Cost Accounting Systems and Classifications

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Philippine School of Business Administration-Manila

826 R. Papa St., Sampaloc Manila
ACCOUNTING 15 C. Gonzaga
TOPIC: COST ACCOUNTING ( JOB ORDER COSTING/ PROCESS COSTING/ ACTIVITY-BASED

COSTING )
Cost Accounting
Cost accounting is linked to tax accounting, financial accounting and managerial accounting because it is an
important component of each discipline. Why? Because cost accounting involves determining the cost of
something, such as a product, a service, an activity, a project, or some other cost object. These costs are
needed for several purposes. For example, the costs of products and services produced and sold are needed for
both tax and external financial statements. In other words, tax and financial accounting depend on cost
accounting to provide cost information. Information about costs is also needed for a variety of management
decisions. For example, cost estimates are needed to determine whether or not a product or service can be
produced and sold at a profit. Unit costs of a product (or service) are also needed for product pricing and
product discontinuance decisions. In addition, accurate cost information is required to determine whether or not
a company should make (produce) or buy the raw materials, parts and subassemblies that become part of its
major products and services. None of the other disciplines including tax accounting, financial accounting or
managerial accounting could exist without cost accounting.
Cost Management
Cost management is a term that has been popularized by CAM-I (Consortium For Advanced Manufacturing –
International). Cost management is said to be a more comprehensive concept than cost accounting in that the
emphasis is on managing and reducing costs rather than reporting costs. In other words, it is a long run
proactive approach rather than a short run reactive approach. For example, a great deal of attention is given
to reducing costs at the design stage of a product's life cycle rather than simply attempting to measure and
control cost during the production stage. James Brimson, who originally served as CAM-I's Cost Management
Systems (CMS) project director, defines cost management as, "the management and control of activities to
determine an accurate product cost, improve business processes, eliminate waste, identify cost drivers, plan
operations, and set business strategies. Based on Brimson's definition, the concept of activity management is
part of the cost management discipline
Cost Department
The cost department, under the direction of the controller, is responsible for keeing records of a company’s
manufacturing and non-manufacturing activities.This department must also analyze all costs of manufactuing,
marketing, and administration. It must issue significant control reports and other decision-making data to those
managers who assist in controlling and improving costs and operations.
Classification Of Costs
Cost classifications are needed for the development of cost data that will aid management in achieving its
objectives. These classifications are based on the relationship of costs to:
1. The product
2. Volume of production
3. Manufacturing departments
4. An accounting period
 Cost in relation to products
Product costs orInventoriable Costs
 Manufacturing costs (production cost or factory cost, is the sum of the three cost elements: direct
materials, direct labor, and factory overhead. Direct materials and direct labor maybe combined into
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another classification called prime cost. Direct labor and factory overhead may be combined into a
classification called conversion cost.
 Direct materials- are all materials that form an integral part of the finished product and that can
be included directly in calculating the cost of the product, eg. lumber to make furniture, and
crude oil to make gasoline.
 Direct labor- is labor expended to convert direct materials into the finished product. It consists
of employees’ wages which can feasibly be assigned to a specific product, eg. wages of machine
operators or assembly line workers.
 Factory overhead- also called manufacturing overhead, manufacturing expenses, or factory
burden, consists of cost of indirect materials (indirect materials are those materials needed for
the completion of a product, but the consumption of which is so minimal or so complex that
treating them as direct materials is futile, e.g. factory supplies such as lubricating oils, grease,
cleaning rags, and brushes needed to maintain the working area and machinery in a usable and
safe condition, sandpaper in a furniture used in furniture-making, threads, screws, rivets, nails,
glue, etc.); indirect labor (labor which does not directly affect the construction or the
composition of the finished product, eg.. wages of supervisors, shop clerks, general helpers,
inspectors, and maintenance personnel in the production area. It also includes defective work
and experimental work..); and all other manufacturing costs that cannot be charged directly to
specific products such as: factory rent, insurance, property tax, depreciation of machineries and
equipment, depreciation of factory buiding, maintenance and repairs, power, light, heat,
employer’s share in SSS, ECC, Phil Health, and Pag-ibig fund of factory personnel, etc.
Period Costs or Non-Inventoriable Costs
 Commercial expenses. Commercial expenses are classified into: (1) marketing (distribution or
selling) expenses and (2) administrative (general and administrative) expenses.
i. Marketing expenses begin when at the point where the factory costs end, that is, when
manufacturing has been completed and the product is in salable condition. These
expenses include the expenses of selling and delivery, such as: sales salaries, sales
commissions, employer’s share in the SSS, ECC, Phil. Health, Pag-ibig Fund of
marketing personnel, advertising, samples, entertainment, travel expenses, rent,
depreciation, property tax, telephone and telegraph, stationery and printing, postage,
freight-out, miscellaneous marketing expenses, etc.
ii. Administrative expenses include expenses incurred in directing and controlling the
organization, such as: administrative and office salaries, employer’s share in SSS,
ECC, Phil Health, Pag-ibig fund of administrative personnel, rent, depreciation,
property tax auditing expenses, legal expenses, uncollectible accounts, telephone &
telegraph, stationery and printing, postage, miscellaneous administrative expenses, etc.
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THE FIVE PARTS OF A COST ACCOUNTING SYSTEM
A cost accounting system requires five parts that include: 1) an input measurement basis, 2) an inventory
valuation method, 3) a cost accumulation method, 4) a cost flow assumption, and 5) a capability of recording
inventory cost flows at certain intervals. These five parts and the alternatives under each part are summarized
in Exhibit 2-1. Note that many possible cost accounting systems can be designed from the various combinations
of the available alternatives, although not all of the alternatives are compatible. Selecting one part from each
category provides a basis for developing an operational definition of a specific cost accounting system.
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1) INPUT MEASUREMENT BASES
The basis of a cost accounting system begins with the type of costs that flow into and through the inventory
accounts. There are three alternatives including: pure historical costing, normal historical costing and
standard costing.
Pure Historical Costing
In a pure historical cost system, only historical costs flow through the inventory accounts.Historical
costsrefers to the costs that have been recorded.
Normal Historical Costing
Normal historical costing uses historical costs for direct material and direct labor, but overhead is charged,
or applied to the inventory using a predetermined overhead rate per activity measure. Typical activity
measures include direct labor hours, or direct labor costs. The amount of factory overhead charged to the
inventory is determined by multiplying the predetermined rate by the actual quantity of the activity measure.
The difference between the applied overhead costs and the actual overhead costs represents an overhead
variance.
Standard Costing
In a standard cost system, all manufacturing costs are applied, or charged to the inventory using standard or
predetermined prices, and quantities. The differences between the applied costs and the actual costs are
charged to variance accounts.
2) FOUR INVENTORY VALUATION METHODS
The Throughput Method. The throughput method was developed to complement a concept referred to as the
theory of constraints. In this method only direct material costs are charged to the inventory. All other costs
are expensed during the period. The concept is symbolized in the enlargement below. Sales, less direct
material costs is referred to as throughput which reflects how the method got its’ name. The throughput method
does not provide proper matching (as defined by GAAP) because all manufacturing cost, other than direct
material are expensed when incurred rather than capitalized in the inventory. Therefore, the throughput method
is not acceptable for external reporting although advocates argue that it provides many advantages for internal
reporting.
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The Direct or Variable Method
In the direct (or variable) method, only the variable manufacturing costs are capitalized, or charged to the
inventory. Fixed manufacturing costs flow into expense in the period incurred. This method provides some
advantages and some disadvantages for internal reporting, However, it does not provide proper matching
because the current fixed costs associated with producing the inventory are charged to expense regardless of
whether or not the output is sold during the period. For this reason direct costing is not generally acceptable for
external reporting.
The Full Absorption Method
Full absorption costing (also referred to as full costing and absorption costing) is a traditional method where
all manufacturing costs are capitalized in the inventory, i.e., charged to the inventory and become assets.
This means that these costs do not become expenses until the inventory is sold. In this way, matching is more
closely approximated.
The Activity Based Method
The technique was developed to provide more accurate product costs. This improved accuracy is accomplished
by tracing costs to products through activities. In other words, costs are traced to activities (activity costing)
and then these costs are traced, in a second stage, to the products that use the activities.
In traditional full absorption costing and direct (or variable) costing systems, indirect manufacturing costs are
allocated to products on the basis of a production volume related measurement such as direct labor hours. Thus,
the fundamental differences between traditional systems and activity based systems are: 1) how the indirect
costs are assigned (ABC uses both production volume and non-production volume related bases) and 2)
which costs are assigned to products (in ABC systems, an attempt is made to assign all costs to products
including engineering, marketing, distribution and administrative costs, although some facility related costs
may not be assigned).
3) FOUR COST ACCUMULATION METHODS
Cost accumulation refers to the manner in which costs are collected and identified with specific customers,
jobs, batches, orders, departments and processes. The center of attention for cost accumulation can be
individual customers, batches of products that may involve several customers, the products produced within
individual segments during a period, or the products produced by the entire plant during a period. The
company’s cost accumulation method, or methods are influenced by the type of production operation and the
extent to which detailed cost accounting information is needed by management.
Job Order
In job order costing, costs are accumulated by jobs, orders, contracts, or lots. The key is that the work is done
to the customer's specifications. As a result, each job tends to be different. For example, job order costing is
used for construction projects, government contracts, shipbuilding, automobile repair, job printing, textbooks,
toys, wood furniture, office machines, caskets, machine tools, and luggage. Accumulating the cost of
professional services (e.g., lawyers, doctors and CPA's) also fall into this category.
Process
In process costing, costs are accumulated by departments, operations, or processes. The work performed on
each unit is standardized, or uniform where a continuous mass production or assembly operation is involved.
For example, process costing is used by companies that produce appliances, alcoholic beverages, tires, sugar,
breakfast cereals, leather, paint, coal, textiles, lumber, candy, coke, plastics, rubber, cigarettes, shoes,
typewriters, cement, gasoline, steel, baby foods, flour, glass, men's suits, pharmaceuticals and automobiles.
Process costing is also used in meat packing and for public utility services such as water, gas and electricity.
Back Flush
Back flush costing is a simplified cost accumulation method that is sometimes used by companies that adopt
just-in-time (JIT) production systems. However, JIT is not just a technique, or collection of techniques. Just-in-
time is a very broad philosophy, that emphasizes simplification and continuously reducing waste in all areas of
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business activity. JIT systems were developed in Japan and depend on the communitarian concepts of teamwork
and continuous improvement. In fact, many of the assumptions, attitudes and practices of communitarian
capitalism are included in the JIT philosophy.
One of the many goals of JIT systems is zero ending inventory. In a backflush cost system, manufacturing
costs are accumulated in fewer inventory accounts than when using the job order or process cost methods. In
fact, in extreme backflush systems, most of the accounting records are eliminated. The production facilities are
also arranged in self contained manufacturing cells that are dedicated to the production of a single, or similar
products. In this way more of the manufacturing costs become direct product costs and fewer cost allocations
are necessary. Thus, more accurate costing is obtained in spite of the fact that the cost accumulation method is
simplified.
Hybrid, or Mixed Methods
Hybrid or mixed systems are used in situations where more than one cost accumulation method is required.
For example, in some cases process costing is used for direct materials and job order costing is used for
conversion costs, (i.e., direct labor and factory overhead). In other cases, job order costing might be used for
direct materials, and process costing for conversion costs. The different departments or operations within a
company might require different cost accumulation methods. For this reason, hybrid or mixed cost
accumulation methods are sometime referred to as operational costing methods.
4) FOUR COST FLOW ASSUMPTIONS
A cost flow assumption refers to how costs flow through the inventory accounts, not the flow of work or
products on a production line. This distinction is important because the flow of costs is not always the same as
the flow of work. The various types of cost flow assumptions include: specific identification (e.g., by job),first
in, first out (FIFO), and weighted average.
Costs flow through the inventory accounts by the job in a job order cost system which represents an example of
specific identification. The requirements of the various jobs determines the timing of the cost flows. Simple
jobs tend to move through the system faster than more complex jobs. The first-in, first-out (FIFO) and
weighted average cost flow assumptions are used in process costing. Since costs are accumulated by the
process or department in a process cost environment, a cost flow assumption is needed to determine the
treatment of the beginning inventory. When FIFO is used, it is assumed that the units of product in the
beginning inventory are finished first and transferred to the next department before any of the units that are
started during the period.The group of units in the beginning inventory maintain their separate identity and
prior period costs. However, when the weighted average cost flow assumption is used, the beginning
inventory units lose their separate identity because they are lumped together with the units of product started
during the period.
5) RECORDING INTERVAL CAPABILITY
Inventory records can be maintained on a perpetual or a periodic basis. Conceptually, the perpetual inventory
method provides a company with the capability of maintaining continuous records of the quantities of
inventory and the costs flowing through the inventory accounts.The periodic method, on the other hand,
requires counting the quantity of inventory before inventory records can be updated. In the past,
manufacturers tended to keep perpetual inventories, while retailers used the periodic method. However, today a
variety of modern point of sale devices and dedicated microcomputer software are readily available to provide
any company with perpetual inventory capability.
FUNCTIONS OF INFORMATION OR COST ACCOUNTING SYSTEMS
The term information system is used to emphasize that although the accounting system is likely to be the
organization’s major source of information, it is not the only source of information. In fact, for some purposes,
accounting information is not as useful as other types of information. Generally the purposes, or functions of
an information or cost accounting system fall into four categories. These include providing information for:
1) external financial statements, 2) planning and controlling activities or processes, 3) short term strategic
decisions and 4) long term strategic decisions. These four functions relate to different audiences, emphasize
different types of information, require different reporting intervals and involve different types of decisions.
These characteristics and requirements of the four functions are summarized in Exhibit 2-4 and discussed
individually below.
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PLANNING AND CONTROLLING ACTIVITIES AND PROCESSES
Plant, production and operating managers and workers need information for planning and controlling specific
activities and processes. These users need dis-aggregated quantitative and qualitative non-financial information
on a timely basis. In some cases, information is needed daily, hourly or even on a real time (continuous) basis.
For example, the operating managers of a nuclear power plant, a computer integrated factory and a jumbo jet
need continuous non-financial information to monitor performance. Although standard costing was developed
to aid in planning and measuring the financial consequences of performance variations, cost accounting reports
and financial statements do not satisfy the requirements of these users. Cost accounting reports and financial
statements are useful to plant managers for planning and measuring financial results, but they are not designed
to control the activities, processes and work performed on a day to day basis.
JOB ORDER COSTING
In job order costing, costs are accumulated by jobs, orders, contracts, or lots. The key is that the work is done
to the customer's specifications. As a result, each job tends to be different. For example, job order costing is
used for construction projects, government contracts, shipbuilding, automobile repair, job printing, textbooks,
toys, wood furniture, office machines, caskets, machine tools, and luggage. Accumulating the cost of
professional services (e.g., lawyers, doctors and CPA's) also fall into this category.
RECORDING TRANSACTIONS AND COSTS FLOWS
In a normal historical, full absorption, job order cost system, costs flow through the perpetual inventory
accounts in a specific manner. There are two ways to illustrate the technique. One very revealing method uses
T-accounts to represent the general ledger accounts involved. The second method illustrates the same
transactions using general journal entries. Both methods are presented below.
THE T-ACCOUNT APPROACH
TWELVE TYPICAL TRANSACTIONS THAT OCCUR

