inventories 3.

Nonfinancial
INTRODUCTION OF COST ACCOUNTING (balance sheet) information such as
using historical defect rates,
Cost Accounting information and percentage of
Provide means to determine product costs and unit costs Generally Accepted products returned,
that enable the preparation of meaningful financial Accounting and percentahe of on-
statements and other reports needed to manage a Standards. time deliveries.
business. 1.

Unit Cost information is useful in making important

COGS AND INVENTORIES
decisions such as:
1. Determining the selling price of a product Cost of Goods Sold (COGS)
2. Meeting competition
3. Bidding on contracts Cost of goods sold pertains to the cost of all items sold
4. Analyzing profitability during the period on the income statement.
Planning and Control Cost of goods sold calculation
Planning is the process of establishing objectives or Merchandising Manufacturing
goals and determining the means by which they will be Beginning Beginning finished goods
met. merchandising inventory inventory
Add: Purchases Add: cost of goods
Effective planning is facilitated by the following: (merchandise) manufactured
1. Clearly defined objectives Merchandise available Finished goods available
2. A Production plan for sale for sale
Less: ending Less: ending finished
merchandise inventory goods inventory
Control is the process of monitoring the Company's
operations and determining whether the objectives Cost of goods sold Cost of goods sold
identified in the planning process are being
accomplished.
Inventories presented in the balance sheet
Effective controls is achieved through: 1. Merchandise inventory 1. Raw materials
1. Assigning responsibility 2. Work in process
2. Periodically measuring and comparing results 3. Finished goods
3. Taking necessary corrective actions
Valuation of inventories
1. First-in. First out (FIFO)
RELATIONSHIP
2. Weighted average

Uses of Product Cost Data in Financial and Inventory subledgers

Management Accounting Detailed inventory listing used to keep track of inventory
records and is reconciled with the general ledger
balance regularly.

ELEMENTS OF MANUFACTURING COST

Cost Accounting Elements of Manufacturing Costs
(for inventory Accounting (for special 1. Direct Materials - Materials that become part of a
costing (product reports to certain manufactured product and can be readily
purposes in cost management identified with that product.
the financial informatio for decision-
statements) 2. Direct Labor - labor of employees who work directly
n)
on the product manufactured, such as machine
operators or assembly-line workers.

3. Factory overhead - all costs used in manufacturing

other than direct materials and direct labor (e.g. indirect
Users and Uses of Cost Accounting Information materials, indirect labor, depreciation of factory building,
insurance, property taxes on factory building and
Character- Financial Managerial machinery and equipments, light, power and
istics Accounting Accounting maintenance.
1. Users External Parties 1. Internal Parties
(Shareholders, (Management) Prime and Conversion Costs
Creditors, 1. Prime cost = direct materials + direct labor
Government, etc.) 2. Conversion cost = direct labor + factory overhead
Managers
2. Focus Entire Business 1. Segments of the
business Flow of manufacturing cost
3. Uses of Product Costs for 1. Budgeting 1. Direct Materials, Direct Labor, Factory Overhead
Cost calculating cost of 2. Special decisions
2. Work in Process (Asset)
Information goods sold (income such as make or buy
statement), and a component, keep or 3. Finished goods (Asset)
Finished goods, replace a facility, and 4. Cost of Goods Sold (Expense)
work-in-process sell a product at a
and raw materials special price
 COST ACCOUNTING SYSTEMS 3. 3. Total gross wages and salaries for the month were:
factory employees working on the product, Php24,000;
factory supervision, maintenance, and custodial employees,
Cost Accounting Systems Php12,000; and sales and administrative employees,
1. Job order - cost is accumulated per job Php14,000.
2. Process costing - Cost is accumulated through all
departments involved.

Flow of costs
Job Order
Direct Materials
Direct Labor Job Cost Sheets Finished Goods
Factory Overhead

Work in process

ILLUSTRATION
A Company, a small, newly organized corporation,
manufactures beginning skateboards. The Company 4. Depreciation expense for the Php500,000 building is 6% of
sells products directly to retailers. The basic steps in the the building cost per year. The sales and administrative
Company's production process are as follows: offices occupy one-tenth of the total building, and the factory
operation is contained in the other nine-tenths.
1. Sheets of thin wood veneer are purchased in precut
specifications. Glue is applied to four sheets, which
are stacked to form the deck, and then placed in a
mold and pressed into shape and dried.
2. Once the deck is dry, holes are drilled for the wheel 5. Depreciation expense for the Php180,000 of factory
assemblies. The deck is then cut into the correct machinery and equipment is 20% of original cost per year.
shape and the edges are sanded.
3. The deck is varnished, and when the varnish is dry,
the wheel assemblies, which are purchased from an 6. The cost of heat, light and power for the month was
outside vendor, is attached. Php3,500.

