufacturing overhead cost----------xx
Various accounts -----------------------------xx
5. Recording of applied manufacturing overhead cost.
Work-in process inventory--------------xx
Manufacturing overhead applied ------------xx
6. Recording of completion of production.
Finished goods inventory----------------xx
Work in process inventory------------------xx
7. Recording sales of product.
Cash/account receivable----------------xx
Sales------------------------------------xx
Finished goods inventory--------------xx
Cost of goods sold expense----------------xx
Schedule of cost of goods manufactured
Alpha-Manufacturing company
Schedule of cost of Goods Manufactured
For the month of November, 20xx
Direct material used:
Raw-material inventory, November-1-------------------------xx
Add: November purchase of raw material---------------------xx
Raw material available for use----------------------------------xx
Deduct: Raw-material inventory, November-30---------------xx
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Raw material used--------------------------------------------------------------------------xx
Direct labor-----------------------------------------------------------------------------xx
Manufacturing overhead applied to work in process-----------------------------xx
Total manufacturing costs----------------------------------------------------------- xxx
Add: Work in process inventory, November-1-------------------------------------xx
Subtotal----------------------------------------------------------------------------------xx
Deduct: Work in process, November-30, -------------------------------------------xx
Cost of goods produced -------------------------------------------------------------------- xxx

17 | P a g e
Cost and management accounting I Compiled by T.k