Accounting Cycle for Manufacturing Company: Actual Costing System and Perpetual Inventory 12.

12. All beginning work-in-process and 50% of current production is completed.

System 13. Sold all beginning finished goods inventory and 40% of recently completed units at 50% mark-
up based on costs on account.
Sample Problem: EXO Manufacturing Company 14. Paid marketing and advertising costs of P12,000 to promote the firm’s products.
EXO Manufacturing Company has the following balances for the month of April 2024:

Raw Materials Inventory 21,000 Journal Entries

Work-in-process Inventory 89,000
Finished Goods Inventory 189,000 Date
Explanations Debit Credit
2024
Apr. 1 Raw materials inventory P175,000
Journal Entries Accounts payable P175,000
To record raw materials purchased on account 5,000 units
1. Purchased 5,000 units of raw materials at P35.00 per unit on account.
× P35
2. Returned 100 units of raw materials to the supplier due to inferior quality.
P175,000
3. Issued all beginning balance of raw materials and 1,000 units of newly-purchased materials to
production,
2 Accounts payable 3,500
4. 50 units of excess materials were returned to storage
Raw materials inventory 3,500
5. Paid salaries to factory employees, maintenance staff, and supervisors, payroll details of which
To record returned raw materials to the supplier 100 units
are:
× P35
Gross Pay 322,000 P3,500
SSS 16,000
PhilHealth 4,830
3 Work-in-process inventory 56,000
Pag-ibig 2,000
Raw materials inventory 56,000
Withholding taxes 1,200
To record materials issued to production
Net Pay 207,970
From beginning balance P21,000
6. Applied factory payroll to production where 70% are direct laborers and 30% are maintenance
From newly-purchased materials
staff and supervisors.
1,000 units × P35 35,000
7. Paid P6,000 for maintenance of factory machinery.
Materials issued to production P56,000
8. Incurred P4,000 for maintenance of office equipment on account.
9. Paid factory utilities of P89,000 and office utilities of P72,000
4 Raw materials inventory 1,750
10. Recognized adjustments for the following:
Work-in-process inventory 1,750
Expired insurance of factory assets 2,000 To record excess materials returned to storage 50 units
Expired insurance of office space 2,500 × P35
Depreciation of factory machinery 6,000
P1,750
Depreciation of office equipment 4,500
11. Actual overhead applied to production 5 Factory salaries and wages 322,000
Indirect labor 96,000 SSS contributions payable 16,000
Maintenance of factory machinery 6,000 PHIC contributions payable 4,830
Factory utilities 89,000 HDMF contributions payable 2,000
Insurance of factory assets 2,000 Withholding tax payable 1,200
Depreciation of factory machinery 6,000 Cash 297,970
Total Overhead 199,600 To record payroll for the period

6 Work-in-process inventory 255,400

Manufacturing overhead 96,600

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 Factory salaries and wages 322,000 Manufacturing overhead 199,600
To record applied factory payroll to production P479,250
Direct laborers P322,000 Multiply by 50% 239,625
× 70% Cost of completed units for the month P328,625
P225,400
13 Accounts receivable 480,675
Indirect laborers P322,000 Sales 480,675
× 30% To record credit sales
P96,600 Finished goods inventory, beginning P189,000
Recently completed (P328,625 × 40%) 131,450
7 Manufacturing overhead 6,000 Cost of goods sold P320,450
Cash 6,000 Cost plus markup multiplier 1.50
To record repairs and maintenance – factory machinery Total selling price P480,675

