COST ACCOUNTING

Cost Accounting Cycle

Types of Manufacturing Costs:

1. Direct Materials – Materials used in the manufacturing process that become a significant part of the finished
goods.

2. Direct Labor – Salaries paid to employees who work directly with the raw materials in converting them to
finished goods.

3. Manufacturing Overhead – All costs incurred in the factory that cannot be considered direct materials or direct
labor. Sometimes called factory overhead, manufacturing expenses, or factory burden. Manufacturing
overhead is usually subdivided into three categories:

a. Indirect Materials – Materials that are used in small amounts in the manufacturing process or that cannot
easily be traced to specific products.

b. Indirect Labor – Wages of factory personnel who do not work directly on raw materials.

c. Other Manufacturing Overhead – Includes payroll taxes on factory wages, rent on factory building,
depreciation of factory building, insurance on factory building and machinery, heat, light and power;
repairs and maintenance of machinery and equipment, etc. Many of these relate to physical plant
(building, machinery, and equipment).

Prime Cost – reflects the primary sources of costs for units in production. It is the sum of direct materials and direct labor.

Conversion Cost – Conversion cost indicates the costs required to convert the raw materials into finished products. It is
the sum of direct labor and factory overhead.

Inventories for a Manufacturing Company

1. Raw Materials Inventory
2. Work in Process Inventory
3. Finished Goods Inventory

System of Cost Accumulation

1. Actual Cost System
2. Standard Cost System
3. Normal Cost System

Recording Transactions of a Manufacturing Company

Transactions Pro-forma Entry

1. Acquisition of raw materials

2. Return of materials to a supplier

3. Issuance of raw materials

a. Direct materials

b. Indirect materials

4. Return of excess materials from production department

5. Payroll for a specified period

6. Distribution of payroll

7. Payment of payroll

8. Incurrence of various overhead, other than indirect

Labor and indirect materials
- Depreciation of factory plant and equipment
- Maintenance of factory plant and equipment
- Insurance of factory plant and equipment
- Power, light and water

9. Overhead is applied to production

10. Completion of goods put into process

11. Sale of goods on account

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12. Disposition of over or under applied overhead

a. If the amount is immaterial and the variance is underapplied

b. If the amount is immaterial and the variance is overapplied

c. If the amount is material and the variance is underapplied

d. If the amount is material and the variance is overapplied

Illustration:

Given the following information for McCurley Corporation, prepare the necessary journal entries, assuming that the Raw
Material Inventory account contains both direct and indirect material.

a. Purchased raw materials on account, P28,500.

b. Issued materials to production: P15,000 of direct materials and P3,000 of indirect materials.
c. Accrued payroll of P90,000, of which 70 percent was direct and the remainder was indirect.
d. Incurred and paid other overhead items, P36,000.
e. Completed goods costing P86,500.
f. Sold goods costing P71,300 on account for P124,700.

Pro-forma Cost of Goods Sold Statement for Manufacturing Companies:

Raw materials, beginning xxx

Raw materials purchases xxx
Raw materials available for use xxx
Raw materials, end ( xxx )
Raw materials used xxx
Direct labor xxx
Factory overhead xxx
Total manufacturing cost xxx
Work in process, beginning xxx
Total work placed in process xxx
Work in process, end ( xxx )
Cost of goods manufactured xxx
Finished goods, beginning xxx
Total goods available for sale xxx
Finished goods, end ( xxx )
Cost of goods sold xxx

Illustration:

Prepare a Schedule of Cost of Goods Statement (in good form) for the Graves Company from the following information
for June 2019:

Inventories Beginning Ending

Raw Material P 6,700 P 8,900
Work in Process 17,700 22,650
Finished Goods 29,730 19,990

Additional information: purchases of raw materials were P46,700; 19,700 direct labor hours were worked at P11.30 per
hour; overhead costs were P33,300.

