University of San Jose – Recoletos

School of Business and Management | Accountancy and Finance Department

Cost Accounting and Control

Module 5: Costs Systems and b. Each job is treated as a unique cost object.
c. Direct material, direct labor, and overhead costs are
Accumulation: Job Order Costing accumulated for each job.
d. The normal costing method of valuation is used since actual
Introduction direct material and direct labor costs are easy to identify
and are associated with a particular job.
A job-order costing system accumulates manufacturing costs by job. e. Overhead costs are not usually traceable to specific jobs
Such a system is used when separate jobs are identifiable, such as a and must be allocated to production.
furniture manufacturer, and is intended for products that are
manufactured within a department or cost center are heterogeneous ✨ The output of a given job can be a single unit or multiple similar or
or dissimilar, special or custom- made products. This system also dissimilar units.
works for products manufactured individually or in distinct lots or a. The total accumulated job cost is averaged over the number
batches. of units produced to determine a per unit cost if all the units
within the batch are similar.
A job order costing system provides a separate record for the b. No per unit cost can be determined if the output consists of
accumulated cost of each job through job order cost sheets. Unit dissimilar units for which individual cost information has not
costs in a job order system are calculated by dividing the total been accumulated.
manufacturing cost of the job by the number of units produced in the
job.
Keeping Track of Job Costs with Source Documents
The module covers the following major topics:
A. The overview of the cost valuation methods It is important to understand the different documents that are used in
B. The two basic cost accumulation systems a job order system. The document for collecting all costs that belong
C. Accounting for raw materials, labor and overhead to a job is the job order cost sheet, which identifies the job and
D. The manufacturing process and cost accumulation flow collects the materials, labor, and overhead costs for the job. It serves
E. Preparation of the Cost of Goods Manufactured as a subsidiary ledger to the work-in-process account. The total of the
F. Accounting for the overhead variance G. Accounting for the costs for all job-cost sheets must equal the total for the controlling
lost units work-in-process account.

When units produced equal units sold (no changes in inventory levels),
Cost Valuation Methods there will be no differences in the net income figures reported for
absorption costing, variable costing, and throughput costing. The cost
Absorption Costing – the traditional approach that includes direct of goods sold under absorption will be higher compared to the figure
materials, direct labor, variable overhead, and fixed overhead as under variable costing, but the period costs under absorption costing
product costs; period costs include selling and administrative costs, will be lower than the figure under variable costing. In sum, all costs
whether variable or fixed. reported for both costing approaches will be the same, thus, resulting
in the same net income figures. A similar case happens for variable
Throughput Costing – an alternative approach that only considers and throughput costing, since there are no changes in inventory
direct materials as product cost, leaving direct labor, variable levels. The following are the source documents:
overhead, fixed overhead, selling and administrative costs as period 1. Job-Order Cost Sheet
costs 2. Materials Requisitions
3. Job Time Tickets/ Time Sheets
Variable Costing – an alternative approach that considers direct 4. Other Source Documents
materials, direct labor, variable overhead as product costs; fixed
overhead and selling and administrative costs are considered as 🧠 Job Order Cost Sheet
period costs. A job-order cost sheet is prepared for every job; it used to accumulate
the manufacturing costs (direct materials, direct labor, and overhead)
A comparison of costs used for actual costing versus normal costing associated with a job.
follows:
Job-Order Cost Sheet

Actual Normal Standard Direct materials Actual cost

Production Costs
Costing Costing Costing
Direct labor Actual cost
Applied overhead Predetermined rate x activity used in job
Direct Materials Actual Actual Standard
Total cost Total cost of the job
Number of units Divide the number of units in the job
Direct Labor Actual Actual Standard
Unit cost Unit cost of the job
Factory Predetermined
Actual Rate Standard
Overhead The job-order cost sheets are the subsidiary ledgers to the Work-in-
Process account. The total costs contained in all job cost sheets for
uncompleted jobs should reconcile to the Work in Process Inventory
Cost Accumulation Systems control account balance in the general ledger. Direct material
information is gathered from the material requisition forms, while
1. A job order costing system is the product costing system used direct labor information is found on employee time sheets or employee
by entities that make (perform) relatively small quantities or labor tickets. Overhead is applied to production using predetermined
distinct batches of identifiable, unique products (services). overhead rates.

