(b) P150, 000 of cost were added by the Assembling Department: direct

materials, P96, 000; direct labor, P36, 00; and factory overhead, P18, 000.
(c) 8, 000 units were completed and transferred to the Finishing
Department.

At June 30, 4, 000 units were still in work in process, with the following degrees
of completion: direct materials, 90%; direct labor, 70%; and factory overhead,
35%.
Determine the cost transferred out during the month of June.
a.P260, 000 b. P114, 700 c. P113, 500 d.P261, 200

5. Magnolia Chicken Farms raises chicks to the egg-laying stage and then moves
the hens to the laying sheds. Information about the Chick Raising Operation for
March is:
(a) Beginning inventory of chicks is 12, 000, 100 percent for chicks and 20
percent for raising costs.
(b) Beginning inventory costs are P129, 6000 for chicks and P11, 530 for raising
costs.
(c) Chicks added during March totaled 20, 000.
(d) Costs incurred during the month are P200, 000 for chicks and P121, 800 for
raising costs.
(e) Ending inventory at March 31 consisted of 2, 000 chicks, 100 percent
complete for chicks and 70 percent for raising costs.

Determine the cost of hens transferred to laying sheds during March.

a. P25, 800 b. P437, 050 c. P26, 550 d. P436, 300

6. Alberta Instrument Company uses a process costing system. A unit of product

passes through three departments – molding, assembly, and finishing – before it
is completed.
The following activity took place in the Finishing Department during May.
Work in process inventory, May 1 1, 400 units
Units transferred in from the Assembly Department 14, 000 units
Units transferred out to finished goods inventory 11, 900 units

40
Raw material is added at the beginning of processing in the Finishing
Department. The work in process inventory was 70 percent complete as to
conversion on May 1 and 40 percent complete as to conversion on May 31.
Alberta Instrument Company uses the weighted-average method of process
costing. The equivalent units and current period costs per equivalent unit of
production for each cost factor are as follows for the Finishing Department.
Equivalent Current Period Costs per
Units Equivalent Unit
Transferred in costs 15,400 P5.00
Raw materials 15,400 1.00
Conversion cost 13,300 3.00

Calculate the cost of units transferred to finished goods inventory during May and
the cost of Finishing Department’s work in process inventory on May 31.

Finished Goods WIP Inventory Finished Goods WIP Inventory

a. P107, 100 P25, 200 c. P126, 000 P6, 300
b. P107, 100 P6, 300 d. P126, 000 P25, 200

7. Department MK had 5, 000 units in process on April 1 which were 60 percent

complete for conversion costs. Materials are added at the beginning of the
departmental process, and conversion costs are added uniformly throughout the
process. On April 30, the in-process inventory consisted of 8, 000 units that had
25 percent of the work completed. There were 83, 000 equivalent units of output
for the period with respect to materials. The company is using the FIFO method.
Calculate the equivalent units for the period with respect to conversion costs.
a. 79, 000 b. 80, 000 c. 81, 000 d. 77, 000

Questions 8 and 9 are based on the following:

Hubert Products Company produces Dalandan fruit drink. The units and
equivalent units (in liters), as well as unit costs, for the Initial Mix Department are
as following:
Materials Conversion
Equivalent units in beginning work in process 6, 000 1, 200
Units started and completed 40, 000 40, 000
Equivalent units in ending work in process 3, 000 1, 800
Unit costs P6.50 P10. 50

41
8. Assuming the company uses the FIFO method. If the beginning work in
process inventory was valued at P126, 000, what would be the cost of goods
completed?
a. P770, 000 b. P896, 000 c. P644, 400 d. P857, 600

9. Assuming the company uses the weighted average method. If the beginning
work in process inventory was valued at P126, 000, what would be the cost of
ending work in process inventory?
a. P19, 500 b. P18, 900 c. P38, 400 d. P51, 600

10. Old Motors is engaged in the production of a standard type of electric motor.
Manufacturing costs for April totaled P660, 000. At the beginning of April,
inventories appeared as follows:
Motors in production, estimated 80% complete
(2, 500 units) P320, 000
Motors on hand and in finished goods
(1, 200 units) P192, 000

During the month, 5, 500 completed units were placed in finished stock. At the
end of April, inventories were:
Motors in production, estimated 50% complete 1, 000 units
Motors on hand, completed and in finished goods 1, 400 units

The company uses FIFO costing for production and goods sold. In costing
finished goods, the unit cost for units completed from beginning work in process
inventory is kept separate from the unit cost of motors started and completed
during the month. Compute the cost of goods sold.
a. P 861, 000 b. P858, 500 c. P669, 000 d. P776, 000

11. The materials equivalent production units for June is 27, 500. Material costs
beginning P55, 000. Materials added this month is P220, 000. Coat of units
transferred to next department is P82, 500. How much is the material unit cost in
June?
a. P3 b. P8 c. P10 d. P2
12. Emerald, Inc. produced 280, 000 complete units of products and 10, 000
incomplete units (50% complete). Direct materials which are added at the
beginning of the process, cost P435, 000 and conversion costs applied uniformly
42
were P142, 500. There were no beginning inventories. The total cost absorbed
by the 280, 000 complete units must be:
a. P567, 368 b. P577, 500 c. P420, 000 d. P560, 000

13. Karen Company had 3, 000 units in work in process at April 1, 2011, which
were 60% complete as to conversion cost. During April, 10,000 units were
completed. At April 30, 4, 000 units remained in work in process, which were
40% complete as to conversion cost. Direct materials are added at the beginning
of the process. How many units were started during April?
a. 9, 000 b. 9, 800 c. 10, 000 d. 11, 000
Questions 14 and 15 are based on the following:
Jethro Company manufactures top-of-the-line ice skates in a five-production-
department process. Department 3 had no beginning work in process inventory
and transferred in 18, 000 units from Department 2, each with an equivalent unit
cost of P12.50. Within Department 3, unit costs for direct materials, direct labor,
and factory overhead (applied) were P8.00, P9.75, and P 4.00, respectively.
Direct materials in Department 3 are added at the beginning. Department 3 has
4, 800 unit in ending work in process inventory which are 65% complete as to
conversion costs.
14. If 620 spoiled units were removed from Department 3 at Jethro’s inspection
point where conversion costs were 45% complete, what was the total spoilage
cost, assuming spoilage is handled as a separate element of cost?
a. P8, 796.25 b. P11, 325.25 c. P13, 818.25 d. P16,
546.25

15. At Jethro’s Department 3 inspection point, which is located halfway through

Department 3’s conversion process, 1, 200 spoiled units were removed from
production. Normal spoilage was 800 units. If total spoilage cost was P32, 850,
how much of that amount should be allocated to ending inventory?
a. P0 b. P5, 821 c. P7, 320 d. P8, 760

Questions 16 and 17 are based on the following:

APCO Company manufactures various lines of bicycles. Because of the high
volume of each type of product, the company employs a process cost system
using the weighted average method to determine unit costs. Bicycle parts are
manufactured in the Molding Department and transferred to the Assembly
Department where they are partially assembled. After assembly, the bicycle is
sent to the Packing Department.

43
Cost per unit data for the 20-inch dirt bike has been completed through the
Molding Department, Annual cost and production figures for the Assembly
Department are presented below.

44
Production Data
Beginning inventory (100% complete as to transferred-in; 100%
complete as to assembly material; 80% complete as
to conversion) 3, 000 units
Transferred in during the year (100% complete as to
transferred-in) 45, 000 units
Transferred to Packing 40, 000 units
Ending inventory (100% complete as to transferred-in; 50%
complete as to assembly material; 20% complete as
to conversion) 4, 000 units
Cost Data Transferred-In Direct Materials Conversion
Costs
Beginning Inventory P 82, 200 P6, 660 P11, 930
Current period 1, 237, 800 96, 840 236, 590

Damaged bicycles are identified on inspection when the assembly process is 70

percent complete; all assembly material has been added at this point of the
process. The normal rejection rate for damaged bicycles above the 5 percent
quota are considered to be abnormal. All damage bikes are removed from the
production process and destroyed.

16. Compute the amount of the total production cost of P1, 672, 020 that will be
associated with normal damaged units.
a. P69, 167 b. P65, 793 c. P59, 500 d. P74, 228

17. Compute the amount of the total production cost of P1, 672, 020 that will be
associated with abnormal damaged units.
a. P65, 793 b. P69, 167 c. P59, 500 d. P60, 732
18. The Jake Department is the first of a two-stage production process. Spoilage
is identified when the units have completed the Jake process. Costs of spoiled
units are assigned to units completed and transferred to the second department
in the period spoilage is identified. The following information concerns Jake’s
conversion costs in May 2013:
Units Conversion
costs
Beginning work in process (50% complete) 2, 000 P10, 000
Units started during May 8, 000 75, 500
Spoilage – normal 500
Units completed and transferred 7, 000
Ending work in process (80% complete) 2, 500

45
Using the average method, what was Jake’s conversion cost transferred to the
second department?
a. P59, 850 b. P64, 125 c. P67, 500 d. P71, 250

19. A company produces plastic drinking cups and uses a process cost system.
Cups go through three departments – mixing, molding, and packaging. During
the month of June the following information is known about the mixing
department.
Work in process at June 1 10, 000 units
An average 3/4 complete
Units complete during June 140, 000
Work in process at June 30 20, 000
An average 1/4 complete
Materials are added at two points in the process: Material A is added at the
beginning of the process and Material B at the midpoint of the mixing process.
Conversion costs are incurred uniformly throughout the mixing process. Under
the FIFO costing flow, the equivalent units for Material A, Material B, and
conversion costs respectively for the month of June (assuming no spoilage)
would be
a. 150, 000; 130, 000; and 137, 500 c. 160, 000; 130, 000; and 135, 000
b. 150, 000; 140, 000; and 135, 000 d. 160, 000; 140, 000; and 137, 500

20. Assume that process conversion costs are uniform but a number of materials
are added at different points in process. Material 1 is added at the beginning of
the process. The transferred-in costs are added at the 20% point in the process.
Material 2 is added uniformly from the 50% to 70% points in the process. Material
3 is added at the 75% point in the process, and Material 4 is added uniformly at
the 90% to the 100 points in the process.

