Republic of the Philippines

Surigao del Sur State University

LIANGA CAMPUS
Lianga Surigao del Sur, 8307
Website: [Link]

Subject: IACCTG 2 (FM3hFM3iFM3g)

Description: Cost Accounting and Cost Management
Time/Day MTH (5:30-7:00 | 7:00-8:30), TF (5:30-7:00)

Objectives:
Prepare the accounting entries of a manufacturing entity in a production process. Prepare the
statement of cost of goods sold for a manufacturing entity.

Three Kinds of Inventories:

1) Held for sale in the ordinary course of business

2) In the process of production for sale; or
3) In the form of materials or supplies to be consumed in the production process or in the
rendering of services

In a manufacturing perspective:

 Raw materials inventory – are the materials or supplies to be consumed in the production
process to be transformed as completed goods.
 Work-in-process inventory – are items that are currently in the process of production.
 Finished goods inventory – are items that completed the production process and are held
for sale in the ordinary course of business.

Raw materials inventory (RMI)

Beginning balance Return of inferior materials to suppliers
Purchase of raw materials Issuance to production
Return of excess raw materials from
production
Ending balance

Factory salaries and wages

Recognition of factory payroll Factory payroll charged to production
Ending balance

Y. GATCHALIAN, CPA
 Republic of the Philippines
Surigao del Sur State University
LIANGA CAMPUS
Lianga Surigao del Sur, 8307
Website: [Link]

Manufacturing overhead
Actual overhead incurred Overhead applied to production
Indirect materials Actual costing – all actual OH
Indirect labor Normal costing – predetermined rates
Factory utilities
Factory rent
Factory insurance
Factory depreciation

Work-in-process inventory (WIP)

Beginning balance Return of excess raw materials from
Direct materials issued to production Production
Direct labor issued to production Cost of goods completed transferred to
Manufacturing overhead applied to Finished Goods Inventory (FGI)
production
Ending balance

Finished goods inventory

Beginning balance Cost of goods sold
Cost of goods completed from WIP
Ending balance

Illustration I

Gidjette Manufacturing Company has the following beginning balances for the month of April
2020:

Raw materials inventory 21,000

Work-in-process inventory 89,000
Finished goods inventory 189,000

Using perpetual inventory system, for the transactions for April 2020, complete the following:

1. Journal entries to record all transactions

2. Ledger postings to relevant T-accounts
3. Statement of cost of goods manufactured and sold

Y. GATCHALIAN, CPA
 Republic of the Philippines
Surigao del Sur State University
LIANGA CAMPUS
Lianga Surigao del Sur, 8307
Website: [Link]

Transactions:

a) Purchased 5,000 units of raw materials at P35.00 per unit on account.

Journal entry:
Raw materials inventory 175,000.00
Accounts payable 175,000.00

b) Returned 100 units of raw materials to the supplier due to inferior quality.

Journal entry:
Accounts payable 3,500.00
Raw materials inventory 3,500.00

c) Issued all beginning balance of raw materials and 1,000 units of newly purchased
materials to production.

Computation:
From beginning balance 21,000.00
From newly-purchased materials (1,000 x P35) 35,000.00
Materials issued to production 56,000.00

Journal entry:
Work-in-process inventory 56,000.00
Raw materials inventory 56,000.00

d) 50 units of excess materials were returned to storage.

Journal entry:
Raw materials inventory 1,750.00
Work-in-process inventory 1,750.00

e) Paid salaries to factory employees, maintenance staff, and supervisors, payroll details of
which are:

Y. GATCHALIAN, CPA
 Republic of the Philippines
Surigao del Sur State University
LIANGA CAMPUS
Lianga Surigao del Sur, 8307
Website: [Link]

Gross pay 322,000.00

SSS 16,000.00
Philhealth 4,830.00
Pag-ibig 2,000.00
Withholding taxes 1,200.00
Net pay 297,970.00

Journal entry:
Factory salaries and wages 322,000.00
SSS contributions payable 16,000.00
PHIC contributions payable 4,830.00
HDMF contributions payable 2,000.00
Withholding tax payable 1,200.00
Cash 297,970.00

f) Applied factory payroll to production where 70% are direct laborers and 30% are
maintenance staff and supervisors.
Direct laborers (P322,000.00 x 70%) 225,400.00
Indirect laborers (P322,000.00 x 30%) 96,600.00

Journal entry:
Work-in-process inventory 225,400.00
Manufacturing overhead 96,600.00
Factory salaries and wages 322,000.00

g) Paid P6,000.00 for maintenance of factory machinery.