FREQUENTLY DURING AN ACCOUNTING CYCLE
NUMBER TRANSACTION
1 The purchase of direct and indirect materials.
2 The distribution of direct material to work in process.
3 The distribution of indirect material to factory overhead.
4 The purchase of direct and indirect labor resulting in factory payroll costs.
5 The payment of the payroll to the factory employees.
6 The distribution of indirect labor to factory overhead.
7 The distribution of direct labor to work in process.
8 The purchase of other indirect resources resulting in additional overhead costs.
9 The application of factory overhead to the inventory.
10 The transfer of completed jobs to finished goods.
11 The transfer of inventory costs to cost of goods sold.
12 The sales of finished products.
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THE GENERAL JOURNAL ENTRY APPROACH
GENERAL JOURNAL ENTRIES FOR NORMAL HISTORICAL JOB ORDER COSTING

1. Entry to record materials purchases. Raw Materials Inventory XXX XXX
Accounts Payable
2. Entry to record direct material usage. Work in Process Inventory XXX
Raw Materials Inventory XXX
3. Entry to record indirect material Factory Overhead Control XXX
usage. Raw Materials Inventory XXX
4. Entry to record the factory payroll. Factory Payroll XXX
Accrued Factory Payroll XXX
Withholding Income Tax XXX
Payable XXX
SSS Premium Payable XXX
Phil Health Contribution XXX
Payable
Pag-ibig Contribution Payable
5. Entry to record the payment of the Accrued Factory Payroll XXX

factory payroll. Cash XXX
6. Entry to record the indirect labor Factory Overhead Control XXX
costs. Factory Payroll XXX
7. Entry to record the direct labor costs. Work in Process Inventory XXX
Factory Payroll XXX
8. Entry to record the other overhead Factory Overhead Control XXX
costs. Sundry Credits (or Various XXX
Credits)
9. Entry to record the factory overhead Work in Process Inventory XXX
applied. Factory Overhead Applied XXX
10. Entry to record the cost of goods Finished Goods Inventory XXX
manufactured. Work in Process Inventory XXX
11. Entry to record the cost of goods Cost of Goods Sold XXX
sold. Finished Goods Inventory XXX
12. Entry to record sales. Cash XXX
Accounts Receivable XXX
Sales XXX
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PREDETERMINED OVERHEAD RATES
Developing an overhead rate involves four steps that include: 1) choosing an activity measurement, or
allocation basis, 2) choosing an activity level, 3) estimating indirect costs for the activity level chosen, and 4)
calculating the rate.
CHOOSING AN ALLOCATION BASIS
The first step involves choosing the manner in which activity will be measured. This activity measurement
becomes the allocation basis.
 Base to be used (physical output orunits of production, direct materials cost, direct labor cost, direct labor
hours, machine hours)
CHOOSING AN ACTIVITY LEVEL
Before the period starts, cost estimates are made for each type of indirect resource based on a particular activity
level chosen by management.
 Activity Level Selection
o Theoretical Capacity. The theoretical capacity of a department is its capacity to produce at full
speed without interruptions. It is achieved if the plant or department produces at 100% of its
rated capacity. It is highly improbable that any company can operate at theoretical capacity.
o Practical Capacity. It is a capacity that provides allowances for unavoidable interruptions, such
as time lost for repairs, inefficiencies, breakdowns, setups, failures, unsatisfactory materials,
delays in delivery of materials or supplies, labor shortages and absences, Sundays, holidays,
vacations, inventory-taking, and pattern and model changes, and the number of work shifts.
This reduction is caused by internal influences and does not consider the main external
influence, that is, lack of customers’ orders.
o Expected Actual Capacity. The expected actual capacity concept is based on a short range
outlook which advocates a rate in which overhead and production are based on the expected
actual output for the next production period. It is feasible with firms whose products are
seasonal and whose market and style changes allow price adjustments according to competitive
conditions and customer demands. This method usually results in the use of different
predetermined rate for each period, depending on increases or decreases in estimated factory
overhead and production figures.
o Normal Capacity. This is a production capacity that considers the average utilization of the
physical plant over a time period long enough to level out the highs and lows that occur in
every business venture. This capacity level is normally used in calculating factory overhead
rates. In determining the plant’s normal capacity, both physical capacity and average sales
expectancy must be considered.
ESTIMATING COST FOR THE ACTIVITY LEVEL CHOSEN
Before an overhead rate can be calculated, the analyst must estimate the indirect costs for the period based on
the activity level chosen in the previous step. Regression analysis is very useful for cost estimating. Learning
curve analysis is also useful, particularly where the process, or work to be performed is relatively new to the
company.
CALCULATING AND USING THE RATE
Estimated factory overhead

Factory Overhead Rate = Base or activity level (e.g. units of production,
Direct labor hour, machine hours, etc.)
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ACCOUNTING FOR SPOILAGE REWORK AND SCRAP
The previous illustrations ignore the possibility of producing units that do not meet product, or customer,
specifications. This is a convenient way to introduce these topics, but it is not very realistic. Spoilage, defective
units, rework and scrap are common in the typical manufacturing environment and should be accounted for and
monitored. The purpose of this section is to define these cost categories and to illustrate some of the applicable
accounting techniques. This section also includes a comparison of the statistical and accounting control
concepts from the perspective of monitoring spoilage costs.
CONCEPTUAL DEFINITIONS
The following conceptual definitions are commonly used for spoilage, normal spoilage, abnormal spoilage,
defective units, rework and scrap.
Spoilage: Spoilage refers to units that do not meet product specifications because of damage or other reasons,
and that cannot be reworked into good units.
Normal Spoilage: Spoilage up to an acceptable level defined by management is referred to as normal spoilage.
Statistically, normal spoilage falls within the control limits on a control chart, although the statistical process
control methodology is not always used for this purpose. It is assumed however, that normal spoilage results
from common causes. Therefore, normal spoilage is considered to be unavoidable, uncontrollable and part of
the cost of producing, i.e., a product or inventoriable cost.
Abnormal Spoilage: Spoilage above an acceptable level is referred to as abnormal spoilage. Statistically, it is
outside the control limits and interpreted as an out of control condition. Thus, abnormal spoilage is considered
to be controllable. Management should be able to keep the amount of spoilage within the control limits. As a
result, spoilage cost above the upper limit is charged to a loss account.
Spoilage within the control limits on the chart is considered to be uncontrollable because it is caused by the
normal variations within the system. Spoilage above the upper control limit is considered to be controllable
because it is caused by a special, or abnormal event or situation that does not occur when the process is stable.
Spoilage below the lower control limit is treated as normal spoilage and does not represent a problem.
Defective Units: A defective unit is a term used to indicate a unit that does not originally meet product
specifications, although it can be reworked into a good unit of product.
Rework: Rework refers to the costs associated with reworking the defective units to convert them into good
products.
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Scrap:Raw material fragments such as wood shavings, sawdust, metal filings, cloth cuttings, and other
leftover, but unusable, pieces of material are defined as scrap.
METHODS OF ACCOUNTING FOR SPOILAGE
Normal Spoilage
There are two methods of accounting for normal spoilage that are applicable in different situations. When
spoilage is common to all jobs, i.e., when it is just as likely to occur on one job as another, spoilage costs are
treated like any other overhead cost. The second method is used where the spoilage is caused by the customer's
exact specifications. Then the spoilage cost is charged to the customer’s job where it occurred. More specific
explanations for these two methods are provided below.
1. Normal Spoilage Common To All Jobs
When spoilage is common to all jobs (i.e., caused by the system) an estimate of spoilage cost (excluding any
estimated disposal value) is included in the numerator when the factory overhead rate is calculated. Then some
spoilage costs will be charged to each job when overhead is applied to work in process and to each job. The
normal spoilage that occurs during the period is charged to factory overhead, less any estimated disposal value.
The estimated disposal value is charged to an account for spoilage inventory. For example, assume spoilage in
the amount of P500 was detected during the period. The disposal value is estimated to be P100 and the spoilage
was caused by defects in the raw materials within control limits. The entry to record the spoilage is:
Factory Overhead 400

Spoilage Inventory 100
Work in Process 500
Note that in this method, actual spoilage is charged to factory overhead and applied spoilage is charged to each
job, just like any other type of factory overhead costs. When the spoilage is sold, an entry is made to debit cash
and credit spoilage inventory for the P100 disposal value. If accurate estimates of the disposal values cannot be
made at the time the spoilage is detected, the following entries will accomplish the same purpose.
The entry when the spoilage is detected is:

Work in Process 500
The entry when the spoilage is sold is:
Cash 100
2. Normal Spoilage Caused by Job Specifications
This method is used only in cases where the customer's specifications causes the spoilage. The idea is that the
customer's requirements are rather unusual, or more precise than the normal product specifications. The
spoilage costs that occur as a result of a particular customer's special requirements should not be shared by other
customers. Therefore, this method simply leaves the spoilage cost in work in process and on the job where it has
already been charged. Any disposal value would be charged to the spoilage inventory account. Using the
example above, the entry is:

Work in Process 100
This entry leaves the unrecovered costs, i.e., P400, in Work in Process and on the job cost sheet where it has
already been charged. To be fair to this customer, the manufacturer might eliminate the spoilage charge from
the overhead rate when applying overhead to this job to avoid overcharging the customer for spoilage.
Abnormal Spoilage
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Spoilage above an acceptable level (statistically above the upper control limit) should be charged to a loss
account. Assuming the spoiled units in the example above were classified as abnormal spoilage, the applicable
entry is:
Loss From Abnormal Spoilage 400

Work In Process 500
Abnormal spoilage results from a special cause other than a customer’s precise or unusual specifications. For
example, abnormal spoilage can occur when production line equipment is not adjusted properly, when inferior
raw materials are purchased, or by fire, explosion, or other unusual events.
METHODS OF ACCOUNTING FOR REWORK
Normal Rework
The two methods of accounting for normal rework are based on the same logic used to account for spoilage.
Normal rework that is common to all jobs is treated like any other factory overhead cost. Rework caused by a
customer's specifications is charged to that particular customer's job.
1. Normal Rework Common To All Jobs
When rework is as likely to occur on one job as another, an estimate of the rework (cost) that is expected to
occur during the period under normal conditions is included in the numerator when the factory overhead rate is
calculated. Then, each job is charged with some rework cost when overhead is applied. Actual rework cost is
charged to factory overhead. For example, assume various jobs had to be reworked during the period that
required P1,000 of additional direct material, and P800 of direct labor for 80 additional hours. Also assume that
overhead is applied at a rate of P20 per direct labor hour. The entry to record these costs is as follows.
Factory Overhead 3,400