8 Repairs and maintenance expense 4,000 Cost of goods sold 320, 450
Accounts payable 4,000 Finished goods inventory 320,450
To record repairs and maintenance – office equipment To charge the cost of finished goods inventory
on account
14 Advertising expense 12,000
9 Manufacturing overhead 89,000 Cash 12,000
Utilities expense 72,000 To record the cost of advertisement as expense
Cash 161,000
To record payments for utilities
T-accounts
10 Manufacturing overhead 8,000
Raw materials inventory
Insurance expense 2,500
2024 Item Debit 2024 Item Credit
Depreciation expense – office equipment 4,500
Apr. Beginning balance 21,000 Apr. 2 Returned to supplier 3,500
Prepaid insurance – factory assets 2,000
1 Purchases 175,000 3 Work-in-process 56,000
Prepaid insurance – office space 2,500
4 Returned to storage 1,750
Accumulated depreciation – factory machinery 6,000
Accumulated depreciation – office equipment 4,500 197,750 59,500
To recognize adjustments 138,250
Expired insurance of factory assets P2,000
Depreciation expense of factory machinery 6,000
Factory salaries and wages
Manufacturing overhead P8,000
2024 Item Debit 2024 Item Credit
Apr. 5 Payroll 322,000 Apr. 6 Payroll 322,000
11 Work-in-process inventory 199,600
Manufacturing overhead 199,600
322,000 322,000
To record the actual overhead applied to production
x

12 Finished goods inventory 328,625

Work-in-process inventory 328,625
To record completed units
Work-in-process inventory, beginning P89,000
Current production charged to WIP account:
Direct materials 54,250
Direct labor 225,400

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 Work-in-process inventory Total manufacturing costs P479,250
2024 Item Debit 2024 Item Credit Add Work-in-process inventory, beginning 89,000
Apr. Beginning balance 89,000 Apr. 4 Returned to supplier 1,750 Total cost of work put into process P568,250
3 Raw materials 56,000 12 Work-in-process 328,625 Less Work-in-process, ending 239,625
6 Payroll 225,400 Cost of goods manufactured P328,625
11 Actual overhead 199,600 Add finished goods inventory, beginning 189,000
570,000 330,375 Cost of goods available for sale P517,625
239,625 Less finished goods inventory, ending 197,175
Cost of goods sold P320,450

Manufacturing overhead
2024 Item Debit 2024 Item Credit Problem: Kimmy Manufacturing Company
Apr. 6 Payroll 96,600 Apr. 11 Actual overhead 199,600
7 Maintenance 6,000 Kimmy Manufacturing Company has the following balances for the month of June 2025:
8 Utilities 89,000
Raw Materials Inventory 120,000
10 Insurance and 8,000
depreciation Work-in-process Inventory 180,000
199,600 199,600 Finished Goods Inventory 225,000
x
Journal Entries
Finished goods inventory
1. Purchased 10,000 units of raw materials at P25.00 per unit on account.
2024 Item Debit 2024 Item Credit 2. Returned 224 units of raw materials to the supplier due to inferior quality.
Apr. Beginning balance 189,000 Apr. 13 COGS 320,450
3. Issued all beginning balance of raw materials and 5,800 units of newly-purchased materials to
13 Completed units 328,625
production,
517,625 320,450
4. 68 units of excess materials were returned to storage
197,175
5. Paid salaries to factory employees, maintenance staff, and supervisors, payroll details of which
are:
Cost of goods sold Gross Pay 525,000
2024 Item Debit 2024 Item Credit SSS 18,000
Apr. 13 COGS 320,450 PhilHealth 6,895
320,450 Pag-ibig 4,000
Withholding taxes 1,485
320,450
Net Pay 494,620
6. Applied factory payroll to production where 80% are direct laborers and 20% are maintenance
Statement of COGMAS staff and supervisors.
7. Paid P8,000 for maintenance of factory machinery.
EXO MANUFACTURING COMPANY 8. Incurred P10,000 for maintenance of office equipment on account.
Statement of Cost of Goods Manufactured and Sold 9. Paid factory utilities of P98,000 and office utilities of P88,000
For the month ended April 30, 2024 10. Recognized adjustments for the following:
Raw materials used: Expired insurance of factory assets 5,000
Raw materials inventory, beginning P21,000 Expired insurance of office space 4,500
Add Net Purchases 171,500 Depreciation of factory machinery 7,000
Raw materials available for use P192,500 Depreciation of office equipment 6,500
Less Raw materials inventory, ending 138,250 P54,250
11. Actual overhead applied to production
Direct Labor 225,400
Indirect labor 120,000
Manufacturing overhead 199,600

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 Maintenance of factory machinery 14,000 16,000
Factory utilities 100,000 4,830
Insurance of factory assets 4,000 2,000
Depreciation of factory machinery 8,000 1,200
Total Overhead 246,000 297,970

