INTRODUCTION TO COST ACCOUNTING
COST ACCOUNTING – This field of accounting informs management with the cost of rendering a particular service, buying and
selling a product, and producing a product.
COST CONCEPTS AND CLASSIFICATION
I.
II.
III.
Cost classified as to relation to a product
A. Manufacturing cost
1. Direct Material
2. Direct Labor
3. Factory Overhead
B. Non – manufacturing cost
1. Marketing or selling expense
2. General or administrative expense
Cost classified as to variability
A. Variable cost
B. Fixed cost
C. Mixed cost (semi-variable cost)
Methods of separating Mixed Cost into fixed and variable components:
1. Scatter graph
2. High-low point
3. Method of lease square
Cost for planning, controlling, and analytical processes
A. Standard cost – Predetermined cost for direct materials, direct labor, and factory overhead. In essence, it is a budget for the production
of one unit of a product or service
B. Opportunity cost – the benefit given up when one alternative is chosen over another. This cost should be considered when evaluating
alternatives for decision-making
C. Differential cost – cost that is present under one alternative but is absent in whole or in part under another alternative.
Incremental cost is an increase in cost from one alternative to another.
Decremental cost is a decrease in cost from one alternative to another.
D. Relevant cost – a future costs that changes across alternatives
E. Sunk cost – cost for which an outlay has already been made and it cannot be changed by present or future decision
F. Controllable cost - a cost is considered to be a controllable cost at a particular level of management if that level has a power to
authorize the cost
PROBLEM 1 (Seatwork Midterm)
Classify the following items as direct or indirect materials
DM
1. Gold to make jewelry
IM
2. Sandpaper used in furniture making
DM
3. Paper used in printing books
DM
4. Milk to make ice cream
DM
5. Seats to be installed in a car
DM
6. Leather to make gloves
IM
7. Tape measure used by tailor
PROBLEM2 (Seatwork Midterm)
Classify the following as manufacturing (M), selling (S), or
administrative (A).
M
1. Factory supplies
S
2. Advertising
M
3. Rent on factory building
S
4. Freight – out
A
5. President’s salary
A
6. Legal expenses
S
7. Samples
A
8. Bad debts
S
9. Travel expenses of salesmen
PROBLEM 3 (Seatwork Midterm)
Classify each of the following costs of Bug Company in two ways:
(a) as variable (V) or fixed cost (F);
(b) as inventoriable cost (I) or period cost (P).
(a) V or F
(b) I or P
Example: Direct Labor
V
I
Salary of company controller
F
P
Fire insurance on direct materials V
I
Direct materials used
V
I
Factory rent
F
I
Sales commissions
V
P
Overtime premium of machine
V
I
operators
Straight line depreciation of
F
I
factory equipment
Straight line depreciation of trucks F
P
used for delivery of sales
to customers
Salary of factory supervisor
F
I
WAGES
V
PROBLEM 4 (Seatwork Midterm)
Johnson Corporation is preparing a flexible budget and desires to separate its electricity expense which is semi-variable and
fluctuates with total machine hours, into its fixed and variable components. Information for the first three months of 2013 is as
follows:
Machine hours Electricity Expense
January
February
March
3, 500
2, 000
4, 000
P31, 500
P20, 000
P35, 600
Requirements: Using the least square method,
1. Compute the variable rate per machine hour
Variable Cost per hour= Change in Cost/Change in Machine hours
= (35 600-20 000) / (4 000-2000)
= P7.8 per machine hour
2. Compute the fixed portion of Johnson’s electricity expense
Fixed portion= 35 600 - (4 000 x 7.8)
= P4 400
3. Compute the total manufacturing cost if actual machine hours is 6, 000