PROBLEM-SOLVING

Problem 1: Determine whether each of the following costs should be classified as direct materials (DM), direct labor
(DL), or factory overhead (FOH).
1. Depreciation on factory equipment 11. Insurance on factory building.
2. Wages paid to assembly line workers 12. Rivets and screws used in production.
3. Factory rent 13. Tires used in manufacturing vehicles.
4. Depreciation of pencil painting machinery 14. Nails and glue used in production
5. Lead inserted into pencils 15. Cabinet maker's wages
6. Wages of assembly line worker 16. Factory supervisors’ salaries
7. Factory machinery maintenance 17. Depreciation on factory machines
8. Wood used to manufacture furniture 18. Factory utilities
9. Eraser compound 19. Property taxes on the factory building
10. Steel used in manufacturing product. 20. Insurance on factory equipment

Problem 2: Manny Manufacturing Company has the following data at June 30, 2019:

Raw materials inventory, June 1 P 13,800

Work in process inventory, June 1 18,100
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Finished goods inventory, June 1 43,500
Total manufacturing costs 510,000
Sales 590,000
Work in process inventory, June 30 30,400
Finished goods inventory, June 30 50,200
Raw materials inventory, June 30 18,000

Required: Prepare an income statement through gross profit for the month of June.

Problem 3: The following information is for the Rayne Manufacturing Company for November.

Inventories Beginning Ending

Raw Material P 17,400 P 13,200
Work in Process 31,150 28,975
Finished Goods 19,200 25,500

Direct Labor (21,000 DLH @ P13)

Raw Material Purchases P 120,000
Indirect Labor 11,200
Factory Supplies Used 350
Other Expenses:
Depreciation – Factory Equipment 17,300
Insurance – Office Building 2,570
Office Supplies Expense 900
Insurance – Factory Building 1,770
Depreciation – Office Equipment 3,500
Repair & Maintenance – Factory Equipment 7,400

Required: Prepare a Statement of Cost of Goods Sold for the Rayne Manufacturing Company

Problem 4: From the following information for the Galveston Company, compute prime costs and conversion costs.

Inventories Beginning Ending

Raw Material P 9,900 P 7,600
Work in Process 44,500 37,800
Finished Goods 36,580 61,300

Raw materials purchased during the period cost P40,800; overhead incurred and paid or accrued for the period was
P21,750; and 23,600 direct labor hours were incurred at a rate of P13.75 per hour.

The following miscellaneous data has been collected for a manufacturing company for the most recent year-end:

Inventories: Beginning Ending

Raw material P50,000 P55,000
Work in process 40,000 45,000
Finished goods 60,000 50,000
Costs recorded during the year:
Purchases of raw material P195,000
Direct labor 150,000
Cost of goods sold 595,000

Required: Prepare a cost of goods sold statement.

Problem 5: Selected data concerning the past fiscal year’s operations (000 omitted) of the Clark Manufacturing
Company are presented below:
Inventories
Beginning Ending
Raw materials P75 P 85
Work in process 80 30
Finished goods 90 110

Other data:
Raw materials used P 326
Total manufacturing costs incurred (FOH is applied at
a rate of 60% of DL) 686
Cost of goods available for sale 826
Selling and general expenses 25

Required: Compute for the following:

1. Cost of raw materials purchased during the year.
2. Direct labor costs charged to production during the year.
3. Cost of goods manufactured.

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4. Cost of goods sold.

Problem 6: The following events took place at the Dreams Company for the current year:

• Purchased P120,000 in direct materials

• Incurred labor costs as follow:
a. Direct labor, P72,000
b. Supervisor labor, P26,000 (part of FOH)
• Purchased manufacturing equipment for P94,000
• Other manufacturing overhead excluding supervisor labor, was P88,000
• Transferred 80% of the materials to the manufacturing assembly line
• Completed work on 70% of the goods in process. Costs are assigned equally across all work in process
• Sold 60% of the completed goods

There were no beginning balances in the inventory accounts. All costs incurred were debited to the appropriate
account and credited to accounts payable.

Required: Compute for the following:

1. Ending balance of direct materials inventory.

2. The amount of cost of goods sold.

Problem 7

In June 2016, the Graves Company has Cost of Goods Manufactured of P296,000; beginning Finished Goods Inventory
of P29,730; and ending Finished Goods Inventory of P19,990. The following additional information is available:

Selling Expenses P 40,500

Administrative Expenses 19,700
Sales 475,600

Required: Prepare an income statement in good form.