The beginning work in process, was 10, 000 units 60% complete, 60, 000 units
were added, and ending work in process was 20, 000 units 95% complete. What
was the Material 2 equivalent units for the month?
FIFO Weighted average FIFO Weighted average
a. 50, 000 60, 000 c. 65, 000 70, 000
b. 60, 000 70, 000 d. 63, 000 67, 000

46
FACTORY OVERHEAD

A. ACCOUNTING FOR OVERHEAD

Accounting for manufacturing overhead is an important part of job order
costing and any other costing system. Overhead consists of all manufacturing
costs other than direct materials and direct labor. The distinguishing feature of
manufacturing overhead is that while it must be incurred in order to produce
goods, it cannot be directly traced to the final product as can direct materials and
direct labor. Therefore, overhead must be applied, rather than directly charged,
to goods produced. The overhead application process is described below:
a. Overhead items are grouped by cost behavior, such as fixed and variable.
b. The fixed and variable overhead costs are estimated for the forthcoming year
(e.g., P5, 000, 000)
c. A denominator (activity) base is chosen. There are five (5) bases of overhead
rate. These are units of production, materials cost, direct labor costs, direct labor
hours and machine hours. A common choice is direct labor hours or machine
hours.
d. The activity level is estimated for the forthcoming year (e.g., 80, 000 direct
labor hours).
e. A predetermined overhead rate is computed
Estimated overhead costs P5, 000, 000
= = P62.50/hour
Estimated activity level 80, 000 hours

4. As actual overhead costs are incurred, they are debited to factory overhead
control (e.g., P4, 000). (Factory overhead control is an account used to described
actual manufacturing expenses incurred except direct materials used and direct
labor employed).
Factory overhead control (actual) 4, 000
Various accounts 4, 000

47
48
5. As jobs completed the predetermined overhead rate is used to apply overhead
to these jobs. For example, if job 17 used 52 direct labor hours, P3, 250 of
overhead (52 x P62.50) would be charged to work in process and entered on the
job cost sheet.
Work in process 3, 250
Factory overhead applied 3, 250
To allocate the costs of overhead to units produced, an activity base must be
chosen for use in the computation of a predetermined overhead rate. This activity
base should bear a causal relationship to the incurrence of overhead costs.
Examples of activity bases also called costs driver are:
1. Direct manufacturing labor hours
2. Direct manufacturing labor cost
3. Machine hours
4. Materials cost
5. Units of production
For example, overhead may result from (be a function of) hours regardless of
who works, which would mean that direct manufacturing labor hours should be
the activity base. If, on the other hand, more overhead costs were incurred
because of heavily automated operations, machine hours might be a more
appropriate activity base.
As illustrated in the diagram below, a number of approaches can be used to
determine the activity level. (step “A.4” above).
Approach Definition
Theoretical capacity Output is produced efficiently 100% of the time.

Practical capacity ADJUSTED FOR: factors such as days off,

down time, etc. Output is produced maximum
percentage of time practical (75-85%)

Normal volume ADJUSTED FOR: long-run product demand.

Average annual output necessary to meet sales and
inventory fluctuations over 4-5 year period.

Expected annual ADJUSTED FOR: current year fluctuations.

Expected output for capacity current year.
Note that theoretical capacity is larger than practical capacity, which is larger
than normal volume. Expected annual capacity fluctuates above and below

49
normal volume. Most firms use expected annual capacity for their predetermined
overhead rate.

At year-end overhead may be

1. Overapplied – more is applied than incurred because
a. Overhead costs were overestimated.
b. More than expected activity took place, and/or
c. Actual overhead costs were less than expected.
2. Underapplied – less overhead is applied than incurred because
a. Overhead costs were underestimated.
b. Less than expected activity took place, and/or
c. Actual overhead costs were less than expected.

B. Disposition of Under- and Overapplied Overhead

1) If the under- or overapplied overhead is immaterial, it is frequently written
off to cost of goods sold on grounds of expediency. (This will be your
general assumption if the problem is silent as to whether the variance is
material or immaterial). The entry below explains that Applied Factory
Overhead which is a credit balance must be closed to Factory Overhead
Control account with a debit balance and the balancing figure to cost of
goods sold, debit or increase if underapplied, credit or decrease if
overapplied.
Applied Factory Overhead xx
Cost of goods sold (debit or credit to balance entry) xx
Factory Overhead Control xx
2) If the balance is material, then an adjustment must be made to all goods
which were costed using an erroneous application rate during the current
period. The goods with the incorrect costs will be in three accounts. Work-
in-Process Inventory, Finished Goods Inventory, and Cost of Goods Sold.
Proration may be made based upon total ending balance (before
proration) of the three accounts or based on their corresponding applied
factory overhead or on some other equitable basis. The problem will
normally give specific directions on what allocation base should be used.

50
C. Service Department Cost Allocation
A large firm will have several production departments, each of which may
compute a separate predetermined overhead rate. A problem arises when a
service department (maintenance, receiving, general factory, etc.) incurs
costs and benefits multiple production departments.
Costs of these service departments must be allocated to production
departments because all manufacturing costs must ultimately be traced to
products. For example, the costs of the materials-handling cost center may
need to be allocated to the production departments (and possibly other
service departments). Apportionment of service department costs should be
based on meaningful criteria such as:

1) Services provided
2) Services available
3) Benefits received
4) Equity

Examples of apportionment bases are:

1) Area or square feet for building costs
2) Usage for electricity
3) Employees for cafeteria, personnel, and first aid
4) Usage for material handling, maintenance, etc.
Service department costs can be allocated by:
1) Direct method
2) Step method
3) Algebraic or simultaneous or reciprocal method

1. Direct Method
The direct method simply allocates the costs of each service department to each
of the producing departments based on a relative level of the apportionment
base. For example, if a service department had costs of P140, 000, and
departments X and Y used 80% and 20% of the apportionment base, X and Y
would be assigned P112, 000 and P28, 000 respectively. Note that the direct
method ignores use of services by other service departments. For example, the
direct method would ignore the fact that service department. A uses the services
of service department B. The essence of the direct method is shown in the
following diagram

51
 Service Service Service
Department Department Department
A B C

Production Production
Department Department
1 2

2. Step Method
The step method allocates service department costs to other service
departments as well as production departments. The allocation process is:
a. Select the service department serving the most other service departments.
1) When more than one service department services an equal number of
service departments, select the department with the highest costs.
b. Allocate the costs of the service department selected in step a. to the
production departments and other service departments based on a relative level
of the apportionment base as in the direct method.
c. Costs of service departments are never allocated back to departments whose
costs have already been allocated.
Note that the step method ignores the fact that reciprocal services are used
between some service departments.

3. Algebraic or Simultaneous or Reciprocal Method

Under this method, the reciprocal services are considered to determine
the total cost of a service department. The total cost will be the amount allocated
to all departments served by the service department. The following steps under
the method are:
a. Identify the equation to determine the total cost of a service department, e.i.,
the budgeted amount plus the share on the cost of the other service
department.
b. Compute the total cost by using either substitution or elimination method.

52
c. The total cost computed will be the amount allocated to all departments
served.
EXAMPLE:
Producing Departments Service Departments
1 2 A B Total
Budgeted costs P380, 000 P420, 000 P40, 000 P60, 000 P900, 000
Use of A 40% 50% 10% 100%
Use of B 40% 30% 30% 100%
Direct Method – Allocate A’s and B’s costs directly to production
departments 1 and 2.
1 2 A B
Costs prior to allocation P380, 000 P420, 000 P40, 000 P60, 000
Allocation of A’s costs – 4:5 17, 778 22, 222 (40, 000)
Allocation of B’s costs – 4:3 34, 286 25, 714 (60, 000)
Total cost for OH rate computation P432, 064 P467, 936

P900, 000
Step Method – Allocate B’s costs (B has more costs than A) to departments 1, 2
and A. Next allocate A’s costs to departments 1 and 2; you cannot allocate A’s
costs back to B, as B’s costs have already been allocated.

Departments 1 2 A B
Costs prior to allocation P380, 000 P420, 000 P40, 000 P60, 000
Allocation of B’s costs – 4:3:3 24, 000 18, 000 18, 000 (60, 000)
Allocation of A’s costs – 4:5 25, 778 32, 222 58, 000
Total cost for OH rate comp. P429, 778 P470, 222

P900, 000

Algebraic or Simultaneous or Reciprocal Method – Compute the total cost by

considering the reciprocal services rendered to other service departments using
algebra. Develop the equation for total cost computation. The equation for
Department A’s cost must be: A = P40, 000 + 30% of B; and Department B’s cost
must be: B cost must be: B P60, 000 + 10% of A. Using the substitution method
the total cost of Department A:
A = P40, 000 + 30% (P60, 000 + 10% of A)
= P40, 000 + P18, 000 + 3% of A
= P58, 000/97%
= P59, 794

53
 B = P60, 000 + 10% (P59, 794)
= P65, 979

Departments 1 2 A B
Costs prior to allocation P380, 000 P420, 000 P40, 000 P60, 000
Allocation of A’s costs – 4:5:1 23, 918 29, 897 (59, 794) 5, 979
Allocation of B’s costs – 4:3:3 26, 392 19, 794 19, 794 (65,
979)
Total cost for OH rate comp. P430, 309 P469, 691

P900, 000

D. Activity-Based Costing
Activity-based costing (ABC) is based upon two principles. First, activities
consume resources. Second, these resources are consumed by products,
services, or other cost objectives (output). ABC allocates overhead costs to
products on the basis of the resources consumed by each activity involved in the
design, production, and distribution of a particular good. This is accomplished
through the assignment of costs to homogeneous cost pools that represent
specific activities and then the allocation of these costs, using appropriate cost
drivers, to the product. Thus, product costs determined using ABC reflects the
underlying behavior of the costs allocated to the product. ABC may be used with
both job and process costing.
Central to ABC are the activities performed to fulfill organizational
objectives (producing products or services for customers). Activities may be
value-added or non-value-added. Value-added activities are those which
customers perceive as increasing the worth of a product or service and for which
customers are willing to pay. They include only production activities. Non-value-
added activities increase the cost of a product but do not increase its value to
customers. Examples include materials handling and rework, Packaging is
required for some products such as milk or potting soil, but it may be non-value-
added for other products such as books. Thus, these activities may be eliminated
and/or restructured without customers perceiving a decline in the value of the
product/service. An activity (process) map is a flowchart which indicates all
activities involved in the production process and identifies both value-added and
non-value-added activities.

54
 Cost drivers are those activities, which have a direct cause and effect
relationship to the incidence of a particular cost. Traditional costing uses only
variable and fixed or total overhead cost pools and views cost drivers at the
output unit level, wherein costs are allocated based on labor hours, machine
hours, etc. Some costs though, such as setup costs, vary at the batch level
(batch-level costs) and should be spread over the units in the batch to which they
relate (not machine hours). Product-sustaining (process-level) costs such as
engineering change orders should be assigned to the products for which the
orders were issued. Facility-sustaining costs incurred at the organizational level
support operations and can only be arbitrarily assigned to products. As shown by
the following table, ABC uses both transaction-related (e.g., machine hours) cost
drivers. Traditional product costing tends to use only volume-related cost drivers.

Activity Cost driver

Purchase of materials Number of purchase transactions
Receiving Number of shipments received
Disbursing Number of checks issued
Setup costs Number of setups or setup hours
Machining Number of machine hours
Repair costs Number of machine hours
Engineering changes to products Number of engineering change notices

The activities listed above are all examples of direct activities, which can
be traced, to an output or service. In contrast, indirect activities such as human
resources are not directly attributable to output. The cost of indirect activities may
be allocated or simply labeled as nontraceable.
To illustrate, ABC traces the costs of setup activities to the production
batch that caused the setup costs to be incurred. The cost of each setup is then
spread over the units in that batch. On the other hand, a traditional costing
system would typically allocate setup costs as overhead on the basis of a
volume-related cost driver such as direct manufacturing labor hours. Assume that
product A and B incur setup costs as follows:
A B Total
Production volume 7, 500 10, 000
Batch size 250 1, 000
Number of setups 30 10
Total setup costs incurred P60, 000 P20, 000 P80, 000
Total cost per setup P 2, 000 P2, 000

55
Direct manufacturing labor hours/unit 3 3
Total direct manufacturing labor hours 22,500 30, 000
Setup cost per DMLH (P80, 000/52, 500) P1.52
Traditional setup cost/unit
A (P1.52 x 3 DMLH required) P4.56
B (P1.52 x 3 DMLH required) P4.56
ABC setup cost/unit
A (P2, 000/setup ÷ 250 units/batch) P8.00
B (P2, 000/setup ÷ 1, 000 units/batch) P2.00
In this case, products A and B are assigned different total setup costs. However,
because they require the same number of direct manufacturing labor hours per
unit, traditional costing allocates equal setup costs per unit to both products. In
effect, one product picks up cost that was caused by another product (cross-
subsidization), which distorts product-costing information. ABC assigns different
setup costs per unit to each product because each unit of product A demand
more resources for setup activity than does each unit of product B. Note that the
total setup cost remains the same under either method.

