INSTALLMENT ACCOUNTING
THE REVENUE RECOGNITION PRINCIPLE
The revenue recognition principle dictates that revenue be recognized when the
earning process is complete or virtually complete and an exchanged transaction has
taken place. Revenue is therefore typically recognized when the firm delivers goods,
performs services, or as time passes (as in the case of interest revenue or rent
revenue). There are other points in the operating cycle where revenue could be
recognized. Revenue could be recognized as production takes place, when production
is completed, or as cash is collected from the customer. The following exhibit shows
these possibilities. Although the revenue recognition is recognized principle prior to or
after delivery. These exceptional situations are depicted as follows:
EXHIBIT – REVENUE RECOGNITION TIME LINE
Production
Production
Sale
Full Price
Begins
Complete
Delivery
Collected
PRODUCTION PERIOD
I
INVENTORY PERIOD
---------------------------------------------
Percentage of
Completed
Completion
Contract
Method
Method
COLLECTION PERIOD
-------------------------------------
Accretion
Basis
-------------------------------------------- I
Revenue
Installment Sales
Recognition
Method and
Principle
Cost Recovery
(General Rule)
Method
Revenue Recognition
For Special Products
With Immediate Marketability
RECOGNITION OF REVENUE AFTER DELIVERY
Revenue is generally recognized when goods are delivered or services
performed at the point of the sale. In some circumstances, recognition of revenue at the
point of sale would be premature because collection of the account receivable is highly
uncertain and a reasonable estimate of uncollectibles cannot be made. The installment
sales or cost recovery method is used to determine when revenue is recognized from
such sales. It should be noted that there are few situations where both of the above
mentioned criteria are met. Generally, a firm will refuse credit to those who are unlikely
to pay and past experience will provide a means of estimating uncollectibles.
1
A. The installment sales method may be used when collectability is uncertain
and it is impossible to estimate bad debt loss.
The installment sales method recognizes gross profit on sales as cash is
collected. The method is acceptable for financial accounting purposes when
collection is highly uncertain and estimation of bad debts is not possible. Under
certain circumstances real estate sales firms and franchise operations are
required to use this method. While the installment method has limited
applicability for financial reporting purposes it is used frequently for taxes.
1. Under the installment sales method proportionate amounts of gross profit are
recognized as cash is collected. Credit sales are recorded in the usual way,
but adjusting entries at the end of each period defer gross profit to the extent
that cash is yet to be collected. The gross profit is recognized as the cash is
collected. The steps in using the installment method are summarized below.
 Step One: Record credit sale in usual manner debiting Installment
Accounts Receivable and crediting Installment Sales. Each period’s
installment sales will be kept in a separate account.
 Step Two: Cash collections are recorded in the usual manner debiting
Cash and crediting Installment Accounts Receivable.
 Step Three: At the end of each period, the cost of goods sold on
installment is removed from the books. The gross profit on the
installment sales is set up as a deferred gross profit account. The
deferred gross profit is recognized as cash is collected. The entry to
defer gross profit on installment sales for the period is
Installment sales
xxx
Cost of Installment Sales
xxx
Deferred Gross Profit
xxx
The Deferred Gross Profit account should be reported as a contra
accounts receivable account on the balance sheet. In practice,
however, it is generally shown as unearned revenue and appears in
the liability section of the balance sheet.
 Step Four: compute the gross profit percentage for the year’s
installment sales.
Installment sales
- Cost of Installment Sales
Gross Profit Percentage =
Installment Sales
This percentage is calculated every year that installment sales are made.
2
 Step five: Apply the gross profit percentage for each year’s installment sales to
cash collected from accounts relating to that year to determine the amount of
realized gross profit to be recognized.
Gross Profit Recognized For Year 20xx
= Gross Profit Recognized For Year x cash collected from instalment
Accounts Receivable From year xx
The entry to recognize gross profit earned debits Deferred Gross Profit for Year
xx and credits Realized Gross Profit on installment sales.
2. The seller can generally repossess merchandise sold on installment, if
payments are stopped. Repossession signals uncollectibility of the related
account. The account receivable and related deferred gross profit must be written
off. The repossessed merchandise should be recorded at it resale or fair market
value. There may be a gain or loss on repossession.
3. Interest included in instalment payments should be separated from repayment
of the account when interest is charged. Deferred gross profit is realized only on
the portion of each payment that is a repayment of the principal amount. Any
interest included in the cash collections must be accounted for under the
effective interest method.
B. The cost recovery method recognizes no gross profit until the full cost of goods sold
has been recovered.
The cost recovery method is used when there is a very high degree of
uncertainty about collectability of the account. No gross profit is recognized on the sale
until the full cost of goods sold has been recovered. Thereafter, all cash received is
reported as gross profit. The cost recovery system is rarely used for financial statement
purposes and is not allowed for income taxes.
3
PROBLEMS
1. On August 31, 2018, BMW Company, which maintains a perpetual inventory sold
a new car to TOYOTA Corporation for 800,000. The car cost the seller, P610,
000. TOYOTA Corporation paid P200, 000 down and received a P80, 000
allowance on an old car traded , the balance being payable in twelve equal
monthly installments beginning on September 30, 2018 inclusive of 12% interest.
The used car traded-in had an estimated value of P110, 000 after reconditioning
cost of
P20, 000. After collecting, six monthly installments TOYOTA Corporation
defaulted and the car was repossessed. When reacquired, the car was appraised
as being worth P200, 000. To improve its salability, the company expended P50,
000 for reconditioning.
2. Emerald Incorporated which began operating on January 2018 appropriately
uses the installment method of accounting. The following information pertains to
Emerald operations in 2018.
Installment sales
P 600, 000
Regular sales
800, 000
Cost of Installment sales
270, 000
Cost of Regular sales
440, 000
Operating expenses
200, 000
Collections on installment sales
150, 000
Collections on regular sales
200, 000
How much is the Realized Gross Profit in 2018?
A. P 690, 000
B. P 242,500
C. P 82, 500 D. P 442, 500
3. Diamond Company began operating in 2017 and using the installment method of
accounting, presenting the following data for is installment sales that are made at
GPR of 20%.
Downpayment is 30%
Collections after down payment: 25% in the year of sale, 30% in the year
after and 45% in the third year.
Installment sales:
2017 P 600, 000
2018 P 762, 500
2019 P 981,000
4
Which of the following is true?
A. IAR at the end of 2017 is P 400, 313
B. DGP for 2017 sales at the end of 2019 is P 80, 063
C. RGP from 2017 and 2018 sales at 2019 is P 85, 838
D. Total Unrealized Gross Profit at the end of 2019 is P 151, 069
4. Silver Corporation started operations on January 1, 2017 selling home
appliances and furniture sets both for cash and on installment basis. Data on the
installment sales operations of the company gathered for the years ending
December 31, 2017 and 2018 were as follows:
2017
2018
Installment sales
P 400,000
P 500,
000
Cost of installment basis
240, 000
350,
000
Cash collected on installment sales:
2017 Installment sales
210, 000
150, 000
2018 Installment sales
300,
000
Additional information:
On January 5, 2019, as installment sales on 2017 was defaulted and the
merchandise with an appraised value of P 5, 000 was repossessed. Related
installment receivable balance on January 2019 was P 8,000.
A) The balance of the deferred gross profit on December 2017 was:
a. P64, 000
b. P 76, 000 c. P 160, 000 d. P 160, 000
B) The balance of the deferred gross profit controlling account at December
2018 was:
a. P 76, 000
b. p 130, 000 c. P 160, 000 d. P 160, 000
C) Recording the repossessed merchandise at its appraised value, the gain or
loss on the repossession should be:
a. No gain or no loss
c. P 1, 800 gain
b. P 200, 000 gain
d. P 3,000 loss
5
5. The partial trial balance of PLDT Company as of December 31, 2019 is provided
for below:
Accounts receivable – charge sales
P 50,000
Installment receivable – 2019
180, 000
Installment receivable – 2018
30, 000
Installment receivable – 2017
10, 000
Merchandise Inventory
35, 000
Purchases
260, 000
Freight in
2, 000
Repossessed merchandise
10, 000
Repossession loss
16, 000
Bad debts – charge sales
3, 000
Cash sales
60, 000
Charge sales
122, 000
Installment sales
302, 400
Deferred gross profit – 2017
14, 800
Deferred gross profit – 2018
26, 240
Additional information:
a. The unsold merchandise on December 31, 2019 (new and repossessed) was
P 47, 000.
b. The charge sales and installment sales prices exceed cash sales prices by
22% and 26%, respectively.
c. The rate of gross profit on 2017 installment sales was 40% and 41% for 2018.
d. The entry for repossession was:
Repossessed merchandise
P 10, 000
Loss on repossession
16, 000
Installment receivable – 2017
P 12, 000
Installment receivable – 2018
14, 000
Required:
A. Determine the cost of cash and charge sales in 2019.
B. Determine the cash collections on installment sales for 2017, 2018 and
2019.
C. Determine the total gross profit realized after repossession.
6
6. Presented below is the unadjusted trial balance of Petron Corporation at
December 31, 2018:
Debit
Credit
Cash
Installment accounts receivable, 2017
P 5,000
40,000
Installment accounts receivable, 2018
140,000
Inventory, December 31, 2018
200,000
Other assets
497,000
Accounts payable – trade
P 50,000
Unrealized gross profit – 2016
10,000
Unrealized gross profit – 2017
86,000
Unrealized gross profit – 2018
100,000
Capital stock
600,000
Retained earnings
80,000
Gain om repossession
6,000
Operating expenses
50,000
Total
________
P932,000
P932,000
Cost of goods sold had been uniform over the years at 60% of sales.
Petron Corporation adopts perpetual inventory procedures. On installment sales, the
corporation charges installment accounts receivable and credits inventory gross profit
accounts.
Repossessions of merchandise have been made during 2018 due to some customer’s
failure to pay maturing installments. Analysis of these transactions were summarized as
follows:
Inventory
7,500
Unrealized gross profit, 2016
800
Unrealized gross profit, 2017
2,400
Installment Accounts Receivable- 2016
Installment Accounts Receivable- 2017
Gain on repossession
2,000
6,000
2,700
The repossessed merchandise was unsold at December 31, 2018. It was ascertained
that they were booked upon repossession at original costs. A fair valuation of these
items would be a sale price of the repossessed
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merchandise at 10,000 after incurring costs of reconditioning of P 5,000 and cost to
dispose them in the market at P 500.
A) Realized gross profit on 2018 sales was:
a. P 44,000
b. P 56,000 c. P 124,000 d. P 136,000
B) Gain/loss on repossession was:
a. P 200 loss b. P 200 gain c. P300 loss d. P300 gain
7. The PREMIER Company makes all sales installment contracts and accordingly
reports income on the installment basis. Installment contracts receivable are accounted
for by years. Defaulted contracts are recorded by debiting Loss on Repossession
account and crediting the appropriate Installment Contract Receivable account for the
unpaid balance at the time of default. All repossessions and trade-ins are recorded at
realizable values. The following data relate to the transactions during 2018 and 2019.
2018
2019
Installment sales
P 150,000
P198,500
Installment contract receivable, Dec. 31:
2018 sales
25,000
80,000
2019 sales
95,000
Purchases
100,000
New merchandise inventory, Dec. 31 at cost
26,000
120,000
10,000
Loss on repossessions
6,000
The company auditor disclosed that the inventory taken on December 31, 2019 did not
include certain merchandise receive as a trade-in on December 2, 2019 for which an
allowance was given. The realizable value of the merchandise is P 1500 which was also
the allowance on the trade-in. No entry was made to record this merchandise on the
books at the time it was received. In 2019, a 2018 contract was defaulted and the
merchandise repossessed. At the time of default, the repossessed merchandise had a
realizable value of P2,500. The repossessed merchandise was neither recorded nor
included in the physical inventory on December 31, 2019.
Required:
A.
B.
C.
D.
Determine the gross profit rate in 2019 after adjustment.
Determine the balance of Deferred Gross Profit – 2018 as December 31, 2019.
Determine the total realized gross profit to be reported in 2019.
Determine the adjusted gain (loss) on repossession.
8
8. PAL Corporation has been using the cash method to account for income since its first
year of operations in 2018. All sales are made on credit for 2018 and 2019 included the
following amounts:
2018
Revenues- collection on principal
Revenues- interest
Cost of goods purchased *
2019
P 32,000
P 50,000
3,600
5,500
45,200
52,020
* includes increase in inventory of goods on hand of P 2,000 in 2018 and P 8,000
in 2019. The balances due on the notes at the end of each year were as follows:
2018
Notes receivable – 2018
2019
P 62,000
P 36,000
Notes receivable – 2019
60,000
Unearned interest revenue -2018
7,167
5,579
Unearned interest revenue -2019
8,043
A. Under the installment method, how much is the realized gross profit in 2018?
B. Under the installment method, how much is the realized gross profit in 2019?
QUIZZER
1. Western started operations on January 1, 2016 selling home appliances and
furniture on installment basis. For 2016 and 2017, the following represented
operational details:
In Thousand Pesos
2016
1,200
720
Installment sales
Cost of installment sales
2017
1,500
1,050
Collections
2016 installment sales
630
450
2017 installment sales
900
On January 7, 2018 an installment sales account in 2016 defaulted and the
merchandise with a market value of P15,000 was repossessed. The related installment
receivable balance as of date of default and repossession was P24,000. The balance of
the unrealized gross profit as of at the end 2017:
A. P 228,000
B. P 360,000
C. p 192,000
9
D. P275,000
Items 2 to 4 are based on the following:
The following information is taken from the unadjusted trial balance as of December
31,2018 for HANDYMAN Corporation:
Cash
Accounts Receivable
Installment receivable – 2016
Installment receivable – 2017
Installment receivable – 2018
Merchandise inventory
Repossessed goods
Purchases
Operating expenses
Repossession loss
Cash sales
Charged sales
Installment sales
Other revenue
Deferred gross profit – 2016
Deferred gross profit – 2017
P 15,000
60,000
15,000
45,000
240,000
52,600
15,000
493, 000
76, 300
24, 000
P 90,000
180, 000
446, 400
8 ,840
22,200
36,360
The rates of gross profit on installment sales were: 30% in 2016 and 32% in 2017.
During 2018, the installment sales price exceeded the cash sales price by 20%. The
repossession in 2018 related to 2016 account balances of P 14,000 and 2017 account
balances of P 25,000. The inventory of new and repossessed merchandise at
December 31,2018 amounted to 77,000.
1. Total realized gross profit on installment sales in 2018 amounted to:
A. P 102,700 B. P 156,240 C. P 179,260 D. P 232, 800
3. the repossession loss was:
A. P 9,000
B. P 11,800 C. P23,200
D. P 24,000
4. The net income for 2018 was:
A. P 100,000 B. P115,000 C. P179,260 D. P 195,000
10
5. The TIGER AIR Company uses the installment method of reporting for accounting
purposes. The following data were obtained for the years 2016 to 2018.
2016
2017
Installment sales
P 600,000
P810,000
Cost of installment sales
420,000
486,000
Gross profit
P 180,000
P 324,000
Installment contracts receivable balances, December 31:
2016
P 360, 000
2018
P990,000
643,500
P 346,500
2018
2016 sales
P180,000
2017 sales
390,000
2018 sales
780,000
In 2018, one of the customers defaulted in his payment and the company repossessed
the merchandise with an estimated market value of P30,000. The sales were in 2016
and the unpaid balance on the date of repossession was P45,000. Compute for 2018(1)
the gain or (loss) on repossession; (2) total realized gross profit, and (3) the deferred
gross profit
A.
B.
C.
D.
2017
P270,000
600,000
(1) P (1,500); (2) P 189,000; (3) P451,000
(1) (1,500); (2) 189,000; (3) 465,000
(1)
750; (2) 129,000; (3) 465,000
(1)
1,500; (2)
73,500; (3) 273,000
Items 6 to 7 are based on the following:
The Abenson appliances accounts for its sales on the installment basis. As the
beginning of 2018, ledger accounts include the following balances:
Installment contracts receivable, 2016
P 30,000
Installment contracts receivable, 2017
96,000
Deferred gross profit, 2016
12,600
Deferred gross profit, 2017
36,000
At the end of 2018 account balances before adjustment for realized gross profit on
installment sales are:
Installment contracts receivable, 2016
P –0-Installment contracts receivable, 2017
24,000
Installment contracts receivable, 2018
130,000
Deferred gross profit, 2016
12,600
Deferred gross profit, 2017
34,350
Deferred gross profit, 2018
60,000
Installment sales in 2018 are made at 25% above the cost of merchandise sold. During
2018 upon default in payment by the customer, the company
11
repossessed the merchandise with an estimated market value of P 2,000. The sales
was in 2017 for 10,800 and P6,400 had been collected prior to repossession.
6. Compute the gain or (loss) on repossession assuming that:
Profit is recognized when the sale is
made
Profit is recognized in proportion to
(Point of sale)
Periodic Collection (I/Sales M)
a. P (2,400)
P (1,520)
b.
750
( 750)
c.
–0-(1,520)
d. (2,400)
( 750 )
7. the realized gross profit on December 31, 2018 is:
A. P 73,600 B. 71,950
C. 34,000
D. 70,000
Items 8 through 11 are based on the following:
The following trial balance was prepared for the DR Sales Corp. on December 31,2018.
Cash
Installment accounts receivable,2018
Installment accounts receivable,2017
Installment accounts receivable,2016
Accounts receivable
Inventory, December 31,2017
Other assets
Accounts payable
Deferred gross profit, 2017
Deferred gross profit, 2016
Capital stock
Retained earnings
Sales
Installment sales
Purchases
Repossessed merchandise
Cost of installment sales
Shipments on installment sales
Loss on repossessions
Operating expenses
12
P 25,000
80,000
20,000
5,000
40,000
30,000
52,000
75,000
96,000
22,500
100,000
44,500
192,000
500,000
455,000
10,000
310,000
310,000
13,000
300,000
1,340,000
1,340,000
The following account balances were found in the post-closing trial balance prepared at
the beginning of 2018:
Installment accounts receivable,2017
Installment accounts receivable,2016
Deferred gross profit,2017
Deferred gross profit,2016
P 240,000
50,000
96,000
22,500
The inventory of new and repossessed merchandise on December 31,2018 was
P35,000. At the end of December, before preparing the trial balance, the bookkeeper
made the following incomplete entry:
Repossessed merchandise
10,000
Loss on repossessions
13,000
Installment accounts receivable,2018
5,000
Installment accounts receivable,2017
10,000
Installment accounts receivable,2016
8,000
8. The total realized gross profit in 2018 must be:
A. P232,000
B. P 199,700
C. P 300,350
D. P258,350
9. The total deferred gross profit in 2018 must be:
A. P 50,150
B. P 40,650
C. P82,650
D. P 0
10. the correct loss on repossession must be:
A. P 13,000
B. P 0
C. P 3,500
D. P 9,500
11. The correct net income (loss) for 2018 must be:
A. P350 loss
B. P 3,150 loss
C. P45,150 loss
D. P54,650 loss
12. The correct total assets for 2018 must be:
A. P257,000
B. P 252,000
C. P211,350
D. P216,350
Items 13 through 15 are based on the following:
The following account balances appear on the books of Macy Co. as of December 31,
2018:
Cash
P 60,000
Accounts receivable
320,000
Merchandise inventory
30,000
Accounts payable
12,000
Unrealized gross profit, 2017 104,500
The accounts receivable account is a
which show the following totals:
Capital stock
P 200,000
Retained Earnings
19,500
Sales
500,000
Purchases
258,000
Expenses
170,000
controlling account for three subsidiary ledgers
2017 installment contracts
2018 installment contracts
Charge accounts (terms,30 days net)
13
P 60,000
240,000
20,000
The gross profit on installment contracts for 2017 was 55% of sales price: on installment
contracts for 2018, 50% with the gross profit on regular charge sales being somewhat
below 50%. Collections on installment contracts for 2017 total P120, 000 for the year
just closed; on installments contracts for 2018, P160,000; on charge accounts, P96,000.
The charge accounts on the books at the beginning of the year amounted to P16,000.
Repossession for the year were on installment contracts for 2017, on which the
uncollected balances at the time of repossession amounted to P 10,000. Merchandise
repossessed was charged to Purchases at the amount of the uncollected balance.
Appraisal reports show that this repossessed merchandise actually was worth P8, 000
at the time of repossession. The final inventory of merchandise valued at cost amounted
to P26, 000, including the repossessed merchandise of P 8,000.
13. The total realized gross profit before gain or loss on repossession in 2018 is:
A. P178, 000 B. P188,000 C.P 186,000 D. P 146,000
14. The total deferred gross profit as of December 31, 2018 is
A. P153, 000 B. P120, 000 C.P 157,000 D. P 158,500
15. The gain (loss) on repossession is:
A. P (3,500) B. P3, 500 C.P 2,000
D. P 2,500
Items 16 and 17 are based on the following:
Disney Corporation has been using the cash method to account for income since
its first year of operations in 2017. All sales are made on credit with notes receivable
given by the customers. The income statements for 2017 and 2018 included the
following amounts:
2017
2018
Revenues –collection on principal
P 32,000 P 50,000
Revenues – interest
3,600
5,500
Cost of goods purchased*
45,200
52,020
*Includes increase in inventory of goods on hand of P2, 000 in 2017 and P8, 000 in
2018
The balances due on the notes at the end of each year were as follows:
2017
P62, 000
Notes receivable – 2017
Notes receivable – 2018
Unearned interest revenue- 2017
Unearned interest revenue- 2018
7,176
2018
P 36,000
60,000
5,579
8,043
16. Under the installment method, how much is the realized gross profit in 2017?
A. P16, 080 B. P32, 000 C.P 17,889 D. P 14,164
17. Under the installment method, how much is the realized gross profit in 2018?
A. P12, 267 B. P11, 062 C.P 23,329 D. P 21,615
14
LONG-TERM CONSTRUCTION CONTRACTS
THE REVENUE RECOGNITION PRINCIPLE
The revenue recognition principle dictates that revenue be recognized when the
earning process is complete or virtually complete and an exchanged transaction has
taken place. Revenue is therefore typically recognized when the firm delivers goods,
performs services, or as time passes (as in the case of interest revenue or rent
revenue). There are other points in the operating cycle where revenue could be
recognized. Revenue could be recognized as production takes place, when production
is completed, or as cash is collected from the customer. The following exhibit shows
these possibilities. Although the revenue recognition principle sets the general rule,
there are circumstances where revenue is recognized prior to or after delivery. These
exceptional situations are depicted as follows:
EXHIBIT- REVENUE RRECOGNITION TIME LINE
Production
Begins
I
Production
Complete
Sale
Delivery
Full Price
Collected
PRODUCTION PERIOD
INVENTORY PERIOD
COLLECTION PERIOD
--------------------------------------------- ------------------------------------- -------------------------------------------- I
Percentage of
Completion
Method
Completed
Contract
Method
Accretion
Basis
Revenue
Recognition
Principle
(General Rule)
Installment Sales
Method and
Cost Recovery
Method
Revenue Recognition
For Special Products
With Immediate Marketability
REVENUE RECOGNITION PRIOR TO DELIVERY
Firms may justify recognizing revenue prior to delivery when the selling price of
the product has been reasonably assured, the firm has a reasonable basis for knowing
or estimating the cost of the product, and there is good reason to expect that the price
will be collected. Revenue from long-term construction products may be recognized as
production takes place (percentage of completion method) or when prion for special
production is completed (completed-contract method). Revenue is often recognized
upon completion of production for special products with immediate marketability (gold,
certain agricultural crops). Some accountants argue that revenue should be recognized
as products requiring long aging period such as wine, increase in value while in the
inventory (accretion basis).
15
Revenue earned on long-term construction projects may be recognized under the
percentage of completion or completed contract methods.
Revenue is recognized prior to delivery for many long-term construction products. A
signed contract sets the price for the product, the construction company generally has
good estimates of the cost of construction, and there should normally be reasonable
assurance that the contract price will be collected. There are two methods in use for
recognizing revenue from long-term construction contracts- the percentage of
completion method and the completed contract method. The general use is the
percentage of completion method.
1. Under the percentage of completion method, revenue is recognized as
production takes place. At the end of each accounting period, the construction
company will determine the percentage of completion of the product based upon
costs to date and estimated total costs. An estimate of final gross profit (contract
price minus estimated total construction costs) is made. Gross profit recognized
for the period is the difference between total gross profit earned to date and
gross profit already recognized in previous periods. Construction costs to date
plus the part of the total gross profit earned to date are accumulated in the
inventory account called Construction in Process/ Progress. The steps in using
the percentage of completion method are described below.
 Step one. Actual construction costs are accumulated in the inventory account,
Construction in Process/Progress.
 Step Two. Accounts receivable is debited and billings on Contracts is credited
when the firm bills the customer for progress payments. The billing account is a
contra construction in process account and is subtracted from that account when
reporting construction in process in excess of billings on the balance sheet.
 Step Three. Cash collected is credited to Accounts Receivable and debited to
cash.
 Step Four. At the end of each period the cumulative amount of gross profit
earned to date on the contract is estimated.
16
Costs incurred to date
Percentage of Completion =
Estimated Total Costs
Gross profit earned to date =
Estimated Total Costs)
Percentage
of
Completion
X
(Contract
Price-
 Step Five. Gross profit to be recognized for the accounting period equals to
gross profit earned to date minus gross profit recognized in previous periods. The
gross profit for the period is debited to Construction in Process/Progress and
credited to Contract Revenue. The balance in Construction in Process/Progress
equal to total construction costs to date plus recognized profit earned to date.
The current period construction costs are recognized as expenses. Contract
revenue equals current period construction costs plus gross profit recognized for
the period.
 Step Six. When the contract is completed and fully billed, the debit balance in
Construction in Process/Progress will be identical to the credit balance in Billings
on Contracts. The entry to close out the project debits the billings account and
credit the construction in Process/Progress account.
2. The completed contract method recognizes all revenue when construction is
completed. The completed contact method is similar to recognizing revenue at
the point of sale because when a contract exists there should be a very limited
holding period after construction is completed. Under the completed contract
method, no revenue is recognized until construction is completed. The
Construction in Progress/Progress account will contain costs to date. It will not
contain gross profit earned to date. Gross profit earned over the life of the
contract will be the same as under the percentage of completion method.
3. The percentage of completion method is the preferable method for accounting for
long term contracts. The accounting profession considers the percentage of
completion method to be preferable when reasonable cost estimates are
available. The completed contract method is used when such estimates cannot
be made. The percentage of completion method is considered at present by the
profession is GAAP.
4. Estimated losses on long-term contracts must always be recognized fully in the
accounting period when the loss estimate is made. This is true under both the
percentage of completion and completed contract methods. Any gross profit
previously recognized under the percentage of completion method must be
removed from the Construction in Process/Progress account.
17
Problem
1. SMDC Construction signed a contract to build a building over a period of 3 years
for a price of P7,000,000. Information relating to the performance of the contract
is summarized as follows:
Construction costs incurred during the year
Estimated costs to complete
Bilings during the year
Collections during the year
2017
2018
2019
P1,500,000 P2,420,000 P1,680,000
3,500,000
1,680,000
1,200,000
2,600,000
3,200,000
1,000,000
2,700,000 3,300,000
Required: Prepare the entries under the percentage of completion
2. The SUN Construction signed a contract to build a dam over a period of 3 years
for a price of P20,000,000. Information relating to the performance of the contract
is summarized as follows:
2017
2018
2019
Construction cost incurred during the year
Estimated costs to complete
Billings during the year
Collections during the year
P4,000,000 P8,000,000 P12,000,000
12,000,000 12,000,000
3,000,000
7,000,000
10,000,000
2,600,000
7,200,000
10,200,000
Required: Prepare the entries under the percentage of completion.
3. Sta. Clara Construction Company has used the cost to cost percentage of
completion method of recognizing revenue. In reviewing the records, Sta. Clara
finds the following information regarding a recently completed building project for
which to total contract was P 20,000,000.
Gross profit (loss)
P400,000
1,400,000
(200,000)
2017
2018
2019
Cost incurred
P3,600,000
?
8,200,000
Sta. Clara wants to know how effectively the company operated during the last 3
years on this project and, since the information is not complete, he asked you to
analyze the project as to the amount of revenue, costs, gross profit and percentage of
completion recognized during the 3 years.
18
Required:
1.
2.
3.
4.
5.
6.
How much is the contract revenue during 2017?
What is the percentage of completion in 2017?
How much is the cost incurred in 2018?
What is the percentage of completion in 2018?
How much is the total estimated cost to complete in 2018?
How much is the total estimated gross profit in 2018?
4. VILLAR Construction entered into a fixed price contract with CITI LIFE on July 1,
2017 to construct a medium rise condominium. At that time VILLAR estimated
that it would take between two to three years to complete the project. The total
contract price for constructing the building is P 4,500,000. VILLAR accounts this
contract under the percentage of completion method. The building was deemed
completed on December 31, 2018. Estimated percentage of completion,
accumulated contract costs incurred, estimated costs to complete the contract
and accumulated building under the contract were as follows:
Percentage of Completion
Contract costs incurred
Estimated Costs of Complete
Progress Billings
At Dec 31, 17
30%
P 1,140,000
2,660,000
1,600,000
At Dec 31, 18
60%
P2, 820,000
1,880,000
2,700,000
At Dec 31, 19
100%
P4, 800,000
0
4,500,000
The amount of gross profit to appear on the income statement for the period ended
2019 is:
A. P(330,000)
B.(441,000) C. (2,920,000)
D. (100,000)
5. Robinsons Land recognizes construction revenue and cost using the percentage
of completion method. During 2017, a single long term project begun which
continue through 2017. Information on the project follows:
Collections
Construction in progress net of billings
Contract billings
Current year gross profit
How much is the cost incurred each year?
a. 210,000; 684,000
b. 210,000; 384,000
2017
200,000
44,000
200,000
34,000
2018
600,000
(112,000)
840,000
100,000
c. 125,000; 356,000
d. 125,000; 796,000
19
6. The Marc Tower Construction Co. enters into a contract on January 1, 2018, to
construct a 20-story office building for P400, 000,000. During the construction
period, many change orders are made to the original contract. The following
schedule summarizes these changes made in 2018.
Cost incurred
2018
Basic contract
Change order #1
Change order #2
Change order #3
P80, 000,000
500,000
1,000,000
Estimated Cost
to Complete
P280, 000,000
Contract Price
P400, 000,000
500,000
1,250,000
500,000
-0-
1,000,000
still to be negotiated
at least cost
Change order #4
1,250,000
-0-
1,000,000
Compute the gross profit on construction to be recognized during the year under the
cost to cost percentage of completion method must be:
7. SM Development commenced doing business on January 1, 2018. Construction
activities for the first year of operations are shown below:
All contract costs are with different customers and any work remaining at
December 31, 2018, is expected to be completed in 2019.
Cash
Contract
Estimated
Total
Billings
collection costs incurred additional
Contract
through
through
through
costs to
Project
Price
12/31/2018 12/31/2018
12/31/2018
complete
A
P3, 000,000
P2, 000,000 P1, 800,000 P2, 480,000
P 670,000
B
3,500,000
1,130,000
1,050,000
678,000
2,712,000
C
2,800,000
2,800,000
2,550,000
1,860,000
-0D
2,000,000
350,000
1,230,000
1,230,000
870,000
E
2,400,000
2,050,000
2,000,000
1,850,000
150,000
P13,700,000
P8,300,000
P7,650,000 P8,098,000
P4,402,000
How much must be shown as current asset (cost of uncompleted contract in
excess of billings) in the balance sheet of SM Development as of December 31, 2018?
a. P0
b. P880,000
c. P 1,280,000
d. P400,000
20
8. AYALA LAND,INC. began work on a P70 million contract in 2019 to construct an
office building. During 2019, LPB uses the percentage of completion method. At
12/31/2019, the balance in certain accounts were ; construction in process, P
24.5 million; accounts receivable P 2.4 million; and billings on construction in
process, P 12 million. At 12/31/2019, the estimated future costs to complete the
project total P3.85 million.
Prepare the entry to record the income from construction recognized in year
2019.
a. Construction in Progress
P 7,350,000
Construction Costs
24,500,000
Construction revenue
P31, 850,000
b. Construction in Progress
P 7,350,000
Construction Costs
17,150,000
Construction revenue
P24, 500,000
c. Construction Costs
P24,500,000
Construction in Progress
P 7,350,000
Construction revenue
17,150,000
d. Construction Costs
P31,850,000
Construction revenue
P24, 500,000
Construction in Progress
7,350,000
9. ACE has two construction jobs, which commenced during 2018:
Project 1
Project 2
Contract Price
P21,000,000
P7,500,000
Cost incurred during 2018
6,000,000
7,000,000
Estimated costs to complete
3,000,000
1,750,000
Contract billings during 2018
6,250,000
7,250,000
Collections
6,000,000
7,000,000
Expenses
500,000
250,000
Compute the net income (loss) that ACE would report in its 2018 Statement of
Comprehensive Income.
Zero-Profit
Percentage of Completion
A. P (1,500,000)
P 7,500,000
B. P (1,500,000)
P 6,000,000
C. P (1,000,000)
P 6,750,000
D. P (2,000,000)
P 6,000,000
21
10. In 2020, MYIESHA Construction began work on a 3-year contract. The contract
price was P6,000,000. MYIESHA uses the percentage-of-completion method/
over time for financial accounting purposes. The financial statement presentation
relating to this contract at December 31, 2020 was follows:
BALANCE SHEET
Accounts receivable –construction contracts
P 129,000
Construction-in-progress
P390,000
Less: Contract billings
369,000
Cost of uncompleted contract in excess of billings
21,000
INCOME STATEMENT
Gross profit (before tax) recognized in 2020
A) How much was collected in 2020?
A. 21,000
C. 240,000
B. 129,000
D. 369,000
B) What is the percentage of completion for the year ended?
A. 6.5%
C. 28%
B. 13%
D. 100%
C) What was the initial estimated gross profit on the contract?
A. 109,200
C. 390,000
B. 280,800
D. 1,680,000
11. MINA CONSTRUCTION has used the cost-to-cost percentage of completion
method to recognize revenue. Recently, their office was struck by fire. In trying to
reconstruct all records of the company, the accountant was able to find the
following information regarding a recently completed building project for which
the total contract was P2, 000, 000.
2020
2021
2022
Goss Profit (loss) each year
80, 000
280, 000
(40, 000)
Cost incurred each year
720, 000
?
, 640, 000
MINA, the owner of the company, would like to find out the answers to the
following questions in relation to the above data:
A) How much cost was incurred in 2021?
A. 3, 680, 000
C. 2, 360, 000
B. 1, 640, 000
D. 1, 320, 000
B) What was the percentage of completion by the end of 2021?
A. 90%
C. 51%
B. 40%
D. 60%
C) What was the estimated cost to complete the project at the end of 2021?
A. 3, 400, 000
C. 2, 040, 000
B. 1, 320, 000
D. 1, 360, 000
22
QUIZZER
1. The following information pertain to the building contract of DMCI Construction
Company, wherein the fixed contract price is P80 million.
2016
2017
2018
Estimated costs
P20.1 million
P30.15 million
P16.75 million
Progress billings
10 million
25 million
45 million
Cash collection
8 million
23 million
49 million
Assume that all costs are incurred, all billings to customers are made, and all
collections from customers are received within 30 days of billing, as planned.
Under the percentage-of-completion method of revenue recognition is used, how
much is the income from construction for the year 2018?
A. P3,900,000
B. P3,250,000
C. P9,750,000
D. P5,850,000
2. Jethro Construction Company began operations in 2019. Construction activity for
the first year is shown below. All contracts are with different customers, and any
work remaining at December 31, 2019, is expected to be completed in 2018.
Cash
Contract
Estimated
Total
Billings Collections
Cost Incurred Additional
Contract
through
through
through
Costs to
Project
Price
12/31/2019 12/31/2019
12/31/2019
Complete
1
P560, 000 P360, 000 P340, 000
P450, 000
P140, 000
2
670, 000
220,000
210,000
126,000
504,000
3
500,000
500,000
440,000
330,000
-0P1,730,000 P1,080,000 P990,000
P906,000
P644,000
Determine the income from construction to be reported in the income statement
for the year 2019.
A. P90,000
B. P60,000
C. P86,000
D.P148,000
3. Philip Construction Company started a project with a contract price of P80
million. The cost incurred to date is P12 million and the estimated cost to
complete is still P48 million. Under the cost to cost basis, how much is the
income from construction?
A. P4 million
B. P8 million
C. P 20 million D. P32 million
23
4. The Stonerich Construction had two projects for which it reported the following as
of the end of 2019.
Quezon City
Mandaluyong
Contract Price
P4,800,000
P960,000
2018: Costs incurred
3,500,000
Percent completed
75%
2019: Costs incurred
1,240,000
140,000
Percent completed
100%
15%
The company used the percentage of completion method of accounting revenue.
How much is income from construction for 2019?
A. P51,000 loss
B. P40,000 loss
C. P36,000 loss
income
D.
P100,000
5. Villar’s Construction is in its fourth year of business. Villar performs long-term
construction projects and accounts for them using the percentage of completion
method. Villar built an apartment building at a price of P1,000,000. The costs and
billings for this contract for the first three years are as follows:
2017
2018
2019
Cost incurred to date
P320,000 P600,000
P790,000
Estimated costs yet to be incurred
480,000
200,000
-0Customer billings to date
150,000
410,000
1,000,000
Collections of billings to date
120,000
340,000
950,000
Determine the income from construction in 2018?
A. P150,000
B. P80,000
C. P70,000
D. P60,000
6. Jessica Construction has consistently used the percentage-of-completion
method. On January 10, 2018, Jessica began work on P3, 000,000 construction
contract. At the inception date, the estimated cost of construction was
P2,250,000. The following data relate to the progress of the contract:
Income recognized at December 31,2018
Costs incurred January 10, 2018 through Dec.31,2019
Estimated costs to complete, December 31, 2019
What percent was completed in 2019?
A. 75%
B. 40%
C. 35%
P 300,000
1,800,000
600,000
D. cannot be determined
24
7. On July 1, 2017, Mean Construction Company Inc. contracted to build an office
building for Terence Corporation for a total contract price of P19.5 million. On
July 1, Mean estimated that it would take between 2 to 3 years to complete the
building. On December 31, 2019, the building was deemed substantially
completed. Following are accumulated contract costs incurred, total estimated
costs, and accumulated billings to Terence for 2017, 2018 and 2019.
At 12/31/2017
At 12/31/2018 At 12/31/2019
Contract costs incurred to date
P1,500,000
P12,000,000
Total estimated costs
15,000,000
20,000,000
3,000,000
11,000,000
Billings to Terence
P21,000,000
-018,500,000
Using the percentage of completion method, determine the correct income (loss)
from construction to be presented in the income statement of the company for the years
2017, 2018, and 2019, respectively.
A.
B.
C.
D.
P450,000;(500,000);(P1,000,000)
P450,000;(450,000);(P1,500,000)
P450,000;(950,000);(P1,000,000)
P450,000;500,000;(P1,500,000)
8. In 2018,Carmela Construction Company was contracted to do private road
network of Courtney Corporation for P100 million. The project was estimated to
be complete in two years.
The construction contract provided among other things the following:
a. 5% mobilization fee (to be deducted from the last billing) payable within 15
days after the signing of the contract;
b. Retention provision of 10% on all billings;
c. Progress billings on construction are payable within seven days from date of
acceptance.
Carmela estimated its gross margin on the project at 25% and used the
percentage of completion method of accounting. By the end year, Carmela presented
progress billings corresponding to 50% completion. Courtney Corp. accepted all the bills
presented except the last one for 10% which was accepted on 10 January. With the
exception of the last billing of 8% accepted in 2018, which was due on 3 January 2018
all accepted billings were settled in 2018.
The gross profit recognized by Carmela Construction Company for 2018 is:
a. P50 million
b. P25 million
c. P12.5 million
d. not determinable
25
9. Cameron Company entered into a contract to build a small bridge for Agdao. The
contract price for the bridge was P7,500,000 and Cameron estimated a total
costs of P6,900,000 in 2018. The company incurred P2,300,000 of costs during
2018. By the end of 2019 it was apparent that Cameron had underestimated the
real costs. The estimated total cost of project skyrocketed to P7,800,000. No
progress billings were made under the contract and no cash was collected by the
end of 2019.
