COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 3 – ACCOUNTING FOR MATERIALS COST
ACCOUNTING FOR MATERIALS COST
Production costs are incurred based on expected output.
Expected output is based on expected volume.
Expected volume is based on sales forecast considering competition, changes in the economy and management’s
policies on pricing, credit and sales promotions.
Effective control of the elements of production cost requires
-
-
Adoption of procedures geared towards maximum efficiency in the use of funds invested in the
manufacturing resources and their recovery upon collection from customers within the shortest period
after their conversion into finished goods.
The time lag between procurement of materials and labor and start of production, the time period for
processing, and the time lag between completion of goods and their delivery to customers are minimized
considering changes in the incidental costs.
CONTROL OF PRODUCTION COST
-
Refers to seeing to it that the different elements incurred (materials, labor and factory overhead), in
total and per unit, are in accordance with plans and
Adopting prompt remedial measures in case there are deviations
It requires effective control systems for the different elements of production costs.
Benefits of having an effective control of the Elements of Production cost
a. Maximizes manufacturing efficiency
b. Reduces unit cost
c. Enables management to attain desired inventory levels
CONTROL OF MATERIALS COST
Requirements for control of materials cost
Estimates of materials cost, in total and per unit.
-
Requires engineering, planning and routing.
Products are designed and manufacturing processes are carefully planned.
o Used as basis in determining materials requirements ( in terms of quantity per unit and quality)
Production budget
-
Shows the budgeted production volumes, monthly or quarterly
o Used as a basis in computing budgeted materials usage
o Used as guides in timing materials procurement and estimating incidental costs involved and the
desired inventory level of materials
Purchase requisition
-
Informs the purchasing agent that materials as indicated therein are needed by the issuing party
Purchase order
-
Issued to suppliers stating the specifications, quantities and unit prices for the different items being
purchased and all the desired delivery date or dates
Receiving report
-
Certifies the quantity of items received and may state the results of inspection and of quality tests
Materials requisition
-
Notifies the storeroom or warehouse that materials as specified therein are needed by the issuing
party and may state the date the materials are needed
Page | 1
COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 3 – ACCOUNTING FOR MATERIALS COST
Materials ledger cards
-
The perpetual inventory records for materials showing receipts and issuances for each class thereof and
the resulting balances.
A card is maintained for each item of materials
Returned materials report
-
Shows the materials previously issued and are being returned to the storeroom
Scrap report
-
Shows the quantity of scrap materials removed from the factory
Return shipping order
-
shows the materials returned or being returned to suppliers
in some companies, they also use delivery receipt ( a form used to evidence that goods are brought out from
the company compound)
SAMPLE FORMS
Silver Corporation
Purchase Requisition
No. 0211
To: Purchasing Department
Date:
_____________
Deliver To: ________________________ Date Required: __________
Job No./ Dept No. ________ Suggested Supplier: _______________
PLEASE ORDER THE ITEMS LISTED BELOW:
Quantity
Item
Description
Unit
No.
Price
Silver Corporation
Receiving and Inspection Report No. 532
RECEIVED FROM: ___________________ DATE: _________
PER INVOICE/ DELIVERY RECEIPT NO. ________
PURCHASE ORDER NO. _______
Quantity
Description
Item No.
Amount
Items Not Accepted:
BUDGET CONTROL
Allowance for the period
P ______
Balance available
______
This purchase
______
Remaining balance
______
Ordered by
___________________
Silver Corporation
Store Requisition
No. 876
SUPPLIER: _______________________________ DATE: __________
Per Pur. Req. No. _______
Prepared b__________________
Posted by: __________________
Approved by
____________________
Silver Corporation
Purchase Order
Please deliver the items listed below:
Quantity
Description
___________________________________________________
Received by:
Inspected by:
_________________________
______________________
Item
No.
Unit
Price
Approved by
_________________________
TO: STORES DEPARTMENT
FROM: ______________________________
REQUESTED BY: ______________________
CHARGE TO __________________________
Please issue the following items:
Quantity
Description
Item
No.
No. 154
Date: ___________
Unit
Cost
Amount
Received the above items.
Approved by:
______________________
_____________________
Signature
Date: _________________
Posted by _________________
Code: ______________________
Page | 2
COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 3 – ACCOUNTING FOR MATERIALS COST
PURCHASE OF, AND PAYMENT FOR MATERIALS
a. When did the stores clerk or department head issues a purchase requisition?
-
When the balance of an item that is carried in stock reaches the critical level or
When a department requisitions items that are not yet carried in stock
b. Purchase requisition is sent to the accounting department for the corresponding account number before it is
sent to the purchasing department.
c. Purchasing department canvasses prices among suppliers and issues a purchase order to the chosen supplier
so that delivery may be effected.
d. A copy of the purchase order is forwarded to the receiving and inspection department to inform them of
what deliveries are to be expected.
e. The supplier delivers the goods to the company thru the latter’s receiving and inspection department and
provides it with a copy of his invoice.
f.
The receiving and inspection department issues a receiving and inspection report after checking whether the
goods so received are in accordance with specifications per purchase order.
g. A copy of the receiving and inspection report goes with the materials received to the materials or stores
department so that the storekeeper may know how many and what kind of materials have been received and
whether they tally with what he actually receives.
h.
The original copy of the receiving and inspection report and the advance copy of the supplier’s invoice are
forwarded to the accounting department so that they can be matched with the purchase order in processing
payment.
i.
Another copy of the receiving and inspection report is sent to the purchasing department (to inform them of
the A deliveries made by the supplier.)
- this copy is subsequently forwarded to the stores or materials ledger clerk in the accounting department for
posting to stock cards.
j.
The supplier, upon receipt of payment, surrenders the original copies of his invoice and of the purchase order.
- these are attached to the voucher, stamped as already paid and are then filed.
* in some companies, they require original copies of the vendor’s invoice and of the purchase order before
payment is processed.
Contracts for Repairs, Subscriptions and Purchase of Supplies – the procedure describe earlier for purchase of
materials is also observed in acquiring other items.
-
These may be supplies for the offices, sales department, engineering department, cafeteria, and medical
and dental clinics.
Page | 3
COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 3 – ACCOUNTING FOR MATERIALS COST
-
Annual contracts for repairs and subscriptions for journals and periodicals are to be covered by
requisitions also.
In case of short-notice or emergency repairs, the purchasing department may issue a blanket purchase
order without specifying the amount.
o Upon receipt of the bill, the amount thereof is verified with the head of the department in which
repairs were made.
ISSUANCE OF MATERIALS AND SUBSEQUENT RETURNS
Issuance of materials – covered by stores( or materials ) requisition.
-
It is both a request for issuance and receipt for items so issued because an acknowledgement blank is
provided therein.
The form should clearly state the department or job to be charged and is accomplished in
quadruplicate providing:
o two copies for the accounting department – for the bookkeeper and the materials ledger clerk who
enters the contents thereof to the ledger cards.
o the storeroom and
o a file copy for the requisitioning department.
