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PE4 Reviewer -Cost cycle to process costing, Summaries of Cost Management

Pamantasan ng Lungsod ng Maynila (PLM)Cost Management

Summary or highlights the important notes for cost accounting to process costing with minimal example problem.

Typology: Summaries

2022/2023

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PROFESSIONAL ELECTIVES 4
CHAPTER 1
COST ACCOUNTING CYCLE
- A process of recording, classifying and
summarization of transaction costs of a business
that is used in the preparation of financial
statements.
MANUFACTURING VS MERCHANDISING COMPANY
Merchandising
Cycle: Purchase of merchandise > Sale of merchandise >
Collection of cash from customers
Merchandise Inventory, beginning
Add: Net Purchases
Gross Purchases
Add: Freight In
Less: Purchase Returns & Allowances
Purchase Discounts
Total Cost of Goods Available for Sale
Less: Merchandise Inventory, end
Cost of Goods Sold
Merchandise Inventory that was not sold (ending
inventory) is shown as an asset in the Statement
of Financial Position
Merchandise Inventory that was sold (cost of
goods sold) is shown as an expense in the
Statement of Comprehensive Income
Manufacturing
Cycle: Purchase raw materials > converts them into
finished products > sells the products to customers
Three Inventory Accounts:
1. Raw Materials Inventory
a. Direct Materials – raw materials that
become an integral part and can be
physically traces to finished products.
(e.g. wood used in tables, leather used
in bags and shoes)
b. Indirect Materials – raw materials that
are too small and cannot be
conveniently traced to the finished
product or its costs is relatively
insignificant. (e.g. paint, nails, glue)
2. Work In Process Inventory – represents all
manufacturing cost incurred and assigned to
products that are partially completed.
The Manufacturing Costs:
a. Direct Materials – raw materials that
become an integral part of the finished
goods.
b. Direct Labor – cost paid to workers who
are directly involved in the production
(touched labor)
c. Factory Overhead – all costs of
manufacturing except direct materials
and direct labor
Taxes
Indirect materials & labor,
Insurance factory
Rent of factory
Utilities of the factory
Depreciation of factory
properties
Variance – difference between the actual
factory overhead and applied factory
overhead
If variance is significant – close
to COGS, FG & WIP (affects the
unit cost and allocated to
inventory accounts)
If variance is insignificant – close
to COGS (no effect on the unit
cost and treated as period cost)
Debit balance of FOH = under applied
FOH (actual > applied)
Credit balance of FOH = over applied
FOH (actual < applied)
3. Finished Goods Inventory – represents
completed products that has produced or ready
for sale.
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PROFESSIONAL ELECTIVES 4

CHAPTER 1

COST ACCOUNTING CYCLE

  • A process of recording, classifying and summarization of transaction costs of a business that is used in the preparation of financial statements. MANUFACTURING VS MERCHANDISING COMPANY Merchandising Cycle: Purchase of merchandise > Sale of merchandise > Collection of cash from customers Merchandise Inventory, beginning Add: Net Purchases Gross Purchases Add: Freight In Less: Purchase Returns & Allowances Purchase Discounts Total Cost of Goods Available for Sale Less: Merchandise Inventory, end Cost of Goods Sold  Merchandise Inventory that was not sold (ending inventory) is shown as an asset in the Statement of Financial Position  Merchandise Inventory that was sold (cost of goods sold) is shown as an expense in the Statement of Comprehensive Income Manufacturing Cycle: Purchase raw materials > converts them into finished products > sells the products to customers Three Inventory Accounts:
  1. Raw Materials Inventory a. Direct Materials – raw materials that become an integral part and can be physically traces to finished products. (e.g. wood used in tables, leather used in bags and shoes) b. Indirect Materials – raw materials that are too small and cannot be conveniently traced to the finished product or its costs is relatively insignificant. (e.g. paint, nails, glue)
  2. Work In Process Inventory – represents all manufacturing cost incurred and assigned to products that are partially completed. The Manufacturing Costs: a. Direct Materials – raw materials that become an integral part of the finished goods. b. Direct Labor – cost paid to workers who are directly involved in the production (touched labor) c. Factory Overhead – all costs of manufacturing except direct materials and direct labor T axes I ndirect materials & labor, Insurance factory R ent of factory U tilities of the factory D epreciation of factory properties  Variance – difference between the actual factory overhead and applied factory overhead  If variance is significant – close to COGS, FG & WIP (affects the unit cost and allocated to inventory accounts)  If variance is insignificant – close to COGS (no effect on the unit cost and treated as period cost)  Debit balance of FOH = under applied FOH (actual > applied)  Credit balance of FOH = over applied FOH (actual < applied)
  3. Finished Goods Inventory – represents completed products that has produced or ready for sale.