6 Work-in-process inventory 255,400

Manufacturing overhead 96,600
12. All beginning work-in-process and 80% of current production is completed.
Factory salaries and wages 322,000
13. Sold all beginning finished goods inventory and 60% of recently completed units at 80% mark-
To record applied factory payroll to production
up based on costs on account. Direct laborers P322,000
14. Paid marketing and advertising costs of P100,000 to promote the firm’s products. × 70%
P225,400

Journal Entries Indirect laborers P322,000

× 30%
Date P96,600
Explanations Debit Credit
2025
June 1 7 Manufacturing overhead 6,000
Cash 6,000
To record repairs and maintenance – factory machinery

8 Repairs and maintenance expense 4,000

Accounts payable 4,000
2 To record repairs and maintenance – office equipment
on account

9 Manufacturing overhead 89,000

Utilities expense 72,000
Cash 161,000
3 To record payments for utilities

10 Manufacturing overhead 8,000

Insurance expense 2,500
Depreciation expense – office equipment 4,500
Prepaid insurance – factory assets 2,000
Prepaid insurance – office space 2,500
Accumulated depreciation – factory machinery 6,000
4 Accumulated depreciation – office equipment 4,500
To recognize adjustments
Expired insurance of factory assets P2,000
Depreciation expense of factory machinery 6,000
Manufacturing overhead P8,000

11 Work-in-process inventory 199,600

5
Manufacturing overhead 199,600

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 To record the actual overhead applied to production Factory salaries and wages
2025 Item Debit 2025 Item Credit
12 Finished goods inventory 328,625 Apr. 5 Payroll 322,000 Apr. 6 Payroll 322,000
Work-in-process inventory 328,625
To record completed units 322,000 322,000
Work-in-process inventory, beginning P89,000 x
Current production charged to WIP account:
Direct materials 54,250
Direct labor 225,400 Work-in-process inventory
Manufacturing overhead 199,600 2025 Item Debit 2025 Item Credit
P479,250 Apr. Beginning balance 89,000 Apr. 4 Returned to supplier 1,750
Multiply by 50% 239,625 3 Raw materials 56,000 12 Work-in-process 328,625
Cost of completed units for the month P328,625 6 Payroll 225,400
11 Actual overhead 199,600
13 Accounts receivable 480,675 570,000 330,375
Sales 480,675 239,625
To record credit sales
Finished goods inventory, beginning P189,000
Recently completed (P328,625 × 40%) 131,450 Manufacturing overhead
Cost of goods sold P320,450 2025 Item Debit 2025 Item Credit
Cost plus markup multiplier 1.50 Apr. 6 Payroll 96,600 Apr. 11 Actual overhead 199,600
Total selling price P480,675 7 Maintenance 6,000
8 Utilities 89,000
10 Insurance and 8,000
Cost of goods sold 320, 450
depreciation
Finished goods inventory 320,450
199,600 199,600
To charge the cost of finished goods inventory
x
14 Advertising expense 12,000
Cash 12,000 Finished goods inventory
To record the cost of advertisement as expense
2025 Item Debit 2025 Item Credit
Apr. Beginning balance 189,000 Apr. 13 COGS 320,450
13 Completed units 328,625
T-accounts
517,625 320,450
Raw materials inventory 197,175
2025 Item Debit 2025 Item Credit
Apr. Beginning balance 21,000 Apr. 2 Returned to supplier 3,500
Cost of goods sold
1 Purchases 175,000 3 Work-in-process 56,000
4 Returned to storage 1,750 2025 Item Debit 2025 Item Credit
197,750 59,500 Apr. 13 COGS 320,450
138,250 320,450
320,450

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Statement of COGMAS Activity Based Costing System