Materials Control 1,000
Factory Payroll 800
Factory Overhead* 1,600
* Factory overhead applied = (80)(P20)
2. Rework Caused by Job Specifications
In cases where the rework is caused by the customer's specifications, the costs of reworking the units is charged
to the job where it occurred. Using the amounts in the example above, the entry is as follows:
Work in Process 3,400

Factory Payroll 800
The P3,400 is also charged to the specific job cost sheet where it occurred. It would be appropriate to eliminate
the rework charge from the overhead rate when applying overhead to this job to avoid overcharging the
customer for rework.
Abnormal Rework
Rework costs that exceed the control limits are charged to a loss account. Conceptually, the approach is the
same as that used for abnormal spoilage. Assuming the rework in the example above is considered to be
abnormal, the following entry is appropriate.
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Loss From Abnormal Rework 3,400

Factory Payroll 800
METHODS OF ACCOUNTING FOR SCRAP
There are many ways to account for scrap. The estimated disposal value of scrap may be charged to a scrap
inventory account if the value is significant. However, if the value of the scrap is relatively minor, an inventory
account for scrap is not needed. Two methods are illustrated below that are variations of an approach referred to
as the cost reduction method.
Cost Reduction Method Where Normal Scrap Is Common To All Jobs
Scrap frequently has a disposal value. When scrap is common to all jobs produced, an estimate of the revenue
expected from the sale of normal scrap is subtracted from the numerator in the overhead rate calculation. This
causes the overhead rate to be lower than it would be otherwise. Then overhead applied to work in process is
somewhat less than it would be without the benefit of this cost reduction. If an inventory account is not used, no
entry is made until the scrap is sold. Then the actual amount received when the scrap is sold is treated as an
overhead cost reduction. For example, assume scrap that accumulated during the period is sold for P300. The
appropriate entry is:
Cash 300
Cost Reduction Method Where Normal Scrap Is Caused by Job Specifications
When scrap is caused by the customer's requirements, the credit for scrap revenue is given to the customer. The
entry is as follows:
Cash 300
Work in Process 300
The P300 credit is also made on the appropriate job cost sheet. When overhead is applied to the job involved,
the estimate of scrap revenue that was subtracted in the overhead rate calculation should be added back to the
rate. This avoids giving the customer an extra cost reduction for scrap.
Job Order Costing

REVIEW EXERCISES
PROBLEM 1.
The Anda Company had the following inventories on August 1 of the current year.
Finished goods P25,000
Work in process 18,500
Materials 22,000
The work in process account controls two jobs

Job 401 Job 402
Materials P 3,000 P 5,600
Labor 2,500 3,000
Factory overhead 2,000 2,400
P 7,500 P11,000
The following information pertains to August operations:

1. Materials purchased on account, P28,000.
2. Materials issued for production, P25,000. Of this amount, P3,000 was for indirect materials; the difference
was distributed: P5,500 to Job 401; P7,000 to Job 402; and P9,500 to Job 403.
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3. Materials returned to the warehouse from the factory, P800, of which P300 was for indirect materials, the
balance from Job 403.
4. Materials returned to vendors, P1,000.
5. Payroll after deducting P3,025 for withholding taxes, P1,600 for SSS Premiums, P375 for
Medicare, and P1,200 for Pag-ibig, was P32,800. The payroll due the employees was paid during the month.
6. The payroll was distributed as follows: P10,400 to Job 401; P12,500 to Job 402, P10,500 to Job 403 and the
balance represents indirect labor.
7. The share of the employer for payroll was recorded - P2,000 for SSS Premiums, P375 for Medicare
Contributions, and P1,200 for Pag-ibig Funds.
8. Factory overhead, other than any previously mentioned, amounted to P15,000. Included in this figure were
P3,000 for depreciation of factory building and equipment, and P 950 for expired insurance on the factory. The
remaining overhead was unpaid at the end of August.
9. Factory overhead was applied to production at the rate of 80% of direct labor cost.
10. Jobs 401 and 402 were completed and transferred to the finished goods warehouse.
11. Job 401 was shipped and billed at a gross profit of 40% of the cost of goods sold.
12. Cash collections from accounts receivable during August were P35,000.
Required:
1. Journal entries to record the above transactions.
2. Job order cost sheets.
3. Cost of goods sold statement.
PROBLEM 2
1) ABC Company manufactures custom-built conveyor systems for factory and commercial operations. Lisa
French is the cost accountant for ABC and she is in the process of educating a new employee, Julie English,
about the job order costing system that ABC uses. (The system is based on normal costs; overhead is
applied based on direct labor cost and rounded to the next whole dollar.) Lisa gathers the following job
order cost records for May:
Direct Direct Total
Job No. Materials Labor Applied OH Cost
667 P 5,901 P1,730 P 1,990 P 9,621
669 18,312 1,810 2,082 22,204
670 406 500 575 1,481
671 51,405 9,500 10,925 71,830
672 9,615 550 633 10,798
To explain the missing job number, Lisa informed Julie that Job #668 had been completed in April. She
also told her that Job #667 was the only job in process at the beginning of May. At that time, the job had been
assigned P4,300 for direct material and P900 for direct labor. At the end of May, Job #671 had not been
completed; all others had. Lisa asked Julie several questions to determine whether she understood the job order
system.
Required: Help Julie answer the following questions:
a. What is the predetermined overhead rate used by ABC Company?

b. What was the total cost of beginning Work in Process inventory?
c. What was total prime cost incurred for the month of May?
d. What was cost of goods manufactured for May?
ANSWER:
a. Use any job started in May:
Rate = MOH JOB $670 $575 = 115%/DL Cost
DL COST $500
b. DM $4,300
DL 900
FOH 1,035 ($900 × 115%)
$6,235
c. Prime Cost =DM + DL
DM = $85,639 – 4,300 = $81,339

DL = 14,090 – 900 = 13,190
14
$94,529
d. COGM = $9,621 + 22,204 + 1,481 + 10,798 = $44,104

PROBLEM 3
James Co. uses a job order costing system and has the following information for the first week of June 2012:
1. Direct labor and direct materials used:

Job No. Direct Material Direct Labor Hours
498 P1,500 116
506 960 16
507 415 18
508 345 42
509 652 24
511 308 10
512 835 30
Total P5,015 256
2. The direct labor wage rate is P4 per hour.
3. The overhead rate is P5 per direct labor hour.
4. Actual overhead costs for the week, P1,480.
5. Jobs completed: Nos. 498, 506, and 509.
6. The factory had no work in process at the beginning of the week.
Required:
a. Prepare a summary that will show the total cost assigned to each job.
b. Compute the amount of overhead over- or underapplied during the week.
c. Calculate the cost of the work in process at the end of the week.
ANSWER:
a. Job No. DM DL OH Total

498 $1,500 $ 464 $ 580 $2,544
506 960 64 80 1,104
507 415 72 90 577
508 345 168 210 723
509 652 96 120 868
511 308 40 50 398
512 835 120 150 1,105
$5,015 $1,024 $1,280 $7,319
b. Actual MOH $1,480

Applied MOH 1,280
Underapplied $ 200
c. JOB 507 $ 577

508 723
511 398
512 1,105
Ending WIP $2,803
2) The Watson Tool Corporation, which commenced operations on August 1, employs a job order costing system.
Overhead is charged at a normal rate of P2.50 per direct labor hour. The actual operations for the month of August are
summarized as follows:
a. Purchases of raw material, 25,000 pieces @ P1.20/piece.
b. Material and labor costs charged to production:
Direct Direct
Job No. Units Material labor cost labor hours
101 10,000 P4,000 P6,000 3,000
102 8,800 3,600 5,400 2,700
103 16,000 7,000 9,000 4,500
15
104 8,000 3,200 4,800 2,400

105 20,000 8,000 3,600 1,800
c. Actual overhead costs incurred:

Variable P18,500
Fixed 15,000
d. Completed jobs: 101, 102, 103, and 104

e. Sales—P105,000. All units produced on Jobs 101, 102, and 103 were sold.
Required: Compute the following balances on August 31:
a. Material inventory
b. Work in process inventory
c. Finished goods inventory
d. Cost of goods sold
e. Under- or overapplied overhead
ANSWER:
a. $30,000 – ($4,000 + $3,600 + $7,000 + $3,200 + $8,000) = $4,200
b. Job #105 $8,000 + $3,600 + ($1,800 × 2.50) = $16,100
c. Job #104 $3,200 + $4,800 + ($2,400 × 2.50) = $14,000
d. Job # 101 $4,000 + $6,000 + ($3,000 × 2.50) = $17,500

102 $3,600 + $5,400 + ($2,700 × 2.50) = 15,750
103 $7,000 + $9,000 + ($4,500 × 2.50) 27,250
$60,500
e. Applied 14,400 × $2.50 = $36,000

Actual 33,500
Overapplied $ 2,500
16
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. Which of the following costing systems allows management to quickly recognize materials, labs, and overhead
variances and take measures to correct them.
Actual Cost System Normal Cost System
a. yes yes
b. yes no
c. no yes
d. no no
3. 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.
4. Job order costing and process costing have which of the following characteristics?
Job Order Costing Process Costing
a. homogeneous products heterogeneous products
and large quantities and small quantities
b. homogeneous products heterogeneous products
and small quantities and large quantities
c. heterogeneous products homogeneous products
and large quantities and small quantities
d. heterogeneous products homogeneous products
and small quantities and large quantities
5. 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.
6. Additional accounts that comprise the balance of a single general account is a

a. worksheet. b. journal.c.subsidiary ledger. d. book of original entry.
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.
b. raw material was purchased on account.
c.direct material was placed into production.
d. direct labor was utilized for production.
8. The source document that records the amount of raw material that has been requested by production is the
a. job order cost sheet. b. bill of lading.c.interoffice memo.d. material requisition.
9. A material requisition form should show all of the following information except
a. job number. b. quantity required.c.unit cost.d. purchase order number.
10. Clyde Jenkins is an auditor for the General Accounting Office. Clyde is investigating invoices sent by Proper
Paper Products charging the Army $30 per roll for toilet paper. Proper Paper uses a job order costing system.
Where should Clyde look to find total production costs related to the toilet paper?
a. material requisition form b. bill of materialsc.sales invoiced. job order cost
11. The cost sheets for incomplete jobs at the end of the period comprise the subsidiary ledger for
a. Finished Goods Inventory. b. Raw Material Inventory.c.Work in Process Inventory. d. Supplies Inventory.
12. Overhead is applied to jobs in a job order costing system

a. at the end of a period.
b. as jobs are completed.
17
c.at the end of a period or as jobs are completed, whichever is earlier.

d. at the end of a period or as jobs are completed, whichever is later.
13. Colt Co. uses a job order costing system. During April 2011, the following costs appeared in the Work in Process
Inventory account:
Beginning balance P 24,000
Direct material used 70,000
Direct labor incurred 60,000
Applied overhead 48,000
Cost of goods manufactured 185,000
C Co. applies overhead on the basis of direct labor cost. There was only one job left in WIP Inventory at the end
of April which contained P5,600 of overhead. What amount of direct material was included in this job?
a. P4,400b. P4,480c.P6,920d. P8,000
14. Q Co. is a print shop that produces jobs to customer specifications. During January 2017, Job #1253 was worked on
and the following information is available:
Direct material used P2,500
Direct labor hours worked 15
Machine time used 6
Direct labor rate per hour P7
Overhead application rate per
hour of machine time P18
What was the total cost of Job #1253 for January?

a. P3,025
b. P2,812
c. P2,770
d. P2,713
Use the following information for questions 15–17.
Ark Co. uses a job order costing system. At the beginning of January, the company had 2 jobs in process with the
following costs:
Direct Material Direct Labor Overhead

Job #456 P3,400 P510 P255
Job #461 1,100 289 ?
Ark pays its workers P8.50 per hour and applies overhead on a direct labor hour basis.
15. What is the overhead application rate per direct labor hour?
a. P0.50 b. P2.00c.P4.25 d. P30.00
16. How much overhead was included in the cost of Job #461 at the beginning of January?
a. P144.50 b. P153.00c.P2,200.00 d. P2,456.50
17. During January, Ark employees worked on Job #479. At the end of the month, P714 of overhead had been applied to
this job. Total Work in Process Inventory at the end of the month was P6,800 and all other jobs had a total cost of
P3,981. What amount of direct material is included in Job #479?
a. P677b. P1,391c.P2,142d. P4,658
18. Black Corp. manufactures products on a job order basis. The job cost sheet for Job #329 shows the following for
March:
Direct material P5,000
Direct labor (100 hours @ P7.25) P725
Machine hours incurred 40
Predetermined overhead rate per
machine hour P26
At the end of March, what total cost appears on the job cost sheet for Job #329?
a. P5,725 b. P5,765c.P6,765 d. P8,325
19. Products at Green Manufacturing are sent through two production departments: Fabricating and Finishing. Overhead is
applied to products in the Fabricating Dept. based on 150 percent of direct labor cost and P18 per machine hour in
Finishing. The following information is available about Job #639:
Fabricating Finishing
Direct material P1,590 P580
Direct labor cost ? 48
18
Direct labor hours 22 6