Additional explanations about activity-based costing:

A. Definition of terms
1. Activity-based costing – identifies the causal relationship between the
incurrence of cost and activities, determine the underlying driver of the
activities, establishes cost pools related to individual drivers, develop
costing rates, and applies cost to product on the basis of resources
consumed (drivers).
2. Cost drive – is a measure of activity, such as direct labor hours, machine
hours, beds occupied, computer time used, flight hours, miles driven, or
contracts, that is causal factor in the incurrence of cost to an entity.
3. Cost objects – are the intermediate and final dispositions of cost pools.
Intermediate cost objects receive temporary accumulations of costs as the
cost pools move from their originating points to the final cost objects. Final
cost objects, such as job, product, or process, should be logically linked
with the cost pool based on a cause-and-effect relationship.
4. Cost pools – are accounts in which a variety of similar cost elements with
a common cause are accumulated prior to allocation to cost objects on
some common basis. The overhead account is a cost pool into which

56
 various types of overhead are accumulated prior to their allocation. In
activity-based accounting, a cost pool is established for each activity.
5. Value-adding costs - are the activities that cannot be eliminated without
reducing the quality, responsiveness, or quantity of the output required by
a customer or the organization.
B. Activity-Based Costing (ABC)
1. ABC may be used by manufacturing, service, or retailing entities and in job-
order or process costing systems. It has been popularized because of the
rapid advance of technology, which has led to a significant increase in the
incurrence of indirect costs and a consequent need for more accurate cost
assignment. Furthermore, developments in computer and related technology
(such as bar coding) also allow management to obtain better and more timely
information at decreased cost.
a. ABC is one means of improving a cost system to avoid what has been
called peanut-butter costing. Inaccurately averaging or spreading costs
like peanut butter over products or service units that use different
amounts of resources results in product-cost cross-subsidization. This
term describes the condition in which the miscasting of one product
causes the miscasting of other products.
1. In a traditional system, direct labor and direct materials are
traced to products or service units, a single pool of costs
(overhead) is accumulated for a given organizational unit, and
these costs are then assigned using an allocative rather than a
tracing procedure. The effect is an averaging of costs that may
result in significant inaccuracy when products or service units do
not use similar amounts of resources.

2. To improve its costing system, an organization, can attempt to identify as

many direct costs as economically feasible. It can also increase the number
of separate cost pools not directly attributable to cost objects. A cost pool
contains cost elements, which are amounts paid for resources used by an
activity. An activity is a set of work actions undertaken within the entity. Cost
objects are the intermediate and final dispositions of cost pools. Intermediate
costs objects receive temporary accumulations of costs as the cost pools
move from their originating points to the final cost objects. A cost object may
be a job, product, process, activity, service, or anything else for which a cost
measure is desired. For example, work in process is an intermediate cost
object; and finished salable goods are final cost objects.
Each cost pool should be homogeneous; that is, each should consist of costs
that have substantially similar relationships with the driver or other base used for
assignment to cost objects. A cost driver is a factor or event that changes an

57
activity’s cost; it is also the means used to assign cost to activities and to
reassign those costs to other activities, products, or services.
a. Thus, choosing the appropriate base, preferably one with a driver or
cause-and-effect relationship (a high correlation) between the
demands of the cost object and the costs in the pools, is another way
to improve a costing system.

3. ABC attempts to improve costing by assigning costs to activities rather than to

an organizational unit. Accordingly, ABC requires identification of the activities
that consume resources and that are subject to demands by ultimate cost
objects.
a. Design of an ABC system starts with process value analysis, a
comprehensive understanding of how an organization generates its
output. It involves a determination of which activities that use resources
are value-adding or nonvalue-adding and how the latter may be
reduced or eliminated. A value-added activity contributes to customer
value satisfies a need of the entity. The perception is that it cannot be
omitted without a loss of the quantity, quality, or responsiveness of
output demanded by the entity or its customers.
b. The linkage of product costing and continuous improvement of
processes is activity-based management (ABM). It encompasses
driver analysis, activity analysis, and performance measurement.
4. Once an ABC system has been designed, costs may be assigned to the
identified activities, costs of related activities that can be reassigned using the
same driver or other base are combined in homogeneous cost pools, and
an overhead rate is calculated to each pool.
a. The next step, as in traditional methods, is to assign costs to next-
stage cost objects. In other words, cost assignment is a two-step
process. first, costs are accumulated for an activity based on the
resources it can be directly observed to use and on the resources it
can be assumed to use based on its consumption of resources drives
(the cost drivers that reflect the use of resources by an activity),
second, costs are reassigned to next-stage cost objects on the basis of
activity drivers (the cost drivers that measure the demands made on
activities by next-stage cost objects).

58
5. An essential element of ABC is driver analysis that emphasizes the search
for the cause-and-effect relationship between activity and its consumption of
resources and an activity and the demands made on it by a cost object. For
this purpose, activities and their drivers have been classified in accounting
literature as follows:
a. Unit-level (volume-related) activities occur when a unit is produced, e.g.,
direct labor and direct materials activities. Drivers are direct labor hours or
pesos/dollars, machine hours, and units of output.
b. Batch-level activities occur when a batch of units is produced, e.g.,
ordering setup, or materials handling. Drivers may include number or
duration of setups, orders processed, number of receipts, weight of
materials handled, or number of inspections.
c. Product-or service-level (product-or service-sustaining) activities provide
support of different kinds to different types of output, e.g., engineering
changes, inventory management, or testing. Drivers may include design
time, testing time, number of engineering change orders, or number of
categories of parts.
d. Facility- or plant-level (facility -sustaining) activities concern overall
operations, e.g., management of the physical plant, personnel
administration, or security arrangements. Drivers may include any of those
used at the first three levels.

6. Using this model, activities are grouped by level, and drivers are determined
for the activities.
a. Within each grouping of activities, the cost pools for activities that can use
the same driver are combined into homogeneous cost pools. In contrast,
traditional systems assign costs largely on the basis of unit-level drivers.
b. A difficulty in applying ABC is that, whereas the first three levels of
activities pertain to specific products or services, facility-level activities do
not. Thus, facility-level costs are not accurately assignable to products or
services. The theoretically sound solution may be to treat these costs are
period costs. Nevertheless, organizations that apply ABC ordinarily
assign them to products or services to obtain a full-absorption cost
suitable for external financial reporting in accordance with GAAP.

59
7. As the foregoing discussion indicates, an advantage of ABC is that overhead
costs are accumulated in multiple cost pools related to activities instead of in
a single pool for a department, process, plant, or company. ABC also is more
likely than a traditional system to assign costs to activities and reassign them
to next stage cost objects using a base that is highly correlated with the
resources consumed by activities or with the demands placed on activities by
cost objects. Furthermore, process value analysis provides information for
eliminating or reducing nonvalue-adding activities (e.g., scheduling
production, moving components, waiting for the next operating step,
inspecting output, storing inventories). The result is therefore not only more
accurate cost assignments, especially of overhead, but also better cost
control and more efficient operations.
a. A disadvantage of ABC is that may still be relatively more costly to
implement because of the more detailed information required. Another
disadvantage is that ABC-based costs of products or services may not
conform with GAAP; for example, ABC may assign research costs to
products but not such traditional product costs as plant depreciation,
insurance, or taxes.

8. Organizations most likely to benefit from using ABC are those with products
or services that vary significantly in volume, diversity of activities, and
complexity of operations; relatively high overhead costs; or operations that
have undergone major technological or design changes.
a. However, service organizations may have some difficulty in
implementing ABC because they tend to have relatively high levels of
facility-level costs that are difficult to assign to specific service units.
They also engage in many nonuniform human activities for which
information is not more problematic in service than in manufacturing
entities. Nevertheless, ABC has been adopted by various insurers,
banks, railroads, and health care providers.

9. Overhead. Direct labor (hours or peso/dollars) has long been the most
common base for allocating overhead because of its simplicity of use, but it is
not always relevant. Companies now use dozens of different allocation base
depending upon how activity affects overhead costs. One company reported
that it used 37 different bases to allocate overhead, some of which were
averages of several activities.

60
 a. In principle, a separate overhead account or subsidiary ledger account
should be used for each type overhead.
b. In the past, direct labor was ordinarily a larger component of total
production cost than overhead and was the activity that drove (caused)
overhead costs. Due to the increased use of computers and robotics,
overheard is more likely to be a large component of total production
cost, overhead is more likely to be a large component of total
production cost, with direct labor often a small percentage.
1. Most overhead costs vary in proportion to product diversity and
the complexity of an operation. Direct labor is not a cost driver
for most overhead costs.
2. Allocating a very large cost (overhead) using a very small cost
(direct labor) as a base is irrational. A small change in direct
labor on a product can make a significant difference in total
production cost, an effect that may rest on an invalid
assumption about the relationship of the coast and the
allocation base.
c. As previously note, ABC is more useful when overhead costs are relatively
high. Also, the more diverse a company’s line of products or services or
the more significant the volume differences among its products or
services, the more beneficial ABC will be.
1. Simple averaging procedures such as direct-labor based costing
are valid only when all products or services are absolutely
uniform. For example, a simple allocation basis in a factory with
large and small machines and high-priced and low-cost labor
that work together would not be very exact.

10. Comprehensive Example. Assume that a company produces two similar

products. Raw materials costs are P2o per unit, direct labor is P70 per unit,
and factory overhead totals P20, 000. The company produces 1, 000 units of
Product 1 and 100 units of Product 2. Using the direct labor as the allocation
base, costs are as follows:
Product 1 Product 2
Raw materials P20, 000 P2, 000
Direct labor 70,000 7, 000
Overhead 18, 182* 1, 818 **
Total cost P108, 182 P10, 818
Cost per unit P108.18 P108.18
*{[P70, 000 + (P70, 000 + P7, 000)] x P20, 000}
** {[P7, 000 + (7, 000 + P7, 000)] x P20, 000}

61
Alternatively, assume that the overhead represents setup costs, with equal setup
times required for the products. Thus, the P20, 000 would be allocated equally
under an ABC system. The ABC costs would be as follows:
Product 1 Product 2
Raw materials P20, 000 P2, 000
Direct labor 70,000 7, 000
Overhead 10, 000 10, 000
Total cost P100, 000 P19, 000
Cost per unit P100.00 P190.00
Because of the low volume of Product 2, the difference between the traditional
allocation base and ABC is significant. If the company were selling Product 2 at
P150 each (resulting in an apparent unit profit of P41.82 based on the P108.18
direct-labor-based-cost), it would be losing money on every sale.
a. As the example above illustrates, differences in volume can distort cost
allocations even when overhead is relatively low. The distortion is
worse when overhead is a higher proportion of total costs. Assume that
the direct labor costs are only P10 per unit and that overhead totals
P140, 000.
b. The traditional allocation results in the following costs:
Product 1 Product 2
Raw materials P20, 000 P2, 000
Direct labor 70,000 1, 000
Overhead 127, 273* 12, 727**
Total cost P157, 273 P15, 727
Cost per unit P157.27 P157.27
*{[P10, 000 + (P10, 000 + P1, 000)] x P140, 000}
** {[P1, 000 + (10, 000 + P1, 000)] x P140, 000}

Using the ABC system, the allocation of overhead setup costs based on equal
setup times would result in the following production costs:
Product 1 Product 2
Raw materials P20, 000 P2, 000
Direct labor 10, 000 1, 000
Overhead 70,000 70,000
Total cost P100, 000 P73, 000
Cost per unit P100.00 P730.00
Thus, the combination of relatively high overhead and a substantial
difference in product volume results in unit costs for Product 1 and Product 2 that
are 36.4% lower and 364% higher, respectively, than those computed using
traditional method.