Computation of COGS in manufacturing business: RM Inventory Beg. xx Purchases xx Total RM Available for use xx RM, end (xx) Indirect RM used (xx) Direct Materials xx Direct Labor xx Factory Overhead xx Total Manufacturing Cost xx WIP, beg xx TGPIP xx WIP, end (xx) COGM xx Finished Goods, beg xx TGAS xx Finished Goods, end (xx) Cost of Goods Sold xx EXAMPLE PROBLEM: Inventory balances on Aug. 1, 2030, the start of the fiscal year, were as follows: (7/31 end) RM inventory 160, WIP inventory 100, FG inventory 240,

  1. Purchased RM on account for 850, RM inventory 850, Accounts Payable 850,
  2. Issued RM for use in production 900,000 (80% direct, 20% indirect) WIP inventory (direct) 720, FOH Control (indirect) 180, Accounts Payable 900,
  3. RM returned 10,000 (80% direct, 20% indirect) RM inventory 10, WIP inventory (direct)

FOH Control (indirect)

  1. Salaries and wages of factory employees : 1M direct labor, 450k indirect; Deductions are: SSS premium 25,000; Medicare contribution 10,000; HDMF 8,000 and WTAX 50,000. Payroll 1,450, SSS prem. payable 25, Medicare prem. Pay. 10, Pag ibig prem. payable

WTAX payable 50, Accrued payroll 1,357, Record labor charged to production WIP inventory (direct) 1,000, FOH Control (indirect) 450, Payroll 1,450,

  1. Selling and Admin salaries, 500k. Deductions are; SSS 12,000; Medicare 8,000; HDMF 5, and WTAX 22,000. Payroll 500, SSS prem. payable 12, Medicare prem. Pay. 8, Pag ibig prem. payable

WTAX payable 22, Accrued payroll 453, Record labor charged to production Selling & Admin Salaries

Payroll 500,

  1. Total salaries and wages paid 1,810,000 ( accrued payroll) Accrued payroll 1,810, Cash 1,810,
  2. Utility cost in factory 100k FOH Control 100, Utilities Payable 100,

Sched 2 Total Selling & Admin Selling & Admin Salaries 500, Advertising Expense 500, Insurance Expense 40, Depreciation Expense 20, Total 1,060, CHAPTER 9: PROCESS COSTING Process Costing  Mass production or continuous processing of homogeneous products  Cost is accumulated by department, operation or process.  Industries: petroleum, food production, mining, textile, tires, wires, cement, beers, utilities etc.  Every department has WIP account.  Cost of Production Report Similarities of Process and Job-Order Costing

  1. Recording product costs
  2. Classify product costs: DM, DL and FOH
  3. Allocate FOH
  4. Cost information for decision making
  5. Perpetual inventory system Product Flows
  6. Sequentially
  7. Parallel
  8. Selective Methods of Costing – only applicable if there is a beginning balance refer to cost of production report
  9. FIFO - complex
  10. Weighted Average – simple **COST OF PRODUCTION REPORT
  11. Quantity Schedule**  Physical Flow of Units  Equivalent Units of Production (EUP) EUP = units completed + (units in WIP end x stage of completion) 2. Cost to Account for (Cost Schedule) TOTAL COST = Beginning inventory cost + current month cost + costs received from preceding department 3. Cost Accounted for (Cost reconciliation/assignment) JOURNAL ENTRIES For transfer to department 1 to department 2 Work In Process – Department 2 xx Work In Process – Department 1 xx For production Work In Process – Department 1 xx Materials xx Quantity Schedule WIP beg xx started in process units xx total units to be accounted for xx FIFO actual units work done Materia ls EUP work done

CC

EUP

WIP

beg xx x% (au x wd) x% (au x wd) WIP finished and transferred xx 100% (au x wd) 100% (au x wd) WP end xx x% (au x wd) x% (au x wd) total units EUP xx xx xx Cost Schedule Cost incurred Unit Cost Mater ials / total units of materials EUP xx Labor /total units of CC EUP xx OH /total units of CC EUP xx

COMPUTATION FOR ALLOCATION COST

WIP beg finished and transferred Materials = (units of materials EUP beg x material unit cost) Labor = (units of CC EUP beg x labor unit cost) Overhead = (units of CC EUP beg x OH unit cost)  Started in Process finished and transferred Materials = (units of materials EUP finished & transferred x material unit cost) Labor = (units of CC EUP finished & transferred x labor unit cost) Overhead = (units of CC EUP finished & transferred x OH unit cost)  WIP end Materials = (units of materials EUP end x material unit cost) Labor = (units of CC EUP end x labor unit cost) Overhead = (units of CC EUP end x OH unit cost) CHAPTER 10: JUST IN TIME AND BACKFLUSH COSTING BACKFLUSH COSTING  Simplified cost accumulation method of accounting the cost to produce goods or services that have adopted just in time (JIT) production system. BACKFLUSH COSTING METHOD  Accounts the company’s inventories backward by calculating the cost of products after they were sold, finished or shipped to customers (the usual of accounting before and during the production process)  Delays the costing process until the production of goods or services is completed.  Standard costs – assign costs to units to record the transactions and then flush costs backward to determine the remaining balance.  Result is that the detailed tracking of costs is eliminated.  Difference between the actual cost and standard cost will be accounted as variance which will be charged to cost of goods sold account. COMPARISON OF TRADITIONAL COSTING AND BACKFLUSH COSTING Traditional Costing Backflush Costing Raw Materials and Work in Process Inventory Separate accounts Combines Raw Materials and Work in Process account into Raw and In Process Inventory (RIP Inventory) Direct Labor Major cost and separately accounted Direct labor is a minor cost item – no separate account. Temporary account – Conversion Cost Control to record the actual cost of direct labor and factory overhead. Difference between the actual conversion cost and the applied conversion cost is closed to Cost of Goods Sold account Application of Factory Overhead Applied to products as they are being produced No Work in Process account is maintained to accumulate the conversion costs. Conversion cost is applied when products are completed (Applied to Finished Goods or Cost of Goods Sold) JUST IN TIME COSTING SYSTEM  Companies purchase materials from suppliers, and it will arrive just in time to be used in the production.  Basics of JIT concept is that the company produces only what is needed, when it is needed and in the quantity that is needed. ADVANTAGES OF USING JIT