MULTIPLE-CHOICE

1. Which of the following costing methods of valuation are acceptable in a job order costing system?

Actual Standard Actual Predetermined

Material Material Labor Overhead
Cost Cost Cost Cost
a. yes yes no yes
b. yes no yes no
c. no yes yes yes
d. yes yes yes yes

2. In a normal cost system, debits to Work in Process Inventory would not be made for
a. actual overhead c. actual direct material
b. applied overhead d. actual direct labor

3. A credit to Work in Process Inventory represents

a. work still in process. c. the application of overhead to production.
b. raw material put into production d. the transfer of completed items to Finished Goods Inventory.

4. Total manufacturing costs for the year plus beginning Work in Process Inventory cost equals
a. cost of goods manufactured in the year c. total manufacturing costs to account for.
b. ending Work in Process Inventory d. cost of goods available for sale.

5. Which of the following would be least likely to be supported by subsidiary accounts or ledgers in a company that
employs a job order costing system?
a. Work in Process Inventory c. Accounts Payable
b. Raw Material Inventory d. Supplies Inventory

6. A journal entry includes a debit to Work in Process Inventory and a credit to Raw Material Inventory. The explanation for
this would be that
a. indirect material was placed into production c. direct material was placed into production
b. raw material was purchased on account d. direct labor was utilized for production

7. Which of the following journal entries records the accrual of the cost of indirect labor used in production?
a. debit Work in Process Inventory, credit Wages Payable
b. debit Work in Process Inventory, credit Manufacturing Overhead
c. debit Manufacturing Overhead, credit Work in Process Inventory
d. debit Manufacturing Overhead, credit Wages Payable

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8. In job order costing, payroll taxes paid by the employer for factory employees are commonly accounted for as
a. direct labor cost c. indirect labor cost
b. manufacturing overhead cost d. administrative cost

9. The logical explanation for an entry that includes a debit to Manufacturing Overhead control and a credit to Prepaid
Insurance is
a. the insurance company sent the company a refund of its policy premium.
b. overhead for insurance was applied to production.
c. insurance for production equipment expired.
d. insurance was paid on production equipment.

10. The journal entry to apply overhead to production includes a credit to Manufacturing Overhead control and a debit to
a. Finished Goods Inventory c. Cost of Goods Sold
b. Work in Process Inventory d. Raw Material Inventory

11. Production overhead does not include the costs of

a. factory depreciation and supplies c. production line workers
b. factory employees’ cafeteria departments d. the maintenance department for the factory

12. In a job order costing system, the use of indirect material would usually be reflected in the general ledger as an
increase in
a. stores control c. manufacturing overhead applied
b. work in process control d. manufacturing overhead control

13. A credit to the Manufacturing Overhead control account represents the

a. actual cost of overhead incurred c. amount of overhead applied to production.
b. actual cost of overhead paid this period d. amount of indirect material and labor used during the period.

14. The journal entry to record the incurrence and payment of overhead costs for factory insurance requires a debit to
a. Cash and a credit to Manufacturing Overhead.
b. Manufacturing Overhead and a credit to Accounts Payable.
c. Manufacturing Overhead and a credit to Cash.
d. Work in Process Inventory and a credit to Cash.

15. Overapplied overhead would result if

a. the plant were operated at less than normal capacity.
b. overhead costs incurred were less than costs charged to production.
c. overhead costs incurred were unreasonably small in relation to units produced.
d. overhead costs incurred were greater than costs charged to production.

16. Debits to Cost of Goods Sold typically represent the

a. transfer of completed items to Finished Goods Inventory.
b. costs of items sold.
c. selling price of items sold.
d. the cost of goods manufactured.

17. In a perpetual inventory system, a transaction that requires two journal entries (or one compound entry) is needed
when
a. raw materials are purchased on account c. goods are finished and transferred out of WIP Inventory.
b. goods are sold for either cash or on account. d. overhead is applied to Work in Process Inventory.