The amount of gross profit (loss) that must be recognized in 2019 must be:
a. P300,000 loss b. P200,000 profit c. P500,000 loss
d. P100,000 loss
10. Clarence Construction has consistently used the percentage-of-completion
method. On January 10, 2018, Clarence began work on P3,000,000 construction
contract. At the inception date, the estimated cost of construction was
P2,250,000. The following data relate to the progress of contract:
Income recognized at December 31, 2018
P300,000
Costs incurred January 10, 2018 through Dec.31,2019
1,800,000
Estimated cost to complete, December 31,2019
600,000
In its income statement for the year ended Dec. 31,2019, what amount of gross
profit should Clarence report?
a. P450,000
b. P300,000
c. P252,500
d. P 150,000
11. Jason Construction, Inc. has consistently used the percentage-of-completion
method of recognizing income. During 2019 Jason started work on a P3,000,000
fixed-price construction contract. The accounting records disclosed the following
data for the year ended December 31,2019:
Cost incurred
P930,000
Estimated cost to complete
2,170,000
Progress billings
1,100,000
Collections
700,000
How much loss should Jason have recognized in 2019?
a. P230,000
b. P100,000
c.P30,000
d. P0
26
FRANCHISE ACCOUNTING
FRANCHISING: ACCOUNTING BY FRANCHISOR
Franchise companies derive their revenue from one or both of two sources:
1. From sale of initial franchises and related assets or services, and
2. From continuing fees based on the operations of franchises.
Franchisor – the party who grants business rights under the franchise.
Franchisee – the party who operates the franchised business.
Normal services performed by franchisor:
1. Assistance in site selection.
a. Analyzing location
b. Negotiating lease
2. Evaluating potential income.
3. Supervision of construction activity.
a. Obtaining financing.
b. Designing building.
c. Supervising contractor while building.
4. Assistance in the acquisition of signs, fixtures, and equipment.
5. Bookkeeping and advisory services.
a. Setting up franchisee’s records.
b. Advising on income, real estate, and other taxes.
c. Advising on local regulations of the franchisee’s business.
6. Employee and management training.
7. Quality control.
8. Advertising and promotion.
INITIAL FRANCHISE FEES
The initial franchise fee is consideration for establishing the franchise relationship
and providing some initial services. Initial franchise fees are to be recorded as revenue
only when and as the franchisor makes “substantial performance” of the services it is
obligated to perform and collection of the fee is reasonably assured.
SUBSTANTIAL PERFORMANCE
Substantial performance occurs when the franchisor has no remaining obligation
to refund any cash received or excuse any nonpayment of a note and has performed all
the initial services required under the contract. Commencement of operations by the
franchisee shall be presumed to be the earliest point at which substantial performance
has occurred, unless it can be demonstrated that
27
Substantial performance of all obligations, including services rendered voluntarily, has
occurred before that time.
CONTINUING FRANCHISE FEES
Continuing franchise fees are received in return for the continuing rights granted
by the franchise agreement and for providing such services as management training,
advertising and promotion, legal assistance, and other support. Continuing fees should
be reported as revenue when they are earned and receivable from the franchisee,
unless a portion of them has been designated for a particular purpose, such as
providing a specified amount for building maintenance or local advertising. In that case,
the portion deferred shall be an amount sufficient to cover the estimated cost in excess
of continuing franchise fees and provide a reasonable profit on the continuing services.
BARGAIN PURCHASES
In addition to paying continuing franchise fees, franchisees frequently purchase
some or all of their equipment and supplies from the franchisor. The franchisor would
account for these sales as it would for any other product sales. Sometimes, however,
the franchise agreements, grants the franchisee the right to make bargain purchases of
equipment or supplies after the initial franchise fee is paid. If the bargain price is lower
than the normal selling price of the same product, or if it does not provide the franchisor
a reasonable profit, then a portion of the initial franchise fee should be deferred. The
deferred portion would be accounted for as an adjustment of the selling price when the
franchisee subsequently purchases the equipment or supplies.
OPTIONS TO PURCHASE
A franchise agreement may give the franchisor an option to purchase the
franchisee’s business. As a matter of management policy, the franchisor may reserve
the right to purchase a profitable franchised outlet, or to purchase one that is in financial
difficulty. If it is probable at the time the option is given that the franchisor will ultimately
purchase the outlet, then the initial franchise fee should not be recognized as revenue
but should be recorded as a liability. When the option is exercised, the liability would
reduce the franchisor’s investment in the outlet.
FRANCHISOR’S COSTS
Franchise accounting also involved proper accounting for the franchisor’s costs.
The objective is to match related costs and revenues by reporting them as components
of income in the same accounting period. Franchisors should ordinarily
28
Defer direct costs (usually incremental costs) relating to specific franchise sales for
which revenue has not yet been recognized. Costs should not be deferred, however,
without reference to anticipated revenue and its realizability. Indirect costs of a regular
and recurring nature such as selling and administrative expenses that are incurred
irrespective of the level of franchise sales should be expensed as incurred.
DISCLOSURES OF FRANCHISORS
Disclosure of all significant commitments and obligations resulting from franchise
agreements, including a description of services that have not yet been substantially
performed, is required. Any resolution of uncertainties regarding the collectability of
franchise fees should be disclosed. Initial franchise fees should be segregated from
other franchise fee revenue if they are significant. Where possible, revenues and costs
related to franchisor-owned outlets should be distinguished from those related to
franchised outlets.
ILLUSTRATION OF ENTRIES FOR INITIAL FRANCHISE FEE
Assume that Jollibee Inc. charges an initial franchise fee of P5,000,000 for the
right to operate a franchise of Jollibee. Of this amount, P1,000,000 is payable when the
agreement is signed and the balance is payable in five annual payments of P800,000
each. In return for the initial franchise fee, the franchisor will help locate the site,
negotiate the leases o purchase of the site supervise the construction activity, and
provide the bookkeeping services. The credit rating of the franchisee indicates that
money can be borrowed at 24%.
1. If there is reasonable expectation that the down payment may ne refunded and if
substantial future services remain to be performed by Jollibee Inc., the entry
should be:
Cash
1,000,000
Notes Receivable
4,000,000
Discount on Notes Receivable
1,803,680
Unearned Franchise Fee
3,196,320
2. If the probability of refunding the initial franchise fee is extremely low, the amount
of future services to be provided to the franchisee is minimal, collectability of the
note is reasonably assured, and substantial performance has occurred, the entry
should be:
Cash
1,000,000
Notes Receivable
5,000,000
Discount on Notes Receivable
Revenue Franchise Fee
1,803,680
3,196,320
29
3. If the initial down payment is not refundable, represents a fair measure of the
services already provided, with a significant amount of services still to be
performed by the franchisor in the future periods, and collectability of the note is
reasonably assured, the entry should be:
Cash
1,000,000
Notes Receivable
5,000,000
Discount on Notes Receivable
1,803,680
Revenue from Franchise Fee
1,000,000
Unearned Franchise Fee
2,196,320
4. If the initial down payment is not refundable and no future services are required by
the franchisor, but collection of the note is so uncertain that recognition of the note
as an asset is unwanted, the entry should be:
Cash
1,000,000
Revenue from Franchise Fee
1,000,000
5. Under the same conditions as those listed under 4 except that the down payment
is refundable or substantial services are yet to be performed , the entry should be:
Cash
1,000,000
Unearned Franchise Fee
1,000,000
In cases 4 and 5, where collection of the note is extremely uncertain, cash
collections may be recognized using the installment method or the cost recovery
method.
ILLUSTRATIVE PROBLEMS
1. VIKINGS’s Inc. franchises its name to different enterprise throughout the country.
The franchise agreement requires the franchisee to make an initial payment of
P80,000 on the agreement date and the balance, covered by a P160,000
noninteresting – bearing note, in four equal annual payments beginning one year
from the agreement date. The franchisor agrees to make market studies, find a
location, train the employees and perform a few other minor related services. The
initial payment is refundable until the date of opening. The following describe the
relationship with a newly appointed franchisee: (assume an interest rate of 10%).
July 01, 2018: Entered into franchise agreement.
Aug.15, 2018: Completed market study at cost of P25,000.
Nov.10, 2018: Found suitable location; service cost, P10,000.
Jan.10, 2018: Completed training of employees;cost, P35,000
Jan.15, 2019: Franchise outlet is opened.
30
Required:
Give the journal entries in 2018 and 2019 record the above transactions,
including any adjusting entry/entries at the 2018 year end.
July 01, 2018: Cash
80,000
Notes Receivable
160,000
Discount on Notes Receivable
33,200
Deposit on franchise or Unearned Franchise Fees
206,800
P80,000+(40,000x 3.17)
Aug.15, 2018 : Deferred franchise costs
25,000
Cash
25,000
Nov.10, 2018: Deferred franchise costs
10,000
Cash
Dec.31, 2018: Discount on notes receivable
10,000
6,340
Interest revenue
Jan. 10, 2019: Deferred franchise costs
6,340
35,000
Cash
Jan. 15, 2019: Deposit on franchise
35,000
206,800
Franchise revenue
Franchise costs
206,800
70,000
Deferred franchise costs
July 1, 2019:
Cash
70,000
40,000
Notes receivable
Dec.31, 2019: Discount on notes receivable
40,000
14,314
Interest income
14,314
2. Triple V Enterprises, a franchisor, charges new franchisees a “franchise fee” of
P500,000. Of this amount, P200,000 is payable at the time the agreement is
signed and the balance in P100,000 non-interest bearing notes due every year
thereafter. Triple V agrees to assists in locating a suitable business site, conduct
a market study, supervise construction of facilities, and provide initial training for
employees.
31
Required:
Assuming an implicit interest rate of 12%, prepare first year entries relating to each of
the following assumptions:
1. Down payment is refundable, but no services have been rendered so far;
collection of notes is reasonable assured.
2. Down payment is nonrefundable, and substantial services, costing P250,00,
have been performed; collections of notes is certain.
3. down payment is nonrefundable, and substantial services, costing P300,000
have been performed; collection of notes is doubtful.
4. Same as #3, except cost recovery method will be used.
Case 1: Deposit Method
Cash
200,000
Notes receivable
300,000
Discount on notes receivable
Deposit on franchise
Case 2: Full Accrual Method
Cash
200,000
Notes receivable
300,000
Discount on notes receivable
Deposit on franchise
Deferred franchise costs
250,000
Cash
Cost of franchise fee revenue
250,000
Deposit on franchise
440,200
Deferred franchise costs
Franchise fee revenue
Case 3: Installment Method
Cash
Notes receivable
200,000
300,000
59,800
440,200
59,800
440,200
250,000
250,000
440,200
Discount on notes receivable
Deposit on franchise
Deferred on franchise
300,000
Cash
59,800
440,200
300,000
32
Deposit on franchise
440,000
Deferred franchise costs
300,000
Deferred gross profit on franchise
140,000
Deferred gross profit on franchise
63,700
Realized gross profit on franchise
63,700
Case 4: Cost Recovery Method
First 3 entries in case 3 are also the entries in this method. However, since
cash received (P200,000) is less than the costs incurred (P300,000), no profit will be
realized in this period.
PROBLEMS
1. On January 1, 2018, Starbucks Company signed an agreement to operate as a
franchisee of Perfect Pizza, Inc. for an initial franchise fee of P1,600,000 for a period
of ten (10) years. Of this amount P600,000 was paid when the agreement was
signed and the balance payable in five annual payments of P200,000 beginning
December 31,2018. Starbucks signed a non-interest bearing note for the balance.
Starbucks’s rating indicates that it can borrow money at 20% for a loan at this type.
In return for the initial fee, the franchisor agrees to make market studies, find a
location, train the employees, and perform other related services. The following
transactions describe the relationship with Perfect Pizza, a franchisee:
2018 Jan. 1:
Entered into a franchise agreement.
April 1:
Completed a market study at cost of P54, 436.
Indirect cost of services (general expenses), P5, 000.
May 15: Found suitable location. Service cost of P280,000.
Nov. 15: Completed training program for employees, cost P20,000.
Dec. 20: Franchise outlet opened and business operations started.
Dec. 31:
Required:
received the first annual payment.
Prepare all entries on the books of the franchisor for 2018, assuming the
collection of the note is reasonably assured.
33
2. On September 1, 2018, Tim Hortons Company entered into franchise
agreements with three franchisees. The agreement required an initial fee
payment of P70,000 plus four (4) P30,000 payments due every 4 months, the
first payment due December 31, 2018. The interest rate is 12%. The initial
deposit is refundable until substantial performance has been completed. The
following table describes each agreement.
Services performed
Total cost
by Franchiser at
Incurred to
Full Collection
December 31, 2018
December 31, 2018
A
Likely
Substantially
B
Doubtful
C
Doubtful
Probability
Franchisee
25%
Substantially
P70,000
20, 000
100,000
For each franchisee, identify the revenue recognition method that you would
recommend considering the circumstances. Prepare the journal entries on the books of
Tim Hortons Company to account the franchise. Assume P100,000 was received form
each franchisee during the year.
3. On January 1, 2017, Phil. Foods signed an agreement to operate as a franchisee
of Snack International for an initial franchise fee of P50,000. The amount of
P20,000 when the agreement was signed, and the balance is payable in five
annual payments of P6,000 each beginning January 1, 2018. The agreement
provides that the down payment is not refundable and that no future services are
required of the franchiser. Phil. Foods’ credit rating indicates that the company
can borrow money at 11% for a loan of this type.
Instructions:
a. How much should Snack International record as revenue from franchise fees on
Jan. 1,2017? At what amount should Phil. Foods record the acquisition cost of
the franchise on Jan. 1,2017?
b. What entry should be made by Snack International on January 1, 2017, if the
down payment is refundable and substantial future services remain to be
performed by Snack International?
c. How much revenue from franchise fees would be recorded by Snack on January
1, 2017, if:
34
1. The initial down payment is not refundable, it represents a fair measure of the
services already provided, a significant amount of services is still to be performed
by Snack International in future periods, and collectability of the note is
reasonable assured?
2. The initial down payment is not refundable and no future services are required by
the franchiser, but collection of the note is so uncertain that recognition of the
note as an asset is unwanted?
3. The initial down has not been earned and collection of the note is so uncertain
that recognition of the as an asset is unwanted?
4. On January 2,2018, REH signed an agreement to operate as a franchisee to
SAMGYUPSALAMAT Corp. for an initial franchise fee of P937,500 for 10 years.
Of this amount P187,500 was paid when the agreement was signed and the
balance was payable in three annual payments beginning on December 31,2018.
REH signed a non interest bearing for the balance. REH’s rating indicates that he
can borrow money at 18% for a loan of this type. Assume that substantial
services amounting to P292,000 had already been rendered by
SAMGYUPSALAMAT and that indirect franchise cost of P25,500 was also
incurred PV is 2.17.
If the collection of the note is not reasonably assured, the net income for the year
ended December 31, 2018 is
a. 334,650
b. 276,060
c. 178,410
d. 237,000
5. Max Company sells a franchise with initial franchise fee P70,000. A down
payment of P20,000 cash is required, with the balance covered by issuance of a
P50,000, 10% note payable in five equal annual installments. If all material
services have been substantially performed, collectibility of the note reasonably
assured, but the refund period has not expired what is the journal entry to record
the transaction.
a. Cash
P 20,000
Notes Receivable 50,000
Franchise Fees
P70,000
b. Cash
P 20,000
Notes Receivable 50,000
Unearned Franchise Fees P70,000
c. Cash
P 20,000
Notes Receivable 50,000
Franchise Fees
P50,000
Unearned Franchise Fees
20,000
d. Cash
P 20,000
Notes Receivable 50,000
Franchise Fees
P50,000
Unearned Franchise Fees
20,000
35
6. On January 2,2017, Penang’s Inc. signed an agreement to operate as franchisee
of JFC Hauz for an initial franchise fee of P2,343,750 for 10 years. Of this
amount, P468,750 was paid when the agreement was signed and the balance
payable in three annual payments beginning on December 31, 2017. Penang’s
signed a non-interest bearing note for the balance. The implicit interest is 18%.
Assume that substantial services amounting to P730,000 had already been
rendered by the franchisor and indirect costs of P53,750 have also been
incurred.
If collection of the note is not reasonably assured, calculate the net income. For
the year ended December 31,2017. Use PV factor 2.17.
A. P753,900
B. P509,776
C. P700,150
D. P456,026
QUIZZER
1. On December 31,2018, Cabalen,Inc. authorized Mr. Chun to operate as a franchisee
for an initial franchise fee of P150,000. Of this amount, P60,000 was received upon
signing the agreement and the balance represented by a note due in three annual
payments of P30,000 each beginning December 31,2016. The present value on
December 31,2018, for three annual payment appropriately discounted is P72,000.
According to the agreement, the non-refundable down payment represents a fair
measure of the services already performed by Cabalen and substantial future
services are still to be rendered. However, the collectibility of the note is not
reasonably assured. Cabalen’s December 31,2018, balance sheet unearned
franchise fee from Mr. Chun’s franchise should report as:
A. P132,000
B. P100,000
C. P -0-
D. P72,000
2. On December 31,2018, Yoshinoya Inc. signed an agreement authorizing CDE
Company to operate as a franchise for an initial franchise fee of P50,000. Of this is
due in three annual payment of P10,000 each, beginning December 31,2011. No
future services are required to be performed. CDE Company’s credit rating is such
that collection of the note is reasonably assured. The present value at December 31,
8 of the three annual payments discounted at 14% (the implicit rate for a loan of this
type) is P23,220.
On December 31,2018, Yoshinoya should record earned franchise fees of:
A. P23,220
B. P43,220
C. P30,000
D. P0
36
3. On December 31,2018, Turks Company signed an agreement to operate as
franchisee of Wendy’s for a franchise fee of P80,000. Of this amount, P30,000 was
paid upon signing of the agreement and the balance is payable in five annual
payments of P10,000 each beginning December 31, 2019. The present value of the
five payment, at an appropriate rate of interest, is P56,000 at December 31,2018.
The agreement provides that the down payment is not refundable and no future
services are required of the franchisor. The collection of note receivable is
reasonably certain. Wendy’s Company should report unearned revenue from
franchise fee in its December 31, 2019 balance sheet at:
A. P80,000
B. P30,000
C. P66,000
D. P 0
4. Each of the Shakeys Pizza Company’s 21 new franchisees contracted to pay an
initial franchise fee of P30,000. By December 31,2018, each franchise had paid a
nonrefundable P10,000 fee and signed a note to pay P10,000 principal plus the
market rate of interest on December 31, 2018, and December 31, 2019. Experience
indicates that five franchisees will default on the additional payments.
What amount of earned franchise fees would Shakeys Pizza Company report at
December 31, 2018:
A. P400,000
B. P610,000
C. P600,000
D. P530,000
5. Mel’s Pizza Hot Inc. grants a franchise to Mr. AA for an initial franchise fee of
P1,000,000. The agreement provides that Mel’s Pizza Hot Inc. has the option within
the one year to acquire franchisee’s business and it seems certain that Pizza Hot,
Inc. will exercise the option. On Pizza Hot, Inc. books, how should the initial
franchise fee be recognized?
a. Deferred revenue and to be recognized
b. Realize revenue
c. Extraordinary revenue
d. Deferred revenue and treated as a reduction from Pizza’s investment when
the option is exercise.
6. On Dec. 29,2018, ELIMINA FISHING VILLAGE signed a franchising agreement for
the operation of an outlet in Dagupan City by CSI Company. The franchising
agreement required the franchisee, CSI Co., to make an initial payment of P200,000
upon signing of the contract and three payments each of P100,000
37
Beginning one year from the agreement date and yearly thereafter. The
franchisor agrees to prepare market studies, find a suitable location, train
employees, and perform some other related services. The location, train
employees, and perform some other related services.
The initial payment is refundable until substantial performance is affected. In
2018, ELIMINA FISHING VILLAGE should report franchise fee revenue of:
A. P-0B. P200,000
C. P125,000
D. P500,000
7. Jollibee, franchisor, entered into a franchising agreement with Jo Levy, franchisee,
on October 31,2018. The total franchise fee is P500,000, of which P100,000 is
payable upon signing of the agreement with the balance payable in four equal
annual installments. The down payment is refundable in the event the franchisor
fails to render stipulated services and, thus far, none has been performed.
When Jollibee prepares it October 31,2018 financial statements, the franchise
fee revenue to be reported is:
A. -0B. P400,000
C. P100,000
D. P500,000
8. The franchise agreement between Jolly-R and Mr. Chris which was signed at the
beginning of the year required a P500,000 franchise fee payable P100,000 upon
signing of the current year. At the time of the granting of the franchise, the present
value using 12% as discount rate of the four installments would approximate
P199,650. The fees once paid are not refundable. The franchise may be cancelled
subject to the provisions of the agreement. Should there be unpaid franchise fee
attributed to the balance of main fee (P500,000), same would become due and
demandable upon cancellation. Further, the franchisor is entitled to a 5% fee on
gross sale payable monthly within the first ten days of the following month. The
Credit Investigation Bureau rated Mr. Chris as AAA credit rating. Further the balance
of the franchise fee was guaranteed by a commercial bank. The first year of
operations yielded gross sales of P9 million. As of the signing of the franchise
agreement, Jolly-R’s unearned franchise fee amounted to
A. P649,650
B. P400,000
C. zero
D. P199,650
38
9. Croley Snack granted a franchise to Eat N Eat for the Ortigas area. Eat N Eat was to
pay franchise fee of P100,000 payable in five equal annual installments starting with
the payment upon signing of the agreement. The franchise was to pay monthly 1%
of gross sales of the preceding month. Should the operations of the outlet prove to
be unprofitable, the franchise may be cancelled with whatever obligations owing
Croley Snack in connection with the P100,000 franchise fee waived. The first year
generated a gross sale of P500,000. Croley Snack earned franchise fee for the first
year amounted to
A. P5,000
B. P25,000
C. P105,000
D. P20,000
10. Kitchenics Inc. awarded its franchise to Wings Co. in Cebu for a total fee of
P100,000. Of said amount, P50,000 was payable upon the signing of the franchise
agreement and the balance, payable in two annual payments of P25,000 each.
Kitchenics had been very successful in Metro Manila with 100 franchisees but Cebu
was the first outside Metro Manila. Kitchenic’s agreement with Wings provided that
in the event the first year of operation would result to an operating loss, the
franchising agreement may be cancelled without need of returning any portion of
paid franchise fee and there would be no need to pay any balance of the unpaid
franchise fee. The entry to record the granting of the franchise to Wings was.
A. Cash
P50,000
Notes receivable
50,000
Unearned franchise fee
P100,000
B. Cash
Notes receivable
Revenue from franchise fee
Unearned franchise fee
C. No entry
D. Cash
Notes receivable
Revenue from franchise fee
50,000
50,000
50,000
50,000
50,000
50,000
100,000
39
11. On December 31, 2019, Mc Dowell Inc. signed an agreement authorizing MN Co. to
operate as a franchise for an initial franchise fee of P50,000. Of this amount P20,000
was received upon signing of the agreement and the balance is due in 3 equals
annual payments beginning December 31, 2018. The agreement provides that the
down payment (representing a fair measure of services already performed by Mc
Dowell) is not refundable and no substantial future services are required to be
performed. MN Co.’s credit rating is such that collection of the note is reasonably
assured. The implicit interest rate on this type of loan is 14%. On December 31,
2019, Mc Dowell should record unearned franchise fee of
A. P23,220
B. P42,220
C. P30,000
D. - - 0 - 12. Coney Island Inc. sells franchises for ice cream outlets in Metro Manila. One
contract has been signed on January 15, 2018. The agreement calls for an initial
franchise fee of P6,000,000 to be paid by the franchise upon signing of the contract.
The franchisor initial cost of services is P2,250,000 to be incurred uniformly over the
6 month period / prior to the scheduled opening date of July 15, 2019. No return
payments are to be made by the franchisor, although there will be continuing costs
of P180,000 per year for services rendered during the 10 year term of contract. The
normal return for the franchisor on continuing operation involving franchise outlets is
10%. How much net income would be recognized by the franchisor on July 15,
2019?
A. P3,750,000
B. P6,000,000
C. P5,750,000
D. P1,750,000
13. On January 1, 2019 Dokito Inc. authorized Mr. T to operate as franchise for an initial
franchise fee of P150,000. Of this amount, P60,000 was received upon signing the
agreement and the balance, represented by a note, is due in a 3 annual payments of
P30,000 each beginning December 31, 2019. The present value on value on
January 1, 2019, for three annual payments appropriately discounted is P72,000.
According to the agreement, the non-refundable down payment represents a fair
measure services already performed by Dokito and substantial future services are
still to be rendered. However, collectibility of the note is reasonably certain. Dokito’s
December 31, 2019 balance sheet, unearned franchise fees from Mr. X franchise
should be reported as
A. P132,000
B. - - 0 - C. P100,000
D. P72,000
14. Each of Potter Pie Co’s. 21 new franchisees contracted to pay an initial franchise fee
of P30,000. By December 31, 2017, each franchise had paid a non-refundable
P10,000 fee and signed a note to pay P10,000 principal plus the market rate of
interest on December 31, 2018 and 2019. Experience indicates
40
that one franchise will default on the additional payments. Services for the initial
fee will be performed in 2017. What amount of net earned franchise fees would
Potter report at Dec. 31, 2016?
A. P400,000
B. P600,000
C. P610,000
D. P630,000
15. PIZZA HOT, franchisor, entered into a franchising agreement with Jo Levy,
franchisee, on October 31, 2019. The total franchise fee is P500,000, of which
P100,000 is payable upon signing of the agreement with the balance payable in four
equal annual installments. The down payment is refundable in the vent the
franchisor fails to render stipulated services and, thus far, none has been performed.
When PIZZA HOT prepares its Oct. 31, 2018 financial statements, the franchise fee
revenue to reported is:
A. - - 0 - B. P400,000
C. P100,000
D. P500,000
16. At the beginning of the year, Zita Eat Haus got the franchise of Max, a known steak
house of upscale patronage. The franchise agreement required a P500,000
franchise fee payable P100,000 upon signing of the franchise and the present value
using 12% as discount rate, the four installments would approximate P303,735. The
fees once paid are not refundable. The franchise may be canceled subject to the
provisions of the agreement. Should there be unpaid franchise fee attributed to the
balance of main fee (P500,000), the same would become due and demandable
upon cancellation. Further, the franchiser is entitled to a 5% fee on gross sales
payable monthly within the first ten days of following month. The Credit Investigation
Bureau rated Zita as AAA credit rating. The balance of the franchise fee was
guaranteed by a commercial bank. The first year of operations yielded gross sales of
P9 million. Max’s earned franchise fees from Zita for the first year of operation,
amounted:
A. P950,000
B. P853,735
C. P500,000
D. P403,735
17. Domino Pizza grants a franchise to KM for an initial fee of P1,000,000. The
agreement provides that Domino has the option within one year to acquire
franchisee business, and it seems certain that Domino will exercise this option. On
Domino’s book, how should the initial fee be recorded?
A. Realized revenue
B. Deferred revenue to be amortized.
C. Extraordinary revenue
D. Deferred and treated as reduction in Domino’s investment.
41
18. Year-Round Golf sells franchises for indoor golf driving ranges and putting greens.
For each franchise, the company charges a non-refundable initial franchise fee of
P400,000. The franchise agreement requires a down payment of P100,000, with
balance covered by the issuance of a P300,000, 10% note, payable by the
franchisee at the end of 5 years. Interest does not begin to accrue until the franchise
open. The company only sells to qualified buyers so the collectibility of the note is
always reasonably assured. The services required for the initial franchise fee are
completed 6 months after the agreement is signed. How much franchise revenue
earned must be recognized upon signing of the agreement by Year-Round?
A. P400,000
B. P100,000
C. P286,276
D. P0
42
HOME & BRANCH ACCOUNTING
1. Accounting for branches
Branches are identifiable locations within a business entity for which
separate accounting records are maintained. Branches are extensions of
home office. Branches are separate accounting entities, but they are not
separate legal entities, and their financial statement are used only for
internal reporting purposes. Financial Statements for the business entity
are prepared by combining the financial statements of the branches with
those of the central reporting unit of the business Branch operations stocks
merchandise, makes sales to customers, passes on customer credit, collects
receivables, incurs expenses, and performs other functions normally
associated with the operations of a separate business enterprise. Such
activities are accounted for through separate branch accounting systems that
parallel the systems of independent businesses expect in the manner of
accounting for ownership equities and in recording transactions
between branches and the main office of the enterprise.
2. Home and branch transactions
Transactions of the home office with external entities are recorded in the
home office accounting records in the usual manner. Similarly, transactions
between a branch and unrelated entities are recorded on the branch books in
accordance with established accounting procedures. Thus, the unique
feature of home office and branch accounting lies in the manner of
recording transactions between the home office and its branches.
Therefore, home and branch accounting is basically accounting inter-office
transactions.
3. Reciprocal branch and home office account
The branch account on the home office books is an asset account
representing the investment of the home office in branch net assets. The
home office account in the branch books is an equity account that
represents the equity of the home office in branch net assets. Thus, the
branch and home office accounts are reciprocal, each representing the
net assets of the branch. The reciprocal relationship between home office and
branch accounts is a continuous relationship. Whenever the home office
increases (debits) its branch account, the branch should increase (credit) its
home office account. Similarly, any decrease (debit) in the home office
account on the branch book should be accompanied by a decrease (credit) in
the branch
43
account on the home office books. The only reasons that differences between home
office and branch accounts occur are time lags (timing difference) in recording
information on the two sets of books and home office or branch errors.
4. Merchandise shipment in excess of cost
Home office transfers prices in excess of cost for internal shipments to their
branches. Sometimes home office set transfer prices at sales prices, or set standard
mark-ups. Reasons commonly cited for internal transfer of merchandise above costs
include equitable allocation of income between the various units of the enterprise,
efficiency in pricing inventories and concealment of the true profit margins from branch
personnel.
When the home office ships merchandise to its branches at transfer prices in
excess of cost, the accounting records of the home office are adjusted to permit
measurement of actual cost of merchandise transferred. This is usually done through an
inventory “loading” or unrealized profit account, which is normally recorded at the
end of the accounting period. The adjustment is made to reflect the correct net income
of the branch on the home office books. The other term used to describe the loading or
unrealized account is “allowance for evaluation in branch inventory” account.
Entries to record transfer of merchandise at prices in excess of cost do not
change the reciprocal relationship between the home office and branch accounts, but
they do affect the relationship between home office and branch shipment accounts,
because the “shipments to branch” account is credited at cost at the “shipments from
home office” account is debited at the transfer price. The difference between the
shipments account lies in mark-up that is reflected in the loading in branch inventories
account. This loading is frequently designated “unrealised profit in branch inventories.”
When a branch receives merchandise at transfer prices that include a loading
factor and sells that merchandise, its cost of goods sold is overstated and its income is
understated. The home office increases it branch account and records branch profit or
loss on the basis of income reported by branch, so any branch profit recorded by the
home office is similarly understated. As mentioned above, this understatement of
branch profit on home office books is corrected by a year-end adjusting entry that
reduces the loading account to reflects amount realized during the period through
branch sales to outside entities.
44
This method is illustrated below in no.10.
5. Shipments to Branch Recorded at Billing Prices
Sometimes home office ships to their branches at billing prices and adjust
the loading account at the end of the accounting period. When this approach is
used, the balance of the loading account during an accounting period will reflect
unrealised profit in branch beginning inventories, and the shipments to branch
account will include the loading factor on shipments for the current period. The
shipments to branch account (home office books) and the shipments from home
office account (branch books) are reciprocal under this method. Under this
method, adjustment to shipments to branch account is made at the end of the
accounting period to reflect the branch loading on the inventories and the loading
account will be adjusted to record the realized profit on shipments sold.
To further explain the above discussion, we will use the information given
in no.10 below.
Home Office Books
a) Entry to record the shipments during the year.
Cebu Branch Books
Cebu Branch
50,000
Shipments from home office 50,000
Shipments to Cebu Branch 50,000
Home Office
50,000
The above shipments account on home office and branch books are recorded
both at billed prices.
b) Entry to adjust the loading – branch inventory account and the Cebu branch
profit.
Shipments to Cebu Branch
10,000
Loading – branch inventory
600
Cebu branch profit
10,600
The shipments to Cebu branch account decreased by P10,000 to adjust amount
of shipments to its correct cost of P40,000. The loading – branch inventory
account decreased by P600, because the beginning balance on the home books
shows P1,600 but the correct ending balance per branch ending inventory from
home office should only be P1,000 (P10,000 x ½ x 25%/ 12%).
45
6. Freight costs on shipments
Freight costs on merchandise shipped between home office and branch
location should be in branch inventory and cost goods sold
measurements.
Merchandise cost should not include excessive freight charges from
the transfer of merchandise between a home office and its branches or
between branch locations. If the branch returns half the merchandise received
from the home office because it is defective, or because of a shortage of
inventory at the home office location, the home office cost of the merchandise
should not include the freight charges to or from the branch. Total
unnecessary freight charges on the merchandise are charged to a home
office “loss on excessive freight charges” account because the freight
charges represent management mistakes or inefficiencies. Therefore, they
are not considered normal operating or freight expenses.
The same is true for errors committed by the home office in transferring
merchandise to branches. The difference between the correct fright directly
from the home office to the branch and the actual freight incurred from the
home office to the branch must be chargeable to the home office and
considered by the home office as loss on excessive freight charges.
7. Home office- Branch expenses allocation
The allocation of expenses among home office and branch operations is
frequently necessary to provide an accurate measurement of income for the
separate units of the enterprise. Advertising expense, for example, may relate
to sales efforts of the home office and one or more branches. If such
advertising is paid by the home office, that part related to branch sales should
be allocated to the branches. Pension costs paid by the home office and
home office general and administrative expenses may also be allocated to
branch operations in order to provide complete profit information for each
business unit. Another situation that requires expense allocation of complete
profit information arises when the plant asset records are centralized in the
home office accounting system. The home office normally will record the
entire depreciation for all plant assets and just allocate the depreciation to
branches for those that pertain to branch plant assets.
8. Reconciliation of home office and branch accounts
Reciprocity between home office and branch accounts will not exist at
year-end if errors have been made in recording reciprocal transactions either
on the home office or the branch books, or if transactions have been recorded
on one
46
set of books but not on the other. The approach for reconciling home office and
branch account at year-end is similar to the approach used for bank
reconciliations. Only, the most commonly used method is the approach of
bringing the two reciprocal accounts to their adjusted balances.
Errors committed by the home office or branch office require adjusting entry(s) on
their corresponding books, whereas timing differences does not require
adjustments.
9. Sales agencies
Sales agencies are established to display merchandise and to take
customer’s orders, but they do not stock merchandise to fill customer’s orders
or pass on customer credit. The sales agency is not a separate accounting
or business entity. Ordinarily, the only account records required for sales
agencies are for cash receipts and disbursements, which are handled in
essentially the same manner as petty cash systems. The central accounting
system of the business maintains records of sales made through agency
operations and related cost of sales and other expenses.
10. ILLUSTRATION OF HOME OFFICE AND BRANCH ACCOUNTING
REH Corporation of Manila has operated a sales branch in Baguio, for a
number of years. All merchandise shipped to the Baguio branch is transferred
at normal sales prices, which are 125% of home office cost. The Baguio
branch also purchases merchandise from outside suppliers. This
merchandise is sold by Baguio at a 25% markup based on invoice cost.
Balance sheets for Danny Corporation’s home office and its Baguio branch at
December 31,2017 are as follows:
REH CORPORATION HOME OFFICE AND BAGUIO BRANCH
BALANCE SHEETS AT DECEMBER 31, 2017
Home office
Branch
Assets
Cash
Accounts Receivable
Inventory
Plant assets – net
Baguio branch
Total assets
P 25,000
42,000
20,000
70,000
43,000
P200,000
P11,000
23,000
16,000
P50,000
Liabilities and Equity
Accounts payable
Other liabilities
P14,000
10,000
P 5,000
2,000
47
loading – branch inventory
Home office
Capital stock
Retained earnings
Total liabilities and equity
1,600
150,000
24,000
P200,000
43,000
P50,000
All plant asset records for REH’s home office and Baguio branch are maintained on the
home office books. Half of the P16,000 branch inventory at December 31,2017 was
received from local suppliers, and the remaining P8,000 was received from the home
office at established transfer prices. A summary of the transactions of REH’s home
office and Baguio branch for 2018 follows:
1. REH’s sales for 2018 were P281,750 of which P200,000 were home office
sales and P81,750 were sales made by Baguio branch. All sales were
account.
2. Home office and branch purchases on account for 2018 were P205,000 and
P20,000, respectively. The home office shipped P40,000 of merchandise to
Baguio branch at a transfer price of P50,000.
3. The home office collected P195,000 on account during 2018, and Baguio
branch collected P79,750.
4. The Baguio branch transferred P55,000 cash to the home office during 2018.
5. Payments on account were home office, P210,000; Baguio branch, P21,000.
6. During 2018, the home office paid operating expenses of P20,000, and
Baguio branch paid operating expenses of P2,000. Of the operating expenses
paid by the home office, P1,000 was allocated to Baguio branch.
7. Total depreciation for the year was P8,000, of which P1,500 was allocated to
branch operations.
Year-end inventories are P25,000 for the home office, and P10,000 for Baguio branch,
with half of the branch inventory consisting of merchandise acquired from the home
office.
Required:
1. Prepare the journal entries for the year 2018 on the books of the home office and
branch office.
2. Prepare the adjusting and closing entries on the home office books and the
closing entry on the books of the branch.
48
3. Prepare the unadjusted trial balance of the home office and branch for the year
2018.
4. Prepare the individual financial statements of the home office and the branch.
5. Prepare the combined financial statements of REH Corporation for the year
2018.
REH CORPORATION
HOME OFFICE AND BAGUIO BRANCH JOURNAL ENTRIES
FOR THE YEAR 2018
Number
1
Home Office Books
Accounts Receivable 200,000
Sales
200,000
To record sales on account.
Baguio Branch Books
Accounts Receivable 81,750
Sales
81,750
To record sales on account.
2
Purchases
205,000
Purchases
20,000
Accounts payable
205,000
Accounts payable
20,000
To record purchases on account.
To record purchases on account.
Baguio branch 50,000
Shipments from home office 50,000
Shipments to Baguio branch 40,000
Home office
50,000
Loading branch inventory
10,000
To record receipt of
merchandise
To transfer merchandise to Baguio
from home office
Branch at 125% of cost.
3
Cash
195,000
Cash
79,750
Accounts receivable 195,000
Accounts Receivable 79,750
To record receipt from Baguio branch
To record collection on accounts
Receivable.
4
Cash
55,000
Home office 55,000
Baguio Branch
55,000
Cash
55,000
To record receipt of cash from Baguio branch. To record cash remittance to
Home office.
5
Accounts payable
210,000
Cash
210,000
To record payments on account.
Accounts payable 21,000
Cash
21,000
To record payments on account.
49
6 Operating expenses
20,000
Cash
20,000
To record payments of expenses.
7
Baguio branch
1,000
Operating expenses
1,000
To record allocation of expenses to
Baguio branch
Baguio branch
1,500
Operating expenses
6,500
Accumulated depreciation 8,000
To record depreciation and allocation
to Baguio branch.
Operating expenses 2,000
Cash
2,000
To record payment of expenses.
Operating expenses 1,000
Home office
1,000
To record expenses allocated
from home office.
Operating expenses 1,500
Home office
1,500
To record allocation of depreciation from home office.
REH CORPORATION
HOME OFFICE AND BAGUIO BRANCH ADJUSTING & CLOSING JOURNAL
ENTRIES
December 331,2018
Home Office Books
Baguio Branch Books
Adjusting Entries
Closing Entry
(1) To record branch reported net income.
Baguio branch 1,250
Baguio branch profit
1,250
To close the nominal accounts and
to record the net income.
Sales
81,750
Inventory, Dec 31,14 10,000
(2) To adjust the net income of the branch
and to record the realized loading.
Loading in branch inventory 10,600
Baguio branch profit
10,600
Unrealized profit per books of 11,600,
Less P1,000 unrealized profit in
branch ending inventory=P10,600
adjustment.
