COST ACCOUNTING REVIEWER
Topic I: Accounting for Labor
Labor Classifications
Labor — consists of workers’ payroll who are
needed to process and convert raw materials
into finished goods.
Direct Labor
▪
▪
Payroll costs that are paid to workers
who are directly engaged in the
conversion process of raw materials to
finished goods
Charged to Work In Process Account
Indirect Labor
▪
▪
Payroll costs that are paid to a worker
that supports the production process
and which are not directly involved in
the conversion of raw materials into
finished products
Charged to Factory Overhead Control
Account
Recording Payroll
❖ Recording the number of hours used in
total and by job.
❖ Recording the quantity produced by
the workers.
❖ Amalyzing the hours used by the
employees to determine how time is to
be charged.
❖ Allocation of payroll costs to jobs and
factory overhead accounts.
❖ Preparation of the payroll, including
computation and recording of the
employees gross earnings,
deductions, and net earnings.
Control for Labor
❖ Correct timekeeping
❖ Strict control on labor engagement
❖ Analysis of time in terms of
departments, operations, and
productions orders
❖ Improvement in the method of
production
Timekeeping
Clock cards
Time tickets
Production reports
Payroll
Payroll records
Employee’s
earning records
Payroll Summaries
Types of Earnings
✓ Wages – earnings of an employee
who is paid by hour, piece or day.
✓ Salaries – earnings of an employee
who is paid a flat amount of per week
or month regardless of the hours
worked in a period.
✓ Commissions – gross earnings of an
employee typically based on the
number of sales.
Wage Payment Plans
-
Should be approved by the Union and
should comply with regulations of
government agencies.
Time Based Wage Plan / Hourly Rate Plan
-
-
Wages are determined on the basis of
time spend by workers irrespective of
the quality of the work done.
Calculated by multiplying the hourly
rate of the worker by the number of
time spent.
Piece Based Wage Plan
-
-
Wages are determined on the basis of
output produced by the workers
without considering the time spent in
performing the job.
Calculated by multiplying the number if
units by a specified rate per unit.
Modified Wage Plan
-
-
Combination of hourly wage and piece
wage plan.
Wages are paid based on a minimum
hourly rate regardless if an established
quota of production is not met.
However, workers are given a bonus
for the additional piece of output if they
exceed the established quota.
Bonus or Incentive Scheme
-
Wages are based on a bonus plan
intended to increase production.
Can be on an individual or group
incentive plan.
Employee’s Gross Earnings
❖ If hourly Based Wage Plan
(Basic Hourly Pay x Hours Spent) + Overtime
❖ If Piece Based Wage Plan
Number of Units Produced x Pay per piece
Payroll Deductions
Mandatory Contributions / deductions
✓
✓
✓
✓
SSS/GSIS contributions
PhilHealth contributions
PAG-IBIG contributions
Withholding taxes on compensation
Other Contributions / deductions
✓ Union Fees
Net Pay = Gross Earnings – deductions
Labor Losses
Idle Time
•
•
Normal Idle Time
Abnormal Idle Time
Machine Set-Up Time
Labor Costs of Reworking Defective Units
Topic II: Accounting for Overhead
Factory Overhead
❖ Includes all factory costs incurred in
the manufacturing process other than
direct materials and direct labor.
❖ Also known as manufacturing
overhead, factory burden, and indirect
manufacturing costs.
❖ Normally accumulated into cost pools
and allocated to unit produced are
later sold as finished goods.
▪
▪
▪
Indirect Materials
Indirect Labor
Other Manufacturing
Expenes/Indirect
Expenses
Recognition of Factory Overhead
1. Budgeting of Expenses Related to
Overhead
2. Determining of Factory Overhead Rate
3. Applying the Factory Overhead Rate to
appropriate base of production
Budgeting of Expenses Related to
Overhead
❖ Budget is a detailed plan, expressed in
quantitive terms, about business
operations for a specific period.
❖ When the company has already
classified factory overhead as either
fixed or variable, the budgets are the
prepared for the expected level of
production.
❖ Factory overhead budget helps the
company monitor and control
production costs to improve its profit
margin.
Accounting for Factory Overhead Rate
✓ Predermined FOH Rate – used to
apply FOH costs to products, services,
or jobs.
✓ Plant-Wide or Blanket Rate – single
OH rate to all
o Similar products
o Services are relatively similar
o Total amount of FOH rate to be
allocated is too small that using
multiple allocaton rates is
unnecessary and costly.
✓ Departmental Rate – one OH rate for
each department
o Various products with different
processes
o Services are highly
differentiated
o Total amount of FOH rate to be
allocated is too large.
✓ Overhead Bases – allocation bases
should be related to the functions
represented by the factory overhead
costs being applied.
o Physical output/units produced
o Direct Materials Cost
o Direct Labor Cost
o Direct Labor Hours
o Machine Hours
Predetermined Overhead Rate
= Estimated Factory Overhead Costs /
Estimated Allocation Base
[SAMPLE PROBLEM]
P2P Company estimates factory overhead at
P225,000 for the next fiscal year. It is
estimated that 45,000 units were to be
produced at a direct material costs of
P300,000. Conversion will require an
estimated 50,000 direct labor hours at a cost
of P1.50 per hour, with 22,500 machine
hours.
