Cost principles (2)
Quick Review:
Manufacturing (Production): the process of converting raw materials into finished
products.
Materials
Cost Elements (factors of production):
Labor
Overhead
Cost;
\ Resource sacrificed or given up to achieve a specific objective.
Manufacturing Costs
Direct Material + Direct Labor + Indirect Manufacturing Costs) MOH, FOH, FB).
Prime costs;
(DM+DL+DE)
H All Direct Manufacturing costs.
= Direct material costs + Direct manufacturing labor costs + Direct Expenses
Conversion costs;
(DL+FOH)
H All manufacturing costs other than direct material costs.
= Direct manufacturing labor costs + Manufacturing overhead.
Direct labor cost is part of both Prime costs and Conversion costs.
The manufacturing process can be:
Labor Intensive :> labor cost will constitute a significant part of total cost.
Capital Intensive :> Overhead will have the highest percentage.
Manufacturing
▪ Prime costs + Manufacturing overhead
Traditional approach
Costs
▪ Direct Material + Conversion costs
Modern approach
1
Cost principles (2)
Material (Stores): the basic ingredients that are transformed into finished goods
through the use of labor and factory overhead.
Direct
Material costs can be:
Indirect
Direct Materials: can be identified within the product easily (Traced).
Represent a major cost of the finished product.
Ex:
\ Steel and glass in a car, wood in furniture, paper in a book.
Indirect Materials: all other materials and supplies involved in a product other than
direct materials. (Allocated) -Necessary but relatively insignificant.
Ex:
\ Glue and nails in furniture, lubricants in a car.
Involves two activities:
9 Purchase of materials
9 Issuance of materials
➢ Purchase of Materials
Purchasing department: orders raw materials and supplies needed for production.
The manager of the purchasing department is responsible for:
1- Assuring the items ordered meet the quality standards set by the company.
2- Acquired at the lowest price
3- Delivered on a timely basis
Forms used:
1- Purchase requisition
2- Purchase order
3- Receiving report
2
Cost principles (2)
Purchase Requisition: a written request sent to inform the purchasing department
>‫<طلب شراء‬
of a need for materials or supplies.
\Sent from the storeroom clerk to the purchasing department.
Two copies are made: the original copy is sent to the purchasing department and the
other copy is retained with the storeroom clerk.
Purchase Order: a written request to a supplier for specified goods at an agreed
>‫< أمر شراء‬
upon price.
\Sent from the purchasing department to the supplier.
It determines:
 Terms of delivery.
 Terms of payment.
The purchase order copies:
▪ The original copy is sent to the supplier to place the order.
A copy is sent to:
\ Accounting department: For future recognition in the purchases journal and the
general and subsidiary ledgers.
\ Accounts payable: For eventual payment within the discount period.
\ Receiving department: To alert them to expect a delivery.
\Purchasing department: To maintain a file of all purchase orders issued.
NOTE: the quantity ordered is not shown on the copy of the purchase order sent to the
Receiving Department (to ensure that goods delivered are actually counted)
Receiving Report:
)‫(تقرير االستالم‬
▪ When the goods that were ordered are delivered, the receiving department will
unpack ‫ يفرغ‬and count them.
▪ Goods are checked to ensure that they are not damaged and meet the specifications
(free from discrepancies) of the purchase order and the packing slip.
✓ Packing slip: a list, prepared by the supplier, which accompanies the order and
the packing that is in the shipment.
3
Cost principles (2)
NOTES
 The three forms (purchase order, receiving report, and vendor’s invoice) should be
matched and approved by an independent party.
 People of unrelated sections should be responsible for checking and approving
since they would have a conflict of interests.
 Purchase requisition is used internally within departments, while Purchase order
is used externally with a supplier.
➢ Issuance of Materials
▪ The person in charge of the storeroom
‫ أمين المخااا‬is responsible for the proper
storage, protection, and issuance of all materials placed in his or her custody.
➢ The issuance must be authorized by means of a Materials Requisition Form
prepared by Production Manager or Department Supervisor.
Materials Requisition Form
Production
Manager
Storeroom
clerk
➢ The cost that is entered in the materials requisition form is the amount charged to
production for materials consumed.
❖ In periods of Stable Prices, calculating the cost of materials issued is Simple.
Total cost of materials issued= Unit Cost X Quantity Purchased
✓ The quantity is readily determined from the materials requisition form.
❖ Determining the unit cost of materials issued is Not Simple during periods of
Inflation (rising prices) or Deflation (declining prices).
True or False?
➢ Purchase Requisition is another name for Materials Requisition Form?
4
Cost principles (2)
➢ Journalizing Materials Cost
Under a perpetual inventory system:
When materials are Purchased
✓ A debit is made directly to the Materials Inventory Account.
When materials are placed into production (Issued):
✓ The cost of direct materials is debited to Work- in Process inventory.
✓ The cost of indirect materials is debited to Factory Overhead control.
Example:
▪ Assume 100 units of direct materials and 20 units of indirect materials
are purchased for $5 and $1 respectively.
The entry to record the Purchase of materials is:
Materials inventory
------------
520
Cash (or accounts payable) ------------
520
100 units X $5 per unit =$500
20 units X $ 1 per unit =$20
Total per Unit
=$520
▪ Assume 30 units of direct materials and 10 units of indirect materials
from the above purchase are placed into production.