Inventory, Jan 1,14
16,000
Purchases
20,000
Shipments from home office 50,000
Operating expenses
4,500
Home office
1,250
Closing Entry
To entry the nominal accounts and to record
the combined net income.
Sales
200,000
Inventory, December 31,2018 25,000
Shipments to Baguio branch
40,000
50
Baguio branch profit
Inventory, January 1,2018
Purchases
Operating expenses
Retained earnings
11,850
20,000
200,000
25,500
26,350
Branch profit = 1,850
Home office = 14,500
REH CORPORATION
HOME OFFICE AND BAGUIO BRANCH UNADJUSTED TRIAL BALANCE
FOR THE YEAR ENDED, DECEMBER 31,2018
Home Office
Baguio Branch
Debit
Credit
Debit
Credit
Cash
P 45,000
P 12,750
Accounts receivable - net
47,000
25,000
Inventories
Plant assets – net
Baguio branch
Accounts payable
Other liabilities
Loading – branch inventory
Home office
Capital stock
Retained earnings
Sales
Purchases
Shipments from home office
Shipments to Baguio branch
Operating expenses
Total
20,000
62,000
40,500
16,000
P 9,000
10,000
11,600
150,000
24,400
200,000
P 4,000
2,000
40,500
81,750
205,000
20,000
50,000
40,000
25,500
P445,000
P 445,000
4,500
P128,250 P 128,250
REH CORPORATION
HOME OFFICE INCOME STATEMENT
FOR THE YEAR ENDED, DECEMBER 31,2018
Sales
Cost of Sales:
Inventory, January 1,2018
Add: Purchases
Available for sale
Less: Shipments to branch
P 200,000
P 20,000
205,000
P 225,000
( 40,000)
51
Inventory, December 31,2018
( 25,000 )
Gross profit
160,000
P 40,000
Less: Operating expenses
25,500
Income from own operations
14,500
Add: Baguio branch profit
11,850
Combined net income
P 26,350
REH CORPORATION
HOME OFFICE BALANCE SHEET
AS OF DECEMBER 31,2018
Assets
Liabilities and Equity
Cash
Accounts receivable
Inventories
Plant assets- net
Baguio branch
Total
P 45,000
47,000
25,000
62,000
41,750
P 220,750
Accounts payable
P 9,000
Other Liabilities
10,000
Loading in branch inventory
1,000
Capital stock
150,000
Retained earnings
50,750
Total
P 220,750
REH CORPORATION
BAGUIO BRANCH INCOME STATEMENT
FOR THE YEAR ENDED, DECEMBER 31, 2018
Sales
P 81,750
Cost of sales:
Inventory, January 1,2018
Add: Purchases
Shipments from home office
Available for sale
Less: Inventory, December 31,2018
Gross profit
Less: Operating expenses
P 16,000
20,000
50,000
P 86,000
(10,000)
Net income
76,000
P 5,750
4,500
P 1,250
REH CORPORATION
52
REH CORPORATION
BAGUIO BRANCH BALANCE SHEET
AS OF DECEMBER 31,2018
Assets
Cash
Accounts receivables- net
Inventories
Total
Liabilities and Equity
P 12,750
25,000
10,000
P 47,750
Accounts payable
Other Liabilities
Home Office
Total
REH CORPORATION
P 4,000
2,000
41, 750
P47,750
COMBINED INCOME STATEMENT
FOR THE YEAR ENDED, DECEMBER 31,2018
Sales
Cost of sales:
Inventory, January 1,2018
Add: Purchases
Available for sale
Less: Inventory, December 31,2018
Gross profit
Less: Operating expenses
Combined net income
P 281,750
P 34,400
225,000
P259,400
(34,000)
225,400
P 56,350
30,000
P 26,350
REH CORPORATION
COMBINED BALANCE SHEET
AS OF DECEMBER 31,2018
Assets
Cash
P 57,750
Accounts receivable – net
72,000
Inventories
34,000
Plant assets – net
62,000
Total
P 225,750
Liabilities and Equity
Accounts payable
P 13,000
Other Liabilities
12,000
Capital stock
150,000
Retained Earnings
50,750
Total
P 225,750
53
PROBLEMS
1. HONESTY Corporation has two branches, Baguio and Davao, to which
merchandise is billed at 20% above cost. Partial trial balance accounts of the
three entities at December 31,2018 are summarized as follows:
Inventory
Baguio branch
Davao branch
Shipments from home office
Purchases
Expenses
Home office Baguio branch
P 800,000
P 180,000
450,000
420,000
600,000
1,600,000
900,000
250,000
Davao branch
P 240,000
360,000
200,000
Home office
Loading- Baguio branch
Loading- Davao branch
Sales
Shipments to Baguio branch
Shipments to Davao branch
130,000
120,000
1,950,000
500,000
400,000
450,000
300,000
900,000
750,000
Additional information:
Physical inventories on hand at December 31,2018 were as follows:
Home office
P 700,000 at cost
Baguio branch
210,000 at billed prices
Davao branch
150,000 at billed prices
A) The ending inventory of HONESTY Corporation must be:
a. P1,100,000
b. P 1,000,000
c. P1,150,000
d. P1,220,000
B) The combined net income of home office and branches for 2018 must be:
a. P250,000
b. P430,000 c. P350,000
d. P600,000
C) Correct net income of branches for 2018 must be:
a. P350,000
b.P250,000 c. P600,000
d. P430,000
54
2. The following information came from the books and records of Philip Corporation
and its branch. The balances are as of December 31,2019, the fourth year of the
Corporation’ s existence.
Home Office
Branch
Dr. (Cr.)
Dr. (Cr.)
Sales
Shipments to branch
Shipments from home office
Purchases
Expenses
P 320,000
P (80,000)
120,000
50,000
80,000
Inventory, January 1,2019
Unrealized profit in branch inventory
36,000
(50,000)
There are no shipments in transit between the home office and branch, both
shipments accounts are properly recorded. The closing inventory at billed prices
includes merchandise acquired from the home office in the amount of P21,000
and P9,000 acquired from vendors for a total of P30,000.
Required: Determine the following:
1. Beginning inventory acquired from outsiders.
2. Correct cost of beginning inventory.
3. Realized profit from inventory shipments.
4. Correct net income of branch.
5. Correct net income inventory.
6. Allowance balance at the end
3. BALLERS COMPANY operates a branch in URDANETA City. At the end of the
year, the branch account in the books of the home office at shows a balance of P
600,000. The following information was ascertained:
 The branch made a profit of P40,000 for the month of December but
the home office erroneously recorded it as P44,720.
 The branch has not received the cash in the amount of P100,000 sent
by the home office on December 31. This was charged to General
Expense account by the home office.
 The home office has billed the branch the amount of P150,000 for
merchandise, which was in transit on December 31.
 Supplies of P18,000 was returned by the branch to the home office but
the home office has not yet reflected in its records the receipt of the
supplies.
55

A home office accounts receivable for P42,000 was collected by the
branch. Said collection was not reported to the home office by the
branch.
What is the unadjusted balance of the Home Office account of URDANETA branch?
A. 427,680
B. 569,680
C. 385,680
D. 469,680
4. The home office transfers inventory to its branch at 20% of billed price. During
the year, inventory costing the home office 320,000 was transferred to the
branch. At the year end, the home office adjusted its deferred gross profit
account by 82,800. The branch year-end Statement of Financial Position shows
19,200 of inventory acquired from the home office.
What is the branch’s beginning inventory at its actual cost?
a. 88,000
c. 33,200
b. 26,560
d. 16,000
5. The Dwarf Corporation is maintaining a branch in Cebu. During the year, the
home office shipped goods to the branch at a cost of 120,000. The branch
submitted to the home office the following report summarizing its operations for
the period ended December 31,2016.
Sales (30% on account), 196,000; Expenses (50% of which is still unpaid),
50,000; Purchases 25,000; Shipments from Home Office 150,000; Inventory beg
(30% from the outsiders) 30,000; Inventory end (40% from Home Office) 90,000;
remittance to Home Office 60,000.
A) What is the cost of sales in so far as the home office is concerned?
A. 88,000
C. 83,000
B. 92,000
D. 115,000
B) From the Problem above, what is the required balance of the allowance for
overvaluation account on December 31,2016?
A. 27,000
C. 27,000
B. 34,200
D. 7,200
56
6. Trial balances for H Corporation and its two branches at December 31,2018 are
as follows:
Home Office
Branch I
Branch 2
Debits
Cash
P 18,000
P 5,000
P 15,000
Accounts receivables
30,000
12,000
26,000
Inventories, January 1,2018
36,000
7,200
5,400
Other assets
200,000
42,800
47,600
Branch 1
50,000
Branch 2
68,000
Shipments from home office
30,000
27,000
Purchases
Expenses
Credits
Accounts payable
Capital stock
Retained earnings
Home office
Shipments to Branch 1
Shipments to Branch 2
Loading – branch inventories
Sales
120,000
78,000
P600,000
P 40,000
200,000
41,900
36,000
30,000
2,100
250,000
P600,000
35,000
P132,000
40,000
P161,000
P10,000
P30,000
42,000
61,000
80,000
P132,000
70,000
P161,000
Additional Information:
1. Ending inventories are P32,000, P8,400 and P4,800 for the home office, the
branch 1 and the branch 2, respectively. Ending inventories of the branches
exclude goods in transit.
2. Cash in transit from home office to branch 1 for operating expenses at
December 31,2018 is P2,000. Cash in transit from Branch 2 to home office
amounts to P4,000.
3. “Loading – branch inventories” represents unrealized profit in beginning
inventories of Branch 1 and Branch 2.
Determine the following:
1) The adjusted balance of reciprocal accounts that will appear on their
individual financial statements.
2) The correct net income of Branch 1 and Branch 2.
57
3) The adjusted balance of loading – branch inventories account at December
31,2018.
4) The cost of sales that must appear on the published financial statements of H
Corp. at December 31,2018.
7. The income statement submitted by the San Carlos City branch to the Home
Office for the month of December 2018 is shown below. After effecting the
necessary adjustments, the true net income of the branch was ascertained to be
P156,000.
Sales
Cost of Sales:
Inventory, December
Shipments from Home Office
Local purchases
Total available for sale
Inventory, December 31
Gross margin
Operating expense
Net income
P600,000
P 80,000
350,000
30,000
P460,000
100,000
360,000
P240,000
180,000
P 60,000
The branch inventories were:
Merchandise from home office
Local purchases
Total
Dec 1,2018
P 70,000
10,000
P 80,000
Dec 31,2018
P 84,000
16,000
P100,000
A) The billing price based on cost imposed by the home office to the branch, and
a. 140%
b. 100%
c. 40%
d. 29%
B) The balance of allowance for overvaluation of branch December 31,2012 after
adjustment.
a. P10,000
c. P24,000
b. P16,000
d. None of the above
58
8. The preclosing general ledger trial balances at December 331,2018 for the ACE
Company and its Cagayan de Oro branch office are shown below:
Cash
Account Receivable
Inventory
Property, plant and equipment(net)
Home Office
Dr. (Cr.)
P 360,000
350,000
700,000
900,000
Branch
Dr. (Cr.)
P 80,000
120,000
150,000
Investment in branch
Accounts payable
Accrued expenses
Home office equity
Common stock (P10 par)
Retained earnings
Sales
Purchases
Expenses
Purchases from home office
200,000
( 360,000 )
( 140,000 )
( 135,000 )
( 25,000 )
( 90,000 )
( 500,000 )
( 450,000 )
( 4,400,000 )
2,900,000
440,000
P
0
( 950,000 )
240,000
160,000
450,000
P
0
An audit disclosed the following data:
a. On December 23 the branch office manager purchased P40,000 of furniture
and fixtures but failed to notify the home office. The bookkeeper, knowing that
all plant assets are carried on the home office books, recorded the proper
entry on the branch books. It is the company policy not to take any
depreciation on assets acquired in the last half of the year.
b. On December 27 a branch customer erroneously sent a P20,000 account
payment to the home office. The bookkeeper made the correct entry on the
home office books but did not notify the branch.
c. On December 30 the branch remitted cash of P 50,000 which was received
by the home office in January 2019.
d. On December 31 the branch erroneously recorded the December allocated
expenses from the home office as P5,000 instead of P15,000.
e. On December 31 the home office shipped merchandise billed at P30,000 to
the branch, which was received in January 2019.
59
f. The entire beginning inventory of the branch had been purchased from the
home office. Home office 2018 shipments to the branch were purchased by
the home office in 2018. The physical inventories at December 31,2018,
excluding the shipment in transit are:
Home office – P550,000 (at cost)
Branch – P 200,000 (consisting of P180,000 from home office and
P20,000 from outsiders)
g. The home office consistently bills shipments to the branch at 20% above cost.
The sales account is credited for the invoice price.
Compute:
1.
2.
3.
4.
The adjusted reciprocal account before branch net income.
The correct branch net income.
The combined net income of home office and branch.
Prepare the financial statements of the company as of December 31,2018.
9. The M Company maintains branches that market the products that it produces.
Merchandise is billed to the branches at 25% above costs, with the branches
paying freight charges from the home office to the branch. On November 15,
Branch No. 1 ships part of its stock to Branch No. 5 upon authorization by the
home office. Originally Branch No. 1 been billed for this merchandise at
P160,000 and had paid freight charges of P35,000 on the shipment from the
home office. Branch No.5, upon receiving the merchandise, pays freight charges
of P25,000 on the shipment from Branch No. 1. If the shipment had been made
from the home office directly to Branch No.5, the freight cost to Branch No. 5
would have been P40,000.
Required: prepare the journal entries necessary to record the above information on
the books of Branch No. 1, Branch No. 5 and home office.
60
QUIZZER
Questions 1 through 5 are based on the following:
Comparative trial balances of the home office and the two branches of Norway
Corporation at December 31, 2018 were as follows:
Cash
Accounts receivables
Home Office
Branch I
Branch 2
P 5,000
80,000
P 15,000
30,000
P 22,000
40,000
Inventories
150,000
Branch No. 1
170,000
Branch No. 2
165,000
Plant assets (net)
730,000
Purchases
900,000
Shipments from home office
Expenses
300,000
Total
P2,500,000
Accounts payable
P 100,000
Other liabilities
80,000
Loading in branch inventories
Capital stock,P10 par
Retained earnings
262,000
Home office
Sales
1,000,000
Shipments to branches
450,000
Total
P2,500,000
Additional information:
60,000
48,000
250,000
200,000
300,000
75,000
P730,000
P 45,000
15,000
108,000
500,000
240,000
50,000
P600,000
P 30,000
5,000
170,000
500,000
0
P 730,000
165,000
400,000
0
P600,000
Home office and Branch inventories at December 31,2018 were:
Home office (at cost)
Branch No. 1 (at billed price)
Branch No. 2 (at billed price)
P 120,000
72,000
96,000
1. What is the mark-up rate on merchandise transfers to branch?
A. 20 percent of billed price
C. 16-2/3 percent of billed price
B. 25 percent of cost
D. 25 percent of billed price
2. How much is the beginning inventory of Norway Corporation?
A. P150,000
B. P258,000
C. P240,000
D. P90,000
3. How much is the ending inventory of Branch No. 1 at cost?
A. P72,000
B. P57,600
C. P60,000
D. P54,000
4. How much is the correct net income of Branch No. 2 as far as home office is
concerned?
A. P190,000
B. P158,000
C. P185,000
D. P94,000
61
5. How much net income will the home office report its separate income statement?
A. P220,000
B. P595,000
C. P494,000
D. P100,000
Questions 6 and 7 are based on the following:
The Dagupan City branch of Andy Enterprises, Manila was billed for merchandise
shipments from home office at cost plus 25% in 2011 and cost plus 20% in 2018.
Other pertinent data for 2018:
Dagupan branch
Home Office
Sales
P63,000
P212,000
Inventory beginning
8,900(at billed price)
23,000(at cost)
Purchases
164,000
Inventory transfers
50,400(at billed price)
42,000(at cost)
Inventory, end
11,700(at billed price)
28,500(at cost)
Expenses
20,300
76,400
6. What will be the combined cost of sales of Dagupan branch and Andy’s home
office that must be shown in the combined income statement?
A.P22,430
B. P155,815
C. P188,870
D. P22,040
7. What will be the combined net income of Dagupan branch and Andy’s home
office?
A.P22,430
B. P22,600
C. P22,133
D. P22,040
Questions 8 and 9 are based on the following:
The following information came from the books and records of Lowe Corporation
and its branch. The balances are as of December 31,2018.
Home Office
Branch
Dr. (Cr.)
Dr. (Cr.)
Sales
Expenses
Shipments to branch
Unrealized profit in branch inventory
P (500,000)
150,000
P (240,000)
( 74,000)
The branch purchases all of its merchandise from the home office. The home
office ships this merchandise at 125 percent of its cost. The ending inventory of the
branch is P60,000 at the billed price. There are no shipments in transit between the
home office and branch.
8. The beginning inventory of the branch per GAAP must be:
A. P 64,000
B. P 70,000 C. P 60,000
D. P 56,000
9. The correct net income of the branch must be:
A. P 40,000
B. P 102,000 C. P 50,000
D. P 62,000
62
10. The home office sells merchandise to its branch at 120% of cost. The branch was
established several years ago with policy that all its merchandise would be
acquired from the home office. The branch reported inventory beginning of
P3,600 and inventory ending of P6,000. The home office showed in its trial
balance an unrealized profit on inventory account balance of P4,600. The cost of
merchandise sold by the branch that came from the home office is:
A) P 21,600
B) P18,000
C) P21,000
D) cannot be determined
11. Given:
Home Office Control(Branch books)
Jan. 1,2018 Balance
Jan. 3,2018 Cash remitted to home office
Jan. 5,2018 Shipments from home office
Jan. 28,2018 Expenses from home office
Jan. 28,2018 Cash remitted to home office
Jan. 28,2018 Merchandise returned to home office
Branch Control (Home Office Books)
Jan. 1,2018 Balance
Jan. 3,2018 Cash received from branch
Jan. 4,2018 Shipments to branch
Jan. 28,2018 Expense allocation
Jan. 28,2018 Shipments to branch
Jan. 28,2018 Collection from branch customer
Jan. 28,2018 Supplies purchased for branch and
Shipped directly to branch
60,000
80,000
120,000
45,200
30,000
12,000
60,000
80,000
120,000
52,400
24,000
18,000
8,000
Except for the branch in recording its share of allocated expenses, all differences
are timing differences.
The adjusted balance of reciprocal account is:
A. P 103,200
B. P 166,400
C. P 117,200
D. P 124,400
63
Items 12 through 16 based on the following:
The preclosing general ledger trial balances at December 31,2018, for the G
Wholesale Company and its Quezon City branch office are shown below:
Trial Balance
Cash
Accounts receivable
Inventories
Plant assets – net
Branch office
Accounts payable
Accrued expenses
Home office
Capital stock
Retained earnings
Sales
Purchases
Purchases from Home Office
Expenses
Home Office
Dr.
(Cr.)
Branch Office
Dr.
(Cr.)
P 360,000
350,000
700,000
900,000
200,000
(360,000)
(140,000)
P 80,000
120,000
150,000
(4,400,000)
2,900,000
440,000
(135,000)
( 25,000)
( 90,000)
(500,000)
(450,000)
(950,000)
240,000
450,000
160,000
Your audit disclosed the following data:
1. On December 23 the branch office manager purchased P40,000 of furniture
and fixtures but failed to notify the home office. The bookkeeper, knowing that
all fixed assets are carried on the home office recorded the proper entry on
the branch office records. It is the company’s policy not to take any
depreciation on assets acquired in the last half of a year.
2. On December 27 a branch office customer erroneously paid his account on
P20,000 to the home office. The bookkeeper made the correct entry on the
home office books but did not notify the branch office.
3. On December 30 the branch office remitted cash of P50,000, which was
received by the home office in January 2018.
4. On December 31 the branch office erroneously recorded the December
allocated expenses from the home office as P5,000 instead of P15,000.
5. On December 31 the home office shipped merchandise billed at P30,000 to
the branch office, which was received in January 2018.
64
6. The entire opening inventory of the branch office had been purchased from
the home office. Home office 2018 shipments to the branch office were
purchased by the home office in 2018. The physical inventories at December
31, 2018, excluding the shipment in transit are:
Home office - P550,000 (at cost)
Branch office – P200,000(comprised of P180,000 from home office and
P20,000 from outside vendors)
7. The home office consistently bills shipments to the branch office at 20%
above cost. The sales account is credited for the invoice price.
12. How much is the correct ending inventory of G Wholesale Company?
A. P 750,000
B. P720,000
C. P 745,000
D. P 738,000
13. How much is the adjusted balance of reciprocal account before the net income
of branch?
A. P 110,000
B. P190,000
C. P 80,000
D. P 130,000
14. How much is the correct net income of the branch?
A. P 220,000
B. P210,000
C. P 234,000
D. P 224,000
15. How much is the correct cost of sales of the G Wholesale Company?
A. P 3,665,000
B. P3,595,000
C. P 3,290,000
D. P 3,220,000
16. How much is the correct sales of G Wholesale Company?
A. P 5,350,000
B. P4,900,000
65
C. P 4,870,000
D. P 4,975,000
ADVANCED FINANCIAL ACCOUNTING AND REPORTING
BOOKLET 2
TOPICS:




PA2- 0505 INSTALLEMENT ACCOUNTING
PA2- 0506 LONG TERM CONSTRUCTION CONTRACTS
PA2- 0507 FRANCHISE ACCOUNTING
PA2- 0508 HOME & BRANCH ACCOUNTING
ADVANCED FINANCIAL ACCOUNTING AND REPORTING
BOOKLET 4





PA2- 0515
PA2- 0516
PA2- 0517
PA2- 0518
PA2- 0519
TOPICS:
NORMAL COSTING
JOB ORDER COSTING
PROCESS COSTING
FACTORY OVERHEAD
JOINT & BY PRODUCT COSTING
BACKFLUSH COSTING & STANDARD COSTING
NORMAL COSTING
The basic purpose of any costing system is to allocate the costs of production (direct
materials, direct labor, and manufacturing overhead) to the units produced. This basic
purpose of costing system (job order, process, activity-based, joint products, standard)
is to be discussed.
A. Cost of Goods Manufactured
Regardless of which costing system is used, a cost of goods
manufactured (CGM) statement is prepared to summarize the manufacturing
activity of the period. CGM for a manufacturing firm is equivalent to purchases for
a merchandising firm. Although it may take different forms, essentially the CGM
statement is a summary of the direct materials and work-in-process (WIP)
account. It is vital statement or schedule supporting the cost of goods sold
section of the income statement. Without this statement the financial statements
of a manufacturing concern is considered not in conformity with the GAAP.
BWIP + DM + DL+ MOH- EWIP= CGM
A typical CGM statement is presented below:
CRC-ACE COMPANY
COST OF GOODS MANUFACTURED
Year Ended December 31,2018
Direct Materials Used:
Inventory, January 1
P 230,000
Purchases
980,000
Materials available for use
1,210,000
Inventory, December 31
160,000
Direct labor employed
Factory overhead incurred:
Indirect labor
P 140,000
Supplies
40,000
Utilities
80,000
Depreciation
130,000
Other
30,000
Manufacturing costs incurred, 2018
Add: Work-in-process inventory, January 1
P 1,050,000
720,000
420,000
2,190,000
250,000
Manufacturing costs to account for
Less: Work-in-process inventory, December 31
Costs of goods manufactured complete
The result of the CGM statement is used in the cost of
goods sold (CGS) statement or cost of goods sold section
on the income statement as indicate below:
CRC-ACE COMPANY
COST OF GOODS SOLD
Year Ended December 31,2018
Finished goods, January 1
Add: Costs of goods manufactured(completed)
Costs of goods available for sale
Less: Finished goods, December 31
Costs of goods sold
2,440,000
300,000
P2,140,000
P 400,000
2,140,000
2,540,000
300,000
P2,010,000
B. Cost Flows
Before discussing any particular costing system, it is important to
understand the flow of costs through the accounts, as summarized in the
diagram below. You must understand how these accounts presented in the
balance sheet and income statement are determined, what transactions affect
these accounts and what are their normal balances.
Expense
Assets
Income
(Balance Sheet)
Statement)
Materials Inventory Work in Process Inventory Finished Goods Inventory
Purchases
Direct Materials Used
Goods completed
Cost of
Sales
Goods sold
(manufactured)
Direct Labor
Factory Overhead
Analyze the above production cycle diagram carefully before proceeding. The details
will be explained further.
2
PROBLEMS
JOURNAL ENTRIES/STATEMENT OF COST OF GOODS MANUFACTURED & SOLD
1. The comparative inventory data for JPE Manufacturing Corporation for the year
ended December 31, 2018 is summarized below:
January 1
December 31
Materials control
P 495,000
P 513,000
Work in process- material
138,000
132,000
Work in process- labor
127,000
136,000
Work in process- overhead
184,000
161,000
Finished goods control
525,000
487,000
During the year 2018, the corporation completed, among others, the following
transactions:
a) Purchases, all on account, direct materials, P2,100,000; indirect
materials,P400,000.
b) The total materials requisitioned for use during the year included
P360,000 for indirect materials, P42,000 for shipping of finished
goods deliveries, and P35,000for general office repairs.
c) The payroll for the year was broken down as follows: direct labor,
P1,650,000, indirect labor, P550,000; sales salaries, P840,000,
and office salaries, P460,000.
d) The payroll was vouchered and analysis disclosed the following
details:
Direct labor
Indirect labor
Sales salaries
Office salaries
Gross
W/H Tax
SSS
Medicare HDMF
ECC
P1,650,000
P80,000 P40,000 P12,000 P38,000 P6,000
550,000
40,000
12,500
3,000
12,000 1,500
840,000
60,000
20,000
8,000
22,000 4,000
460,000
50,000
11,000
5,000
14,000 2,500
e) The corporation’s share of the payroll taxes, SSS contribution,
Medicare premium, HDMF premiums and employer compensation
contribution was appropriately recorded. (Assume the same
amount of SSS, Medicare and HDMF premiums was contributed
by the employer.)
f) Other manufacturing expenses vouchered amounted to P920,000
and depreciation charges were P250,000 on plant assets,
P120,000 on delivery trucks and P80,000 on office equipment.
g) Manufacturing expenses were applied to production at
predetermined rate equal to 130% of direct labor cost.
h) Completed goods were transferred to the finished goods
warehouse.
i) All sales are made on terms 2/10,n/30; billing price at 150% of cost.
3
j) At the end of the year, any overapplied or underapplied manufacturing expenses is
treated as an adjustment to the cost of goods sold.
Required:
1. Prepare entries in general journal form, to record the above transaction of JPE
Manufacturing Corporation for the year 2018.
2. Prepare the statement of cost of goods manufactured and sold for the year
ended Dec 31, 2018.
3. Determine the following amounts:
a. Prime cost
c. Product cost
b. Conversion cost
d. Period cost
2. For the year just ended,Royal Corporation reported total manufacturing costs of
P3,600,000 and cost of goods sold of P3,750,000. For the past periods,the factory
overhead had been about ½ of material costs and ⅖ of the conversion costs. Raw
materials on January 1 of P240,000 was 6/5 of the December 31 inventory, while work
in process of P160,000 on January 1 increased by ¼ at the year-end. The finished
goods inventory decreased by ⅓.
Required: prepare a statement of cost of goods sold for the year just ended, giving as
much details as can be determined from the information given.
3. You are asked to bring the following incomplete accounts up to date through May
2018. Also consider the additional information that follows:
April 30, 2018
May 31, 2018
Materials control
?
P 180,000
Work in process control
P 20,000
?
Finished goods control
250,000
?
Accounts payable
100,000
?
Department factory overhead control
150,000
Factory overhead applied
?
Cost of goods sold
?
Additional information:
a. The overhead is applied by using a predetermined rate that is set at the
beginning at each year by forecasting the year’s overhead and relating it to
forecasting the year’s overhead and relating it to forecasted direct labor hours.the
budget for 2018 called for a total of P150,000 hours of direct labor and
P2,250,000 of factory overhead.
b. The accounts payable ar for direct materials only. The balance on May 31 was
P50,000. Payments of P350,000 were made during May.
4
c. The finished goods inventory as of May 31 was P220,000.
d. The cost of goods sold during the month was P650,000.
e. On May 31, there was only one unfinished job in factory, cost records show
that P10,000 (400 hours) of direct labor and P20,000 of the direct materials had been
charged to the job.
f. A total of P9,400 direct man-hours were work during the month of May. All
factory workers earn the same rate of pay.
g. All “actual” factory overhead incurred during May has already been posted.
Required:
1. Materials purchased during May.
2. Costs of goods completed during May.
3. Overhead applied during May
4. Balance, work in process, May 31, 2018.
5. Materials used during May
6. Balance, Stores control, April 30,2018.
7. Over or under applied overhead for May.
4. Tan Company,a manufacturer of recyclable soda cans, had the following inventory
balances at the beginning and end of 2018:
Inventory Classification
Jan 1, 2018
Dec 31,2018
Raw material
P 60,000
P 70,000
Work in process
120,000
115,000
Finished goods
150,000
165,000
During 2018, the company purchased P250,000 of raw material and spent P400,000 on
direct labor. Manufacturing overhead costs were as follows:
Indirect material
P 10,000
Indirect labor
25,000
Depreciation on plant and equipment
100,000
Utilities
25,000
Other
30,000
Sales revenue was P1,105,000 for the year. Selling administrative expenses for the
year amounted P110,000. Factory overhead is applied at 50% of Direct Labor Cost.
Required: Reconstruct the entries recorded by Tan Company for the year 2018.
5
5. The following data refer to Plain & Prints Company for the year 2018:
Sales revenue
P 950,000
Work in process inventory, 12/31/2018
30,000
Work in process inventory, 1/1/2018
40,000
Selling and administrative expenses
150,000
Income tax expense
90,000
Purchases of raw materials
180,000
Raw materials inventory, 12/31/2018
25,000
Raw materials inventory, 1/1/2018
40,000
Direct labor
200,000
Utilities: plant
40,000
Depreciation: plant and equipment
60,000
Finished goods inventory, 12/31/2018
50,000
Finished goods inventory, 1/1/2018
20,000
Indirect material
10,000
Indirect labor
15,000
Other manufacturing overhead
80,000
Determine the costs of goods manufactured for 2018.
MULTIPLE CHOICE
1. Davis Company applies overhead using direct labor cost. The following Taccounts pertain to 2018 operations:
Work in Process
Factory Overhead
------------------------------------------------------------------------(a)10,0000
70,000 60,000
(b) 50,000 120,000
(c) 20,000
(d)
?
(e)
?
a. Beginning balance;
b. Direct materials;
c. Direct labor;
d. Factory overhead;
e. Ending balance
Compute the overhead rate that was used for 2018.
a. 33-⅓
b. 133- ⅓
c. 300%
6
d. 3%
Questions 2 through 6 are based on the following:
Find the missing values in the following manufacturing income statement.
2016
2017
2018
Sales
P ?
P 133,7000
P ?
Cost of goods sold:
Direct materials purchases, 1/
8,000
?
?
+Direct materials purchases
?
20,000
30,000
Direct materials available
?
26,000
?
-Direct materials inventory, 12/31
?
(9,000)
(12,300)
Direct materials used
?
?
?
Direct labor
20,000
23,500
?
Manufacturing overhead
16,000
?
24,000
Total manufacturing costs
53,000
?
90,900
+Work in process inventory, 1/1
12,000
18,000
?
-Work in process inventory,12/31
?
(16,300)
(22,300)
Costs of goods manufactured
?
63,500
84,900
+Finished goods inventory, 1/1
?
?
?
Goods available for sale
62,000
84,500
103,200
-Finished goods inventory, 12/31
(21,000)
?
?
Costs of goods sold
?
?
83,200
Gross profit
P 49,000
P ?
P 46,800
2. Determine the total sales of 2016.
a. P 90,000
b. P 130,000
c. P113,700
3. Determine the direct materials purchases for 2016.
a. P 20,000
b. P 30,000
c. P 15,000
4. Determine the manufacturing overhead for 2017.
a. P 61,800
b. P 21,300
c. P 16,000
5. Determine the gross profit for 2017.
a. P 66,200
b. P 49,000
c. P 46,800
6. Determine the direct labor costs for 2018.
a. P 40,200
b. P 26,700
c. P 23,500
7
d. P132,000
d. P 23,000
d. P 24,000
d. P 47,500
d. P 20,000
7. Marco Polo Map Company’s costs of goods sold for March 2018 was P 345,000.
March 31 work in process inventory was 90 percent of March 1 work in process
inventory. Manufacturing overhead applied was 50 percent of direct-labor cost. Other
information pertaining to the company’s inventories and production for the month of
March is as follows:
Beginning inventories, March 1:
Raw material
P 70,000
Work in process
40,000
Finished goods
102,000
Purchases of raw material during March 113,000
Ending inventories, March 31:
Raw material
26,000
Work in process
?
Finished goods
105,000
How much is the direct labor cost?
a. P160,000
b. P 80,000
c. P 344,000
d. P 240,000
8. The estimated unit costs for CNR Inc, when it is operating at a production and sales
level of P12,000 units, are as follows:
Estimated
Cost Item
Unit Cost
Direct materials
P 32
Direct labor
10
Variable factory overhead
15
Fixed factory overhead
6
Variable marketing
3
Fixed marketing
5
Compute the total cost that would be incurred during a month with a production level of
P11,500 units and a sales level of P 9,500 units.
a. P800,500
b. P 813,000
c. P 816,000
d. P 852,000
9. Walker Company incurred P 80,000 direct labor cost in 2018 and had the following
selected account balances at the beginning and end of 2018: Finished goods January 1,
P56,000; Work in process January 1, P24,000; Materials January 1, P34,000; Finished
goods December 31, P90,000; Work in process December 31, P 28,000;Materials
December 31, P48,000. The total cost of goods sold and actual factory overhead during
the year are P 280,000 and P 70,000, respectively.
8
Determine the total material purchases during the year.
a. P 182,000
b. P 162,000
c. P 148,000
d. P 144,000
10. The general ledger of the Ebron Company contained the following accounts, among
others, on January 1; Finished Goods,P150,000; Work in Process, P300,000;
Materials,P 250,000. During January the following transactions were completed:
a. Materials were purchased on account at a cost of P135,000.
b. Steel in the amount of P175,000 was issued from stores.
c. Requisitions for indirect materials and supplies amounted to P 18,000.
d. The total payroll for January amounted to P270,000, including marketing salaries
of P 50,000 and administrative salaries of P 30,000. Labor time tickets show that
P170,000 of the labor cost was direct labor. A payroll clearing account is used.
e. Various indirect manufacturing costs totalling P 25,080 were paid in cash.
f. Various indirect manufacturing costs totalling P85,000 were incurred on account.
g. Total factory overhead is charged to Work in process.
h. Cost of production completed in January totalled P601,000 and finished goods
on January 31, totalled P151,000.
i. Customers to whom shipments were made during the month were billed for
P800,000.
Determine the work in process ending inventory.
a. P167,080
b. P192,080 c. P322,080 d. P187,080
11. The B Company provides the following data for 2018:
Dec. 31, 2017
Dec. 31, 2018
Inventories:
Raw materials *
P 12,000
P 13,500
Work in process
15,100
17,600
Finished goods
19,500
21,200
Operating data:
Costs of goods manufactured
151,700
Direct labor cost
50,000
Factory overhead cost(utilities only)
62,500
Indirect material cost
5,000
* consisting of both direct and indirect materials.
The cost of materials purchases for 2018:
a. P43,200 b. P38,200 c. P36,700 d. P33,200
9
12. FOX Outfitters makes Artic Warmsuits. The general manager has a special board on
his office wall where he writes key statistics.on the board for March, he has written the
following:
Production output
25,000 suits
Materials costs
P 50,000
Direct labor costs
2,000 hours at P10 per hour
Factory overhead
P2 per outfit produced plus P40,000 per month
Selling expenses
P1 per outfit sold plus P50,000 per month
He heard the sales manager brag about selling 20,000 suits this month.
What was the costs of goods sold per unit?
a. P6.40
b. P9.20
c.P 5.80
d. P7.00
13. In the Joanne Company, costs incurred during November were P15,000 for
materials purchased, P40,000 for direct labor, and P50,000 for overhead. Materials
inventory decreased by P4,000. If cost of goods manufactured in November was
P99,000 and beginning work in process inventory was P28,00, find ending work in
process inventory.
a. P38,000 b. P 34,000 c .P 30,000 d. P 18,000
14. Work in process inventory of Virgie Corporation increased P11,500 from the
beginning to the end of November. Costs incurred during November were P 12,000 for
materials used, P63,000 for direct labor, and P21,000 for overhead. Find costs of goods
manufactured for November.
a. P 96,000 b. P 84,500 c. P 107,500 d.P 73,000
10
JOB ORDER COSTING
A. Job Order Costing
Job Order Costing is a system for allocating costs to groups of unique
products. It is applicable to the production of customer-specified products such
as the manufacture of special machines and even to cost of particular service
(e,g., providing legal services for a client of a law firm). Each job becomes a cost
center for which cost are accumulated. A subsidiary record(job cost sheet) is
needed to keep track of all unfinished jobs (work in process) and finished jobs
(finished goods). Note that the total of unfinished job cost sheets will equal the
work in process ending inventory balance.
Cost sheet
Cost sheet
Cost sheet
Job 1
DM
P8,000
DL
6,000
FOH
9,000
P23,000
Job 2
DM P10,000
DL
5,000
FOH
7,500
P22,500
Work In Process
DM P18,000
DL
11,000
FOH 16,500
P45,500
Note that whenever work in process is debited or credited in the above entries, the
amount of the entry is the sum of the postings on the job order cost sheets. The
balances on the job order sheets are also the basis for the entries transferring
completed goods to finished goods inventory and transferring the cost of goods shipped
to customers to cost of goods sold.
The work process account is analyzed below.
Work in process
1. Beginning balance
manufactured(CGM)
2. Direct materials used
3. Direct labor employed
4. Overhead applied
6. Ending inventory
6.
Costs
of
goods
A similar analysis can be performed on the finished goods account.
Finished Goods
1. Beginning balance
(CGS)
2. Cost of goods manufactured
4. Ending balance
11
3. Cost of goods sold
B. Spoilage in Job Order Costing
In a job-order costing system, the costs of normal spoilage and defective
units can be handled in two different ways. When spoilage is attributable to
general factory conditions, net spoilage costs are allocated to all jobs through
overhead application
(i.e., estimated spoilage costs are included with other overhead in the
computation of the overhead application rate). Alternatively, when spoilage is
attributable to exacting job specifications, net spoilage is not reflected in the
predetermined overhead rate. Under both methods, the proceeds from the sale
of spoiled goods should be offset against the cost of spoiled goods produced.
Net spoilage cost would be charged to factory overhead in the first case and left
in work in process in the second case.
If the predetermined overhead rate does not include an allowance for
spoilage, then spoilage are considered abnormal. Costs of abnormal spoilage
should not be charged to jobs but would be written off as a loss on period,
normally part of factory overhead control.
PROBLEMS
1. The following job order cost details pertains to the three jobs that were in process
at the UNILEVER Company during January:
Job 66
Job 67
Job
668
Cost charged in prior period
P40,000
P15,000
P Costs added in January:
Direct materials
35,000
45,000
55,000
Direct labor
45,000
40,000
35,000
Factory overhead (P50/MHrs)
?
?
?
January machine hours used
720
640
460
Required: prepare the journal entry to record each of the following January
transactions:
1. Direct materials were issued from the material storeroom to work in
process.
2. The payroll was distributed to work in process.
3. Factory overhead was applied to production for the period.
4. Job orders 66 and 67 were completed and transferred to the finished
goods storeroom.
12
2. The books of Olay Products Company shoe the following account balances as of
March 1:
Finished goods
P 78,830
Work in process
292,621
Materials
65,000
over -or underapplied factory overhead 12,300 (Cr.)
