PHILIPPINE REVIEW INSTITUTE FOR ACCOUNTANCY (PRIA) ADVANCED FINANCIAL ACCOUNTING AND REPORTING (AFAR) 14.0 Cost Accounting 14.1 System of Cost Cost Accumulation or Costing System 14.1.1 Comparison Comparison between Actual Costing, Normal Normal Costing and Standard Standard Costing 14.2 Job-order costing system 14.2.1 Cost accumulation accumulation procedures – materials, labor and overhead 14.2.2 Journal entries 14.2.3 Preparation of statement statement of goods manufactured manufactured and sold 14.2.4. Accounting for scrap, waste, spoilage and rework 14.4 Backflush costing costing system (JIT (JIT system) 14.4.1 Cost accumulation accumulation procedures – materials, labor and overhead 14.4.2 Journal entries 14.6 Activity-based-costing Activity-based-costing system (ABC (ABC costing) 14.6.1 Allocation of of costs: Traditional Costing versus ABC Costing Costing 14.6.2 Determination of Total Product Costs: Traditional Costing versus ABC Costing ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ REVIEW OF LEARNING OBJECTIVES 1. Describe and and illustrate illustrate the following costs: costs: direct and and indirect, indirect, direct materials, direct labor, factory overhead, and product and period costs. Manufacturing companies use machinery and labor to convert materials into a finished product. A direct cost can can be traced to a finished product, while an indirect cost cannot. The cost of a finished product is made made up of three components: components: (a) the cost of materials that are directly identifiable with the final product, (b) the wages of employees that directly convert convert materials to a finished product, product, and (c) costs incurred in the the manufacturing process process other than direct materials and direct labor. These three manufacturing costs costs can be categorized into prime costs (direct materials and direct labor) or conversion costs (direct labor and factory overhead). Product costs consists of the elements of manufacturing cost – direct materials, direct labor, and factory overhead – while period costs consist of selling and administrative expenses. 2. Describe accounting accounting systems used used by manufacturing businesses. businesses. A cost accounting system accumulates product costs. costs. Management uses cost accounting accounting systems to determine the product cost, establish product prices, control operations, and develop financial statements. statements. The two primary cost cost accounting systems systems are job order and and process cost systems. Job order cost systems accumulate accumulate costs for each each quantity of product product that passes through the factory. Process cost systems accumulate accumulate costs for each department or process within the factory. 3. Describe and prepare prepare summary summary journal entries for a job order order cost accounting system. system. A job order cost system accumulates costs for each quantity of product, or “job,” that passes through the factory. Direct materials, direct labor, and factory overhead overhead are accumulated on cost sheet sheet , which is the subsidiary cost ledger for each job. Direct materials and direct the job cost labor are assigned to individual jobs based based on the quantity used. Factory overhead costs costs are assigned to each job based on an activity base that reflects the use of factory overhead costs. Work in Process Inventory is is the controlling account for the cost ledger. As a job is finished, its costs are transferred to the finished goods ledger, for which Finished Goods Inventory is is the controlling account. account. When goods are sold, the cost is transferred transferred from finished goods inventory to Cost of Goods Sold .
4. Describe and illustrate the statement of cost of goods sold, sold, statement of comprehensive comprehensi ve income, and statement of financial position for a manufacturing business. The financial statements of manufacturing companies differ from those of merchandising companies. Manufacturing Manufacturing company company statement of financial position reports three types of inventory: raw materials, materials, work work in process, and finished goods. goods. The statement of comprehensive income of manufacturing company reports cost of goods sold, which is the total manufacturing manufacturing cost of goods sold. sold. The statement statement of comprehensive comprehensive income income is supported by the schedule of cost of goods manufactured , which provides the details of the cost of goods manufactured during the period. 5. Use job order order cost information information for decision decision making. Job order cost systems can be used to evaluate cost performance. Unit costs can be compared over time to determine if product product costs are staying staying within expected expected ranges. Job order cost information can support pricing and cost analysis. analysis. Managers can use job cost information to identify unusual trends and areas for cost improvement.