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 1) The practical effect of this difference can be illustrated in a competitive
bid situation for Product 1. A manager using direct-labor based cost
would bid some amount slightly greater than P157.27 and, after losing,
would then wonder how a competitor could made a profit with a bid just
over P100. The ABC system provides more relevant costing figures.

11. Companies have begun adopting ABC because of its ability to solve costing
problems that conventional cost accounting either creates or fails to address.
These problems include suboptimal pricing, poor allocation of costs, and
incorrect direction by management. For example, if overhead is allocated
700% of direct labor, managers may try to reduce direct labor costs by P1 to
reduce the amount of overhead allocated by P7. But the better decision may
be to ignore direct labor and concentrate on such cost-cutting efforts as
eliminating setups, engineering changes, and movement of materials.

PROBLEMS
1. B Company Inc. records incoming materials at invoice price less cash
discounts plus applied receiving and handling cost. For product G, the
following data are available:
Budgeted for Actual Cost
the Month for the Month
Freight-in and cartage-in P25, 000 P25, 800
Purchasing department cost 48, 000 45, 000
Receiving department cost 39, 000 42, 000
Storage and handling 42, 000 38, 000
Testing, spoilage, and rejects 26, 000 31, 200
P180, 000 P182, 000

The purchasing budget shows estimated net purchases of P1, 440, 000
for the month. Actual invoices net of discounts total P1, 485, 000 for the month.

Required:
1. Determine the applied acquisition costing rate for the month.
2. Determine the amount of applied cost added to materials purchased
during the month.
3. Indicate the possible disposition of the variance.

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2. Kaleidoscope Cutlery manufactures kitchen knives. One of the employees,
whose job is to cut out wooden knife handles, worked 48 hours during a week in
January. The employee earns P12 per hour for 40-hour week. For additional
hours the employee is paid an overtime rate of P16 per hour. The employee’s
time was spent as follows:

Regular duties involving cutting out knife handles 38 hours

General shop cleanup duties 9 hours
Idle time due to power outage 1 hour

Required:
1. Calculate the total cost of the employee’s wages during the week
described above.
2. Determine the portion of this cost to be classified in each of the
following categories:
a. Direct labor.
b. Manufacturing overhead (idle time).
c. Manufacturing overhead (overtime premium).
d. Manufacturing overhead (indirect labor).

3. C Corporation estimates factory overhead of P207, 000 for the next fiscal
year. It is estimated that 52, 000 units will be produced at a materials cost of
P500, 000. Conversion will require an estimated 85, 000 labor hours at a cost
of P9 per hour, with 69, 000 machine hours.
Required:
Calculate the predetermined factory overhead rate based on:
1. Materials costs 4. Direct labor cost
2. Units of production 5. Direct labor hours
3. Machine hours

4. Madison Corporation is developing departmental overhead rates based on

direct labor hours for its two production departments, Molding and Assembly.
The Molding Department employs 20 people, and the Assembly Department
employs 80 people. Each person in these two department work 2, 000 hours
per year. The production-related overhead costs for the Molding department
are budgeted at P204, 000, and the Assembly Department costs are
budgeted at P320, 000. Two service departments, Repair and Power, support
the two production departments and have budgeted costs of P48, 000 and
P250, 000, respectively. The production department’s overhead rates cannot
be determined until service departments’ costs are distributed. The following
schedule reflects the use of the Repair Department and Power Department’s
output by the various departments.

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 Services Provided
Department Repair Hours KWH
Molding 1, 000 840, 000
Assembly 8, 000 120, 000
Repair - 240, 000
Power 1, 000 -
10, 000 1, 200, 000

Required:
1. Calculate the overhead rate per direct labor hour for Molding Department,
distributing service department costs to producing departments only.
2. Calculate the overhead rate per direct labor hour for Assembly
Department, using the simultaneous method to distribute service
department costs.

5. The Ronrox Ink Company prepared the following list in order to determine the
factory overhead in each department for the year 208:
Factory Overhead Cost Total Cost
Production Departments Service Departments
H G U V W
Rent P250, 000 P770, 000 P15, 000 P14, 500 P7, 000
Repairs 100,000 120, 500 23, 000 30, 000 7, 500
Fuel 350, 000 420,000 9, 500 7, 000 6, 000
Indirect labor 157, 500 170, 000 145, 000 100, 000 97, 500
Heat and Light 202, 500 151, 200 9, 000 6, 000 7, 500
Depreciation 94, 000 71, 300 3, 000 1, 500 2, 000
Miscellaneous 60, 000 50, 500 500 500 500
Total P1,275,000 P1,810,000 P332,000 P254,000 P188,000

Additional data needed for allocation of factory overhead:

Department U services G, V, and W in the ratio of 2:1:1, respectively.

Department V services Department H, G, U, and W in the ration of 3:1,
respectively.
Department W services Department H and G in the ratio of 3:1, respectively.

65
Required:
Assume Department U is allocated first, V is second, and W is last.
a. Allocate the total costs of the service departments to the producing
departments by using the following methods: (1) Direct; (2) Step; (3)
Algebraic.
b. Determine the factory overhead application rates for the producing
departments using the following bases: Department H, 100, 000 direct
labor hours; and Department G, 195, 000 direct labor hours.

6. Globe Telecommunications Corporation manufactures two different fax

machines for the business market. Cost estimates for the two models for the year
2018 are as follows:
Basic System Advanced System
Direct material P400 P800
Direct labor (20 hours at P15 per hour) 300 300
Manufacturing overhead * 400 400
Total P1, 100 P1, 500

*The predetermined overhead rate is P20 per direct labor hour.

Each model of fax machine requires 20 hours of direct labor. The basic system
requires 5 hours in department A and 15 hours in department B. The advanced
system requires 15 hours in department A and 5 hours in department B. The
overhead costs budgeted in these two production departments are as follows:
Department A Department B
Variable cost P16 per direct labor hour P4 per direct labor hour
Fixed cost P200, 000 P200, 000
The firm’s management expects to operate at a level of 20, 000 direct labor
hours in each production department during 2018.
Required:
1. If the firm prices each model of fax machine at 10 percent over its cost,
what will be the price of each model?
2. Suppose the company were to use departmental predetermined overhead
rates. Calculate the rate for each of the two production departments.
3. Compute the product cost of each model using the departmental overhead
rates calculated in requirement (2).
4. Compute the price to be charged for each model, assuming the company
continues to price each product at 10 percent above cost. Use the revised
product costs calculated in requirement (3).

66
 5. Using the information of the main problem, assuming the company has
implemented an activity-based system with the following activity cost pools
and cost drivers:
Activity Activity CostCost DriverBasic System Advanced
System
Machine setup P100,000 200 setups 50 setups 150 setups
Material receiving 60,000 80,000 lbs 30,000 lbs 50,000 lbs
Inspection 80,000 1,600 inspections700 inspections 900 inspections
Machinery-related 420,000 60,000 machine hrs20,000 mach hrs 40,000 mach hrs
Engineering 140,000 7,000 engineering hrs3,000 eng. hrs 4,000 eng. hrs
Total Overhead P800, 000

Globe plans to produce 1, 000 units of each model for fax machine.
Required:
a. Compute the cost rate per unit of each cost driver (e.g., the cost per
setup).
b. Determine the total overhead to be assigned to each product line under
activity-based costing.
c. Calculate the overhead assigned per unit of each type of fax machine
under ABC.
d. Prepare a table comparing the total product cost assigned to each type of
fax machine using a plant wide overhead rate, departmental overhead
rates, and activity-based costing.

7. Edgeworth Box Corporation manufactures a variety of special packaging

boxes used in the pharmaceutical industry. The company’s Canlubang plant is
semiautomated, but the special nature of the boxes requires some manual labor.
The controller has chosen the following activity cost pools, cost drivers, and pool
rates for the Canlubang plant’s product- costing system.
Budgeted
Overhead Level for Cost
Activity Cost Pool Cost Cost Driver Driver Pool Rate
Purchasing, store and Raw material
material handling P200, 000 costP1,000,00020%ofmaterialcost
Engineering and product Hours in design
design 100,000 department 5,000 hrs P20 per hr
Machine setup costs 70,000 Production runs1,000 runP70 per run
Machine depreciation
and maintenance 300,000 Machine hrs 100,000 hrs P3 per hr
Factory depreciation, taxes,
insurance, utilities 200,000 Machine hours 100,000 hrsP2 per hr

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Other manufacturing
overhead costs 150,000 Machine hrs 100,000 hrs P1.50 per hr
Total P1,020,000
Two recent production orders had the following requirements.
20,000 units of10,000 unit of
Box C52 Box W29
Direct labor hours 42 hours 21 hours
Raw materials cost P40,000 P35,000
Hours in design department 10 25
Production runs 2 4
Machine hours 24 20

Required:
a. Calculate the total overhead cost that should be assigned to Box C52 and
Box W29.
b. Calculate the overhead cost per box for Box C52 and Box W29.

8. Thom Co. manufactures a variety of high- and low-volume products, including

Product 456, in its San Pedro Plant. The following information pertains to the
most recent year:
Total for Total for
Product 456 San Pedro
Unit-level overhead P200, 000
Batch-level overhead 300,000
Product-level overhead 500,000
Plant-level overhead 400,000
P1, 400,000
Units produced 100 5,000
Direct labour hours 200 20,000
Machine hours 90 10,000
Setups 6 120
Setup hours 30 500
Design changes 4 40
Design hours 280 4,000

Required: Determine:
a. If the San Pedro Plant accumulates all overhead in a single cost pool and
allocates it on the basis of machine hours, how much overhead cost will
be allocated to a unit of Product 456?