The work in process account is supported by the following job order cost sheets:
Direct
Direct
Factory
Job
Item
materials
Labor Overhead Total
204 80,000 balloons P 15,230 P 21,430
P13,800
P 50,460
205
5,000 Life rafts
40,450 55,240
22,370
118,060
206 10,000 Life belts
60,875
43,860
19,366
124,101
During March, the following transactions occurred:
a. Purchase of materials, P 42,300.
b. Purchase of special materials was P5,800 for new Job 207, which calls for
P4,000 life jackets.
c. Indirect labor cost was P12,480. Direct labor was as follows:
Job
Amount
Hours
204
P 26,844
3,355.5
205
22,750
3,250.0
206
28,920
3,615.0
207
20,370
2,910.0
d) Materials issued:
Job 204
P 9,480
Job 205
11,320
Job 206
10,490
Job 207
16,640 (excluding P5,800 of special materials, which are
also
issued at this)
e) Other factory overhead incurred or accrued:
Insurance on factory
P 830.00
Tax on real estate
845.00
Depreciation - machinery
780.00
Depreciation - factory building
840.00
Light
560.00
Coal used
1,810.00
Power
3,390.00
Repairs and maintenance
2,240.00
13
Indirect supplies
Miscellaneous
1,910.00
15,256.87
f) Factory overhead is applied at the rate of P2.30 per direct labor hour. An
applied overhead control account is used and is then closed to the overhead control
account.
g) Job 204 was shipped and billed at a contract price of P117,500.
Required:
1. Compute the total cost of each job at the end of March.
2. Determine the over or underapplied factory overhead remaining in the overhead
control account.
3. Little Hugs Corp. is a manufacturer of furnishings for children. The company uses a
job-order costing system. Little Hugs work in process inventory on November 30,2018
consisted of the following jobs:
Job No.
Description
Units
Accumulated Costs
CBS102
Cribs
20,000
P 900,000
PLP086
Playpens
15,000
420,000
DRS114
Dressers
25,000
250,000
Total
P1,570,000
The company’s finished-goods inventory, which Little Hugas values using the FIFO(firstin, first-out) method, consisted of five items.
Item
Quantity and Unit Cost
Accumulated Costs
Cribs
7,500 units @ P64 each
P 480,000
Strollers
13,000 units @ P23 each
299,000
Carriages
11,200 units @ P102 each
1,142,400
Dressers
12,000 units @ P55 each
1,155,000
Playpens
19,400 units @ P35 each
679,000
Total
P3,755,400
Little Hugs applies manufacturing overhead on the basis of direct-labor hours. The
company’s overhead budget for the year totals P4,500,000, and the company plans to
use 600,000 direct-labor hours during this period. Through the first 11 months of the
year, a total of 555,000 direct-labor hours were worked, and total overhead amounted to
P4,273,500.
At the end of November, the balance in Little Hugs Raw Material Inventory account,
which includes both raw materials and purchased parts, was
14
P668,000. Additions to inventory and requisitions from inventory during December
included the following:
Raw Material
Purchased Parts
Purchases
P 242,000
P 396,000
Requisitions:
Job CBS102
51,000
104,000
Job PLP086
3,000
10,800
Job DRS11
124,000
87,000
Job STR077 (10,000 strollers) 62,000
81,000
Job CRG098 (5,000 strollers)
65,000
187,000
During December, Little Hugs factory payroll consisted of the following:
CBS102
12,000 hrs
P 122,400
PLP086
4,400 hrs
43,200
DRS11
19,500 hrs
200,500
STR077
3,500 hrs
30,000
CRG098
14,000 hrs
138,000
Indirect labor
3,000 hrs
29,400
Supervision
57,600
Total
P 621,100
The following lists shows the jobs that were completed and the units sales for
December.
Production
Sales
Job No.
Items Quantity completed
Items Quantity Shipped
CBS102
Cribs 20,000
Cribs
17,500
PLP086
Playpens
15,000
Playpens
21,000
STR077
Strollers
10,000
Strollers
14,000
CRG098 Carriage
5,000
Dressers
18,000
Carriages
6,000
Required:
1. Determine the over-or underapplied factory overhead.
2. Calculate the peso balance in Little Hugs Work in Process Inventory account as
of Dec. 31, 2018.
3. Calculate the peso amount related to the playpens in Little Hugs Finished- Goods
Inventory amount as of December 31, 2018.
15
4. During August,Altamont Machine Company started production orders 116,117, and
118. Order 115 was in process at the beginning of the month with direct materials costs
of P35,000, direct labor costs of P21,000 and applied factory overhead of P25,200.
During the month, direct materials were requisitioned, and direct labor was identified
with the orders as follows:
Order No.
Direct Materials
Direct labor
115
P 26,000
116
P39,000
45,000
117
53,000
47,000
118
47,000
16,000
Factory overhead is applied to the orders at 120 percent of direct labor cost. Orders
115, 116, and 117 were completed and sold in August. Order 118 was incomplete on
August 31.
A. Determine the cost of goods sold for the month of August.
B. Determine the work in process ending balance August 31.
SPOILED GOODS - JOB ORDER COSTING
5. P Foundry Inc., manufactures custom metal products that require casting, such
as engine blocks, pistons, and engine housings. During the current period, an
order for 5,000 custom housings was begun on job number 3387 for R Pump
Company. After the job was completed, the housings were inspected and 200
units were determined to be defective. The customer has agreed to accept the
spoiled units can be sold as seconds for P15 each. Spoiled goods are kept in a
inventory account separate from Finished Goods. Total costs charged to job
number 3387 are:
Materials
P46,000
Labor (1,000 hour X P14 per hour)
14,000
Factory overhead (P30 per labor hour)
30,000
Total cost charged to job number 3387 P90,000
Required:
1. Assuming that the defective units are the result of an internal failure (that is,an
employee error or a machine failure), prepare the appropriate general journal
entry to record the transfer of the defective units to Spoiled Goods Inventory and
the shipment of job number 3387 to the customer.
16
2) Assuming that the defective units are the result of a change in design
specified by the customer after the units are completed, prepare the
appropriate general journal entry to record the transfer of the defective
units to Spoiled Goods Inventory and the shipment of job number 3387 to
the customer.
6. Troy Cabinet Co. manufactures custom cabinets for modular and prefabricated
housing companies. During the current period, an order for 1,000 custom
cabinets was begun on job number 89621 for Baggy Housing Corp. Customs
jobs are marked up 150 percent of cost. Total costs charged to job number 8962
are:
Materials
P 92,000
Labor (3,000 hours X P12 per hour)
36,000
Factory overhead (P24 per labor hour)
72,000
On inspection, 100 of the cabinets were found to have defects. Materials costing
P4 and ½ hour of labor are required to correct each of defective unit. Factory overhead
is charged to production on the basis of direct labor hours.
Required: Prepare the appropriate general journal entries assuming that spoilage were
cause by (a) internal failure, (b) change in the specification made by customer.
7. F Company had a production run of 8,000 pair of slacks during the last week of
June, at the following costs per pair:
Materials
P50.00
Labor
40.00
Factory overhead (includes P7.00 allowance
30.00
for spoiled work)
final inspection revealed 600 pairs not meeting quality standards, salable as
seconds at P40.00 per pair.
Required: 1) Prepare the journal entries assuming the loss is charged to the
production run.
2) Prepare the journal entries assuming the loss is to be charged to
all production run.
17
8. Fabricators manufactures jacks and other lifting equipment. One order from A
Supply House for 1,000 jacks showed the following costs per unit: materials,
P40.00; labor, P17.50; factory overhead applied at 160% of direct labor cost
(150% in cases in which any defective unit costs are to be charged to a specific
order).
Final inspection revealed that 75 of the units were improperly riveted. Correction
of each defective unit requires P2.00 for materials, P3.00 for labor, and factory
overhead at the appropriate rate.
Required:
1. Assume the order is charged with the cost of defective work, prepare the
necessary journal entries in the books.
2. Assume the cost of correcting the defective work is not charged to the
specific order, prepare the necessary journal entries in the books.
MULTIPLE CHOICE
1.
Amy prints brochures for clients and uses job costing. She applies her
overhead costs to jobs each month by adding 20 percent to prime costs.
In February, she had the following job activity:
Beginning Materials
Direct Labor
Job
Inventory
Added
Added
115
P 25,000
P10,000
116
P20,000
20,000
117
20,000
10,000
Job 117 was incomplete at the end of February.
Determine the cost of jobs completed in February.
a.P 75,000
b. P85,000
c.P 90,000
d. P126,000
Questions 2 and 3 are based on the following:
Newport Company, a manufacturer of fiber optic communications equipment, uses a
job-order costing system. Since the production process is heavily automated,
manufacturing overhead is applied on the basis of machine hours using a
predetermined overhead rate. The current annual rate of P15 per machine hour is
based on budgeted manufacturing overhead costs of P1,200,000 and a budgeted
activity level of 80,000 machine hours. Operations for the year 2018 have been
completed, and all of the accounting entries have been made for the year except the
application of manufacturing overhead to the jobs
18
Worked on during December, the transfer of costs from Work in Process to Finished
Goods for the jobs completed in December, and the transfer of costs from Finished
Goods to Cost of Goods Sold for the jobs that have been sold during December.
Summarized data as of November 30,2018 and for December 2018 are presented in
the following table. Jobs T11-007, N11-013, and N11-015 were completed during
December. All completed jobs except Job N11-013 have been turned over to customers
by the close of business on December 31,2018.
Job No.
T11-007
N11-013
N11-015
D12-002
D12-003
Total
Work in Process
Balance
Direct
11/30/2018
Material
P 87,000
P 1,500
55,000
4,000
-025,600
-037,900
-026,000
P142,000
P95,000
December 2018 Activity
Direct
Machine
Labor
Hours
P4,500
300
12,000
1,000
26,700
1,400
20,000
2,500
16,800
800
P80,000
P6,000
Activity through
Operating Activity
11/30/2018
Actual manufacturing overhead:
Indirect material
P125,000
Indirect labor
345,000
Utilities
245,000
Depreciation
385,000
Total overhead
P1,100,000
Other items:
Raw material purchases*
P965,000
Direct-labor costs
845,000
Machine hours
73,000
Account Balances at Beginning of Year:
1/1/2018
Raw material inventory*
P105,000
Work in process inventory
60,000
Finished goods inventory
125,000
December 2018
Activity
P 9,000
30,000
22,000
35,000
P96,000
P98,000
80,000
6,000
*raw material purchases and raw material inventory consist of both direct and
indirect materials. The balance of the Raw Materials Inventory account as of December
31,2018 is P85,000.
19
2.
Determine the amount by which the overhead is applied or underapplied
as of Dec. 31,2018.
a. P11,000 underapplied
c. P6,000 underapplied
b. P11,000 overapplied
d. P 6,000 overapplied
3.
Determine the balance in Newport Company’s Finished Goods Inventory
account on Dec. 31,2018.
a.P86,000 b.P31,000 c.P39,000 d.P211,000
4.
You find that the cost records at Sabath Tool and Die Company have been
poorly maintained. Some information has been entered, but other
information is missing. Fortunately, the information given is correct.
The costs for Jobs 686,687,688 are to be determined. The direct materials
cost is P5,280 for Job 686 and P7,150 for Job 687. The cost of direct
materials requisitioned during the month for all other jobs, except Job 688,
is P48,200. No jobs were in process at the beginning of the month. The
total cost of direct materials requisitioned during the month was P69,130.
Labor is paid at a uniform rate of P100 an hour. Job 686 required 82 direct
labor hours, and Job 688 required 43 direct labor hours. A total of 760
direct labor hours were worked during the month. The direct labor cost of
all jobs, with the exception of the three jobs being considered, was
P58,500.
Two machine hours are used for each direct labor hour. Overhead is
applied at a rate of P40 per machine hour. The actual overhead cost for
the month was P63,200. Jobs 686,687, and 688 were completed during
the month.
Determine the costs of goods manufactured during the month.
a.P 44,820
b. P 48,710
c. P 63,190
d. P 64,860
5.
During 2018, Danzi Company purchased materials costing P152,600.
Materials requisitioned for job cost P98,000, and indirect materials costing
P42,000 were charged to Factory Overhead. Factory payroll were
P212,000 with payroll taxes deducted of P60,000. Indirect labor of
P71,000 included in the payroll was charged to Factory Overhead. All
other labor was direct labor charged to the jobs. Factory overhead was
applied to the jobs at the rate of P8 per machine hour. During the year, the
company operated at P45,000 machine hours and incurred factory
overhead costs of P259,000 (in addition to the indirect materials and
indirect labor previously stated). Depreciation of P47,000 was included in
the P259,000 of factory overhead costs.
20
Product costing P465,000 were completed during the year, and the cost of goods sold
was P480,000. At the beginning of the year, Danzi had the following balances:
Materials P27,000;
Work in process P48,000;
Finished Goods P34,000
Determine the cost of work in process ending inventory for 2018.
a.P134,000
6.
b.P182,000
c. P167,000
d. P194,000
The Solomon Company uses a job-costing system at its Dover, Delaware
plant. The plant has a Machining Department and a Finishing Department.
Its job-costing system has two direct-cost categories (direct materials and
direct manufacturing labor) and two manufacturing overhead cost pools
(the Machining department, allocated using actual machine hours and the
Finishing Department, allocated using actual labor cost). The 2011 budget
for the plant is as follows:
Manufacturing overhead
Direct manufacturing labor cost
Direct manufacturing labor-hours
Machine-hours
Machining
Department
P10,000,000
900,000
30,000
200,000
Finishing
Department
P8,000,000
4,000,000
160,000
33,000
During the month of January, the cost record for Job 431 shows the
following:
Machining
Finishing
Department
Department
Manufacturing overhead
P14,000
P3,000
Direct manufacturing labor cost
600
1,250
Direct manufacturing labor-hours
30
50
Machine-hours
130
10
Assuming that Job 431 consisted of 200 units of product, what is the unit
product cost of Job 431?
a.P139.25 b.P45
c. P105.50 d. P33.75
7.
In addition to the above problem, the balances at the end of 2018 are as
follows:
Manufacturing overhead incurred
Direct manufacturing labor cost
Machine-hours
8.
Machining
Department
P11,200,000
950,000
220,000
Finishing
Department
P7,900,000
4,100,000
32,000
21
Compute the under or overallocated manufacturing overhead for Dover
plant as a whole.
a.P200,000 underallocated
c. P100,000 overallocated
b.P300,000 overallocated
d. P 500,000 overallocated
Safety First Parachute Company uses a job order cost system and has
two production departments, T and P. Budgeted information for the year is
as follows:
Machine hours
Direct materials
Direct labor
Factory overhead
Department T
500
P400,000
350,000
455,000
Department P
25,000
P600,000
100,000
300,000
Both Department T and Department P apply factory overhead to
production order through the use of predetermined factory overhead
application rates, which are based upon the yearly budget. Department T
applies factory overhead on a direct labor cost basis while Department P
does so on a machine hour basis. Actual information relating to job 194
during the year was as follows:
Machine hours
Direct materials
Direct labor
Factory overhead
Department T
150
P18,000
11,000
14,500
Department P Total
2,500
2,650
4,500
24,600
P15,500
39,100
If Safety First Parachute Company contracted to sell Job194 for P100,000
and if estimated selling and administrative expenses are 5% of the selling
price, what is the estimated profit on job 194?
a.P17,200
b.P22,400 c.P28,600 d.P33,700
9.
The following relates to Job No.999, which is being carried out by DR to
meet customer’s order.
Department 1 Department 2
Direct materials consumed
P10,000
P6,000
Direct labor hours employed
800
400
Direct labor rate per hour
8
10
Production overhead per direct labor hour
Administrative and other overhead
Profit markup
22
What is the selling price to the customer for Job 999?
a.P45,000
b.P55,200
c.P54,000
8
8
20% of full
production cost
25% of selling price
d.P57,600
10.
Bel-air uses a job order cost system and applies factory overhead to
production orders on the basis of direct manufacturing labor cost. The
overhead rates for 2019 are 200% for Department A and 50% for
Department B. Job 123, started and completed during 2017, was charged
with the following costs:
Department
A
B
Direct materials
P25,000
P 5,000
Direct manufacturing labor
?
30,000
Factory overhead
40,000
?
The total manufacturing costs associated with Job 123 should be
a.P135,000
b.P180,000
c.P195,000
d.P240,000
11.
Under Paddacks Co.’s job order costing system manufacturing overhead
is applied to work in process using a predetermined annual overhead rate.
During January 2018, Passacks’s transaction included the following:
Direct materials issued to production
P 90,000
Indirect materials issued to production
8,000
Manufacturing overhead incurred
125,000
Manufacturing overhead applied
113,000
Direct labor costs
107,000
Paddacks beginning work in process inventory is P20,000 greater than
ending work in process inventory. What was the cost of jobs completed in
January 2018?
a.P302,000 b.P310,000 c.P322,000 d.P330,000
12.
Belgium Company uses a job order cost system. The following debits
(credits) appeared in Belgium’s work in process account for the month of
April 2018:
April
Description
Amount
1
Balance
P 4,000
30
Direct materials
24,000
30
Direct manufacturing labor 16,000
30
Factory overhead
12,800
30
To finished goods
(48,000)
23
Belgium applies overhead to production at a predetermined rate of 80% of
direct manufacturing labor costs. Job No.5, the only job still in process on
April 30,2018, has been charged with direct manufacturing labor of
P2,000. What was the amount of direct materials charged to Job No.5?
a.P3,000
b.P5,200
c.P8,800
d.P24,000
13.
a.
b.
c.
d.
e.
f.
J Co. employs the job order cost system. Data for the month just ended
are summarized below:
Work in process, beginning
Direct materials used for the month
Direct labor costs for the month
Factory overhead applied
(set rate based on direct labor)
Goods completed and transferred to stock
Ending work in process referred to Job 105 charged with direct labor cost
of P12,000 and Job 107 charged with overhead of P9,600.
The cost of direct materials charged to Jobs 105 and 107 was
a. P34,800
b. P16,800
c. P30,000
d. P36,000
14.
H Co. manufactures leather bags and uses the job order cost system. Its
work in process below:
Direct materials used
P 341,000
Direct labor incurred
324,500
Factory overhead
259,000
Transferred to finished goods
825,000
Two jobs are still in process, upon which direct materials of P70,400 have
been expended. Factory overhead is applied at a predetermined
percentage of direct labor cost. What is the (1) direct labor and (2) factory
overhead component on the jobs transferred to the finished goods?
a.(1) P308,000; (2) P246,400
c.(1) P324,500; (2)P259,600
b.(1) P310,500; (2) P248,400
d.(1) P341,000; (2)P272,800
15.
Handy Manufacturing has accumulated the following information for Job
453:
 P37,000 of direct materials received on requisition 76.
 Eleven hours of direct labor were needed each day for 5 days.
Labor rate is P90.00 per hour. Any hours over 40 are considered

overtime and are charged at 1-1/2 times the normal labor rate to
Job 453.
Factory overhead is applied at 80% of direct labor cost.
24
This job will produce 25 units, size 4 crankshafts for AI’s Auto
Supply store. The goods were ordered on April 27 and work was
begun on that day. The job was completed on May 3 and was to be
delivered on May 9. The crankshafts were sold for P3,000 a piece.
Compute the cost of job 453.
a.P49,474 b.P50,419 c.P51,175 d.P48,502
18.Danica Manufacturing Company uses job order costing system. Factory
overhead is applied to production at a predetermined rate of 150% of direct labor cost.
Any over- or underapplied factory overhead is closed to the cost of goods sold account
at the end of each month. Additional information is available as follows:
a. Job 101 was the only job in process at January 31, with accumulated costs of
direct materials, P4,000; direct labor P2,000 and applied overhead of P3,000.
b. Jobs 102,103, and 104 were started during February.
c. Direct materials requisitions for February totaled P26,000.
d. Direct labor cost of P20,000 was incurred for February.
e. Actual factory overhead was P32,000 for February.
f. The only job still in process on February 28 was Job 104, with costs of P2,800
for direct materials and P1,800 for direct labor.
g. Jobs 101,102 and 103 were sold in February.
The cost of goods sold for February was
a.P79,700
b.P75,700
c.P80,000
d. P77,700
25
PROCESS COSTING
Process costing, in contrast to job-order costing, is applicable to a continuous
process of production of the same or similar goods, e.g., oil refining and chemical
production. Since the product is uniform, there is no need to determine the costs of
different groups of products and each processing department becomes a cost center.
Process costing computations can be broken down into the 5 steps listed below:
1.
2.
3.
4.
5.
Visualize the physical flow of units.
Compute the equivalent units of production
Determine costs to allocate
Compute unit costs
Allocate total costs to
a.Goods manufactured (complete)
b. Ending work in process
Note that the five steps above can be memorized using the acronym:
PECUA (Physical Flow, Equivalent Units of Production, Costs to Allocate, Units
Costs, Allocated Costs).
1. Flow of Units
The cost of diagram shown in normal costing handout is the same for
process costing except that there will typically be several WIP accounts (i.e.,
one for every department). When solving a process costing problem, it is
helpful to visualize the physical flow of units, as illustrated in the diagram
below:
Beginning WIP
Units started
Completed good output and spoilage
Ending WIP
The units in BWIP are either completed or become spoiled. The arrow
from units started to completed good output and spoilage is commonly called
“units started and completed”. Units started but not completed become EWIP.
Completed good output and spoilage can include good units completed,
normal spoilage, and/or abnormal spoilage.
26
2. Equivalent Units of Production
An EUP is the amount of work equivalent to completing one unit from start
to finish. In a process costing system, products are assigned costs
periodically (usually monthly). At any one moment some units are incomplete
which makes the EUP calculations necessary to allocate manufacturing costs
between.
1. Goods finished during the period (cost of goods manufactured)
2. Ending work in process
The two primary EUP methods used for process costing are first-in, first-out
(FIFO) and weighted-average (WA). In FIFO, beginning WIP is handled separately;
equivalent units refer only to the work done in the current period. The weighted-average
method averages work done last period (on this period’s beginning WIP) plus the
current period’s work when computing EUP. The EUP calculations are
FIFO
WA
Finished and transferred to next department
xx
xx
+ Work done to date on EWIP
xx
xx
-Work done last period on BWIP
(xx)
-
Equivalent units of production
xx
xx
Note that the FIFO computation excludes the work done last period on the
beginning WIP, while the WA computation includes all work done on the beginning WIP.
Importantly, the method assumes that all units completed during a period are started
and completed during that period. As a result, the percentage of work done last period
on the beginning work in process inventory is ignored. Furthermore, under the WA,
current costs are combined with prior period costs, and all units are carried at an
average cost of production.
The computation of equivalent units and its interrelationship with the last three
steps of the PECUA acronym are diagrammed below:
FIFO METHOD
Equivalent units
Finished and transferred out
In process, end
In process, beginning
Total equivalent units
Materials
Labor & Overhead
EU= 100%
+EU, end
-EU, last month
= EUP
EU= 100%
+EU, end
-EU, last month
= EUP
27
Costs to allocate
In BWIP
Current costs
PXXXX
÷ EUP
PXXXX
PXXXX
÷ EUP
PXXXX
Total
PXXXX
PXXXX
PXXXX
Units costs
Allocate costs
Finished and transferred out (balancing figure*)
PXXXX
In process, end= Mat. EUP x Unit Cost
PXXXX
Lab. & Overhead EUP x Units Cost
PXXXX PXXXX
 The detailed computation of finished and transferred and transferred out costs
must be as follows:
Finished and transferred out units
XXXX units
In process, beginning
XXXX units
Cost last month
PXXXX
Cost this month: Material EU this month X Unit Cost
PXXXX
Labor and OH this month x Unit cost PXXXX PXXXX
Started, finished and transferred out, EUP x unit cost
PXXXX
Total cost of finished and transferred out
PXXXX
WEIGHTED AVERAGE
Finished and transferred out
In process, end
Costs to allocate
In BWIP
Current costs
Total costs
Materials
EU=100%
+ EU, end
=EUP
PXXXX
PXXXX
PXXXX
÷ EUP
PXXXX
Labor & Overhead
EU=100%
+ EU, end
=EUP
Total
PXXXX
PXXXX
PXXXX
PXXXX
PXXXX
PXXXX
÷ EUP
PXXXX
Allocate costs
Finished and transferred out
(EUP = 100%) x Unit cost
In process, end (balancing figure*)
PXXXX
PXXXX
PXXXX
** the detailed computation of in process, end cost is as follows:
28
Material EU x unit cost
Labor & Ovethead EU X unit cost
Total in process, end ocsts
PXXXX
PXXXX
PXXXX
3. Simple Process Costing Example
The CRC-ACE Toy Company uses a process cost system to collect costs.
Data relevant to 2005 production is given below. Assume we begin with 800
units 25% complete for labor and overhead (conversion costs), and 100%
complete for materials because they are introduced at the start of the
process. We start 4,200 units, 4,000 units are completed, while 1,000 remain
in EWIP (20% complete for labor and overhead and 100% complete for
materials). No spoilage occurs. The costs are summarized in the following TAccount:
Work In Process Control
BWIP
Materials
P9,000
Labor & OH 5,320
Current
Materials
P42,000
Labor & OH 140,000
EWIP
P14,320
Goods Finished
???
182,000
???
First, the physical flow of units is diagrammed.
BWIP
800
800
3,200
Started
4,200
1,000
To account for 5,000
4,000 Completed
1,000 EWIP
5,000
Second, equivalent units are computed. Both FIFO and WA are illustrated:
FIFO
Materials
Finished and transferred out,
4,000
Lab. & OH
4,000
WA
Materials Lab. & OH
4,000
4,000
In process, end
In process, beginning
Equivalent units of production
1,000
(800)
4,200
200
(200)
4,000
1,000
200
5,000
4,200
29
The next step is the computation of unit cost: FIFO is current costs divided by
current work, while WA is all costs divided by all work.
FIFO
Materials
Lab. & OH
Current costs
P42,000
P140,000
Equivalent units of production ÷ 4,200
÷ 4,000
Unit costs
P 10.00
P 35.00
WA
Materials Lab. & OH
P51,000
P145,300
÷ 5,000
÷ 4,200
P 10.20
P 34.60
The final step is to allocate the total costs to units completed (4,000) and to
EWIP (1,000). Remember, in FIFO, BWIP is handled separately.
FIFO
WA
Finished and transferred out (balancing figure)
4,000 x P44.80
In process, end (balancing figure)
Materials, (1,000 x P10.00)
P10,000
Labor & Overhead (200 x P35.00)
7,000
Total costs
P196,320
Now the T- account can be filled in.
WIP (FIFO)
14,320
182,000
179,320
17,000
P 179,320
P 179,200
17,120
17,000
P 196,320
WIP (WA)
14,320
182,000
179,200
17,120
4. EUP for material
In the above example, material was assumed to be added at the
beginning of the production process. (this must be your normal assumption if
the problem is silent as to application of materials because this is really the
normal case in actual production). Material can also be added at different
points in the process (e.g., 10%, 70%) or gradually during the process. Also
note that the costs associated with units transferred between departments are
treated the same as material added at the beginning of the production
process.
30
5. FIFO WORK IN PROCESS ASSUMPTION
Notice that two groups of finished products are transferred out of work in
process in the above FIFO example.
1) Product started last period and finished this period.
2) Product started and finished this period.
FIFO assumes that the first batch into production (i.e., the beginning work in
process inventory) is to be the first batch completed. This batch is treated as separate,
distinct layer- separate from goods that are started and completed during the period.
Under the WA method, all goods are assumed to be started and completed during the
period. Thus, the only difference between FIFO and WA methods is the treatment of the
beginning work in process inventory.
6. Spoilage in process
The following terms are commmonly used:
1. Spoilage - inferior goods either discarded or sold for
disposal value.
2. Defective units – inferior goods reworked and sold as
normal product. A major distinction is made between
normal and abnormal spoilage.
A. Normal spoilage is the cost of spoiled units caused by the nature of the
manufacturing process (i.e., which occur under efficient operating conditions).
(1) normal spoilage is a necessary cost in the production process
and is, therefore, a product cost.
b. Abnormal spoilage is the cost of spoiled units which were spoiled through
some unnecessary act, event or condition.
(1) abnormal spoilage is a period cost (e.g., “loss on abnormal spoilage
or charged to factory overhead control account).
(2) abnormal spoilage costs should not be included in the normal cost of
goods sold.
spoilage must be considered in EUP calculations. For example, if spoilage
is discovered at the 60% point in processing and 100 units of abnormal spoilage is
discovered, 60 EUP have occurred. The amount of abnormal loss would be the cost of
60 EUP (conversion) plus the materials added to 100 units of production up to the 60%
point. In contrast, if the spoilage is considered normal in nature, the spoilage cost would
be treated as a product cost and simply added to the cost of goods units completed.
31
PROBLEMS
1. Compute the EUP for each of the following independent cases below:
A. The production of data of Jewel Company for the month of December, 2018,
follow:
In process, December 1
Stage of completion
Started in process
In process, December 31
Stage of completion
Department A
10,000
2/5
20,000
?
60%
Department B
5,000
10%
25,000
10,000
3/5
Department A applies materials as follows:
1/5 when the process is started; 30% when the process reaches ½ completion,
and the balance at the end of the process. In Department B, materials are
applied
60% at the start of the process and 40% at the end. (Compute for material
equivalent production only in both departments).
B. Materials are issued at the following stages:
At the start of the process
25%
When work is 50% completed
50%
When work is 75% completed
balance
Conversion costs are applied uniformly.
In process, June 1 (3/4 incomplete)
10,000 units
Transferred out
65,000
In process, June 30 (2/5 incomplete)
25,000
C. In process, beginning (40% incomplete)
28,000 units
Started in process during the period
86,000
Transferred out to next department
86,000
In process, end (3/5 complete)
?
Materials are issued 100% at the start of the process, and conversion costs are
applied uniformly.
D. In process, beginning (1/4 complete)
10,000 units
Started in process
7,500
In process, end (2/5 complete)
10,500
Materials are issued as follows: 40% at the start and the balance at the end of
process.
Conversion costs are applied evenly.
32
2. The W Company uses a process in its two producing departments. On April 1,
Department B had no units in beginning inventory. During April, 25,000 units were
transferred from Department A to Department B. On April 30, Department B had 5,000
unit of work in process, 60% complete as to labor and 40% complete as to factory
overhead. During the month, 20,000 units were transferred from Department B to
Finished Goods Inventory. Materials are added in the beginning of the process in
Department B. the following journal entries summarize April activity:
Work in Process – Department A
Work in Process – Department B
Materials
250,000
150,000
Work in Process – Department A
Work in Process – Department B
Payroll
108,000
92,000
Work in Process – Department A
Work in Process – Department B
Applied Factory Overhead
146,000
154,000
400,000
200,000
Work in process – Department B
400,000
Work in process – Department A
300,000
400,000
Required: prepare a cost of production report for Department B.
3. S Manufacturing Company produces a product in two manufacturing departments,
Molding and Finishing. The product is molded out of plastic in the Molding department
and then transferred to the Finishing Department, where parts are added to the molded
plastic unit.
Beg. Inventory
Added This Period
Costs charged to the department:
Materials
Direct labor
Factory overhead
P41,200
1,100
12,900
P448,800
130,500
184,500
During the period, P9,200 units were transferred from the Molding Department to the
Finishing Department. The Molding Department had 1,000 units still in process at the
end of July (100% complete as to materials and 40% complete
33
as to conversion cost and 800 units still in process at the end of August (75% complete
as to materials and 25% complete as to conversion cost.)
Required: Prepare a cost of production report under weighted average method and
FIFO method.
4. Pop Cola Company produces a soft drink in three departments, Syrup, Carbonation
and Bottling. Syrup, which gives the drink its flavor, is produced in the first department.
The syrup is then transferred to the second department, where carbonated water is
added to give the drink its frizz. After carbonated water has been added, the liquid drink
is bottled for storage and transport to customers. A process cost system with an
average cost flow assumption is used to account for work in process inventories. Data
related to operations in the Carbonation Department during the month of October are:
Units in beginning inventory
1,000
Units transferred from the Syrup Department
2,000
Units added to process in the Carbonation Department
6,000
this period
Units transferred to Bottling Department this period
7,800
Units in ending inventory (100% materials, 25% labor
1,200
and overhead)
Beginning Inventory
Costs charged to the department:
Costs from the preceding department
Materials
Direct labor
Factory overhead
P11,200
1,900
600
1,200
Added this Period
P96,800
16,100
15,600
31,200
Required: compute the equivalent units, unit cost and cost assigned to finished and
transferred out units and cost assigned to work in process ending inventory.
5. H Corporation manufactures a product in three departments. The product is cut out of
sheet metal in the Cutting Department, then transferred to the Forming Department
where it is bent to shape and certain parts purchased from outside vendors are added
to the unit. The product is finally transferred to the Painting Department, where it is
prime painted, and packaged.
34
Data related to September operations in the Forming Department are:
Units in beginning inventory (80% materials, 40% labor and overhead)
1,400
Units received from the Cutting Department this period
4,600
Units transferred to Painting Department this period
5,000
Units in ending inventory (60% materials, 30% labor and overhead)
1,000
Beg. Inventory Added this Period
Costs charged to the department:
Costs from the preceding period
P211,200
P703,800
Materials
59,360
203,840
Direct labor
26,020
175,380
Factory overhead
52,040
350,760
Required: Prepare a cost of production report under weighted average and FIFO
methods.
6. Charlotta Textiles Company manufactures a variety of natural fabrics for the clothing
industry. The following data pertain to the Weaving Department for the month of
September.
Weighted Average
FIFO
Equivalent units of direct materials
60,000
40,000
Equivalent units of conversion
52,000
44,000
Units completed and transferred out during
September
50,000
50,000
The cost data for September is as follows:
Work in process, September 1
20,000 units
Direct material
P94,000
Conversion
44,400
Cost incurred during September
Direct material
P164,000
Conversion
272,800
1) If average method is used, how much is the cost of units transferred out during
September?
A. P520,000
B. P515,000
C. P521,800
D. P447,400
2) If FIFO method id used, what is the cost of work in process ending inventory during
September?
A. P55,200
B. P53,400
C. P60,200
D. P127,800
35
7. The Able Medicine Company manufactures an all-purpose capsule. Four
direct materials are put into production in Department A. Department B places
the units received from Department A into quick-dissolving capsules. Raw
materials (all direct) are placed into production in Department A as follows:
Raw material 101 (aspirin): Beginning of process
Raw material 102 (caffeine): When units are 40% complete.
Raw material 103 (decongestant): When units are 60% complete.
Raw material 104 (muscle relaxer): When units are 95% complete.
July date, Department A:
Units started in process
300,000
Units transferred out
250,000
Ending units in process: (30% are 45% complete, 35% are 50% complete,
15% ARE 65% complete, 20% are 98% complete)
Costs incurred:
Direct materials: 101
P 60,000.00
102
30,000.00
103
93,625.00
104
130,000.00
Conversion costs: Direct labor
P812,507.50
Factory overhead 364,227.50
Required: Prepare a cost of production report for Department A.
SPOILED UNITS
8. The D Manufacturing Company uses a process cost system. In the second
department, Department X, spoiled units occur during operations. Inspection
of spoiled units occurs when units are 70% complete. Direct materials are
added at the end of the process. Conversion costs are incurred evenly
throughout the process. Spoiled goods are considered by management as
internal failure and charged to Factory Overhead Control account.
Data pertaining to December’s activity in Department X are shown below:
Units
17,000
Costs
Beginning in process – 90% complete
Cost from preceding department
P 9,110.00
Direct labor
5,377.50
Factory overhead applied
3,375.00
Received from preceding department (Dept. W) 38,000 48,640.00
36
Added during the period:
Direct materials
Direct labor
Factory overhead applied
Units transferred to next department
40,000
Spoiled units
8,000
Ending units in process – 75% complete
P 38,000
30,217.50
14,931.00
?
Required: Prepare a cost of production report for Department X using
average and fifo methods.
9. Edwin Company uses average costing in accounting for its three
manufacturing departments. Department 2 receives units from Department 1
and applies conversion costs to these units at a uniform rate. When the units
are 80% complete, they are inspected and material is then added to the good
units. A Department 2 spoilage rate of 5% is considered normal.
For December, the following information is available:
(a) 3,000 units were in process on December 1, estimated to be
30% complete, with cost from December 1 of P15,960 and
Department 2 costs of P2,726.
(b) 32,000 units were received from Department 1 at a cost of
P180,000.
(c) Department 2 costs were: materials, P12,075; conversion,
P96,700.
(d) 30,000 units were completed and transferred to Department
3.
(e) 4,500 units were in process December 31, estimated to be
90% complete.
Required: Prepare a cost of production report.
10. M Company uses process costing. All materials are added at the beginning of
the process. The product is inspected when it is 80% converted, and spoilage
is identified only at that point. Normal spoilage is expected to be 3% of good
output.
During March, 10, 500 units were put into process. Current costs were
P52,530 for materials; P39,933 for labor; and P29,580 for factory overhead.
The 3,000 units still in process at the end of March were estimated to be 90%
complete. A total of 7,000 units were transferred to finished goods.
Required: Prepare a cost of production report.
37
MULTIPLE CHOICE
Questions 1 and 2 are based on the following:
Unilab Pharmaceutical Company manufactures a tablet for allergy
sufferers. All ingredients are added at the beginning of the Blending
Operation. Conversion costs flow uniformly throughout the process.
Tabulating and Coating are operations downstream from Blending.
Information on the Blending Operation for October is as follows:
Work in process – Blending Operations
October 1, balance(100,000 units
40% complete for conversion)
151,760
Direct materials added (1,000,000
Units)
1,310,000
Direct labor cost
?
Factory overhead (applied at 180%
of direct labor cost)
396,000
Completed and transferred to
Tabulating:
Units - ?
Costs - ?
October 31, balance (200,000 units,
70% complete for conversion costs)
?
The October 1 balance consists of the following cost elements:
Direct materials
P128,000
Direct labor
8,800
Factory overhead
14,960
Total costs
P151,760
1. Using the FIFO method, compute the cost of completed and transferred to Tabulating
operation.
a.P1,729,520
b. P2,077,760
c. P1,730,250
d. P1,926,000
2. Using the average method, compute the cost of completed and transferred to
Tabulating operation.
a.P1,729,520
b. P2,077,760
c. P1,730,250
d. P1,926,000
3. The Blondie Dye Company manufactures hair rinses and colourings. Direct materials
are introduced into production at the 50% stage of completion in Department A. Direct
labor and factory overhead are incurred evenly throughout the process. Because of the
timing of certain chemical processes, units are often at different stages of completion.
Management uses the fifo costing method in an effort to analyze costs.
38
Beginning units in process in Department A for May were at the following stages of
completion.
40% of the units were 10% complete
15% of the units were 40% complete
20% of the units were 55% complete
25% of the units were 70% complete
Beginning units in process amounted to 26,000 units, with a total cost of P37,700.
During May, 68,000 units were started in process. The following costs were incurred:
direct materials, P47,092; direct labor, P34,658; factory overhead, P51,987.
Ending units in process for May amounted to 6,000 units. They were at the following
stages of completion:
35% of the units were 25% complete
50% of the units were 45% complete
10% of the units were 75% complete
5% of the units were 95% complete
There were no spoiled units during the month.
Determine the cost of work in process inventory ending.
a. P, 4,565.50
b. P3,825.25
c.P4,250.75
d.P3,354.75
4. C Corporation is manufacturer that uses average costing to account for costs of
production. C manufactures a product that is produced in three separate departments:
Molding, Assembling, and Finishing. The following information was obtained for the
Assembling Department for June:
Work in process, June 1 – 2,000 units, composed of :
Amount
Transferred in from the Molding Department
P32,000
Cost added by the Assembling Department
Direct materials
20,000
Degress of completion
100%
100%
Direct labor
7,200
60%
Factory overhead
5,500
50%
The following activity occurred during June.
a) 10,000 units were transferred in from the Molding department at a cost of
P160,000.
39
(b) P150, 000 of cost were added by the Assembling Department: direct materials,
P96, 000; direct labor, P36, 00; and factory overhead, P18, 000.
(c) 8, 000 units were completed and transferred to the Finishing Department.
At June 30, 4, 000 units were still in work in process, with the following degrees of
completion: direct materials, 90%; direct labor, 70%; and factory overhead, 35%.
Determine the cost transferred out during the month of June.
a.P260, 000
b. P114, 700
c. P113, 500
d.P261, 200
5. Magnolia Chicken Farms raises chicks to the egg-laying stage and then moves the
hens to the laying sheds. Information about the Chick Raising Operation for March is:
(a) Beginning inventory of chicks is 12, 000, 100 percent for chicks and 20 percent for
raising costs.