Total manufacturing cost = (Machine hour x Variable Cost) + Fixed Portion
= (6 000 x 7.8) + 4 400
= P51 000
PROBLEM 5 (Seatwork Midterm)
Mighty Muffler Inc. operated an automobile service facility, which specializes in replacing mufflers on cars. The following table
shows the cost incurred during a month when 750 mufflers were replaced. Fill in the missing amount
500
Total Fixed cost
Total Variable cost
Total cost
Fixed cost per replacement
Variable cost per replacement
Total cost per replacement
P60 000
500X50= P25 000
P85 000
60K/500= P120
P50
120+50=P170
Number of Muffler Replacements
750
P60, 000
P37, 500
P97, 500
60K/500= P80
37500/750=P50
80+50=P130
1, 000
P60 000
1000X50= P50 000
P110 000
60K/500= P60
P50
60+50=P110
PROBLEM 6 (Seatwork Midterm)
The financial statements of Mother Goose Company include these items:
Marketing Cost
P160, 000
Direct Labor Cost
P245, 000
Administrative Cost
P145, 000
Direct Materials used
P285, 000
Fixed Factory overhead costs
P175, 000
Variable Factory Overhead Costs
P155, 000
Compute:
1. Prime Cost
PC = DMU + DLC
= 285K + 245K
= P530 000
2. Conversion Cost
CC = DLC + FFOC + VFOC
= 245K + 175K + 155K
= P575 000
3. Total inventoriable/ product cost
TIC = DMU + DLC + FFOC + VFOC
= 285K + 245K + 175K +155K
= P860 000
4. Total period cost
TPC = MC + AC
= 160K +145K
= P305 000
PROBLEM 7 (Seatwork Midterm)
Valdez Motors Co. makes motorcycles. Management wants to estimate overhead costs to plan its operations. A recent trade
publication revealed that overhead costs tend to vary with machine hours. To check this, they collected the following data for the
past 12 months.
Month no.
1
2
3
4
5
6
7
8
9
10
11
12
Machine Hours
175
170
160
190
175
200
160
150
210
180
170
145
Overhead costs
P4, 500
P4, 225
P4, 321
P5, 250
P4, 800
P5, 100
P4, 450
P4, 200
P5, 475
P4, 760
P4, 325
P3, 975
Required:
1. Using the high-low method to estimate the fixed and variable portion of overhead costs based on machine hours
VARIABLE COST = (high OC – low OC) / (high MH – low MH)
= (P5 475 – 3 975) / (210 – 145)
= P23.08 per machine hour
Overhead Cost
High OC (5 475)
Variable Cost
High MH (210hrs) x 23.08
4, 847
Low MH (145hrs) x 23.08
Fixed Cost = OC - VC
628
2.
Low OC (3 975),
3 347
628
If the plant is planning to operate at a level of 450 machine hours next period, what would be the estimated overhead
cost?
= (Machine hours x per machine hour) + Fixed Cost
= (450 x 23.08) + 628
= P11 014
COST ACCOUNTING CYCLE
Merchandising Companies
beginning balance of inventory
Purchase raw materials
Purchase (add inventory)
Used materials for production
Sold inventory (COGS)
Computation of COGS:
Beginning inventory
Plus: Net Purchases
Total goods available for sale
Less: Ending Inventory
Cost of Goods Sold
Manufacturing Company
Incurred Labor and Overhead for production
Beg WIP + DM, DL, OH
cost of completed units be transferred from WIP to FG
cost of sold units be transferred from FG to COGS
Computation of COGS:
Direct Materials Used
Add: Direct Labor used
Add: Factory Overhead
Total Manufacturing Cost
Add: WIP, Beginning
Cost of Goods put into process
Less: WIP, Ending
Cost of goods manufactured
Add: FG, Beginning
Total goods available for sale
Less: FG, Ending
Cost of Goods Sold
QUIZ 1 MIDTERM
Provide solution and final answer.
PROBLEM 8 (Quiz 1 Midterm)
The Ram Manufacturing Company produced P100, 000 units during the year ended December 31, 2009. It incurred the following
costs for the year
Materials
P75, 000 (10% is indirect materials)
= 67 500
Labor
P97, 000 (7% is indirect labor)
= 90 210
Factory Overhead
125% of direct labor cost
= 121 250
WIP – January 1
P25, 500
WIP – December 31
P27, 000
Required: How much is the Company’s cost of goods manufactured?