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 b. In relation to the above information, if the San Pedro Plant uses ABC with
setups as the driver for all batch-level overhead, design hours as the
driver for all product-level overhead, and machine hours as the driver for
all unit- and plant-level overhead, how much overhead cost will be
allocated to a unit of Product 456?
9. The controller for Bagani Supply Company has established the following
activity cost pools and cost drivers.
Budgeted Budgeted
Overhead Level for Cost
Activity Cost Pool Cost Cost Driver Driver Pool Rate
Machine setups P200,000 Number of setups 100 P2,000/setup

Material handling 100,000 Weight of raw

material 50,000 pounds P2/pound

Hazardous waste control 50,000 Weight of hazardous10,000 pounds 5/pound

chemical used

Quality control 75,000 Number of inspections1,000 P75/inspection

Other overhead costs 200,000 Machine hours 20,000 10/machine hr

Total P625,000

An order for 2, 000 boxes of film development chemicals has the following
production requirements:
Machine setups 4 setups
Raw materials 10, 000 pounds
Hazardous materials 2, 000 pounds
Inspections 10 Inspections
Machine hours 500 machine hours
Under the activity based cost system, how much is the overhead cost per
box of chemicals?
A. P21.875 B. P43.75 C. P15.625 D. P7.8125
Using the single predetermined overhead rate based on machine hours,
compute the rate per box of chemicals.
A. P21.875 B. P43.75 C. P15.625 D. P7.8125

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MULTIPLE CHOICE
1. The following information is available concerning the inventory and cost of
goods sold accounts of Richmond Corporation Company at the end of the most
recent year.
Work in Finished Cost of
Process Goods Goods Sold
Direct Materials P2,000 P6,000 P12,000
Direct labor 2,000 16,000 32,000
Applied factory overhead 2,000 16,000 32,000
Year-end balance P6,000 P38,000 P76,000
Applied Factory Overhead has already closed to Factory Overhead Control. In all
previous years, over- or underapplied factory overhead was treated as an
adjustment to income or expense. Beginning inventories of the most recent year
were insignificant.
Calculate the amount of Finished Goods account presented in the balance
sheet for the year assuming an overlapplied of P12, 000 is to be allocated to
inventories and cost of goods sold in proportion to the applied overhead in those
accounts.
a. P41,800 b. P34,200 c. P34,160 d. P41,840
Questions 2 and 3 are based on the following:
Tess is the supervisor of Department 5 in the Davao plant of Myles Instrument
Company. She is responsible for the cost of direct materials, direct labor, and
variable overhead costs incurred in this department. The fixed overhead cost is
not under her jurisdiction.
During a recent week, actual factory overhead costs for Department cost for
December 5 were as follows:
Actual Variable Overhead:
Indirect materials P19,400
Supplies 14,200
Telephone 700
Heat and light 1,600
Power 7,000
Repairs and maintenance 3,200
Total variable overhead P46,100

Actual Fixed Overhead:

Indirect labor P61,000
Supervision 42,000
Heat & light 7,000
Repairs & maintenance 9,000

70
 Depreciation 21,000
Total fixed overhead 140,000
Total actual overhead P186,100

The department operated at 45,000 direct labor hours during this week. A budget
of factory overhead for 45,000 direct labor hours is as follows:

Budgeted Variable Overhead:

Indirect materials P16,500
Supplies 12,400
Telephone 700
Heat and light 1,550
Power 7,000
Repairs and maintenance 2,350
Total variable overhead P40,500

Budgeted Fixed Overhead:

Indirect labor P61,000
Supervision 42,000
Heat & light 7,000
Repairs & maintenance 9,000
Depreciation 21,000
Total fixed overhead 140,000
Total actual overhead P180,500
Variable overhead is costed to the products at the rate of 0.90 per direct labor
hour, and fixed overhead is costed to the products at the rate of 2.80 per direct
labor hour.
2. How much overhead was costed to the products during the week?
a. P166,500 b. P186,100 c.P180,500 d. P172,100
3. Compute the overapplied or underapplied overhead for the week?
a. P5,600 overapplied c. P19,600 overapplied
b. P5,600 underapplied d. P19,600 underapplied
4. The following cost data for 2016 pertain to Heartstring, Inc., a greeting card
manufacturer:
Direct material used in production P2,100,000
Advertising expense 99,000
Depreciation on factory building 155,000
Direct labor: wages 485,000
Cost of finished goods inventory at year-end 115,000
Indirect labor: wages 140,000

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 Production supervisor’s salary 45,000
Service department costs* 100,000
Direct labor: fringe benefits 95,000
Indirect labor: fringe benefits 30,000

Fringe benefits for production supervisor 9,000

Total overtime premiums paid 55,000
Cost of idle time: production employees 40,000
Administrative costs 150,000
Rental of office space for sales personnel 15,000
Sales commissions 5,000
Product promotion costs 10,000

*All services are provided to manufacturing departments.

**The rental of sales space was made necessary when the sales offices were
converted to storage space for raw material.
Compute the total amount charged to Factory Overhead Control account.
a. P669,000 b. P684,000 c. P654,000 d. P569,000
5. Kyoto Corporation, a Japanese manufacturer of television sets, provides the
following data for 2016:
Budgeted overhead cost Y 20,000,000
Budgeted activity 20,000 machine hours
Actual overhead cost Y 21,500,000
Overapplied overhead Y 500,000

Determine the amount of machine hours worked at Kyoto Corporation during

2016.
a. 22, 000 b. 20,000 c. 21,000 d. 20,500
6. Jabotinsky Company, an Israeli manufacturer of olive wood products, uses a
predetermined factory overhead application rate based on direct labor cost. For
2016, Jabotinsky’s budgeted overhead was 900,000 shekels, based on a volume
of 50,000 direct labor hours and a budgeted wage rate of 9 shekels per hour.
Actual factory overhead amounted to 963,000 shekels. For 2016, the overapplied
factory overhead was 33,000 shekels.
Compute the amount of actual direct labor cost for 2016.

72
 a. P498,000 b. P465,000 c. P450,000 d. P481,500
7. Evan’s Enterprises operates its factory on a two-shift and pays a late-shift
differential of 15 percent above the regular wage rate of P18 per hour. The
company also pays a premium of 50 percent for overtime work. During 2013,
work occurred in the following categories:
Number of hours during the regular shift 10,000
Number of overtime hours for regular shift 300
Number of hours worked during the late shift 6,000
Compute the amount of labor-related cost to assign to factory overhead.
a. P8,100 b. P132,300 c. P18,900 d. P73,710

8. The following information pertains to Portsmouth Glass Works for 2016.

Budgeted direct-labor cost 75,000 hours at P16 per hour
Actual direct-labor cost 80,000 hours at P17.50 per hour
Budgeted manufacturing overhead P997,500
Actual manufacturing overhead:
Depreciation P240,000
Property taxes 12,000
Indirect labor 82,000
Supervisory salaries 200,000
Utilities 59,000
Insurance 30,000
Rental space 300,000
Indirect material (see date below) 79,000
Indirect material:
Beginning inventory, 1/1/2016 48,000
Purchases during the 2016 94,000
Ending inventory, 12/21/2016 63,000

Compute the overapplied or underapplied overheads for 2016.

a. P62, 000 overapplied c. P66, 843.75 overapplied

b. P P62, 000 underapplied d. P P66,843.75 underapplied

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9. C Manufacturing Company produces CB stereos for cars. The following cost
information is available for the period ended December 31, 2016:
Materials put into production: P1,200,000, of which P800,000 was direct
materials.
Factory labor costs for the period: P900,000, of which P250,000 was indirect
labor.
Factory overhead for utilities: P400,000
Selling, general, and administrative expenses: P600,000.
Compute the factory overhead cost.
a. P400,000 b. P1,700,000 c. P1,000,000 d. P1,050,000

10. R Factory for an incentive scheme for its factory workers which features a
combined maximum guaranteed wage and a piece rate. Each worker is paid
P11.25 per piece with a minimum guaranteed wage of P875 per week.
Production report for the week show:
Employee Name Units Produced Employee Name Units Produced
B 67 S 82
L 78 H 72
E 80 A 75
Compute the portion of the weekly payroll that should be changed to factory
overhead.
a. P5,325.00 b. P5,275.00 c. P5,217.50 d. P217,50

Questions 11 and 12 are based on the following:

Korecase Instrument Company manufactures gauges for construction machinery.
The company has two production departments: Molding and Assembly. There
are three service departments: Maintenance, Personnel, and Computer Aided
Design (CAD). The usage of these service departments’ output and their
budgeted costs during 2018 are as follows:
Provision of Service Output in 2018 (in hours of service)
Provider of Service
User of Service Personnel Maintenance CAD
Personnel - - -
Maintenance 500 - -
CAD 500 500 -
Molding 4,000 3,500 4,500

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Assembly 5,000 4,000 1,500
Total 10,000 8,000 6,000
The budgeted costs in Korecase Instrument Company’s service departments
during 2018 are as follows:
Personnel Maintenance CAD
Variable P50,000 P80,000 P50,000
Fixed 200,000 150,000 300,000
Total P250,000 P230,000 P350,000

11. Use the direct method to allocate Korecase Instrument Company’s service
department costs to its production departments. Determine the share of
Molding Department.
a. P480,944 b. P463,125 c. P340,508 d. P349,056
12. Determine the proper sequence to use in allocating the firm’s service
departments costs by the step-down method and use the step-down method to
allocate the company’s service department costs. Determine the share of
Assembly Department.
a. P340,664 b. P480,944 c. P463,125 d. P489,492
13. Tiger Airlines has two operating departments (Freight and Passenger) and
two service centers (Maintenance and Administration). The following table shows
June 2018 data:
Service Centers Operating Departments
Maintenance Administration Freight Passenger
Costs P630,000 P950,000 P1,800,500 P5,260,470
Labor hours 8,000 9,000 30,000 51,000
Number of
employees 40 50 80 200

Maintenance costs are allocated using labor hours, while Administration costs
are allocated using number of employees.

Using the reciprocal method, how much service department cost will be allocated
to Freight Operating Department?
a. P618,050 b. P354,000 c. P509,198 d. P505,163

14. Rural Bank has two service departments, the Personnel Department and the
Computing Department. The bank has two other departments that directly
service customers, the Deposit Department and the Loan Department. The
usage of the two service departments’ output in 2018 is as follows:

75
 Provider of Service
User of service Personnel Computing
Personnel 15%
Computing 10%
Deposit 60% 50%
Loan 30% 35%
The budgeted cost in the two service departments in 2018 were as follows:
Personnel – P153,000 Computing – P229,500
Under the direct method of allocating service department cost, the amount
allocated to Deposit Department must be:
a. P237,000 b. P238,431 c.P235,800 d. P191,250

15. Under the step method of allocating service department cost, the amount
allocated to Loan Department must be (Rural allocates Personnel Department
first):
a. P145,500 b. P146,700 c. P144,069 d. P191,250
16. This schedule was used by Junes, Inc., in order to change its method of
allocation from the step method to the direct method.
Factory Overhead
Costs, Producing Total Costs
Department Service Departments
ONE TWO A B C
Budgeted costs: P1,000,000 P975,000 P300,000 P400,125 P150,85
Allocation of:
Department C 45,225 72,360 18,090 15,200 (150,875)
Department B 166,130 166,130 83,065 (415,325)
Department A 240,693 160,462 (401,155)
Balance per allocation P1,452,048 P1,373,952
Rates based on direct
Labor hours P48.4016 P68.6976

Using the direct method, calculate the new factory overhead rate for producing
department two.
a. P47.936 b. P69.395 c. P47.516 d. P70.025