(b) Beginning inventory costs are P129, 6000 for chicks and P11, 530 for raising costs.
(c) Chicks added during March totaled 20, 000.
(d) Costs incurred during the month are P200, 000 for chicks and P121, 800 for raising
costs.
(e) Ending inventory at March 31 consisted of 2, 000 chicks, 100 percent complete for
chicks and 70 percent for raising costs.
Determine the cost of hens transferred to laying sheds during March.
a. P25, 800
b. P437, 050
c. P26, 550
d. P436, 300
6. Alberta Instrument Company uses a process costing system. A unit of product passes
through three departments – molding, assembly, and finishing – before it is completed.
The following activity took place in the Finishing Department during May.
Work in process inventory, May 1
1, 400 units
Units transferred in from the Assembly Department
14, 000 units
Units transferred out to finished goods inventory
11, 900 units
Raw material is added at the beginning of processing in the Finishing Department. The
work in process inventory was 70 percent complete as to
40
conversion on May 1 and 40 percent complete as to conversion on May 31. Alberta
Instrument Company uses the weighted-average method of process costing. The
equivalent units and current period costs per equivalent unit of production for each cost
factor are as follows for the Finishing Department.
Equivalent
Current Period Costs per
Units
Equivalent Unit
Transferred in costs
15,400
P5.00
Raw materials
15,400
1.00
Conversion cost
13,300
3.00
Calculate the cost of units transferred to finished goods inventory during May and the
cost of Finishing Department’s work in process inventory on May 31.
Finished Goods
a. P107, 100
b. P107, 100
WIP Inventory
P25, 200
P6, 300
Finished Goods
c. P126, 000
d. P126, 000
WIP Inventory
P6, 300
P25, 200
7. Department MK had 5, 000 units in process on April 1 which were 60 percent
complete for conversion costs. Materials are added at the beginning of the departmental
process, and conversion costs are added uniformly throughout the process. On April 30,
the in-process inventory consisted of 8, 000 units that had 25 percent of the work
completed. There were 83, 000 equivalent units of output for the period with respect to
materials. The company is using the FIFO method. Calculate the equivalent units for the
period with respect to conversion costs.
a. 79, 000
b. 80, 000
c. 81, 000
d. 77, 000
Questions 8 and 9 are based on the following:
Hubert Products Company produces Dalandan fruit drink. The units and equivalent units
(in liters), as well as unit costs, for the Initial Mix Department are as following:
Materials
Conversion
Equivalent units in beginning work in process
6, 000
1, 200
Units started and completed
40, 000
40, 000
Equivalent units in ending work in process
3, 000
1, 800
Unit costs
P6.50
P10. 50
8. Assuming the company uses the FIFO method. If the beginning work in process
inventory was valued at P126, 000, what would be the cost of goods completed?
a. P770, 000
b. P896, 000
c. P644, 400
d. P857, 600
41
9. Assuming the company uses the weighted average method. If the beginning work in
process inventory was valued at P126, 000, what would be the cost of ending work in
process inventory?
a. P19, 500
b. P18, 900
c. P38, 400
d. P51, 600
10. Old Motors is engaged in the production of a standard type of electric motor.
Manufacturing costs for April totaled P660, 000. At the beginning of April, inventories
appeared as follows:
Motors in production, estimated 80% complete
(2, 500 units)
Motors on hand and in finished goods
(1, 200 units)
P320, 000
P192, 000
During the month, 5, 500 completed units were placed in finished stock. At the end of
April, inventories were:
Motors in production, estimated 50% complete
1, 000 units
Motors on hand, completed and in finished goods
1, 400 units
The company uses FIFO costing for production and goods sold. In costing finished
goods, the unit cost for units completed from beginning work in process inventory is
kept separate from the unit cost of motors started and completed during the month.
Compute the cost of goods sold.
a. P 861, 000
b. P858, 500
c. P669, 000
d. P776, 000
11. The materials equivalent production units for June is 27, 500. Material costs
beginning P55, 000. Materials added this month is P220, 000. Coat of units transferred
to next department is P82, 500. How much is the material unit cost in June?
a. P3
b. P8
c. P10
d. P2
12. Emerald, Inc. produced 280, 000 complete units of products and 10, 000 incomplete
units (50% complete). Direct materials which are added at the beginning of the process,
cost P435, 000 and conversion costs applied uniformly were P142, 500. There were no
beginning inventories. The total cost absorbed by the 280, 000 complete units must be:
a. P567, 368
b. P577, 500
c. P420, 000
d. P560, 000
42
13. Karen Company had 3, 000 units in work in process at April 1, 2011, which were
60% complete as to conversion cost. During April, 10,000 units were completed. At April
30, 4, 000 units remained in work in process, which were 40% complete as to
conversion cost. Direct materials are added at the beginning of the process. How many
units were started during April?
a. 9, 000
b. 9, 800
c. 10, 000
d. 11, 000
Questions 14 and 15 are based on the following:
Jethro Company manufactures top-of-the-line ice skates in a five-production-department
process. Department 3 had no beginning work in process inventory and transferred in
18, 000 units from Department 2, each with an equivalent unit cost of P12.50. Within
Department 3, unit costs for direct materials, direct labor, and factory overhead (applied)
were P8.00, P9.75, and P 4.00, respectively. Direct materials in Department 3 are
added at the beginning. Department 3 has 4, 800 unit in ending work in process
inventory which are 65% complete as to conversion costs.
14. If 620 spoiled units were removed from Department 3 at Jethro’s inspection point
where conversion costs were 45% complete, what was the total spoilage cost,
assuming spoilage is handled as a separate element of cost?
a. P8, 796.25
b. P11, 325.25
c. P13, 818.25
d. P16, 546.25
15. At Jethro’s Department 3 inspection point, which is located halfway through
Department 3’s conversion process, 1, 200 spoiled units were removed from production.
Normal spoilage was 800 units. If total spoilage cost was P32, 850, how much of that
amount should be allocated to ending inventory?
a. P0
b. P5, 821
c. P7, 320
d. P8, 760
Questions 16 and 17 are based on the following:
APCO Company manufactures various lines of bicycles. Because of the high volume of
each type of product, the company employs a process cost system using the weighted
average method to determine unit costs. Bicycle parts are manufactured in the Molding
Department and transferred to the Assembly Department where they are partially
assembled. After assembly, the bicycle is sent to the Packing Department.
Cost per unit data for the 20-inch dirt bike has been completed through the Molding
Department, Annual cost and production figures for the Assembly Department are
presented below.
43
Production Data
Beginning inventory (100% complete as to transferred-in; 100%
complete as to assembly material; 80% complete as
to conversion)
Transferred in during the year (100% complete as to
transferred-in)
Transferred to Packing
Ending inventory (100% complete as to transferred-in; 50%
complete as to assembly material; 20% complete as
to conversion)
Cost Data
Transferred-In
Direct Materials
Beginning Inventory
P 82, 200
P6, 660
Current period
1, 237, 800
96, 840
3, 000 units
45, 000 units
40, 000 units
4, 000 units
Conversion Costs
P11, 930
236, 590
Damaged bicycles are identified on inspection when the assembly process is 70 percent
complete; all assembly material has been added at this point of the process. The normal
rejection rate for damaged bicycles above the 5 percent quota are considered to be
abnormal. All damage bikes are removed from the production process and destroyed.
16. Compute the amount of the total production cost of P1, 672, 020 that will be
associated with normal damaged units.
a. P69, 167
b. P65, 793
c. P59, 500
d. P74, 228
17. Compute the amount of the total production cost of P1, 672, 020 that will be
associated with abnormal damaged units.
a. P65, 793
b. P69, 167
c. P59, 500
d. P60, 732
18. The Jake Department is the first of a two-stage production process. Spoilage is
identified when the units have completed the Jake process. Costs of spoiled units are
assigned to units completed and transferred to the second department in the period
spoilage is identified. The following information concerns Jake’s conversion costs in
May 2013:
Beginning work in process (50% complete)
Units started during May
Spoilage – normal
Units completed and transferred
Ending work in process (80% complete)
Units
2, 000
8, 000
500
7, 000
2, 500
Conversion costs
P10, 000
75, 500
44
Using the average method, what was Jake’s conversion cost transferred to the second
department?
a. P59, 850
b. P64, 125
c. P67, 500
d. P71, 250
19. A company produces plastic drinking cups and uses a process cost system. Cups
go through three departments – mixing, molding, and packaging. During the month of
June the following information is known about the mixing department.
Work in process at June 1
10, 000 units
An average 3/4 complete
Units complete during June
140, 000
Work in process at June 30
20, 000
An average 1/4 complete
Materials are added at two points in the process: Material A is added at the beginning of
the process and Material B at the midpoint of the mixing process. Conversion costs are
incurred uniformly throughout the mixing process. Under the FIFO costing flow, the
equivalent units for Material A, Material B, and conversion costs respectively for the
month of June (assuming no spoilage) would be
a. 150, 000; 130, 000; and 137, 500
c. 160, 000; 130, 000; and 135, 000
b. 150, 000; 140, 000; and 135, 000
d. 160, 000; 140, 000; and 137, 500
20. Assume that process conversion costs are uniform but a number of materials are
added at different points in process. Material 1 is added at the beginning of the process.
The transferred-in costs are added at the 20% point in the process. Material 2 is added
uniformly from the 50% to 70% points in the process. Material 3 is added at the 75%
point in the process, and Material 4 is added uniformly at the 90% to the 100 points in
the process.
The beginning work in process, was 10, 000 units 60% complete, 60, 000 units were
added, and ending work in process was 20, 000 units 95% complete. What was the
Material 2 equivalent units for the month?
FIFO
Weighted average
FIFO
Weighted average
a. 50, 000
60, 000
c. 65, 000
70, 000
b. 60, 000
70, 000
d. 63, 000
67, 000
45
FACTORY OVERHEAD
A. ACCOUNTING FOR OVERHEAD
Accounting for manufacturing overhead is an important part of job order costing
and any other costing system. Overhead consists of all manufacturing costs other than
direct materials and direct labor. The distinguishing feature of manufacturing overhead
is that while it must be incurred in order to produce goods, it cannot be directly traced to
the final product as can direct materials and direct labor. Therefore, overhead must be
applied, rather than directly charged, to goods produced. The overhead application
process is described below:
a. Overhead items are grouped by cost behavior, such as fixed and variable.
b. The fixed and variable overhead costs are estimated for the forthcoming year (e.g.,
P5, 000, 000)
c. A denominator (activity) base is chosen. There are five (5) bases of overhead rate.
These are units of production, materials cost, direct labor costs, direct labor hours and
machine hours. A common choice is direct labor hours or machine hours.
d. The activity level is estimated for the forthcoming year (e.g., 80, 000 direct labor
hours).
e. A predetermined overhead rate is computed
Estimated overhead costs
P5, 000, 000
=
Estimated activity level
= P62.50/hour
80, 000 hours
4. As actual overhead costs are incurred, they are debited to factory overhead control
(e.g., P4, 000). (Factory overhead control is an account used to described actual
manufacturing expenses incurred except direct materials used and direct labor
employed).
Factory overhead control (actual)
4, 000
Various accounts
4, 000
46
5. As jobs completed the predetermined overhead rate is used to apply overhead to
these jobs. For example, if job 17 used 52 direct labor hours, P3, 250 of overhead (52 x
P62.50) would be charged to work in process and entered on the job cost sheet.
Work in process
3, 250
Factory overhead applied
3, 250
To allocate the costs of overhead to units produced, an activity base must be chosen for
use in the computation of a predetermined overhead rate. This activity base should bear
a causal relationship to the incurrence of overhead costs. Examples of activity bases
also called costs driver are:
1.
2.
3.
4.
5.
Direct manufacturing labor hours
Direct manufacturing labor cost
Machine hours
Materials cost
Units of production
For example, overhead may result from (be a function of) hours regardless of who
works, which would mean that direct manufacturing labor hours should be the activity
base. If, on the other hand, more overhead costs were incurred because of heavily
automated operations, machine hours might be a more appropriate activity base.
As illustrated in the diagram below, a number of approaches can be used to determine
the activity level. (step “A.4” above).
Approach
Theoretical capacity
Practical capacity
Definition
Output is produced efficiently 100% of the time.
ADJUSTED FOR: factors such as days off, down
time, etc. Output is produced maximum percentage of time
practical (75-85%)
Normal volume
ADJUSTED FOR: long-run product demand. Average
annual output necessary to meet sales and inventory
fluctuations over 4-5 year period.
Expected annual
ADJUSTED FOR: current year fluctuations. Expected
output for capacity current year.
Note that theoretical capacity is larger than practical capacity, which is larger than
normal volume. Expected annual capacity fluctuates above and below
47
normal volume. Most firms use expected annual capacity for their predetermined
overhead rate.
At year-end overhead may be
1. Overapplied – more is applied than incurred because
a. Overhead costs were overestimated.
b. More than expected activity took place, and/or
c. Actual overhead costs were less than expected.
2. Underapplied – less overhead is applied than incurred because
a. Overhead costs were underestimated.
b. Less than expected activity took place, and/or
c. Actual overhead costs were less than expected.
B. Disposition of Under- and Overapplied Overhead
1) If the under- or overapplied overhead is immaterial, it is frequently written off to
cost of goods sold on grounds of expediency. (This will be your general
assumption if the problem is silent as to whether the variance is material or
immaterial). The entry below explains that Applied Factory Overhead which is a
credit balance must be closed to Factory Overhead Control account with a debit
balance and the balancing figure to cost of goods sold, debit or increase if
underapplied, credit or decrease if overapplied.
Applied Factory Overhead
xx
Cost of goods sold (debit or credit to balance entry)
Factory Overhead Control
xx
xx
2) If the balance is material, then an adjustment must be made to all goods which
were costed using an erroneous application rate during the current period. The
goods with the incorrect costs will be in three accounts. Work-in-Process
Inventory, Finished Goods Inventory, and Cost of Goods Sold. Proration may be
made based upon total ending balance (before proration) of the three accounts
or based on their corresponding applied factory overhead or on some other
equitable basis. The problem will normally give specific directions on what
allocation base should be used.
48
C. Service Department Cost Allocation
A large firm will have several production departments, each of which may compute a
separate predetermined overhead rate. A problem arises when a service department
(maintenance, receiving, general factory, etc.) incurs costs and benefits multiple
production departments.
Costs of these service departments must be allocated to production departments
because all manufacturing costs must ultimately be traced to products. For example,
the costs of the materials-handling cost center may need to be allocated to the
production departments (and possibly other service departments). Apportionment of
service department costs should be based on meaningful criteria such as:
1)
2)
3)
4)
Services provided
Services available
Benefits received
Equity
Examples of apportionment bases are:
1)
2)
3)
4)
Area or square feet for building costs
Usage for electricity
Employees for cafeteria, personnel, and first aid
Usage for material handling, maintenance, etc.
Service department costs can be allocated by:
1) Direct method
2) Step method
3) Algebraic or simultaneous or reciprocal method
1. Direct Method
The direct method simply allocates the costs of each service department to each of the
producing departments based on a relative level of the apportionment base. For
example, if a service department had costs of P140, 000, and departments X and Y
used 80% and 20% of the apportionment base, X and Y would be assigned P112, 000
and P28, 000 respectively. Note that the direct method ignores use of services by other
service departments. For example, the direct method would ignore the fact that service
department. A
49
uses the services of service department B. The essence of the direct method is shown
in the following diagram
Service
Department
A
Service
Department
B
Production
Department
1
Service
Department
C
Production
Department
2
2. Step Method
The step method allocates service department costs to other service
departments as well as production departments. The allocation process is:
a. Select the service department serving the most other service departments.
1) When more than one service department services an equal number of service
departments, select the department with the highest costs.
b. Allocate the costs of the service department selected in step a. to the production
departments and other service departments based on a relative level of the
apportionment base as in the direct method.
c. Costs of service departments are never allocated back to departments whose costs
have already been allocated.
Note that the step method ignores the fact that reciprocal services are used between
some service departments.
3. Algebraic or Simultaneous or Reciprocal Method
Under this method, the reciprocal services are considered to determine the total
cost of a service department. The total cost will be the amount allocated to all
departments served by the service department. The following steps under the method
are:
a. Identify the equation to determine the total cost of a service department, e.i., the
budgeted amount plus the share on the cost of the other service department.
b. Compute the total cost by using either substitution or elimination method.
50
c. The total cost computed will be the amount allocated to all departments served.
EXAMPLE:
Producing Departments
1
Budgeted costs
P380, 000
Service Departments
2
A
P420, 000
Use of A
40%
50%
Use of B
40%
30%
B
P40, 000
Total
P60, 000 P900, 000
10%
30%
100%
100%
Direct Method – Allocate A’s and B’s costs directly to production departments 1
and 2.
1
Costs prior to allocation
P380, 000
Allocation of A’s costs – 4:5 17, 778
Allocation of B’s costs – 4:3 34, 286
Total cost for OH rate computation
2
P420, 000
22, 222
25, 714
P432, 064
A
P40, 000
(40, 000)
B
P60, 000
(60, 000)
P467, 936
P900, 000
Step Method – Allocate B’s costs (B has more costs than A) to departments 1, 2 and A.
Next allocate A’s costs to departments 1 and 2; you cannot allocate A’s costs back to B,
as B’s costs have already been allocated.
Departments
1
Costs prior to allocation
P380, 000
Allocation of B’s costs – 4:3:3 24, 000
Allocation of A’s costs – 4:5 25, 778
Total cost for OH rate comp. P429, 778
2
P420, 000
18, 000
32, 222
P470, 222
A
P40, 000
18, 000
58, 000
B
P60, 000
(60, 000)
P900, 000
Algebraic or Simultaneous or Reciprocal Method – Compute the total cost by
considering the reciprocal services rendered to other service departments using
algebra. Develop the equation for total cost computation. The equation for Department
A’s cost must be: A = P40, 000 + 30% of B; and Department B’s cost must be: B cost
must be: B P60, 000 + 10% of A. Using the substitution method the total cost of
Department A:
A = P40, 000 + 30% (P60, 000 + 10% of A)
= P40, 000 + P18, 000 + 3% of A
51
= P58, 000/97%
= P59, 794
B = P60, 000 + 10% (P59, 794)
= P65, 979
Departments
Costs prior to allocation
Allocation of A’s costs – 4:5:1
Allocation of B’s costs – 4:3:3
Total cost for OH rate comp.
1
P380, 000
23, 918
26, 392
P430, 309
2
P420, 000
29, 897
19, 794
P469, 691
A
P40, 000
(59, 794)
19, 794
B
P60, 000
5, 979
(65, 979)
P900, 000
D. Activity-Based Costing
Activity-based costing (ABC) is based upon two principles. First, activities
consume resources. Second, these resources are consumed by products, services, or
other cost objectives (output). ABC allocates overhead costs to products on the basis of
the resources consumed by each activity involved in the design, production, and
distribution of a particular good. This is accomplished through the assignment of costs
to homogeneous cost pools that represent specific activities and then the allocation of
these costs, using appropriate cost drivers, to the product. Thus, product costs
determined using ABC reflects the underlying behavior of the costs allocated to the
product. ABC may be used with both job and process costing.
Central to ABC are the activities performed to fulfill organizational objectives
(producing products or services for customers). Activities may be value-added or nonvalue-added. Value-added activities are those which customers perceive as increasing
the worth of a product or service and for which customers are willing to pay. They
include only production activities. Non-value-added activities increase the cost of a
product but do not increase its value to customers. Examples include materials handling
and rework, Packaging is required for some products such as milk or potting soil, but it
may be non-value-added for other products such as books. Thus, these activities may
be eliminated and/or restructured without customers perceiving a decline in the value of
the product/service. An activity (process) map is a flowchart which indicates all activities
involved in the production process and identifies both value-added and non-valueadded activities.
52
Cost drivers are those activities, which have a direct cause and effect
relationship to the incidence of a particular cost. Traditional costing uses only variable
and fixed or total overhead cost pools and views cost drivers at the output unit level,
wherein costs are allocated based on labor hours, machine hours, etc. Some costs
though, such as setup costs, vary at the batch level (batch-level costs) and should be
spread over the units in the batch to which they relate (not machine hours). Productsustaining (process-level) costs such as engineering change orders should be assigned
to the products for which the orders were issued. Facility-sustaining costs incurred at
the organizational level support operations and can only be arbitrarily assigned to
products. As shown by the following table, ABC uses both transaction-related (e.g.,
machine hours) cost drivers. Traditional product costing tends to use only volumerelated cost drivers.
Activity
Purchase of materials
Receiving
Disbursing
Setup costs
Machining
Repair costs
Engineering changes to products
Cost driver
Number of purchase transactions
Number of shipments received
Number of checks issued
Number of setups or setup hours
Number of machine hours
Number of machine hours
Number of engineering change notices
The activities listed above are all examples of direct activities, which can be
traced, to an output or service. In contrast, indirect activities such as human resources
are not directly attributable to output. The cost of indirect activities may be allocated or
simply labeled as nontraceable.
To illustrate, ABC traces the costs of setup activities to the production batch that
caused the setup costs to be incurred. The cost of each setup is then spread over the
units in that batch. On the other hand, a traditional costing system would typically
allocate setup costs as overhead on the basis of a volume-related cost driver such as
direct manufacturing labor hours. Assume that product A and B incur setup costs as
follows:
Production volume
Batch size
Number of setups
Total setup costs incurred
A
B
Total
7, 500
10, 000
250
1, 000
30
10
P60, 000
P20, 000
P80, 000
53
Total cost per setup
P 2, 000
Direct manufacturing labor hours/unit
3
Total direct manufacturing labor hours 22,500
Setup cost per DMLH (P80, 000/52, 500)
Traditional setup cost/unit
A (P1.52 x 3 DMLH required)
P4.56
B (P1.52 x 3 DMLH required)
ABC setup cost/unit
A (P2, 000/setup ÷ 250 units/batch) P8.00
B (P2, 000/setup ÷ 1, 000 units/batch)
P2, 000
3
30, 000
P1.52
P4.56
P2.00
In this case, products A and B are assigned different total setup costs. However,
because they require the same number of direct manufacturing labor hours per unit,
traditional costing allocates equal setup costs per unit to both products. In effect, one
product picks up cost that was caused by another product (cross-subsidization), which
distorts product-costing information. ABC assigns different setup costs per unit to each
product because each unit of product A demand more resources for setup activity than
does each unit of product B. Note that the total setup cost remains the same under
either method.
Additional explanations about activity-based costing:
A. Definition of terms
1. Activity-based costing – identifies the causal relationship between the
incurrence of cost and activities, determine the underlying driver of the activities,
establishes cost pools related to individual drivers, develop costing rates, and
applies cost to product on the basis of resources consumed (drivers).
2. Cost drive – is a measure of activity, such as direct labor hours, machine hours,
beds occupied, computer time used, flight hours, miles driven, or contracts, that
is causal factor in the incurrence of cost to an entity.
3. Cost objects – are the intermediate and final dispositions of cost pools.
Intermediate cost objects receive temporary accumulations of costs as the cost
pools move from their originating points to the final cost objects. Final cost
objects, such as job, product, or process, should be logically linked with the cost
pool based on a cause-and-effect relationship.
4. Cost pools – are accounts in which a variety of similar cost elements with a
common cause are accumulated prior to allocation to cost objects on some
common basis. The overhead account is a cost pool into which various types of
overhead are accumulated prior to their allocation. In activity-based accounting, a
cost pool is established for each activity.
54
5. Value-adding costs - are the activities that cannot be eliminated without
reducing the quality, responsiveness, or quantity of the output required by a
customer or the organization.
B. Activity-Based Costing (ABC)
1. ABC may be used by manufacturing, service, or retailing entities and in job-order or
process costing systems. It has been popularized because of the rapid advance of
technology, which has led to a significant increase in the incurrence of indirect costs
and a consequent need for more accurate cost assignment. Furthermore,
developments in computer and related technology (such as bar coding) also allow
management to obtain better and more timely information at decreased cost.
a. ABC is one means of improving a cost system to avoid what has been called
peanut-butter costing. Inaccurately averaging or spreading costs like peanut
butter over products or service units that use different amounts of resources
results in product-cost cross-subsidization. This term describes the condition
in which the miscasting of one product causes the miscasting of other
products.
1. In a traditional system, direct labor and direct materials are traced to
products or service units, a single pool of costs (overhead) is
accumulated for a given organizational unit, and these costs are then
assigned using an allocative rather than a tracing procedure. The effect
is an averaging of costs that may result in significant inaccuracy when
products or service units do not use similar amounts of resources.
2. To improve its costing system, an organization, can attempt to identify as many
direct costs as economically feasible. It can also increase the number of separate
cost pools not directly attributable to cost objects. A cost pool contains cost
elements, which are amounts paid for resources used by an activity. An activity is a
set of work actions undertaken within the entity. Cost objects are the intermediate
and final dispositions of cost pools. Intermediate costs objects receive temporary
accumulations of costs as the cost pools move from their originating points to the
final cost objects. A cost object may be a job, product, process, activity, service, or
anything else for which a cost measure is desired. For example, work in process is
an intermediate cost object; and finished salable goods are final cost objects.
55
a. Each cost pool should be homogeneous; that is, each should consist of costs
that have substantially similar relationships with the driver or other base used for
assignment to cost objects. A cost driver is a factor or event that changes an
activity’s cost; it is also the means used to assign cost to activities and to
reassign those costs to other activities, products, or services.
b. Thus, choosing the appropriate base, preferably one with a driver or cause-andeffect relationship (a high correlation) between the demands of the cost object
and the costs in the pools, is another way to improve a costing system.
3. ABC attempts to improve costing by assigning costs to activities rather than to an
organizational unit. Accordingly, ABC requires identification of the activities that
consume resources and that are subject to demands by ultimate cost objects.
a. Design of an ABC system starts with process value analysis, a
comprehensive understanding of how an organization generates its output. It
involves a determination of which activities that use resources are valueadding or nonvalue-adding and how the latter may be reduced or eliminated.
A value-added activity contributes to customer value satisfies a need of the
entity. The perception is that it cannot be omitted without a loss of the quantity,
quality, or responsiveness of output demanded by the entity or its customers.
b. The linkage of product costing and continuous improvement of processes is
activity-based management (ABM). It encompasses driver analysis, activity
analysis, and performance measurement.
4. Once an ABC system has been designed, costs may be assigned to the identified
activities, costs of related activities that can be reassigned using the same driver or
other base are combined in homogeneous cost pools, and an overhead rate is
calculated to each pool.
a. The next step, as in traditional methods, is to assign costs to next-stage cost
objects. In other words, cost assignment is a two-step process. first, costs are
accumulated for an activity based on the resources it can be directly observed
to use and on the resources it can be assumed to use based on its
consumption of resources drives (the cost drivers that reflect the use of
resources by an activity), second, costs are reassigned to next-stage cost
objects on
56
the basis of activity drivers (the cost drivers that measure the demands made
on activities by next-stage cost objects).
5. An essential element of ABC is driver analysis that emphasizes the search for the
cause-and-effect relationship between activity and its consumption of resources and
an activity and the demands made on it by a cost object. For this purpose, activities
and their drivers have been classified in accounting literature as follows:
a. Unit-level (volume-related) activities occur when a unit is produced, e.g., direct
labor and direct materials activities. Drivers are direct labor hours or
pesos/dollars, machine hours, and units of output.
b. Batch-level activities occur when a batch of units is produced, e.g., ordering
setup, or materials handling. Drivers may include number or duration of setups,
orders processed, number of receipts, weight of materials handled, or number of
inspections.
c. Product-or service-level (product-or service-sustaining) activities provide
support of different kinds to different types of output, e.g., engineering changes,
inventory management, or testing. Drivers may include design time, testing time,
number of engineering change orders, or number of categories of parts.
d. Facility- or plant-level (facility -sustaining) activities concern overall operations,
e.g., management of the physical plant, personnel administration, or security
arrangements. Drivers may include any of those used at the first three levels.
6. Using this model, activities are grouped by level, and drivers are determined for the
activities.
a. Within each grouping of activities, the cost pools for activities that can use the
same driver are combined into homogeneous cost pools. In contrast, traditional
systems assign costs largely on the basis of unit-level drivers.
b. A difficulty in applying ABC is that, whereas the first three levels of activities
pertain to specific products or services, facility-level activities do not. Thus,
facility-level costs are not accurately assignable to products or services. The
theoretically sound solution may be to treat these costs are period costs.
Nevertheless, organizations that apply ABC ordinarily assign them to products or
services to obtain a full-absorption cost suitable for external financial reporting in
accordance with GAAP.
57
7. As the foregoing discussion indicates, an advantage of ABC is that overhead costs
are accumulated in multiple cost pools related to activities instead of in a single pool
for a department, process, plant, or company. ABC also is more likely than a
traditional system to assign costs to activities and reassign them to next stage cost
objects using a base that is highly correlated with the resources consumed by
activities or with the demands placed on activities by cost objects. Furthermore,
process value analysis provides information for eliminating or reducing nonvalueadding activities (e.g., scheduling production, moving components, waiting for the
next operating step, inspecting output, storing inventories). The result is therefore
not only more accurate cost assignments, especially of overhead, but also better
cost control and more efficient operations.
a. A disadvantage of ABC is that may still be relatively more costly to implement
because of the more detailed information required. Another disadvantage is
that ABC-based costs of products or services may not conform with GAAP;
for example, ABC may assign research costs to products but not such
traditional product costs as plant depreciation, insurance, or taxes.
8. Organizations most likely to benefit from using ABC are those with products or
services that vary significantly in volume, diversity of activities, and complexity of
operations; relatively high overhead costs; or operations that have undergone major
technological or design changes.
a. However, service organizations may have some difficulty in implementing
ABC because they tend to have relatively high levels of facility-level costs that
are difficult to assign to specific service units. They also engage in many
nonuniform human activities for which information is not more problematic in
service than in manufacturing entities. Nevertheless, ABC has been adopted
by various insurers, banks, railroads, and health care providers.
9. Overhead. Direct labor (hours or peso/dollars) has long been the most common
base for allocating overhead because of its simplicity of use, but it is not always
relevant. Companies now use dozens of different allocation base depending upon
how activity affects overhead costs. One company reported that it used 37 different
bases to allocate overhead, some of which were averages of several activities.
58
a. In principle, a separate overhead account or subsidiary ledger account should
be used for each type overhead.
b. In the past, direct labor was ordinarily a larger component of total production
cost than overhead and was the activity that drove (caused) overhead costs.
Due to the increased use of computers and robotics, overheard is more likely
to be a large component of total production cost, overhead is more likely to be
a large component of total production cost, with direct labor often a small
percentage.
1. Most overhead costs vary in proportion to product diversity and the
complexity of an operation. Direct labor is not a cost driver for most
overhead costs.
2. Allocating a very large cost (overhead) using a very small cost (direct
labor) as a base is irrational. A small change in direct labor on a
product can make a significant difference in total production cost, an
effect that may rest on an invalid assumption about the relationship of
the coast and the allocation base.
c. As previously note, ABC is more useful when overhead costs are relatively high.
Also, the more diverse a company’s line of products or services or the more
significant the volume differences among its products or services, the more
beneficial ABC will be.
1. Simple averaging procedures such as direct-labor based costing are
valid only when all products or services are absolutely uniform. For
example, a simple allocation basis in a factory with large and small
machines and high-priced and low-cost labor that work together would
not be very exact.
10. Comprehensive Example. Assume that a company produces two similar products.
Raw materials costs are P2o per unit, direct labor is P70 per unit, and factory
overhead totals P20, 000. The company produces 1, 000 units of Product 1 and 100
units of Product 2. Using the direct labor as the allocation base, costs are as follows:
Product 1 Product 2
Raw materials
P20, 000
P2, 000
Direct labor
70,000
7, 000
Overhead
18, 182*
1, 818 **
Total cost
P108, 182
P10, 818
Cost per unit
P108.18
P108.18
*{[P70, 000 + (P70, 000 + P7, 000)] x P20, 000}
** {[P7, 000 + (7, 000 + P7, 000)] x P20, 000}
59
Alternatively, assume that the overhead represents setup costs, with equal setup times
required for the products. Thus, the P20, 000 would be allocated equally under an ABC
system. The ABC costs would be as follows:
Raw materials
Direct labor
Overhead
Total cost
Cost per unit
Product 1
P20, 000
70,000
10, 000
P100, 000
P100.00
Product 2
P2, 000
7, 000
10, 000
P19, 000
P190.00
Because of the low volume of Product 2, the difference between the traditional
allocation base and ABC is significant. If the company were selling Product 2 at P150
each (resulting in an apparent unit profit of P41.82 based on the P108.18 direct-laborbased-cost), it would be losing money on every sale.
a. As the example above illustrates, differences in volume can distort cost
allocations even when overhead is relatively low. The distortion is worse when
overhead is a higher proportion of total costs. Assume that the direct labor
costs are only P10 per unit and that overhead totals P140, 000.
b. The traditional allocation results in the following costs:
Raw materials
Direct labor
Overhead
Total cost
Cost per unit
Product 1
P20, 000
70,000
127, 273*
P157, 273
P157.27
Product 2
P2, 000
1, 000
12, 727**
P15, 727
P157.27
*{[P10, 000 + (P10, 000 + P1, 000)] x P140, 000}
** {[P1, 000 + (10, 000 + P1, 000)] x P140, 000}
Using the ABC system, the allocation of overhead setup costs based on equal setup
times would result in the following production costs:
Raw materials
Direct labor
Overhead
Total cost
Cost per unit
Product 1
P20, 000
10, 000
70,000
P100, 000
P100.00
Product 2
P2, 000
1, 000
70,000
P73, 000
P730.00
Thus, the combination of relatively high overhead and a substantial
difference in product volume results in unit costs for Product 1 and Product
60
2 that are 36.4% lower and 364% higher, respectively, than those computed using
traditional method.
1) The practical effect of this difference can be illustrated in a competitive bid
situation for Product 1. A manager using direct-labor based cost would bid
some amount slightly greater than P157.27 and, after losing, would then
wonder how a competitor could made a profit with a bid just over P100. The
ABC system provides more relevant costing figures.
11. Companies have begun adopting ABC because of its ability to solve costing
problems that conventional cost accounting either creates or fails to address. These
problems include suboptimal pricing, poor allocation of costs, and incorrect direction
by management. For example, if overhead is allocated 700% of direct labor,
managers may try to reduce direct labor costs by P1 to reduce the amount of
overhead allocated by P7. But the better decision may be to ignore direct labor and
concentrate on such cost-cutting efforts as eliminating setups, engineering changes,
and movement of materials.
PROBLEMS
1. B Company Inc. records incoming materials at invoice price less cash discounts plus
applied receiving and handling cost. For product G, the following data are available:
Freight-in and cartage-in
Purchasing department cost
Receiving department cost
Storage and handling
Testing, spoilage, and rejects
Budgeted for
the Month
P25, 000
48, 000
39, 000
42, 000
26, 000
P180, 000
Actual Cost
for the Month
P25, 800
45, 000
42, 000
38, 000
31, 200
P182, 000
The purchasing budget shows estimated net purchases of P1, 440, 000 for the
month. Actual invoices net of discounts total P1, 485, 000 for the month.
Required:
1. Determine the applied acquisition costing rate for the month.
2. Determine the amount of applied cost added to materials purchased during the
month.
3. Indicate the possible disposition of the variance.
61
2. Kaleidoscope Cutlery manufactures kitchen knives. One of the employees, whose job
is to cut out wooden knife handles, worked 48 hours during a week in January. The
employee earns P12 per hour for 40-hour week. For additional hours the employee is
paid an overtime rate of P16 per hour. The employee’s time was spent as follows:
Regular duties involving cutting out knife handles
General shop cleanup duties
Idle time due to power outage
38 hours
9 hours
1 hour
Required:
1. Calculate the total cost of the employee’s wages during the week described
above.
2. Determine the portion of this cost to be classified in each of the following
categories:
a. Direct labor.
b. Manufacturing overhead (idle time).
c. Manufacturing overhead (overtime premium).
d. Manufacturing overhead (indirect labor).
3. C Corporation estimates factory overhead of P207, 000 for the next fiscal year. It is
estimated that 52, 000 units will be produced at a materials cost of P500, 000.
Conversion will require an estimated 85, 000 labor hours at a cost of P9 per hour,
with 69, 000 machine hours.
Required:
Calculate the predetermined factory overhead rate based on:
1. Materials costs
4. Direct labor cost
2. Units of production
5. Direct labor hours
3. Machine hours
4. Madison Corporation is developing departmental overhead rates based on direct
labor hours for its two production departments, Molding and Assembly. The Molding
Department employs 20 people, and the Assembly Department employs 80 people.
Each person in these two department work 2, 000 hours per year. The productionrelated overhead costs for the Molding department are budgeted at P204, 000, and
the Assembly Department costs are budgeted at P320, 000. Two service
departments, Repair and Power, support the two production departments and have
budgeted costs of P48, 000 and P250, 000, respectively. The production
department’s overhead rates cannot be determined until service departments’ costs
are distributed. The following schedule reflects
62
the use of the Repair Department and Power Department’s output by the various
departments.
Services Provided
Repair Hours
KWH
1, 000
840, 000
8, 000
120, 000
240, 000
1, 000
10, 000
1, 200, 000
Department
Molding
Assembly
Repair
Power
Required:
1. Calculate the overhead rate per direct labor hour for Molding Department,
distributing service department costs to producing departments only.
2. Calculate the overhead rate per direct labor hour for Assembly Department, using
the simultaneous method to distribute service department costs.
5. The Ronrox Ink Company prepared the following list in order to determine the factory
overhead in each department for the year 208:
Rent
Repairs
Fuel
Indirect labor
Heat and Light
Depreciation
Miscellaneous
Total
Factory Overhead Cost
Total Cost
Production Departments
Service Departments
H
G
U
V
W
P250, 000 P770, 000 P15, 000
P14, 500
P7, 000
100,000
120, 500
23, 000
30, 000
7, 500
350, 000
420,000
9, 500
7, 000
6, 000
157, 500
170, 000
145, 000
100, 000
97, 500
202, 500
151, 200
9, 000
6, 000
7, 500
94, 000
71, 300
3, 000
1, 500
2, 000
60, 000
50, 500
500
500
500
P1,275,000 P1,810,000 P332,000
P254,000 P188,000
Additional data needed for allocation of factory overhead:
Department U services G, V, and W in the ratio of 2:1:1, respectively.
Department V services Department H, G, U, and W in the ration of 3:1, respectively.
Department W services Department H and G in the ratio of 3:1, respectively.
63
Required:
Assume Department U is allocated first, V is second, and W is last.
a. Allocate the total costs of the service departments to the producing
departments by using the following methods: (1) Direct; (2) Step; (3)
Algebraic.
b. Determine the factory overhead application rates for the producing
departments using the following bases: Department H, 100, 000 direct labor
hours; and Department G, 195, 000 direct labor hours.
6. Globe Telecommunications Corporation manufactures two different fax machines for
the business market. Cost estimates for the two models for the year 2018 are as
follows:
Basic System
Direct material
P400
Direct labor (20 hours at P15 per hour)
300
Manufacturing overhead *
400
Total
P1, 100
Advanced System
P800
300
400
P1, 500
*The predetermined overhead rate is P20 per direct labor hour.
Each model of fax machine requires 20 hours of direct labor. The basic system requires
5 hours in department A and 15 hours in department B. The advanced system requires
15 hours in department A and 5 hours in department B. The overhead costs budgeted in
these two production departments are as follows:
Department A
Department B
Variable cost
P16 per direct labor hour P4 per direct labor hour
Fixed cost
P200, 000
P200, 000
The firm’s management expects to operate at a level of 20, 000 direct labor hours in
each production department during 2018.
Required:
1. If the firm prices each model of fax machine at 10 percent over its cost, what will
be the price of each model?
2. Suppose the company were to use departmental predetermined overhead rates.
Calculate the rate for each of the two production departments.
3. Compute the product cost of each model using the departmental overhead rates
calculated in requirement (2).
4. Compute the price to be charged for each model, assuming the company
continues to price each product at 10 percent above cost. Use the revised
product costs calculated in requirement (3).