Recording requisitions
-
Inasmuch as many requisitions are made every month, it would be impractical to make a journal entry for
each.
Instead, they may be summarized monthly so that only one journal entry is made each month for
requisitions.
Another alternative – use of a special journal – the requisitions journal. ( illustrated below)
Requisitions summary may have the same columns with the exception of the post reference column for the
sundry accounts.
o If a requisitions journal is used, it is part of the books of accounts and must be registered with the
Bureau of Internal Revenue.
REQUISITIONS JOURNAL
Date
Req.
No.
Job or
Account
No.
Description
Credit
Materials
Debit
Work in
Process
Factory
Overhead
Control
Selling
Expenses
Control
General and
Adm. Exp.
Control
Sundries
Account Post Amount
Title
Ref.
Page | 4
COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 3 – ACCOUNTING FOR MATERIALS COST
ISSUANCE OF MATERIALS: REQUISITIONS JOURNAL AND FLOW OF WORK
Date
Req.
No.
Description
Credit
Materia
ls
Work
in
Proces
s
Debit
FOHC –
Indirect
Materials
Sundries
F
Amount
Material – X
Received
1997
D
May 5
9
15
20
27
28
551
552
553
554
555
556
557
Job No. 225
Job No. 223
For Machine Shop
Job No. 226
Job No. 224
Shipping Supplies
Factory office
supplies
Total
for
the
month
7,000
4,500
1,200
6,800
3,500
2,500
800
7,000
4,500
Issued
Am
t.
D
1,200
6,800
3,500
26,300
21,800
1,200
(15)
(14)
(21)
Materials
15
May 31 Purchases
May 31 Req.
V.R.
31,000
Jr. 26,300
STORES REQUISITION
For : Carpentry Dept.
Date: 5/5
For Job 225
Materials X
Material Y
Q
Q
5/5
Selling
Expenses –
Shipping
supplies
FOH –
Factory Off.
Supplies
31
21
2,500
800
Material – Y
Received
D Q Amt.
3,300
Work in Process
Balance
Amt.
4,200
Issued
D
Q
Amt.
5/5
2,800
D
Q
Amt.
5/1
6,000
5/5
1,800
Balance
D
Q
5/1
5/5
Amt.
4,500
1,700
14
May 31 Req.
Jr. 21,800
Job Order Cost Sheet
No. 551
Job No. 225
For Stock – 20 computer tables
Started : 5/4
4,200
2,800
7,000
Direct
Cost
5/5
Materials Direct
Cost
Labor Factory
Overhead
7,000
GENERAL LEDGER ACCOUNTS AND SUBSIDIARY RECORD ENTRIES
-
-
Based on the procedure given for acquisitions, issuances and returns, the transactions are analyzed as to
their effects on general ledger accounts and the corresponding subsidiary records per illustration below. In
the given illustration, the stores account instead of the materials account is used so that acquisitions of
items that go to the storeroom are debited to the account.
Accounts Payable may also be used despite the use of vouchers in processing payment if said account
appears in the chart of accounts.
STORES LEDGER CARDS AND BIN CARDS
Stores Ledger Cards
-
The perpetual records of the different items in the storeroom.
Items received and issued for each class are posted to the corresponding card and the resulting balance
must be equal to the inventory for said item.
The total of all balances per stores ledger cards must therefore be equal to the inventory in the storeroom
as of the same date.
o To be assured of this, the balances per stores ledger cards are compared with the physical
inventory on chosen dates during the accounting period.
▪ if there is a difference between the balance per books and the inventory per physical count,
the possible cause thereof is determined.
▪ If a difference still exists after eliminating significant causes, the balance per books is
adjusted by a corresponding debit or credit to factory overhead (inventory adjustment)
Page | 5
COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 3 – ACCOUNTING FOR MATERIALS COST
Bin cards or bin tags
-
Those attached to storage bins, shelves, racks or other containers of items in the storeroom showing the
movement of stock in said containers.
Not part of the accounting records but are useful in controlling flow of materials.
Balances per bin cards must be equal to the balances per materials or stores ledger cards.
BIN TAG
STOCK NO. ________
MAXIMUM ____
LOCATION ________
MINIMUM ____
DESCRIPTION ____________________________
Date
Received Issued Balance
Remarks
COSTING METHODS FOR REQUISITIONS
These methods are related to the flow of costs and not necessarily to the actual flow of materials or finished goods.
If only the materials were acquired at the same cost all year round, then valuation of materials inventory end, will
not be a problem because the value can be computed by simply multiplying the units on hand and the unit cost.
The same can be said for the finished because if the units were produced at the same cost all year round, the value
at the end of the period can be computed by multiplying the finished goods on hand by the cost to produce each
unit.
The different methods are used because the materials are acquired at different costs during the year.
Average cost for:
Perpetual inventory system refers to moving average
Periodic inventory system refers to weighted average
FIFO method
• Based on the assumption that cost should be charged to manufacturing cost or cost
of goods sold in the order in which incurred
• Inventories are stated in terms of the most recent costs and
• Expense is charged with the earliest costs incurred
▪ Average method – discussed in detail in financial accounting
• Weighted average method
o Based on the assumption that units issued should be charged at an average
cost, such average being influenced or weighted by the number of units
acquired at each price.
o Inventory at the end is computed by multiplying the weighted average cost
per unit by the units on hand.
• Moving average method
o When a perpetual inventory system is used, a new weighted average unit
cost is calculated after each new purchase, and this amount is used to cost
each subsequent issuance until another purchase is made.
The FIFO method is used in illustrating the use of the 5-column stock card and the average method
is used in emphasizing adjustments to average unit costs brought about by returns on the next
page.
▪
o
Page | 6
COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 3 – ACCOUNTING FOR MATERIALS COST
Inventory adjustment
When inventory per physical count is different from balances per materials ledger cards (the total of w/c
must be equal to the balance per general ledger), the latter are adjusted to make the balances equal to the
former.
- An addition is shown either in the “received” column or in the “issued” column but negative and vice-versa.
In making the entry, the corresponding debit or credit is to factory overhead – inventory adjustment
-
-
THE FIVE-COLUMN STOCK CARD
- In the five-column stock card, the columns ordered and reserved are added to facilitate materials
management.
o These additional columns do not affect the balance but are reminders that some units have already
been ordered although not yet received and that some have been reserved but not yet issued.
- To illustrate the use of the five-column stock card, the following data are given on Silver Corporation’s raw
material item 605, one-inch concrete nail, (with minimum and maximum balances of 150 and 400 kilos
respectively, reorder quantity of 200 kls. And located in bin no. 455) for March, 2014.
2014
March 1
Inventory: 80 kgs. @ P 5
120 kgs. @ 6
3
Purchase order no. 653 for 200 kgs. at P 4.50
4
Reservation for 90 kgs. for job 786 per requisition no. 850.
5
Received 50 kgs. (P.O 653) per receiving and inspection report 026.
7
Issued 70 kgs. for job 786 per requisition 850.