Direct Materials Used
Add: Direct Labor used
Add: Factory Overhead
Total Manufacturing Cost
Add: WIP, Beginning
Cost of Goods put into process
Less: WIP, Ending
Cost of goods manufactured
67 500
90 210
112 762.50
270 472.50
25 500
295 972.50
27 000
268,972.50
Problem 9 (Quiz 1 Midterm)
Donna Company submits the following data for May 2013
Direct labor cost
P80, 000
Purchases
P100, 000
Factory overhead
Applied at 150% of direct labor cost
Inventories
May 1
May 31
Finished goods
P45, 000
P24, 000
Work in Process
P25, 800
P18, 000
Materials
P22, 000
P25, 000
Required: How much is the Company’s Cost of goods sold?
Direct Materials Used May 1
ADD: Purchases
Less Direct Materials Used May 31
DM, used
Add: Direct Labor used
Add: Factory Overhead (80k x 1.50)
Total Manufacturing Cost
Add: WIP, Beginning
Cost of Goods put into process
Less: WIP, Ending
Cost of goods manufactured
Add: FG, Beginning
Total goods available for sale
Less: FG, Ending
Cost of Goods Sold
22 000
100 000
25 000
97,000
80 000
120 000
297 000
25 800
322 800
18 000
304 800
45 000
349 800
24 000
P325 800
Problem 10 (Quiz 1 Midterm)
Kyle Manufacturing Company produces various types of fertilizers. No beginning work in process or finished goods were on hand
on January 1, 2012. The following are data provided by the company:
30, 000 finished goods were on hand on December 31, 2012.
95, 000 units were sold during the year
No units in work in process inventories on December 31, 2012.
Materials put into production amounts to P300, 000, 75% were direct materials DM = 225 000
(No beginning or ending materials inventory)
Labor costs were P350, 000, 40% was for indirect labor
DM = 210 000
IDM = 140 000
Factory overhead costs other than indirect material and indirect labor were the following:
Heat, light, water
P120, 000
Depreciation
P75, 000
Property Taxes
P65, 000
Repairs and maintenance P40, 000
Selling Expenses were P80, 000 and general and administrative expenses were P50, 000.
Required: Compute the following:
1. Cost of goods manufactured
Direct Materials Used
Add: Direct Labor used
Add: Tot. Factory Overhead
Indirect Material Used
Indirect Labor Used
Heat, light, water
Depreciation
Property Taxes
Repairs and maintenance
Cost of goods manufactured
P225 000
P210 000
P515 000
P75 000
P140 000
P120, 000
P75, 000
P65, 000
P40, 000
P950 000
2. Unit Cost (cost per unit of goods manufactured)
Unit Cost = COGS Manufactured / units
= 950 000 / 125 000
= 7.60 per unit of goods manufactured
3. Prime Cost
Prime Cost = Direct Material Used + Direct Labor Used
= 225 000 + 210 000
= P435 000
4. Conversion cost
CC= Direct Labor Used + Factory Overhead Cost
=210 000 + 515 000
= P725 000
5. Period cost
Period Cost = Selling Cost + Administrative Cost
= 80 000 + 50 000
= P130 000
6. Cost of Goods Sold
Direct Materials Used
225 000
Add: Direct Labor used
210 000
Add: Tot. Factory Overhead
P515 000
Indirect Material Used P75 000
Indirect Labor Used
P140 000
Heat, light, water
P120, 000
Depreciation
P75, 000
Property Taxes
P65, 000
Repairs and maintenance P40, 000
Total Manufacturing Cost
950K/125K=7.6units
WIP. BEG
0
0
WIP, END
0
0
FG, BEG
0
0
Less: FG, Ending
?
30K
Cost of Goods Sold (950k x 7.6)
7. Net Income
Sales
Less: COGS
P722k
3 325 000
722 000
950k
Gross Profit
Less: Selling Cost
Less: Administrative Cost
NET INCOME
IDM = 75 000
2 603 000
80 000
50 000
2 473 000