18. Davis Company manufacturers desks. The beginning balance of Raw Material Inventory was P4,500; raw material
purchases of P29,600 were made during the month. At month end, P7,700 of raw material was on hand. Raw material
used during the month was
a. P26,400 b. P34,100 c. P37,300 d. P29,600

19. Urban Company manufactures tables. If raw material used was P80,000 and Raw Material Inventory at the beginning
and end of the period, respectively, was P17,000 and P21,000, what was amount of raw material was purchased?
a. P76,000 b. P118,000 c. P84,000 d. P101,000

20. Putnam Company manufactures computer stands. What is the beginning balance of Finished Goods Inventory if Cost
of Goods Sold is P107,000; the ending balance of Finished Goods Inventory is P20,000; and Cost of Goods Manufactured
is P50,000 less than Cost of Goods Sold?
a. P70,000 b. P77,000 c. P157,000 d. P127,000

21. TMNT Products has no WIP or FG inventories at the close of business on December 31, 2019. The balances of TMNT’s
accounts as of December 31, 2019, are as follows:

Cost of goods sold-unadjusted P 2,040,000

Factory overhead-control 700,000
Selling & administrative expenses 900,000
Factory overhead-applied 648,000
Sales 3,600,000

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Pretax income for 2019 is
a. P 608,000 b. P 660,000 c. P 712,000 d. P 620,000

22. The accounting records of Wagan Co. showed the following: Increase in raw materials inventory, P45,000; Decrease in
finished goods inventory, P150,000; Raw materials purchased, P1,290,000; Direct labor payroll, P600,000; Factory
overhead, P900,000; Freight-out, P135,000.

The cost of raw materials used for the period amounted to

a. P1,245,000 b. P1,335,000 c. P1,290,000 d. P1,380,000

23. Killua Company is a manufacturing concern using the perpetual inventory system. The following materials inventory
account data is provided:

Beginning balance P 275,000

Other debits to the account 825,000
Excess of ending over beginning inventory 55,000

How much is the cost of materials issued to production?

a. P770,000 b. P1,045,000 c. P1,100,000 d. P1,155,000

24. Eiji Company has the following data on April 30, 2016:

April manufacturing overhead P 30,101.80

Decrease in ending inventories
Materials 2,430.00
Goods in process 590.00
Increase in ending inventory:
Finished goods 1,320.40

The manufacturing overhead amounts to 50% of the direct labor and the direct labor and manufacturing, combined
equal 50% of the total cost of manufacturing. All materials are purchased FOB shipping point.

What is the cost of goods manufactured?

a. P 180,610.80 b. P 181,200.80 c. P 182,300.00 d. P 183,200.80

25. Milagrosa Manufacturing Company manufactured 50,000 kilos of compound BB in 2016 at the following costs:

Beginning work in process P 88,125

Materials (10% indirect) 182,500
Labor (7% indirect) 242,500
Ending work in process 67,500
Factory overhead 125% of DLC

The cost of goods manufactured is

a. P651,056 b. P692,306 c. P706,906 d. P727,531

QUIZZER

1. Which of the following costing methods of valuation are acceptable in a job order costing system?

Actual Standard Actual Predetermined

Material Material Labor Overhead
Cost Cost Cost Cost
a. yes yes no yes
b. yes no yes no
c. no yes yes yes
d. yes yes yes yes

2. In a normal cost system, debits to Work in Process Inventory would not be made for
a. actual overhead b. applied overhead c. actual direct material d. actual direct labor

3. A credit to Work in Process Inventory represents

a. work still in process.
b. raw material put into production.
c. the application of overhead to production.
d. the transfer of completed items to Finished Goods Inventory.

4. In a job order costing system, the dollar amount of the entry that debits Finished Goods Inventory and credits Work
in Process Inventory is the sum of the costs charged to all jobs
a. started in process during the period. c. completed and sold during the period.
b. in process during the period. d. completed during the period.

5. Total manufacturing costs for the year plus beginning Work in Process Inventory cost equals
a. cost of goods manufactured in the year.
b. ending Work in Process Inventory.
c. total manufacturing costs to account for.

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d. cost of goods available for sale.

6. Which of the following would be least likely to be supported by subsidiary accounts or ledgers in a company that
employs a job order costing system?
a. Work in Process Inventory c. Accounts Payable
b. Raw Material Inventory d. Supplies Inventory

7. A journal entry includes a debit to Work in Process Inventory and a credit to Raw Material Inventory. The explanation
for this would be that
a. indirect material was placed into production c. direct material was placed into production
b. raw material was purchased on account d. direct labor was utilized for production

8. Which of the following journal entries records the accrual of the cost of indirect labor used in production?
a. debit Work in Process Inventory, credit Wages Payable
b. debit Work in Process Inventory, credit Manufacturing Overhead
c. debit Manufacturing Overhead, credit Work in Process Inventory
d. debit Manufacturing Overhead, credit Wages Payable

9. In job order costing, payroll taxes paid by the employer for factory employees are commonly accounted for as
a. direct labor cost c. indirect labor cost
b. manufacturing overhead cost d. administrative cost

10. The logical explanation for an entry that includes a debit to Manufacturing Overhead control and a credit to Prepaid
Insurance is
a. the insurance company sent the company a refund of its policy premium.
b. overhead for insurance was applied to production.
c. insurance for production equipment expired.
d. insurance was paid on production equipment.