9
Ordered 200 kgs. per P.O. No. 659 at P 5.70.
14
Issued the 20 kgs. reserved for job 786 per requisition 850.
19
Receiving and inspection report 035: balance ordered per P.O. 653.
22
Returned 20 kgs. to supplier for P.O. 653 per return shipping order 081.
25
Received 10 kgs. returned from job 786 per returned materials report 017.
27
Received 80 kgs. (P.O. 659) per receiving report No. 042.
30
Reserved 100 kgs. for job 75 per requisition no. 895.
31
Issued 125 kgs. for job 797 per requisition 910.
Page | 7
COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 3 – ACCOUNTING FOR MATERIALS COST
Returns.
- Returns to suppliers are shown in the received column as negative and at the unit cost at which they were
recorded upon purchase.
- Returns to storeroom are shown in the issued column as negative and at the unit cost used upon their
issuance.
Practices differ in extending the latter to the balance column.
They may be shown is such a way that they are the first to be issued depending on the assumed flow of cost.
This means that under FIFO, the returns are to be shown ahead of the others while under LIFO, they are to
be shown as the last.
AVERAGE COSTING METHOD: ADJUSTMENT ARISING FROM RETURNS
- When the average costing method is in use and there are returns to suppliers, the average unit cost may be
different from the acquisition cost of the materials being returned.
o The difference is treated as a debit or credit to factory overhead (inventory adjustement).
o Per illustration on the previous page, the return of 20 units on March 22 is posted to the stock card
at the average unit cost P 4.9542. However, the purchase unit cost was P 4.50 only so that the P.
4542 difference gives rise to a debit to factory overhead of P 9.00 (or 20 units x P .4542) as shown
in the following entry.
Vouchers Payable ( 20 units x P 450)
P 90
Factory Overhead
(Inventory Adjustment)
9
Materials
P 99
- Returns to storeroom of previously issued materials may give rise to adjustment in average unit cost. In the
given example, the return to storeroom of 10 units on March 25 is posted at the assigned unit cost of P 5.38.
The adjusted average unit cost is computed as follows:
Balance, March 22 ( 290 units @ P 4.9542)
P 1,437
Add:
Return to storeroom, March 25 ( 10 x P 5.38)
54
Total
P 1,491
Divide by
300 units
Adjusted average unit cost
P
4.97 / 4.8684 to be exact.
Page | 8
COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 3 – ACCOUNTING FOR MATERIALS COST
SUMMARY OF MATERIALS ACCOUNTING UNDER A COST SYSTEM
General Ledger
Transactions
Subsidiary Records
Debit
Credit
Purchase of
materials for stock
Stores
Accounts
Payable
Purchase of
materials for
immediate need in a
job
Work in
Process
Purchase of indirect
materials
Stores
Accounts
Payable
Accounts
Payable
Purchase of supplies
for factory, and the
sales and
administrative
offices
Issuance of direct
materials
Stores
Issuance of indirect
materials
Factory
Overhead
Control
Issuance of supplies
for factory, and the
sales and
administrative
offices
Return of materials
to suppliers
Accounts
Payable
Work in
Process
Stores
Stores
Factory
Overhead
Control
Selling
Expenses
Control
Gen. And Adm. Stores
Exp. Control
Return of indirect
materials to
storeroom
Accounts payable subsidiary
ledgers
Stores Ledger cards: Received
section
Accounts payable subsidiary
ledgers
Stores Ledger cards: Received
section
Accounts payable subsidiary
ledgers
Stores Ledger cards: Received
section
Accounts payable subsidiary
ledgers
Cost sheet or production
report:
Materials cost section
Stores ledger cards: Issued
section
Factory overhead analysis
sheet
Stores ledger cards: Issued
section
Factory overhead analysis
sheet
Selling expenses analysis
sheet
General and adm.exp. analysis
sheet
Stores ledger cards: Issued
section
Accounts payable subsidiary
ledgers
Accounts
Payable
Stores
Return of materials
from factory to
storeroom
Stores Ledger cards: Received
section
Stores
Work in
Process
Stores
Factory
Overhead
Control
Stores ledger cards: Received
section (negative)
Stores ledger cards: Issued
section (negative)
Cost sheet or production
report:
Materials cost section
Stores ledger cards: Issued
section (negative)
Factory overhead analysis
sheet
(negative for indirect
materials)
Forms Used as Basis for
Entry on Subsidiary
Records
Invoice, receiving and
inspection report,
purchase order
Voucher
Receiving and inspection
report or voucher
Voucher
Receiving and inspection
report or voucher
Voucher
Receiving and inspection
report or voucher
Voucher
Stores Requisition
Stores Requisition
Stores Requisition
Stores Requisition
Stores Requisition
Stores Requisition
Stores Requisition
Stores Requisition
Return shipping order/
delivery receipt
Return shipping order/
delivery receipt
Returned materials
report
Returned materials
report
Returned materials
report
Returned materials
report
Page | 9
COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 3 – ACCOUNTING FOR MATERIALS COST
PURCHASE DISCOUNTS
Trade discounts
-
Generally given in terms of percentage (15%, 10%, 5%) and are used to convert single price list into a
series of price lists for different types of middleman.
Not recorded on the books because purchases are recorded on the books net of the discount
Example:
Windy Corporation bys all of its materials and supplies from the Oregon Company and is allowed a trade
discount of 10%. Purchases during the month were P 400,000 before the discount.
Entry:
Materials
360,000
Accounts Payable (400,000*90%)
360,0000
Quantity discounts
-
Represent cost savings for volume purchases.
Not given explicit accounting recognition in the books
Cash discounts
-
Deductions from the invoice price when payment is made within the discount period.
Purpose: to encourage prompt payment
Recorded as purchase discount by the buyer and sales discount by the seller
Purchase discount
- Deducted from purchases to arrive at net purchases
Illustration:
- The list price of a merchandise purchased is P 500,000 less 20% and 10%, with credit terms of 5/10, n/30.
This means that trade discounts are 20% and 10%, and the cash discount is 5% if payment is made in 10
days.
The full amount of the invoice is paid if the payment is made after 10 days and within the credit period of
30 days.
List price
First trade discount (20% x P 500,000)
Second trade discount (10% x P 400,000)
Invoice price
Cash discount (5% x 360,000)
Payment within the discount period
The journal entry to record the purchase is:
Purchases
Accounts Payable
o
o
500,000
(100,000)
400,000
(40,000)
360,000
(18,000)
342,000
360,000
360,000
Note that the trade discounts are not recorded.