The entry of Issuance is:
Work-in-process inventory (30 units X $5)
Factory overhead control (10 units X $1)
Materials inventory
150
10
160
5
Cost principles (2)
NOTE:
➢ The Factory Overhead Control account is used to accumulate all indirect costs of
production (EX; indirect materials, indirect labor, factory depreciation, etc.)
➢ A separate inventory account for Direct Materials and one for Indirect Materials
may be maintained if desired by management.
Materials Inventory account
Purchases
520 Work-In-Process
150
➢ Direct Materials (100 X $5 =$500)
(30 units X $5)
➢ Indirect Materials (20 X $ 1 =$20) Factory Overhead
10
(10 units X $1)
Ending inventory
360
Balance
520 Balance
520
There’s no distinction between types of materials (direct and indirect) in
case of purchase but we make distinction only when we place them into
production.
Under a PERIODIC inventory system:
When materials are Purchased
✓ A debit is made to the Purchase of Raw Material Account.
When materials are placed into production (Issued):
No entry
6
Cost principles (2)
Exercise
Ali papa manufacturing corporation was formed on September 29 2017,
the president of the company, provided the following data concerning
materials inventory for the month of February:
February 2
Purchased for cash 1,000 units of direct materials costing $20 per
unit, 30 units of indirect materials costing $5 per unit.
5
Placed into production: 400 units of direct materials.
20 Placed into production: 10 units of indirect materials.
Required: write journal entries for the above transactions.
Multiple Choice
1- A written order sent to inform the purchasing department of a need for materials is:
A) Purchase order.
B) Receiving report.
c) Purchase requisition.
D) Materials requisition form.
2- A written request to a supplier for specified goods at an agreed-upon price is:
A) Purchase order.
B) Receiving report.
c) Purchase requisition.
D) Materials requisition form.
3- Which of the following forms must be filled out when inventory is to be removed
from materials inventory to be placed into production?
A) Purchase order.
B) Receiving report.
c) Purchase requisition.
D) Materials requisition form.
7
Cost principles (2)
Periodic and Perpetual inventory systems
Companies use two systems to determine COGS & END.INV. :
1- Periodic Inventory System
2- Perpetual Inventory System
Under a Periodic inventory system:
(many accounts)
➢ The Purchase of Material is recorded in an account called “Purchases Of Raw
Materials”
➢ If a Beginning Inventory exists, it would be recorded in a separate account”
Materials Inventory- Beginning”
✓ Purchases plus Beginning Inventory equal Materials Available for Use.
▪ Ending Inventory is determined through “a Physical Count” of the materials still
on hand at the end of the period.
▪ The Cost Of Materials Issued for the period (COMI) equals:
= Materials available for use minus Ending Materials Inventory.
+
=
=
Materials Inventory- Beginning
Purchases
Materials Available For Use
Materials inventory- ending (based on a physical count)
COST OF MATERIALS issued
XX
XX
XX
XX
XX
Note
▪ The cost of materials issued under this method is not directly determined; it’s
indirectly computed as a Residual.
(Ending Inventory is determined First)
▪ The cost of materials issued equals what is left over after the cost of the ending
inventory is subtracted from the cost of materials available for use.
8
Cost principles (2)
Example
The Douglas Corporation uses a periodic inventory system and provided
the following data:
Cost of materials issued …………
Purchase of materials ……………
Materials available for use ……...
$12,000
15,000
19,000
Required: compute by how much the ending materials inventory Exceeded the
beginning materials inventory.
Answer
Ending materials inventory= Materials available for use - Cost of materials issued
=19,000 – 12,000=$7,000
Beginning materials inventory= Materials available for use- Purchase of materials
= 19,000-15,000= $ 4,000
Ending materials inventory- beginning materials inventory= 7,000- 4,000= $3,000
Under a Perpetual inventory system: (one account)
➢ The Purchase of Material is recorded in an account called “Materials
inventory” not the purchase account.
➢ If a Beginning Inventory exists, it would be recorded as a Debit in the Materials
Inventory account.
➢
When materials are issued, the Materials inventory account is credited for the
cost of materials issued with a corresponding debit to Work in Process
Inventory account.
Note
▪ Both the cost of materials issued and the ending materials inventory can be
determined after each transaction.
▪ The balance in the materials inventory account shows the cost of materials
still available for use.
9
Cost principles (2)
▪ The cost of materials issued is charged to production at the time when the
materials are issued, not at the end of period.
▪ The Physical Taking of inventory is required at least once a year to check for errors
or shrinkage due to theft or spoilage (damage).
✓ If the physical count disagrees with the balance in the inventory record cards the
book figures are adjusted upward or downward to reflect the actual count.
▪ The materials subsidiary ledger has a separate inventory record card for each type
of item in inventory.
✓ The total of the materials subsidiary ledger record cards must equal the
amount in the materials inventory control account in the general ledger.
▪ The perpetual inventory system is widely used and provides better control and more
information than a periodic inventory system.
Example
The following information relating to the materials inventory account was
provided by the Sheila Corporation, which uses a perpetual inventory
system:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional debits added to the account during the period . . . . . . .
The ending balance exceeded the beginning balance by . . . . . . .
$100,000
300,000
20,000
Required: compute the cost of materials issued.