2. A process costing system is the product costing system used 🧠 Materials Requisition
by entities that produce large quantities of homogeneous The cost of materials is traced to each job using a materials requisition
goods. form. When materials are issued to production, the materials
requisition form identifies the job, the quantity and type of materials,
Job Order Costing System and the cost of materials. This document is the source document for
assigning materials costs to individual job orders. Warehouse
personnel are released from further responsibility for issued materials,
In a job order costing system, product costing is concerned with: (a)
and responsibility is assigned to the department that issued the
cost identification; (2) cost measurement; and (3) product cost
requisition. Material costs are released from Raw Materials
assignment.
Inventory—materials that are direct to the job are sent to Work in
Process Inventory, while indirect materials are assigned to the
✨ Costs are accumulated individually by job in a job order product
Manufacturing Overhead account. Therefore, the journal entry will be
costing system. as follows:
a. A job is a single unit or group of like units identifiable as
being produced to distinct customer specifications.
University of San Jose – Recoletos
School of Business and Management | Accountancy and Finance Department
Cost Accounting and Control
Finished Goods Inventory file and serve as a subsidiary ledger for that
Work in Process Inventory (for DM) xx account.
Manufacturing Overhead (for IM) xx
Raw Materials Inventory xx Finished Goods Inventory xx
Work in Process Inventory xx
Completed material requisition forms provide the ability to verify the To transfer completed goods to FG inventory
flow of materials from the warehouse to the department and job that
received the materials. They are usually prenumbered and come in The cost shown on the job order cost sheet is transferred to Cost of
multi-copy sets so that completed copies can be maintained in the Goods Sold when goods are sold.
warehouse and the department for each job.
Cost of Goods Sold xx
✨ A company’s inventory records should show the quantity of each Finished Goods Inventory xx
kind of material on hand and its cost. Fortunately, in the actual To transfer goods sold from FG to expense
practice, most manufacturing companies integrate their materials
accounting into their computerized systems for better control and Job cost sheets for sold jobs are kept in a company’s permanent files,
monitoring. providing management with a historical summary about total costs
and, if appropriate, the cost per finished unit for a given job.
🧠 Job Time Tickets / Timesheets

Job time tickets are the source documents used to assign labor costs
to jobs. When direct laborers work on a job, they fill out a time ticket
indicating the time spent on the job, along with their wage rate.
Knowledge of employee labor rates is required in transferring
employee time sheet information to the job order cost sheet. Time
sheet information is also used for payroll preparation; the journal entry
to record the information is:

Work in Process Inventory (for DM) xx

Manufacturing Overhead (for IM) xx
Salaries and Wages Payable xx
Product and Material Losses in Job Order Costing
If total actual labor costs differ significantly from the original estimate,
the manager responsible for labor cost control will have to explain the The production processes may result in losses of materials or partially
difference. The number of hours worked on a cost plus contract may completed products Evaporation, leakage, or oxidation is inherent in
also be audited by the buyer as with government contracts or other the manufacturing process; such reductions are called shrinkage.
buyers. In addition, time sheets provide information on overtime Defects are production process errors that cause a loss of units
hours. through rejection at inspection for failure to meet appropriate quality
standards or designated product specifications that can be
Accounting for Overhead Costs economically reworked and later sold. Spoilage is production process
errors that cause a loss of units through rejection at inspection for
Actual overhead costs are recorded in the Overhead Control account. failure to meet appropriate quality standards or designated product
Actual overhead costs include: specifications that cannot be economically reworked.
1. indirect materials
2. indirect labor, overtime premium, and idle time ✨ Normal loss is a loss of units that falls within a tolerance level that
3. invoices received from outside suppliers for utilities, rent, is expected during production. Normal losses are part of the cost of
repairs, property taxes, etc. the job, while abnormal losses are written off as a period cost.
4. internal transfers of costs, such as depreciation and the
expiration of prepaid insurance. ✨ Abnormal loss is a loss of units more than expected levels (normal
loss) during production. Normal losses are part of the cost of the job,
✨ Actual Overhead Costs are debited in the Overhead account while abnormal losses are written off as a period cost.
✨ Applied Overhead Costs are credited in the Overhead account
✨ Applied Overhead Costs are debited in the WIP account Generally anticipated losses on all jobs