The journal entry to record the payment of the invoice within the discount period is:
Accounts payable
Cash
Purchase discount
360,000
342,000
18,000
Methods of recording purchases
1. Gross method – purchases and accounts payable are recorded at gros
2. Net method - purchases and accounts payable are recorded at net
Illustration – Gross method
1. Purchases on account, P 200,000, 2/10, n/30.
Purchases
200,000
Accounts payable
200,000
Page | 10
COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 3 – ACCOUNTING FOR MATERIALS COST
2. Assume payment is made within the discount period.
Accounts payable
200,000
Cash
Purchase discount
3. Assume payment is made beyond the discount period.
Accounts payable
200,000
Cash
196,000
4,000
200,000
Illustration – Net Method
1. Purchases on account, P 200,000, 2/10, n/30.
Purchases
196,000
Accounts payable
196,000
2. Assume payment is made within the discount period.
Accounts payable
196,000
Cash
196,000
3. Assume payment is made beyond the discount period.
Accounts payable
196,000
Purchase discount lost (other expense)
4,000
Cash
200,000
4. Assume it is the end of accounting period, no payment is made and the discount period has expired.
Purchase discount lose
4,000
Accounts Payable
4,000
Gross method vs. Net method
In practice, most entities record purchases at gross invoice amount.
Technically, the gross method violates the matching principle because discounts are recorded only when taken or
when cash is paid rather than when purchases that give rise to the discounts are made.
Moreover, this procedure does not allocate discounts taken between goods sold and goods on hand.
Despite its theoretical shortcomings, the gross method is supported on practical grounds.
The gross method is more convenient than the net method from a bookkeeping standpoint.
FREIGHT IN
- Freight cost for purchases may be treated as:
A. ADDITION TO PURCHASE COST – specific freight charges ma either be
• directly added to purchase cost
-
Example: Freight cost of P 600 is incurred on 10,000 units of material ABC bought for P.55
The purchase of material ABC is posted to the stock cards at the unit cost of P.61
considering the addition of freight cost per unit of P .06 (or P600/10,000 units) as shown
below.
Invoice price (10,000 units x P.55)
P 5,500
Freight In
600
Total
P 6,100
Divide by
10,000 units
Unit cost
P .61
•
-
The entry to record the acquisition would be:
Materials
P 6,100
Accounts Payable
P 6,100
accumulated in the Freight In account and applied to purchases at a
predetermined rate.
Example: Freight cost of P 600 is incurred on 10,000 units of material ABC bought for P.55
Assume that purchases consist of P 6,000 units of material ABC @ P .20 and 2,400 units of
mate rial DEF @ P .70 with total weights of 300 and 200 pounds, respectively.
Page | 11
COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 3 – ACCOUNTING FOR MATERIALS COST
The allocation based on relative weights, would be as follows:
Allocated Freight
In
Material ABC (300/500 lbs.) x P 600
360
Material DEF (200/500 lbs.) x P 600
240
Freight In Per
unit
P .06
.10
Unit Cost
P .26
.80
Freight bills are not based solely on weights but also on peso values because of insurance coverage so that
if there is a great disparity in relative weights and the bill is significant in amount, allocation of freight cost
may be revised to consider both factors.
- Freight cost may also be charged to purchases at a predetermined rate based on estimated freight costs and
the corresponding estimated purchases in terms of peso value, weight or volume.
o Freight costs are charged to Freight In and applied to the corresponding debit for materials
purchased (such as Materials, Work in Process, and Factory Overhead Control).
▪ Any year-end balance is treated in a similar manner as that accorded to factory overhead
variance, that is:
• It is closed to cost of goods sold or to income and expense summary
• If the balance is significant, it is prorated to cost of goods sold and the inventories
of materials, work in process and finished goods.
B. FACTORY OVERHEAD
- this treatment requires the inclusion of estimated freight in cost in the computation for predetermined
factory overhead rate so that it is automatically included in production cost upon recording the applied
amount.
- Freight in for supplies purchased for the sales and administrative departments are charged to the
corresponding expense accounts.
-
MATERIALS HANDLING ACCOUNTS
Materials Handling Costs
- Refers to those incurred incidental to acquisition and storage of materials. These are the costs incurred in:
o Ordering (purchasing department)
o Receiving (receiving and inspection department)
o Processing payment (accounting department) and in
o Handling and storing materials ( materials department)
-
They are treated either as factory overhead or as an additional cost of materials.
o
As Factory Overhead
▪ Estimated materials handling costs are included in the computation for predetermined
overhead rate and the actual figures are charged to factory overhead control.
o
As Additional Cost of Materials
▪ Materials handling costs are charged to Materials upon purchase at a predetermined rate.
▪ Costs incurred are charged to Materials Handling Cost Control and the variance, if any, is
closed to Cost of Goods Sold.
• If the variance is significant, it is allocated between cost of goods sold and the
inventories of materials, work in process and finished goods.
o
Materials handling costs may be charged to cost of purchases using a single rate only or a rate for
each of the departments involved.
▪ One predetermined rate used.
Materials handling rate = Estimated materials handling costs
Estimated materials purchases
o
Illustrative Problem.
The budget of Cavite Mfg. Co. for 2014, its books of accounts and analysis sheets show the
following:
Page | 12
COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 3 – ACCOUNTING FOR MATERIALS COST
Peso Value
Number of units
Number of orders
Departmental costs:
Purchasing dept
Receiving and inspection dept
Materials dept
Accounting
dept
(portion
applicable to
processing of
payment)
Per Budget
P 5,000,000
25,000 units
20x
Actual
P 5,500,000
30,000 units
22x
P 120,000
70,000
50,000
30,000
P 132,000
80,000
56,000
37,000
P 270,000
P 305,000
In using one predetermined rate, the computations and entries would be as follows:
Materials handling cost rate: P 270,000/ 5,000,000 =
5.4%
Materials handling cost variance:
Actual
P305,000
Applied
(P 5,500,000 * 5.4%)
297,000
Materials handling cost variances – underapplied
P 8,000
Entries:
Upon purchase:
Materials (P 5,500,000 + 297,000)
Accounts Payable
Applied Materials Handling Cost
P 5,797,000
P 5,500,000
297,000
Actual materials handling cost:
Materials Handling Cost Control
Cash and other credits
305,000
To set up the variance:
Applied Materials Handling Cost
Materials Handling Cost Variance
Materials Handling Cost Control
297,000
8,000
305,000
305,000
To close the variance:
Cost of Goods Sold
Materials Handling Cost Variance
8,000
8,000
Departmental Rates Used. A materials handling cost rate may be computed for each of the departments
involved as follows:
For purchasing department:
Estimated purchasing department cost
Estimated no. of purchases or amount of purchases
=
Rate per purchase or per peso of purchases
For receiving department:
Estimated receiving department cost
Estimated number of units to be received
=
Rate per unit
=
Rate per unit or cubic foot
For the materials department:
Estimated materials department cost
Estimated number of units or cubic feet of items to be purchased
Page | 13
COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 3 – ACCOUNTING FOR MATERIALS COST
For the accounting department:
Estimated applicable accounting department cost = Rate per transaction
Estimated number of transactions
The departmental rates based on the illustrative problem would be as follows:
Purchasing dept.:
P 120,000/ 20 orders =
P 6,000 per order
Receiving and inspection dept.:
P 70,000/ 25,000 u. =
P 2.80 per unit
Materials dept.:
P 50,000/ 25,000 u. =
P 2.00 per unit
Accounting dept.:
P 30,000/ 20 orders =
P 1,500 per transaction
The materials handling cost variance is computed as follows:
Applied:
Purchasing dept.:
P 6,000 x 22 orders
=
Receiving and inspection dept.:
P 2.80 x 30,000 units =
Materials dept.:
P 2.00 x 30,000 units =
Accounting dept.:
P 1,500 x 22 transactions =
Applied materials handling cost
Actual
Overapplied materials handling cost
P 132,000
84,000
60,000
33,000
P 309,000
305,000
P 4,000
The entries may be similar to those made when using only one rate. If there is departmentalization of expenses in
the company, departmental applied accounts are used as shown in the following entry upon purchase of materials:
Materials ( P 5,500,000 + 309,000)
P 5,809,000
Accounts Payable
Applied Purchasing Dept. Expenses
Applied Receiving and Inspection Dept. Expenses
Applied Materials Dept. Expenses
Applied Accounting Dept. Expenses
P 5,500,000
132,000
84,000
60,000
33,000
The actual expenses related to materials purchases may be charged to the applied accounts so that the total of the
resulting balances shall be equal to the variance.