76
Questions 17 and 18 are based on the following:
The Chromosome Manufacturing Company produces two products, X and Y. The
company president, Gene Mutation, is concerned about the fierce competition in
the market for product X. He notes that competitors are selling X for a price well
below Chromosome’s price of P12.70. At the same date, he notes that
competitors are pricing product Y almost twice as high as Chromosome’s price of
P12.50.
Mr. Mutation has obtained the following data for a recent time period:
Product X Product Y
Number of units 11,000 3,000
Direct materials cost per unit P3.23 P3.09
Direct labor cost per unit P2.22 P2.10
Direct labor hours 10,000 2,500
Machine hours 2,100 2,800
Inspection hours 80 100
Purchase orders 10 30

Mr. Mutation has learned that overhead costs are assigned to products on the
basis of direct labor hours. The overhead costs for this time period consisted of
the following items:
Overhead Cost Item Amount
Inspection costs P16,200
Purchasing costs 8,000
Machine costs 49,,000
Total P73,200
17. Using the labor hours to allocate overhead costs, determine the gross margin
per unit for Product X
a. P1.394 b. P1.454 c. P4.505 d. P1.926
18. Using the activity-based costing, determine the gross margin per unit for
Product X
a. P1.454 b. P1.394 c. P4.505 d. P1.926
19. Delerico Manufacturing Company makes a variety of backpacks. The activity
centers and budgeted information for factory overhead for the year are:
Activity Center Overhead Costs Cost Driver Activity Center Rate
Materials Handling P3,000,000 Weight of materials P3.00 per pound
Cutting 13,000,000 Number of shapes P30.00 per shape
Assembly 46,000,000 Direct labor hours P120.00per labor
hour
Sewing 12,000,000 Machine hours P80.00 per mach
hour

77
Two styles of backpacks were produced in December, the EasyRider and the
Overnighter. The quantities and other operating data for the month are:
EasyRider Overnighter
Direct materials costs P15,000 P200,000
Direct labor cost P300,000 P50,000
Direct materials weight in pounds 50,000 15,000
Number of shapes 35,000 15,000
Assembly direct labor hours 7,500 1,200
Sewing machine hours 12,500 1,800
Units produced 5,000 1,000
Calculate the cost per unit for each backpack.
a. EasyRider, P620; Overnighter, P783
b. EasyRider, P1,232; Overnighter, P1,240
c. EasyRider, P783; Overnighter, P620
d. EasyRider, P710; Overnighter, P1,033

20. David Corporation has used a traditional cost accounting system to apply
quality control costs uniformly to all products at a rate of 15% of direct labor cost.
Monthly direct labor cost for its main product is P30,000. In an attempt to
distribute quality control costs more equitably, David is considering activity-based
costing (ABC). The monthly data shown below have been gathered for the main
product. The three activities are (1) incoming materials inspection, (2) in-process
inspection, and (3) product certification. Costs are to be allocated to each activity
on the basis of cost drivers.
Activity Cost Driver Cost Rate Quantity for Main Product
(1) Number of types of materials P12 per type 12 types
(2) Number of units P0.14 per unit 17,500 units
(3) Number of orders P77 per order 30 orders
The monthly quality control assigned to the main product using ABC is
a. P150 per order
b. P404 lower than using the traditional system
c. P4,500
d. P404 higher than using the traditional system

78
JOINT & BY PRODUCT, STANDARD AND BACKFLUSH COSTING
A. Joint Products
Joint Products are two or more products produced together up to a split-off
point where they become separately identifiable. They cannot be produced by
themselves. For example, a steak cannot be produced without also roasts,
ribs, liver, hamburger, etc. Other industries which produce joint products
include
1) Chemicals 3) Mining
2) Lumber 4) Petroleum
Joint Products incur common, or joint costs, (direct materials, direct labor
and applied factory overhead) before the split-off point. The split-off point is the
point of production at which the joint products can be individually identified and
removed from the joint, or common process. The joint Products can then be sold
or processed further. Costs incurred after the split-off point for any one of the
joint products are called separable costs or further processing costs. These costs
are already identified to each joint product.
Common costs are allocated to the joint products at the split-off point,
usually on the basis of sales value at the split-off point, estimated net realizable
value method allocates joint costs using the estimated sales values of the joint
products after further processing less the separable processing costs. This is
also called the relative sales value method. The sales value at split-off method
must be used if a sales value at split-off point exists. If not, then a hypothetical
value at split-off must be determined. The following example illustrates the sales
value at split-off and estimated net realizable value methods.
Start
Product X1 separable costs, P2,000 Product X2
Sales value – P4,000 sales value – P6,700
Joint cost – P3,000
Product Y1 separable costs, P400 Product Y2
Split-off point Sales value – P1,000 sales value – P1,700

79
SALES VALUE AT SPLIT-OFF
Sales value Joint
Product at split-off Ratio x Costs = Allocated joint costs
X1 P4,000 4/5 xP3,000 = P2,400
Y1 P1,000 1/5 x P3,000 = P600
Total 5,000 P3,000

If the sales value at split-off were not available or one did not exist, we must use
the estimated net realizable value (NRV). This is also called the relative sales
value or hypothetical value method.

ESTIMATED NET REALIZABLE VALUE METHOD (NRV)

Final sales Separable Estimated net Joint Allocated
Product value -costs = realizable value Ratio x Costs = joint costs
X2 P6,700- P2,000 = P4,700 4.7/6 x P3,000 = P2,350
Y2 P1,700- P400 = 1,300 1.3/6 x P3,000 = P650
Total P6,000 P3,000

Physical measure (units, pounds, etc.) generally are not used because of
the misleading income statement effect. With an allocation based on pounds,
steak would show a big profit while ground beef would be consistent loser; each
pound would carry the same cost although steak sells for more per round.
Joint cost allocation is performed for the purpose of inventory valuation
and income determination. However, joint costs should be ignored for any
internal decisions including the decision on whether to process a joint product
beyond the split-off point. The sell or process further decision should be based
on incremental revenues and costs beyond the split-off point. If incremental
revenues from further processing exceeds incremental costs, then process
further. If incremental costs exceed incremental revenues, then sell at the split-off
point. In the previous example in which we assumed a sales value at the slit-off
point, both X1 and Y1 should be further processed.

Advantage of
Incremental revenues Incremental costs further processing
X1: P6,700-P4,000 = P2,700 - P2,000 = P700
Y1: P1,700 – P1,000 = P700 - P400 = P300

If X1 could be sold for only P5,500 after further processing, the

incremental revenue (P1,500) would not cover the incremental cost (P2,000),
and X1 should not be further processed.

80
B. By-Products
By-Products, in contrast to joint products, have little market value relative
to the overall value of the products(s) being produced. Joint (common) costs are
usually not allocated to a by-product. Instead they are frequently valued at
market or net realizable value (NRV) and accounted for as a contra production
cost.
Rather than recognizing by-Product market value as a reduction of
production cost, it is sometimes recognized when sold and disclosed as
1) Ordinary sales 2) Other income 3) Contra to cost of sales
C. Standard Costing
Standard costs are predetermined target costs which should be attainable
under efficient conditions. The tightness, or attainment difficulty, of standard
costs should be determined by the principles of motivation (e.g., excessively tight
standards may result in employees feeling that the standards are impossible to
achieve; consequently, they may ignore them). Standard costs are used to aid in
the budget process, pinpoint trouble areas, and evaluate performance. Standard
costing will often result in lower bookkeeping costs than actual costing, because
standard costing does not require actual department costs to be allocated to
each unit produced in that department.
The tightness of standards is generally described by one of two terms.
Ideal standards reflect the absolute minimum costs which could be achieved
under perfect operating conditions. Currently attainable standards should be
achieved under efficient operating conditions. Generally, currently attainable
standards are most often used since they are more realistic for budgeting
purposes and are a better motivational tool than ideal standards.
Variances are differences between actual and standard costs. The total
variance is generally broken down into sub-variances to further pinpoint the
causes of the variance.
1. Journal Entries for Variances
Variances are often computed and analyzed, but not entered into the
accounts. If incorporated into the accounts, the standard amounts are entered
into the inventory account. For example, when materials are purchased, standard
price is known but standard quantity at standard price. When materials account is
debited for actual quantity at standard price. When materials are used, standard
quantity is also known, so work in process is debited for standard quantity at
standard price. Pro-forma entries for materials, labor and overhead are
presented below.

81
 a. To record material purchases.
Materials AQ x SP
Price variance XXX (U) or XXX(F)
Accounts payable AQ x AP
b. To record materials used.
WIP inventory SQ x SP
Quantity variance XXX(U) or XXX(F)
Materials AQ x SP
c. To record accrued payroll or distribution of payroll.
WIP inventory SH x SR
Rate variance XXX(U) or XXX(F)
Efficiency variance XXX(U) or XXX(F)
Accrued payroll or Payroll AH x SR
d. To record actual factory overhead.
Factory overhead control xxx
Various credits xxx
e. To record applied overhead.
WIP inventory AH(Units) x SQHR
Applied factory overhead AH(units) x SOHR
f. To record factory overhead variances
Applied factory overhead XXX
Controllable variance AOH-BASH(U) or AOH-BASH(F)
Volume variance BASH-SOH(U) or BASH-SOH(F)
Factory overhead control XXX

A(n) unfavorable (favorable) variance is recorded as a debit (credit) to the

variance account. Overhead variances, while computed and analyzed monthly,
would normally be entered in the accounts. The total overhead variance, of
course, is the difference between the balances in the Control and Applied
accounts.

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 2. Disposition of Variances
If immaterial, variances are frequently written off to cost of goods
sold on grounds of expediency. If material, the variances must be
allocated among the inventories and cost of goods sold, usually in
proportion to EUP or ending balances.

D. Backflush Costing
The term backflush costing (also called delayed costing, endpoint costing,
or post-deduct costing) describes a costing system that delays recording
changes in the status of a product being produced until good finished units
appear; it then uses budgeted or standard costs to work backward to flush out
manufacturing costs for the units produced. An extreme form of such delay is to
wait until sale of finished units has occurred. Typically, no record of work in
process appears in backflush costing.

In companies that adopt costing, the following occurs:

1. Management wants a simple accounting system. Detailed tracking of
direct costs through each step of the production system to the point of
completion is deemed unnecessary.
2. Each product has a set of budgeted or standard costs.
3. Backflush costing reports approximately the same financial results as
sequential tracking would generate.
If inventories are low, managers may not believe it worthwhile to spend
resources tracking costs through Work in Process, Finished Goods, and Cost of
Goods Sold. Backflush costing, therefore, is especially attractive in companies
that have low inventories resulting from Just-In Time (JIT). Backflush costing and
sequential tracking (traditional approach) will also produce approximately the
same results, however, when inventory is present, provided inventories maintain
stable values. Constant amounts of costs will deferred in inventory each period.