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PHILIPPINE REVIEW INSTITUTE FOR ACCOUNTANCY (PRIA) ADVANCED FINANCIAL ACCOUNTING AND REPORTING (AFAR) 6. Accounting for scrap, waste, spoilage and rework. Most companies today are justifiably concerned about product quality. To a great extent the current concern is the result of increased competition, particularly competition from abroad. Many manufacturers, recognizing the need to improve efficiency and reduce costs, have changed the emphasis of their businesses to continuous quality improvement and those that succeed are becoming world-class manufacturers. Production losses in a job order cost system include the cost of materials scrap, spoiled goods (spoilage), and reworking defective goods. For the most part, these losses result from a lack of quality and should be eliminated if possible. One way to call attention to the need for reducing these types of quality failures is to determine their costs and then report these costs to top management. Large costs signal an opportunity to improve quality substantially, which should be interpreted by management as an opportunity to improve profits. 7. Backflush costing system ( Just-in-Time system). Backflush costing is a streamlined cost accounting method that speeds up, simplifies, and minimizes accounting effort in an environment that minimizes inventory balances, requires few allocations, uses standard costs, and has minimal variances from standard. During the period, this costing method records purchases of raw material and accumulates actual conversion costs. Then, at a predetermined trigger point such as (a) at completion of production, or (b) on the sale of goods, an entry is made to allocate the total costs incurred to Cost of Goods Sold and to Finished Goods Inventory using standard production costs. The four alternatives to the entries are: First, if production time were extremely short, completion of the finished goods is the trigger point. Second, if goods were shipped immediately to customers on completion, sale of the product is the trigger point. The third alternative reflects the ultimate JIT system, sale of the product is the trigger point. A fourth alternative charges all costs to the Cost of Goods Sold account, with a subsequent backflush of costs to the Raw and In Process Inventory and the Finished Goods Inventory accounts at the end of the period, sale of the product is the trigger point. Contrast just-in-time processing with conventional manufacturing practices. The just-in-time processing philosophy focuses on reducing time, cost, and poor quality within the process. This is accomplished by combining process functions into work centers, assigning overhead services directly to the cells, involving the employees in process improvement efforts, eliminating wasteful activities, and reducing the amount of work in process inventory required to fulfill production targets. It complements the other materials planning and control tools, such as EOQ and safety stock calculations. Implementation of the just-in-time philosophy can cause significant cost reductions and productivity improvements. But, even within a single company, all inventory situations do not necessarily have to be on a just-in-time system. The costs and benefits of any inventory control system must be evaluated before management should consider installing the system. The use of JIT, however, does allow workers as well as managers to concentrate on providing quality service to customers. 8. Describe Activity-Based-Costing and why a number of companies are using this product costing approach. Activity-based costing is a method of accumulating and allocating factory overhead costs to products, using many overhead rates. Each rate is related to separate factory activities, such as inspecting, moving, and machining. Activity-based costing may be useful in making product pricing decisions where manufacturing operations involve large amounts of factory overhead. In such cases, traditional overhead allocation using bases such as direct labor cost or direct labor hours may yield inaccurate cost allocations. This, in turn, may result in distorted product costs and product prices. By providing more accurate product cost allocations, activity-based costing aids in setting product prices that will cover costs and expenses. Multiple Choice Problems Accounting for Elements of Cost (Actual Cost) 1.
Aerosmith Manufacturing Company produces liquefied oxygen and stores them in tanks. For the year, the following information was made available:
No. of oxygen tanks produced, 10,000 Materials used, P164,000 of which P156,000 represents direct materials Total factory payroll, P143,000 of which P119,000 is direct labor Other factory overhead costs, P100,000 Operating expenses, P135,400
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PHILIPPINE REVIEW INSTITUTE FOR ACCOUNTANCY (PRIA) ADVANCED FINANCIAL ACCOUNTING AND REPORTING (AFAR) Compute the prime costs a. P283.000 b. P251,000 2. 3.
Refer to No. 1. Cost of goods manufactured per unit is a. P40.70 b. P37.50 c. P54.24
d. P299,000
d. P51.04
Nicole Company has provided you with the following pertinent information for the calendar year: Raw material purchases P135,000; Beginning Raw materials inventory P100,000; Ending Raw materials inventory P175,000; Factory overhead (including P20,000 of indirect materials and P85,000 of indirect labor) P277,500; Total manufacturing costs P960,000. Direct labor cost is a. P642,500
4.
c. P275,000
b. P577,500
c. P402,500
d. P660,000
Pear Company’s material purchases during the period amounted to P25,590. Put into production were direct and indirect materials worth P18,500 and P7,090, respectively. Total factory payroll is P74,000 of which P50,000 represents direct labor. Other factory overhead costs amounted to P32,000. Pear Company applies the actual factory overhead to work in process. Sales and cost of goods sold are P130,000 and P120,000, respectively. Cost of goods manufactured is P128,000. By what amount did Pear Company’s ending work in process inventory exceeds its beginning work in process inventory? a. P10,590 b. P3,590 c. P5,390 d. P1,590
5.