KIMMY MANUFACTURING COMPANY Activity Based Costing System allocates overhead costs to multiple activity cost pools and assigns the
Statement of Cost of Goods Manufactured and Sold activity cost pools to products by means of cost drivers.
For the month ended April 30, 2025
Raw materials used: ➢ Cost driver is a factor that causes change in the cost pool for a particular activity. It is used a
Raw materials inventory, beginning P21,000 basis for cost allocation; any factor of activity that has a direct cause-effect relationship.
Add Net Purchases 171,500 ➢ Activity cost pool is a bucket in which costs are accumulated that relate to a single measure in
Raw materials available for use P192,500 ABC system.
Less Raw materials inventory, ending 138,250 P54,250
Direct Labor 225,400
Manufacturing overhead 199,600
Benefits
Total manufacturing costs P479,250
Add Work-in-process inventory, beginning 89,000 ➢ Provides realistic costs of manufacturing for specific products.
Total cost of work put into process P568,250 ➢ Allocates manufacturing overhead more accurately to products and processes that use the
Less Work-in-process, ending 239,625
activity.
Cost of goods manufactured P328,625
➢ Identifies inefficient processes and target for improvements.
Add finished goods inventory, beginning 189,000
➢ Determines product profit margins more precisely.
Cost of goods available for sale P517,625
➢ Discovers which processes have unnecessary and wasted costs.
Less finished goods inventory, ending 197,175
➢ Offers better understanding and justification of costs in manufacturing overhead.
Cost of goods sold P320,450

Very Good! Limitations

➢ Collection and preparation of data is time-consuming.

➢ Costs more to accumulate and analyze information.
Activity Based Costing
➢ Source data isn't always readily available from normal accounting reports.
Traditional Costing ➢ Reports from ABC don't always conform to generally accepted accounting
principles and can't be used for external reporting.
Broad Averaging or Peanut Butter Costing System describes a costing approach that uses broad ➢ Data produced by ABC may conflict with managerial performance standards
averages for assigning the cost of resources uniformly to cost objects when the individual products or previously established from traditional costing methods.
services, in fact, use those resources in non-uniform ways. ➢ May not be as useful for companies where overhead is small in proportion to total
operating costs.
The name comes from how peanut butter is spread - uniformly over an entire piece of bread.

When to switch to ABC?

Undercosting and Overcosting
➢ Product lines differ greatly in volume and manufacturing complexity.
➢ If a company undercosts one product, it will overcost at least one of its products. (product
➢ Product lines are numerous, diverse, and require differing degrees of support service.
cost cross-subsidization).
➢ Overhead costs constitute a significant portion of total costs.
➢ Product undercosting happens when a product consumes high level of resources but is
➢ The manufacturing process or the number of products has changed significantly.
reported to a lower cost per unit.
➢ Production or marketing managers are ignoring data provided by the existing system.
➢ Product overcosting happens when a product consumes low level of resources but is reported
to a higher cost per unit.

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Problem: Red Velvet Manufacturing Company 2. The allocation of overhead per product line is based on machine hours.
3. Compute product cost and gross profit under traditional costing.
The following cost information has been established by the accounting department of Red Velvet 4. Compute product cost and gross profit under activity-based costing.
Company:

Direct materials 600,000

Direct Labor 800,000 Traditional Costing: Number of products produced and sold

Product Product Product Total

Factory overhead: Kim Janna Jhas
Direct materials
Activity Cost driver Activity level Direct labor
costs Factory overhead:
Machine set-ups 400,000 Number of setups 200 setups Product (Total overhead × sold units/total
Materials handling 280,000 Weight of materials 80,000 lbs. sold units)
Hazardous waste control 80,000 Weight of hazardous waste 40,000 lbs. Product Kim (P1,560,000 × 5,000/15,000)
Quality control 300,000 Number of inspections 4,000 inspections Product Kim (P1,560,000 × 5,000/15,000)
Other overhead costs 500,000 Machine hours 50,000 machine hours Product Kim (P1,560,000 × 5,000/15,000)
Total Overhead 1,560,000
Total Manufacturing cost

Detailed cost information is provided as:

Product Product Product Total
Product Product Product Total Kim Janna Jhas
Kim Janna Jhas Sales
Direct materials 250,000 180,000 170,000 600,000 Product (sold units × selling price)0,000 ×
Direct labor 400,000 240,000 160,000 800,000 Product Kim (P1,560,000 × 5,000/15,000)
Product Kim (P1,560,000 × 5,000/15,000)
Activities: Product Kim (P1,560,000 × 5,000/15,000)
Number of machine setups 80 50 70 200
Weight of materials in lbs. 40,000 28,000 12,000 80,000 Less Cost of goods sold
Weight of hazardous waste in lbs. 20,500 9,500 10,000 40,000 Gross profit
Number of inspections 1,600 1,400 1,000 4,000
Machine hours 20,000 15,000 15,000 50,000
Traditional Costing: Based on machine hours

