CHAPTER 1:  Total Cost = $8000

COST CONCEPT AND COST BEHAVIOR  Earning Total Benefits = $12000

 Cost-Benefit Ratio = (8000/12000) 1.5
I. COST CONCEPT
Project 2
1.1. Introduction to Cost Accounting  Total Cost = $11000
 Earning Total Benefits = $20000
Cost Accounting  Cost-Benefit Ratio = (8000/12000) 1.81
 Branch of accounting that deals with the
process of recording and summarizing the  So, Project 2 is feasible having a high cost-
amount of cost that is spent on the company’s benefit ratio.
activities
 It includes all costs of process, product, or
service used, provided, and sold.

Objectives of Cost Accounting

 Determining costs of products or services from Financial Accounting vs Management Accounting
the time of research and development until external persons who Managers who plan for
distributed and customers’ servicing is make a financial and control an
completed. decision organization
 Providing quantitative information for the Historical perspective Future emphasis
creation of plans, and establishment of Emphasis on Emphasis on relevance
measures and procedures for the controlling verifiability for planning and control
and evaluation purposes of management. Emphasis on precision Emphasis on timeliness
Primary focus is on the Focuses on segments of
Scope of Cost Accounting whole organization an organization
 Cost Analysis - determines the deviation of Need not to follow
Must follow GAAP and
the actual cost as compared to the planned GAAP and prescribed
prescribed formats
expense, along with the reason for such formats
variation Mandatory for external
Not mandatory
 Cost Audit - verify the cost sheets and ensure reports
the efficient application of cost accounting.
 Cost Report - prepared from the data acquired Organizational Strategy and Cost Information
to be analyzed by the management for  One of the ways an entity can attain
strategic decision-making. competitive advantage is through cost
 Cost Ascertainment - it is essential to know leadership
the total cost involved in generating that  Cost leadership differs from product
product or service. differentiation in the perspective if providing
 Cost Book Keeping - journal entries, ledger, unique products to be offered to the market
balance sheet and profit and loss account is  To become a cost leader, costs shall be
prepared in cost accounting too managed well
 Cost System - provides for time to time  In order for costs to be managed well, COST
monitoring and evaluation of the cost incurred ACCOUNTING information is now of
in the production of goods and services paramount importance.
 Cost Comparison - examines the other  PROPERLY MANAGED COSTS> LOWER
alternative product line or activities and the COSTS> LOWER PRICES> COST
cost involved in it LEADER> MORE PEOPLE WILL BUY>
 Cost Control - to eliminate the difference and ADDED VALUE TO THE ENTITY
control the actual cost, cost accounting is
What about value?
required
 Cost Computation - the actual per-unit cost  A value chain is a set of activities an entity
derives from a particular product or applies to be able to deliver a valuable product
commodity to customers.
 Cost Reduction - to find out if there is any  Value chain is a set of activities or functions
scope of reducing the standard cost involved in that allows the conversion of inputs into useful
the production of goods and services products and services.

