Cost accounting involves measuring, recording and reporting product and service costs.

Cost accounting system accounts for various manufacturing and service costs.

It involves the use of a perpetual inventory system and it provides immediate, up-to-date
information on the cost of a product.

2 basic types of cost accounting systems:

1) Process cost system

2) Job order cost system

Process cost system - manufactures a large volume of similar products. Production is continuous.
It accumulates product-related costs for a period of time and assigns the costs to departments or
processes.

The objective of both cost accounting systems is to provide unit cost information for product
pricing, cost control, inventory valuation, and financial statement presentation.

Manufacturing costs are sourced from raw materials, factory labor and manufacturing overhead.

Flow of cost
2 major steps of flow
1. accumulating
2. assigning
3.
The flow of costs will begin with accumulating the costs incurred in Raw materials, factory labor
and manufacturing overhead. No costs will be assigned to specific jobs yet. Once it does, the
assignment of costs can proceed. Next, the assignment of costs as the second activity will
involve additional entries to be made as it will show that costs from Raw Materials, factory labor
and manufacturing overhead will be transferred to the Work in Process Inventory.

Accumulating Manufacturing Costs

The main activity of this is to accumulate the costs made in each account: raw materials, factory
labor and manufacturing overhead.

1) Raw Material Costs

- Receive materials from suppliers.

Debit Raw Material Inventory

Credit Accounts payable or cash

No entries have been made to allocate these costs to specific job orders as they have not
planned it out yet.

2) Factory Labor Costs

We won’t include salaries and wages of non-manufacturing employees as they will be expensed
in the selling and administrative expenses account since they are treated as period costs. The
factory labor will consist of

a) Wages payable to factory workers

b) Employer payroll taxes on these wages

c) fringe benefits incurred by employer

Debit Factory Labor (this includes direct and indirect labor)

Credit Factory wages payable

Employer payroll taxes payable

3) Manufacturing Overhead

Overheads related to non manufacturing activities will be expensed in the S&A expenses but
those that are involved in the manufacturing process will be accumulated int he manufacturing
overhead.

Debit Manufacturing Overhead

Credit overheads incurred related to manufacturing activities

DO IT! 1

Raw Materials 4200

Accounts Payable 4200

Factory Labor 18000

Wages Payable 15000

Payroll taxes payable 3000

Manufacturing Overhead 7500

Utilities Payable 2200

Prepaid Insurance 1800

Depreciation on factory 3500

building

Assigning Manufacturing Costs

Costs from Raw Materials inventory, factory labor and manufacturing overhead that are to be
allocated in specific jobs will have to be debited to the Work in Process Inventory. Every entry
made in the WIP inventory will be accompanied by a corresponding posting in a job cost sheet of
a particular job. A job cost sheet functions as a subsidiary ledger as it will consist individual
records for each job. Whereas, the WIP inventory account would be referred to as a control
account since it summarizes the total costs incurred from the overall job costs sheets from the
jobs performed by the company.

1) Raw materials cost

To complete a job order, a company must determine the required materials for the particular job.
The raw materials needed for a job must be requested through a materials requisition slip This slip
will show the quantity and type of materials required for each job. The person handing over the
materials requisition slip to the manager of raw materials will also be held accountable for
transferring these materials for a job. These people’s accountability will be displayed on the slip
as their names and signatures will be written.

Direct materials will be debited to the WIP inventory

Indirect materials will be debited to MOH

and these transferred costs will be credited to the raw materials inventory as they have been
taken out of this account.

After posting to the job cost sheets, the sum from the all the jobs must be equal to the direct
materials debited to the WIP inventory.

Material requisition slips are source documents for posting to job cost sheets and work in process
inventory.

2) Factory labor costs

Let's assume that the labor costs chargeable to Wallace's three jobs are $15,000, $9,000, and
$4,000.  As in the case of direct materials, the sum of the postings to the direct labor columns of
the job cost sheets (subsidiary accounts Job 101 $15,000, Job 102 $9,000, and Job 103
$4,000) should equal the posting of direct labor to the Work in Process Inventory control
account ($28,000). Also, time card and job ticket hours should be periodically reconciled as an
internal control.

DO IT 2

Work in Process 9600

Raw Materials 9600

Work in Process 6000

Factory Labor 6000

Work in Process 7500

Manufacturing Overhead

3) Predetermined Overhead Rates

Companies charge the actual costs of direct materials and direct labor to specific jobs because
these costs can be directly traced to specific jobs. To allocate manufacturing overhead can be
difficult as they are the overhead applied to the overall operations.

We will instead use a predetermined overhead rate which is:

estimated annual overhead costs/estimated annual operating activity

this will then be multiplied with actual activity base used to find the manufacturing overheads to
be allocated in the job cost sheets and the WIP inventory.

the costs to be transferred in the WIP are the overhead costs from material, labor and other
overhead costs multiplied with the actual activity base used from the overall jobs.

Do not assign overhead using actual overhead costs but instead apply overhead using a
predetermined rate.

Entries for jobs completed and sold

When a job is completed, the total cost of the job will be determined and it will be transferred to
the Finished Goods inventory.

Debit Finished Goods

Credit Work in Process Inventory

When a sale occurs, entires of the amount sold and how much it costed will be made

Accounts receivable

Sales Revenue

Cost of Goods sold

Finished Goods inventory

Flow of costs
1) Accumulating

2) Assigning

3) Completed goods - to be transferred to the finished goods

4) Goods sold - from finished goods to cogs

Applied Manufacturing Overhead

When companies prepare financial statements and present the cost of goods manufactured, the
income statement will show the cost including the applied manufacturing overheads rather than
the actual manufacturing overheads incurred.

If a manufacturing overhead has a debit balance, this means that the applied costs are lower than
the actual costs. This is called under-applied overhead.
At the end of the year. the company will have to make adjusting entries to remove the
balance as manufacturing overhead account is a temporary account and it must be closed.

If there’s a debit balance, then it must be debited to the COGS account to get rid of the balance. if
the MOH is overapplied, then it must be credited to the COGS.

Under-applied

Cogs

MOH

Over-applied

MOH

COGS

now the MOH has a zero balance

And in preparing the Income statement, we will present the cogs after adjusting MOH.

sales revenue

less cogs

finsihed goods, jan 1

cogm

coga

less finished goods inventory, jan 31

cogs - unadjusted (this shows the actual overhead incurred)

add: adjustment for undersupplied overhead