64
5. Using the information of the main problem, assuming the company has
implemented an activity-based system with the following activity cost pools and
cost drivers:
Activity
Machine setup
Material receiving
Inspection
Machinery-related
Engineering
Total Overhead
Activity CostCost DriverBasic System Advanced System
P100,000
200 setups
50 setups
60,000
80,000 lbs
30,000 lbs
80,000
1,600 inspections700 inspections
420,000 60,000 machine hrs20,000 mach hrs
140,000 7,000 engineering hrs3,000 eng. hrs
P800, 000
150 setups
50,000 lbs
900 inspections
40,000 mach hrs
4,000 eng. hrs
Globe plans to produce 1, 000 units of each model for fax machine.
Required:
a. Compute the cost rate per unit of each cost driver (e.g., the cost per setup).
b. Determine the total overhead to be assigned to each product line under activitybased costing.
c. Calculate the overhead assigned per unit of each type of fax machine under
ABC.
d. Prepare a table comparing the total product cost assigned to each type of fax
machine using a plant wide overhead rate, departmental overhead rates, and
activity-based costing.
7. Edgeworth Box Corporation manufactures a variety of special packaging boxes used
in the pharmaceutical industry. The company’s Canlubang plant is semiautomated, but
the special nature of the boxes requires some manual labor. The controller has chosen
the following activity cost pools, cost drivers, and pool rates for the Canlubang plant’s
product- costing system.
Budgeted
Level for Cost
Driver
Pool Rate
Overhead
Activity Cost Pool
Cost
Cost Driver
Purchasing, store and
Raw material
material handling
P200, 000 costP1,000,00020%ofmaterialcost
Engineering and product
Hours in design
design
100,000 department
5,000 hrs
P20 per hr
Machine setup costs
70,000
Production runs1,000 runP70 per run
Machine depreciation
and maintenance
300,000
Machine hrs 100,000 hrs P3 per hr
Factory depreciation, taxes,
65
Machine hours 100,000 hrsP2 per hr
insurance, utilities
200,000
Other manufacturing
overhead costs
150,000
Machine hrs 100,000 hrs P1.50 per hr
Total
P1,020,000
Two recent production orders had the following requirements.
20,000 units of10,000 unit of
Box C52
Box W29
Direct labor hours
42 hours
21 hours
Raw materials cost
P40,000
P35,000
Hours in design department
10
25
Production runs
2
4
Machine hours
24
20
Required:
a. Calculate the total overhead cost that should be assigned to Box C52 and Box
W29.
b. Calculate the overhead cost per box for Box C52 and Box W29.
8. Thom Co. manufactures a variety of high- and low-volume products, including
Product 456, in its San Pedro Plant. The following information pertains to the most
recent year:
Total for
Product 456
Unit-level overhead
Batch-level overhead
Product-level overhead
Plant-level overhead
Units produced
Direct labour hours
Machine hours
Setups
Setup hours
Design changes
Design hours
100
200
90
6
30
4
280
Total for
San Pedro
P200, 000
300,000
500,000
400,000
P1, 400,000
5,000
20,000
10,000
120
500
40
4,000
Required: Determine:
a. If the San Pedro Plant accumulates all overhead in a single cost pool and
allocates it on the basis of machine hours, how much overhead cost will be
allocated to a unit of Product 456?
66
b. In relation to the above information, if the San Pedro Plant uses ABC with
setups as the driver for all batch-level overhead, design hours as the driver for
all product-level overhead, and machine hours as the driver for all unit- and
plant-level overhead, how much overhead cost will be allocated to a unit of
Product 456?
9. The controller for Bagani Supply Company has established the following activity cost
pools and cost drivers.
Budgeted
Budgeted
Overhead
Level for Cost
Activity Cost Pool
Cost
Cost Driver
Driver Pool Rate
Machine setups
P200,000
Number of setups
100
Material handling
100,000
Weight of raw
material
Hazardous waste control
50,000
50,000 pounds
P2,000/setup
P2/pound
Weight of hazardous10,000 pounds 5/pound
chemical used
Quality control
75,000 Number of inspections1,000 P75/inspection
Other overhead costs
200,000
Total
P625,000
Machine hours
20,000 10/machine hr
An order for 2, 000 boxes of film development chemicals has the following
production requirements:
Machine setups
4 setups
Raw materials
10, 000 pounds
Hazardous materials
2, 000 pounds
Inspections
10 Inspections
Machine hours
500 machine hours
Under the activity based cost system, how much is the overhead cost per box of
chemicals?
A. P21.875
B. P43.75
C. P15.625
D. P7.8125
Using the single predetermined overhead rate based on machine hours, compute
the rate per box of chemicals.
A. P21.875
B. P43.75
C. P15.625
D. P7.8125
67
MULTIPLE CHOICE
1. The following information is available concerning the inventory and cost of goods sold
accounts of Richmond Corporation Company at the end of the most recent year.
Work in
Finished
Cost of
Process
Goods
Goods Sold
Direct Materials
P2,000
P6,000
P12,000
Direct labor
2,000
16,000
32,000
Applied factory overhead
2,000
16,000
32,000
Year-end balance
P6,000
P38,000
P76,000
Applied Factory Overhead has already closed to Factory Overhead Control. In all
previous years, over- or underapplied factory overhead was treated as an adjustment to
income or expense. Beginning inventories of the most recent year were insignificant.
Calculate the amount of Finished Goods account presented in the balance sheet
for the year assuming an overlapplied of P12, 000 is to be allocated to inventories and
cost of goods sold in proportion to the applied overhead in those accounts.
a. P41,800
b. P34,200
c. P34,160
d. P41,840
Questions 2 and 3 are based on the following:
Tess is the supervisor of Department 5 in the Davao plant of Myles Instrument
Company. She is responsible for the cost of direct materials, direct labor, and variable
overhead costs incurred in this department. The fixed overhead cost is not under her
jurisdiction.
During a recent week, actual factory overhead costs for Department cost for December
5 were as follows:
Actual Variable Overhead:
Indirect materials
Supplies
Telephone
Heat and light
Power
Repairs and maintenance
Total variable overhead
P19,400
14,200
700
1,600
7,000
3,200
P46,100
Actual Fixed Overhead:
Indirect labor
Supervision
P61,000
42,000
Heat & light
Repairs & maintenance
7,000
9,000
68
Depreciation
Total fixed overhead
Total actual overhead
21,000
140,000
P186,100
The department operated at 45,000 direct labor hours during this week. A budget of
factory overhead for 45,000 direct labor hours is as follows:
Budgeted Variable Overhead:
Indirect materials
Supplies
Telephone
Heat and light
Power
Repairs and maintenance
Total variable overhead
P16,500
12,400
700
1,550
7,000
2,350
P40,500
Budgeted Fixed Overhead:
Indirect labor
P61,000
Supervision
42,000
Heat & light
7,000
Repairs & maintenance
9,000
Depreciation
21,000
Total fixed overhead
140,000
Total actual overhead
P180,500
Variable overhead is costed to the products at the rate of 0.90 per direct labor hour, and
fixed overhead is costed to the products at the rate of 2.80 per direct labor hour.
2. How much overhead was costed to the products during the week?
a. P166,500
b. P186,100
c.P180,500
d. P172,100
3. Compute the overapplied or underapplied overhead for the week?
a. P5,600 overapplied
c. P19,600 overapplied
b. P5,600 underapplied
d. P19,600 underapplied
4. The following cost data for 2016 pertain to Heartstring, Inc., a greeting card
manufacturer:
Direct material used in production
Advertising expense
P2,100,000
99,000
Depreciation on factory building
155,000
Direct labor: wages
485,000
Cost of finished goods inventory at year-end
115,000
69
Indirect labor: wages
140,000
45,000
100,000
95,000
30,000
Production supervisor’s salary
Service department costs*
Direct labor: fringe benefits
Indirect labor: fringe benefits
Fringe benefits for production supervisor
Total overtime premiums paid
Cost of idle time: production employees
Administrative costs
Rental of office space for sales personnel
Sales commissions
Product promotion costs
9,000
55,000
40,000
150,000
15,000
5,000
10,000
*All services are provided to manufacturing departments.
**The rental of sales space was made necessary when the sales offices were converted
to storage space for raw material.
Compute the total amount charged to Factory Overhead Control account.
a. P669,000
b. P684,000
c. P654,000
d. P569,000
5. Kyoto Corporation, a Japanese manufacturer of television sets, provides the following
data for 2016:
Budgeted overhead cost
Budgeted activity
Actual overhead cost
Overapplied overhead
Y 20,000,000
20,000 machine hours
Y 21,500,000
Y 500,000
Determine the amount of machine hours worked at Kyoto Corporation during 2016.
a. 22, 000
b. 20,000
c. 21,000
d. 20,500
6. Jabotinsky Company, an Israeli manufacturer of olive wood products, uses a
predetermined factory overhead application rate based on direct labor cost. For 2016,
Jabotinsky’s budgeted overhead was 900,000 shekels, based on a volume of 50,000
direct labor hours and a budgeted wage rate of 9 shekels per hour. Actual factory
overhead amounted to 963,000 shekels. For 2016, the overapplied factory overhead
was 33,000 shekels.
Compute the amount of actual direct labor cost for 2016.
a. P498,000
b. P465,000
c. P450,000
d. P481,500
70
7. Evan’s Enterprises operates its factory on a two-shift and pays a late-shift differential
of 15 percent above the regular wage rate of P18 per hour. The company also pays a
premium of 50 percent for overtime work. During 2013, work occurred in the following
categories:
Number of hours during the regular shift
10,000
Number of overtime hours for regular shift
300
Number of hours worked during the late shift
6,000
Compute the amount of labor-related cost to assign to factory overhead.
a. P8,100
b. P132,300
c. P18,900
d. P73,710
8. The following information pertains to Portsmouth Glass Works for 2016.
Budgeted direct-labor cost
75,000 hours at P16 per hour
Actual direct-labor cost
80,000 hours at P17.50 per hour
Budgeted manufacturing overhead
Actual manufacturing overhead:
Depreciation
Property taxes
Indirect labor
Supervisory salaries
Utilities
Insurance
Rental space
Indirect material (see date below)
Indirect material:
Beginning inventory, 1/1/2016
Purchases during the 2016
Ending inventory, 12/21/2016
P997,500
P240,000
12,000
82,000
200,000
59,000
30,000
300,000
79,000
48,000
94,000
63,000
Compute the overapplied or underapplied overheads for 2016.
a. P62, 000 overapplied
c. P66, 843.75 overapplied
b. P P62, 000 underapplied
d. P P66,843.75 underapplied
71
9. C Manufacturing Company produces CB stereos for cars. The following cost
information is available for the period ended December 31, 2016:
Materials put into production: P1,200,000, of which P800,000 was direct materials.
Factory labor costs for the period: P900,000, of which P250,000 was indirect labor.
Factory overhead for utilities: P400,000
Selling, general, and administrative expenses: P600,000.
Compute the factory overhead cost.
a. P400,000
b. P1,700,000
c. P1,000,000
d. P1,050,000
10. R Factory for an incentive scheme for its factory workers which features a combined
maximum guaranteed wage and a piece rate. Each worker is paid P11.25 per piece with
a minimum guaranteed wage of P875 per week. Production report for the week show:
Employee Name Units Produced Employee Name Units Produced
B
67
S
82
L
78
H
72
E
80
A
75
Compute the portion of the weekly payroll that should be changed to factory overhead.
a. P5,325.00
b. P5,275.00
c. P5,217.50
d. P217,50
Questions 11 and 12 are based on the following:
Korecase Instrument Company manufactures gauges for construction machinery. The
company has two production departments: Molding and Assembly. There are three
service departments: Maintenance, Personnel, and Computer Aided Design (CAD). The
usage of these service departments’ output and their budgeted costs during 2018 are as
follows:
Provision of Service Output in 2018 (in hours of service)
Provider of Service
User of Service
Personnel
Maintenance
CAD
Personnel
Maintenance
CAD
500
500
500
-
Molding
Assembly
Total
4,000
5,000
10,000
3,500
4,000
8,000
4,500
1,500
6,000
72
The budgeted costs in Korecase Instrument Company’s service departments during
2018 are as follows:
Personnel
Maintenance
CAD
Variable
P50,000
P80,000
P50,000
Fixed
200,000
150,000
300,000
Total
P250,000
P230,000
P350,000
11. Use the direct method to allocate Korecase Instrument Company’s service
department costs to its production departments. Determine the share of Molding
Department.
a. P480,944
b. P463,125
c. P340,508
d. P349,056
12. Determine the proper sequence to use in allocating the firm’s service departments
costs by the step-down method and use the step-down method to allocate the
company’s service department costs. Determine the share of Assembly Department.
a. P340,664
b. P480,944
c. P463,125
d. P489,492
13. Tiger Airlines has two operating departments (Freight and Passenger) and two
service centers (Maintenance and Administration). The following table shows June 2018
data:
Service Centers
Operating Departments
Maintenance
Administration Freight
Passenger
Costs
P630,000
P950,000 P1,800,500
P5,260,470
Labor hours
8,000
9,000
30,000
51,000
Number of
employees
40
50
80
200
Maintenance costs are allocated using labor hours, while Administration costs are
allocated using number of employees.
Using the reciprocal method, how much service department cost will be allocated to
Freight Operating Department?
a. P618,050
b. P354,000
c. P509,198
d. P505,163
13. Rural Bank has two service departments, the Personnel Department and the
Computing Department. The bank has two other departments that directly
service customers, the Deposit Department and the Loan Department. The
usage of the two service departments’ output in 2018 is as follows:
73
Provider of Service
User of service
Personnel
Computing
Personnel
15%
Computing
10%
Deposit
60%
50%
Loan
30%
35%
The budgeted cost in the two service departments in 2018 were as follows:
Personnel – P153,000
Computing – P229,500
Under the direct method of allocating service department cost, the amount allocated to
Deposit Department must be:
a. P237,000
b. P238,431
c.P235,800
d. P191,250
15. Under the step method of allocating service department cost, the amount allocated
to Loan Department must be (Rural allocates Personnel Department first):
a. P145,500
b. P146,700
c. P144,069
d. P191,250
16. This schedule was used by Junes, Inc., in order to change its method of allocation
from the step method to the direct method.
Factory Overhead
Costs, Producing
Department
ONE
TWO
Budgeted costs: P1,000,000
Total Costs
Service Departments
A
B
C
P975,000
P300,000
Allocation of:
Department C 45,225
72,360
18,090
Department B 166,130
166,130
83,065
Department A 240,693
160,462
(401,155)
Balance per allocation P1,452,048 P1,373,952
Rates based on direct
Labor hours
P48.4016
P68.6976
P400,125 P150,85
15,200
(415,325)
(150,875)
Using the direct method, calculate the new factory overhead rate for producing
department two.
a. P47.936
b. P69.395
c. P47.516
74
d. P70.025
Questions 17 and 18 are based on the following:
The Chromosome Manufacturing Company produces two products, X and Y. The
company president, Gene Mutation, is concerned about the fierce competition in the
market for product X. He notes that competitors are selling X for a price well below
Chromosome’s price of P12.70. At the same date, he notes that competitors are pricing
product Y almost twice as high as Chromosome’s price of P12.50.
Mr. Mutation has obtained the following data for a recent time period:
Number of units
Direct materials cost per unit
Direct labor cost per unit
Direct labor hours
Machine hours
Inspection hours
Purchase orders
Product X
11,000
P3.23
P2.22
10,000
2,100
80
10
Product Y
3,000
P3.09
P2.10
2,500
2,800
100
30
Mr. Mutation has learned that overhead costs are assigned to products on the basis of
direct labor hours. The overhead costs for this time period consisted of the following
items:
Overhead Cost Item
Amount
Inspection costs
P16,200
Purchasing costs
8,000
Machine costs
49,,000
Total
P73,200
17. Using the labor hours to allocate overhead costs, determine the gross margin per
unit for Product X
a. P1.394
b. P1.454
c. P4.505 d. P1.926
18. Using the activity-based costing, determine the gross margin per unit for Product X
a. P1.454
b. P1.394
c. P4.505
d. P1.926
19. Delerico Manufacturing Company makes a variety of backpacks. The activity
centers and budgeted information for factory overhead for the year are:
Activity Center
Overhead Costs
Cost Driver
Activity Center Rate
Materials Handling
Cutting
Assembly
Sewing
P3,000,000
13,000,000
46,000,000
12,000,000
Weight of materials
Number of shapes
Direct labor hours
Machine hours
P3.00 per pound
P30.00 per shape
P120.00per labor hour
P80.00 per mach hour
75
Two styles of backpacks were produced in December, the EasyRider and the
Overnighter. The quantities and other operating data for the month are:
EasyRider
Overnighter
Direct materials costs
P15,000
P200,000
Direct labor cost
P300,000
P50,000
Direct materials weight in pounds
50,000
15,000
Number of shapes
35,000
15,000
Assembly direct labor hours
7,500
1,200
Sewing machine hours
12,500
1,800
Units produced
5,000
1,000
Calculate the cost per unit for each backpack.
a. EasyRider, P620; Overnighter, P783
b. EasyRider, P1,232; Overnighter, P1,240
c. EasyRider, P783; Overnighter, P620
d. EasyRider, P710; Overnighter, P1,033
20. David Corporation has used a traditional cost accounting system to apply quality
control costs uniformly to all products at a rate of 15% of direct labor cost. Monthly
direct labor cost for its main product is P30,000. In an attempt to distribute quality
control costs more equitably, David is considering activity-based costing (ABC). The
monthly data shown below have been gathered for the main product. The three
activities are (1) incoming materials inspection, (2) in-process inspection, and (3)
product certification. Costs are to be allocated to each activity on the basis of cost
drivers.
Activity
Cost Driver
Cost Rate Quantity for Main Product
(1) Number of types of materials
P12 per type
12 types
(2) Number of units
P0.14 per unit
17,500 units
(3) Number of orders
P77 per order
30 orders
The monthly quality control assigned to the main product using ABC is
a.
b.
c.
d.
P150 per order
P404 lower than using the traditional system
P4,500
P404 higher than using the traditional system
76
JOINT & BY PRODUCT, STANDARD AND BACKFLUSH COSTING
A. Joint Products
Joint Products are two or more products produced together up to a split-off point
where they become separately identifiable. They cannot be produced by
themselves. For example, a steak cannot be produced without also roasts, ribs, liver,
hamburger, etc. Other industries which produce joint products include
1) Chemicals
3) Mining
2) Lumber
4) Petroleum
Joint Products incur common, or joint costs, (direct materials, direct labor and
applied factory overhead) before the split-off point. The split-off point is the point of
production at which the joint products can be individually identified and removed from
the joint, or common process. The joint Products can then be sold or processed further.
Costs incurred after the split-off point for any one of the joint products are called
separable costs or further processing costs. These costs are already identified to each
joint product.
Common costs are allocated to the joint products at the split-off point, usually on
the basis of sales value at the split-off point, estimated net realizable value method
allocates joint costs using the estimated sales values of the joint products after further
processing less the separable processing costs. This is also called the relative sales
value method. The sales value at split-off method must be used if a sales value at splitoff point exists. If not, then a hypothetical value at split-off must be determined. The
following example illustrates the sales value at split-off and estimated net realizable
value methods.
Start
Product X1
separable costs, P2,000 Product X2
Sales value – P4,000
sales value – P6,700
Joint cost – P3,000
Product Y1
Split-off point
separable costs, P400
Sales value – P1,000
77
Product Y2
sales value – P1,700
SALES VALUE AT SPLIT-OFF
Sales value
Product at split-off Ratio
x Costs
X1
P4,000
4/5
Y1
P1,000
1/5 x
Total 5,000
=
xP3,000
P3,000
Joint
Allocated joint costs
=
P2,400
=
P600
P3,000
If the sales value at split-off were not available or one did not exist, we must use the
estimated net realizable value (NRV). This is also called the relative sales value or
hypothetical value method.
ESTIMATED NET REALIZABLE VALUE METHOD (NRV)
Final sales Separable Estimated net
Joint Allocated
Product value -costs =
X2
P6,700- P2,000 =
Y2
P1,700- P400 =
Total
realizable value Ratio
P4,700
4.7/6
1,300
1.3/6
P6,000
x
x
x
Costs =
P3,000 =
P3,000 =
joint costs
P2,350
P650
P3,000
Physical measure (units, pounds, etc.) generally are not used because of the
misleading income statement effect. With an allocation based on pounds, steak would
show a big profit while ground beef would be consistent loser; each pound would carry
the same cost although steak sells for more per round.
Joint cost allocation is performed for the purpose of inventory valuation and
income determination. However, joint costs should be ignored for any internal decisions
including the decision on whether to process a joint product beyond the split-off point.
The sell or process further decision should be based on incremental revenues and costs
beyond the split-off point. If incremental revenues from further processing exceeds
incremental costs, then process further. If incremental costs exceed incremental
revenues, then sell at the split-off point. In the previous example in which we assumed a
sales value at the slit-off point, both X1 and Y1 should be further processed.
Incremental revenues
X1: P6,700-P4,000 = P2,700
Y1: P1,700 – P1,000 = P700
Advantage of
Incremental costs
further processing
P2,000
=
P700
P400
=
P300
If X1 could be sold for only P5,500 after further processing, the incremental
revenue (P1,500) would not cover the incremental cost (P2,000), and X1 should not be
further processed.
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B. By-Products
By-Products, in contrast to joint products, have little market value relative to the
overall value of the products(s) being produced. Joint (common) costs are usually not
allocated to a by-product. Instead they are frequently valued at market or net realizable
value (NRV) and accounted for as a contra production cost.
Rather than recognizing by-Product market value as a reduction of production
cost, it is sometimes recognized when sold and disclosed as
1) Ordinary sales
2) Other income
3) Contra to cost of sales
C. Standard Costing
Standard costs are predetermined target costs which should be attainable under
efficient conditions. The tightness, or attainment difficulty, of standard costs should be
determined by the principles of motivation (e.g., excessively tight standards may result
in employees feeling that the standards are impossible to achieve; consequently, they
may ignore them). Standard costs are used to aid in the budget process, pinpoint
trouble areas, and evaluate performance. Standard costing will often result in lower
bookkeeping costs than actual costing, because standard costing does not require
actual department costs to be allocated to each unit produced in that department.
The tightness of standards is generally described by one of two terms. Ideal
standards reflect the absolute minimum costs which could be achieved under perfect
operating conditions. Currently attainable standards should be achieved under efficient
operating conditions. Generally, currently attainable standards are most often used
since they are more realistic for budgeting purposes and are a better motivational tool
than ideal standards.
Variances are differences between actual and standard costs. The total variance
is generally broken down into sub-variances to further pinpoint the causes of the
variance.
1. Journal Entries for Variances
Variances are often computed and analyzed, but not entered into the accounts. If
incorporated into the accounts, the standard amounts are entered into the inventory
account. For example, when materials are purchased, standard price is known but
standard quantity at standard price. When materials account is debited for actual
quantity at standard price. When materials are used, standard quantity is also known,
so work in
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process is debited for standard quantity at standard price. Pro-forma entries for
materials, labor and overhead are presented below.
a. To record material purchases.
Materials
AQ x SP
Price variance
XXX (U) or
Accounts payable
XXX(F)
AQ x AP
b. To record materials used.
WIP inventory
SQ x SP
Quantity variance
XXX(U) or
Materials
XXX(F)
AQ x SP
c. To record accrued payroll or distribution of payroll.
WIP inventory
SH x SR
Rate variance
XXX(U) or XXX(F)
Efficiency variance
XXX(U) or XXX(F)
Accrued payroll or Payroll
AH x SR
d. To record actual factory overhead.
Factory overhead control
xxx
Various credits
xxx
e. To record applied overhead.
WIP inventory
AH(Units) x SQHR
Applied factory overhead
AH(units) x SOHR
f. To record factory overhead variances
Applied factory overhead
XXX
Controllable variance
AOH-BASH(U) or AOH-BASH(F)
Volume variance
BASH-SOH(U) or BASH-SOH(F)
Factory overhead control
XXX
A(n) unfavorable (favorable) variance is recorded as a debit (credit) to the variance
account. Overhead variances, while computed and analyzed monthly, would normally
be entered in the accounts. The total overhead variance, of course, is the difference
between the balances in the Control and Applied accounts.
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2. Disposition of Variances
If immaterial, variances are frequently written off to cost of goods sold on
grounds of expediency. If material, the variances must be allocated among
the inventories and cost of goods sold, usually in proportion to EUP or
ending balances.
D. Backflush Costing
The term backflush costing (also called delayed costing, endpoint costing, or
post-deduct costing) describes a costing system that delays recording changes in the
status of a product being produced until good finished units appear; it then uses
budgeted or standard costs to work backward to flush out manufacturing costs for the
units produced. An extreme form of such delay is to wait until sale of finished units has
occurred. Typically, no record of work in process appears in backflush costing.
In companies that adopt costing, the following occurs:
1. Management wants a simple accounting system. Detailed tracking of direct
costs through each step of the production system to the point of completion is
deemed unnecessary.
2. Each product has a set of budgeted or standard costs.
3. Backflush costing reports approximately the same financial results as
sequential tracking would generate.
If inventories are low, managers may not believe it worthwhile to spend resources
tracking costs through Work in Process, Finished Goods, and Cost of Goods Sold.
Backflush costing, therefore, is especially attractive in companies that have low
inventories resulting from Just-In Time (JIT). Backflush costing and sequential tracking
(traditional approach) will also produce approximately the same results, however, when
inventory is present, provided inventories maintain stable values. Constant amounts of
costs will deferred in inventory each period.
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1. Manufacturing Cost Flows in a JIT Setting
Backflush system
1. Purchase of raw materials,
Traditional system
P200,000
Raw and In-process inventory
200,000
Raw materials inventory
Accounts payable
200,000
Accounts payable
2. Raw material requisitioned for production.
No entry
200,000
200,000
Work-in-process inventory 200,000
Raw materials inventory 200,000
3. Direct-labor cost incurred, P50,000.
4. Actual manufacturing overhead cost incurred, P95,000.
Conversion costs
Wages payable
Accounts payable
145,000
Work-in-process inventory 50,000
50,000
Wages payable
50,000
95,000 Manufacturing overhead 95,000
Accounts payable
95,000
5. Application of manufacturing overhead to work-in-process inventory (predetermined overhead
rate is 200% of direct-labor cost).
No entry
Work-in-process inventory 100,000
Manufacturing overhead100,000
Products are completed,
Finished goods inventory
Raw and in-process inventory
Conversion costs*
6. Goods are sold,
P350,000.
350,000Finished goods inventory 350,000
200,000 Work-in-process inventory 350,000
150,000
P350,000
Cost of goods sold
Finished goods inventory
350,000
Cost of goods sold
350,000
350,000 Finished goods inventory 350,000
*Applied conversion costs include direct labor of P50,000 and applied manufacturing
overhead of P100,000.
Notice that overhead is overapplied by P5,000 under both systems. Under the
traditional system, we have actual overhead of P95,000 and applied overhead of
P100,000. Under the backflush system, we have actual conversion costs of P145,000
and applied conversion costs of P150,000. Under both approaches, the P5,000 of
overapplied costs will be closed into Cost of Goods Sold (deduct) at the end of the
period.
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PROBLEMS
Joint & By-Product Costing
1. The Katy Company produced three joint products at a joint cost of P132,000.
Additional information for a recent period is as follows:
Product
Units
Produced
Sales Value at
SO
A
B
C
13,200
8,800
4,400
P88,000
77,000
55,000
If processed further
Sales Value
Additional costs
P121,000
99,000
66,000
P19,800
15,000
11,000
Required: Allocate joint cost and compute for the total cost using:
1. Physical units
2. Sales value at split-off
3. NRV method
2. The Three Stooges Production Company uses a process cost system to account for
the production of the three different products: M, L, and C. The products are considered
joint products in the first department (Department I). The products are split off, at the
end of processing in Department I. Product M needs no further processing after the
split-off point while products L and C are sent to Departments 2A and 2B, respectively,
for further processing.
The following revenue and cost information is available:
Product
M
L
C
Units
Produced
80,000
70,000
90,000
Market Value Per Unit
At End of Processing
P200
300
250
Department
Department Cost per Unit
1
P120
2
80
3
60
4
Required: Allocate the joint costs of Department 1 and using the net realizable value
method.
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3. Blessa Corporation produces three products, A, B and C are joint products; B is a byproduct of A. No joint cost is to be allocated to the by-product. The production
processes for a given year are as follows:
(a) In Department 1, 110,000 pounds of material are processed, at a total cost of
P120, 000. After processing, 60% of the units are transferred to Department 2,
and 40% of the units (now C) are transferred to Department 3.
(b) In Department 2, the material is further processed at a total additional cost of
P38, 000. Seventy percent of the units (now A) are transferred to In Department
4 and 30% emerge as B, the by-product, to be sold at P1.20 per pound. The
marketing expense related to B is P8, 100.
(c) In Department 4, A is processed at a total additional cost of P23, 660. After
processing, A is ready for sale at P5 per pound.
(d) In Department 3, C is processed at a total additional cost of P165, 000. In this
department, a normal loss of units of C occurs, which equals 10% of the good
output of C. The remaining good output is sold for P12 per pound.
Required:
Allocate the joint cost to joint products using the market value at split-off and treating the
net realizable value of B as an addition to the sales value of A.
4. Kalamazoo Chemical Company is a diversified chemical processing company. The
firm manufactures swimming pool chemicals, chemicals for metal processing,
specialized chemical compounds, and pesticides.
Currently, the Norwood plant is producing two derivatives, RNA-1 and RNA-2, from the
chemical compound VDB developed by the company’s research labs. Each week 1,
200, 000 pounds of VDB is processed at a cost of P246, 000 into 800, 000 pounds of
RNA-1 and 400, 000 pounds of RNA-2. The proportion of these two outputs cannot be
altered, because this is a joint process. RNA-1 has no market value until it is converted
into a pesticide with the trade name Fastkil. Processing RNA-1 into Fastkil costs P240,
000. Fastkil wholesales at P50 per 100 pounds.
RNA-2 is sold as is for P80 per hundred pounds. However, management has
discovered that RNA-2 can be converted into two new products by adding 400,000
pounds of RNA-2. This joint process would yield 400, 000 pounds each of DMZ-3 and
Pestrol, the two new products. The additional direct materials and related processing
costs of this
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joint process would be P120, 000. DMZ-3 and Pestrol would each be sold for P57.50
per 100 pounds. The company’s management has decided to produce RNA-2 further.
Required:
a. Allocate the joint production costs using the market value method.
b. Assuming the units of production method is used to allocate joint production costs,
would it be advantageous for the company to process further RNA-2?
Standard Costing
5. M Manufacturing Company manufactures a product, which has the following standard
costs:
Materials
Labor
Variable factory overhead
Fixed factory overhead (normal capacity
is 4, 000 hours of processing time)
Total standard cost
6 units at P2.00
1/4 hour at P8.00
3/4 hour at P4.00
P12.00
2.00
3.00
3/4 hour at P12.00 9.00
P26.00
The following information pertains to actual production activity for August:
a) 6, 000 equivalent units were produced with respect to materials, 5, 800
equivalent units with respect to labor, and 5, 500 equivalent units with respect to
factory overhead.
b) 33, 000 units of materials were purchased on account at a total cost of P64,350.
The materials price variance is recorded when the materials are purchased.
c) 40, 000 units of materials were issued to production and used during the period.
d) Direct labor cost was P12, 300 for 1, 500 actual hours. Assume that the liability
has already been recorded but not yet distributed.
e) Actual processing required during August totaled 4, 300 hours.
f) Actual factory overhead was p65, 000.
g) 5, 200 units were completed and transferred to finished goods inventory during
the month.
h) 5, 500 units were sold during the month for P40 each.
Required: Prepare the journal entries to record the information provided, including two
variances for each element of cost.
85
Backflush Costing
6. The Lee Company has a plant that manufactures transistor. The production time is
only a few minutes per unit. The company uses a just-in-time production system and
a backflush costing system with two trigger points for journal entries:
 Purchase of direct (raw) materials.
 Completion of good finished units of product.
There are no beginning inventories. The following data pertains to April
manufacturing:
Direct (raw) materials purchased
P8, 800, 000
Direct (raw) materials used
8, 500, 000
Conversion costs incurred
4, 220, 000
Allocation of conversion costs incurred
4, 000, 000
Costs transferred to finished goods
12, 500, 000
Cost of goods sold
11, 900, 000
Prepare summary journal entries for April (without disposing of under or overallocated
conversion costs). Assume no direct materials variances.
7. The Action Corporation manufactures electric meters. For August, there were no
beginning inventories of direct (raw) materials and no beginning and ending work in
process. Action uses a JIT production system and backflush costing with two trigger
points for making entries in the accounting system.


Purchase of direct materials debited to Inventory: Raw and In-Process Control.
Completion of good finished units of product debited to Finished Goods Control
at standard costs.
Action’s August standard cost per unit are: direct materials, P25; conversion costs, P20.
The following data apply to August manufacturing:
Direct (raw) materials purchased
Conversion costs incurred
Number of finished units manufactured
Number of finished units sold
P550, 000
440,000
21,000
20, 000
1. Prepare summary journal entries for August (without disposing of under-or
overallocated conversion costs). Assume no direct materials variances.
2. Assume the same facts as in 1 above. Assume that the second trigger point for
the Acton Corporation is the sale – rather than the production
86
– of finished units. Also, the Inventory Control account is confined solely to direct
materials, whether these materials are in a storeroom, in work in process, or in
finished goods. No conversion costs are inventoried. They are allocated at
standard cost to the units sold. Any under- or overallocated conversion costs are
written off monthly to Cost of Goods Sold. Prepare the summary journal entries
for August, including the disposition of under- or overallocated conversion costs.
Assume no direct materials variances.
3. Assume the same facts as in 2 above. Now assume that there is only one trigger
point, the completion of goods finished units of product, which are debited to
Finished Goods Control at standard costs. Any under- or overallocated
conversion costs are written off monthly to cost of goods sold. Prepare summary
journal entries for August, including the disposition of under- or overallocated
conversion costs. Assume no direct materials variances.
MULTIPLE CHOICE
a. Love Inc., manufactures four products: Brand W, Brand X, Brand Y, and Brand Z.
These products, each with significant sales value, are produced simultaneously. The
following information is utilized in order to allocate the joint costs under a process
cost system:
1. Brands W, X, Y and Z emerge at the end of processing in Department 1.
Brand Y is processed further in Department 2 and then sold.
2. The final market values for all the products total P550, 000.
3. The costs of the finished products total P375, 000.
4. Additional processing costs in Department 2 total P50, 000.
5. Percentage of the final total market value of all the products: Brand W: 35%,
Brand X: 15%, Brand Y: 30%, and Brand Z: 20%.
Calculate the joint cost allocated to Brand W using the market (hypothetical) value
method.
a. P131,250
b. P113,750
c. P144,375
87
d. P125,125
2.
Gasoline
Heating Oils
Kerosene
Total market value of gallons sold
P400,000
P285,000
P365,400
Market value per gallon
P10.00
P6.00
P7.00
Beginning inventory (gallon)
10,275
20,000
25,000
The above chart was used by the GET Rich Company for allocating P450,000 of joint
costs incurred in March x7 for Department A.
During March the company no inventory. No additional processing costs were incurred.
The GET Rich Company uses a process cost system. If management decided to use
the physical output method to allocate joint costs, what would the joint cost for
Gasoline?
a. P128,848
b. P116,034
c. P146,580
d. P158,440
3. Crusher Corporation drills oil wells to obtain crude oil and natural gas. Last month,
the company produced 100, 000 gallons of crude oil and 15,750 cubic feet of natural
gas. The crude oil sells for P550 per gallon and the natural gas sells for P120 per
cubic foot. After split-off the crude oil and natural gas were processed further at costs
of P4, 004,400 and P290, 000, respectively. The direct labor joint costs relating to the
four oil wells were P2,500,000, P4,000,000, P8, 801, 000, and P3, 300, 000. Selling
expenses were P1, 003, 500 for crude oil and P150, 000 for natural gas.
Administrative expenses were P500, 000 for crude oil and P110, 000 for natural gas.
The additional joint costs incurred before split-off were P5, 506, 600. The ending
inventory is 10, 000 gallons of crude oil; there are no beginning inventories. Crusher
Corp. uses process costing to accumulate cost.
Determine the net income if the net by-product income will be treated as deduction from
costs of goods sold of the main product.
a. P29,535,700
b. P26,724,500
c. P23,901,700
d. P24,035,700
Questions 4 through 7 are based on the following:
Jovart Corporation manufactures two products out of a joint process: Compod and
Utrasene. The joint costs incurred are P2, 500, 000 for a standard production run that
generates 120, 000 gallons of Compod and 80, 000 gallons of Ultrasene. Compod sells
for P20 per gallon while Ultrasene sells for P32.50 per gallon.
88
4. If there are no additional processing costs incurred after the split-off point, calculate
the amount of joint cost of each production run allocated to Compod on a physicalunits basis.
a. P1,500,000
b. P1,000,000
c. P1,200,000
d. P1,300,000
5. If there are no additional processing costs incurred after the split-off point, calculate
the amount of joint cost of each production run allocated to Ultrasene on a relativesales-value basis.
a. P1,500,000
b. P1,000,000
c. P1,200,000
d. P1,300,000
6. Suppose the following additional processing costs are required beyond the split-off
point in order to obtain Compod and Ultrasene: P1.00 per gallon for Compod and
P11.00 per gallon for Ultrasene, calculate the amount of joint cost of each production
run allocated to Compod on a net-realizable-value basis.
a. P1,200,000
b. P1,300,000
c. P1,425,000
d. P1,075,000
7. Suppose the following additional processing costs are required beyond the split-off
point in order to obtain Compod and Ultrasene: P1.00 per gallon for Compod and
P11.00 per gallon for Ultrasene. Suppose also, Compod can be processed further
into a product called Compodalene, at an additional cost of P4.00 per gallon.
Compodalene will be sold for P26.00 per gallon by independent distributors. The
distributor’s commission will be 10% of the sales price. Should Hovart sell Compod or
Compodalene?
a.
b.
c.
d.
Compod because of an advantage of P240, 000.
Compod because of an advantage of P72, 000.
Compodalene because of an advantage of P240, 000.
Compodalene because of an advantage of P72, 000.
8. David Company produces joint products X and Y, together with by-product W. X is
sold at split-off, but Y and W undergo additional processing. Production data pertaining
to these products for the year ended December 31, 2018 are as follows:
X
Joint costs: Variable
Fixed
Separable costs: Variable
Fixed
Production in pounds
50,000
Sales price per pound
P4.00
Y
W
P120,000
90,000
40,000
P7.50
P3,000
2,000
10,000
P1.10
Total
P88,000
148,000
123,000
92,000
100,000
89
There are no beginning or ending inventories. No materials are spoiled in production.
Variable costs change in direct proportion to production volume. Joint costs are
allocated to joint products to achieve the same gross profit percentage for each joint
product. Net revenue from by-product W is deducted from production costs of the main
products.
Determine the joint cost share of Product Y.
a. P176,000
b. P54,000
c. P138,000
d. P71,380
9. Stevens Corp., is a chemical manufacturer that produces two main products, Pepco-1
and Repke-3, and a by-product SE-5, from a joint process. If the company had the
proper facilities, it could process SE-5 further into a main product. The ratio of output
quantities to input quantity of direct material used in the joint process remains
consistent with the processing conditions and activity level.
The company currently uses the quantitative method of allocating joint costs to the
main products. The fifo inventory method is used to cost the main products. The byproduct is inventoried at its net revenue, and this figure is used to reduce the joint
production costs before the joint costs are allocated to the main products.
Jerrick, the company’s controller, wants to implement the market value method of
joint cost allocation. He believes that inventoriable cost should be based on each
product’s ability to contribute to the recovery of joint production cost. The market
value of the by=product would be treated in the manner it is treated under the
quantitative method.
Data describing operations during November follow. The joint cost of production
amounts to P2, 640, 000 for November.
Main Products
Pepco-1
Finished goods inventory in gallons on Nov. 1
20,000
November sales in gallons
800,000
November production in gallons
900,000
Sales value per gallon at split-off point
P2.00
Additional processing cost after split-off
P1,800,000
Final sales value per gallon
P5.00
By-Product
Repke-3
SE-5
40,000 10,000
700,000 200,000
720,000 240,000
P1.50
P0.55*
P720,000
P4.00
-
90
*Marketing costs of P0.05 per gallon will be incurred to sell the by-product.