SCRAP MATERIALS
Scrap
- Refers to pieces or fragments of materials or something to be discarded.
- Examples:
o pieces of cloth resulting from cutting the material into the required shapes and sizes in the
manufacture of t-shirts
o fragments of iron bars resulting from cutting them into the desired lengths in a construction
company.
- Although it cannot be avoided, they should be minimized and should be reported and controlled.
- A scrap report is prepared regularly so that unusual quantities and value may be noted for the adoption of
prompt corrective measures.
- When the value of scrap is significant and readily determinable, an entry is made upon transfer thereof
to storeroom, otherwise, an entry is made only upon sale.
- Regardless of whether an entry is made or not upon transfer of scrap, it is preferable to maintain a ledger
to control the quantity of scrap. It its value can be reasonably estimated, the corresponding value may also
be indicated thereon.
- The treatment for scrap is summarized on the next page.
Page | 14
COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 3 – ACCOUNTING FOR MATERIALS COST
-
o
Entry is made only upon sale
▪ the credit may be to factory overhead (if not traceable to any specific job or process), to
income and expense summary ( as other income) or to work in process ( if traceable to a
specific job or process).
o
Entry is made upon gathering of scrap.
▪ Debit “Scrap Materials” crediting factory overhead or work in process.
▪ Upon sale, the difference between assigned value and selling price is treated as an
adjustment to factory overhead or work in process depending on which account was
credited when the scrap was recorded.
Example: Scrap materials with estimated value of P P 4,800 are transferred to the storeroom. They are
subsequently sold for P 5,000 cash.
A. Entry is made upon sale only.
1. Scrap sales treated as other income
Cash
P 5,000
Scrap Sales
P 5,000
To close a year-end:
Scrap Sales
5,000
Income and Expense Summary
5,000
2. Scrap sales treated as adjustment to factory overhead ( if not traceable to specific job or
process):
Cash
5,000
Factory Overhead
5,000
3. Scrap sales treated as adjustment of production cost of a job or process:
Cash
5,000
Work in Process
5,000
B. Scrap materials are taken up upon gathering them.
Scrap Materials
4,800
Factory Overhead (or Work in Process)
4,800
Upon Sale:
Cash
5,000
Scrap Materials
4,800
Factory Overhead (or Work in Process)
200
-
When sales of scrap are recurring and significant in amount, they may be accumulated first in “ Scrap Sales”
and subsequently closed to factory overhead or work in process (as the case may be) to facilitate analysis
and for more effective control)
Page | 15
COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 3 – ACCOUNTING FOR MATERIALS COST
SPOILED GOODS
-
Those that have developed imperfections and are disposed of as such.
The difference between selling price and accumulated cost is treated either as a
a. Charge to factory overhead (loss on spoiled goods) - charged when spoilage is normal or
inherent in the manufacture of standard jobs.
▪ This practice has the effect of charging the cost item to all regular jobs inasmuch as charges
to factory overhead are prorated among all jobs upon the application of the factory
overhead rate.
• this implies that in computing for factory overhead rate, sufficient provision for
spoilage is included in the estimated amount of factory overhead.
• In making the entry, the cost of the spoiled units is removed from work in process
and spoiled goods are taken up at their estimated market value with the loss in
value debited to factory overhead.
b. Left with work in process as additional cost of the remaining good units in a job.
▪ When spoilage is due to the special nature of a job or due to strict specifications or difficult
processing involved, the loss is treated as part of the cost of the particular job or is left
with work in process.
▪ In making the entry, only the estimated cost recovery is removed from work in process so
that whatever loss is incurred from spoilage is left with work in process as part of the cost of
the remaining good units in the particular job.
- Example:
The prime cost per unit for 100 beds are as follows:
Direct materials
P 450
Direct labor
300
Factory overhead is P 250 per unit and includes a P 10 provision for normal spoilage.
Upon final inspection of the beds, two units are considered imperfect and can be sold for P 600 each.
o
Loss from Spoilage Charged to Factory Overhead
▪ If the spoilage is considered normal so that it must be charged to total prod uction, the
overhead rate used is P250 per unit so that cost per unit of the 100 beds must be P 1,000.
The production costs are tabulated as follows:
Original
Cost of 2 beds
Cost of
98 beds
Direct materials
P 45,000 ( 2%)
P 900
P 44,100
Direct labor
30,000
600
29,400
Factory overhead @ P 250
25,000
500
24,500
P100,000
P 2,000
P 98,000
Unit cost
P 1,000
P 1,000
P 1,000
The entries would be as follows:
To charge the original cost to production:
Work in Process – Direct Materials
Work in Process – Direct Labor
Work In Process – Factory Overhead
Materials
Payroll
Applied Factory Overhead
To take up the spoiled goods:
Spoiled Goods
Factory Overhead Control
Work in Process – Direct Materials
Work in Process – Direct Labor
Work In Process – Factory Overhead
To take up the completion of the remaining 98 beds:
P 45,000
30,000
25,000
P 45,000
30,000
25,000
1, 200
800
900
600
500
Page | 16
COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 3 – ACCOUNTING FOR MATERIALS COST
Finished Goods
Work in Process – Direct Materials
Work in Process – Direct Labor
Work in Process – Factory Overhead
98,000
44,100
29,400
24,500
It may be noted that the cost per unit of the 98 remaining good beds remains at P 1,000 (or P 98,000/ 1,000
beds).
o
Loss from Spoilage Charged to a Particular Job
▪ Assume that the production order is a special one because of strict specifications. The
overhead rate used excludes the P 10 provision for normal spoilage so that the original cost
per bed must be P 990 (direct materials – P 450, direct labor – P 300, and factory overhead –
P 240).