Cost Benefit Example

Project 1 Research and Desig Supply Producti
Development n on

Marketing Distributi Customer

on Service
 II. CLASSIFICATION OF COST etc.)
accounting secretarial,
public relations, etc.)
Cost
 cash or cash equivalent value sacrificed in
As to behavior
order to achieve the company’s objective.
a. Fixed Cost b. Variable Cost c. Mixed
1.2. Classification of Cost Cost
As to Relation to a product items of cost
items of cost
which remain
which vary
Manufacturing Cost - all the costs associated with constant in
directly in total, refers to costs
production of goods. total,
in relation to that has both
irrespective of
Material Labor Overhead volume of variable &
the volume of
salaries, wages, production fixed
all indirect production
and other components.
costs necessary it is
all raw benefits to unit variable cost
for product independent to
materials used those who are remains
conversion that the level of
in the working unchanged
are not direct production
manufacturing directly in the
material and
process production
labor
process.
a. Fixed Cost
Direct Labor
Direct Material
e.g. cost of Committed Fixed Managed Fixed
e.g. wood
salaries paid to Cost Cost
(chair or table)
laborers of costs that incurred
or flour (bread)
furniture Indirect on short-term
Cost that represents
materials basis and can be
relatively long-term
Indirect Labor Indirect labor more easily
commitments on the
e.g. all other Depreciation of modified in
part of management as
factory equipment response to
Indirect a result of past
personnel Insurance of changes in
Material decisions
necessary in the the factory management
e.g. glue, nails,
manufacturing plant objectives
screw, and the
but not directly Factory utilities ex: advertising,
like
related to the research and
conversion ex: depreciation of development costs
process equipment and cost of
employee training
programs
Direct Material + Direct Labor = Prime Cost
Direct Labor + factory overhead = Conversion Cost Fixed Cost Total
D. mat + D. labor + factory overhead = Activity
per unit Fixed Cost
Manufacturing Cost 1 1,500 1,500
10 150 1,500
Non-Manufacturing Cost - costs related to selling 20 75 1,500
and other activities not related to the production of 30 50 1,500
goods. 50 30 1,500
Marketing or Administrative or
Selling Expenses General Expenses b. Variable Cost
include all executive, Variable Total
include all costs
organizational and Activity Cost Variable
necessary to secure
clerical expenses that per unit Cost
customer orders and get
cannot be logically 1 100 100
the finished product or
included under either 10 100 1,000
service into the hands of
production or marketing 20 100 2,000
the customer
secretarial 30 100 3,000
(e.g. commission, travel (e.g. executive
expense, sales salaries. compensation, general
 Example: cost per um)
A
Assume an entity’s normal manufacturing kwh) B
process with a range of 5,000 to 7,000 units of A P150 P300 0 P300
goods with a variable cost per unit of P20 and B P225 P300 0 P300
P15,000 fixed cost. C P300 P300 0 P300
D P375 P300 75 P375
FIXED COST E P450 P300 150 P450
Fixed Costs FC/Unit
Example of Step-cost
5,000 units P15,000 P3.00
Assume that one supervisor with a salary of P30,000 is
6,000 units P15,000 P2.50
needed for every 10 worker, then if 15 workers are
7,000 units P15,000 P2.14
used, 2 supervisors (with salaries of P60,000) will be
needed. If 18 workers are used, still 2 supervisor are
VARIABLE COST
needed. If the number of workers increases to 22, three
Total Variable supervisors will be needed.
VC/Unit
Cost
5,000 units P20 P100,000 d. Cost in Relation to the Manufacturing
6,000 units P20 P120,000 Department or Other Segments
7,000 units P20 P140,000 manual and machine
operations are
c. Mixed Cost machining,
Producing performed directly
forming, and
Semi-Variable Cost Step Cost Departme upon any part of the
assembly
fixed portion of the the fixed part of the nt product manufacture;
departments
semi-variable cost fixed costs changes contributed directly
usually represent a abruptly at a various to its production
minimum fee for activity level Maintenance,
Its costs are part of
making a particular because these costs Service janitorial &
factory overhead and
item or service are acquired in Departme cost
are a cost of the
available indivisible portions. nt accounting
product
Ex: Cost of department
electricity (basic machining,
Direct is a cost traceable to
minimum plus Ex: Supervisor forming, and
Departme the department in
specified cost per salary assembly
nt Charge which it originates
kilowatt hour above departments
minimum) Indirect are costs shared by
building rent,
Departme several departments
building
ntal that benefit from its
insurance
Charge incurrence

e. Cost in Relation to an Accounting period

Facility or factory;
including an upgrade or
is intended expansion.
to benefit
Example of Semi-Variable Cost: Capital
future Vehicles, such as
Coryentee Electric Cooperative charge its consumers a Expenditu
periods and trucks used for the
flat rate of P300 plus P1.5 per kilowatt hour above re
is reported delivery of products.
minimum. Assume that customer A consumes 100 as an asset
kwh, customer B consume 150 kwh, customer C Manufacturing
consumes 200 kwh, customer D consumes 250kwh and equipment
customer E consumes 300 kwh. Compute for total cost benefits the
incurred by each of the customers. current
Revenue Examples: Utilities,
period and
Expenditu Rent, Business travel,
Custom Actual Fixed Variab Total is reported
re and Property Taxes
er Consumpt Cost le Cost Cost as an
ion (minimu (above (A + expense.
(kwh x m) minim B)
  Sunk Cost - cost incurred that will not affect a
future decision.
 Differential Cost – costs that differs between
alternatives.
 Out-Of-Pocket Cost – a cost that required
cash outlay as a result of their incurrence.
 Controllable Cost - it is considered to be a
controllable cost at a particular level of
management.
 Non controllable Cost - if that manager is not
Other Cost Terminologies responsible for incurring a cost it is a non
 Standard Cost – are estimates of the actual controllable cost with respect to that manager.
costs in a company's production process
 Opportunity Cost – benefits foregone in
choosing one action over another.
 III. MERCHANDISING & MANUFACTURING OPERATIONS

Merchandising Operation
 purchase goods in finished or almost finished condition
Cost of Goods Sold for Merchandising Company
Cash

Purchases Formula:
Beginning Merchandise Inventory
Plus: xx
Merchandising Add: Net Purchases xx
Inventory Beg. Freight-in xx
Cost of Goods Available for sale
xx
Merchandisi Less: Ending Merchandise inventory
Cost of
ng Cost of Goods xx
Goods
Inventory Available for Sale Cost of Goods sold xx
Sold
Ending

Example:
Celestine Company sells ball pens to office supply stores and other retailers around the world. On the date of April 1,
the company’s inventory was 109,000. During the month, the company purchased 875,000 worth of ball pens. A
physical count of the inventory on April 30 revealed that there was 72,000 worth of pencils remaining. Compute the
cost of goods sold for the year.

