GUERRERO BOOK 2.

Which of our costs are out of line, and how can they be
controlled?
CHAPTER1 – COST ACOOUNTING BASIC 3. Are our sales prices set realistically in relation to costs?
4. What is the unit cost of each type of product being
CONCEPTS AND THE JOB ORDER COST CYCLE
manufactured?
- Answers to those questions required detailed data based on
computations that will pinpoint unit costs of products and processes,
BASIC CONCEPTS major function of cost accounting
1. Ability to make specific and detailed identification and
- The accounting system is the major quantitative information system measurement of cost elements permits management to reach
in almost every organization. decisions and evaluate results with greater intelligence
- Provides info. For; I. Estimating and Bidding
1. Internal reporting for managers, for use in planning and - Knowledge of the costs of doing business is needed to estimate the
controlling operations bids for jobs or contracts; the order goes to the lowest bidder.
2. Internal reporting for managers, for use in formulating plans and - Attempting to bid w/o detailed cost info. can mean losing job, or it
policies can mean winning the job but having to perform the work at loss.
3. External reporting to stockholders, government and other outside Either result is undesirable.
parties II. Planning, Budgets, and Control
- Internal reporting – management accounting - Cost accounting system also provides vital info. needed to plan
- External reporting – financial accounting future operations. Cost data help to resolve the ff. questions;
1. Should we build a new plant or modernize the old one?
COST ACCOUNTING DEFINED 2. How far can we go in lowering prices to increase our volume of
sales?
- System that records, summarizes, analyzes and interprets the details
3. What will be the effect on the costs of automating part of our
of the costs materials, labor, and overhead necessary to produce and
factors operation?
sell an article.
- Cost accounting is used in preparing company’s budget of the overall
- Usually considered only as it applies to manufacturing operations
financial plan for future activities.
and service organization. Today, it is generally indistinguishable
1. It is possible to compute flexible budgets , then actual costs can
from management accounting because it serves multiple purposes.
be compared with a realistic budget
PURPOSE OF COST ACCOUNTING - Standard cost procedures are helpful in evaluating the results of
operations.
- Cost accounting furnishes management with the necessary 1. Standard cost is often based on the past experience of the firm,
accounting tools for planning and controlling activities. and then it will compared by actual costs incurred.
- Gathering presentation, and analysis of cost data will help - Cost acctg. Is one of the most valuable management tools to control
management in answering the ff. questions; operations
1. Is our plant operating efficiently and economically? 1. Cost acctg. Also reveals how efficiently the work is being done,
strong and weak spots, and how to improve performance
 2. With cost info., management can issue directives, perform VI. Other Manufacturing Head
follow-up activities, and obtain operating results. - Includes payroll taxes, rent, depreciation, taxes, and insurance on
factory building and machinery (heat, light, power, repair and
MANUFACTURING COSTS CLASSIFIED maintenance)
VII. Prime and Conversion Costs
- Manufacturing overhead, process of converting materials into
- DM + DL = Prime cost
finished goods, by using labor and other costs
1. Primary sources of cost
1. Overhead costs include utilities, supplies, taxes, insurance, and
- DL + MOH = Conversion cots
depreciation.
1. Indicates cost required to convert RM into FG
2. The 3 major manufacturing cost classifications – direct
materials, direct labor and manufacturing overhead INVENTORIES FOR A MANUFACTURING COMPANY
I. Direct Materials
- Also called as raw material, materials used in the manufacturing - It has 3 distinct inventory accounts
process that becomes the significant part of the finished goods. 1. RM inventory
- Raw materials to one manufacturer are considered finished goods to 2. WIP inventory
supplier. 3. FG inventory
II. Direct Labor I. RM Inventory
- The employees who work directly with the raw materials in - Reflects the cost of RM and factory supplies used in the
converting them to finished goods represent direct labor manufacturing process
III. Manufacturing overhead 1. RM – WIP
- All costs incurred in the factory that cannot be considered DM or - Some manufacturing firms may use a separate Supplies Inventory
DL, sometimes called factory overhead, manufacturing expenses, or account if the quantities are kept on hand are significantly enough to
factory burden justify the addt’l accounts
- Subdivided into 3 categories, indirect materials, indirect labor and II. WIP Inventory
other manufacturing overhead - Reflects the cost of RM, DL, and MOH on which manufacturing has
IV. Indirect Materials begun but has not been completed at the end of the fiscal period
- Materials that are used in small amounts in the manufacturing III. FG Inventory
process or that cannot easily be traced to specific products (ex. Glue - Reflects the costs of goods that have been completed and are ready
used in manufacturing) for sale
- Another type is called factory supplies or operating supplies, - Any change in the FG Inventory account are reflected in the COGS
consists of items that are used in the manufacturing process but do of the IS
not become part of the finished goods (ex. cleaning supplies, oil used
for lubricating machines, and minor repair parts) SYSTEM OF COST ACCUMULATION
V. Indirect Labor
- The basic obj. of cost acctg. Is the determination or accumulation of
- The wages of factory personnel who do not work directly on raw
products cost for inventory valuation and income determination
materials (ex. factory workers such as storeroom clerks, janitors,
- The ff. systems may be used in accum. Of a products cost
superintendent, maintenance crew, and factory supervisors)
 1. Actual Cost System (Historical) – DM , DL, FOH costs are called as ave. costing. If process cost system is used, the
determined as they occur simultaneously w/ the manufacturing goods manufactured must be similar in nature so that ave.