83
1. Manufacturing Cost Flows in a JIT Setting
Backflush system Traditional system
1. Purchase of raw materials, P200,000
Raw and In-process inventory 200,000 Raw materials inventory 200,000
Accounts payable 200,000 Accounts payable 200,000
2. Raw material requisitioned for production.
No entry Work-in-process inventory 200,000
Raw materials inventory 200,000
3. Direct-labor cost incurred, P50,000.
4. Actual manufacturing overhead cost incurred, P95,000.
Conversion costs 145,000 Work-in-process inventory 50,000
Wages payable 50,000 Wages payable 50,000
Accounts payable 95,000 Manufacturing overhead 95,000
Accounts payable 95,000
5. Application of manufacturing overhead to work-in-process inventory (predetermined
overhead rate is 200% of direct-labor cost).
No entry Work-in-process inventory 100,000
Manufacturing overhead
100,000
Products are completed, P350,000.
Finished goods inventory 350,000Finished goods inventory 350,000
Raw and in-process inventory 200,000 Work-in-process inventory 350,000
Conversion costs* 150,000
6. Goods are sold, P350,000
Cost of goods sold 350,000 Cost of goods sold 350,000
Finished goods inventory 350,000 Finished goods inventory 350,000

*Applied conversion costs include direct labor of P50,000 and applied

manufacturing overhead of P100,000.
Notice that overhead is overapplied by P5,000 under both systems. Under the
traditional system, we have actual overhead of P95,000 and applied overhead of
P100,000. Under the backflush system, we have actual conversion costs of
P145,000 and applied conversion costs of P150,000. Under both approaches,
the P5,000 of overapplied costs will be closed into Cost of Goods Sold (deduct)
at the end of the period.

84
PROBLEMS
Joint & By-Product Costing

1. The Katy Company produced three joint products at a joint cost of P132,000.
Additional information for a recent period is as follows:
If processed further
Product Units Sales Value at Sales Value Additional costs
Produced SO
A 13,200 P88,000 P121,000 P19,800
B 8,800 77,000 99,000 15,000
C 4,400 55,000 66,000 11,000

Required: Allocate joint cost and compute for the total cost using:
1. Physical units
2. Sales value at split-off
3. NRV method
2. The Three Stooges Production Company uses a process cost system to
account for the production of the three different products: M, L, and C. The
products are considered joint products in the first department (Department I). The
products are split off, at the end of processing in Department I. Product M needs
no further processing after the split-off point while products L and C are sent to
Departments 2A and 2B, respectively, for further processing.

The following revenue and cost information is available:

Units Market Value Per Unit
Product Produced At End of Processing
M 80,000 P200
L 70,000 300
C 90,000 250

Department
Department Cost per Unit
1 P120
2 80
3 60
4

Required: Allocate the joint costs of Department 1 and using the net realizable
value method.

85
3. Blessa Corporation produces three products, A, B and C are joint products; B
is a by-product of A. No joint cost is to be allocated to the by-product. The
production processes for a given year are as follows:

(a) In Department 1, 110,000 pounds of material are processed, at a total cost

of P120, 000. After processing, 60% of the units are transferred to
Department 2, and 40% of the units (now C) are transferred to Department
3.
(b) In Department 2, the material is further processed at a total additional cost
of P38, 000. Seventy percent of the units (now A) are transferred to In
Department 4 and 30% emerge as B, the by-product, to be sold at P1.20
per pound. The marketing expense related to B is P8, 100.
(c) In Department 4, A is processed at a total additional cost of P23, 660.
After processing, A is ready for sale at P5 per pound.
(d) In Department 3, C is processed at a total additional cost of P165, 000. In
this department, a normal loss of units of C occurs, which equals 10% of
the good output of C. The remaining good output is sold for P12 per
pound.
Required:
Allocate the joint cost to joint products using the market value at split-off and
treating the net realizable value of B as an addition to the sales value of A.

4. Kalamazoo Chemical Company is a diversified chemical processing company.

The firm manufactures swimming pool chemicals, chemicals for metal
processing, specialized chemical compounds, and pesticides.
Currently, the Norwood plant is producing two derivatives, RNA-1 and RNA-2,
from the chemical compound VDB developed by the company’s research labs.
Each week 1, 200, 000 pounds of VDB is processed at a cost of P246, 000 into
800, 000 pounds of RNA-1 and 400, 000 pounds of RNA-2. The proportion of
these two outputs cannot be altered, because this is a joint process. RNA-1 has
no market value until it is converted into a pesticide with the trade name Fastkil.
Processing RNA-1 into Fastkil costs P240, 000. Fastkil wholesales at P50 per
100 pounds.
RNA-2 is sold as is for P80 per hundred pounds. However, management
has discovered that RNA-2 can be converted into two new products by adding
400,000 pounds of RNA-2. This joint process would yield 400, 000 pounds each
of DMZ-3 and Pestrol, the two new products. The additional direct materials and

86
related processing costs of this just process would be P120, 000. DMZ-3 and
Pestrol would each be sold for P57.50 per 100 pounds. The company’s
management has decided to produce RNA-2 further.
Required:
a. Allocate the joint production costs using the market value method.
b. Assuming the units of production method is used to allocate joint production
costs, would it be advantageous for the company to process further RNA-2?

Standard Costing
5. M Manufacturing Company manufactures a product, which has the following
standard costs:
Materials 6 units at P2.00 P12.00
Labor 1/4 hour at P8.00 2.00
Variable factory overhead 3/4 hour at P4.00 3.00
Fixed factory overhead (normal capacity
is 4, 000 hours of processing time) 3/4 hour at P12.00 9.00
Total standard cost P26.00

The following information pertains to actual production activity for August:

a) 6, 000 equivalent units were produced with respect to materials, 5, 800
equivalent units with respect to labor, and 5, 500 equivalent units with
respect to factory overhead.
b) 33, 000 units of materials were purchased on account at a total cost of
P64,350. The materials price variance is recorded when the materials are
purchased.
c) 40, 000 units of materials were issued to production and used during the
period.
d) Direct labor cost was P12, 300 for 1, 500 actual hours. Assume that the
liability has already been recorded but not yet distributed.
e) Actual processing required during August totaled 4, 300 hours.
f) Actual factory overhead was p65, 000.
g) 5, 200 units were completed and transferred to finished goods inventory
during the month.
h) 5, 500 units were sold during the month for P40 each.
Required: Prepare the journal entries to record the information provided,
including two variances for each element of cost.

87
Backflush Costing
6. The Lee Company has a plant that manufactures transistor. The production
time is only a few minutes per unit. The company uses a just-in-time
production system and a backflush costing system with two trigger points for
journal entries:
 Purchase of direct (raw) materials.
 Completion of good finished units of product.
There are no beginning inventories. The following data pertains to April
manufacturing:
Direct (raw) materials purchased P8, 800, 000
Direct (raw) materials used 8, 500, 000
Conversion costs incurred 4, 220, 000
Allocation of conversion costs incurred 4, 000, 000
Costs transferred to finished goods 12, 500, 000
Cost of goods sold 11, 900, 000

Prepare summary journal entries for April (without disposing of under or

overallocated conversion costs). Assume no direct materials variances.

7. The Action Corporation manufactures electric meters. For August, there were
no beginning inventories of direct (raw) materials and no beginning and ending
work in process. Action uses a JIT production system and backflush costing with
two trigger points for making entries in the accounting system.
 Purchase of direct materials debited to Inventory: Raw and In-Process
Control.
 Completion of good finished units of product debited to Finished Goods
Control at standard costs.
Action’s August standard cost per unit are: direct materials, P25; conversion
costs, P20.
The following data apply to August manufacturing:
Direct (raw) materials purchased P550, 000
Conversion costs incurred 440,000
Number of finished units manufactured 21,000
Number of finished units sold 20, 000

1. Prepare summary journal entries for August (without disposing of under-or

overallocated conversion costs). Assume no direct materials variances.

2. Assume the same facts as in 1 above. Assume that the second trigger
point for the Acton Corporation is the sale – rather than the production – of
inished units. Also, the Inventory Control account is confined solely to

88
 direct materials, whether these materials are in a storeroom, in work in
process, or in finished goods. No conversion costs are inventoried. They
are allocated at standard cost to the units sold. Any under- or
overallocated conversion costs are written off monthly to Cost of Goods
Sold. Prepare the summary journal entries for August, including the
disposition of under- or overallocated conversion costs. Assume no direct
materials variances.

3. Assume the same facts as in 2 above. Now assume that there is only one
trigger point, the completion of goods finished units of product, which are
debited to Finished Goods Control at standard costs. Any under- or
overallocated conversion costs are written off monthly to cost of goods
sold. Prepare summary journal entries for August, including the disposition
of under- or overallocated conversion costs. Assume no direct materials
variances.

MULTIPLE CHOICE
a. Love Inc., manufactures four products: Brand W, Brand X, Brand Y, and
Brand Z. These products, each with significant sales value, are produced
simultaneously. The following information is utilized in order to allocate the
joint costs under a process cost system:

1. Brands W, X, Y and Z emerge at the end of processing in Department

1. Brand Y is processed further in Department 2 and then sold.
2. The final market values for all the products total P550, 000.
3. The costs of the finished products total P375, 000.
4. Additional processing costs in Department 2 total P50, 000.
5. Percentage of the final total market value of all the products: Brand W:
35%, Brand X: 15%, Brand Y: 30%, and Brand Z: 20%.
Calculate the joint cost allocated to Brand W using the market (hypothetical)
value method.
a. P131,250 b. P113,750 c. P144,375 d. P125,125

2. Gasoline Heating Oils Kerosene

Total market value of gallons sold P400,000 P285,000 P365,400
Market value per gallon P10.00 P6.00 P7.00
Beginning inventory (gallon) 10,275 20,000 25,000

89
The above chart was used by the GET Rich Company for allocating P450,000 of
joint costs incurred in March x7 for Department A.
During March the company no inventory. No additional processing costs were
incurred. The GET Rich Company uses a process cost system. If management
decided to use the physical output method to allocate joint costs, what would the
joint cost for Gasoline?
a. P128,848 b. P116,034 c. P146,580 d. P158,440
3. Crusher Corporation drills oil wells to obtain crude oil and natural gas. Last
month, the company produced 100, 000 gallons of crude oil and 15,750 cubic
feet of natural gas. The crude oil sells for P550 per gallon and the natural gas
sells for P120 per cubic foot. After split-off the crude oil and natural gas were
processed further at costs of P4, 004,400 and P290, 000, respectively. The
direct labor joint costs relating to the four oil wells were P2,500,000,
P4,000,000, P8, 801, 000, and P3, 300, 000. Selling expenses were P1, 003,
500 for crude oil and P150, 000 for natural gas. Administrative expenses were
P500, 000 for crude oil and P110, 000 for natural gas. The additional joint
costs incurred before split-off were P5, 506, 600. The ending inventory is 10,
000 gallons of crude oil; there are no beginning inventories. Crusher Corp.
uses process costing to accumulate cost.

Determine the net income if the net by-product income will be treated as
deduction from costs of goods sold of the main product.
a. P29,535,700 b. P26,724,500 c. P23,901,700 d. P24,035,700

Questions 4 through 7 are based on the following:

Jovart Corporation manufactures two products out of a joint process: Compod
and Utrasene. The joint costs incurred are P2, 500, 000 for a standard production
run that generates 120, 000 gallons of Compod and 80, 000 gallons of Ultrasene.
Compod sells for P20 per gallon while Ultrasene sells for P32.50 per gallon.

