PHILIPPINE REVIEW INSTITUTE FOR ACCOUNTANCY (PRIA)

ADVANCED FINANCIAL ACCOUNTING AND REPORTING (AFAR)

14.0 Cost Accounting

14.1 System of Cost Accumulation or Costing System
14.1.1 Comparison between Actual Costing, Normal Costing and Standard Costing
14.2 Job-order costing system
14.2.1 Cost accumulation procedures – materials, labor and overhead
14.2.2 Journal entries
14.2.3 Preparation of statement of goods manufactured and sold
14.2.4. Accounting for scrap, waste, spoilage and rework
14.4 Backflush costing system (JIT system)
14.4.1 Cost accumulation procedures – materials, labor and overhead
14.4.2 Journal entries
14.6 Activity-based-costing system (ABC costing)
14.6.1 Allocation of costs: Traditional Costing versus ABC Costing
14.6.2 Determination of Total Product Costs: Traditional Costing versus ABC Costing
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
REVIEW OF LEARNING OBJECTIVES

1. Describe and illustrate the following costs: direct and indirect, direct materials, direct
labor, factory overhead, and product and period costs.
Manufacturing companies use machinery and labor to convert materials into a finished
product. A direct cost can be traced to a finished product, while an indirect cost cannot. The
cost of a finished product is made up of three components: (a) the cost of materials that are
directly identifiable with the final product, (b) the wages of employees that directly convert
materials to a finished product, and (c) costs incurred in the manufacturing process other
than direct materials and direct labor. These three manufacturing costs can be categorized
into prime costs (direct materials and direct labor) or conversion costs (direct labor and
factory overhead). Product costs consists of the elements of manufacturing cost – direct
materials, direct labor, and factory overhead – while period costs consist of selling and
administrative expenses.

2. Describe accounting systems used by manufacturing businesses.

A cost accounting system accumulates product costs. Management uses cost accounting
systems to determine the product cost, establish product prices, control operations, and
develop financial statements. The two primary cost accounting systems are job order and
process cost systems. Job order cost systems accumulate costs for each quantity of product
that passes through the factory. Process cost systems accumulate costs for each department
or process within the factory.

3. Describe and prepare summary journal entries for a job order cost accounting system.
A job order cost system accumulates costs for each quantity of product, or “job,” that passes
through the factory. Direct materials, direct labor, and factory overhead are accumulated on
the job cost sheet, which is the subsidiary cost ledger for each job. Direct materials and direct
labor are assigned to individual jobs based on the quantity used. Factory overhead costs are
assigned to each job based on an activity base that reflects the use of factory overhead costs.

Work in Process Inventory is the controlling account for the cost ledger. As a job is finished,
its costs are transferred to the finished goods ledger, for which Finished Goods Inventory is
the controlling account. When goods are sold, the cost is transferred from finished goods
inventory to Cost of Goods Sold.

4. Describe and illustrate the statement of cost of goods sold, statement of comprehensive
income, and statement of financial position for a manufacturing business.
The financial statements of manufacturing companies differ from those of merchandising
companies. Manufacturing company statement of financial position reports three types of
inventory: raw materials, work in process, and finished goods. The statement of
comprehensive income of manufacturing company reports cost of goods sold, which is the
total manufacturing cost of goods sold. The statement of comprehensive income is
supported by the schedule of cost of goods manufactured, which provides the details of the
cost of goods manufactured during the period.
5. Use job order cost information for decision making.
Job order cost systems can be used to evaluate cost performance. Unit costs can be compared
over time to determine if product costs are staying within expected ranges. Job order cost
information can support pricing and cost analysis. Managers can use job cost information to
identify unusual trends and areas for cost improvement.

AFAR – Cost Accounting – Job order, Backflush, and ABC Costing Page 1 of 7
 PHILIPPINE REVIEW INSTITUTE FOR ACCOUNTANCY (PRIA)
ADVANCED FINANCIAL ACCOUNTING AND REPORTING (AFAR)

6. Accounting for scrap, waste, spoilage and rework.

Most companies today are justifiably concerned about product quality. To a great extent the
current concern is the result of increased competition, particularly competition from abroad.
Many manufacturers, recognizing the need to improve efficiency and reduce costs, have
changed the emphasis of their businesses to continuous quality improvement and those that
succeed are becoming world-class manufacturers. Production losses in a job order cost
system include the cost of materials scrap, spoiled goods (spoilage), and reworking defective
goods. For the most part, these losses result from a lack of quality and should be eliminated
if possible. One way to call attention to the need for reducing these types of quality failures
is to determine their costs and then report these costs to top management. Large costs signal
an opportunity to improve quality substantially, which should be interpreted by management
as an opportunity to improve profits.