Answer
Ending materials inventory- beginning materials inventory=$20,000
Ending materials inventory= 100,000+20,000= $120,000
Cost of materials issued= beginning inventory + total debits added - Ending inventory
= 100,000 + 300,000 – 120,000= $280,000
Or;
Cost of materials issued= (beginning inventory - Ending inventory) + total debits added
= (-20,000) +300,000= $280,000
10
Cost principles (2)
Multiple Choice
1- Under a periodic inventory system, the purchase of materials is recorded in an
account entitled:
A) Cost of goods sold.
B) Materials inventory.
c) Purchases of raw materials.
D) work-in-process inventory.
2- Under a perpetual inventory system, the purchase of materials is recorded in an
account entitled:
A) Cost of goods sold.
B) Materials inventory.
c) Purchases of raw materials.
D) work-in-process inventory.
3- The total of the materials subsidiary ledger inventory cards must be equal to the
amount in the following account:
A) Cost of goods sold.
B) Materials inventory.
c) Purchases of raw materials.
D) work-in-process inventory.
4- Jason company accounts for materials issued to production through a periodic
inventory system. If Jason company had materials available for use of $30,000,
purchases of $16,000, and an ending materials inventory (based on a physical
count) of $9,000. What is the cost of materials issued?
A) $37,000
B) $23,000
C)
$5,000
D)
$21,000
5- Which statement is true?
A) For purposes of internal control, the quantity ordered should not be shown on the
copy of the purchase order sent to the receiving department.
B) The copies of a purchase requisition are customarily made; kept with the
purchasing department and a copy goes to both the storeroom clerk and the
receiving department.
C) For purposes of internal control, the three documents__ purchase order, receiving
report, and vendor’s invoice__ should be matched and approved by someone who
regularly handles one of these documents.
D) A materials requisition form is simply another name for a purchase requisition
form.
11
Cost principles (2)
Inventory
i.
costing methods
SPECIFIC IDENTIFICATION
✓ The simplest but the most time consuming method of all methods.
✓ Requires having a record of the purchase price and quantity of materials used.
✓ Used when dealing with Expensive Materials which are unique (such as
Diamonds).
❖ In many cases, when materials are purchased, a TAG showing the purchase price is
attached in order to identify the item.
DATE
Beginning inventory
1/1
1/5
1/6
Total
UNITS
COST PER UNITS
BALANCE OF
PURCHASED
UNIT
USED UNITS AVAILABLE
20
$10
____
20
____
50
11
70
30
____
____
40
1/9
40
12
13
____
____
1/15
20
1/20
1/28
100
____
____
60
40
10
15
____
50
140
80
90
✓ The cost of materials = Quantity Used X Purchase Price of each material.
12
Cost principles (2)
❖ Assume the 30 units issued on January 6 were taken from the lot purchase on
January 5, and the 60 units issued on January 20 were taken from both the
beginning inventory (20 units) and the lot purchase on January 9 (40 units):
❖ Ending Inventory would be $630. The Cost of Materials Issued is computed:
Cost of Materials Available for Sale . . . . . . . . . .
Less: Ending Materials Inventory . . . . . . . . . . . .
Cost of Materials Issued . . . . . . . . . . . . . . . . . .
$1,640
630
$1,010
❖ The choice of either the perpetual or periodic system will not affect the method
of measurement.
ii.
AVERAGE COST
✓ Used when inventory contains small, homogeneous materials (like Gasoline).
✓ The materials issued and on hand are likely to be a mixture of all the materials
available for use.

SIMPLE AVERAGE
( Periodic)
➢ The various purchase Prices are added together and their sum is divided by the
total number of purchases (Beginning Inventory is treated as a purchase) to arrive at
the Average Cost per Unit.
Simple Average=
$𝟏𝟎+𝟏𝟏+𝟏𝟐+𝟏𝟑+𝟏𝟓
𝟓
= $𝟏𝟐. 𝟐𝟎
Ending Materials Inventory = Number of units on hand X the simple average
Ending Materials Inventory . . . . . . = 50 X $12.20 =$610
Cost of Materials Issued . . . . . . . . . =90 X $12.20
=$1,098
13
Cost principles (2)
Cost of materials available for use would be:
Cost of materials issued . . . . . . . . . . . . . . . . .
Plus: Ending materials inventory . . . . . . . . .
Cost of materials available for use . . . . . .
$1,098
$610
$1,708
❖ The Computed Cost of materials available for use would be $86 Greater than the
Actual of materials available for use:
Actual Cost of materials available for use . . . . . . . . . . . . . . . $ 1,640
Computed Cost of materials available for use . . . . . . . . . . .
1,708
Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 68
➢ The discrepancy arises because a different quantity was purchased at each price.

Simple moving average
(Perpetual)
▪ When the perpetual inventory system is used, the simple average cost per unit is
determined after each purchase. (Many averages may be used in one period)
Date
1/1
1/5
Received
Quantity Price Cost
20
10
200
50
11
550
1/6
1/9 40
1/15 20
12
13
1/20
1/28 10
140
15
Issued
Quantity Price
Balance
Cost Quantity Price
20
10
70
10.50
70
10.50
30
10.50 315 40
10.50
480
80
11
260
100
11.50
100
11.50
60
11.50 690 40
11.50
150
50
12.2
1640 Materials Issued 1005 Ending Inventory
Cost
200
735
735
420
880
1,150
1,150
460
610
$ 610
Cost of materials issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,005
Ending materials inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
610
Computed Cost of materials available for use . . . . . . . . . . $1,615
Computations:
14
Cost principles (2)
▪ The actual cost of materials available for use ($1,640) will differ from the computed
amount under the perpetual and the periodic inventory system.