6. 7.
The following information is taken from the records of the PRC Manufacturing Company for the first quarter of the year: January 1 March 31 Raw materials P 32,200 P 34,100 Work in process 38,500 33,050 Finished goods 44,600 48,800 Direct labor P 254,000 Factory overhead 236,900 Cost of goods sold 678,300 The cost of goods manufactured during the first quarter was a. P676, 100 b. P243,000 c. P682,500
d. P713,350
Refer to No. 5. The cost of raw materials used was a. P263,150 b. P186,150 c. P224,650
d. P286,150
The following cost data pertain to Matatag Company for March: March 1 March 31 P 40,000 P 50,000 25,000 35,000 60,000 70,000 P 120,000 108,000 378,000
Raw materials Work in process Finished goods Direct labor Factory overhead Cost of goods sold
The amount raw materials purchased for the month was a. P50,000 b. P170,000 c. P180,000 8.
d. P220,000
The following were taken from the books of Marvin Company. The company uses the FIFO method for costing inventories. January 1 March 31 Raw materials P 268,000 P 167,000 Work in process 0 0 Finished goods 43,000 ? (100 units) (200 units) Raw materials purchased P 1,946,700 Direct labor 2,125,800 Factory overhead 764,000 Sales 12,400 units @ P535 The number of units manufactured is a. 11,900 b. 12,000
c. 12,500
AFAR – Cost Accounting – Job order, Backflush, and ABC Costing
d. 15,200
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PHILIPPINE REVIEW INSTITUTE FOR ACCOUNTANCY (PRIA) ADVANCED FINANCIAL ACCOUNTING AND REPORTING (AFAR) 9. 10.
Refer to No. 8. The cost of goods manufactured per unit is a. P 300 b. P 350 c. P 395
d. P 420
Refer to No. 8. The cost of goods sold is a. P4,091,500 b. P4,109,500
d. P4,910,500
c. P4,901,500
Job Order Costing (Normal - Traditional vs. Activity-Based) 11.
The following data were taken from the records of Charming Company: Raw materials Work in process Finished goods Raw materials purchased Factory overhead, 75% of Direct labor Operating expenses, 12.5% of Sales Net income (ignore income taxes)
September 1 September 30 P ? P 50,000 80,000 95,000 60,000 78,000 P 46,000 63,000 25,000 25,000
The inventory of raw materials at September 1 was a. P30,000 b. P40,000 c. P46,000 12.
Abner Corporation has manufactured 100,000 units of compound X in the year at the following costs: Labor P242,500 of which 93% represents direct labor; Materials P182,500 of which 90% represents direct materials; Opening work in process P88,125; Closing work in process P67,500; Factory overhead is 125% of direct labor cost and includes indirect materials and indirect labor. The cost of goods manufactured is a. P671,150 b. P692,306
13.
d. P50,000
c. P651,036
d. P629,900
South Tools Corp. manufactures specialized precision tools for the electronics industry. For the month of April, it started work on two orders, East and West. The total material costs for both orders were estimated at P120,000 of which 60% applies to East and 40% to West. Direct labor hours amounted to 700 for East and 400 for West. The labor rate amounted to P18 per hour. Variable overhead varies at the rate of P10 per direct labor hour. By the end of April, 75% of the acquired materials were issued to production amounting to P90,000. Also, the two orders were all 50% completed with respect to conversion costs. Labor hours for the month were charged at 360 to East and 180 to West. Variable overhead is equal to the hourly rate given. The total cost for East order for the month is a. P64,080 b. P45,800 c. P52,350 d. P67,600
14.
Bedovin Company manufactures office tables and chairs using the job order cost systems. The data given below were taken from the records as of April 30, the first month of operations. Job No. Materials Direct Labor Hours Direct Labor Cost 121 P 2,160.00 650 P 800.00 122 4,575.00 1,850 3,625.00 123 5,637.50 4,100 7,162.50 124 1,612.50 750 1,400.00 125 3,250.00 1,600 3,050.00 126 1,375.00 490 825.00 In April, Job Nos. 121, 122, 124, and 125 were completed. Job No. 124and 125 were sold for P6,200 and P15,897.50, respectively. Overhead is applied to the jobs at the rate of P1.50 per direct labor hour. Actual factory overhead for April amounted to P15,175.