7. Backflush costing system ( Just-in-Time system).

Backflush costing is a streamlined cost accounting method that speeds up, simplifies, and
minimizes accounting effort in an environment that minimizes inventory balances, requires
few allocations, uses standard costs, and has minimal variances from standard. During the
period, this costing method records purchases of raw material and accumulates actual
conversion costs. Then, at a predetermined trigger point such as (a) at completion of
production, or (b) on the sale of goods, an entry is made to allocate the total costs incurred
to Cost of Goods Sold and to Finished Goods Inventory using standard production costs. The
four alternatives to the entries are: First, if production time were extremely short,
completion of the finished goods is the trigger point. Second, if goods were shipped
immediately to customers on completion, sale of the product is the trigger point. The third
alternative reflects the ultimate JIT system, sale of the product is the trigger point. A fourth
alternative charges all costs to the Cost of Goods Sold account, with a subsequent backflush
of costs to the Raw and In Process Inventory and the Finished Goods Inventory accounts at
the end of the period, sale of the product is the trigger point.

Contrast just-in-time processing with conventional manufacturing practices.

The just-in-time processing philosophy focuses on reducing time, cost, and poor quality
within the process. This is accomplished by combining process functions into work centers,
assigning overhead services directly to the cells, involving the employees in process
improvement efforts, eliminating wasteful activities, and reducing the amount of work in
process inventory required to fulfill production targets. It complements the other materials
planning and control tools, such as EOQ and safety stock calculations. Implementation of the
just-in-time philosophy can cause significant cost reductions and productivity improvements.
But, even within a single company, all inventory situations do not necessarily have to be on a
just-in-time system. The costs and benefits of any inventory control system must be
evaluated before management should consider installing the system. The use of JIT,
however, does allow workers as well as managers to concentrate on providing quality service
to customers.

8. Describe Activity-Based-Costing and why a number of companies are using this product
costing approach.
Activity-based costing is a method of accumulating and allocating factory overhead costs to
products, using many overhead rates. Each rate is related to separate factory activities, such
as inspecting, moving, and machining. Activity-based costing may be useful in making
product pricing decisions where manufacturing operations involve large amounts of factory
overhead. In such cases, traditional overhead allocation using bases such as direct labor cost
or direct labor hours may yield inaccurate cost allocations. This, in turn, may result in
distorted product costs and product prices. By providing more accurate product cost
allocations, activity-based costing aids in setting product prices that will cover costs and
expenses.

Multiple Choice Problems

Accounting for Elements of Cost (Actual Cost)

1. Aerosmith Manufacturing Company produces liquefied oxygen and stores them in tanks.
For the year, the following information was made available:
 No. of oxygen tanks produced, 10,000
 Materials used, P164,000 of which P156,000 represents direct materials
 Total factory payroll, P143,000 of which P119,000 is direct labor
 Other factory overhead costs, P100,000
 Operating expenses, P135,400

AFAR – Cost Accounting – Job order, Backflush, and ABC Costing Page 2 of 7
 PHILIPPINE REVIEW INSTITUTE FOR ACCOUNTANCY (PRIA)
ADVANCED FINANCIAL ACCOUNTING AND REPORTING (AFAR)

Compute the prime costs

a. P283.000 b. P251,000 c. P275,000 d. P299,000

2. Refer to No. 1. Cost of goods manufactured per unit is

a. P40.70 b. P37.50 c. P54.24 d. P51.04

3. Nicole Company has provided you with the following pertinent information for the
calendar year: Raw material purchases P135,000; Beginning Raw materials inventory
P100,000; Ending Raw materials inventory P175,000; Factory overhead (including
P20,000 of indirect materials and P85,000 of indirect labor) P277,500; Total
manufacturing costs P960,000.
Direct labor cost is
a. P642,500 b. P577,500 c. P402,500 d. P660,000