4. If there are no additional processing costs incurred after the split-off point,
calculate the amount of joint cost of each production run allocated to Compod
on a physical-units basis.
a. P1,500,000 b. P1,000,000 c. P1,200,000 d. P1,300,000

90
5. If there are no additional processing costs incurred after the split-off point,
calculate the amount of joint cost of each production run allocated to Ultrasene
on a relative-sales-value basis.
a. P1,500,000 b. P1,000,000 c. P1,200,000 d. P1,300,000

6. Suppose the following additional processing costs are required beyond the
split-off point in order to obtain Compod and Ultrasene: P1.00 per gallon for
Compod and P11.00 per gallon for Ultrasene, calculate the amount of joint cost
of each production run allocated to Compod on a net-realizable-value basis.
a. P1,200,000 b. P1,300,000 c. P1,425,000 d. P1,075,000

7. Suppose the following additional processing costs are required beyond the
split-off point in order to obtain Compod and Ultrasene: P1.00 per gallon for
Compod and P11.00 per gallon for Ultrasene. Suppose also, Compod can be
processed further into a product called Compodalene, at an additional cost of
P4.00 per gallon. Compodalene will be sold for P26.00 per gallon by
independent distributors. The distributor’s commission will be 10% of the sales
price. Should Hovart sell Compod or Compodalene?
a. Compod because of an advantage of P240, 000.
b. Compod because of an advantage of P72, 000.
c. Compodalene because of an advantage of P240, 000.
d. Compodalene because of an advantage of P72, 000.
8. David Company produces joint products X and Y, together with by-product W.
X is sold at split-off, but Y and W undergo additional processing. Production data
pertaining to these products for the year ended December 31, 2018 are as
follows:
X Y W Total
Joint costs: Variable P88,000
Fixed 148,000
Separable costs: Variable P120,000 P3,000 123,000
Fixed 90,000 2,000 92,000
Production in pounds 50,000 40,000 10,000 100,000
Sales price per pound P4.00 P7.50 P1.10

91
There are no beginning or ending inventories. No materials are spoiled in
production. Variable costs change in direct proportion to production volume. Joint
costs are allocated to joint products to achieve the same gross profit percentage
for each joint product. Net revenue from by-product W is deducted from
production costs of the main products.
Determine the joint cost share of Product Y.
a. P176,000 b. P54,000 c. P138,000 d. P71,380

9. Stevens Corp., is a chemical manufacturer that produces two main products,

Pepco-1 and Repke-3, and a by-product SE-5, from a joint process. If the
company had the proper facilities, it could process SE-5 further into a main
product. The ratio of output quantities to input quantity of direct material used
in the joint process remains consistent with the processing conditions and
activity level.
The company currently uses the quantitative method of allocating joint costs to
the main products. The fifo inventory method is used to cost the main
products. The by-product is inventoried at its net revenue, and this figure is
used to reduce the joint production costs before the joint costs are allocated to
the main products.
Jerrick, the company’s controller, wants to implement the market value method
of joint cost allocation. He believes that inventoriable cost should be based on
each product’s ability to contribute to the recovery of joint production cost. The
market value of the by=product would be treated in the manner it is treated
under the quantitative method.
Data describing operations during November follow. The joint cost of
production amounts to P2, 640, 000 for November.
Main Products By-Product
Pepco-1 Repke-3 SE-5
Finished goods inventory in gallons on Nov. 1 20,000 40,000 10,000
November sales in gallons 800,000 700,000 200,000
November production in gallons 900,000 720,000 240,000
Sales value per gallon at split-off point P2.00 P1.50 P0.55*
Additional processing cost after split-off P1,800,000 P720,000 -
Final sales value per gallon P5.00 P4.00 -

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*Marketing costs of P0.05 per gallon will be incurred to sell the by-product.

Assuming the company adopts the market value method for internal
reporting purposes, calculate the joint cost allocated to main product Pepco-
1.
a. P1,575,000 b. P1,065,000 c. P1,400,000 d. P1,120,000

10. Using the above information, calculate the cost assigned to finished goods
ending inventory for Repke-3 under the market value method.
a. P88,750 b. P93,333 c. P450,000 d. P138,750
11. Blessa Corporation operates an ore processing plant. A typical batch of ore
runs through the plant which yield three refined products: lead, copper, and
manganese. At the split-off point, the intermediate products cannot be sold
without further processing. The lead from a typical batch will sell for P20, 000
after incurring additional processing costs of P8, 000. The copper is sold for
P40, 000 after additional processing costs of P1, 000. The manganese yield
sells for P30, 000 but requires additional processing costs of P6, 000. Using
the market value approach, the cost ratio is 80%. The joint allocated to
copper would be:
a. P44,000 b. P31,200 c. P9,600 d. P11,200
Questions 12 and 13 are based on the following:
Arlene chemical Company manufactures two industrial chemical products in a
joint process. In May, 10, 000 gallons of input costing P60, 000 were processed
at a cost of P150, 000. The joint process resulted in 8, 000 pounds of Resoline
and 2, 000 pounds of Krypto. Resoline sells at P25 per pound and Krypto sells
for P50 per pound. Management generally processes each of –these chemicals
further in separable processes to produce more refined chemical products.
Resoline is processed separately at a cost of P5 per pound. The resulting
product, Resolite, sells for P35 per pound. Krypto is processed separately at a
cost of P15 per pound. The resulting product, Kryptite, sells for P95 per pound.

12. The joint cost share of product Kryptite using the net realizable value
method would be:
a. P126,000 b. P84,000 c. P140,000 d. P70,000

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13. Assuming that Arlene Chemical Company’s management is considering an
opportunity to process Kryptite further into a new product called Omega. The
separable processing will cost P40 per pound. Packaging costs for Omega
are projected to be P6 per pound, and the anticipated sales price is P130 per
pound. Should Kryptite be processed further into Omega?
a. Yes, because of an advantage of P22, 000
b. No, because of a disadvantage of P10, 000.
c. No, because of a disadvantage of P22, 000.
d. Yes, because of an advantage of P10, 000.
Questions 14 and 15 are based on the following:
Mark, the cost accountant for Billings Plastics, Inc., has provided you with actual
and standard cost data for one of the basic product lines for the month of
February.
Direct materials Direct labor
Purchased and used at actual cost, 38,000 units P104,500
Actual direct labor payroll P63,000
Standard materials units per product unit 2
Standard labor time per product unit 20 minutes
Standard price per unit of materials P2.50
Standard direct labor rate per hour P10
Labor rate variance (unfavorable) P6,000
During February, 18,000 units of product were manufactured.

14. Determine the entry to record direct materials charged to production under
the standard costing system.
a. Work in Process 90,000 c. Work in Process 104,500
Material Qty Variance5,000 Material Qty Variance9,500
Materials 95,000 Materials 95,000
b. Work in Process 90,000 d. Work in Process 95,000
Materials 90,000 Materials 95,000

15. Prepare the entry to record direct labor changed to production under the
standard costing system.
a. Work in Process 63,000 c. Work in Process 60,000
Payroll 63,000 Labor Rate Variance3,000
Payroll 63,000
b. Work in Process 60,000 d. Work in Process 57,000
Labor Rate Variance6,000 Labor Rate Variance6,000
Labor Efficiency Variance 90,000 Payroll 63,000
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 Payroll 63,000

16. N Co. uses a standard process cost system for all its products. All inventories
are carried at standard. Inventories and cost of goods sold are adjusted for
financial statement purposes for all variances considered material in amount
at the end of the fiscal year. All products are considered to flow through the
manufacturing process to finished goods and ultimate sale in a first-in, first-
out pattern.
The standard cost of one of N’s products is as follows:
Materials P2
Direct labor (.5 DHL @ P8) 4
Factory overhead 3

There is no work in process inventory of this product due to the nature of the
product and the manufacturing process. The following schedule reports the
manufacturing and sales activity measured at standard cost for the current
fiscal year:
Units Pesos
Products manufactured 95,000 P855,000
Beginning finished goods inventory 15,000 135,000
Goods available for sale 110,000 990,000
Ending finished goods inventory 19,000 171,000
Cost of goods sold 91,000 P819,000

The balance of the Finished Goods Inventory, P140,800 reported on the

balance sheet at the beginning of the year, included a P5, 800 adjustment for
variances from standard cost. The unfavorable standard cost variance for
labor for the current fiscal year consisted of a wage rate variance of P32, 000
and labor efficiency variance of P20, 000 (2, 500 hours @P8). There were no
other variances from standard cost for this year.

Assuming the unfavorable labor variance totaling P52, 000 are considered
material in amount by management and are to be allocated to finished goods
sold, compute the amount for Cost of Goods Sold on the income statement
prepared for the fiscal year.

a. P871,000 b. P876,000 c. P866,400 d. P860,600

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17. The Kornbrant Company was totally destroyed by fire during June. However,
certain fragment of its cost record with the following data were recovered: idle
capacity variance, P12, 660 favorable; spending variance, P8, 790
unfavorable; and applied factory overhead, P162, 340.
Determine the budget allowance, based on capacity utilized.
a. P149,680 b. P175,000 c. P153,550 d. P171,130

18. Garment Company manufactures “one size fits all” ready-to-wear outfit and
uses a standard costing system. Each unit finished outfit contains 2 yards of
fabric. Based on experience, 20% waste on fabric input is incurred. The cost
of fabric is P75 per yard.
How much material cost is incurred in producing one outfit?
a. P187.50 b. P150.00 c. P 200.00 d. P120.00
19. Evelyn Corp. manufactures rafts for use in swimming pools. The standard
cost for material and labor is P892 per raft. This includes 8 kilograms of direct
material at a standard cost of P50 per kilogram, and 6 hours of direct labor at
P82 per hour. The following data pertain to November.
 Work in process inventory on November 1: none
 Work in process inventory on November 30: 800 units (75 percent
complete as to labor; material is issued at the beginning of processing).
 Units completed: 5, 600 units.
 Purchase of materials: 50, 000 kilograms for P2, 492, 500.
 Total actual labor costs: P3, 007, 600.
 Actual hours of labor: 36, 500 hours.
 Direct-material quantity variance: P15, 000 unfavorable.
The entry to record direct labor cost charged to production must be:
a. Work in process inventory 3, 007, 600
Payroll 3, 007, 600
b. Work in process inventory 2, 755, 200
Labor cost variance 252, 400
Payroll 3, 007, 600
c. Work in process inventory 3, 050, 400
Labor efficiency variance 13, 100
Labor rate variance 55, 900
Payroll 3, 007, 600

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 d. Work in process inventory 3, 050, 400
Labor rate variance 14,600
Labor efficiency variance 57, 400
Payroll 3, 007, 600

10. Rochester Plumbing Fixtures Corporation manufactures a wide range of

plumbing fixtures for the housing construction industry. The company recently
adopted backflush costing. The following events occurred in April.
1. Raw material costing P300, 000 was purchased on account.
2. Direct-labor costs of P165, 000 and actual manufacturing overhead costs
of P370, 000 were incurred. These amounts have not yet been paid in
cash.
3. Conversion costs of P540, 000 were applied to finished products. These
goods included raw material costing P300, 000.
4. Goods costing P840, 000 were sold for P1, 000, 000 on account.
5. Overapplied or underapplied conversion costs were closed into Cost of
Goods Sold.

The entry to record the cost of goods manufactured must be:

a. Finished Goods Control 840,000
Accounts Payable Control 300, 000
Conversion Costs Applied 540, 000
b. Finished Goods Control 835, 000
Raw & In Process Control 300,000
Conversion Costs Incurred 535, 000
c. Finished Goods Control 840, 000
Work in Process Control 840, 000
d. Finished Goods Control 840, 000
Raw & In Process Control 300,000
Conversion Costs 540,000

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