15. 16.
The total cost of goods manufactured for the month was a. P27,747.50 b. P28,782.50 c. P49,632.50
d. P50,647.50
Refer to No. 14. The gross profit for the month was a. P2,690 b. P6,290 c. P8,145
d. P9,260
The Work in process account of the Malinta Company which uses a job order cost system follows: Beginning inventory P25,000; Direct materials used P50,000; Direct labor P40,000; Factory overhead applied P30,000; Cost of goods manufactured P125,450. Overhead is applied to production at a predetermined rate based on direct labor cost. The work in process at the end represents the cost of Job No. 456, which has been charged
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PHILIPPINE REVIEW INSTITUTE FOR ACCOUNTANCY (PRIA) ADVANCED FINANCIAL ACCOUNTING AND REPORTING (AFAR) with direct labor cost of P3,000 and Job No. 789, which has been charged with applied overhead of P2,400. The cost of direct materials charged to Job No. 456 and 789 amounted to a. P8,700 b. P7,600 c. P4,500 d. P4,200 17.
The factory ledger of the WTS Manufacturing Co. contains the following account Work in Process Materials 40,000 Manufactured 120,000 Labor 100,000 Overhead 80,000 The amount of materials charged to the uncompleted job was P28,000. The amounts of labor and overhead charges for the uncompleted job a. P40,000 and P32,000 c. P72,000 and P40,000 b. P32,000 and P40,000 d. P40,000 and P72,000
18.
Hamilton Company uses a job order costing. Factory overhead is applied to production at a budgeted rate of 150% of direct labor costs. Any overapplied or underapplied factory overhead is closed to the cost of goods sold account at the end of the month. Additional information is available as follows: Job 101 was the only job in process at February 1 with accumulated costs as follows: Direct materials P4,000; Direct labor P2,000, and Factory overhead applied P3,000. Jobs 102, 103, and 104 were started during February. Direct materials requisitions for February totaled P26,000. Direct labor costs of P20,000 were incurred for February. Actual factory overhead was P32,000 for February. The only job still in process at the end of February was Job 104, with costs of P2,800 direct materials and P1,800 for direct labor. The cost of goods manufactured for February was a. P78,000 b. P77,700 c. P79,700
19.
d. P85,000
Candice Company uses activity-based costing to determine unit product costs for External reports. The company has two products. Candy A and Candy B. The annual production sales of Candy A are 10,000 units and of Candy B are 4,000 units. There are three overhead activity centers with estimated overhead costs and expected activity as follows: Activity Estimated Expected Activity Center Overhead Cost Candy A Candy B Activity 1 P 25,000 150 100 Activity 2 65,000 800 200 Activity 3 90,000 1,000 2.000 The overhead cost per unit of Candy A under activity-based costing is a. P6.00 b. P3.00 c. P1.50 d. P9.70
20.
Mayflower Company uses Activity-Based Costing in the manufacture of two models of furniture. Below are the Activity-Based data together with the amounts of cost driver per job: Activity Driver Direct labor Machine set ups Number of parts
Budgeted Overhead P9,600,00 0 2,400,000 1,800,000
Annual Activity 600,000 10,000 900,000
Amount of Cost Driver per Job De Luxe Standard 1,200 hours 300 hours 2 set ups 24 set ups 800 parts 1,600 parts
Actual data for the year ended December 31: Units produced Direct Materials Direct labor @ P40 per hour
De Luxe 400 P148,000 48,000
Standard 60 P140,800 12,000
The manufacturing cost per unit of De Luxe and Standard model is a. P196,000 and P152,800 c. P490.00 and P2,547.00 b. P217,280 and P166,560 d. P543.20 and P2,776.00
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PHILIPPINE REVIEW INSTITUTE FOR ACCOUNTANCY (PRIA) ADVANCED FINANCIAL ACCOUNTING AND REPORTING (AFAR)
Job Order Costing (Accounting for scrap, waste, spoilage and rework) 21.