Machine hours 5 15
Overhead applied 429 ?
What is the total cost of Job #639?

a. P2,647 b. P3,005 c.P3,093 d. P3,203
20. Carolina Co. applies overhead to jobs at the rate of 40 percent of direct labor cost. Direct material of P1,250 and direct
labor of P1,400 were expended on Job #44 during June. At May 31, the balance of Job #44 was P2,800. The June 30th
balance is
a. P3,210. b. P4,760. c. P5,450. d. P6,010.
Adams Co. uses a job order costing system and the following information is available from its records. The company has 3
jobs in process: #5, #8, and #12.
Raw material used P120,000

Direct labor per hour $8.50
Overhead applied based on
direct labor cost 120%
Direct material was requisitioned as follows for each job respectively: 30 percent, 25 percent, and 25 percent; the balance
of the requisitions was considered indirect. Direct labor hours per job are 2,500; 3,100; and 4,200; respectively. Indirect
labor is P33,000. Other actual overhead costs totaled P36,000.
21. What is the prime cost of Job #5?

a. P42,250 b. P57,250c. P73,250 d. P82,750
22. What is the total amount of overhead applied to Job #8?

a. P18,250 b. P26,350 c. P30,000 d. P31,620
23. What is the total amount of actual overhead?

a. P36,000 b. P69,000 c.P93,000 d. P99,960
24. How much overhead is applied to Work in Process?

a. P69,000 b. P99,960c. P132,960 d. P144,000
25. If Job #12 is completed and transferred, what is the balance in Work in Process Inventory at the end of the period
if overhead is applied at the end of the period?
a. P96,700 b. P99,020 c.P170,720 d. P139,540
26. Assume the balance in Work in Process Inventory was P18,500 on June 1 and P25,297 on June 30. The balance on
June 30 represents one job that contains direct material of P11,250. How many direct labor hours have been worked on
this job (rounded to the nearest hour)?
a. 751 b. 1,324c.1,653d. 2,976
Kool Co. uses a job order costing system. Assume that Job #101 is the only one in process. The following information is
available:
Budgeted direct labor hours 65,000 Budgeted machine hours 9,000
Budgeted overhead P350,000 Direct material P110,500
Direct labor cost P70,000
27. What is the overhead application rate if Kool uses a predetermined overhead application rate based on direct labor
hours (rounded to the nearest whole peso)?
a. P0.20 b. P5.00 c.P5.38 d. P38.89
28. What is the total cost of Job #101 assuming that overhead is applied at the rate of 135 percent of direct labor cost
(rounded to the nearest whole peso)?
a. P192,650 b. P268,250 c.P275,000 d. P329,675
29. Benhur company consumed P450,000 worth of direct materials during May 2017. At the end of the month the direct
materials inventory of Benhur was P25,000 lower than the May 1 inventory level. How much were the direct materials
procured during May 2017?
A. P475,000 C. P400,000
19
B. P375,000 D. P425,000
30. Pin company incurred the following costs during the month: direct labor, P122,000; factory overhead, 108,000 and
direct materials purchases, P160,000. Inventories show the following costs:
Beginning Ending
Finished goods P27,000 P30,000
Work in process 61,500 57,500
Direct materials 37,500 43,500
How much is the cost of goods manufactured?

A. P443,500 C. P386,000
B. P382,000 D. P388,000
31. Last month, Pare company placed P55,000 of materials into production. The Printing Department used 8,000 labor
hours at 5.60 per hour and the Binding Department used 4,600 hours at P6.00 per hour. Factory overhead is applied at a
rate of P6.00 per labor hour in the Printing Department and P8.00 per labor hour in the Binding Department. Pares
inventory accounts show the following balances:
Beginning Ending
Finished goods P22,000 P17,000
Materials 20,000 18,000
What is the total cost of goods sold?

A. P219,600 C. P108,000
B. P214,600 D. P217,200
32. The factory ledger of Diamond Corporation contains the following cost data for the year ended December31, 2017:
Inventories
Opening Closing
Raw materials P150,000 170,000
Finished goods 180,000 220,000
Raw materials used 652,000
Total manufacturing costs charged to production
during the year (including raw materials,
direct labor and factory overhead applied
at the rate of 50% of direct labor cost) 1,372,000
Compute the: (1) cost of raw materials purchased and (2) direct labor charged to production during the year:
A. (1) P632,000; (2) P240,000 C. (1) P.72,000; (2) P720,000
B. (1) P672,000; (2) 480,000 D. (1) 360,000; (2) P480,000
33. National Marketing Corp. uses a job-order costing system. It has three production departments, X, Y and Z.
The manufacturing cost budget for 2017 is as follows:

Dept. X Dept. Y Dept. Z
Direct Materials P600,000 P400,000 P200,000
Direct Labor 200,000 500,000 400,000
Manufacturing overhead 600,000 100,000 200,000
For Job no. 01-90 which was completed in 2017, direct materials cost was P75,000 and direct labor was as follows:
Dept. X P 40,000
Dept. Y 100,000
Dept. Z 20,000
The corporation applies manufacturing overhead to each job order on the basis of direct labor cost, using departmental
rates predetermined at the beginning of the year based on the manufacturing cost budget.
The total manufacturing cost of Job No. 01-90 which was completed is 2017 is:
A. P235,000 C. P385,000 .
B. P310,000 D. P150,000
34. Avery Co. uses a predetermined factory overhead rate based on direct labor hours. For the month of October, Avery’s
budgeted overhead was P300,000 based on a budgeted volume of 100,000 direct labor hours. Actual overhead amounted to
P325,000 with actual direct labor hours totaling 110,000. How much was the overapplied or underapplied overhead?
A. P30,000 overapplied C. P5,000 overapplied
20
B. P30,000 underapplied D. P5,000 underapplied
35. Yolanda Company provided the inventory balances and manufacturing cost data for the month of January.
Under Yolanda’s cost system, any over-or underapplied overhead is closed to the cost of goods
sold account at the end of the calendar year.
Inventories January 1 January31

Direct materials P30,000 P40,000
Finished goods 65,000 50,000
Month of January
Factory overhead applied P150,000
Cost of goods manufactured 515,000
Direct materials used 190,000
Actual factory overhead 144,000
What would cost of goods sold be if under-or overapplied overhead were closed to cost of goods
sold?
A. P509,000 C. P530,000
B. P524,000 D. P536,000
36. Using the same information in No. 7, what would cost of goods sold be if under-or overapplied were allocated to
inventories and cost of goods sold?
A. P509,700 C. P526,300
B. P524,700 D. P530,300
37. The BAM Manufacturing Co. uses a job-order costing system, and it applies factory overhead to production at a pre-
determined rate based on direct labor cost. The following account appears in the general ledger:
WORK IN PROCESS
Beg. Bal P50,000 Finished goods P250,900
Direct Materials 100,000
Direct Labor 80,000
Applied overhead 60,000
The ending work in process represents the cost of Job# 26 which has been charged with P6,000 of direct labor and the cost
of Job # 27 which has been charged with applied factory overhead of P4,800. Total cost of direct materials in the ending
work in process was
A. P8,400 B. P9,000 C. P15,200 D. P17,400
Questions 38 through 39 are based on the following information

The following information is taken from the records of JOHN REY Manufacturing Company for the first calendar quarter
of 2017:
Jan. 1 March31
Inventory, Raw materials P32,300 P34,100
Inventory, Goods in Process 38,500 35,050
Inventory, Finished Goods 44,600 48,800
Direct labor 254,000
Factory overhead cost 236,900
Cost of goods sold 676,300
38. How much is the total “cost of goods manufactured» during the first quarter of 2017?
A. P676,100 C. P680,500
B. P243,000 D. P713,350
39. How much is the total cost of goods placed in process during the first quarter of 2017?
A. P680,500 C. P715,550
B. P677,050 D. P719,050
40. How much is the total cost of raw materials used during the first quarter of 2018?
A. P263,150 C. P224,650
B. P186, 150 D. P286, 150
21
41. The Papaya Company uses a job order cost system. The following data were obtained from the company’s cost records
as of June 30. No jobs were in process at the beginning of June, all costs listed being incurred during the month.
Job Order No. Direct Materials Direct Labor Hours Direct Labor Cost
1001 P4,320 1,300 P1,600
1002 9,150 3,700 7,250
1003 11,275 8,200 14,325
1004 3,225 1,500 2,800
1005 6,500 3,200 6,100
1006 2,750 980 1,650
Manufacturing overhead costs are charged to jobs on the basis of P1.50 per direct labor hour. The
actual manufacturing overhead cost for the month totaled P30,350. During June, Job Order Nos.
1001, 1002, 1004 and 105 were completed. Jobs 1001l and 1002 were shipped out and the customers were billed P9,000
for Job 1001 and P20,000 for Job 1002.
The cost of goods manufactured would be:

A. P55,500 C. P56,495
B. P55,495 D. P57,500
PROCESS COSTING
Introduction to Process Costing
 Process costing is a method of accumulating and assigning costs to units of production in companies that
make large quantities of homogeneous products.
 A process costing system is a costing system in which costs are accumulated by cost component in each
department and assigned to all of the units that flowed through the department.
a. Units are transferred from one department to the next; unit costs are also transferred so
that a total production cost is accumulated by the end of production.
b. The accumulated departmental costs are spread or assigned to all units produced that
flowed through the department during the period.
 Cost assignment in any production environment is essentially an averaging process.
 The actual unit cost of a product is found by dividing a period’s departmental production costs by the
period’s departmental quantity of production, the average being expressed by the following formula:
Sum of Production Costs

Unit Cost 
Production Quantity
a. The numerator in the average product cost fraction is the sum of the actual direct materials cost,
actual direct labor cost, and actual or predetermined overhead cost.
b. The denominator in the average product cost fraction represents total departmental production for
the period.
 The two basic differences between job order and process costing are:
a. the quantity of production for which costs are being accumulated at any one time and
b. the cost object to which the costs are assigned.
 Equivalent units of production(EUP) are an approximation of the number of whole units of output that
could have been produced during a period from the actual effort expended during that period. Two facts are
recognized by the use of equivalent units of production.
a. Units in the beginning Work in Process were started last period, but will be completed
during the current period—meaning that some costs related to these units were
incurred last period and additional costs will be incurred in the current period.
22
b. Partially completed units in the ending Work in Process Inventory were started in the
current period, but will not be completed until the next period—meaning that costs were
incurred in this period and additional costs will be incurred next period, due to current
production efforts on the ending Work in Process Inventory.
 Weighted Average and FIFO Process Costing Methods
o The weighted average method is a method of process costing that computes an average cost per
equivalent unit of production; it combines beginning inventory units and costs with current
production and costs, respectively, to compute that average.
o The weighted average method is not concerned about what quantity of work was performed in the
prior period on the units in beginning inventory; it only focuses on units that are completed in the
current period and units remaining in ending inventory.
o The method does not distinguish between units in beginning inventory and units entering production
during a period.
o Average unit cost is found by dividing the total cost to be accounted for by the total equivalent units
of production and is calculated as follows:
Beginning Inventory Cost  Current Period Cost

Unit Cost 
Weighted Average Equivalent Units of Production
Total Cost Incurred

Total Equivalent Units of Effort
 The FIFO method is a method of process costing that computes an average cost per equivalent unit of
production using only current period production and cost information; units and costs in beginning inventory
are separately sent to the next department or to Finished Goods Inventory, as is appropriate.
o The FIFO method more realistically reflects the way in which most goods actually flow through the
production system.
o The method does not commingle units and costs of different periods, so that equivalent units and
costs of beginning inventory are withheld from the computation of average current period cost.
o The focus is specifically on the work performed during the current period, and the EUP schedule
shows only that work.
o The FIFO average cost per equivalent unit is calculated as follows:
Current Period Costs

Unit Cost 
Equivalent Units of Production
MULTIPLE CHOICE
1. Which cost accumulation procedure is most applicable in continuous mass-production manufacturing

environments?
a. standard b. actualc.process d. job order
2. Process costing is used in companies that

a. engage in road and bridge construction.
b. produce sailboats made to customer specifications.
c.produce bricks for sale to the public.
d. construct houses according to customer plans.
3. A producer of ________ would not use a process costing system.