11. The journal entry to apply overhead to production includes a credit to Manufacturing Overhead control and a debit to
a. Finished Goods Inventory c. Cost of Goods Sold
b. Work in Process Inventory d. Raw Material Inventory

12. Production overhead does not include the costs of

a. factory depreciation and supplies c. production line workers
b. factory employees’ cafeteria departments d. the maintenance department for the factory

13. In a job order costing system, the use of indirect material would usually be reflected in the general ledger as an
increase in
a. stores control c. manufacturing overhead applied
b. work in process control d. manufacturing overhead control

14. A credit to the Manufacturing Overhead control account represents the

a. actual cost of overhead incurred.
b. actual cost of overhead paid this period.
c. amount of overhead applied to production.
d. amount of indirect material and labor used during the period.

15. The journal entry to record the incurrence and payment of overhead costs for factory insurance requires a debit to
a. Cash and a credit to Manufacturing Overhead.
b. Manufacturing Overhead and a credit to Accounts Payable.
c. Manufacturing Overhead and a credit to Cash.
d. Work in Process Inventory and a credit to Cash.

16. Overapplied overhead would result if

a. the plant were operated at less than normal capacity.
b. overhead costs incurred were less than costs charged to production.
c. overhead costs incurred were unreasonably small in relation to units produced.
d. overhead costs incurred were greater than costs charged to production.

17. Debits to Cost of Goods Sold typically represent the

a. transfer of completed items to Finished Goods Inventory.
b. costs of items sold.
c. selling price of items sold.
d. the cost of goods manufactured.

18. In a perpetual inventory system, a transaction that requires two journal entries (or one compound entry) is needed
when
a. raw materials are purchased on account.
b. goods are sold for either cash or on account.
c. goods are finished and transferred out of Work in Process Inventory.
d. overhead is applied to Work in Process Inventory.

Use the following to answer questions 19 to 22:

The following information has been taken from the cost records of Wilson Company for the past year:

Raw material used in production P326

Total manufacturing costs charged to production during the year (includes direct 686

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material, direct labor, and overhead equal to 60% of direct labor cost)
Cost of goods available for sale 826
Selling and Administrative expenses 25

Inventories Beginning Ending

Raw materials P 75 P 85
Work in process 80 30
Finished goods 90 110

19. The cost of raw material purchased during the year was
a. P316 b. P336 c. P360 d. P411

20. Direct labor cost charged to production during the year was
a. P135 b. P216 c. P225 d. P360

21. Cost of Goods Manufactured was

a. P636 b. P716 c. P736 d. P766

22. Cost of Goods Sold was

a. P691 b. P716 c. P736 d. P801

Use the following to answer questions 23 to 26:

Brandt Company manufactures wood file cabinets. The following information is available for June 2014:

Beginning Ending
Raw Material Inventory P 6,000 P 7,500
Work in Process Inventory 17,300 11,700
Finished Goods Inventory 21,000 16,300

23. Direct labor is P9.60 per hour and overhead for the month was P9,600. Compute total manufacturing costs for June,
if there were 1,500 direct labor hours and P21,000 of raw material was purchased.
a. P58,500 b. P46,500 c. P43,500 d. P43,100

24. Direct labor is paid P9.60 per hour and overhead for the month was P9,600. What are prime costs and conversion
costs, respectively if there were 1,500 direct labor hours and P21,000 of raw material was purchased?
a. P29,100 and P33,900 b. P33,900 and P24,000 c. P33,900 and P29,100 d. P24,000 and P33,900