4. Pear Company’s material purchases during the period amounted to P25,590. Put into
production were direct and indirect materials worth P18,500 and P7,090, respectively.
Total factory payroll is P74,000 of which P50,000 represents direct labor. Other factory
overhead costs amounted to P32,000. Pear Company applies the actual factory overhead
to work in process. Sales and cost of goods sold are P130,000 and P120,000, respectively.
Cost of goods manufactured is P128,000.
By what amount did Pear Company’s ending work in process inventory exceeds its
beginning work in process inventory?
a. P10,590 b. P3,590 c. P5,390 d. P1,590

5. The following information is taken from the records of the PRC Manufacturing Company
for the first quarter of the year:
January 1 March 31
Raw materials P 32,200 P 34,100
Work in process 38,500 33,050
Finished goods 44,600 48,800
Direct labor P 254,000
Factory overhead 236,900
Cost of goods sold 678,300

The cost of goods manufactured during the first quarter was

a. P676, 100 b. P243,000 c. P682,500 d. P713,350

6. Refer to No. 5. The cost of raw materials used was

a. P263,150 b. P186,150 c. P224,650 d. P286,150

7. The following cost data pertain to Matatag Company for March:

March 1 March 31
Raw materials P 40,000 P 50,000
Work in process 25,000 35,000
Finished goods 60,000 70,000
Direct labor P 120,000
Factory overhead 108,000
Cost of goods sold 378,000
The amount raw materials purchased for the month was
a. P50,000 b. P170,000 c. P180,000 d. P220,000

8. The following were taken from the books of Marvin Company. The company uses the FIFO
method for costing inventories.
January 1 March 31
Raw materials P 268,000 P 167,000
Work in process 0 0
Finished goods 43,000 ?
(100 units) (200 units)
Raw materials purchased P 1,946,700
Direct labor 2,125,800
Factory overhead 764,000
Sales 12,400 units @ P535
The number of units manufactured is
a. 11,900 b. 12,000 c. 12,500 d. 15,200

AFAR – Cost Accounting – Job order, Backflush, and ABC Costing Page 3 of 7
 PHILIPPINE REVIEW INSTITUTE FOR ACCOUNTANCY (PRIA)
ADVANCED FINANCIAL ACCOUNTING AND REPORTING (AFAR)

9. Refer to No. 8. The cost of goods manufactured per unit is

a. P 300 b. P 350 c. P 395 d. P 420

10. Refer to No. 8. The cost of goods sold is

a. P4,091,500 b. P4,109,500 c. P4,901,500 d. P4,910,500

Job Order Costing (Normal - Traditional vs. Activity-Based)

11. The following data were taken from the records of Charming Company:
September 1 September 30
Raw materials P ? P 50,000
Work in process 80,000 95,000
Finished goods 60,000 78,000
Raw materials purchased P 46,000
Factory overhead, 75% of Direct labor 63,000
Operating expenses, 12.5% of Sales 25,000
Net income (ignore income taxes) 25,000
The inventory of raw materials at September 1 was
a. P30,000 b. P40,000 c. P46,000 d. P50,000

12. Abner Corporation has manufactured 100,000 units of compound X in the year at the
following costs: Labor P242,500 of which 93% represents direct labor; Materials P182,500
of which 90% represents direct materials; Opening work in process P88,125; Closing work
in process P67,500; Factory overhead is 125% of direct labor cost and includes indirect
materials and indirect labor.
The cost of goods manufactured is
a. P671,150 b. P692,306 c. P651,036 d. P629,900

13. South Tools Corp. manufactures specialized precision tools for the electronics industry.
For the month of April, it started work on two orders, East and West. The total material
costs for both orders were estimated at P120,000 of which 60% applies to East and 40%
to West. Direct labor hours amounted to 700 for East and 400 for West. The labor rate
amounted to P18 per hour. Variable overhead varies at the rate of P10 per direct labor
hour. By the end of April, 75% of the acquired materials were issued to production
amounting to P90,000. Also, the two orders were all 50% completed with respect to

conversion costs. Labor hours for the month were charged at 360 to East and 180 to West.
Variable overhead is equal to the hourly rate given. The total cost for East order for the
month is
a. P64,080 b. P45,800 c. P52,350 d. P67,600