operation but the total of these costs is known only after the cost will be meaningful. Businesses that use process cost
operation has been completed. It collects the actual amounts of system, manufacturing consists of progressive series of
DM, DL and FOH incurred for each product distinct operations and carried out in diff. dep’t. total cost of
2. Standard Cost System (Predetermined) – cost are determined production – all departmental costs.
in advance from analysis and forecasts made before the actual III. Dual System – often used when a company makes standard
production begins. Computed for the DM , DL, FOH are carried parts continuously and then incorporate them into finished
into FG inventory goods. The cost of the parts is accum. Under a process cost
3. Normal Cost System – combination of actual cost system and system. Cost of each customer’s order for finished goods is
the standard cost system. It only accum. DM and DL costs, FOH under a job order cost system.
costs are accum. On the basis of a predetermined rate
INTRODUCTION TO THE JOB ORDER COST CYCLE –
TYPE OF COST SYSTEM NORMAL COSTING
- One type of acctg. Systems are needed to accum. COG WORK FLOW
Manufactured when products are produced in jobs of varying
quantities. - Steps in a typical cycle of operations of a firm using Job Order Cost
- Diff. type of system is used when there is a continuous flow of goods System;
for identical characteristic throughout the manufacturing process 1. Procurement – material and supplies needed for manufacturing
- Job order cost system is developed for the first type of operation and are ordered, received, and stored. DL and IDL and services are
the process cost system for the second obtained.
I. Job Order Cost System – accum. Costs applicable to each 2. Production – materials are transferred from the storeroom to the
specified job order on a specific order for stock or for a factory, costs are applied to complete the product.
customer. When production on job begins, the job assigned a 3. Warehousing – FG are moved from the factory to the
number, and a form called job cost sheet is set up. The job warehouse to be held until they are sold.
cost sheet, when complete, shows the total cost of the 4. Selling – Customers are found. Merchandise is shipped from the
completed job. Cost per unit = total cost of the job / no. of warehouse. Sales to customers are recorded.
units completed. Actual costs on the job cost sheet may be - Cost accountants job is to design a system in which all cost elements
compared with estimated costs in which the sales prices were are recorded as incurred and then charged to production.
based. Any discrepancies between estimated costs and actual
costs are analyzed, and necessary corrective actions are RECORDING COSTS AS INCURRED
taken to ensure that adequate profit margins are maintained. 1. Procurement – accounts must be provided to record the
II. Process Cost System – It accum. Costs w/o attempting to purchase of materials, labor, and OH. General ledger accounts
allocate them during the accounting period to specific units title; Material, Factory Payroll, Manufacturing OH control.
of goods being manufactured. Ave. cost per unit = total no. 2. Production – an account is required to gather procurement costs.
of units produced / total cost accum, this technique is also This account is WIP
 3. Warehousing – FG account must be setup to record the COG 6. Costs of material handling nd storage must be kept to a
that have completed manufacturing process. minimum.
4. Selling – Accounts; COGS, A/R (if the sale were made on - Specific procedures and methods for controlling materials vary from
credit), Sales diff. company. Modern system of inventory control include the ff.
features:
MATCHING COST FLOW AND WORK FLOW 1. Physical safeguards for receiving, storing, and issuing materials.
2. Formal procedures for ordering and paying for materials.
1. Procurement – Purchase of materials, labor and OH are recorded as
3. Perpetual inventory system to provide an ongoing record of the
debits to materials, factory payroll and manufacturing OH. As these
quantity and value of each type of materials received and issued
costs are used, they are credited to these accounts and transferred to
and the bal. on hand.
production.
I. Organization for control
2. Production – costs of material, labor, and OH transferred into
- Control is achieved through an organizational structure; it defines
production are debited to WIP. As goods are finished and moved
authority, fixes responsibility, and provides systems of checks and
from the factory, their total costs are removed from the WIP account
balances.
by a credit entry and debit to FG.
- Subdivided into ff. departments:
3. Warehousing – cost of FG transferred form WIP is recorded as debit
1. Purchasing department – they place orders for materials with
to FG. Merchandise shipped from the warehouse to customer is
reliable supplier, at the right time and at the right place.
credited to FG and debited to COGS.