a. gasoline b. potato chipsc.blank videotapesd. stained glass windows
4. A process costing system is used by a company that

a. produces heterogeneous products.
b. produces items by special request of customers.
c.produces homogeneous products.
d. accumulates costs by job.
23
5. Which is the best cost accumulation procedure to use for continuous mass production of like
units?
a. actual b. standardc.job orderd. process
6. Equivalent units of production are equal to the

a. units completed by a production department in the period.
b. number of units worked on during the period by a production department.
c.number of whole units that could have been completed if all work of the period had been used to
produce whole units.
d. identifiable units existing at the end of the period in a production department.
7. In a process costing system using the weighted average method, cost per equivalent unit for a given
cost component is found by dividing which of the following by EUP?
a. only current period cost
b. current period cost plus the cost of beginning inventory
c.current period cost less the cost of beginning inventory
d. current period cost plus the cost of ending inventory
8. The weighted average method is thought by some accountants to be inferior to the FIFO method
because it
a. is more difficult to apply.
b. only considers the last units worked on.
c. ignores work performed in subsequent periods.
d. commingles costs of two periods.
9. The first step in determining the cost per EUP per cost component under the weighted average
method is to
a. add the beginning Work in Process Inventory cost to the current period’s production cost.
b. divide the current period’s production cost by the equivalent units.
c. subtract the beginning Work in Process Inventory cost from the current period’s production
cost.
d. divide the current period’s production cost into the EUP.
10. The difference between EUP calculated using FIFO and EUP calculated using weighted average is the
equivalent units
a. started and completed during the period.
b. residing in beginning Work in Process Inventory.
c.residing in ending Work in Process Inventory.
d. uncompleted in Work in Process Inventory.
CLASS PROBLEMS
Problem 1
Boston Co. has the following information available for November:
Beginning Work in Process Inventory

(25% complete as to conversion) 10,000 units
Started 120,000 units
Ending Work in Process Inventory
(30% complete as to conversion) 30,000 units
Beginning Work in Process Inventory Costs:

Material P2,100
Conversion 2,030
Current Period Costs:

Material P 33,000
Conversion 109,695
All products completed are transferred out.
REQUIRED: 1. Prepare a COST OF PRODUCTION REPORT using the (a) FIFO and (b) weighted average
method assuming:
a) All materials are added at the start of production and all products completed are transferred out.
24
b) Materials are added 50% at start of the process, 20% at production mid-point, and the balance at the
end of the process.
ANSWER:
FIFO Weighted Average
Beg. WIP 10,000 Beg. WIP 10,000
Started 120,000 Started 120,000
To Acct. For 130,000 To Acct. For 130,000
Beg. WIP 10,000 TO 100,000

S&C 90,000 EI 30,000
End. WIP 30,000 Acct. for 130,000
Acct. For 130,000
(a) FIFO (b) Weighted Average

Mat. CC Mat.CC
BWIP 0 7,500
S&C 90,000 90,000 TO 100,000 100,000
EWIP 30,000 9,000 EI 30,000 9,000
EUP 120,000 106,500 EUP 130,000 109,000
MEDIUM
(a) FIFO (b) Weighted Average

Mat. CC Mat. CC
$ 33,000 $ 109,695 $ 35,100 $ 111,725
 120,000  106,500  130,000  109,000
$ .275 $ 1.03 $ .27 $ 1.025
$1.305 $1.295
(a) FIFO
Beginning Work in Process $ 4,130
To complete (7,500 × $1.03) = 7,725
$11,855
Started and Completed

90,000 × $1.305 = 117,450
Total costs transferred out $129,305
Ending Work in Process

30,000 × $ .275 = $ 8,250
9,000 × $1.03 = 9,270
$ 17,520
Total costs accounted for $146,825
(b) Weighted Average

Completed
100,000 × $1.295 = $129,500
Ending Work in Process

30,000 × $ .27 = $ 8,100
9,000 × $1.025 = 9,225
$ 17,325
Total costs accounted for $146,825
PROBLEM 2
The Hearty Company has two processing departments, Cooking and Packaging. Ingredients are placed
into production at the beginning of the process in Cooking, where they are formed into various shapes.
When finished, they are transferred into Packaging, where the candy is placed into heart and tuxedo
boxes and covered with foil. All material added in Packaging is considered as one material for
convenience. Since the boxes contain a variety of candies, they are considered partially complete until
filled with the appropriate assortment. The following information relates to the two departments for
February 2017:
25
Cooking Department:
Beginning WIP (30% complete as to conversion) 4,500 units
Units started this period 15,000 units
Ending WIP (60% complete as to conversion) 2,400 units
Packaging Department:
Beginning WIP (90% complete as to material,
80% complete as to conversion) 1,000 units
Units started during period ?
Ending WIP (80% complete as to material and 80% complete as to conversion) 500 units
a. Determine equivalent units of production for both departments using the weighted average
method.
b. Determine equivalent units of production for both departments using the FIFO method.
ANSWER:
a. Cooking Department
Mat. CC
Trans. Out 17,100 17,100
EWIP 2,400 1,440
TOTAL EUP 19,500 18,540
Packaging Department
T. In Mat. CC
Trans. Out 17,600 17,600 17,600
EWIP 500 400 400
TOTAL EUP 18,100 18,000 18,000
b. Cooking Department
Mat. CC
BWIP 0 3,150
S&C 12,600 12,600
EWIP 2,400 1,440
TOTAL EUP 15,000 17,190
Packaging Department
T. In Mat. CC
BWIP 0 100 200
S&C 16,600 16,600 16,600
EWIP 500 400 400
TOTAL EUP 17,100 17,100 17,200
LOST UNITS AND ACCRETION
Loss of Units
o Shrinkage is a decrease in units arising from an inherent characteristic of the production process; includes
decreases caused by evaporation, leakage, and oxidation.
o Economically reworked means that the incremental revenue from the sale of reworked defective units is
greater than the incremental cost of the rework.
o A defective unit is a unit that has been rejected at a control inspection point for failure to meet appropriate
standards of quality or designated product specifications; it can be economically reworked and sold through
normal distribution channels.
o A spoiled unit is a unit that is rejected at a control inspection point for failure to meet appropriate standards
of quality or designated product specifications; it cannot be economically reworked to be brought up to
standard.
o A normal loss is an expected decline in units during the production process.
o An abnormal loss is a decline in units in excess of normal expectations during a production process.
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o A variety of methods may be applied to account for units that are lost during production, and the designation
of the most suitable method depends on two factors:
a. the cause of the decrease and
b. management expectations regarding lost units.
Types of Lost Units
o Normal loss is normally calculated on the basis of goods output or actual input.
a. The normal loss is often estimated to be quite high since the lowest costing material,
labor, or overhead support is chosen.
b. Highly estimated normal losses can also be caused by a problem inherent in the design
or production process.
c. Managers often discover, based on cost-benefit analysis, that a problem would cost
more to eliminate than to tolerate.
o An abnormal loss is a loss in excess of the normal, predicted tolerance limits.
a. When an abnormal loss occurs, so does a normal loss—unless zero defects have been
set as the AQL (accepted quality level).
b. Abnormal losses usually arise due to human or machine error during the production
process.
o Continuous loss is loss that is assumed to occur uniformly throughout the production process.
o A discrete loss is a loss that occurs at a specific point in the production process.
Accounting for Lost Units
o Normal loss cost is treated as a product cost.
a. Such cost is included as part of the cost of good units that result from the production
process.
b. The cost of normal spoilage is inventoried in Work in Process and Finished Goods and
expensed only when good units are sold.
o Abnormal loss cost is considered to be a period loss since abnormal spoilage is not necessary in the
production of good units and its cost is avoidable in the future.
a. Such cost should be brought to the attention of the responsible production manager.
b. The production manager should then investigate the causes of the spoilage to
determine what action needs to be taken to prevent similar occurrences in the future.
Defective Units
o Defective units can be reworked and sold as either regular or irregular units.
o The cost of rework is considered either a product cost or a period loss, depending on whether the rework is
determined to be normal or abnormal.
a. Rework cost is added to the current period's work in process costs for good units and
assigned to all units completed, in the case of normal rework with an actual costing
system.
b. Rework cost is estimated and included as part of the estimated factory overhead cost
used to calculate the overhead rates, in the case of normal rework with a normal or
standard costing system.
27
c. Rework cost should be accumulated and assigned to a loss account if the rework is
abnormal.
d. Production cost of irregular reworked units should be transferred to a special inventory

account and should not be commingled with the production costs of good units.
e. The difference between total cost and a lesser net realizable value results in a
deficiency. The portion of the deficiency assigned to normal defective units should be
treated as part of the production cost of good units, while the portion of the deficiency
assigned to abnormal defective units should be written off as a period loss.
Defects/Spoilage in Job Order Costing
o The overhead rate should include an amount for the net cost of normal spoilage, which is the cost of
spoiled work less the estimated disposal value of that work, if normal spoilage is expected on all jobs.
o Spoilage that is not expected can be periodically encountered on specific jobs due to job-related
characteristics, and its estimated cost should not be included in calculating the overhead rate.
o The cost of abnormal losses (net of any disposal value) should be written off as a period cost.
Accretion
o Accretion refers to an increase in units or volume because of the addition of material in successor
departments or to factors that are inherent in the production process.
o The occurrence of accretion in a successor processing department requires that both the number of units
transferred in and the related cost per unit be adjusted to reflect the occurrence.
MULTIPLE CHOICE THEORY
1. Shrinkage should be treated as

a. defective units.
b. spoiled units.
c. miscellaneous expense.
d. a reduction of overhead.
2. Economically reworked units may

a. not be sold through normal channels of distribution.
b. be sold through normal channels of distribution.
c. not be reprocessed to a sufficient quality level.
d. also be called a spoiled unit.
3. A unit that is rejected at a quality control inspection point, but that can be reworked and sold, is referred
to as a
a. spoiled unit.
b. scrap unit.
c. abnormal unit.
d. defective unit.
4. Spoiled units are

a. units that cannot be economically reworked to bring them up to standard.
b. units that can be economically reworked to bring them up to standard.
c. the same as defective units.
d. considered abnormal losses.
5. The cost of abnormal losses (net of disposal costs) should be written off as
Product cost Period cost
a. yes no
b. yes yes
c. no yes
d. no no
6. Which of the following would fall within the range of tolerance for a production cycle?
Abnormal loss Normal loss
a. yes yes
28
b. yes no
c. no no
d. no yes
7. If abnormal spoilage occurs in a job order costing system, has a material dollar value, and is related to
a specific job, the recovery value of the spoiled goods should be
debited to credited to
a. a scrap inventory account the specific job in process
b. the specific job in process overhead
c. a loss account the specific job in process
d. factory overhead sales
8. If normal spoilage is detected at an inspection point within the process (rather than at the end), the cost
of that spoilage should be
a. included with the cost of the units sold during the period.
b. included with the cost of the units completed in that department during the period.
c. allocated to ending work in process units and units transferred out based on their relative
values.
d. allocated to the good units that have passed the inspection point.
9. The net cost of normal spoilage in a job order costing system in which spoilage is common to all jobs
should be
a. assigned directly to the jobs that caused the spoilage.

b. charged to manufacturing overhead during the period of the spoilage.
c. charged to a loss account during the period of the spoilage.
d. allocated only to jobs that are completed during the period.
10. Normal spoilage is

a. written off as a period cost.
b. never shown in EUP schedules.
c. treated as a product cost.
d. both b and c.
11. In a job order costing system, the net cost of normal spoilage is equal to
a. estimated disposal value plus the cost of spoiled work.
b. the cost of spoiled work minus estimated spoilage cost.
c. the units of spoiled work times the predetermined overhead rate.
d. the cost of spoiled work minus the estimated disposal value.
12. Taylor Co. has a production process in which the inspection point is at 65 percent of conversion. The
beginning inventory for July was 35 percent complete and ending inventory was 80 percent complete.
Normal spoilage costs would be assigned to which of the following groups of units, using FIFO costing?
Beginning Ending Units Started
Inventory Inventory & Completed
a. no yes yes
b. yes yes yes
c. no no yes
d. yes no no
CLASS PROBLEMS
PROBLEM 1
Department 1 uses FIFO costing and Department 2 uses weighted average.
Units are introduced into the process in Department 1 (this is the only material added in Department 1).
Spoilage
occurs continuously through the department and normal spoilage should not exceed 10 percent of the units
started.
Department 2 adds material (packaging) at the 75 percent completion point; this material does not cause an
increase in the number of units being processed. A quality control inspection takes place when the goods are
80 percent complete. Spoilage should not exceed 5 percent of the units transferred in from Department 1.
The following production cost data are applicable for operations for May 2011:
29
Department 1 Production Data
Beginning inventory (65% complete) 1,000

Units started 25,000
Units completed 22,000
Units in ending inventory (40% complete) 2,800
Department 1 Cost Data
Beginning inventory:
Material P1,550
Conversion 2,300 P3,850
Current period:
Material P38,080
Conversion 78,645 116,725
Total costs to account for P120,575
Department 2 Production Data
Beginning inventory (90% complete) 8,000