Beginning merchandise inventory 109,000

Add: Net Purchases 875,000
Cost of Goods Available for Sale 984,000
Less: Ending Merchandise Inventory 72,000
Cost of Goods Sold 912,000

1.3. Merchandising vs manufacturing Operation

Manufacturing Operation - engage in activities that involve the physical transformation of inputs into finished
goods or products

Raw materials warehouse > factory > finished goods warehouse

COGS in a Manufacturing Operation

Beginning Materials Inventory XX

Add: Purchases XX
Less: Purchase Returns XX
Less: Purchase Discounts XX
Add: Freight-in XX
Total Raw Materials Available for Use XX
Less: Raw Materials Inventory, ending XX
Raw Materials, used XX
Less: Indirect Materials XX
Direct Materials Used XX
Add: Direct Labor XX
Add: Manufacturing Overhead XX
Total Manufacturing Cost XX
Add: Work in Process Inventory, beginning XX
Total Goods Put into Process XX
Less: Work in Process inventory, ending XX
Cost of Goods Manufactured XX
Add: Finished Goods Inventory, beginning XX
Total Goods Available for Sale XX
Less: Finished Goods Inventory, ending XX
Cost of Goods Sold XX
COGS in manufacturing operation
Problem 1:
Adeleigh Manufacturing Company has the following beginning balances for the month of April 2020:
Raw materials Inventory 21,000
Work-in-process inventory 89,000
Finished Goods inventory 189,000

Using actual costing system and the perpetual inventory system , for the transactions for April 2020, complete the
following:
a. Journal entries to record all transactions
b. Ledger postings to relevant T-accounts
c. Statements of cost of goods manufactured and sold  

a. Purchased 5,000 unis of raw materials at P35.00 per unit on account.

Raw materials inventory 175,000

Accounts Payable 175,000

b. Returned 100 units raw materials to the supplier due to inferior quality.

Accounts payable 3,500

Raw materials inventory 3,500

c. Issued all beginning balance of raw materials and 1,000 units of newly purchased materials to
production.

Work in process inventory 56,000

Raw materials Inventory 56,000

d. 50 units of excess materials were returned to storage.

Raw materials inventory 1,750

Work in process inventory 1,750

e. Paid salaries to factory employees, maintenance staff, and supervisors, payroll details of which are:
Gross Pay 322,000
Less:
SSS 16,000
PhilHealth 4,830
Pag-ibig 2,000
Withholding taxes 1,200
Net Pay 297,970

Factor Salaries and Wages 322,000

SSS contributions payable 16,000
PHIC contribution payable 4,830
HDMF contributions payable 2,000
Withholding tax payable 1,200
Cash 297,970

f. Applied factory payroll to production where 70% are direct laborers and 30% are maintenance staff
and supervisors.

Work in process inventory 225,400

Manufacturing overhead 96,600
Factory Salaries and wages 322,000

g. Paid P6,000 for maintenance of factory machinery.

Manufacturing overhead 6,000

Cash 6,000
h. Incurred P4000 for maintenance of office equipment on account

Repairs and maintenance expenses 4,000

Accounts Payable 4,000

i. Paid factory utilities of P89,000 and office utilities of P72,000

Manufacturing overhead 89,000

Utilities expense 72,000
Cash 161,000
j. Recognized adjustments for the following:
Expired insurance of factory assets 2,000
Expired insurance of office space 2,500
Depreciation of factory machinery 6,000
Depreciation of office equipment 4,500

Manufacturing overhead 8,000

Insurance Expense 2,500
Depreciation Expense-office equipment 4,500
Prepaid insurance-factory assets 2,000
Prepaid insurance – office space 2,500
Accumulated depreciation – factory machinery 6,000
Accumulated depreciation – office equipment 4,500

k. Actual overhead applied to production

Indirect Labor 96,600
Maintenance of factory machinery 6,000
Factory Utilities 89,000
Insurance of factory assets 2,000
Depreciation of factory machinery 6,000
Total Overhead 199,600

Work-in-process Inventory 199,600

Manufacturing Overhead 199,600

l. All beginning work-in-process and 50% of current production is completed.

Work-in-process, beginning 89,000
Current production charged to WIP account:
Direct materials 54,250
Direct labor 225,400
Manufacturing overhead 199,600
479,250
Multiply by 50% 239,625
Cost of completed units for the month 328,625

Finished Goods Inventory 328,625

Work-in-Process Inventory 328,625

m. Sold all beginning finished goods inventory and 40% of recently completed units at 50% mark-up
based on costs on account.

Accounts Receivable 480,675

Sales Revenue 480,675

Cost of goods sold 320,450

Finished goods inventory 320,450

n. Paid marketing and advertising cost of ₱ 12,000 to promote the firm’s products.

Marketing expense 12,000

Cash 12,000
 IV. METHODS OF SEPARATING MIXED COST

Merchandising Operation
 purchase goods in finished or almost finished condition