▪ This problem is overcome by employing the Weighted Average Cost method.

Weighted average
Weighted Average=
Beginning Inventory
(periodic)
∑ (Each Purchase Price X Quantity of Units in Each Purchase)
Total Number of Units Available for Use
PURCHASE
DATE
1/1
1/5
1/9
1/15
1/28
➢ Total
UNITS
PURCHASED
20
50
40
20
10
140
X
COST PER
UNIT
$ 10
11
12
13
15
= TOTAL
$ 200
550
480
260
150
$1,640
Weighted Average = $1,640 / 140= $11.71
Ending Materials Inventory = Number of units on hand X Weighted average
➢ Ending Materials Inventory = 50 X $11.71 = $586
➢ Cost of Materials Issued
= 90 X $11.71 = $1,054
Cost of materials available for use would be:
Ending Inventory . . . . . . . . . . . . . . . . . . . . .
Cost of Materials Issued . . . . . . . . . . . . .
➢ Cost of materials available for use . . . .
$ 586
1,054
$1,640
Under Weighted Average method, the ending inventory plus the Cost of materials
issued (Computed) will equal the (Actual) cost of materials available for use.
15
Cost principles (2)
 Weighted moving average (perpetual)
▪ When the perpetual inventory system is used, the weighted average cost per unit
must be recomputed after each purchase instead of at the end of the period.
Weighted Average Cost =Total cost of materials on hand / total number of units on hand
Date
1/1
5/1
Received
Quantity Price Cost
20
10
200
50
11
550
6/1
Issued
Quantity Price
30
9/1 40
15/1 20
12
13
20/1
480
260
60
28/1 10
140
15
150
1640 90
Balance
Cost Quantity Price
20
10
50
11
70
10.71
10.71 321 40
10.71
80
11.36
100
11.69
100
11.69
11.69 701 40
11.69
50
12.36
1022 50
12.36
Cost of materials issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending materials inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computed Cost of materials available for use . . . . . . . . . .
Cost
200
550
750
429
909
1169
1169
468
150
618
$1,022
618
$1,640
Computations:
16
Cost principles (2)
 First-in, first-out (FIFO)
✓ Means that, the Fist Received (input) materials are First Issued (output) materials.
✓ Suitable more for perishable items.)‫(الحاجات اللى بتبوظ بسرعه‬
✓ Ending Inventory would consist of materials received last, and prices would
closely reflect current costs.
Beginning Inventory
PURCHASE
DATE
UNITS
PURCHASED
1/1
1/5
1/9
20
50
20
X
COST PER
UNIT
=
$10
11
12
TOTAL
$200
550
240
$990
Cost of Materials Issued
▪ The 50 units in ending inventory are computed from the last purchase date back:
PURCHASE
DATE
UNITS
PURCHASED
1/28
1/15
1/9
10
20
20
X
COST PER
UNIT
$15
13
12
Ending Inventory
PURCHASE
DATE
1/1
1/5
1/9
1/15
1/28
=
TOTAL
$150
260
240
$650
UNITS PURCHASED
20
▪ Old/ earlier
50
prices
40
20 ▪ New/ recent
prices
10
Cost of materials issued
(90 units)
Ending materials inventory
(50 units)
▪ The value of Materials Issued and Ending Inventory will be identical under
both the periodic and the perpetual inventory system.
17
Cost principles (2)
Date
1/1
5/1
Received
Quantity Price
20
10
50
11
Cost
200
550
Issued
Quantity Price Cost
20
10
30
6/1
9/1
15/1
40
20
12
13
40
20
60
10
140
15
200
110
310
480
260
20/1
28/1
10
11
11
12
440
240
680
150
1640
90
990
Balance
Quantity Price
20
10
50
11
70
40
11
Cost
200
550
750
440
40
40
20
1100
20
20
40
20
20
10
50
440
480
260
1180
240
260
500
240
260
150
650
11
12
13
12
13
12
13
15
Cost of materials issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $990
Ending materials inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
650
Computed Cost of materials available for use . . . . . . . . . . . . . $1,640
18
Cost principles (2)
 Last-in, first-out (LIFO)
✓ Assumes that materials received last are the first to be issued.
✓ Ending inventory reflects the earliest materials received.
✓ This method provides a better matching of current costs with current revenues
than FIFO (during inflation) so income determination should be more accurate.
✓ Usually the cost flow parallels the materials flow.
The cost of 90 units issued:
PURCHASE
DATE
1/28
1/15
1/19
1/5
UNITS
PURCHASED
X
COST PER
UNIT
10
20
40
20
=
$15
13
12
11
TOTAL
$ 150
260
480
220
$1,110
Cost of materials issued
The cost of 50 units in ending inventory:
PURCHASE
DATE
1/1
1/5
UNITS
PURCHASED
X
COST PER
UNIT
20
30
=
TOTAL
$10
11
Ending Inventory
PURCHASE
DATE
1/1
1/5
1/9
1/15
1/28
$200
330
$650
UNITS PURCHASED
20
50
40
20
10
▪ Old/Earlier
prices
▪ New/ Recent
prices
Ending materials inventory
(50 units)
Cost of materials issued
(90 units)
▪ Under the perpetual inventory system the cost must be assigned to each unit
issued on the date of issue, where under the periodic system, the cost is assigned
at the end of period.