Journal entry:
Manufacturing overhead 6,000.00
Cash 6,000.00

h) Incurred P4,000 for maintenance of office equipment on account.

Journal entry:
Repairs and maintenance expense 4,000.00
Accounts payable 4,000.00

Y. GATCHALIAN, CPA
 Republic of the Philippines
Surigao del Sur State University
LIANGA CAMPUS
Lianga Surigao del Sur, 8307
Website: [Link]

i) Paid factory utilities of P89,000 and office utilities of P72,000.00

Journal entry:
Manufacturing overhead 89,000.00
Utilities expense 72,000.00
Cash 161,000.00

j) Recognized adjustments for the following:

Expired insurance of factory assets 2,000.00

Expired insurance of office space 2,500.00
Depreciation of factory machinery 6,000.00
“Manufacturing overhead” account
Depreciation of office equipment 4,500.00
was used since they were used in
the factory which means they are
Journal entry: indirect “product” costs
Manufacturing overhead 8,000.00
Insurance expense 2,500.00
Depreciation expense – office equipment 4,500.00
Prepaid insurance – factory assets 2,000.00
Prepaid insurance – office space 2,500.00
Accumulated depreciation – factory machinery 6,000.00
Accumulated depreciation – office equipment 4,500.00

k) Actual overhead applied to production.

Remember:
Indirect labor 96,600 Period costs- operating expense
Maintenance of factory machinery 6,000
Factory utilities 89,000 Product cost – manufacturing
Insurance of factory assets 2,000 costs
Depreciation of factory machinery 6,000
Total overhead 199,600

Entry:

Work-in-process inventory 199,600.00

Y. GATCHALIAN, CPA
 Republic of the Philippines
Surigao del Sur State University
LIANGA CAMPUS
Lianga Surigao del Sur, 8307
Website: [Link]

Manufacturing overhead 199,600.00

l) All beginning work-in-process and 50% of current production is completed.

WIP, beg. 89,000.00

Current production charged to WIP acct:
Direct materials 54,250.00
Direct labor 225,400.00
Manufacturing overhead 199,600.00
479,250.00
Multiply by 50% 239,625.00
Cost of completed units for the month 328,625.00

Entry:

Finished goods inventory 328,625

Work-in-process inventory 328,625

m) Sold all beginning finished good inventory and 40% of recently completed units at 50%
mark-up based on costs on account. Cost totaled P320,250.00.

Entry:
Accounts receivable (320,250 x 150%) 480,675.00
Sales revenue 480,675.00
Cost of goods sold 320,450.00
Finished goods inventory 320,450.00

n) Paid marketing and advertising costs of P12,000.00 to promote the firm’s products.

Entry:

Marketing expense 12,000.00

Cash 12,000.00

T-Accounts and Cost of Goods Manufactured:

175,000 – 3,500 = 171,500

Y. GATCHALIAN, CPA
 Republic of the Philippines
Surigao del Sur State University
LIANGA CAMPUS
Lianga Surigao del Sur, 8307
Website: [Link]

Note: Period costs / expenses were not included since they are not part of the Cost of Goods
Sold. However, in the preparation of Statement of Financial Performance or Income Statement,
these expenses are included

To illustrate:

GIDJETTE MANUFACTURING COMPANY

CONDENSED STATEMENT OF FINANCIAL PERFORMANCE
FOR THE MONTH ENDED APRIL 30, 2020

Sales P 480,675.00
Cost of Goods Sold 320,450.00
Gross Profit P 160,225.00
Less: Operating Expenses
Marketing expense 12,000.00
Utilities Expense 72,000.00
Insurance Expense 2,500.00
Repairs and maintenance expense 4,000.00
Depreciation expense – Office Equipment 4,500.00
Total Expenses 95,000.00
Operating Income P 65,225.00

Y. GATCHALIAN, CPA
 Republic of the Philippines
Surigao del Sur State University
LIANGA CAMPUS
Lianga Surigao del Sur, 8307
Website: [Link]

What Is Cost of Goods Sold (COGS)?

 Cost of goods sold (COGS) refers to the direct costs of producing the goods sold by a
company. This amount includes the cost of the materials and labor directly used to create
the good. It excludes indirect expenses, such as distribution costs and sales force costs.
 Cost of goods sold is also referred to as "cost of sales."
 Cost of goods sold (COGS) includes all of the costs and expenses directly related to the
production of goods.
 COGS excludes indirect costs such as overhead and sales & marketing.
 COGS is deducted from revenues (sales) in order to calculate gross profit and gross
margin. Higher COGS results in lower margins.
 The value of COGS will change depending on the accounting standards used in the
calculation.
ABC Company
Income Statement (partial)
For the Year Ended December 31, 2020

Sales P 100,000.00 100%

Cost of goods sold
Beginning inventory P 22,000.00
Purchases, net 83,000.00
Cost of goods available 105,000.00
Less: Ending inventory 25,000.00
Cost of goods sold 80,000.00 80%
Gross Profit P 20,000.00 20%

Estimating Inventory: Gross Profit Method

Illustration:

Y. GATCHALIAN, CPA
 Republic of the Philippines
Surigao del Sur State University
LIANGA CAMPUS
Lianga Surigao del Sur, 8307
Website: [Link]

ABC Company
Statement of Financial Performance (partial)
For the Year Ended December 31, 2020

Sales P 56,000.00 100%

Cost of goods sold
Beginning inventory P 25,000.00
Purchases, net 46,000.00
Cost of goods available ?
Less: Ending inventory ?
Cost of goods sold ? 80%
Gross Profit ? 20%

Step 1: Cost of Goods Available = Beginning Inventory + Net Purchases

Cost of Goods Available = P 25,000.00 + P 46,000.00
Cost of Goods Available = P 71,000.00

Step 2: Gross Profit = Gross Profit Percentage (or Gross Margin) x Sales
Gross Profit = 20% x P 56,000
Gross Profit = P 11,200.00

Step 3: Cost of Goods Sold = Sales – Gross Profit

Cost of Goods Sold = P 56,000 – P 11,200 (from Step 2)
Cost of Goods Sold = P 44,800.00

or

Cost of Goods Sold = Sales of P 56,000.00 x 80%

Cost of Goods Sold = P 44,800.00

Inserting this information into the income statement yields the following:

ABC Company
Income Statement (partial)
For the Year Ended December 31, 2020

Y. GATCHALIAN, CPA
 Republic of the Philippines
Surigao del Sur State University
LIANGA CAMPUS
Lianga Surigao del Sur, 8307
Website: [Link]

Sales P 56,000.00 100%

Cost of goods sold
Beginning inventory P 25,000.00
Purchases, net 46,000.00
Cost of goods available 71,000.00
Less: Ending inventory ?
Cost of goods sold 44,800.00 80%
Gross Profit P 11,200.00 20%

Next, we need to compute the ending inventory amount. This is done by subtracting the cost of
goods sold from the cost of goods available as shown here:

Ending Inventory = Cost of Goods Available – Cost of Goods Sold

Ending Inventory = P 71,000.00 – P 44,800.00
Ending Inventory = P 26,200.00

Below is the completed partial income statement with the estimated amount of ending inventory
at P 26,200.00. (Note: Always recheck the math on the income statement to be certain you
computed the amounts correctly.)

Y. GATCHALIAN, CPA