Units transferred in 22,000
Units completed 24,000
Units in ending inventory (20% complete) 4,500
Department 2 Cost Data
Beginning inventory:
Transferred in P40,800
Material 24,000
Conversion 4,320 P 69,120
Current period:
Transferred in P113,700 *
Material` 53,775
Conversion 11,079 178,554
Total costs to account for P247,674
*This may not be the same amount determined for Department 1; ignore any difference and use this
figure.
Required:
a. Compute the equivalent units of production in each department.
b. Determine the cost per equivalent unit in each department and compute the cost transferred out, the
cost in ending inventory, and the cost of spoilage (if necessary).
ANSWER:
a.
1
Mat CC Mat = $38,080 = $1.60
23,800
Complete 22,000 22,000
+ End WIP 2,800 1,120 (2,800 × 4) CC = $78,645 = $3.50
24,800 23,120 22,470
– Beg WIP (1,000 ) (650 ) (1,000 × .65) End WIP = 2,800 × $1.60 = $ 4,480
23,800 22,470 = 1,120 × $3.50 3.920
$ 8,400
COGM = $120,575 – 8,400 = $112,175
b.
2
TI Mat CC Mat = $ 77,775 = $3.05
25,500
30
Complete 24,000 24,000 24,000

+ End WIP 4,500 0 900 CC = $ 15,399 = $0.59
+ Normal 1,100 1,100 880 26,100
+ Abnormal 400 400 320
30,000 25,500 26,100 TI = $154,500 = $5.15
30,000
End WIP Abn Loss

4,500 × $5.15 $23,175 400 × $3.05 $1,220
900 × $0.59 531 320 × $0.59 189
$23,706 400 × $5.15 2,060
$3,469
COGM = $247,674 – 23,706 – 3,469 = $220,499
PROBLEM 2
Consider the following data for a cooking department for the month of January:
Physical
Units
Work in process, beginning inventory* 11,000

Started during current period 74,000
To account for 85,000
Good units completed and transferred out during current period:
From beginning work in process 11,000
Started and completed 50,000
Good units completed 61,000
Spoiled units 8,000
Work in process, ending inventory~ 16,000
Accounted for 85,000
*Direct material, 100% complete; conversion costs, 25% complete

~Direct material, 100% complete; conversion costs, 75% complete
Inspection occurs when production is 100 percent completed. Normal spoilage is 11 percent of good
units completed and transferred out during the current period.
The following cost data are available:
Work in process, beginning inventory:

Direct material P220,000
Conversion costs 30,000 P 250,000
Costs added during current period:
Direct material 1,480,000
Conversion costs 942,000
Costs to account for P2,672,000
Required: Prepare a detailed cost of production report. Use the FIFO method. Distinguish between
normal and abnormal spoilage.
ANSWER:
Normal Sp = 11% × 61,000 = 6,710 units FIFO

Abnormal Sp = 8,000 – 6,710 = 1,290 units
Mat CC Mat = $1,480,000 = $22.00

67,290
Complete 61,000 61,000
+ End 16,000 12,000
+ Ab Sp 1,290 1,290 CC = $942,000 = 13.17
– Ave 78,290 74,290 71,540 $35.17
– Beg (11,000 ) (2,750 )
FIFO 67,290 71,540
WIP
Material 16,000 × $22.00 $352,000
CC 12,000 × $13.17 158,040
$510,040
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Loss = 1,290 × $35.17 45,369
COGM = $2,672,000 – 510,040 – 45,369 = $2,116,591
MULTIPLE CHOICE
Questions 1 through 4 concern Levittown Company, which employs a process costing system for its
manufacturing operations. All direct materials are added at the beginning of the process and conversion costs
are added proportionately. Levittown’s production quantity schedule for November is reproduced here.
Units
Work in process on November 1 (60% complete as to conversion costs) 1,000
Units started during November 5,000
Total units to account for 6,000
Units completed and transferred out from beginning inventory 1,000
Units started and completed during November 3,000
Work in process on November 30 (20% complete as to conversion costs) 2,000
Total units accounted for 6,000
1. Using the FIFO method, the equivalent units for direct materials for November are:
a. 5,000 units. b. 6,000 units. c. 4,400 units. d. 3,800 units.
Solution
Materials: Total Equivalent

Units Units
Beginning inventory 1,000 × 0% = -0-
Started and completed 3,000 × 100% = 3,000
Ending inventory 2,000 × 100% = 2,000
Totals 6,000 5,000
2. Using the FIFO method, the equivalent units for conversion costs for November are:
Solution
Conversion: Total Equivalent

Units Units
Beginning inventory 1,000 × 40% = 400
Ending inventory 2,000 × 20% = 400
Totals 6,000 3,800
3. Using the weighted average method, the equivalent units for direct materials for November are:
Solution
Materials: Total Equivalent

Units Units
Beginning inventory 1,000 × 100% = 1,000
Totals 6,000 6,000
4. Using the weighted average method, the equivalent units for conversion costs for November are:
Solution

Units Units
32
Ending inventory 2,000 × 20% = 400

Totals 6,000 4,400
The following data apply to items 5 and 6.
Kimbeth Manufacturing uses a process cost system to manufacture Sensors for the mining industry. The
following information pertains to operations for the month of May.
The beginning inventory contained 16,000 units and was 60 percent complete for materials and 20 percent
complete for conversion costs. The ending inventory contained 24,000 units and was 90 percent complete for
materials and 40 percent complete for conversion costs. There were 76,000 units started and completed during
May.
Costs pertaining to the month of May are as follows:
 Beginning inventory costs are: materials, P54,560; direct labor, P20,320; and factory overhead,
P15,240.
 Costs incurred during May are: material used, $468,000; direct labor, $182,880; and factory overhead,
P391,160.
5. Using the FIFO method, the equivalent unit conversion cost for May is:
a. P5.65. b. P5.83.c. P6.00. d. P6.20. e. P6.62.
Solution

Units Units
Totals 116,000 98,400
Conversion costs for May ($182,880 + $391,160) $ 574,040.00
Equivalent units ÷ 98,400.00
Equivalent unit conversion cost $ 5.83
6. Using the weighted average method, the equivalent unit conversion cost for May is:
a. P5.65. b. P5.83. c.P6.00. d. P6.41. e. P6.62.
Solution

Units Units
Totals 116,000 101,600
All conversion costs
($20,320 + $15,240 + $182,880 + $391,160) $ 609,600.00
Equivalent units ÷ 101,600.00
Equivalent unit conversion cost $ 6.00
Use the following information relating to I M Cute Co. for questions 7-10.
Beginning inventory (30% complete as to Material B

and 60% complete for conversion) 700 units
Started this cycle 2,000 units
Ending inventory (50% complete as to Material B
and 80% complete for conversion) 500 units
Beginning inventory costs:

Material A P14,270
Material B 5,950
Conversion 5,640
33
Current Period costs:

Material A P40,000
Material B 70,000
Conversion 98,100
Material A is added at the start of production, while Material B is added uniformly throughout the process.
7. Assuming a weighted average method of process costing, compute EUP units for Materials A and B.
a. 2,700 and 2,280, respectively
b. 2,700 and 2,450, respectively
c. 2,000 and 2,240, respectively
d. 2,240 and 2,700, respectively
8. Assuming a FIFO method of process costing, compute EUP units for Materials A and B.
a. 2,700 and 2,280, respectively
b. 2,700 and 2,450, respectively
c. 2,000 and 2,240, respectively
d. 2,450 and 2,880, respectively
9. Assuming a weighted average method of process costing, compute EUP for conversion.
a. 2,600
b. 2,180
c. 2,000
d. 2,700
10.Assuming a FIFO method of process costing, compute EUP for conversion.

a. 2,240
b. 2,180
c. 2,280
d. 2,700
11. Assuming a weighted average method of process costing, compute the average cost per unit for
Material A.
a. P20.10
b. P20.00
c. P31.25
d. P31.00
12. Murphy Co. uses a weighted average process costing system and started 30,000 units this month.
Murphy had 12,000 units that were 20 percent complete as to conversion costs in beginning Work in
Process Inventory and 3,000 units that were 40 percent complete as to conversion costs in ending
Work in Process Inventory. What are equivalent units for conversion costs?
a. 37,800 b. 42,000c.40,200 d. 40,800
13. Kim Co. makes small metal containers. The company began December with 250 containers in process
that were 30 percent complete as to material and 40 percent complete as to conversion costs. During
the month, 5,000 containers were started. At month end, 1,700 containers were still in process (45
percent complete as to material and 80 percent complete as to conversion costs). Using the weighted
average method, what are the equivalent units for conversion costs?
a. 4,610 b. 4,910c.3,450 d. 4,560
14. Zammillo Co. uses a FIFO process costing system. The company had 5,000 units that were 60 percent
complete as to conversion costs at the beginning of the month. The company started 22,000 units this
period and had 7,000 units in ending Work in Process Inventory that were 35 percent complete as to
conversion costs. What are equivalent units for material, if material is added at the beginning of the
process?
a. 18,000 b. 22,000c.25,000 d. 27,000
15. Lisa Co. makes fabric-covered hatboxes. The company began August with 500 boxes in process that
were 100 percent complete as to cardboard, 80 percent complete as to cloth, and 60 percent complete
as to conversion costs. During the month, 3,300 boxes were started. On August 31, 350 boxes were in
process (100 percent complete as to cardboard, 70 percent complete as to cloth, and 55 percent
complete as to conversion costs). Using the FIFO method, what are equivalent units for cloth?
a. 3,450 b. 3,295c. 3,395 d. 3,595
Baguio Plant applies process costing in the manufacture of its sole product, “e-tox”.Manufacturing starts in Department 1
where materials are all added at the start of processing.The good units are then transferred to Department 2 where all the
34
incremental materials areneeded for its completion are added after final inspection. In Department 1, units are inspected at
the end of processing while in Department 2, inspection takes place when the units are 90% converted. Assume that
Department 1 uses FIFO while Department 2 uses WA. The following production for the month of April show:
Department 1 Department 2
Quantity schedule:
BWIP P 8,000 P 4,000
Work to be done 4/5 1/5
EWIP 12,000 7,000
Stage of completion 2/3 5/7
Put into process 60,000 -
Normal loss 2,400 1,000
Abnormal loss 600 500
Cost data:
Work-in process, June 1
Transferred-in P 19,030
Materials P 9,000 P 14,325
Conversion costs 6,500 18,715
Current period costs:

Materials P 132,000 P 56,000
Conversion costs 205,920 85,500
Transferred-in ?
Required: Determine the following:
16. Total cost transferred to Department 2 and the amount of WIP, end in Department 1
a. P281,820; P52,800 c. P297,320; P52,800
b. P284, 120; P26,400 d. P2,320; P36,620
17. Total costs transferred to storeroom and the amount of WIP, end in Department 2
a. P43,910; P450 c. P43 1,650; P38,850
b. P431,650; P48,350 d. P 438,910; P 38,850
ACTIVITY-BASED COSTING SYSTEM
ACTIVITY-BASED MANAGEMENT - focuses on the activities incurred during the production or

performance process asa way to improve the value received by a customer and the resulting profit
achievedby providing this value. A primary component of activity based management is activity
analysis, which is the process of studying activities to classify them and to devise ways of minimizing
or eliminating non-value-added activities. The activity-based management umbrella includes:
 Activity analysis
 Cost driver analysis
 Activity-based costing
 Continuous improvement
 Operational control
 Performance evaluation
 Business process reengineering
Terminology
Activity a repetitive action performed in fulfillment of business functions
Activity analysis the process of detailing the various repetitive actions that are performed in making
a product or providing a service, classifying them as value-added and non-value-added, and devising
ways of minimizing or eliminating non-value-added activities
Activity center a segment of the production or service process for which management wants to
separately report the costs of the activities performed
Activity driver a measure of the demands on activities and, thus, the resources consumed by
products and services; often indicates an activity’s output
35
Attribute-based costing(ABC II) an extension of activity-based costing using cost-benefit analysis

(based on increased customer utility) to choose the product attribute enhancements that the company
wants to integrate into a product
Batch-level cost a cost that is caused by a group of things being made, handled, or processed at a
single time
Business-value-added activity an activity that is necessary for the operation of the business but for
which a customer would not want to pay
Continuous improvement an ongoing process of enhancing employee task performance, level of

product quality, and level of company service through eliminating non-value-added activities to
reduce lead time, making products (performing services) with zero defects, reducing product costs on
an ongoing basis, and simplifying products and processes
Cost driver analysis the process of investigating, quantifying, and explaining the relationships of
cost drivers and their related costs
Cost table database providing information about the impact on product costs of using different input
resources, manufacturing processes, and design specifications
Cycle time the time between the placement of an order to the time the goods arrive for usage or are
produced by the company; it is equal to value-added time plus non-value-added time
Idle time the amount of time spent storing inventory or waiting at a production operation for
processing
Inspection time the time taken to perform quality control activities
Activity – any event that causes the consumption of overhead resources.