🧠 Other Source Documents 🧠 If a normal loss is generally anticipated on all jobs, the
Job-order cost sheets for jobs that are complete but not yet sold predetermined overhead application rate should include an amount for
serve as subsidiary ledgers for Finished Goods inventory. Job-order all net cost of the loss, which is equal to the cost of defective or
cost sheets for unfinished jobs serve as subsidiary ledgers for Work in spoiled work less the estimated disposal value, if any of that work.
Process inventory.
🧠 This approach assumes that such losses are naturally inherent or
Accounting for Cost of Goods Sold unavoidable in the production of goods and products and the
estimated loss should be allocated to the goods produced.
If the overhead variance is immaterial, it is treated as an adjustment to
cost of goods sold at the end of the year. Specifically identified with a particular job
📍 Normal cost of goods sold is the amount of cost of goods sold
If defects or spoilages are not generally anticipated but are
before adjustment for an overhead variance.
occasionally experienced on specific jobs because of job related
characteristics, the estimated cost should not be included in setting a
📍 Adjusted cost of goods sold is normal cost of goods sold after
predetermined overhead application rate.
adjustment for an overhead variance.

Because the defects/spoilage cost attaches to the job, disposal value

Accounting for Non-Manufacturing Costs of such goods reduces the costs of the job that created those goods.
The cost of the lost units remains with the job that caused the
Selling and general administrative costs (nonmanufacturing costs) are defects/spoilage.
considered period costs and are not assigned to the product. Selling
and administrative expenses appear on the income statement. Disposal value of the defective work xx
Work in Process – Job # xx
To record disposal value of defective work incurred on Job #
Completion of Production

Job cost sheets for completed jobs are removed from the Work in
Process Inventory subsidiary ledger and are transferred to the
University of San Jose – Recoletos
School of Business and Management | Accountancy and Finance Department
Cost Accounting and Control

Abnormal Spoilage

The cost of abnormal losses should be written off as a period cost.

Abnormal losses should be separately identified and investigated to
prevent future recurrences.

In the following journal entry, the first debit represents the defective
inventory’s disposal value. The debit to Manufacturing Overhead is for
the net cost of normal spoilage. The debit to Loss from Abnormal
Spoilage is the net cost of spoilage that was unnecessary and
unanticipated in setting the predetermined application rate.

Disposal Value of Defective Work xx

Manufacturing Overhead xx
Loss from Abnormal Spoilage xx
Work in Process Inv – Job # xx
To record reassignment of cost of defective and spoiled
work on Job #
University of San Jose – Recoletos
School of Business and Management | Accountancy and Finance Department
Cost Accounting and Control
.

Discussion Problems

Problem 1

The Ikaw Ra Gang Manufacturing Company had the following inventories on October 1, 2021:

Finished Goods 75,000

WIP 55,500
Materials 66,000

The WIP account controls two jobs:

Job 401 Job 402

Materials 9,000 16,800
Labor 7,500 9,000
Factory Overhead 6,000 7,200
22,500 33,000

The following information pertains to October operations:

1. Materials purchased on account, P84,000.

2. Materials issued for production, P75,000. Of this amount, P9,000 was for indirect materials; the difference was distributed: P16,500 to Job
401; P21,000 to Job 402; and P28,500 to Job 403.
3. Materials returned to the warehouse from the factory, P2,400, of which P900 was for indirect materials, the balance from Job 403.
4. Materials returned to vendors, P3,000.
5. Payroll after deducting P9,075 for withholding taxes, P4,800 for SSS Premiums, P1,125 for Philhealth, and P3,600 for Pag-ibig, was P98,400.
The payroll due the employees was paid during the month.
6. The payroll was distributed as follows: P31,200 to Job 401; P37,500 to Job 402, P31,500 to Job 403 and the balance represents indirect
labor.
7. The share of the employer for payroll was recorded – P6,000 for SSS Premiums, P1,125 for Philhealth Contributions, and P3,600 for Pag-ibig
Funds.
8. 8. Factory overhead, other than any previously mentioned, amounted to P45,000. Included in this figure were P9,000 for depreciation of
factory building and equipment, and P 2,850 for expired insurance on the factory. The remaining overhead was unpaid at the end of October.
9. Factory overhead was applied to production at the rate of 80% of direct labor cost.
10. Jobs 401 and 402 were completed and transferred to the finished goods warehouse.
11. Job 401 was shipped and billed at a gross profit of 40% of the cost of goods sold.
12. Cash collections from accounts receivable during October were P105,000.
13. Variance, if any, was considered as immaterial.