25. Direct labor is paid P9.60 per hour and overhead for the month was P9,600. If there were 1,500 direct labor hours
and P21,000 of raw material purchased, Cost of Goods Manufactured is:
a. P49,100 b. P45,000 c. P51,000 d. P49,500

26. Direct labor is paid P9.60 per hour and overhead for the month was P9,600. If there were 1,500 direct labor hours
and P21,000 of raw material purchased, how much is Cost of Goods Sold?
a. P64,500 b. P59,800 c. P38,800 d. P53,800

27. Davis Company manufacturers desks. The beginning balance of Raw Material Inventory was P4,500; raw material
purchases of P29,600 were made during the month. At month end, P7,700 of raw material was on hand. Raw
material used during the month was
a. P26,400 b. P34,100 c. P37,300 d. P29,600

28. Urban Company manufacturers tables. If raw material used was $80,000 and Raw Material Inventory at the
beginning and end of the period, respectively, was $17,000 and $21,000, what was amount of raw material was
purchased?
a. P76,000 b. P118,000 c. P84,000 d. P101,000

29. Putnam Company manufacturers computer stands. What is the beginning balance of Finished Goods Inventory if
Cost of Goods Sold is $107,000; the ending balance of Finished Goods Inventory is $20,000; and Cost of Goods
Manufactured is $50,000 less than Cost of Goods Sold?
a. P70,000 b. P77,000 c. P157,000 d. P127,000

30. TMNT Products has no WIP or FG inventories at the close of business on December 31, 2014. The balances of TMNT’s
accounts as of December 31, 2014, are as follows:

Cost of goods sold-unadjusted P 2,040,000 Factory overhead-control 700,000

Selling & administrative expenses 900,000 Factory overhead-applied 648,000
Sales 3,600,000

Pretax income for 2014 is

a. P 608,000 b. P 660,000 c. P 712,000 d. P 620,000

31. The accounting records of Wagan Co. showed the following: Increase in raw materials inventory, P45,000; Decrease
in finished goods inventory, P150,000; Raw materials purchased, P1,290,000; Direct labor payroll, P600,000;
Factory overhead, P900,000; Freight-out, P135,000.

The cost of raw materials used for the period amounted to

a. P1,245,000 b. P1,335,000 c. P1,290,000 d. P1,380,000

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32. Killua Company is a manufacturing concern using the perpetual inventory system. The following materials inventory
account data is provided:

Beginning balance P 275,000

Other debits to the account 825,000
Excess of ending over beginning inventory 55,000

How much is the cost of materials issued to production?

a. P770,000 b. P1,045,000 c. P1,100,000 d. P1,155,000

33. Eiji Company has the following data on April 30, 2014:

April manufacturing overhead P 30,101.80

Decrease in ending inventories
Materials 2,430.00
Goods in process 590.00
Increase in ending inventory:
Finished goods 1,320.40

The manufacturing overhead amounts to 50% of the direct labor and the direct labor and manufacturing, combined
equal 50% of the total cost of manufacturing. All materials are purchased FOB shipping point.

What is the cost of goods manufactured?

a. P 180,610.80 b. 181,200.80 c. P 182,300.00 d. 183,200.80

Use the following data in answering questions 34 through 37:

Selected data concerning the past fiscal year’s operations (000 omitted) of the Clark Manufacturing Company are
presented below:
Inventories
Beginning Ending
Raw materials P75 P85
Work in process 80 30
Finished goods 90 110

Other data:
Raw materials used P326
Total manufacturing costs incurred (FOH is applied at
a rate of 60% of DL) 686
Cost of goods available for sale 826
Selling and general expenses 25

34. The cost of raw materials purchased during the year amounted
a. P411 b. P360 c. P316 d. P336

35. Direct labor costs charged to production during the year amounted to
a. P135 b. P225 c. P360 d. P216

36. The cost of goods manufactured was

a. P363 b. P766 c. P736 d. P716

37. The cost of goods sold was

a. P736 b. P716 c. P691 d. P801

38. Milagrosa Manufacturing Company manufactured 50,000 kilos of compound BB in 2014 at the following costs:

Beginning work in process P 88,125

Materials (10% indirect) 182,500
Labor (7% indirect) 242,500
Ending work in process 67,500
Factory overhead 125% of DLC

The cost of goods manufactured is

a. P651,056 b. P692,306 c. P706,906 d. P727,531

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