Activity cost pool- is a “bucket” in which costs are accumulated that relate to a single activity
measure in the ABC system.
Activity measure- is an allocation base in an activity-based costing system.
Cost driver- refers to an activity measure because the activity measure should drive the cost to be
allocated.
Long-term variable cost a cost that was traditionally viewed as a fixed cost
Manufacturing cycle efficiency(MCE) a ratio resulting from dividing the actual production time by
total lead time; it reflects the proportion of lead time that is value-added
Mass customization personalized production generally accomplished through the use of flexible
manufacturing systems; it reflects an organization’s increase in product variety from the same basic
component elements
Organization-level cost a cost incurred to support the ongoing facility or operations
Pareto principle a rule which states that the greatest effects in human endeavors are traceable to a
small number of causes (the vital few), while the majority of causes (the trivial many) collectively yield
only a small impact; this relationship is often referred to as the 20:80 rule
Processingtime the actual time consumed performing the functions necessary to manufacture a
product
Process map a flowchart or diagram indicating every step that goes into making a product or
providing a service
Product complexity an assessment about the number of components in a product or the number of
processes through which a product flows
Product- (or process-) levelcost a cost that is caused by the development, production, or
acquisition of specific products or services
Product variety the number of different types of products produced (or services rendered) by a firm
36
Simultaneousengineering an integrated approach in which all primary functions and personnel

contributing to a product’s origination and production are involved continuously from the beginning of
a product’s life
Transfer time the time consumed by moving products or components from one place to another
Unit-level cost a cost caused by the production or acquisition of a single unit of product or the
delivery of a single unit of service
Value chart a visual representation indicating the value-added and non-value-added activities and
time spent in those activities from the beginning to the end of a process
The ABC Model
Cost Objects e.g. products and customers
Activities
Consumption of resources
Cost
A. Activity-Based Management
1. Product cost determination, although specifically designated as an accounting

function, is a major concern of all managers.
2. Activity-based management (ABM) is a concept that focuses on the activities incurred

during the production/performance process as the way to improve the value received
by a customer and the resulting profit achieved by providing this value.
3. Activity analysis is the process of studying activities to classify them as value-added

or non-value-added and to devise ways of minimizing or eliminating non-value-added
activities.
4. Activities may be designated as value-added and non-value-added.
a. An activity is a repetitive action performed in fulfillment of business functions.
b. A value-added activity (VA) is an activity that increases the worth of a product

or service to the consumer and for which the customer is willing to pay.
c. A non-value-added activity (NVA) is an activity that increases the time spent on

a product or service but does not increase its worth.
5. A business-value-added activity is an activity that is necessary for the operation of a

business but for which a customer would not want to pay.
6. A process map is a detailed flowchart that indicates every step that goes into making
a product or providing a service.
7. A value chart is a visual representation that identifies the stages and the time spent in
those stages from the beginning to the end of a process.
37
8. There are four types of time that compose the entire processing time of an entity.
a. Processing(or service)time is the actual time it takes to perform the functions

necessary to manufacture a product or perform a service; this quantity of time
is value-added.
b. Inspection time is the time taken to perform quality control activities. Such
time is non-value-added time.
c. Move time or Transfer time is the time consumed moving products or

components from one place to another. Such time is non-value-added time.
d. Queue time or Idle time is the amount of time spent in storing inventory or
waiting at a production operation for processing. Such time is non-value-added
time.
9. Manufacturing cycle efficiency(MCE) is a ratio resulting from dividing the value-

added processing time by total cycle time.
Cycle Time = Processing Time + Inspection Time + Transfer Time + Idle Time
MCE = Value-Added Processing Time / Total Cycle Time
Or
MCE = *Value- added time (Process time)

Throughput time or cycle time or mfg. cycle time
*Value added time = Process time

**Non-value added time = wait time + inspection time + move time +
queue time
Delivery cycle time = customer wait time + manufacturing cycle time
 Service cycle efficiency is a ratio resulting from dividing the actual service time by total cycle
time.
 Cycle time in a retail environment is the time from ordering an item to the sale of that item to a
customer. Non-value-added activities include shipping time from the supplier, receiving delays
for counting merchandise, and any storage time between receipt and sale.
 Cycle time for a service company refers to the time between the service order and service
completion. All time spent on activities that are not actual service performance are considered
non-value-added for that job.
 Non-value-added activities can be attributed to systematic, physical, and human factors.
 The NVA activities that create the most cost should be the ones management focuses its
efforts on diminishing or eliminating.
 The concentration of attention on the elimination of NVA activities should cause product
quality to increase and cycle time and cost to decrease.
B. Cost Driver Analysis
1. Cost drivers are the factors having direct cause-effect relationships with costs.
2. Cost driver analysis is the process of investigating, quantifying, and explaining the
relationships of cost drivers and their related costs.
3. A greater number of cost drivers can normally be identified than should be used for
cost allocation or activity elimination. Management should, therefore, restrict the cost
drivers chosen to a reasonable number and determine that the cost of measuring each
cost driver does not exceed the benefit of using it.
4. Costs have traditionally been accumulated into one or two cost pools —total factory
overhead or variable and fixed factory overhead.
38
a. One or two cost drivers—direct labor hours and/or machine hours—have been
used to assign costs to products.
b. The use of single cost pools and single cost drivers may produce illogical
product or service costs in complex production (or service) environments.
5. The accounting system, to reflect more complex environments, must first recognize
that costs are created and incurred because their drivers occur at different levels.
a. A unit-level cost is a cost that is caused by the production or acquisition of a

single unit of product or the delivery of a single unit of service.
b. A batch-level cost is a cost that is caused by a group of things made, handled,

or processed at a single time.
c. A product-level (or process-level) cost is a cost that is caused by the

development, production, or acquisition of different items.
d. An organizational-levelcost is a cost incurred to support the ongoing facility

operations.
Levels of Costs
Classification Levels Types of Costs Necessity of Costs

Unit -level costs Direct materials Once for each unit produced
Direct labor
Some machine costs, if
traceable
Batch-level costs Purchase orders Once for each batch produced
Setup
Inspection
Movement
Scrap, if related to the batch
Product/Process-level costs Engineering change orders Supports a product type or a
Equipment maintenance process
Product development
Scrap, if related to product
design
Organizational or Facility costs Building depreciation Supports the overall production or
Plant or division manager’s service process
salary
Organizational advertising
ACTIVITY-BASED COSTING (ABC)
A costing method that uses several activities to allocate indirect (overhead) costs to products. It is a
costing method that is designed to provide managers with cost information for strategic and other
decisions that potentially affect capacity and therefore “fixed” as well as variable costs. Under the
traditional costing system, a single cost driver, example, number of hours, is used to estimate and
allocate overhead cost assigned to products. On other hand, ABC identifies multiple cost drivers that
cause the incurrence of overhead costs and assign overhead cost to individual products on the basis
of these identified activities or cost drivers.
1. Activity-based costing (ABC) is a cost accounting system that focuses on the various
activities performed in an organization and collects costs on the basis of the underlying
nature and extent of those activities.
2. ABC focuses on attaching costs to products and services based on the activities
performed to produce, perform, distribute, or support those products and services.
3. ABC is useful in companies having the following characteristics:
a. the production or performance of a wide variety of products or services;

39
b. high overhead costs that are not proportional to the unit volume of individual
products;
c. significant automation that has made it increasingly more difficult to assign

overhead to products using the traditional direct labor or machine hour bases;
d. profit margins that are difficult to explain; and
e. hard-to-make products that show big profits and easy-to-make products that
show losses.
4. A two-step allocation of costs must be accomplished.
a. Costs, after being initially recorded, are accumulated in activity center cost
pools using first-step cost drivers that reflect the appropriate level of cost
incurrence (unit, batch, or product/process).
b. Costs, after accumulation, are allocated out of the activity center cost pools and
applied to products and services using a second-step cost driver.
5. An activity center is a segment of the production or service process for which

management wants to separately report the costs of the activities performed.
6. An activity driver is a measure of the demands placed on activities and, thus, the
resources consumed by products and services; it often indicates an activity’s output.
7. Activity-based costing systems do not use the traditional definitions of variable and
fixed costs. Instead, costs are referred to as being short-term variable and long-term
variable costs.
a. A short-term variablecost increases or decreases in direct relation to changes

in the volume of activity.
b. A long-term variable cost is a cost that has traditionally been viewed a fixed
cost, and for which the appropriate cost drivers simply need to be identified.
c. Product variety refers to the number of different types of products made.
d. Product complexity refers to the number of components included in a product

or the number of processes through which a product flows.
8. ABC allows managers to recognize the horizontal flow of products, services, and
activities through an organization.
a. The process focuses on the numerous cost impacts created by making a

product or performing a service.
b. A vital loss of information may occur in an accounting system that ignores

activity and cost relationships.
9. Attribute-based costing(ABC II) is an extension of activity-based costing employing

detailed cost-benefit analyses relating to information based on customer needs and
the costs of the incremental improvements necessary to obtain the required attributes.
D. Determining Whether ABC is Appropriate
1. There are some general operating activity clues that may alert managers to the need
to review the cost data being provided by their conventional accounting system.
2. Two factors that are commonly associated with a need to consider activity-based
costing are product variety and product complexity.
a. Product variety is commonly associated with a need to consider ABC.

40
b. Mass customization refers to the relatively low-cost mass production of

products to the unique specifications of individual customers; it requires the use
of flexible manufacturing systems.
c. The Pareto principle is a rule stating that the greatest effects in human
endeavors are traceable to a small number of causes (the vital few), while the
majority of causes (the trivial many) collectively yield only a small impact; this
relationship is often referred to as the 20:80 rule and is named after the Italian
economist Vilfredo Pareto.
d. Simultaneous(or concurrent) engineering refers to a continuous involvement

of all primary functions and personnel contributing to a product’s origination
and production from the beginning of a project.
e. Business process reengineering (BPR) is a process innovation and redesign

aimed at finding and implementing radical changes in how things are made or
how tasks are performed to achieve substantial cost, service, or time
reductions.
3. Certain products and services create considerably more overhead costs than others.
a. While some of the additional costs may be caused by product variety or

product complexity, others may be related to a variety of support services.
b. Some companies’ output volumes differ significantly among their products and
services, and each of these differences creates additional overhead costs.
c. Overhead related to specific products will be spread over all products if only
one or two overhead cost pools are used.
4. Managers and accountants need to ascertain whether the existing cost system still
provides a reasonable estimate of product or service cost if a company’s process or
product/service line has undergone one or more significant changes.
5. Many companies with automated production processes have experienced large

increases in overhead costs and large decreases in labor. In such firms, the use of
direct labor as an overhead allocation base produces extremely high application rates.
6. A change in the competitive environment in which a company operates may also mean
a need for better cost information. Increased competition may occur for several
reasons:
a. Other companies have recognized the profit potential of a particular product or

service;
b. The product or service has become cost-feasible to make or perform; or
c. An industry has been deregulated.
7. Changes in management strategy can also signal a need for a new cost system.
8. Continuous improvement is an ongoing process of enhancing employee task

performance, level of product quality, and level of company service through eliminating
non-value-added activities to reduce lead time, making products (performing services)
with zero defects, reducing product costs on an ongoing basis, and simplifying
products and processes.
9. The benefits from ABC are two-dimensional in that ABC improves product costs for
managerial decision making and improves the performance measurement process.
10. Traditional accounting systems focus attention on controlling cost incurrence, while
ABC concentrates on controlling the causes (activities) of the cost incurrence.
41
11. ABC systems disclose that significant resources are consumed by low-volume
products and complex production operations.
E. Criticisms of Activity-Based Costing
1. ABC implementation necessitates a considerable amount of time and cost. Significant

support is needed throughout the firm for the implementation process to be successful.
2. ABC does not specifically comply with generally accepted accounting principles.
3. Companies desiring to implement ABC systems must be aware that, while more
accurate costing may be provided, ABC systems are not always appropriate.
4. Another criticism that has been charged is that ABC does not, in and of itself, promote
total quality management and continuous improvement. However, companies can
implement ABC and its related management techniques in support of and in
conjunction with TQM, JIT, and any other world-class methodologies.
Activity-Based Costing Procedures

1. Determine the activity centers of the organization.
2. Determine departmental activities and efforts needed to conduct those activities, that is, the cost
drivers.
3. Determine departmental resources consumed in conducting activities and allocate costs of these
resources to activity centers based on the cost drivers.
4. Determine activities needed to manufacture products or provide revenueproducing services, that is,
the activity drivers.
5. Allocate costs to products and services based on activities and cost drivers involved.
MULTIPLE CHOICE
1. An objective of activity-based management is to

a. eliminate the majority of centralized activities in an organization.
b. reduce or eliminate non-value-added activities incurred to make a product or provide a service.
c. institute responsibility accounting systems in decentralized organizations.
d. all of the above
2. Which of the following is/are part of activity-based management?

Activity analysis Cost driver analysis
a. yes yes
b. no yes
c. no no
d. yes no
3. Which of the following falls under the Activity-Based Management umbrella?