Direct materials
Direct labor
Factory overhead @ P 240
Unit cost
Original
P 45,000
30,000
24,000
P 99,000
P 990
Estimated cost recovery
P 545
364
291
P 1,200
The estimated cost recovery per element of cost is computed as follows:
Direct materials
[(P 450/P 990) x P 1,200]
Direct labor
[(P 300/P 990) x P 1,200]
Factory Overhead
[(P 240/P 990) x P 1,200]
Estimated Cost Recovery
The entries would be as follows:
To charge the original cost to production:
Work in Process – Direct Materials
Work in Process – Direct Labor
Work In Process – Factory Overhead
Materials
Payroll
Applied Factory Overhead
=
=
=
Cost of 98 beds
P 44,455
29,636
23,709
P 97,800
P 998
P 545
364
291
P 1,200
P 45,000
30,000
24,000
P 45,000
30,000
24,000
To take up the spoiled goods:
Spoiled Goods
Work in Process – Direct Materials
[(P 450/P 990) x P 1,200]
Work in Process – Direct Labor
[(P 300/P 990) x P 1,200]
Work In Process – Factory Overhead [(P 240/P 990) x P 1,200]
To take up the completion of the remaining 98 beds:
Finished Goods
Work in Process – Direct Materials
(P 45,000 – 545)
Work in Process – Direct Labor (P 30,000 – 364)
Work in Process – Factory Overhead (P 24,000 – 291)
1, 200
545
364
291
97,800
44,455
29,636
23,709
With loss from spoilage treated as part of work in process (or left with the cost of the particular job) , unit
cost of the 98 remaining good units becomes P 998 (P 97,800/98 units). This means that the spoilage
results in an adjustment in unit cost of P 8 which may also be arrived at as follows:
Loss from spoilage (P 2,000 – 1,200)
P 800.00
Divide by remaining good units
98 units
Adjustment in unit cost
P
8
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COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 3 – ACCOUNTING FOR MATERIALS COST
-
From the foregoing illustration, the following comparison may be emphasized:
When loss from spoilage is treated as factory overhead, the overhead rates includes the provision for
normal spoilage and the cost of the spoiled units is removed from work in process.
When loss is charged to a particular job, the overhead rate excludes the provision for normal spoilage and
it is the estimated cost recovery that is removed from work in process.
DEFECTIVE GOODS
-
Those that have developed imperfections and are reprocessed so that they can be sold as regular finished
goods.
Advisability of correcting imperfections depends on whether the expected benefit therefrom (that is,
increase in sales value) exceeds the incremental cost arising from the reprocessing.
-
Cost of reprocessing defective work may be charged (debited) to:
o Factory overhead – when imperfections are normal or expected in standard jobs
▪ Has the effect of prorating said cost among all jobs and requires the inclusion of sufficient
provision therefor in computing for the factory overhead rate.
o Work in process/ particular job – when imperfections are due to the special nature of the job.
-
Example:
A job order for 30 kitchen cabinets entails the following prime costs:
Direct materials
P 18,000
Direct labor
12,000
Factory overhead rate of 80% of direct labor cost includes 3% provision for reprocessing cost of defective work.
Five of the cabinets are found to have imperfections and are reprocessed. Prime cost incurred in reprocessing them
amounts to P 2,000 ( Direct materials - P 800, direct labor – P 1,200).
o Reprocessing cost treated as Factory Overhead
if the job is a standard or regular one and imperfections are considered normal, the
reprocessing cost is charged to factory overhead so that the overhead rate to be used is P
80%. The original cost of the job must therefore be equal to P 39,600 or at P 1,320 per unit
arrived at as follows:
Per Unit
Direct materials
P 18,000
P 600
Direct labor
12,000
400
Factory overhead (80% of P 12,000)
9,600
320
P 39,600
P 1,320
The entries are given below.
To take up the original cost of the job
Work in Process – Direct Materials
P 18,000
Work in Process – Direct Labor
12,000
Work In Process – Factory Overhead
9,600
Materials
P 18,000
Payroll
12,000
Applied Factory Overhead
9,600
▪
To take up the reprocessing cost:
Factory Overhead Control
(Defective work)
Materials
Payroll
Applied Factory Overhead
(80% x P 1,200)
2,960
800
1,200
960
To take up the completion of the
Finished Goods
39,600
Work in Process – Direct Materials
18,000
Work in Process – Direct Labor
12,000
Work in Process – Factory Overhead
9,600
It may be noted that the unit cost of the 30 units remains at their original figure of P 1,320
inasmuch as the reprocessing cost is charged to factory overhead.
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COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 3 – ACCOUNTING FOR MATERIALS COST
o Reprocessing Cost Charged to a Particular Job.
When defective work is due to the special nature of a job as when it requires difficult
processing or the specifications are very strict, cost of reprocessing is charged to the job.
▪ Factory overhead rate should therefore exclude the provision for normal imperfection.
▪ Based on the given example, the original production costs of 30 kitchen cabinets in total and
per unit would be as follows:
Per Unit
Direct materials
P 18,000
P 600
Direct labor
12,000
400
Factory overhead (77% of P 12,000)
9,240
308
P 39,240
P 1,308
The entries are given below.
To take up the original production costs:
Work in Process – Direct Materials
P 18,000
Work in Process – Direct Labor
12,000
Work In Process – Factory Overhead
9,240
Materials
P 18,000
Payroll
12,000
Applied Factory Overhead
9,240
▪
To take up the reprocessing cost:
Work in Process – Direct Materials
Work in Process – Direct Labor
Work in Process – Factory Overhead
Materials
Payroll
Applied Factory Overhead
800
1,200
924
800
1,200
924
(77% x P 1,200)
To take up the completion of the job
Finished Goods
Work in Process – Direct Materials
Work in Process – Direct Labor
Work in Process – Factory Overhead
P 42,164
18,800
13,200
10,164
In charging the reprocessing cost to the job, unit cost goes up to P 1,405.47 (that is, P 42,164/30
units) or there is an adjustment for defective work of P 97.47 ( P 2,924/30 units).
LOSS FROM SPOILAGE AND REPROCESSING COST AS PERIOD COST
Loss from spoilage and reprocessing cost
- when treated as given in the preceding paragraph (as factory overhead or as cost of a particular job), are
product cost.
- Treated as period cost when imperfections are due to extraordinary factors beyond the control of
production men and the amount involved is significant.
o Examples: those caused by fortuitous events such as flood and earthquake.
o For spoiled goods, the entry upon recognition of the spoiled goods would be
Spoiled goods (at market value)
Loss from Flood
Work in Process – Direct Materials
Work in Process – Direct Labor
Work in Process – Factory Overhead
o
o
P xxx
xxx
Pxxx
xxx
xxx
For defective work, the reprocessing cost is taken up as follows:
Loss from Flood
xxx
Materials
xxx
Payroll
xxx
Applied Factory Overhead
xxx
It may be emphasized that normal loss is treated as product cost and abnormal loss, as period cost.