Assuming the company adopts the market value method for internal reporting
purposes, calculate the joint cost allocated to main product Pepco-1.
a. P1,575,000 b. P1,065,000
c. P1,400,000
d. P1,120,000
10. Using the above information, calculate the cost assigned to finished goods ending
inventory for Repke-3 under the market value method.
a. P88,750
b. P93,333
c. P450,000
d. P138,750
11. Blessa Corporation operates an ore processing plant. A typical batch of ore runs
through the plant which yield three refined products: lead, copper, and manganese.
At the split-off point, the intermediate products cannot be sold without further
processing. The lead from a typical batch will sell for P20, 000 after incurring
additional processing costs of P8, 000. The copper is sold for P40, 000 after
additional processing costs of P1, 000. The manganese yield sells for P30, 000 but
requires additional processing costs of P6, 000. Using the market value approach,
the cost ratio is 80%. The joint allocated to copper would be:
a. P44,000
b. P31,200
c. P9,600
d. P11,200
Questions 12 and 13 are based on the following:
Arlene chemical Company manufactures two industrial chemical products in a joint
process. In May, 10, 000 gallons of input costing P60, 000 were processed at a cost of
P150, 000. The joint process resulted in 8, 000 pounds of Resoline and 2, 000 pounds
of Krypto. Resoline sells at P25 per pound and Krypto sells for P50 per pound.
Management generally processes each of –these chemicals further in separable
processes to produce more refined chemical products. Resoline is processed
separately at a cost of P5 per pound. The resulting product, Resolite, sells for P35 per
pound. Krypto is processed separately at a cost of P15 per pound. The resulting
product, Kryptite, sells for P95 per pound.
12. The joint cost share of product Kryptite using the net realizable value method would
be:
a. P126,000
b. P84,000
c. P140,000
d. P70,000
91
13. Assuming that Arlene Chemical Company’s management is considering an
opportunity to process Kryptite further into a new product called Omega. The
separable processing will cost P40 per pound. Packaging costs for Omega are
projected to be P6 per pound, and the anticipated sales price is P130 per pound.
Should Kryptite be processed further into Omega?
a. Yes, because of an advantage of P22, 000
b. No, because of a disadvantage of P10, 000.
c. No, because of a disadvantage of P22, 000.
d. Yes, because of an advantage of P10, 000.
Questions 14 and 15 are based on the following:
Mark, the cost accountant for Billings Plastics, Inc., has provided you with actual and
standard cost data for one of the basic product lines for the month of February.
Direct materials Direct labor
Purchased and used at actual cost, 38,000 units
P104,500
Actual direct labor payroll
P63,000
Standard materials units per product unit
2
Standard labor time per product unit
20 minutes
Standard price per unit of materials
P2.50
Standard direct labor rate per hour
P10
Labor rate variance (unfavorable)
P6,000
During February, 18,000 units of product were manufactured.
14. Determine the entry to record direct materials charged to production under the
standard costing system.
a. Work in Process
90,000
c. Work in Process 104,500
Material Qty Variance5,000
Material Qty Variance9,500
Materials
95,000
Materials
95,000
b. Work in Process
90,000
d. Work in Process 95,000
Materials
90,000
Materials
95,000
15. Prepare the entry to record direct labor changed to production under the standard
costing system.
a. Work in Process
63,000
c. Work in Process 60,000
Payroll
63,000 Labor Rate Variance3,000
Payroll
63,000
b. Work in Process
60,000
d. Work in Process 57,000
Labor Rate Variance6,000
Labor Rate Variance6,000
Labor Efficiency Variance 90,000
Payroll
63,000
Payroll 63,000
92
16. N Co. uses a standard process cost system for all its products. All inventories are
carried at standard. Inventories and cost of goods sold are adjusted for financial
statement purposes for all variances considered material in amount at the end of the
fiscal year. All products are considered to flow through the manufacturing process to
finished goods and ultimate sale in a first-in, first-out pattern.
The standard cost of one of N’s products is as follows:
Materials
P2
Direct labor (.5 DHL @ P8)
4
Factory overhead
3
There is no work in process inventory of this product due to the nature of the product
and the manufacturing process. The following schedule reports the manufacturing
and sales activity measured at standard cost for the current fiscal year:
Units
Pesos
Products manufactured
95,000
P855,000
Beginning finished goods inventory
15,000
135,000
Goods available for sale
110,000
990,000
Ending finished goods inventory
19,000
171,000
Cost of goods sold
91,000
P819,000
The balance of the Finished Goods Inventory, P140,800 reported on the balance
sheet at the beginning of the year, included a P5, 800 adjustment for variances from
standard cost. The unfavorable standard cost variance for labor for the current fiscal
year consisted of a wage rate variance of P32, 000 and labor efficiency variance of
P20, 000 (2, 500 hours @P8). There were no other variances from standard cost for
this year.
Assuming the unfavorable labor variance totaling P52, 000 are considered material
in amount by management and are to be allocated to finished goods sold, compute
the amount for Cost of Goods Sold on the income statement prepared for the fiscal
year.
a. P871,000
b. P876,000
c. P866,400
93
d. P860,600
17. The Kornbrant Company was totally destroyed by fire during June. However, certain
fragment of its cost record with the following data were recovered: idle capacity
variance, P12, 660 favorable; spending variance, P8, 790 unfavorable; and applied
factory overhead, P162, 340.
Determine the budget allowance, based on capacity utilized.
a. P149,680
b. P175,000
c. P153,550
d. P171,130
18. Garment Company manufactures “one size fits all” ready-to-wear outfit and uses a
standard costing system. Each unit finished outfit contains 2 yards of fabric. Based
on experience, 20% waste on fabric input is incurred. The cost of fabric is P75 per
yard.
How much material cost is incurred in producing one outfit?
a. P187.50
b. P150.00
c. P 200.00
d. P120.00
19. Evelyn Corp. manufactures rafts for use in swimming pools. The standard cost for
material and labor is P892 per raft. This includes 8 kilograms of direct material at a
standard cost of P50 per kilogram, and 6 hours of direct labor at P82 per hour. The
following data pertain to November.
Work in process inventory on November 1: none
Work in process inventory on November 30: 800 units (75 percent complete as to
labor; material is issued at the beginning of processing).
 Units completed: 5, 600 units.
 Purchase of materials: 50, 000 kilograms for P2, 492, 500.
 Total actual labor costs: P3, 007, 600.
 Actual hours of labor: 36, 500 hours.
 Direct-material quantity variance: P15, 000 unfavorable.
The entry to record direct labor cost charged to production must be:
a. Work in process inventory
3, 007, 600
Payroll
3, 007, 600
b. Work in process inventory
2, 755, 200
Labor cost variance
252, 400
Payroll
3, 007, 600
c. Work in process inventory
3, 050, 400
Labor efficiency variance
13, 100
Labor rate variance
55, 900
Payroll
3, 007, 600


d. Work in process inventory
Labor rate variance
Labor efficiency variance
Payroll
94
3, 050, 400
14,600
57, 400
3, 007, 600
10. Rochester Plumbing Fixtures Corporation manufactures a wide range of plumbing
fixtures for the housing construction industry. The company recently adopted backflush
costing. The following events occurred in April.
1. Raw material costing P300, 000 was purchased on account.
2. Direct-labor costs of P165, 000 and actual manufacturing overhead costs of
P370, 000 were incurred. These amounts have not yet been paid in cash.
3. Conversion costs of P540, 000 were applied to finished products. These goods
included raw material costing P300, 000.
4. Goods costing P840, 000 were sold for P1, 000, 000 on account.
5. Overapplied or underapplied conversion costs were closed into Cost of Goods
Sold.
The entry to record the cost of goods manufactured must be:
a. Finished Goods Control
Accounts Payable Control
Conversion Costs Applied
b. Finished Goods Control
Raw & In Process Control
Conversion Costs Incurred
c. Finished Goods Control
Work in Process Control
d. Finished Goods Control
Raw & In Process Control
Conversion Costs
840,000
300, 000
540, 000
835, 000
300,000
535, 000
840, 000
840, 000
840, 000
300,000
540,000
95
ADVANCED FINANCIAL ACCOUNTING AND REPORTING
SOLUTION FOR BOOKLET 2
INSTALLMENT ACCOUNTING
1. A
2. Total sales in terms of cash sales:
Cash sales
P 90,000
Charge sales (180,000/120%)
150,000
Installment sales (446,400/124%)
360,000
Total
P600,000
Cost of all sales must be:
Beginning inventory
P 52,600
Add: Purchases
493,000
Repossessed goods
15,000
Available for sale
P 560,600
Less: Ending Inventory
(77,000)
P483,600
Gross profit rate for 2018 installment sales
Installment sales
Cost of installment sales (360/600x 483,600)
Gross profit
GP rate (156,240/446,400) = 35%
P446,400
290,160
P156,240
2016
2017
2018
Total
Unadjusted deferred gross profit
P22,200 P39,360 P156,240
Less: Adjusted deferred gross profit:
2016 (15,000x 30%)
(4,500)
2017 (45,000x 32%)
(14,400)
2018 (240,000x 35%)
(84,000)
Less: Deferred gross profit on default
2016 (14,000x 30%)
(4,200)
2017 (25,000x 32%)
(8,000)
Realized gross profit
P13,500
P16,960
P72,240 P102,700
A
3. Repossessed value
Unrecovered cost:
2016 sale (14,000x 70%)
2017 sale (25,000x 68%)
Loss on repossession
P9,800
17,000
4. Realized gross profit:
Cash sales (90,000- (90/600 x 483,600)
Charge sales (180,000- (150/600x 483,600)
Installment sales (refer to no. 17)
26,800
P11,800
B
P 17,460
59,100
102,700
Total realized gross profit
Less: Loss on repossession
Realized gross profit net loss on repossession
Less: Operating expenses
Operating income
Add: Other income
Net income
5. Repossessed value
P30,000
Unrecovered cost (45,000x 70%)
31,500
Loss from repossession
P 1,500
2016 sales (270,000-120,000-45,000) x 30%
2017 sales (600,000-390,000) x 40%
2018 sales (990,000-780,000) x 35%
Total realized gross profit in 2018
2016 sales (120,000x 30%)
2017 sales (390,000x 40%)
2018 sales (780,000x 35%)
Total deferred gross profit at the end of 2018
P179,260
( 11,800)
P167,460
(76,300)
P 91,160
8,840
P100,000
A
B
P31,500
84,000
73,500
P189,000
P 36,000
156,000
273,000
P465,000
B
GP rates for:
2016 (180/600) = 30%
2017 (324/810) = 40%
2018 (346.5/990) =35%
6. Point of sale:
Repossessed value
Installment account balance (P10,800 – P6,400)
Loss on repossession
Installment sales:
Repossessed value
Unrecovered cost (4,400 x 62.5%)
Loss on repossession
GP rate for 2017 (36/96)
= 37.5%
7. 2016 sales (30,000 x 42%)
2017 sales (96,000 -24,000- 4,400) x 37.5%
2018 sales (300,000 – 130,000) x 20%
Total realized gross profit in 2018
Sales 2018:
Gross profit
P 60,000
GP to cost
÷ 25%
Cost of sales
P240,000
Add: Gross profit
60,000
GP rate (60/300) = 20%
P 12,600
25,350
34,000
P 71,950
P300,000
P 2,000
4,400
P 2,400
D
P 2,000
( 2,750)
P 750
D
B
8. realized gross profit on installment sales during 2018:
2018
P500,000
( 80,000)
( 5,000)
P415,000
x
38%
P157,700
Installment sales/ Beginning bal.
Less: Ending balance
Default
Collections
Gross profit rate *
2017
P240,000
( 20,000)
( 10,000)
P210,000
x
40%
P 84,000
Realized gross profit during 2018:
Regular sales
Cost of regular sales:
Beginning inventory
P 30,000
Add: Purchases
455,000
Repossessed merchandise
10,000
Available for sale
P 495,000
Less: Ending Inventory
(35,000)
Total cost of sales
P 460,000
Less: Cost of installment sales
(310,000)
Total realized gross profit during 2018
2016
P50,000
( 5,000)
( 8,000)
P37,000
x 45%
P16,650
P258,350
P 192,000
(150,000)
Gross profit rates:
2018 = 500,000-310,000/500,000 = 38%
2017 = 96,000/240,000 = 40%
2016 = 22,500/50,000 = 45%
9. Total deferred gross profit as of December 31,2018:
2018 = 80,000 x 38%
P 30,400
2017 = 20,000 x 40%
8,000
2016 = 5,000 x 45%
2,250
42,000
P300,350 C

10. Repossessed value
Unrecovered costs:
2018 = 5,000 x 62%
2017 = 10,000 x 60%
2016 = 8,000 x 55%
P40,650
B
P 10,000
P 3,100
6,000
4,400
11. Total realized gross profit during 2018
Less: Loss on repossession
Less: operating expenses
Operating loss
B
13,500
P 3,500
C
P300,350
( 3,500)
(300,000)
( P 3,150 )
12. Cash
Accounts receivable
Installment accounts receivable
Inventories
Other assets
Total assets
P 25,000
40,000
105,000
35,000
52,000
P257,000
A
OR
Total assets above
Less: Deferred gross profit on installment sales (refer to no. 11)
Total assets
P257,000
( 40,650)
P216,350
D
Note: Both are acceptable in accounting. Possible answers are A and D.
13. Total sales reported both regular and installment
Less: Regular sales:
Collected charge accounts
P96,000
Uncollected balance
20,000
Less: charge account beginning balance (16,000)
Installment sales during the year
Total realized gross profit during 2018:
Realized gross profit on installment sales:
2018 – 160,000 x 50%
2017 - 120,000 x 55%
Realized gross profit on regular sales:
Regular sales (see above)
Cost of regular sales:
Beginning inventory
Add: Purchases
Reported
P258,000
Merchandise repossessed ( 10,000)
Correct purchases
Add: Repossessed inventory
Available for sale
Less: Ending inventory
Total cost of sales
Less cost of installment sales (400,000 x 50%)
P500,000
( 100,000)
P400,000
P80,000
66,000
P146,000
P100,000
P30,000
248,000
8,000
P286,000
( 26,000)
P260,000
(200,000)
P 60,000
40,000
Total realized gross profit before gain or loss on repossession
14. Total deferred gross profit as of December 31, 2018:
2017 sales – 60,000 x 55%
P 33,000
2018es – 240,000 x 50%
120,000
P186,000
P153,000
A
C
15. Repossessed value
Unrecovered cost = 10,000 x 45%
Gain on repossession
P 8,000
4,500
P 3,500
B
16. GP rate in 2017:
Sales in 2017:
Collected selling price equal to principal collected P32,000
Selling price not yet collected:
Notes receivable
P62,000
Less: Unearned interest revenue ( 7,167)
54,833 P86,833
Cost of sales in 2017:
Purchases
P45,200
Less: Increase in inventory
( 2,000)
43,200
Gross profit
P43,633
Gross profit rate – 43,633/86,833 = 50.25%
Realized gross profit in 2017 = 32,000 x 50.25% = P16,080
A
17. GP rate in 2018:
Sales in 2018:
Collected selling price for 2017 and 2018 sales
Less: Sales of 2017 collected in 2018:
Notes receivable, beginning
P62,000
Notes receivable, ending
36,000
Collected notes
26,000
Less: interest collected (7,167 – 5,579) ( 1,588)
Collected selling price for 2017 sales
Selling price not yet collected for 2017 sales
Notes receivable, ending
Less: Unearned interest revenue
Cost of sales in 2018:
Purchases
Less: Increase in inventory
Gross profit
Gross profit rate = 33,525/77,545 = 43.23%
Total realized gross profit in 2018:
2017 sales = 24,412 x 50.25%
2018 sales = 25,588 x 43.23%
LONG-TERM CONSTRUCTION CONTRACTS
1.
Total Contract Price
Total Estimated costs
P60,000
( 8,043)
P 50,000
(24,412)
P 25,588
51,957
P 52,020
( 8,000)
P12,267
11,062
P 80,000,000
P77,545
44,020
P33,525
P23,329
C
2016
P 20,100,000
2017
30,150,000
2018
16,750,000
67,000,000
Estimated gross profit
P 13,000,000
2018 gross profit:
16,750,000/67,000,000 x 13,000,000 = P 3,250,000 B
2. Project 1:
Contract price
Total estimated costs:
Costs incurred during 2019
P 450,000
Est. additional costs to complete 140,000
Gross loss during the year totally recognized
Project 2:
Contract price
Total estimated costs:
Costs incurred during 2019
P 126,000
Est. additional costs to complete
504,000
Estimated gross profit
Percentage of completion (126/630 or 20%)
Gross profit realized during the year
Project 3:
Contract price
Total actual costs incurred
Actual gross profit realized during the year
Total income from construction recognized during the year
P 560,000
590,000
P(30,000)
P 670,000
630,000
40,000
x 20%
8,000
P 500,000
330,000
170,000
P148,000 D
3. Contract price
Total estimated costs
Costs incurred
P 12,000,000
Estimated costs to complete
48,000,000
Estimated gross profit
Percentage of completion (12,000,000/60,000,000)
Income from construction
P 80,000,000
4. Contract price – Quezon City
Total costs incurred (3,500,000 + 1,240,000)
Actual total gross profit
Less: Gross profit recognized in prior years:
Contract price
Percentage of completion
Contract revenue in prior years
Costs incurred in prior years
Gross loss recognized this year 2019
Contract price – Pampanga
Percentage of completion
P 4,800,000
4,740,000
P 60,000
60,000,000
P 20,000,000
x
20%
P 4,000,000
P 4,800,000
x
75%
P 3,600,000
3,500,000 (
A
100,000)
P(40,000)
P 960,000
x 15%
Contract revenue recognized this year
Costs incurred during the year
Gross profit recognized during 2019
Total loss recognized during the year
P 144,000
140,000
5. Contract price
Total estimated costs 2019:
Cost incurred to date
Estimated costs yet to be incurred
Estimated gross profit, 2019
Percentage of completion 2019 (600,000/800,000)
Gross profit to date 2019
Less: Gross profit 2017
Contract price
Total estimated costs (320 + 480)
Estimated gross profit 2017
Percent completed in 2017 (320/800)
Gross profit recognized in 2018
4,000
P (36,000) C
P 1,000,000
P 600,000
200,000
800,000
P 200,000
x
75%
P 150,000
P 1,000,000
( 800,000)
200,000
x 40% (
80,000)
P 70,000 C
6. Cost incorrect January 10, 2018 through December 31, 2019
P 1,800,000
Estimated cost to complete, December 31, 2019
600,000
Total estimated cost
P 2,400,000
Total percentage of completion as of December 31, 2019:
1,800,000/2,400,000
75%
Less percentage of completion prior year
Income recognized December 31, 2018
= P 300,000
Total estimated profit prior year (3,000,000 – 2,250,000) = P 750,000
Percentage of completion prior year (300,000/750,000)
40%
Percent completed in 2019
35% C
7.
2017
2018
2019
Contract price
P 19,500,000P 19,500,000P 19,500,000
Total estimated costs
15,000,000 20,000,000 21,000,000
Estimated (Actual) Profit (loss)
P 4,500,000P( 500,000) P( 1,500,000)
Percentage of completion:
1,500,000/15,000,000
x
10%
Recognized in full
x
100% x
100%
Gross profit to date
P 450,000 P( 500,000) P( 1,500,000)
Less: Gross profit(loss) prior year
450,000 ( 500,000)
Gross profit(loss) during the year P 450,000 P( 950,000) P( 1,000,000)
8. Gross profit realized (100 million x 25% x 50%)
9.
P 12.5 million
C
C
Contract price (fixed)
Total estimated cost
Anticipated loss to date
Add: Gross profit recognized in 2018:
Contract price
P 7,500,000
Total estimated cost
6,900,000
Estimated gross profit
P 600,000
Percentage of completion (2.3/6.9) x
1/3
Total loss recognized in 2019
10. Gross profit to date:
Contract price
Total estimated costs (1,800,000 + 600,000)
Estimated gross profit
Percentage of completion (1.8/2.4)
Less: Gross profit in prior year, 2018
Gross profit this year, 2019
11. Contract price (fixed)
Total estimated costs:
Cost incurred to date
Add: Estimated cost to complete
Gross profit (loss) recognized
FRANCHISE ACCOUNTING
1 D
2 B
3 D
4 D
5 D
6 A
7 A
8 D
9 B
1 A
0
11 D
12 A
13 D
14.
Down payment (21 x 30,000)
Less: Default (2 additional payments)
Unearned franchise fee, December 31, 2016
15. A
16.
P 7,500,000
7,800,000
(P 300,000)
( 200,000)
(P 500,000)
C
P 3,000,000
( 2,400,000)
P 600,000
x
75% P 450,000
( 300,000)
P 150,000
P 3,000,000
P 930,000
2,170,000 ( 3,100,000)
(P 100,000) B
P 630,000
( 20,000)
P 610,000
C
D
Franchise fees earned during the year:
Initial franchise fee earned:
Down payment
P 100,000
Installments
303,735
Continuing franchise fee (5% x 9 million) 450,000
P 853,735
B
17. The option is determined to be probable or certain. Therefore, the answer must be
D.
18. Upon signing of the agreement the entire fee of P 400,000 is still considered
unearned, because substantial services were just completed 6 months after the
agreement is signed. D
HOME AND BRANCH ACCOUNTING
1. C 6. C 11. D 16. C
2. C 7. A 12. C
3. C 8. D 13. A
4. A 9. B 14. B
5. A 10 B 15. D
.
11. Home Office Control (Branch Books)
Jan. 1, 2018 Balance
60,000
Jan. 3, 2018 Cash remitted to home office
( 80,000)
Jan. 5, 2018 Shipments from home office
120,000
Jan. 28, 2018 Expenses from home office
45,200
Jan. 28, 2018 Cash remitted to home office
( 30,000)
Jan. 28, 2018 Merchandise returned to home office
( 12,000)
Unadjusted balance
P 103,200
Branch Control (Home Office Books)
Jan. 1, 2018 Balance
60,000
Jan. 3, 2018 Cash received from branch
( 80,000)
Jan. 4, 2018 Shipments to branch
120,000
Jan. 28, 2018 Expense allocation
52,400
Jan. 28, 2018 Shipments to branch
24,000
Jan. 28, 2018 Collection from branch customer
( 18,000)
Jan. 28, 2018 Supplies purchased for branch and shipped
directly to branch
8,000
Unadjusted balance
P 166,400
Branch Control
Home Office Books
Books
Unadjusted balance
P 166,400
Error committed by the branch in recording
Its share of expenses (52,400 – 45,200)
Shipments in transit to branch
Home Office Control
Branch
P 103,200
7,200
24,000
Remittance in transit from the branch
Collection of branch receivable
Merchandise returned in transit
Supplies in transit from the home office
Reconciled or adjusted balance
( 30,000)
( 18,000)
( 12,000)
8,000
P 124,400
D
12. Total ending inventories of G Wholesale Company.
Home office
P 550,000
Branch office:
From home office
P 180,000
Shipments in transit (No. 5)
30,000
Total
P 210,000
Less: Mark up (1/6 of 210) ( 35,000)
P 175,000
From outsiders
20,000 195,000
P 745,000
C
13.
Unadjusted balance
1) Furniture purchased by the branch
2) Collection of branch accounts
3) Remittance in transit
4) Error on allocated expenses
5) Shipment in transit
Adjusted balance
P 124,400
Branch account
P 200,000
( 40,000)
Home office account
P 90,000
( 20,000)
( 50,000)
14. Correct sales
Correct cost of sales:
Beginning inventory (150,000 x 5/6)
Add: Purchases from outsiders
Add: Shipments from home office at cost
(450,000 + 30,000 x 5/6)
Less: Ending inventory (refer to no. 2)
Gross profit
Less: Correct expenses (160,000 + 10,000)
Correct net income of the branch
15. Beginning inventory:
Home office
P 700,000
Branch (refer to no. 3)
125,000
Add: Purchases:
Home office
P 2,900,000
Branch
240,000
Available for sale
Less Ending inventory (refer to no. 2)
Cost of sales of G Wholesale Company
P 110,000
10,000
30,000
P 110,000
A
P 950,000
P 125,000
240,000
400,000
( 195,000)
P 825,000
3,140,000
P 3,965,000
( 745,000)
P 3,220,000
D
( 570,000)
P 380,000
( 170,000)
P 210,000
B
16. Sales of the home office reported
Less: Sales to branch (450,000 + 30,000)
Correct sales of the home office
Correct sales of the branch
Total correct sales of the company
P 4,400,000
( 480,000)
P 3,920,000
950,000
P 4,870,000
C
ADVANCED FINANCIAL ACCOUNTING AND REPORTING
BOOKLET 4 SOLUTIONS
Normal Costing
PROBLEM 1
1. a. Material Control
P2,500,000
Accounts payable
2,500,000
b. Work in process-Material
P2,045,000
Factory overhead
360,000
Salaries Expense
42,000
Administrative and General Expense
35,000
Material Control
P2,482,000
c. Work in process- labor
P1,650,000
Factory Overhead
550,000
Salaries Expense
840,000
Administrative and General Expense
460,000
Payroll
P3,500,000
d. Payroll
P3,500,000
W/ tax
P230,000
SSS payable
83,500
Phil. Health Payable
28,000
Pag-ibig Payable
86,000
Accounts Payable
3,072,500
e. Factory Overhead
P125,000
Salaries Expense
54,000
Admin. & Gen. Expense 32,500
SSS payable
83,500
Phil. Health Payable
28,000
Pag-ibig Payable
86,000
ECC Payable
14,000
f. Factory Overhead
P1,170,000
Salaries Expense
120,000
Admin. & Gen. Expense 80,000
Accounts Payable
P920,000
Accumulated Depreciation
450,000
g. Work in process- overhead
P2,145,000
Factory overhead
P2,145,000
h. Finished Goods Inventory
P5,860,000
Work in process-Material
P2,051,000
Work in process- labor
1,641,000
Work in process- overhead
2,168,000
i. Accounts Receivable P8,847,000
Sales (5,898,000x 1.5)
P8,847,000
Costs of Goods Sold
P5,898,000
Finished Goods Inventory
P5,898,000
j. Costs of Goods Sold P60,000
Factory overhead
P60,000
2. Raw material used
P2,045,000
Direct labor
1,650,000
Factory Overhead(applied)
2,145,000
Total Manufacturing Cost
P5,840,000
Work in process- beg.
449,000
FCPIF
P6,289,000
Work in process-end
429,000
Cost of Goods Manufactured P5,860,000
Finished Goods- beg.
525,000
Total Goods Available for Sale P6,385,000
Finished Goods- end
( 487,000)
Cost of Goods Sold
P5,898,000
3. A. P3,675,000
B. P3,795,000
C. P5,840,000
D. P1,663,500
PROBLEM 2
Raw material used
P1,600,000
Direct labor
1,200,000
Factory Overhead(applied)
800,000
Total Manufacturing Cost
P3,600,000
Work in process- beg.
160,000
FCPIF
P3,760,000
Work in process-end
( 200,000)
Cost of Goods Manufactured P3,560,000
Finished Goods- beg.
570,000
Total Goods Available for Sale P4,130,000
Finished Goods- end
( 380,000)
Cost of Goods Sold
P3,750,000
Job Order Costing
PROBLEM 1
1. Work in Process
Materials Inventory
2. Work in Process
Payroll Accounts
3. Work in Process
Factory Overhead
4. Finished Goods
Work in Process
P135,000
P135,000
P120,000
P120,000
P91,000
P91,000
P288,000
P288,000
PROBLEM 2
1.
204
Beginning
P50,460.00
Raw Materials
9,480.00
Direct Labor
26,844.00
7,717.65
Overhead
P94,501.65
205
P118,060
11,320
22,750
7,475
P159,605
2. Overhead Control Account:
Beginning (credit) P12,300
Applied
30,200.15
Actual
40,941.87
Ending (credit)
P 1,558.28
PROBLEM 3
1. P202,500
OH- Control
P4,723,500
87,500
P4,162,500
400,000
P 200,500
2. DRS 114
Materials
Direct Labor
Overhead
WIP, ending
P250,000
211,000
200,500
146,250
P807,750
3. Playpens
P420,000
206
P124,101.00
10,490.00
28,920.00
8,314.50
P171,725.50
207
22,440
20,370
6,693
P49,503
Raw materials
13,800
Direct labor
43,200
Overhead
P33,000
90,000
Finished Goods- Playpens
P510,000
PROBLEM 4
A.
Beginning
Direct Materials
Direct labor
Overhead
B.
115
P81,200
-26,000
31,200
P138,400
116
-39,000
45,000
54,000
P138,000
117
-53,000
47,000
56,400
P156,400
=P432,800
118
Beginning
P47,000
Direct Materials
16,000
Direct labor
19,200
Work in Process, end P82,200
PROBLEM 5
1. INTERNAL
WIP-M
46,000
WIP-L
14,000
WIP-OH
30,000
Raw Mat.
46,000
Payroll
14,000
FOH
30,000
2. CUSTOMER FAULT
WIP-M
46,000
WIP-L
14,000
WIP-OH
30,000
Raw Mat.
46,000
Payroll
14,000
FOH
30,000
SG Inv.
3,000
FOH
600
WIP-M
1,840
WIP-L
560
WIP-OH
1,200
FG Inv.
86,400
WIP-M
44,160
WIP-L
13,440
WIP-OH
28,800
SG Inv.
3,000
WIP-M
1,533
WIP-L
467
WIP-OH
1,000
FG Inv.
87,000
WIP-M
44,467
WIP-L
13,533
WIP-OH
29,000
PROBLEM 6
1. INTERNAL
WIP-M
92,000
2. CUSTOMER FAULT
WIP-M
92,000
WIP-L
36,000
WIP-OH
72,000
Raw Mat.
92,000
Payroll
36,000
FOH
72,000
FOH
2,200
Raw Mat.
400
Payroll
600
FOH
1,200
WIP-L
36,000
WIP-OH
72,000
Raw Mat.
Payroll
FOH
WIP-M
400
WIP-L
600
WIP-OH
1,200
Raw Mat.
Payroll
FOH
92,000
36,000
72,000
400
600
1,200
PROBLEM 7
1. INTERNAL
WIP-M
400,000
WIP-L
320,000
WIP-OH
240,000
Raw Mat.
400,000
Payroll
320,000
FOH
240,000
2. CUSTOMER FAULT
WIP-M
400,000
WIP-L
320,000
WIP-OH
240,000
Raw Mat.
400,000
Payroll
320,000
FOH
240,000
SG Inv.
24,000
FOH
48,000
WIP-M
30,000
WIP-L
24,000
WIP-OH
18,000
SG Inv.
24,000
WIP-M
10,619
WIP-L
8,496
WIP-OH
4,885
FG Inv.
888,000
WIP-M
370,000
WIP-L
296,000
WIP-OH
222,000
FG Inv.
880,000
WIP-M
389,381
WIP-L
311,504
WIP-OH
179,115
PROCESS COSTING
Problem 1
A.
Department A
Department B
Mat.
CC
Mat.
CC
Finished & Transfer 25,000 25,000 25,000
Finished & Transfer 20,000 20,000 20,000
In-process End
5,000 2,500
3000
In-process End
10,000 5,000 6,000
Weighted Average
30,000 27,500
28,000
Weighted Average
30,000 25,000
26,000
In-process beg.
10,000 2,000 (4,000)
In-process beg.
( 5,000) (1,000)
( 500)
FIFO
20,000 25,500 24,000
FIFO
25,000 24,000 25,500
B.
Mat.
Finished & Transfer 65,000 65,000
In-process End
25,000 25,000
Weighted Average 30,000 27,500
In-process beg.
10,000 2,000
FIFO
20,000 25,500
CC
65,000
15,000
28,000
(4,000)
24,000
C.
Mat.
CC
Finished & Transfer 86,000 86,000 86,000
In-process End
28,000 28,000 16,800
Weighted Average 114,000 114,000 102,800
In-process beg.
(28,000) (28,000) (16,800)
FIFO
86,000 86,000 86,000
D.
Mat.
Finished & Transfer 7,000
7,000
In-process End
10,500
4,200
Weighted Average 17,500 11,200
In-process beg.
(10,000) (4,000)
FIFO
7,500
7,200
CC
7,000
4,200
11,200
(2,500)
8,700
Problem 2
CPD 400,000 @ P16
Materials 150,000 @ 6
Labor 92,000 @ 4
Overhead 154,000 @ 1
796,000 33
Finished & Transfered (20,000 x 33) 660,000
ln-Process End
136,000
Problem 3
Material
Finished and Transferred
9,200
ln-Process End
Weighted Average
10,000
9,000
ln-Process Beginning
9,200
800
(1,000)
CC
9,200
600
200
9,800
(1,000)
8,800
(400)
9,000
9,400
FIFO
Weighted Average FIFO
Mat. 490,000 @ 50
IPB 55.200
cc 329.000 @ 35
Mat. 448,800 @ 51
819.000 @ 85
cc 315 000 @ 35
Total 819.000 @ 86
Finished & Transfered 782,000
F & T 37.600
ln-Process End 37,000
IPB 781.400
Problem 4
CPD
M
CC
FT 7,800 7,800 7,800 7,800
1,200 1,200
300
9.000 9,000
8.100
1,000
WA 8,000
IPB
CPD 108,000 @ 12
M
18.000 @ 2
CC
48,600 @ 6
174,600 @ 20
FT (156,000)
(78,000 x 20)
IPE 18,600
Problem 5
CPD
M
CC
FT
5,000 5,000 5,000 5,000
IPE
1,000 1,000
WA
6,000 6,000 5,600 5,300
IPB
1,400 1,400 1,120
600
300
560
4,600 4,600 4,480 4,740
CPD
915,000 @ 152.5
M
263,200 @ 47
114
313.5
CC
604,200 @ 1,782,400
FT
(1,567,500)
IPE
214,900
CLM
348,620
CPD
703,800 @ 153
M
203,840 @ 45.5
CC
526,140 @ 111
1,782,400
IPE
FT
309.5
(213,600)
1,568,800 @ 313.76
PROBLEM 6
FT
100%
40%
60%
95%
101
102
103
104
/
/
/
/
250,000
/
/
/
/
9,800
250,000
CC
IPE
98% 10,000
65% 7,500
/
/
/
4,871
50% 17,500
/
/
X
8,750
45% 15,000
M
CC @
FT
IPE
50,000
/
/
X
300,000 300,000 300,000 267,500 260,000
60,000 @ .2
30,000 @.1
93,625 @ .35
130,000 @ .5
1,176,735
4.2
1,490,360
5.35
1,337,500 @ 5.35
152,860
1,490,360
6,750
280,175
FACTORY OVERHEAD
Problem1
1. 180,000/1,440,000 12.50
2. 1,485,000 x 12.5% = 185,625
3. 3,625 overapplied
Problem 2
1. RH (40 X 12) 480
OT (8 X 16
128
Total
608
2. Direct Labor (38 x 12)
456
FOH Indirect Labor (4 x 12) 100
Idle time (1 x 12)
12
Overtime premium
32
152
Problem 3
1. 207,000 / 500,000 =41.4%
2. 207,000 / 52,100 = 3.97 /unit
3. 207,000/ 69,000= 3 mhr
4. 207,000 / 765,000 = 27.1%
5.207,000 / 85,000-2.44/ hr.
Problem 4
1.
POWER
REPAIR
MOLDING
ASSEMBLY
Budgets
Allocation of P
250,000
(250,000)
48,000
218,750
204,000
31,250
320,000
Allocation of R
(48,000)
Departmental Cost ÷ DL hrs.
PDAR
5,333
42,667
428,083
393,917
40,000
P10.70
160,000
P2.46
2.
POWER
REPAIR
MOLDING
ASSEMBLY
Budgets
250,000
48,000
204,000
320,000
Allocation of P
Allocation of R
(260,000) 52,000 182,000
10,000
Departmental Cost DL Hrs.
PDAR
(100,000)
26,000
10,000
80,000
396,000
426,000
40,000
160.000
P2.66
P9.90
ADVANCED FINANCIAL ACCOUNTING & REPORTING
MIDTERM EXAMINATION
January 22,2019
1. Under the installment sales method,
a. revenue , costs, and gross profit are recognized proportionate to the cash that is received
from the sale of the product.
b. Gross profit is deferred proportionate to cash uncollected from sale of the product, but
total revenues and costs are recognized at the point of sale.
c. Gross profit is not recognized until the amount of cash received exceeds the cost of the
item sold.
d. Revenues and costs are recognized proportionate to the cash received from the sale of
the product
Answer: B
2. Income recognized using the installment method of accounting generally equals cash
collected multiplied by the
a. Net operating profit percentage
b. Net operating profit percentage adjusted for expected uncollectible accounts.
c. Gross profit percentage.
d. Gross profit percentage adjusted for expected uncollectible accounts.
Answer: C
3. According to the cost recovery method of accounting, the gross profit on an installment sale is
recognized in income:
a. After cash collections equal to the cost of sales are received.
b. In proportion to cash collections
c. On the date the final cash collection is received
d. On the date of sale
Answer: A
4. When assets that have been sold and accounted for by the installment method are
subsequently repossessed and returned to inventory, they should be recorded on the books at
a. Selling price
b. The amount of the installment receivable less associated deferred gross profit
c. Net realizable value minus normal profit
d. Net realizable value minus normal profit
Answer: D
5. When using the installment sales method,
a. Gross profit is deferred until all cash is received, but revenues and costs are recognized in
proportion to the cash collected from the sale.
b. Gross profit is recognized only after the amount of cash collected exceeds the cost of the
item sold.
c. revenue ,costs, and gross profit are recognized proportionally as the cash is received from
the sale of product
d. Total revenues and costs are recognized at the point of sale, but gross profit is deferred in
proportion to the cash that is uncollected from the sale
Answer: D
6. The theoretical support for using the percentage-of-completion method of accounting for longterm construction projects is that it
a. Is more conservative than the completed-contract method
b. Reports a lower Net Income figure than the completed-contract method
c. More closely conforms to the cost principle
d. Produces a realistic matching of expenses with revenues
Answer: D
7.the principal advantage of using the percentage-of-completion method of recognizing revenue
from long-term contracts is that it
a. is unacceptable for income tax purposes
b. gives results based upon estimates which may be subject to considerable uncertainty
c. is likely to assign a small amount of revenue to a period during which much revenue was
actually earned.
d. none of these
Answer: B
8. how should the balances of progress billings and construction in progress be shown at
reporting dates prior to the completion of a long-term contract?
a. progress billings as deferred income, construction in progress as a deferred expense
b. progress billings as income, construction in progress as inventory
c. net as a current asset if debit balance, and loss from construction if debit balance.
d. net as income from construction if credit balance, and loss from construction if debit
balance.
Answer: C
9. When a new partner is admitted to an existing partnership through the purchase of a portion
of existing interest of incumbent partner, which of the following is correct?
a. the total capital of the old and new partnership will be the same
b. the partnership will recognize gain or loss on the difference between the amount paid and
capital transferred.
c. goodwill may be recognized by virtue of the admission
d. there will be increase in the total assets of the partnership equivalent to the amount paid by
the newly admitted partner.
Answer: C
For item nos. 10-11
Carmela Appliance Company operates a branch in Quezon City. The following are transactions
between the home office and branch for the current year:
a. The home office sends P100,000 cash to the branch.
b. Shipments to branch are billed at cost of P78,750.
c. The home office pays branch expense of P78,750.
d. Home Office expense of 3,375 are paid at the branch.
e. The branch returned merchandise costing P15,000 to the home office.
f. Home office acquires branch furniture for P22,500 cash. The said fixed asset is carried on
Branch Books.
g. The depreciation of the branch furniture is 10%.
h. The branch sends a P5,000 cash remittance to home office.