  1. Zeroes out the inventory or keeps the inventory as low as possible.
  2. Most of the accounting records are eliminated because it avoids the manual assignment of costs

Cost of Goods Sold Cost of Goods Sold xxx Finished Goods Inventory xxx Sales Accounts Receivable xxx Sales xxx Over / Under Applied Factory Overhead Over-applied Factory Overhead xxx Cost of Goods Sold xxx Cost of Goods Sold xxx Under-applied Factory Overhead xxx THREE TRIGGER POINTS Purchase of Raw Materials Raw and In Process Inventory xxx Account Payable / Cash xxx Raw Materials to Production No Entry Factory Overhead Incurred Conversion Cost Control xxx Accrued Payroll xxx Various Accounts xxx Factory Overhead charged to Production No Entry Completion of Goods Finished Goods xxx Raw and In Process Inventory xxx Conversion Cost Applied (UnitsUnit Price) xxx Cost of Goods Sold Cost of Goods Sold xxx Finished Goods xxx Sales Accounts Receivable xxx Sales xxx Over / Under Applied Factory Overhead Over-applied Factory Overhead xxx Cost of Goods Sold xxx Cost of Goods Sold xxx Under-applied Factory Overhead xxx TWO TRIGGER POINTS (PURCHASE AND SALE) Purchase of Raw Materials Raw and In Process Inventory xxx Account Payable / Cash xxx Raw Materials to Production No Entry Factory Overhead Incurred Conversion Cost Control xxx Accrued Payroll xxx Various Accounts xxx Factory Overhead charged to Production No Entry Completion of Goods No Entry Cost of Goods Sold Finished Goods xxx Cost of Goods Sold xxx Raw and In Process Inventory xxx Conversion Cost Applied (UnitsUnit Price) xxx Sales Accounts Receivable xxx Sales xxx Over / Under Applied Factory Overhead Over-applied Factory Overhead xxx Cost of Goods Sold xxx Cost of Goods Sold xxx Under-applied Factory Overhead xxx

TWO TRIGGER POINTS (COMPLETION AND SALE)

Purchase of Raw Materials No Entry Raw Materials to Production No Entry Factory Overhead Incurred Conversion Cost Control xxx Accrued Payroll xxx Various Accounts xxx Factory Overhead charged to Production No Entry Completion of Goods Raw and In Process Inventory xxx Finished Goods xxx Account Payable / Cash xxx Conversion Cost Applied (UnitsUnit Price) xxx Cost of Goods Sold Cost of Goods Sold xxx Finished Goods xxx Sales Accounts Receivable xxx Sales xxx Over / Under Applied Factory Overhead Over-applied Factory Overhead xxx Cost of Goods Sold xxx Cost of Goods Sold xxx Under-applied Factory Overhead xxx ONE TRIGGER POINT (SALE) Purchase of Raw Materials No Entry Raw Materials to Production No Entry Factory Overhead Incurred Conversion Cost Control xxx Accrued Payroll xxx Various Accounts xxx Factory Overhead charged to Production No Entry Completion of Goods No Entry Cost of Goods Sold Raw and In Process Inventory xxx Finished Goods xxx Cost of Goods Sold xxx Raw and In Process Inventory xxx Conversion Cost Applied (UnitsUnit Price) xxx Sales Accounts Receivable xxx Sales xxx Over / Under Applied Factory Overhead Over-applied Factory Overhead xxx Cost of Goods Sold xxx Cost of Goods Sold xxx Under-applied Factory Overhead xxx EXAMPLE PROBLEM: Tom Corporation uses backflush costing system to records its production transactions. During September 2030, Tom produced 450,000 units and sold 447, units. The standard cost for each product is: Direct Materials P Conversion Costs P The company had no beginning inventories. The following transactions took place during the month of September. a. Purchased P906,000 of raw materials. b. Incurred P1,820,000 of conversion costs. c. Applied P1,825,000 of conversion costs to Raw and In-Process Inventory. d. Finished 450,000 units. e. Sold 447,000 units for P 12 each.