19
Cost principles (2)
Date
1/1
5/1
Received
Quantity Price Cost
20
10
200
50
11
550
Issued
Quantity Price
30
11
20
40
60
13
12
6/1
9/1
15/1
40
20
12
13
480
260
20/1
28/1 10
140
15
150
1640 90
Balance
Cost Quantity Price
20
10
50
11
70
330 20
10
20
11
40
20
10
20
11
40
12
20
13
100
1100
260 20
10
480 20
11
740 40
20
10
20
11
10
15
1070 50
Cost of materials issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending materials inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computed Cost of materials available for use . . . . . . . . . . . .
Cost
200
550
750
200
220
420
200
220
480
260
1160
1180
200
220
420
200
220
150
570
$1070
570
$1,640
20
Cost principles (2)
Comparison of costing systems
Periodic system
Balance: 10 units X $15
FIFO
20
50
Issued: 20
50
20
90
X
LIFO
$150 Balance:
260
50 units
$650
90 units
990
50 units
1640
$570
90 units
1070
650
X
X
X
Balance: 20
30
50
Issued: 10
20
40
20
90
15
Perpetual system
X
X
10
11
12
10
11
200
Issued:
550
240
990
1640
200
Balance:
330
530
X
X
X
X
15
13
12
11
150
Issued:
260
480
220
1110
1640
1640
Comparison of the different methods
Method
Specific Identification
Ending Cost Of Materials
Total
Inventory Issued
$630
$1010
$1640
Simple Average
610
1098
1708
Weighted Average
586
1054
1640
Weighted Moving Average
618
1022
1640
FIFO
650
990
1640
LIFO
470
1070
1640
21
Cost principles (2)
Assuming
INFLATION
FIFO
LIFO
ac
Cost Of Materials
Issued
LOWER
HIGHER
IN BETWEEN
Gross Profit
HIGHER
LOWER
IN BETWEEN
Net Income
HIGHER
LOWER
IN BETWEEN
Income Tax
HIGHER
LOWER
IN BETWEEN
Ending Inventory
HIGHER
LOWER
IN BETWEEN
• The difference between gross profit under FIFO versus LIFO would be exactly
EQUAL to the difference between the two ending materials inventories and cost of
materials issued
fifo
lifo
Average
cost
Cost Of Materials
Issued
• Oldest
prices
• Newest
prices
• (recent
prices)
Smooth Out
Ending Inventory
• Newest
prices
• (recent
prices)
• Oldest
prices
Smooth Out
22
Cost principles (2)
Shortcomings of the periodic inventory system:
▪ The cost of materials issued cannot be determined without a physical count
of ending inventory which can be very expensive and time-consuming.
▪ It can be inadequate if information were continuously needed and the cost of
materials issued and on hand. So most sizable manufacturing companies use
a perpetual inventory system.
Consistency:
▪ Once a method of valuing inventory has been selected, the same method must be
used every year to prevent manipulation and confusion. (Required by GAAP).
True or false
1) When
the goods are sold, their costs are transferred from Work in Process to
Finished Goods.
True /False
2) The materials requisition serves as the source document for debiting the accounts
in the materials ledger.
True /False
3) Materials are transferred from the storeroom to the factory in response to materials
requisitions.
True /False
4)
A receiving report is prepared when purchased materials are first received by the
manufacturing department.
True /False
23
Cost principles (2)
Multiple choice
1) The personnel involved in the physical control of materials includes all of the
following except the:
a.
b.
c.
d.
Purchasing agent.
Receiving clerk.
Cost accountant.
Production department supervisor.
2) The employee who is responsible for preparing purchase requisitions is most likely
the:
a.
b.
c.
d.
Purchasing agent.
Production supervisor.
Receiving clerk.
Storeroom keeper.
3) Sam Jones works at Seeker, Inc. Sam’s duties include identifying where materials
can be obtained most economically, placing orders and verifying invoices and
approving them for payment. Sam is a (n):
a.
b.
c.
d.
Receiving clerk.
Accounts payable clerk.
Purchasing agent.
Production supervisor.
4) The form used to notify the purchasing agent that additional materials are needed is
known as a:
a.
b.
c.
b.
Purchase order.
Vendor's invoice.
Receiving report.
Purchase requisition.
5) The form prepared by the purchasing agent and sent to the vendor to obtain
materials is known as a:
a.
b.
c.
b.
Materials requisition.
Purchase requisition.
Purchase order.
Vendor's invoice.
24
Cost principles (2)
6) A receiving report would include all of the following information except:
a.
b.
c.
b.
What the shipment contained.
The purchase order number.
The customer.
The date the materials were received.
7) Listed below are steps of purchasing and receiving materials:
1. The receiving clerk prepares a receiving report.
2. Purchase requisitions are prepared to notify the purchasing agent that additional
materials are needed.
3. The purchase of merchandise is recorded by the accounting department.
4. The purchasing agent completes a purchase order.
In which order would these events typically happen?
a.
b.
c.
b.
4, 2, 3, 1
2, 4, 3, 1
2, 4, 1, 3
4, 2, 1, 3
8) Listed below are steps of procuring materials for production:
1.
2.
3.
4.
The receiving clerk checks the quantity and quality of incoming materials.
The purchasing agent issue the purchase order to the vendor.
The production floor supervisor issues a materials requisition.
The storeroom clerk issues a purchase requisition.