In this problem assume that: Product Product Product Total

Kim Janna Jhas
1. Produced and sold 5,000 units each of all products. Direct materials
2. Selling prices are: Direct labor
Product Kim Product Janna Product Jhas Factory overhead:
P800 P780 P640 Product (Total overhead × machine
3. No beginning and ending work-in-process and finished goods inventory hours/total machine hours)
Product Kim (P1,560,000 × 5,000/15,000)
Product Kim (P1,560,000 × 5,000/15,000)
Product Kim (P1,560,000 × 5,000/15,000)
Requirement:
Total Manufacturing cost
1. The allocation of overhead per product line is based on the number of units produced and sold.

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 Product Product Product Total Product Jhas
Kim Janna Jhas
Sales Other overhead costs
Product (sold units × selling price)0,000 × Product Jhas
Product Kim (P1,560,000 × 5,000/15,000) Product Jhas
Product Kim (P1,560,000 × 5,000/15,000) Product Jhas
Product Kim (P1,560,000 × 5,000/15,000)
Factory overhead per product line
Less Cost of goods sold
Gross profit
Step 3. Compute for the total manufacturing costs for each product.

Activity Based Costing Product Kim Product Product Jhas Total

Janna
Step 1. Calculate for the overhead rates per activity based on cost drivers. Direct materials
Direct labor hours
Factory overhead: Factory overhead
Total manufacturing costs
Activity Cost driver Activity level Cost rates
costs
Machine setups 400,000 Number of setups 200 setups
Materials handling 280,000 Weight of materials 80,000 lbs. Step 4. Compute for the gross profit.
Hazardous waste control 80,000 Weight of hazardous waste 40,000 lbs.
Quality control 300,000 Number of inspections 4,000 inspections Product Kim Product Product Jhas Total
Other overhead costs 500,000 Machine hours 50,000 machine hours Janna
Total overhead 1,560,000 Sales
Direct labor hours
Factory overhead
Step 2. Allocate overhead based on activity using rates calculated.

Product Product Product Total Less Cost of Goods Sold

Kim Janna Jhas Gross Profit
Machine setups
Product Kim
Product Janna
Product Jhas
Prime Cost and Conversion Cost
Materials handling
Product Kim Prime Cost = Direct materials + Direct Labor
Product Janna
Product Jhas Conversion Cost = Direct labor + Manufacturing Overhead

Hazardous waste control

Product Kim Problems: Bawal i-search
Product Janna
Product Jhas 1. Elijah Company produces different sizes of basketballs. The following costs were incurred
during the year.
Quality Control Materials 120,000 (15,000 is indirect)
Product Kim Labor 85,000 (20,000 is indirect)
Product Janna

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 Manufacturing Overhead 90,000 (including indirect materials and labor d) Total Period Cost
General and admin expenses 3,500 General and Admin Expense
Office salaries 16,000 Office Salaries
Total Period Cost
There was no work in process at the end of the year, 4,000 units were produced, and 95% of the
units produced were sold.
e) Net Income = Revenue – Expenses
Required: Selling price per unit
Multiply by: Units sold
a) Compute the prime costs
Revenue
b) Compute the conversion costs
c) Compute the total product cost
d) Compute the total period cost Total Product Cost
e) If the selling price is P45, how much is the net income? Divide by: Unit Produced
Cost per unit

Solution: Cost per unit

Multiply by: Units sold
a) Prime Cost Cost of goods sold
Materials
Less: Indirect Materials Cost of goods sold
Direct Materials Add: Total period cost
Expense
Labor
Less: Indirect Labor Revenue
Direct Labor Less: Expenses
Net Incom/Loss
Direct Materials
Direct Labor
Prime Cost

b) Conversion Cost
Direct Labor
Manufacturing Overhead
Conversion Cost

c) Total Product Cost

Direct Materials
Direct Labor
Manufacturing Overhead
Total Product Cost

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