Page | 19
COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 3 – ACCOUNTING FOR MATERIALS COST
TREATMENT FOR LOSS FROM SPOILAGE AND REPROCESSING COST COMPARED
Although entries for loss from spoilage and reprocessing cost differ, there may be one set of guidelines in
their treatment. These are briefly stated as follows:
Imperfections
Reprocessing Cost or Loss from Spoilage treated as
Normal or inherent in the regular manufacturing process
Normal in particular jobs or due to strict specifications
Due to extraordinary causes
Factory overhead
Additional cost of the job (or work in process)
Charge to specific loss account
-
Although the above treatment are observed for both defective work and spoiled goods, it should be borne
in mind that:
o In the case of the former, the entry is to take up the additional cost incurred to correct the
imperfection.
o In the case of spoiled goods, the entry is to remove said goods from work in process and any
difference between accumulated cost of the spoiled goods and their estimated market value is
accorded the corresponding treatment as given above.
-
Factory overhead rate – when reprocessing costs (in the case of defective work) and loss from spoilage in
the case of spoiled goods) are treated as factory overhead, the proration automatically occurs upon
inclusion of their estimated figures in estimated total factory overhead in computing for the predetermined
overhead rate.
o Illustrative Problem: Accounting for Defective Goods and Spoiled Goods
Prime costs charged to job 324 (for 10,000 units of a product) are the following:
Per Unit
Direct materials
P 20,000
P 2.00
Direct labor cost
10,000
1.00
Factory overhead is charged to production at 80% of direct labor cost. This rate excludes provision
for normal imperfections.
Five hundred units develop imperfections.
What entries are to be made under each of the following assumptions?
A. The five hundred units that have developed imperfections are reprocessed requiring prime costs
of P 800 (direct materials, P 500 and direct labor cost, P 300).
1. The imperfections are considered normal or expected in all the regular jobs. Factory
overhead rate is to include an additional 10% to provide for the defective work.
2. The imperfections are considered due to the special nature of the particular job.
B. The goods with imperfections are to be sold at P 1.50 per unit. Observe the different assumptions
as given above.
The entries as given are presented in comparative form and three work in process accounts are
used to emphasize the difference between accounting for defective goods and spoiled goods.
A-1: Defective Work Normal in all Regular Jobs. The reprocessing cost is charged to factory overhead
and the cost of the job is affected by the corresponding increase in factory overhead rate. The unit
cost of the finished units is P 3.90 (or P 39,000/10,000 units) broken down as follows:
Direct materials
P 2.00
Direct labor
1.00
Factory overhead
.90
P 3.90
Without any provision for normal imperfection, the unit cost ought to be P 3.80 with factory
overhead per unit at P .80. Thus, even if the reprocessing cost is charged to factory overhead, the
cost of the given job is affected by the inclusion of the provision for normal defective work in the
computation for factory overhead rate.
Page | 20
COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 3 – ACCOUNTING FOR MATERIALS COST
A-2: Defective Work Normal Only in the Special Job. The reprocessing cost is treated as additional
cost of the special job so that the overhead rate used is 80%, that is, without including any
provision for defective work that is considered normal in all regular jobs. Without the defective
work, unit cost is P 3.80 only (direct materials – P 2; direct labor – P 1 and factory overhead – P
.80). With the additional debit to work in process of P 1,040 (reprocessing cost), unit cost of the
finished units becomes P 3.904 (P 39,040/10,000 units) or higher by P 1.04 when compared with
the original unit cost of P 3.80.
B-1: Loss from Spoilage Normal in all Regular Jobs. The difference between accumulated cost of the
spoiled units of P 1, 950 and their estimated market value of P 750 is charged to factory overhead.
The overhead rate used is 90% and includes the 10% provision for spoilage normal in all regular
jobs. The unit cost of the remaining good units remains at P 3.90 (or P 37,050/9,500 units).
B-2: Spoiled Goods Normal in the Particular Job. Factory overhead rate used is 80%, that is,
disregarding the provision for normal spoilage in all regular jobs. The loss from spoiled goods of P
1,150 (see computation below) remains in work in process so that only the estimated market value
of the spoiled units is credited to the cost of the job. The cost recovery is allocated among the three
cost elements in the ratio that each bears to the total. Consequently, the unit cost of the remaining
good units goes up to P 3.921 (or P 37,250/ 9,500 units) with the adjustment for loss from spoilage
arrived at as follows:
Cost of spoiled units (500 x P 3.80)
P 1,900
Cost recovery (500 x 1.50)
(750)
Loss from Spoilage
P 1,150
Divide by remaining good units
9,500 units
Adjustment in unit cost for spoilage
P .121
Page | 21
COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 3 – ACCOUNTING FOR MATERIALS COST
EXERCISES
Problem 1
The following information is to be used in costing inventory on August 31.
August 1
Beginning balance
1,600 units at P 6.00
5
Purchased
400 units at P 7.00
9
Purchased
400 units at P 8.00
16
Issued
800 units
24
Purchased
600 units at P 9.00
27
Issued
1,000 units
Required:
The cost of materials used and the cost assigned to the August 31 inventory by each of these perpetual inventory
costing methods.
1. First-in, first-out
2. Average
Problem 2
The Heaven & Earth Company made the following purchases and issues during January:
January
1
Balance on hand, 1,000 units at P 4.00 each
3
Issued 250 units
5
Received 500 units at P 4.50 each
6
Issued 150 units
10
Issued 110 uunits
11
Factory returned 10 units to the store room that were issued on the 10th
15
Received 500 units at P 5.00 each
20
Returned 300 units to vendor from May 15th purchase
26
Issued 100 units
Required:
Cost of materials used and inventory, end using:
1. First-in, first out
2. Average
Problem 3 – Materials Cost – Accounting for Scrap
Scrap materials with estimated value of P 6,000 are gathered and separated from work in process. They are
subsequently sold for P 6,200.
Make the entries under each of the following assumptions:
a. Revenue from sale of scrap is recognized only upon sale as
(1) other income
(2) as adjustment to factory overhead
(3) as reduction in the cost of a particular job
b. Scrap is recognized upon separation thereof from work in process and revenues is treated as
(1) as adjustment to factory overhead
(2) as reduction in the cost of a particular job
Problem 4 - Materials Cost – Accounting for Spoiled Goods
Sunny Corp. manufactures portable beds and chairs made of round steel bars and woven plastic strips (similar to
woven rattan strips). The steel bars are cut, heated and bent before they are connected by bolts and nuts to form
the desired structures. The woven plastic strips are subsequently attached per specifications.
For 2014, estimated factory overhead (without the corresponding provision for any imperfection) is P 60,000
based on estimated direct labor cost of P 120,000. Per estimates, a 5% spoilage may be expected with unrecovered
cost of P 3,000.
For January, 2014, the company processed an order for 10 portable rocking chairs (job no. 027). The prime costs
are as follows:
Direct materials
P 10,000
Direct labor
5,000
Upon final inspection, two rocking chairs are found below standard. Estimated cost recovery is P 1,000 per chair.
Page | 22
COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 3 – ACCOUNTING FOR MATERIALS COST
Questions:
a. Assuming that the job is a regular or standard one,
(1) what factory overhead rate must be used?