10. What is the adjusted balance of Branch Current account in the Home Office Books?
a. 0
b. P83,125
c. P185,375
d. P187,625
Answer: C
11. What is the adjusted Home Office Current account in the Home Office Books?
a. 0
b. P183,125
c. P185,375
d. P187,625
Answer: A
For item nos. 12-14:
On December 31,2016, the Branch current ledger accounting in the accounting records of the
home office of Pearly Shell company shows a debit balance of P41,625. You ascertained the
following facts in analyzing this account:
a. On December 31,2016, merchandise billed at P8,700 was in transit from the home
office to the branch. The periodic inventory system is used by both home office and branch.
b. The branch issued a credit memo to home office to the collection of the trade
accounts receivable of P1,500: the home office did not yet receive the said memo.
c. The branch acquired equipment costing P17,000. The equipment account is to be
maintained in the home office books. The home office had not been notified of the acquisition.
d. A debit memo amounting to P1,500 was issued by the home office to the branch for
the share of the branch in advertising expense. However, the same was not yet recorded by the
branch.
e. A branch customer erroneously remitted P2,500 to the home office. The home office
recorded this cash collection on December 29,2016 by crediting account receivable. Meanwhile,
back at the branch, no entry has been made yet.
f. Branch net income for December 2016, was recorded erroneously by the home office
at P48,000 instead of P84,000. The credit was recorded by the home office in the Branch
income Summary Ledger account.
12. What is the balance of the Home Office Current account on the books of Branch as of
December 31,2016 before its adjustment?
a. 0
b. P41,625
c. P51,925
d. P59,625
Answer: C
13. What is the adjusted balance of Branch Current Account?
a. 0
b. P44,625
c. P51,925
Answer: D
d. P59,625
14. What is the net adjusted for Home office current account and Branch current account
respectively?
a. P18,000 Dr; P7,700 Dr
c. P18,000 Dr; P7,700 Cr
b. P7,700 Cr; P18,000 Dr
d. P7,700 Dr; P18,000 Cr
Answer: B
For item nos. 15-19
ASH Company maintains branches that market the products it produces. Merchandise is billed
to the branches at cost, with the branches paying the freight charges for the Home office to the
branch. On April 27, MEISY- branch ship a portion of its merchandise to ROBB – branch upon
authorization by Home Office. Originally, MEISY- branch had been billed for this merchandise at
P25,000 and paid freight charges of P3,125 on the shipments from Home Office ROBB- branch,
upon receiving the merchandise, pays freight charges of P1,875 on the shipment from MEISYbranch. If the shipment had been made from Home office direct to ROBB- branch, the freight
cost to ROBB- branch, the freight cost to ROBB- branch would have been, P4,000.
15. How much is the excess freight cost to be credited in the books of Home office?
a. 0
b. P1,000
c. P2,000
d. P2,750
Answer: C
16. How much is the ROBB- branch current in the books of the Home Office?
a. P25,000
b. P26,875
c. P27,125
d. P28,125
Answer: C
17. Upon receipt of shipment by ROBB- branch freight in is debited in the amount of?
a. P1,000
b. P 1,875
c. P2,125
d. P4,000
Answer: D
18. Home office current is debited by MEISY- branch in the amount of?
a. P25,000
b. P 26,875
c. P27,125
d. P28,125
Answer: D
For item nos. 19-22:
LEIGHT Company maintains branches that market the products is produces. Merchandise is
billed to the branches at cost and the freight charges were paid by the shipper. On March
3,2016, MEISY- branch ships a portion of its merchandise to ROBB- branch upon authorization
by Home Office. Originally, MEISY- branch had been billed for this merchandise at P31,250. The
freight charges of shipment from the home office amounted to P3,750. On the other hand, the
inter branch freight charge amounted to P2,250. If the shipment had been made from the Home
Office directly to ROBB- branch, the freight cost to ROBB- branch would have been P40,00.
19. How much is the express freight cost to be debit in the books of Home Office?
a. P0
b. P1,000
c. P2,000
d. P2,250
Answer: C
20. How much is to be debited as ROBB- branch current in the books of the Home Office?
a. P31,250
b. P35,250
c. P37,250
d. P38,250
Answer: B
21. Upon receipt of shipment by ROBB- branch, how much cash was credited in its books for
the freight payment?
a. P 0
b. P1,000
c. P2,000
d. P4,000
Answer: A
22. Home office current is debited by MEISY- branch in the amount of?
a. P31,250
b. P35,250
c. P37,250
d. P38,250
Answer: D
For item nos. 23-26:
The following records were taken from the books of the Company and its branch on December
31,2016:
Home Office Books
Branch Books
Sales
P 920,000
P 800,000
Shipments to branch
600,000
Beginning inventory
96,000
64,000
Purchases
1,200,000
24,000
Shipment from home office
Allowance for overvaluation
Ending inventory
Expenses
750,000
158,000
112,000
40,000
82,800
20,000
Ending inventory to the branch includes P34,800 acquired from outsiders.
23. Compute for the true net income of the branch
a. P0
b. P(42,800)
c. P42,800
d. P(191,200)
Answer: B
24. Ending balance and balance before adjustment of Unrealized Profit on Branch Inventory
a. P9,600; 158,000
b. P158,000; 9,600
c. P9,600; 185,000 d. P185,000;9,600
Answer: A
25. Combine net income
a. P104,800
b. P253,000
c. P253,200
d. P255,200
Answer: C
26. Beginning and ending inventory at cost presented in the combine financial statements
a. P152,000;185,000 b. P185,200;152,000 c. P131,250;152,000 d. P152,000;131,250
Answer: A
For item nos. 27-30
The Home Office in Global City bills QC branch for shipments of goods at 25% above cost at
the close of the business on April 27,2016, a fire gutted the branch warehouse and destroyed
70% of the merchandise stock stored therein. Thereafter, the following data were gathered:
January 1 Inventory
P 672,000
Shipments from Home office, January 1 through April 27
1,008,000
Net sales, January 1, through April 27
1,428,000
Undamaged merchandise recovered are marked to dell for
378,000
27. What is the amount of inventory destroyed by fire per home office records?
a. P178,500
b. P 273,000
c. P 441,000
d. P892,500
Answer: C
28. How much is the branch cost of goods sold?
a. P178,500
b. P 273,000
c. P 441,000
d. P892,500
Answer: D
29. How much is the branch net income as provided by GAAP?
a. P178,500
b. P 273,000
c. P 441,000
d. P892,500
Answer: B
30. How much is the overvaluation in branch Cost of Goods Sold?
a. P178,500
b. P 273,000
c. P 441,000
d. P892,500
Answer: A
For item nos. 31-32:
A, B and C decided to form ABC Partnership. It was greed that A will contribute an equipment
with assessed value of P200,000 which historical cost of P1,600,000 and accumulated
depreciation of P1,200,000. A day after the partnership formation, the equipment was sold for
P600,000.
B will contribute a land and building with carrying amount of P2,400,000 and fair value of
P3,000,000. The land and building are subject to a mortgage payable amounting to P600,000 to
be assumed by the partnership. The partners agreed that B will have 60% capital interest in the
partnership. The partners also agreed that C will contribute sufficient cash to the partnership.
31. What is the total agreed capitalization of the ABC Partnership?
a. 3,000,000
b. 4,000,000
c. 5,000,000
d. 6,000,000
Answer: A
32. What is the cash to be contributed by C in the ABC Partnership?
a. 1,000,000
b. 1,200,000
c. 1,400,000
d. 1,600,000
Answer: B
33. On December 31,2018, the statement of financial position of ABC partnership provided the
following data with profit or loss ration of 1:6:3
Current assets
2,000,000
Total liabilities
1,200,000
Noncurrent assets
4,000,000
A, capital
1,800,000
B, capital
1,600,000
C, capital
1,400,000
On January 1, 2019, D is admitted to the partnership by purchasing 40% of the capital interest
of B at a price of P1,000,000. What is the capital balance of B after the admission of D on
January 1,2019?
a. 1,080,000
b. 960,000
c. 840,000
d. 600,000
Answer: B
34. Which of the following will not result to automatic dissolution of a general partnership?
a. Assignment of partner’s interest to third persons
c. Insolvency of the partnership
b. Death of a partner
d. Civil interdiction of a partner
Answer: B
35. How shall the net profit or net loss of the partnership be divided among the partners,
whether capitalist or industrial?
a. In accordance with their capital contribution ratio
b. In accordance with just and equitable sharing taking into account the circumstances of
the partnership
c. Equally
d. In accordance with the partnership agreement
Answer: D
36. Allan Company is one of the leading construction firms in the country. On January 1,2021, it
entered into a long-term construction contract with a fixed contract price of P4,500,000. The
construction started on July 1, 2021 and ended on October 31,2023. The following costs
were provided by the chief accountant of Allan Company:
2021
2022
2023
Construction costs incurred to
P1,000,000
P 2,916,000
P4,556,250
date
Estimated costs to complete
P 3,000,000
P 1,640,250
P0
as of the end of the year
Assuming the outcome of the construction can be reliably and the company decided to
employ cost-to-cost method, what is the amount of (1) revenue from long term contract, (2)
costs to construction and (3) gross profit/(gross loss), respectively to be reported by Allan
company for the year ended December 31,2022?
a. 1,734,750 and 1,916,000 and (181,250)
b. 1,755,000 and 1,936,250 and (181,250)
c. 1,859,250 and 1,916,000 and (56,250)
d. 1,755,000 and 1,811,250 and (56,250)
Answer: B
37. JK Restaurant sold a fastfood restaurant franchise to Keisha. The sale agreement, signed
on January 2020 called for a P100,000 down payment plus two P50,000 payments
representing the value of initial franchise services rendered by JK restaurant. In addition, the
agreement required the franchise to pay 8% of its gross revenue to the franchisor. The
restaurant opens early in 2020 and its sales for the year amounted to P750,000. The
prevailing rate for similar note was 12% (PV factor was 1.6901). How much is the total
revenue for 2020?
a. 84,505
b. 244,505
c. 254,646
d. 266,646
For item nos. 38-40:
On December 31,2018, the statement of financial position of ABC Partnership with profit or loss
ratio of 4:1:5 is presented below:
Cash
4,000,000
Liability to third person
8,000,000
Noncash asset
16,000,000
A, capital
7,000,000
B, capital
3,000,000
C, capital
2,000,000
On January 1,2019, ABDC partnership has been subjected to installment liquidation. As of
December 3,2019, the following data concerning liquidation are provided:
 None cash asset with book value of P12,000,000 has been sold at a loss of P4,000,000.
 Liquidation expense amounting to P800,000 has been incurred for the month of January.
 P1,200,000 has been withheld for future liquidation expense.
 P6,000,000 liability has been paid.
38. What is C’s share in the maximum possible loss on January 31,2019?
a. P2,600,000
b. P2,400,000
c. P3,000,000
d. P1,500,000
Answer: A
39. What is the amount received by B on January 31,2019?
a. P1,300,000
b. P1,400,000
c. P2,000,000
d. none
Answer: B
40. At the time of partnership liquidation which credit shall be settled first?
a. Those amounts owing to third persons
b. Those amounts owing to partners other that capital contribution and share in profit
c. Those amounts owing to partners with respect to capital contribution in
d. Those amounts owing to partners with respect to share in profit
Answer: A
DRILL - AFAR
January 29,2019
1.
On December 31, 2014, the books of A, B and C partnership showed capital balances of
P40,000; P25,000 and P5,000 to A,B and C respectively. Moreover, the partners share in
the profit and loss ratio of 3:2:1 each, respectively. The books of the partnership also
showed current liabilities amounting to P12,000. The first installment sale of the NCA’s
amounting to P70,000 was made for P40,000. If the partnership had beginning cash of
P1,000, how much would be the share of A in the first cash distribution to the partners?
17,000
19,000
18,000
17,800
2.
X,Y and Z are partners in XYZ Partnership and share profits and loses in a 5:3:2 ratio.
The partners have agreed to liquidate their partnership. Prior to the liquidation, the
partnership balance sheet reflects the following balances in their books:
Cash
25,200 X, Capital
72,000
Non-cash Assets
Notes payable to Z
Other Liabilities
297,600 Y, Capital
(12,000)
38,400 Z, Capital
39,600
184,800
Assuming that the partnership incurred liquidating expenses of P16,800 and that the noncash assets with a book value of P24,000 was sold for P216,000, how much cash would Z
receive?
-039,600
3.
46,457
74,571
Alpha, Beta and Charlie formed a partnership on July 1, 2014 and are to share profits and
losses in the ratio of 20:50:30 each, respectively. The partners also agree that Alpha is to
receive annual salaries of P280,000 and that Charlie is to receive a minimum of P112,000
in his share of the profits. By the end of 2014, the partnership reported total revenues
amounting to P1,000,000, operating expenses of P600,000 and interest expense for a
loan to Alpha amounting to P50,000. The partnership failed to record depreciation of a
machine with a 5-year life which was donated by Charlie with a value of P800,000. How
much would be the share of Alpha in the net income?
328,000
196,000
4.
One, Two and Three are partners with average capital balances during 2014 of P472,500;
P238,650 and P162,350, each respectively. The partners receive a 10% interest on their
average capital balances; after deducting salaries of P122,325 to One and P82,625 to
Three. The residual profits or loss is then divided equally. In 2014, the partnership had a
net loss of P125,624 before the interest and salaries to the partners. By what amount
would the capital of One change because of the results of operations?
29,476
30,267
5.
6.
305,143
188,000
(40,844)
28,358
John and Jane are partners who share in the profits and losses in the ratio of 6:4 each
respectively. John retires to the partnership with the agreement that the fixed assets with
a value of P17,000 are first to be revalued by increasing their amount by P29,000. Total
liabilities of the partnership at this time amount to P10,000 while the working capital
amounts to P85,000. John receives cash amounting to 25% of his adjusted capital, and
inventory items costing P18,750 and a note receivable for the balance. Both partners
agreed that the inventory’s book value is a fair representation of its’ fair value. Right after
the retirement of John, the partnership reported total current assets of P56,000; fixed
assets amounting to P46,000, current liabilities of P52,000 and Jane capital of P50,000.
How much was the adjustment to John’s capital before his retirement?
7,200
51,000
17,400
Cannot be determined
Partners John and Doe, who share equally in the profits and losses, have the following
balance sheet as of December 31, 2014:
Cash
120,000 Payables
Receivables
100,000 Accumulated depreciation
Inventory
140,000 John, Capital
140,000
80,000 Doe, Capital
120,000
Equipment
172,000
8,000
The partners agreed to incorporate their partnership with the new corporation absorbing
the net assets after the following adjustments; provision for allowance for doubtful
accounts of P10,000; restatement of the inventory to its current fair value of P160,000 and
recognition of further depreciation on the equipment of P3,000. The corporation’s capital
stock is to have a par value of P100 and the partners are to be issued corresponding total
shares equivalent to their adjusted capital balances. How much is the total par value of
the shares of stock issued to the partners?
280,000
267,000
260,000
273,000
7.
Easy Partnership reported the following account balances: Sales, P70,000; Cost of Sales,
P40,000; Operating expenses, P10,000; Partners’ salaries, P13,000; Interest to partners,
P8,000; Interest paid to banks, P1,500; Interest paid to partner (loan to partner), P500.
What is the partnership net income/(loss)?
5,000
18,000
8.
First, Second and Third have capital balances of P11,200; P13,000 and P5,800, each
respectively, and share in the profit and loss ratio of 4:2:1. If the partnership is liquidated
and cash available for distribution amount to P1,400, who among the partners shall be
paid first?
First
Second
9.
Third
No one
Seven, Eight, Nine and Ten are partners who share in the profits and losses in the ratio of
5:3:1:1 each respectively, and have capital balances of P160,000; P120,000; P60,000 and
P100,000 each respectively. The partners decide to liquidate when their books reflect
Advances (dr.) from Nine and Ten amounting to P18,000 and 10,000 each respectively
and Loans (cr.) to Seven and Eight amounting to P20,000 40,000 each respectively. If the
partnership is liquidated and P72,000 is available for distribution, who among the partners
are to share in the P72,000 cash distribution?
Nine and Ten
Eight and Ten
10.
17,500
(3,000)
All, equally
Seven and Eight
Armscor, Gloc and Taurus agreed to form a partnership by contributing the following:
Armscor and Gloc are to invest their existing businesses with the following account
balances:
Armscor
Cash
98,000
Accounts Receivable
50,000
Allowance for Bad Debts
Gloc
50,000
2,000
PPE
300,000
Accumulated Depreciation
50,000
Accounts Payable
25,000
Taurus on the other hand is to invest cash so that his capital account would be equal to
40% of the partnership after the following adjustments to the non-cash assets are to be
made:
a.
The Accounts Receivable is to have a 90% realizable value
b.
The PPE are to have a condition percentage of 80%.
How much should the cash investment of Taurus be?
238,667
272,000
237,333
11.
Apple, Banana and Grape are partners who initially invested P80,000; P120,000 and
P75,000 each respectively on June 30, 2014 and share profits and losses in the ratio of
5:2:3, each respectively after annual salaries of P60,000 each are given to Apple and
Banana; 10% interest on beginning capital to Banana and Grape and a 25% bonus to
Grape with the bonus being considered as an expense in the distribution of the net
income. If after the first year of operations, Apple and Banana received a total of P76,000,
how much would be the bonus to be given to Grape?
14,875
11,900
12.
-012,000
Using the information in problem no 13, as an independent case, assuming that after the
first installment sale of the non-cash assets, Rene and Jose already receive a total of
P45,000 and the second sale of non-cash assets generated P75,000 with the partners
withholding P5,000, how much would Rene receive after the 2nd installment sale?
34,031
36,281
15.
150,000
Cannot be determined
Rene, Jose, Allan and Noel are partners with profit and loss ratios of 45:15:20:20 each
respectively. The partners decide to liquidate their business. Prior to their liquidation, their
accounts reflected the following balances: Cash-P50,000; Liabilities-P150,000; Rene,
Capital-P90,000; Jose, Capital-P45,000; Allan, Capital, P35,000 and Noel, CapitalP25,000. The buyer of the non-cash assets of the partnership pays the partnership
P90,000 and agrees to pay 75% of the liabilities. The partners also incur liquidating
expenses of P15,000. How much cash would Jose receive after the first sale of the noncash assets?
28,875
21,375
14.
12,000
Cannot be determined
From the data given in No 11, assume that on January 1, 2018, the partners decided to
admit Duhat into the partnership by him purchasing 30% of the capital of Grape for
P60,000 for a 25% interest in the partnership. The partners agree that the assets of the
partnership must be adjusted prior to the admission of Duhat. The books further shows
that the net income of the partnership for the past four years amount to 2014-P50,000;
2015-P125,000; 2016-P95,000; 2017-P105,000. What would be the capital balance of
Grape immediately after the admission of Duhat?
200,000
140,000
13.
270,667
33,750
36,000
Using the information in problem no 13, as an independent case, assuming that after the
first installment sale of the non-cash assets, Allan and Jose already receive a total of
P45,000 and the second sale of non-cash assets generated P75,000 with the partners
withholding P5,000, how much would Rene receive after the 2nd installment sale?
18,900
32,850
16.
35,100
31,500
On January 2, 2014, Papa Company issues its own P10 par common stock for all the
outstanding stock of Mama Corporation. After the acquisition, Mama is to be dissolved.
Papa pays P40,000 for registering and issuing the securities and P60,000 for other costs
related to the business combination. The stocks of Papa were selling at P30 per share on
January 2,2014. Relevant balance sheet information for Papa and Mama on January 2,
2014 just before the business combination are as follows:
Papa Company
Book Value
Fair Value
Mama Corporation
Book Value
Fair Value
Cash
120,000
120,000
10,000
10,000
Non-Cash Assets
880,000
950,000
240,000
540,000
Liabilities
200,000
190,000
50,000
50,000
Common
par
Stock-P10
500,000
100,000
APIC
200,000
50,000
Retained Earnings
100,000
150,000
Papa Company will issue 25,000 shares of its stock for all of the outstanding shares of
Mama Company. Moreover, Papa agrees to Mama an additional P50,000 in cash if the
net income of the combined company in 2015 exceeds P3,000,000. As of the acquisition
date, Papa determines that there is a 60-70% probability that the net income in 2015
would be more than P3,000,000. How much would be the total assets to be reported in the
balance sheet of Papa immediately after the business combination?
a.
b.
17.
1,750,000
-0-
1,510,000
1,010,000
c.
d.
900,000
-0-
Using the information in problem no 16, how much would be the total liabilities to be
reported in the balance sheet of Mama immediately after the business combination?
a.
b.
19.
c.
d.
Using the information in problem no 16, how much would be the total stockholders equity
to be reported in the balance sheet of Papa immediately after the business combination?
a.
b.
18.
1,730,000
1,735,000
250,000
280,000
c.
d.
285,000
-0-
Mac Company paid P110,000 for the net assets of Bee Company. At the time of the
acquisition, the following information was available related to Bee Company’s balance
sheet:
Bok Value
Current Assets
50,000
Building
80,000
Fair Value
Book
Value
50,000 Equipment
100,000 Liabilities
Fair Value
40,000
50,000
30,000
30,000
What is the amount to be recorded by Mac for the building?
a.
b.
20.
c.
d.
100,000
110,000
Using the same information in no 19, what amount of gain/(loss) on disposal of a business
should Bee Company recognize?
a.
b.
21.
20,000
80,000
Gain-P30,000
Gain-P60,000
c.
d.
Loss-P30,000
Loss-P60,000
On January 1, 2014, Alien Corporation and Earth Corporation’s condensed balance sheet
are presented as follows:
Alien Corporation
Earth Corporation
Current Assets
70,000
20,000
Non-Current Assets
90,000
40,000
Current Liabilities
30,000
60,000
Long-term Liabilities
50,000
Stockholders’ Equity
80,000
50,000
On January 1, 2014, Alien Corporation borrowed P60,000 and used the proceeds to obtain
80% of the outstanding common shares of Earth Corporation. The acquisition price was
considered proportionate to Earth’s fair value. The P60,000 debt is payable in 10 equal
annual principal payments plus interest, beginning December 31, 2014. The excess fair
value of the investment over the underlying book value of the acquired net assets is
allocated to inventory (60%) and to goodwill (40%).
From the data above, how much would be the reported goodwill; using the proportionate
basis, to be presented in the consolidated balance sheet immediately after the business
combination?
a.
b.
22.
8,000
-0-
c.
d.
10,000
20,000
Using the same information in no 21, how much would be the total current assets to be
presented in the consolidated balance sheet immediately after the business combination?
a.
b.
105,000
102,000
c.
d.
100,000
90,000
23.
Using the same information in no 21, how much would be the total non-current assets to
be presented in the consolidated balance sheet immediately after the business
combination?
a.
b.
24.
c.
d.
134,000
138,000
Using the same information in no 21, how much would be the total long-term liabilities to
be presented in the consolidated balance sheet immediately after the business
combination?
a.
b.
25.
140,000
130,000
110,000
104,000
c.
d.
50,000
90,000
Using the same information in no 21, how much would be the total current liabilities to be
presented in the consolidated balance sheet immediately after the business combination?
a.
b.
46,000
30,000
c.
d.
40,000
50,000
26.Using the same information in no 21, how much would be the stockholders’ equity to be
presented in the consolidated balance sheet immediately after the business combination?
27.
a. 80,000
c. 130,000
b. 95,000
d. 93,000
Using the same information in no 21, how much would be the non-controlling interest to be
presented in the consolidated balance sheet immediately after the business combination?
a.
b.
28.
80,000
95,000
c.
d.
130,000
93,000
On January 1, 2011, X Corporation purchased 10,000 of the 100,000, P10par value
outstanding shares of Y Corporation for P10/share. On January 2, 20,13, X Corporation
purchased additional 15,000 shares of Y Corporation at P12/share (this price
approximates the FV of Y Co’s Net Assets) and on January 1, 2014, X Corporation
purchased additional 40,000 shares of Y Corporation at P15 per share. Moreover, it was
determined that the net assets of Y corporation amounted to P1,100,000 on January 1,
2014. This amount is a fair representation of Y Corporation’s non-cash assets at fir value.
X Corporation
Y Corporation
Dividends
Declared
FV/Shares
on 12/31
11.00
Net Income
Net Income
2011
150,000
80,000
20,000
2012
160,000
90,000
15,000
2013
185,000
85,000
25,000
13.00
From the data above, how much would be the goodwill to be presented in the consolidated
balance sheet immediately after the business combination?
a.
b.
29.
400,000
none
35,000
(8,750)
c.
d.
1,250
45,000
Using the same information in no 28, how much would be the value of the non-controlling
interest to be presented in the consolidated balance sheet immediately after the business
combination?
a.
b.
31.
c.
d.
Using the same information in no 28, what is the gain/(loss) from the change in the
investment in classification in the books of X Company?
a.
b.
30.
280,000
330,000
525,000
455,000
c.
d.
420,000
385,000
Guy Company acquired 60% of the outstanding common shares of Girl Company on
January 1, 2014 for P200,000. On this date, Girl Company reports Common Stock
amounting to P175,000 and Retained earnings amounting to 50,000.Guy on the other
hand, reports retained earnings of P240,000 on this date. The book values of Girl
Company’s net assets are fairly stated except for a machine which is undervalued by
P30,000. The machine has a remaining life of 4 years and goodwill if any is not to be
depreciated.
The financial statements for Guy and Girl Company of December 31, 2014 reflected the
following balances:
Guy Company
Girl Company
Cash
40,000
25,000
Accounts Receivable
30,000
15,000
Inventories
144,000
60,000
Investment in Girl
200,000
Other Assets
500,000
260,000
90,000
70,000
Common Stock
500,000
200,000
Retained Earnings
324,000
90,000
Liabilities
Additional Information:
a. During the year, Guy paid dividends amounting to P20,000 and Girl paid dividends of
P10,000
b. Girl Company sold to Guy inventory items costing P40,000 for P60,000. It was
determined that 30% of these items remain unsold at the end of the year and Guy still
owes Girl P10,000 for the transaction.
c.
Girl sold an equipment to Guy Company on July 1, 2014 for P50,000. The
equipment had a book value of P35,000 during the sale and had a remaining life of 5
years.
d. Girl sold land to Guy on October 1, 2014 for P150,000. Girl reported a gain of P20,000
for this sale.
From the data above, what would be the Equity Holders of Parent’s Net Income to be
reported in the consolidated financial statements on December 31, 2014?
a.
b.
32.
320,700
314,400
c.
d.
319,800
326,700
1,000
6,600
c.
d.
1,200
1,800
Using the same information in problem no 31, what would be the total assets to be
reported in the consolidated financial statements on December 31, 2014?
a.
b.
35.
99,800
106,700
Using the same information in problem no 31, what would be the Non-Controlling Interest
Net Income to be reported in the consolidated financial statements on December 31,
2014?
a.
b.
34.
c.
d.
Using the same information in problem no 31, what would be the Equity Holders of
Parent’s retained earnings to be reported in the consolidated financial statements on
December 31, 2014?
a.
b.
33.
100,100
94,400
1,104,000
1,105,500
c.
d.
1,075,500
1,074,000
Using the same information in problem no 31, what would be the goodwill to be reported in
the consolidated financial statements on December 31, 2014?
a.
b.
47,000
65,000
c.
d.
17,000
83,000
End of Exams
ADVANCED FINANCIAL ACCOUNTING & REPORTING
March 6, 2019
PROBLEM 1: PAL Company transferred 5,500 units to Finished Goods Inventory during October. On
October 1, the company had 300 units on hand (40 percent complete as to both material and
conversion costs). On October 30, the company had 800 units (10 percent complete as to material and
20 percent complete as to conversion costs).
1. What is the number of units started during October?
A.
5,000
B.
5,200
C.
6,500
2. What is the number of units started and completed during October?
A.
4,700
B.
5,200
C.
6,500
D.
6,000
D.
6,000
PROBLEM 2: Skyjet Company makes small metal containers. The company began December with 250
containers in process. The EUP for direct material and conversion cost under weighted average method
are 4,315 and 4,910, respectively. During the month, 5,000 containers were started. The EUP for direct
material and conversion cost under FIFO method are 4,240 and 4,810, respectively. The started and
completed units during the period were 3,300 containers.
3. What is the percentage completion for direct material and conversion cost regarding the
beginning WIP in units?
A.
30%:30%
B.
40%:40%
C.
30%:40%
D.
40%:30%
4. What is the percentage completion for conversion cost and direct material regarding the ending
WIP in
units?
A.
45%:45%
B.
80%:80%
C.
80%:45%
D.
45%:80%
PROBLEM 3: AirAsia Manufacturing uses a process cost system to manufacture Dust Density Sensors for
the mining industry. The following information pertains to operations for the month of May:
Units
Beginning work-in-process inventory, May 1
16,000
Started in production during May
100,000
Completed production during May
92,000
Ending work-in-process inventory, May 31
24,000
The beginning inventory was 60% complete for materials and 20% conversion costs. The ending
inventory was 90% complete for materials and 40% completed for conversion costs.
Costs pertaining to the month of May are as follows:
 Beginning inventory costs are materials, P54,560; direct labor, P20,320; and factory overhead,
P15,240.
 Costs incurred during May are materials used, P468,000; direct labor, P182,880; and factory
overhead, P391,160.
5. Using the weighted-average method, the equivalent unit cost of materials for May is
A.
4.12
B.
4.50
C.
4.60
D.
5.02
6. Using the weighted-average method, the equivalent unit conversion cost for May is
A.
5.65
B.
5.83
C.
6.00
D.
6.20
PROBLEM 4: Products at Johnson&Johnson Manufacturing Corporation are sent through two production
departments, fabricating and finishing. Overhead is applied to products in the Fabricating Department
based on 150% of direct labor cost and P18 per machine hour in Finishing. The following information is
available about Job #470:
Fabricating
Finishing
Direct Material
1590
580
Direct Labor Cost
?
48
Direct Labor Hours
22
6
Machine Hours
5
15
Overhead Applied
429
?
7. What is the total cost of Job #470?
A.
2,305
B.
3,041
C.
3,203
D.
3,560.50
PROBLEM 5: For fiscal year 2016, KMJS Solution would incur total overhead costs of P1,200,000 and
work 40,000 machine hours. During January 2016, the company works exclusively on one job, Job#458.
It incurred January costs as follow:
Direct materials usage
P121,000
Direct labor (1,400 hours)
30,800
Manufacturing overhead:
Rent
11,200
Utilities
15,200
Insurance
32,100
Labor
15,500
Depreciation
23,700
Maintenance
10,800
Total OH
108,500
Total Manufacturing Costs
P260,300
Machine hours worked in January
3,400
8. If the company uses an actual cost system, compute the January costs assigned to Job #458.
A.
237,500
B.
245,000
C.
253,800
D.
260,300
9. If the company uses a normal cost system, compute the January costs assigned to Job #458.
A.
237,500
B.
245,000
C.
10. How much is the (over) or under applied overhead?
A.
5,500
B.
6,500
C.
253,800
(5,500)
D.
260,300
D.
(6,500)
PROBLEM 6: Stonerich Company has the following estimated costs for next year:
Direct materials
P15,000
Direct labor
55,000
Sales commissions
75,000
Salary of production supervisor
35,000
Indirect materials
5,000
Advertising expenses
11,000
Rent on factory equipment
16,000
Stonerich estimates that 10,000 direct labor and 16,000 machine hours will be worked during
the year.
11. If overhead is applied on the basis of machine hours, the overhead rate per hour will be:
A.
8.56
B.
7.63
C.
6.94
D.
3.50
PROBLEM 7: Divine Co. uses a job order costing system and the following information is available from
its records. The company has 3 jobs in process: #5, #8 and #12.
Raw materials used
P120,000
Direct labor per hour
P8.50
Overhead applied based on direct labor cost
120%
Direct materials were requisitioned as follows for each job respectively: 30 percent, 25 percent, and 15
percent; the balance of the requisites was considered indirect. Direct labor hour per job are 2,500;
3,100; and 4,200; respectively. Indirect labor is P33,000. Other actual overhead costs totaled P36,000.
12. What is the prime cost of Job #5?
A.
56,350
B.
57,250
C.
13. What is the total amount of overhead applied to Job #8?
61,500
D.
66,250
A.
25,500
B.
31,000
14. What is the total amount of actual overhead?
C.
31,620
D.
42,480
A.
69,000
B.
93,000
C.
15. How much overhead is applied to Work in Process?
99,600
D.
99,960
A.
69,000
B.
93,000
C.
99,600
D.
99,960
16. If Job #12 is completed and transferred, what is the balance in Work in Process Inventory at the
end of the period?
A.
108,540
B.
170,720
C.
167,600
D.
175,000.75
PROBLEM 8: Yellow-Arrow Company manufactures picture frames and uses job order costing system.
The following cost relate to the current run:
Estimated Overhead (exclusive of spoilage)
P80,000
Spoilage (Estimated)
12,500
Sales Value of the Spoiled frames
5,750
Labor hours
50,000
The actual cost of a spoiled frame is P7. During the production, 150 frames are considered spoiled. Each
spoiled frames can be sold for P4.
17. If spoilage is part of all jobs, what is the predetermined overhead rate using labor hour as the
activity
base?
A.
1.235
per B.
1.600
per C.
1.735
per D.
7.965
per
DLHr
DLHr
DLHr
DLHr
18. Assume that the spoilage relate to a specific job #143, what is the predetermined overhead rate
using labor hours as activity base?
A.
1.235
DLHr
per B.
1.600
DLHr
per C.
1.735
DLHr
per D.
7.965
DLHr
per
PROBLEM 9: Thanos, Inc. specializes in custom steel frames and uses job costing to account for its
operations. The following information is available as of May 1 for the work-in-process inventory
account.
Job#
Direct Materials
Direct Labor
Overhead
Total Costs
304
P3,000
P1,800
P2,520
P7,320
306
4,000
2,100
2,940
9,040
Total costs
P7,000
P3,900
P5,460
P16,360
Thanos pays an hourly rate of P15 for direct labor. The manufacturing overhead costs are applied to jobs
based on the direct labor hours. During the month of May, Thanos spends P5,800 for materials and
P4,650 for manufacturing overhead. The operations in May are summarized below.
Job#
Material requisition summary
Time card summary (Hours)
304
P1,100
40
306
900
30
307
2,800
110
308
750
25
Total
P5,550
205
Jobs 304, 306 and 307 are completed in May but only Jobs 304 and 307 are delivered to customers.
Calculate the predetermined overhead rate used.
A.
140% of B.
P21/DL
C.
40%
of D.
P21/DLC
DLC
hour
DLC
19. Calculate the over/(under) applied overhead.
A.
345
B.
(345)
C.
4,305
D.
4,650
20. Calculate the ending balance of work in process (assuming that over/under applied overhead is
insignificant or immaterial)
A.
1,650
B.
6,760
C.
9,860
D.
11,020
21. Calculate the ending balance of finished goods inventory account. (Assuming that over/under
applied
overhead is significant or material).
A.
10,890.20
B.
11,020
C.
11,149.80
D.
22. Calculate the Cost of Goods Sold if over/under applied overhead is immaterial.
11,365
A.
16,275
B.
16,620
C.
16,815.76
23. Calculate the Cost of Goods Sold if over/under applied is material.
A.
16,275
B.
16,620
C.
16,815.76
D.
16,965
D.
16,965
PROBLEM 10: Green-Peace Co’s Job #168 for the manufacture of 4,400 coats, which was completed in
September at unit costs presented below. Final inspection of Job #168 disclosed 400 spoiled coats
which were sold to a jobber for P12,000.
Direct Materials
P40
Direct Labor
36
Factory Overhead (includes an allowance for P2 overhead)
36
P112
24. If the spoilage loss is charged to all production, how many units are deemed as good units?
A.
4,400
B.
4,000
C.
3,600
D.
3,400
25. If the spoilage loss is charged to all production, how much is the original product cost?
A.
440,000
B.
448,000
C.
484,000
D.
492,800
26. If the spoilage loss is charged to all production, how much is to be credited to WIP inventory
account
due to spoilage?
A.
12,000
B.
32,800
C.
44,000
D.
44,800
27. If the spoilage loss is charged to all production, what would be the unit cost of good coats
produced on Job #168?
A.
110
B.
112
C.
118
D.
120.20
28. If the spoilage loss is attributable to exacting specifications, how many units are deemed as good
units?
A.
4,400
B.
4,000
C.
3,600
D.
3,400
29. If the spoilage loss is attributable to exacting specifications, how much is the original product
cost?
A.
440,000
B.
448,000
C.
484,000
D.
492,800
30. If the spoilage loss is attributable to exacting specifications, how much is to be credited to WIP
inventory account due to spoilage?
A.
12,000
B.
32,800
C.
44,000
D.
44,800
31. If the spoilage loss is attributable to exacting specifications, what would be the unit cost of good
coats produced on Job #168?
A.
110
B.
112
C.
118
D.
120.20
PROBLEM 11: Deadpool Co. incurred the following costs on Job #999 for the manufacture of 400
motors during April:
Direct Materials
P1,320
Direct Labor
1,600
Factory Overhead (150% of DL)
2,400
P5,320
Direct Costs of reworking 10 units:
Direct Materials
Direct Labor
P200
320
P520
32. If the rework costs were attributable to internal failure or charged to Factory Overhead, what
amount of
rework cost is to be debited to WIP inventory account?
A.
0
B.
520
C.
800
D.
1,000
33. If the rework costs were attributable to exacting specifications of Job #999, how many units are
deemed
as good units?
A.
390
B.
400
C.
410
D.
450
34. If the rework costs were attributable to exacting specifications of Job #999, what amount of
rework cost is to be debited to WIP inventory account?
A.
0
B.
520
C.
800
D.
1,000
35. If the rework costs were attributable to exacting specifications of Job #999, what would be the
new cost
per unit of Job #999?
A.
B.
C.
D.
13.30
14.60
15.30
15.80
PROBLEM 12: Otep Construction and Development Corporation (OCDC) was contracted to construct a
50-floor building with a contract price of P25,200,000 on January 1, 2014. At the beginning of 2015, the
building was still in process and had the status of construction as follows:
Costs incurred up to January 1, 2015 (including P200,000 worth of materials stored at the construction
site but to be used in 2016 for the completion of the project)
P5,700
0
Estimated cost to complete
16,300
As of the end of 2015, the following data were obtained with respect to the same building:
Costs incurred to date
P12,200,000
Estimated cost to complete, December 31, 2015
7,800,000
36. What is the correct realized gross profit in 2015 using percentage-of-completion method?
A.
2,372,000
B.
2,320,000
C.
3,120,000
D.
3,172,000
PROBLEM 13: Wolf Industries, Inc. was contracted to construct a two-storey national library for P200
Million in 2016. The project was to be completed in three years and the stipulation of the contracts
were as follows:
 15% mobilization fee is to be deducted from the last billing of the contract
 10% retention on all billings
 Payment of progress billings shall be made in 20 days after acceptance
Wolf uses cost-to-cost method in estimating the percentage of completion. As of the year 2016, 45% of
the contract price has been realized as revenue. As to billings made, 40% of the contact price has been
presented and accepted. All progress billings accepted were paid by the client except for the lat billings
which was equivalent to 5% of the contract price that was accepted last December 24, 2016.
37. How much was paid by the client to Wolf in 2016?
A.
63,000,000
B.
50,000,000
C.
93,000,000
D.
E.
80,000,000
Number 38, 39, and 40
On January 1, 2021, Entity A acquired 80% of outstanding ordinary shares of Entity B with a
gain on bargain purchase amounting to P1,000,000. The following additional data are provided:
 On January 1, 2021, Entity A sold a equipment to Entity B with cost of P1,000,000 and
accumulated depreciation of P400,000 at a selling price of P900,000. The black equipment has
original life of 5 years with residual value.
 On July 1, 2022, Entity B sold a white equipment to Entity A with cost of P500,000 and
accumulated depreciation of P300,000 at a selling price of P150,000. The white equipment has
original life of 10 years with no residual value.
 On year 2022, Entity A reported net income of P5,000,000 and declared dividends of
P2,000,000 while Entity B reported net income of P1,000,000 and declared dividends of
P500,000.
38. What is the consolidated net income attributable to parent’s shareholder for the year ended
December
31, 2020?
a.
5,236,250
b.
5,535,000
c.
6,442,500
d.
6,622,500
39. What is the consolidated depreciation expense of the equipment of the year ended December
31,
2022?
a.
P250,000
b.
P225,000
c.
P125,000
d.
P112,500
40. What is the consolidated book value of the equipment on December 31, 2022?
a.
375,000
b.
P412,500
c.
P350,000
d.
P425,000