▪
Physical Output per Units Produced
Predetermined overhead rate = Estimated
FOH Costs / /Estimated Allocation Base
= P225,000 / 45,000 units
= P5.00 / unit of production
▪
Direct Materials Cost
Predetermined overhead rate = Estimated
FOH Costs / /Estimated Allocation Base
= P225,000 / P300,000
= 0.75 or 75% of material costs
▪
Direct Labor Cost
Predetermined overhead rate = Estimated
FOH Costs / /Estimated Allocation Base
= P225,000 / (P1.50 x 50,000 DLHs) x 100
= P225,000 / (75,000) x 100
= 3 x 100
= 300% of Labor Costs
▪
Direct Labor Hours
Predetermined overhead rate = Estimated
FOH Costs / /Estimated Allocation Base
= P225,000 / 50,000 DLHs
= P4.50 per DLH
▪
Machine Hours
Predetermined overhead rate = Estimated
FOH Costs / /Estimated Allocation Base
= P225,000 / 22,500 MHrs
= P10 per MHrs
Capacity of Production – in the estimation
of the factory overhead base and its
allocation base, it is important to know the
capacity of production to be used.
✓ Theoretical (Maximum or Ideal) – plan
or department’s capablity to produce
without any interruptions.
✓ Practical – plan or department’s
capablity to produce with an allowance
for internal factors.
o Theoretical less unavoidable
operating interruptions
✓ Expected (Budget) – level based on
expected capaciy utilization for the
budget period.
✓ Normal – most commonly used
capacity.
o Capacity driven by customers or
business demand and not by
maximum capacity.
Typial Allocation Bases for Common
Costs
Departmentalization of Factory Overhead
Departmentalization – dividing the plant into
segments or departments or cost centers to
which expense are charged.
✓ Producing Department – responsible
for actual manufacture of the product.
o Cutting, Assembly, Machining,
Sewing, Mixing, Extracting,
Refining, Finishing, etc.
✓ Service Department – responsible in
assisting other departments by
redering services to production and
service departments.
o Repairs and Maintenance,
Storage, Medical, Recieving,
Purchasing, Personnel,
Security, Cafeteria, Inspection,
etc.
Direct Departmental Expenses
❖ Supervision
❖ Indirect Labor
❖ Overtime
❖ Sick and Vacation Leaves
❖ Pension aand other Labor Fringe
Benefits
❖ Mandatory Contributions
❖ Indirect Materials
❖ Factory Supplies
❖ Repairs and Maintenance
Indirect Departmental Expenses
❖ Depreciation – Building
❖ Factory Rent
❖ Insurance – Building
❖ Interior and Building Maintenance
❖ Supervision
❖ Utilities
❖ Insurance – Equipment
❖ Depreciation – Equipment
❖ Equipment Maintenance
❖ Property Taxes
❖ Freight – In
❖ Materials Handling
Methods of Service Department Cost
Allocation
1. Direct Method – simplest of the three
methods.
- It ignores interdepartmental services
which means no portion of the cost of
the service department is allocated to
another service department, only
directed to revenue producing
departmemnts.
2. Step Method – allocates in a
sequential manner.
- Starts with the service department that
provides the most number of services
or with the one with the largest amount
of costs.
3. Algebraic Method – also called
“reciprocal method”.
- It is the most accurate and recognizes
interrelationship among all
departments.
[SAMPLE PROBLEM]
AD Inc. is exploring ways to allocate the cost
of service departments such as Quality
Control and Maintenance to the production
departments such as Machining and
Assembly. In determining the factory
overhead rate, the machine hours 30,000 is
used for Machining Department and 60,000
direct labor hours is used for Assembly
Department. The controller of the company
has the following information:
DIRECT METHOD
Cost
Total
Quality Control Maintenance
Machining
Assembly
P350,000
P200,000
P400,000
P300,000
P(350,000)
P262,500
P87,500
P(200,000)
P120,000
P80,000
P782,500
P467,500
Divide by MHrs
30,000 Divide by DLHrs
60,000
FOH/hr P26.08/MHr
P7.79/DLHr
Allocation Fraction:
Allocation of Quality Control
Machining 21,000/28,000 x P350,000
Assembly 7,000/28,000 x P350,000
Allocation of Maintenance
Machining 18,000/30,000 x P200,000
Assembly 12,000/30,000 x P200, 000
STEP METHOD
Cost
Total
Quality Control Maintenance
Machining
Assembly
P350,000
P200,000
P400,000
P300,000
P(350,000)
P70,000
P210,000
P70,000
P(270,000)
P162,000
P108,000
P772,000
P478,000
Divide by MHrs
30,000 Divide by DLHrs
60,000
FOH/hr P25.73/MHr
P7.97/DLHr
Allocation Fraction:
Allocation of Quality Control
Maintenance 7,000/35,000 x P350,000
Machining
21,000/35,000 x P350,000
Assembly
7,000/35,000 x P350,000
Machining
Assembly
Allocation of Maintenance
18,000/30,000 x P270,000
12,000/30,000 x P270,000
Topic III: Activity-Based Costing
Activity-based Costing
❖ Costs are allocated on the basis of
different types of cost drivers utilized. It
uses a cost hierarchy to classify
different activities.
▪
▪
▪
▪
Unit Level Activities – activities
performed evey time a service is
performed or product is made.
Bath-Level Activities – activities
which occur every time a group of
units is produced or a seried of steps
are made.
Product-Line Activities – activities
that occur too support an entire
product line but nt always performed
every time a new unit or batch of
products is produced.
Facility-Level Activities – activities
that are carried out at the plant level, it
is independent of the number of units
produced.
[SAMPLE PROBLEM]