In which order would these events typically happen?
a.
b.
c.
b.
3, 2, 4, 1
3, 4, 2, 1
2, 1, 3, 4
4, 2, 1, 3
9) The duties of the purchasing agent would include all of the following except:
a.
b.
c.
d.
Placing purchase orders.
Counting and identifying materials received.
Compiling information that identifies vendors and prices.
Verifying invoices and approving them for payment.
25
Cost principles (2)
10) The form that serves as authorization to withdraw materials from the storeroom is
known as the:
a.
b.
c.
d.
Purchase order.
Purchase requisition.
Materials requisition.
Returned materials report.
11) The Egbert Company uses an industrial chemical, XRG, in a manufacturing
process. Information as to balances on hand, purchases, and requisitions of XRG
is given in the following table.
If a perpetual inventory record of XRG is maintained on a FIFO basis, the March 16 issue
will consist of:
a.
b.
c.
d.
1,000 kilograms @ $2.10 and 200 kilograms @ $2.25.
1,200 kilograms @ $2.25.
300 kilograms @ $2.10 and 900 kilograms @ $2.25.
700 kilograms @ $2.10 and 500 kilograms @ $2.25.
12) The inventory method which results in the most recent costs being assigned to
inventory on hand at the end of the period is:
a.
b.
c.
d.
Last-in, first-out.
Last-in, last-out.
First-in, first-out.
Moving average
26
Cost principles (2)
13) The Beaches Company uses metal grates when assembling appliances.
Information as to balances on hand, purchases, and requisitions of the grates is
given in the following table.
If a perpetual inventory record of the metal grates is maintained on a FIFO basis, the
September 6 issue will consist of:
a.
b.
c.
d.
15 units @ $2.80, 120 units @ $3.10 and 30 units @ $3.34.
75 units @ $2.80 and 90 units @ $3.10.
165 units @ $3.10.
75 units @ $3.10 and 90 units @ $3.34.
14) The inventory method which results in the prices paid for earliest purchases
assigned to cost of goods sold is:
a.
b.
c.
d.
Last-in, first-out.
Last-in, last-out.
Moving average.
First-in, first-out.
27
Cost principles (2)
15) The Bisset Corporation uses Raw Material A in a manufacturing process.
Information as to balances on hand, purchases, and requisitions of Raw Material A
is given in the following table.
If a perpetual inventory record of Raw Material A is maintained on a FIFO basis, 200
units on hand on August 18 will consist of:
a.
b.
c.
d.
100 units @ $1.40, 80 units @ $1.55 and 20 units @ $1.62.
100 units @ $1.55 and 100 units @ $1.62.
150 units @ $1.62 and 50 units @ $1.55.
200 units @ $1.55.
16) The inventory method which results in the prices paid for the earliest purchases
being assigned to inventory on hand at the end of the period is:
a.
b.
c.
d.
First-in, first-out.
Last-in, last-out.
Last-in, first-out.
Moving average.
28
Cost principles (2)
17) Filmac, Inc. uses speakers when assembling computers. Information as to
balances on hand, purchases, and requisitions of speakers is given in the following
table.
If a perpetual inventory record of speakers is maintained on a LIFO basis, the March 8
issue will consist of:
a.
b.
c.
d.
20 units @ $15.00 and 50 units @ $16.00.
70 units @ $15.00.
50 units @ $16.00 and 20 units @ $15.00.
70 units @ $16.00.
18) The Bisset Corporation uses Raw Material A in a manufacturing process.
Information as to balances on hand, purchases, and requisitions of Raw Material A
is given in the following table.
29
Cost principles (2)
If a perpetual inventory record of Raw Material A is maintained on a LIFO basis, the
September 6 issue will consist of:
a.
b.
c.
d.
80 units @ $1.55, 20 units @ $1.62 and 10 units @ $1.40.
110 units @ $1.55.
50 units @1.55 and 60 units @ 1.62.
20 units @ $1.62 and 90 units @ $1.55.
19) Wiggins, Inc. uses sulfuric acid in a manufacturing process. Information as to
balances on hand, purchases, and requisitions of acid is given in the following
table.
If a perpetual inventory record of Raw Material A is maintained on a LIFO basis, the
20,000 units in inventory at July 18 will consist of:
a.
b.
c.
d.
5,000 units @ $.72 and 15,000 units @ $.65.
10,000 units @ $.60 and 10,000 units @ $.65.
2,000 units @ $.72, 8,000 units @ $.65 and 10,000 units @ $.60.
10,000 units @ $.50, 6,000 units @ $.65 and 4,000 units @ $.72.
30
Cost principles (2)
20) The Jordan Corporation uses Raw Material A in a manufacturing process.
Information as to balances on hand, purchases, and requisitions of Raw Material A
is given in the following table.
If a perpetual inventory record of Raw Material A is maintained on a moving average
basis, the 140 units issued on March 16 will have a unit cost of (round to 3 decimal
places):
a.
b.
c.
d.
$1.525.
$1.475.
$1.50.
$1.438
21) In a period of rising prices, the use of which of the following cost flow methods
would result in the highest tax liability?
a.
b.
c.
d.
LIFO
FIFO
Weighted average cost
Moving average cost
31
Cost principles (2)
22) The Kennedy Company uses throttles in its assembly of lawn mowers. Information
as to balances on hand, purchases, and requisitions of throttles is given in the
following table.