2. Receiving department – they do inspection for incoming
4. Selling – at the end of the acctg. Period, this account is closed by
shipments and verification of the quantities received on order.
crediting COGS and debiting Income Summary.
3. Storeroom (stockroom) – responsible for protecting materials
against physical deterioration and ensuring the stocks are
properly issued.
CHAPTER 2 – PURCHASING MATERIALS 4. Accounting department – records all transactions in the
accounts after the documentary evidence have been supplied by
MATERIALS CONTROL other departments.

- Rigid controls are over raw materials are necessary not only to guard MATERIALS PURCHASING PROCEDURES
against theft but also to minimize waste and misuse.
- Certain requirements are essential to an effective internal control - Purchasing agent is responsible for purchasing materials. They must
system for materials, as follows: buy materials in correct quantities, at the proper time, and at the
1. Materials of the desired quality must be avail. When needed. lowest price. The routine work of the purchasing agent begins with
2. Correct quantities and types of materials must be on hand at the the receipt of a purchase requisition.
right time for production to proceed on schedule. I. Recorder Point - following factors should be considered:
3. Materials must be purchased at the most favorable prices. 1. The frequency at which material is used.
4. Materials must be protected from loss or theft. 2. The length of time it takes for the material to deliver from
5. Risks of spoilage and obsolescence must be minimized. the supplier after an order has been placed, known as lead
time.
 3. The minimum level of materials that should be maintained to copy of purchase order and compares its contents with the
ensure that the company does not run out of materials, shipment. After that, the clerk prepares receiving report.
known as safety stock. - it is usually prepared in quadruplicate:
II. Economic Order Quantity (EOQ) – it should reflect the 1. The orig. and one copy are sent to the purchasing dep’t. they are
quantity necessary to get the best price while keeping inventory compared with purchase order and supplier invoice.
at an appropriate level to ensure uninterrupted production. 2. One copy is sent to accompany the storeroom. It compares the
- Formula : purchase order and the storeroom records.
2 × annual requirements × cost of an order 3. The storeroom supervisor signs the final copy to confirm that the

-
√ Cost ¿
carry a signle item¿
As the order size increases, total cost to order decreases and total
materials have reached the storeroom.
- The storeroom clerks record the receipt of materials in
subsidiary ledger, the material or store ledger.
cost to carry increases.
VI. Comparing Documents – the purchasing dep’t compares the
- As the order size decreases, total cost to order increases and total
supplier invoice (purchase invoice) with purchase order and
cost to carry decreases.
receiving report to make sure that :
III. Purchase Requisition – properly approved, written request for
1. Materials order has been received in good condition and
materials and is prepared for duplicate. Original copy is sent to
these are listed only in the invoice.
the purchasing dep’t as a request for the materials. Duplicate
2. Terms, unit prices, shipping charges, and other details are in
copy is retained in the storeroom files. It must be numbered for
accordance with order specifications.
easy reference.
3. Computations are correct.
IV. Purchase Order – when purchasing dep’t receives purchase
- If all documents are in order, they are stapled and filed in a complete
requisition, source of supply must be selected. In choosing the
purchase folder arranged alphabetically by supplier
supplier, the purchasing agent considers factors such as
- Next, check voucher or disbursement voucher is prepared with
dependability, quality of material, delivery date and price.
supporting documents attached to it.
 After choosing the supplier, the purchasing agent prepares the
- Once approved, it will be sent to actg. Dep’t for recording.
purchase order. It is a written authorization to the supplier to
VII. Recording the Voucher
ship the specified material. It is prepared in 5 copies.
- In verifying the account distribution against the purchase order,
1. Supplier – as an authority to deliver materials.
the purchase voucher clerk enters the purchase in the voucher
2. Storeroom – as a notification that the materials requested are
register.
on order.
- After the entry is made in the voucher register, the voucher is
3. Receiving dep’t – as an authorization to accept an incoming
sent to the cash dep’t for filing in the unpaid vouchers file.
shipment.
VIII. Paying the Voucher – before the due date, the vouchers are
4-5. Purchasing dep’t – 2 copies for file in unfilled order.
removed in the unpaid voucher file.
V. Receiving Report – materials are received by the receiving clerk
- Cash dep’t prepares a check based on the amounts in voucher, and
from the supplier. Receiving clerk s responsible for unpacking
then the check is recorded in the check register. The voucher is
item, checking quantities and transferring them to the storeroom.
marked paid by using a rubber stamp and enters the check no. and
Upon the receipt of materials, the receiving clerk takes out his
date paid on the voucher.
 - The check is sent to the supplier, then the voucher is returned to the
voucher clerk, they record the check no. and date payment in the
voucher.
- The voucher, with invoice and supporting docu., is filed in the paid
voucher file.

COMPUTERIZED MATERIALS PURCHASING SYSTEM