Continuous Business process Activity-based
improvement reengineering costing
a. no no yes
b. yes no no
c. yes yes yes
d. no yes no
4. The sum of the non-value-added time and the value-added time equals
a. inspection time. b. production time. c. the product life cycle. d. cycle time.
5. Which of the following add customer value?

a. setup time b. storage time c. idle time d. processing time
6. Lead time minus production time is equal to

a. idle time. b. storage time. c. non-value-added time. d. value-added time.
7. When a firm redesigns a product to reduce the number of component parts, the firm is
42
a. increasing consumer value. c. decreasing product variety.

b. increasing the value added to the product. d. decreasing non-value-added costs.
8. Non-value-added activities that are necessary to businesses, but not costs that customers are willing to pay for are
known as
a. business-value-added activities. b. long-term variable activities.c. short-term variable activities.d. superior
business activities.
9. Which of the following would not be considered a value-added activity in the preparation of a tax return?
a. printing a copy of the return for the client b. printing a copy of the return for the IRS c. installing tax software
d. checking for accuracy
10. Which of the following is considered a value-added activity?

Idle time Inspection time Transfer time
a. yes yes no
b. no no no
c. yes no yes
d. no yes yes
11. A process map

a. should indicate only value-added activities.
b. is also known as a detailed flowchart.
c. should indicate only those steps/processes that are obvious in the production of goods/services.
d. is also known as a value chart.
12. A value chart should include which of the following?

Service time Inspection time Transfer time
a. yes no yes
b. no no yes
c. yes yes no
d. yes yes yes
13. The actual time it takes to perform a specific task is called

a. inspection time. b. service time.c. transfer time. d. quality time.
14. Manufacturing cycle efficiency is a measure of

a. bottlenecks. b. effectiveness. c. efficiency. d. quality.
15. Which of the following is typically regarded as a cost driver in traditional accounting practices?
a. number of purchase orders processed c. number of transactions processed
b. number of customers served d. number of direct labor hours worked
16. When a company is labor-intensive, the cost driver that is probably least significant would be
a. direct labor hours. b. direct labor dollars. c. machine hours. d. cost of materials used.
17. An activity driver is used for which of the following reasons?

To measure demands To measure resources consumed
a. yes yes
b. yes no
c. no yes
d. no no
18. The term cost driver refers to

a. any activity that can be used to predict cost changes.
b. the attempt to control expenditures at a reasonable level.
c. the person who gathers and transfers cost data to the management accountant.
d. any activity that causes costs to be incurred.
19. Cost allocation bases in activity-based costing should be

a. cost drivers. b. value-added activities.c. activity centers.d. processes.
43
20. Costs that are common to many different activities within an organization are known as ____________ costs.
a. product- or process-level b. organizational-level c. batch-level d. unit-level
21. In activity-based costing, cost reduction efforts are directed at specific

a. cost categories. b. cost pools. c. processes. d. cost drivers.
23. Traditional overhead allocations result in which of the following situations?

a. Overhead costs are assigned as period costs to manufacturing operations.
b. High-volume products are assigned too much overhead, and low-volume products are assigned too little
overhead.
c. Low-volume products are assigned too much, and high-volume products are assigned too little overhead.
d. The resulting allocations cannot be used for financial reports.
28. For one product that a firm produces, the manufacturing cycle efficiency is 20 percent. If the total production time is
12 hours, what is the total manufacturing time?
a. 15.0 hours b. 60.0 hoursc. 12.0 hours d. 2.4 hours
29. In activity-based costing, final cost allocations assign costs to

a. departments. b. processes. c. products. d. activities.
30. Of the following, which is the best reason for using activity-based costing?
a. to keep better track of overhead costs
b. to more accurately assign overhead costs to cost pools so that these costs are better controlled
c. to better assign overhead costs to products
d. to assign indirect service overhead costs to direct overhead cost pools
PROBLEMS
1. Nards Company keeps careful track of the time to complete customers orders. During the most recent quarter, the
following average times were recorded for each unit or order:
Days
Customer wait time 17
Inspection time 0.4
Process time 2
Move time 0.6
Queue time 5
Goods are shipped as soon as production is completed.

REQUIRED:
a. Compute the throughput time. 2days + 0.4 day + 0.6 day + 5 days = 8 days
b. Compute the manufacturing cycle efficiency (MCE). 2 days / 8 days = 25%
c. What percentage of the production time is spent in non-value-added activities? 100% - 25% = 75%
d. Compute the delivery cycle time. 17 days + 8 days = 25 days
2. Royal Co. manufactures hand-made pine storage boxes for a variety of clients. As production manager, you have
developed the following value chart:
Operation Average Number of Days

Receiving materials 1
Storing materials 2
Handling materials 3
Cutting/measuring materials 6
Assembling materials 4
Building boxes 7
Attaching hinges 2
Inspection 1
a. Determine the value-added activities and their total time.

b. Determine the non-value-added activities and their total time.
c. Calculate the manufacturing cycle efficiency.
ANSWER:
44
a. Value-added activities Time

Cutting/measuring materials 6
Assembling materials 4
Building boxes 7
Attaching hinges 2
Total production time (days) 19
b. Non-value-added activities Time

Receiving 1
Storing 2
Handling 3
Inspection 1
Total nonproduction time (days) 7
c. Total lead time = 19 + 7 = 26 days

MCE = 19/26 = 73.1%
2. Tektite Company would like to institute an activity-based costing system to price products. The company’s
Purchasing Department incurs costs of P550,000 per year and has six employees. Purchasing has determined the
three major activities that occur during the year.
Allocation # of Total
Activity Measure People Cost
Issuing purchase orders # of purchase 1 $150,000
orders
Reviewing receiving # of receiving 2 $175,000
reports reports
Making phone calls # of phone calls 3 $225,000
During the year 50,000 phone calls were made in the department; 15,000 purchase orders were issued; and
10,000 shipments were received. Product A required 200 phone calls, 150 receiving reports, and 50 purchase
orders. Product B required 350 phone calls, 400 receiving reports, and 100 purchase orders.
a. Determine the amount of purchasing department cost that should be assigned to each of these products.
b. Determine purchasing department cost per unit if 1,500 units of Product A and 3,000 units of Product B
were manufactured during the year.
ANSWER:
a. P150,000/15,000 = $10 per purchase order

P175,000/10,000 = $17.50 per receiving report
P225,000/50,000 = $4.50 per phone call
Product A Product B
50 purchase orders ×$10 P 500
100 purchase orders × $10 P1,000
150 receiving reports × $17.50 2,625
400 receiving reports × $17.50 7,000
200 phone calls × $4.50 900
350 phone calls × $4.50 1,575
Total cost P4,025 P9,575
b. Product A= P4,025/1,500 = P2.68 per unit

Product B= P9,575/3,000 = P3.19 per unit
3. Kan Co. produces two products (A and B). Direct material and labor costs for Product A total P35 (which reflects 4
direct labor hours); direct material and labor costs for Product B total P22 (which reflects 1.5 direct labor hours).
Three overhead functions are needed for each product. Product A uses 2 hours of Function 1 at P10 per hour, 1
hour of Function 2 at P7 per hour, and 6 hours of Function 3 at P18 per hour. Product B uses 1, 8, and 1 hours of
Functions 1, 2, and 3, respectively. Kan produces 800 units of A and 8,000 units of B each period. If total overhead
is assigned to A and B on the basis of units produced, Product A will have an overhead cost per unit of
45
a. P 88.64. b. P123.64.c. P135.00.
4. Use the information from #3. If total overhead is assigned to A and B on the basis of units produced, Product B will
have an overhead cost per unit of
a. P84.00. b. P88.64.c. P110.64.
5. Use the information from #3. If total overhead is assigned to A and B on the basis of direct labor hours, Product A
will have an overhead cost per unit of
a. P51.32. b. P205.28.c. P461.88.
6. Use the information from #3. If total overhead is assigned to A and B on the basis of direct labor hours, Product B
will have an overhead cost per unit of
a. P51.32. b. P76.98.c. P510.32.
7. Use the information from #3. If total overhead is assigned to A and B on the basis of overhead activity hours used,
the total product cost per unit assigned to Product A will be
a. P86.32. b. P95.00. c. P115.50.
8. Use the information from #3. If total overhead is assigned to A and B on the basis of overhead activity hours used,
the total product cost per unit assigned to Product B will be
a. P115.50. b. P73.32.c. P34.60.
9. JJ Corp. produces 50,000 units of Product Q and 6,000 units of Product Z during a period. In that period, four set-
ups were required for color changes. All units of Product Q are black, which is the color in the process at the
beginning of the period. A set-up was made for 1,000 blue units of Product Z; a set-up was made for 4,500 red
units of Product Z; a set-up was made for 500 green units of Product Z. A set-up was then made to return the
process to its standard black coloration and the units of Product Q were run. Each set-up costs P500. If set-up cost
is assigned on a volume basis for the department, what is the approximate per-unit set-up cost for Product Z?
a. P.010. b. P.036.c. P.040.
10. JJ Corp. produces 50,000 units of Product Q and 6,000 units of Product Z during a period. In that period, four set-
ups were required for color changes. All units of Product Q are black, which is the color in the process at the
beginning of the period. A set-up was made for 1,000 blue units of Product Z; a set-up was made for 4,500 red
units of Product Z; a set-up was made for 500 green units of Product Z. A set-up was then made to return the
process to its standard black coloration and the units of Product Q were run. Each set-up costs P500. If set-up cost
is assigned on a volume for the department, what is the approximate per-unit set-up cost for the red units of
Product Z?
a. P.036. b. P.111.c. P.250.
9. Use the information from #9. Assume that JJ Corp. has decided to allocate overhead costs using levels of cost
drivers. What would be the approximate per-unit set-up cost for the blue units of Product Z?
a. P.04. b. P.25. c. P.50.
10. Use the information from #9. Assume that JJ Corp. has decided to allocate overhead costs using levels of cost
drivers. What would be the approximate per-unit set-up cost for the green units of Product Z?
a. P1.00. b. P0.25.c. P0.04.

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Philippine School of Business Administration-Manila

TOPIC: COST ACCOUNTING ( JOB ORDER COSTING/ PROCESS COSTING/ ACTIVITY-BASED

 Cost in relation to products

Product costs orInventoriable Costs

Period Costs or Non-Inventoriable Costs

THE FIVE PARTS OF A COST ACCOUNTING SYSTEM

1) INPUT MEASUREMENT BASES

Pure Historical Costing

Normal Historical Costing

2) FOUR INVENTORY VALUATION METHODS

The Direct or Variable Method

The Full Absorption Method

The Activity Based Method

3) FOUR COST ACCUMULATION METHODS

Hybrid, or Mixed Methods

4) FOUR COST FLOW ASSUMPTIONS

5) RECORDING INTERVAL CAPABILITY

FUNCTIONS OF INFORMATION OR COST ACCOUNTING SYSTEMS

PLANNING AND CONTROLLING ACTIVITIES AND PROCESSES

JOB ORDER COSTING

RECORDING TRANSACTIONS AND COSTS FLOWS

THE T-ACCOUNT APPROACH

TWELVE TYPICAL TRANSACTIONS THAT OCCUR

THE GENERAL JOURNAL ENTRY APPROACH

GENERAL JOURNAL ENTRIES FOR NORMAL HISTORICAL JOB ORDER COSTING

5. Entry to record the payment of the Accrued Factory Payroll XXX

PREDETERMINED OVERHEAD RATES

CHOOSING AN ALLOCATION BASIS

CHOOSING AN ACTIVITY LEVEL

 Activity Level Selection

ESTIMATING COST FOR THE ACTIVITY LEVEL CHOSEN

CALCULATING AND USING THE RATE

Estimated factory overhead

ACCOUNTING FOR SPOILAGE REWORK AND SCRAP

METHODS OF ACCOUNTING FOR SPOILAGE

1. Normal Spoilage Common To All Jobs

Factory Overhead 400

The entry when the spoilage is detected is:

Factory Overhead 500

The entry when the spoilage is sold is:

2. Normal Spoilage Caused by Job Specifications

Spoilage Inventory 100

Loss From Abnormal Spoilage 400

METHODS OF ACCOUNTING FOR REWORK

1. Normal Rework Common To All Jobs

Factory Overhead 3,400

* Factory overhead applied = (80)(P20)

2. Rework Caused by Job Specifications

Work in Process 3,400

Loss From Abnormal Rework 3,400

METHODS OF ACCOUNTING FOR SCRAP

Cost Reduction Method Where Normal Scrap Is Common To All Jobs

Cost Reduction Method Where Normal Scrap Is Caused by Job Specifications

Job Order Costing

The work in process account controls two jobs

The following information pertains to August operations:

Required: Help Julie answer the following questions:

a. What is the predetermined overhead rate used by ABC Company?

c. Prime Cost =DM + DL

DM = $85,639 – 4,300 = $81,339

d. COGM = $9,621 + 22,204 + 1,481 + 10,798 = $44,104