Required:

1. Journal entries to record the above transactions.

2. Cost of goods sold statement.

Problem 2

LiveLoveLiloan Inc. charges factory overhead to production at a predetermined rate based on direct labor cost. The rate has remained the same for the
last two years. The following data are given on its production:

Job # 01 Job # 02 Job # 03 Job # 04 Total

WIP – Jan 1
Direct Materials 8,000 15,000 23,000
Direct Labor 3,200 6,500 9,700
Applied FO 1,920 3,900 5,820
Cost Added – Jan
Direct Materials 3,000 8,500 18,000 9,500 39,000
Direct Labor 1,200 3,150 7,500 2,700 14,550

Job Nos. 1, 2, and 3 were completed during the month. Job Nos. 1 and 3 were sold at 180% of cost. The balance of the factory overhead control
account is P 11,640. The variance is material and is allocated between cost of goods sold, finished goods, and work in process.

Required:

1. Predetermined factory overhead rate

2. The cost of the January 1 work in process inventory
3. The amount of factory overhead applied to production
4. The cost of goods completed and transferred to finished goods inventory 5. The cost of goods sold (normal)
5. The cost of goods sold (actual)
6. The cost of the finished goods inventory end.
7. The cost of the work in process inventory end.

MCQ

Problem 3

The following information pertains to IamMandaue Co., manufacturing process

March 1 March 31
Inventories
Direct Materials 36,000 30,000
WIP 18,000 12,000
FG 54,000 72,000
Additional Info for March:
DM Purchased 84,000
DL Payroll 60,000
DL per rate per hour 7.50
FO rate per DL hour 10.00
University of San Jose – Recoletos
School of Business and Management | Accountancy and Finance Department
Cost Accounting and Control

How much must be the prime cost, conversion cost, and cost of goods manufactured for the month?

Prime Cost Conversion Cost Cost of Good Mftd

a. 90,000 60,000 236,000
b. 150,000 140,000 296,000
c. 144,000 170,000 230,000
d. 150,000 140,000 236,000

Problem 4

FuntastykMedellin Company uses a job order costing system and the following information is available from the records. The company has 3 jobs in
process: 501, 502 and 503.

Raw materials used 120,000

Direct labor per hour 8.50
Overhead applied based on DL cost 120%

Direct material was requisitioned as follows for each job, respectively: 30%, 25%, and 25%, the balance of the requisitions were considered indirect.
Direct labor hours per job are 2,500, 3,100, and 4,200, respectively. Indirect labor is P33,000. Other actual overhead costs totaled P 36,000.

What is the total amount of actual factory overhead?

a. 36,000
b. 69,000
c. 93,000
d. 99,600

If Job 503 is completed and transferred, how much is the total cost transferred to Finished Goods Inventory?

a. 96,700
b. 99,020
c. 108,540
d. 139,540

Problem 5

ILoveCebu Company provides you with the following information

Jan 1, 2021 Jan 31, 2021

Materials ? 50,000
WIP 80,000 95,000
FG 60,000 78,000

January Transactions:

Purchases of materials, P 46,000

Factory overhead (75% of direct labor cost) P 63,000 Selling and adm. expenses (12.5% of sales, P 25,000 Factory overhead control, P 62,800
Net income for January, P 25,200
Indirect materials used, P 1,000

Compute for materials inventory, Jan. 1, cost of goods manufactured and cost of goods sold (normal) for the month of January, 2021.

Mat., Beg. COGM COGS

a. 40,000 168,200 150,200
b. 40,200 168,000 150,000
c. 40,800 167,800 149,800
d. 41,000 168,000 150,000