(2) what must be the unit cost for the remaining eight rocking chairs upon completion?
(3) what are the entries to take up the original production cost, spoilage and completion of the
remaining units?
b. Assuming that the job is a special one, what would be your answers for the questions given above?
Problem 5 – Materials Cost – Accounting for Defective Work
A job order for 1,000 pairs of carved wooden bookends is processed and prime costs are as follows:
Direct materials
P 30,000
Direct labor
20,000
Factory overhead rate of 50% of direct labor cost excludes a 2% provision for defective work.
Prior to transfer to stockroom, 50 pairs are found defective and are reprocessed. Prime costs in reprocessing
amount to P 800 (direct materials of P 200 and direct labor of P 600).
Questions:
a. Assuming that the job is a regular or standard one,
(1) what factory overhead rate must be used?
(2) what must be the unit cost for the 1,000 pairs of bookends upon completion?
(3) what are the entries to take up the original production cost, spoilage and completion of the job?
b. Assuming that the job is a special one, what would be your answers for the questions given above?
Multiple Choice
1. According to the net method, which of the following items should be included in the cost of inventory?
Freight cost
Purchase discounts not taken
a.
Yes
No
b.
Yes
Yes
c.
No
Yes
d.
No
No
2. The weighted average for the year inventory cost flow method is applicable to which of the following
inventory system?
Periodic
Perpetual
a.
Yes
Yes
b.
Yes
No
c.
No
Yes
d.
No
No
3. During June, Delta Co. experienced scrap, normal spoilage, and abnormal spoilage in its manufacturing
process. The cost of units produced includes
a. Scrap, but not spoilage
b. Normal spoilage, but neither scrap nor abnormal spoilage
c. Scrap and normal spoilage, but not abnormal spoilage
d. None of the items mentioned
4. March Company had 150 units of product on hand at January1 costing P 21.00 each. Purchasing of product
A during the month of January were as follows:
Units
Unit cost
January
10
200
P 22.00
18
250
23.00
28
100
24.00
Physical count on January 31 shows 250 units of product A on hand.
The cost of the inventory at January 31, under the FIFO method is:
a. P 5,850
b. P 5,550
c. P 5,350
d. P 5,250
Page | 23
COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 3 – ACCOUNTING FOR MATERIALS COST
Harper Company’s Job 301 for the manufacture of 2,200 coats was completed during August, 2014 at the
following unit costs:
Direct materials
P 20.00
Direct labor
18.00
Factory overhead (includes an allowance of
P 1 for spoiled work)
18.00
Final inspection of Job 301 discloses 200 spoiled costs which were sold to a jobber for P 6,000.
5. Assume that spoilage loss is charged to all production during August. What would be the unit cost of the
good units produced on Job 301?
a. P 53.00
b. P 55.00
c. P 56.00
d. P 58.00
6. Assume instead, that the spoilage loss is attributable to exacting specification of Job 301 and is charged to
this specific job. What would be the unit cost of the good coats produced on Job 301?
a. P 55.00
b. P 57.50
c. P 58.60
d. P 61.60
7. Palmer Corporation is a manufacturing concern that uses a perpetual inventory system. Te following data
on the material inventory account is provided for 2014.
Material balance
P 275,000
Other debits to the materials account during the year
825,000
Increase of ending over beginning inventory
55,000
How much is the cost of materials issued to production?
a. P 1,045,000
b. P 770,000
c. P 880,000
d. P 430,000
8. Job 75 incurred the following costs for the manufacture of 200 units of motors:
Original cost accumulation
Direct materials
P 13,200
Direct labor
16,000
Factory overhead (150% of direct labor)
24,000
Direct costs of reworked 10 units
Direct materials
2,000
Direct labor
3,200
The total rework costs were attributable to exacting specifications of Job 75 and the full rework costs were
charged to the specific job.
The cost of Job 75 was
a. P 316
b. P 266
c. P 280
d. P 292
9. The following data on materials purchases and issues during the month of April were reported:
April 1
Beginning balance
400 units at P 6
5
Received
100 units at P 7
11
Received
100 units at P 8
13
Issued
400 units
15
Received
200 units at P 6
22
Issued
250 units
27
Returned from factory
50 units
30
received
300 units at P 9
Assuming that the company used a perpetual inventory system (FIFO method), the total quantity and cost
of materials purchased for the month of April should be:
a. 700 units at P 5,800
c. 700 units at P 5,400
b. 700 units at P 5,810
d. 700 units at P 6,200
10. Euphorbia Company produces and sells a single item of product. Inventory at the beginning of September
was 400 units valued at P 1.80 per unit. Further receipts and sales during the month were as follows
Units
Cost per unit
September
8
Receipts
600
P 2.10
20
Receipts
50
?
25
Sales
1,250
4.00
The inventory uses the FIFO method of stock valuation. Gross margin for September was P 2,500.
What was the cost per unit of the 500 units received on September 20?
a. P 1.04
b. P 1.94
c. P 2.00
d. P 2.08
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COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 3 – ACCOUNTING FOR MATERIALS COST
During March, March Company incurred the following costs on Job 209 for the 200 motors:
Original cost accumulation:
Direct materials
P 660
Direct labor
800
Factory overhead
1,200
P 2,660
Direct costs of reworking 10 units:
Direct materials
P 100
Direct labor
160
P 260
Method A – The rework cost were attributable to the exacting specifications of Job 209, and the full rework
costs were charged to this specific job.
Method B – The defective units fall within the normal range and the rework is not related to a specific job,
or the rework is common to all the jobs.
11. The cost per finished unit of Job 209 using Method A us:
a. P 15.60
b. P 15.80
c. P 13.30
d. P 13.50
12. The cost per finished unit of Job 209 using method B is:
a. P 13.30
b. P 15.80
c. P 15.30
d. P 13.60
13. Tools Company manufactured electric drills to the exacting specifications of various customers. During
February 2008, Job 403 for the production of 1,100 drills was completed at the following cost per unit
Direct materials
P 100
Direct labor
80
Factory overhead
120
Total
P 300
Final inspection of Job 403 disclosed 50 defective units and 100 units of normal spoilage. The defective
drills were reworked at a total cost of P 5,000 and the spoiled drills were sold to a jobber for P 15,000.
The unit cost of the good units produced on Job 403 was:
a. P 330
b. P 320
c. P 300
d. P 290
14. Arko Manufacturing Co. purchased 10,500 lbs. Of materials XY at P 2 per lb. and incurred freight cost of P
1,050. A cash discount of 2% is granted on payments within ten days. Freight in is treated as an additional
cost of materials purchased.
What unit cost must be entered on the stock card for material XY assuming that the allowance method is
used in accounting for discount?
a. P 2.06
b. P 1.96
c. P 2.00
d. P 2.058
REFERENCES USED FOR THE 3RD MODULE – ACCOUNTING FOR MATERIALS COST
Cost accounting by Nenita Mejorada, 3rd Edition.
Cost accounting by Guillermo M. De Leon Jr. And Norma D. De Leon.
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