All of the previous steps are performed in a single

department
The beginning balance sheet for the Company on
January 1 of the current year is presented as follows:
Assets 7. Miscellaneous selling and administrative expenses for
Cash 80,000.00 80,000.00 telephone and fax, copying charges, office supplies, travel,
Building 500,000.00 500,000.00 rental of office furniture and equipment totalled Php7,500 on
Machinery and equipment 180,000.00 180,000.00 account.
Total assets 760,000.00 760,000.00

Liabilities and stockholder's equity

Liabilities - -
Capital stock 760,000.00 760,000.00
Total liabilities and stocholder's
equity 760,000.00 760,000.00 8. Invoices of Php52,000, representing cost of materials,
utilities, and selling and administrative expenses, are paid.
Assume for purposes of simplification, in the following
example that the Company is currently making only one
style of skateboard. During January, the following 9. Assume all goods started were finished. Furthermore,
transactions occurred: assume that 3,200 units were produced but only 2,600 units
were sold to retailers at Php40.50 per unit.
1. Materials (wood veneers, wheel assemblies, glue, varnish,
screws and sandpaper) are purchased on account at a cost
of Php50,000.

2. During the month, direct materials (sheets of wood veneer

and wheel assemblies) costing Php40,000 and indirect
materials (glue, sandpaper, varnish, and screws) costing 10. Cash totaling Php68,000 is collected on accounts
Php2,000 are issued into production receivable.
 CASH
Beginning balance 80,000.00 50,000.00 Wages payment ACCOUNTS PAYABLE
Payments 52,000.00 50,000.00 Puchase of materials
Materials, utilities and 3,500.00 Utilities incurred
selling and Misc. selling and
administrative expenses
7,500.00 administrative expenses
Collection 68,000.00 52,000.00 payment
9,000.00
46,000.00

WAGES PAYABLE
FINISHED GOODS Payment 50,000.00 50,000.00 Labor incurred
Cost of goods
transferred to -
finished goods 86,400.00 70,200.00 Cost of goods sold
16,200.00 CAPITAL STOCK
- 760,000.00 Beginning balance

WORK IN PROCESS 760,000.00

Transfer to finished
Direct materials 40,000.00 86,400.00 goods
SALES
Direct labor 24,000.00
105,300.00 Sales
Factory overhead 22,400.00 105,300.00
-

COST OF GOODS SOLD

ACCOUNTS RECEIVABLE Cost of goods sold 70,200.00 -
Sales 105,300.00 68,000.00 Collection 70,200.00
37,300.00

PAYROLL
MATERIALS Payroll incurred 50,000.00 50,000.00 Payroll distributed
Purchase 50,000.00 42,000.00 Issued to manufacturing -
8,000.00
FACTORY OVERHEAD
BUILDING Transferred to finished
Indirect materials 2,000.00 22,400.00 goods
Beginning balance 500,000.00 -
Indirect labor 12,000.00
500,000.00 Depreciation -
building 2,250.00
Depreciation -
ACCUMULATED DEPRECIATION - BUILDING
machinery and
- 2,500.00 Depreciation charge equipment 3,000.00
2,500.00 Utilities 3,150.00
-
MACHINERY AND EQUIPMENT
Beginning balance 180,000.00 - SELLING AND ADMIN EXPENSES
180,000.00 Wages 14,000.00
Depreciation -
building 250.00
ACCUMULATED DEPRECIATION - MACHINERY AND EQUIPMENT
Utilities 350.00
- 3,000.00 Depreciation charge
Miscellaneous 7,500.00
3,000.00
22,100.00
 PRACTICE PROBLEM h. Completed and transferred goods with a total cost of
Php91,000 to the finished goods storeroom.
The post-closing trial balance of Custer Products, Inc. on April 30, is reproduced as follows:

Cash 25,000.00
Accounts Receivable 65,000.00
Finished goods 120,000.00
Work in process 35,000.00 i. Sold goods costing Php188,000 for Php362,000.
Materials 18,000.00 (Assume that all sales were made on account.)
Building 480,000.00
Accumulated depreciation - building 72,000.00
Factory equipment 220,000.00
Accumulated depreciation - factory equipment 66,000.00
Office equipment 60,000.00
Accumulated depreciation - office equipment 36,000.00
Accounts payable 95,000.00 j. Collected accounts receivable in the amount of
Capital stock 250,000.00 Php345,000.
Retained earnings 504,000.00
######### #########

During May, the following transactions took place:

a. Purchased raw materials at a cost of Php45,000 and
general factory supplies at a cost of Php13,000 on
account (recorded materials and supplies in the materials
account).

b. Issued raw materials to be used in production, costing

Php47,000, and miscellaneous factory supplies costing
Php15,000.

c. Recorded payroll and the payments to employees as

follows: factory wages (including Php12,000 indirect
labor), Php41,000; and selling and administrative
salaries, Php7,000. Additional account titles include
Wages Payable and Payroll. (Ignore payroll withholding
and deductions.)

d. Distributed the payroll in (c).

e. Recognized depreciation for the month at an annual

rate of 5% on the building, 10% on the factory equipment,
and 20% on the office equipment. The sales and
administrative staff uses approximately one-fifth of the
building for its offices.

f. Incurred other expenses totaling Php11,000. One-

fourth of this amount is allocable to the office function.

g. Transferred total factory overhead costs to Work in

Process.