If a perpetual inventory record of throttles is maintained on a moving average basis, the
165 items in inventory on June 14 will have a unit cost of (rounded to three decimal
places):
a.
b.
c.
e.
$3.438.
$3.167.
$3.386.
$2.875.
23) In a period of rising prices, the use of which of the following cost flow methods
would result in the highest cost of goods sold?
a.
b.
c.
d.
LIFO
FIFO
Weighted average cost
Moving average cost
32
Cost principles (2)
24) When selecting a method of inventory costing, a company must consider all of the
following except:
a.
b.
c.
d.
Federal and state income tax regulations.
Current economic conditions.
The flow of materials.
Its rate of inventory turnover.
25) At the end of the period, the balance in the Materials account should represent
a.
b.
c.
d.
The cost of materials purchased.
The cost of materials issued into production.
The cost of materials included in Work in Process and Finished Goods.
The cost of materials on hand, not yet put into production.
26) The journal entry to record undamaged direct materials returned to the storeroom
would be:
a. Debit - Materials
Credit - Finished Goods
b. Debit - Factory Overhead
Credit - Work in Process
c. Debit - Materials
Credit - Factory Overhead
d. Debit - Materials
Credit - Work in Process
27) If the amount of materials on hand at the end of the period is less than the control
account balance, the control account balance should be decreased by the following
entry:
a. Debit - Work in Process
Credit - Materials
b. Debit - Materials
Credit - Factory Overhead
c. Debit - Materials
Credit - Work in Process
d. Debit - Factory Overhead
Credit – Materials
▪ If the amount of materials on hand per the physical count is less than the control account
balance, the balance should be decreased by a debit to a factory overhead account (usually
called Inventory Short and Over), because differences may be due to damage, theft or errors
and usually cannot be easily identified with a specific job, and a credit to Materials.
33
Cost principles (2)
28) The document authorizing the issuance of materials from the storeroom is the:
a.
b.
c.
d.
purchase requisition
materials requisition
receiving report
purchase order
29) The source of the data for debiting Work-in-Process for direct materials is the:
a.
b.
c.
d.
purchase order
purchase requisition
materials requisition
receiving report
30) A summary of the materials requisitions completed during a period serves as the
basis for transferring the cost of the materials from the controlling account in the
general ledger to the controlling accounts for:
a.
b.
c.
d.
work in process and cost of goods sold
work in process and factory overhead
finished goods and cost of goods sold
work in process and finished goods
31) The recording of the jobs shipped and customers billed would include a debit to:
a. Accounts Payable
b. Cash
c. Finished Goods
d. Cost of Goods Sold
32) The recording of the jobs shipped and customers billed would include a credit to:
a.
b.
c.
d.
Accounts Payable
Cash
Finished Goods
Cost of Goods Sold
33) Materials purchased on account during the month amounted to $195,000.
Materials requisitioned and placed in production totaled $168,000. From the
following, select the entry to record the transaction on the day the materials were
bought.
a. Materials
Accounts Payable
b. Materials
Accounts Payable
168,000
168,000
195,000
195,000
34
Cost principles (2)
c. Materials
Cash
d. Accounts Payable
Materials
195,000
195,000
195,000
195,000
34) Select the proper journal entry to record the movement of 1,450 units of part
number 116B to work in process when each unit of 116B has a value of $2.00.
a. Jan 15 Raw Material Inventory
Work in Process
b. Jan 15 Work in Process
Factory Overhead
c. Jan 15 Work in Process
Raw Material Inventory
d. Jan 15 Work in Process
Cash
2,900
2,900
2,900
2,900
2,900
2,900
2,900
2,900
35) Bar code scanners are now being used to track incoming materials and to
electronically transmit this data. Scanners have replaced which of the following:
a.
b.
c.
d.
materials requisition
materials ledger
receiving report
job cost sheet
36) The materials requisition is used to
a.
b.
c.
d.
release finished goods to the shipping department
record the acquisition of materials from a vendor
release materials from the storeroom to the factory
record and electronically transmit materials data in place of a receiving report
37) Which of the following entries would probably not be found on the books of a service
provider?
a.
b.
c.
d.
Debit Work in Process; credit Materials
Debit Work in Process; credit Wages Payable
Debit Work in Process; credit Overhead
Debit Cost of Services; credit Work in Process
35
Cost principles (2)
Problems
1) For the following materials control forms, please indicate the following:
a. who prepares the form;
b. who receives the form; and
c. The form’s intended purpose.
1.
2.
3.
4.
Purchase Requisition
Materials Requisition
Receiving Report
Purchase Order
2) The materials account of the Lankford Company reflected the following changes
during January:
▪ Assuming that Lankford Company maintains perpetual inventory records, calculate
the cost of the ending inventory at January 31 and the cost of the units issued in
January using the FIFO method.
36
Cost principles (2)
3) The materials account of the Flynn Company reflected the following changes during
May:
▪ Assuming that Flynn Company maintains perpetual inventory records, calculate the
ending inventory at May 31 and the cost of the units issued in May using each of the
following methods:
(a) First in, first out (FIFO)
(b) Last in, first out (LIFO)
(c) Moving average
37
Cost principles (2)
4) The following accounts are maintained by the Sprague Manufacturing Company in
its general ledger: Materials, Work in Process, Factory Overhead, and Accounts
Payable. The materials account had a debit balance of $40,000 on November 1. A
summary of material transactions for November shows:
(1) Materials purchased on account, $62,000
(2) Direct materials issued, $58,500
(3) Direct materials returned to storeroom, $1,200
(4) Indirect materials issued, $3,600
(5) Indirect materials returned to storeroom, $550
(6) Materials on hand were $200 less than the stores ledger balance
a. Prepare journal entries to record the materials transactions.
b. Post the journal entries to T-accounts.
c. What is the balance of the materials account on November 30?