MJ Company manufactures picture frames of all sizes and shapes and uses a job order costing system. There is always some spoilage in each production run. The following costs relate to the current run: Estimated overhead (exclusive of spoilage) P160,000; Spoilage (estimated) P25,000; Sales value of spoiled frames P11,500; Labor hours 100,000 hours. The actual cost of a spoiled picture frame is P7.00. During the year 170 frames are considered spoiled. Each spoiled frame can be sold for P4. The spoilage is considered a part of all jobs. Labor hours are used to determine the predetermined overhead rate. What is the journal entry needed to record the spoilage? a. Spoiled goods Factory overhead control Work in process inventory b. Spoiled goods Work in process inventory c. Spoiled goods Work in process inventory d. Spoiled goods Loss on spoiled goods Work in process inventory
680 510 1,190 680 680 1,190 1,190 680 510 1,190
22.
RTW Company, in producing Lot No. 647 which called for 2,500 dresses, Style No. 34, incurred costs as follows: Materials, P240 per dress; Labor, P165 per dress; Factory overhead, P135 per dress. When the lot was completed, inspection rejected 200 spoiled dresses which were sold for P324 each. Assuming spoilage is normal what is the cost per unit of good output? a. P540 b. P324 c. P558.78 d. P586.96
23.
Refer to No. 22. Assuming spoilage is abnormal, what is the cost per unit of good output? a. P540 b. P324 c. P558.78 d. P586.96
24.
The Products Company manufactures, among other items, a unique nutcracker. One order from the Specialty Company for 1,000 nutcrackers showed the following costs per unit: Materials P140; Labor P44; Factory overhead 125% of labor cost. Final inspection revealed that 120 units were improperly machined. These units were broken down, properly machined, and reassembled. Cost of correcting the defective nutcrackers consists of P30 per unit labor plus overhead at the normal rate. Assuming the company’s predetermined overhead rate includes allowance for normal rework costs, how much is the cost per unit of good output? a. P306.50 b. P239 c. P247.10 d. P230.90
25.
Refer to No. 24. Assuming spoilage is abnormal, how much loss is to be reported in the income statement? a. P8,100 b. P28,680 c. P972 d. P36,780 Backflush Costing System (JIT System) Job Order Costing
26.
Molly Memories is a company that makes dolls. The product’s standard production cost is P130.50. The company has a long-term contract with its direct material supplier for raw materials at P58.50 per unit. Beginning inventories for July are assumed to be zero. Standard conversion cost per unit is P92. Transactions for the month follow: Purchases P756,000; Conversion costs incurred P1,843,500; Units completed 20,000; Sales 19,800 units @ P225 each. Required: Give all the entries to record the transactions for the month using the basic entries and the four alternatives.
27.
The Fat Manufacturing Company uses Raw and In Process (RIP) Inventory account and expense all conversion costs to the Cost of Goods Sold account. At the end of each month, all inventories are counted, their conversion costs components are estimated, and inventory aaccount balances are adjusted accordingly. Raw material cost is backflushed from RIP to Finished Goods Inventory. The following information is for the month of August: Beginning balance for RIP Inventory account including P4,500 of conversion costs ……………………………. P 43,500 Raw materials received on credit ………………………… 680,000
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PHILIPPINE REVIEW INSTITUTE FOR ACCOUNTANCY (PRIA) ADVANCED FINANCIAL ACCOUNTING AND REPORTING (AFAR) Ending RIP inventory per physical count, including P5,300 conversion cost estimate ……………………………….
47,200
The amount to be backflushed from RIP Inventory to Finished Goods Inventory at the end of August would be a. P680,000 b. P718,700 c. P676,800 d. P676,300 28.
In backflush costing, if the conversion cost in the Raw and In Process Inventory was P500 on July 1 and P1,000 on July 31, the account to be credited at the end of July for the P500 increase would be a. Raw and In Process Inventory c. Raw Materials Inventory b. Finished Goods Inventory d. Cost of Goods Sold
29.
In backflush costing, if the conversion cost in the Raw and In Process Inventory was P1,000 on March 1 and P400 on March 31, the account to be credited at the end for the P600 decrease would be a. Raw and In Process Inventory c. Raw Materials Inventory b. Finished Goods Inventory d. Cost of Goods Sold
30.
Cheeta Company has materials cost in the June 1 Raw and In Process Inventory of P10,000, materials received during June of P205,000, and materials cost in the June 30 Raw and In Process Inventory of P12,500. The amount to be backflushed from Raw and In Process nventory to Finished Goods Inventory at the end of June would be a. P215,000 b. P202,500 c. P207,500 d. P217,500 End.
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