38
Cost principles (2)
5) The following decisions and transactions were made for the Sanders Company in
May:
May 1 the production manager informed the storeroom keeper that the forecasted
usage of Component X is 3,000 units. There are 1,500 units on hand, each having a
unit cost of $20. The company maintains a minimum stock of 1,000 units. The
storeroom keeper notifies the purchasing agent that the company will need 2,500
units of X to meet May’s production needs and maintain a minimum inventory of 1,200
units.
May 3 the purchasing agent checks with a number of vendors and orders 2,500 units
of Component X. Unfortunately, the price has gone up to $25.
May 7 the shipment of Component X is received and inspected. The units are in good
condition and the company received the number of units it ordered.
May 9 the invoice covering Component X is received from the vendor and approved for
payment. May 21 the May 9 invoice is paid in full.
39
Cost principles (2)
May 31 during the month, 2,950 units of Component X are issued to production. The
company uses FIFO costing and a job order cost system.
May 31 an inventory of the storeroom is taken at the end of the day and there are 1,040
units of Component X on hand.
(a) Prepare a table to answer the following questions:
(1) What forms, if any, were used?
(2) What entry, if any, was recorded?
(b) Calculate the balance in the Materials account at May 31.
40
Cost principles (2)
6) The Outdoor Manufacturing Company produces sporting equipment. The company
maintains a single raw materials inventory account for both direct and indirect
materials. The following information came from the factory ledger accounts for
December:
Answer
41
Cost principles (2)
42
Cost principles (2)
43
Cost principles (2)
Labor
Labor: the physical or mental effort expended in manufacturing a product.
Labor cost: the price paid for using human resources.
Factory labor cost: the compensation paid to employees who engage in productionrelated activities.
Direct labor: those who on a product directly, either manually or by using machines.
: Labor that is directly involved in the production of a finished product, that
can be traced to the product, and that represents a major labor cost of producing that
product.
Example: assembly line workers machine operators.
Direct labor is part of both prime cost and conversion cost.
Indirect labor: factory labor that is not directly traceable to a product, nor economically
feasible (worthwhile) to trace it.
Example: product designers, job supervisors, product inspectors.
Indirect labor is part pf factory overhead cost.
Costs included in labor
Wages: payments made on hourly, daily, or piecework basis.
Paid to production workers.
Salaries: fixed payments (monthly) made regularly for managerial or clerical services.
In practice “wages” and “salaries” are often incorrectly used interchangeably.
Accounting for labor
Involves three activities:
Timekeeping
44
Cost principles (2)
Computation of total payroll
Allocation of payroll costs.
These activities must be performed before the payroll is recorded in the accounting
records.
Timekeeping
Collecting the hours worked by employees.
Two source documents are used:
Time card
Labor job ticket
Time card (clock card):
Keeps a record of total hours worked each day by employees.
Inserted several times each day.
Provides a reliable source for computing and recording total payroll costs.
Labor job ticket:
Prepared daily by employees for each job worked on.
Includes: the number of hours worked, a description of the work performed, and the
employee’s wage rate.
The sum of the labor cost and hours for different jobs (as shown on labor job tickets)
should be equal to the total labor cost and labor hours for the period (as shown on time
cards).
Computation of total payroll:
It considered a responsibility of the payroll department.
Total payroll includes: gross amount earned, net amount payable to employees after
deductions.
Deductions include: federal and state withholding taxes, social security taxes.
Allocation of payroll costs:
Allocating the total payroll costs( including the employer’s portion of taxes and fringe
costs) using time cards and labor job tickets.
45
Cost principles (2)
The total payroll cost for one period must equal the sum of the labor costs allocated to
the individual jobs, departments, or products.
It considered a responsibility of the cost accounting department.
Journalizing labor costs:
Payrolls are generally prepared weekly, semimonthly, or monthly.
Gross wage=
Hours worked (shown on time cards) X rate per hour+ any bonuses or overtime.
To record the payroll:
Work-in-process inventory (direct labor) . . . . . . . . . . . . X X
Factory overhead (indirect labor) . . . . . . . . . . . . . . . . . . . X X
Payroll payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
XX
To record employee withholdings and pay the payroll:
Payroll payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X X
Employee withholdings payable . . . . . . . . . . . . . .
Cash (to employee) . . . . . . . . . . . . . . . . . . . . . . . . . .
XX
XX
** Withholdings include: state and federal taxes, union dues, insurance, savings, etc.
To record employer taxes and fringe benefit costs (pensions, insurance, etc.):
Factory overhead control . . . . . . . . . . . . . . . . . . . . .
XX
Employer taxes and benefits payable . . . . . . . . .
XX
Special problems relating to the accounting for labor:
1234561-
Employee taxes.
Employer taxes and fringe benefit costs.
Shift premiums.
Overtime.
Idle time.
Minimum guaranteed wage and inventive plans.
Employee taxes.
46
Cost principles (2)
47
Cost principles (2)
48
Cost principles (2)
49
Cost principles (2)
50