14. Bedovin Company manufactures office tables and chairs using the job order cost systems.
The data given below were taken from the records as of April 30, the first month of
operations.
Job No. Materials Direct Labor Hours Direct Labor Cost
121 P 2,160.00 650 P 800.00
122 4,575.00 1,850 3,625.00
123 5,637.50 4,100 7,162.50
124 1,612.50 750 1,400.00
125 3,250.00 1,600 3,050.00
126 1,375.00 490 825.00

In April, Job Nos. 121, 122, 124, and 125 were completed. Job No. 124and 125 were sold
for P6,200 and P15,897.50, respectively. Overhead is applied to the jobs at the rate of
P1.50 per direct labor hour. Actual factory overhead for April amounted to P15,175.
The total cost of goods manufactured for the month was
a. P27,747.50 b. P28,782.50 c. P49,632.50 d. P50,647.50

15. Refer to No. 14. The gross profit for the month was
a. P2,690 b. P6,290 c. P8,145 d. P9,260

16. The Work in process account of the Malinta Company which uses a job order cost system
follows: Beginning inventory P25,000; Direct materials used P50,000; Direct labor
P40,000; Factory overhead applied P30,000; Cost of goods manufactured P125,450.
Overhead is applied to production at a predetermined rate based on direct labor cost. The
work in process at the end represents the cost of Job No. 456, which has been charged

AFAR – Cost Accounting – Job order, Backflush, and ABC Costing Page 4 of 7
 PHILIPPINE REVIEW INSTITUTE FOR ACCOUNTANCY (PRIA)
ADVANCED FINANCIAL ACCOUNTING AND REPORTING (AFAR)

with direct labor cost of P3,000 and Job No. 789, which has been charged with applied
overhead of P2,400.
The cost of direct materials charged to Job No. 456 and 789 amounted to
a. P8,700 b. P7,600 c. P4,500 d. P4,200

17. The factory ledger of the WTS Manufacturing Co. contains the following account
Work in Process
Materials 40,000 Manufactured 120,000
Labor 100,000
Overhead 80,000
The amount of materials charged to the uncompleted job was P28,000. The amounts of
labor and overhead charges for the uncompleted job
a. P40,000 and P32,000 c. P72,000 and P40,000
b. P32,000 and P40,000 d. P40,000 and P72,000

18. Hamilton Company uses a job order costing. Factory overhead is applied to production at
a budgeted rate of 150% of direct labor costs. Any overapplied or underapplied factory
overhead is closed to the cost of goods sold account at the end of the month. Additional
information is available as follows: Job 101 was the only job in process at February 1 with
accumulated costs as follows: Direct materials P4,000; Direct labor P2,000, and Factory
overhead applied P3,000. Jobs 102, 103, and 104 were started during February. Direct
materials requisitions for February totaled P26,000. Direct labor costs of P20,000 were
incurred for February. Actual factory overhead was P32,000 for February. The only job
still in process at the end of February was Job 104, with costs of P2,800 direct materials
and P1,800 for direct labor.
The cost of goods manufactured for February was
a. P78,000 b. P77,700 c. P79,700 d. P85,000

19. Candice Company uses activity-based costing to determine unit product costs for External
reports. The company has two products. Candy A and Candy B. The annual production
sales of Candy A are 10,000 units and of Candy B are 4,000 units. There are three overhead
activity centers with estimated overhead costs and expected activity as follows:
Activity Estimated Expected Activity
Center Overhead Cost Candy A Candy B
Activity 1 P 25,000 150 100
Activity 2 65,000 800 200
Activity 3 90,000 1,000 2.000
The overhead cost per unit of Candy A under activity-based costing is
a. P6.00 b. P3.00 c. P1.50 d. P9.70

20. Mayflower Company uses Activity-Based Costing in the manufacture of two models of
furniture. Below are the Activity-Based data together with the amounts of cost driver per
job:
Activity Budgeted Annual Amount of Cost Driver per Job
Driver Overhead Activity De Luxe Standard
Direct labor P9,600,00 600,000 1,200 hours 300 hours
Machine set ups 0 10,000 2 set ups 24 set ups
Number of parts 2,400,000 900,000 800 parts 1,600 parts
1,800,000

Actual data for the year ended December 31:

De Luxe Standard
Units produced 400 60
Direct Materials P148,000 P140,800
Direct labor @ P40 per hour 48,000 12,000
The manufacturing cost per unit of De Luxe and Standard model is
a. P196,000 and P152,800 c. P490.00 and P2,547.00
b. P217,280 and P166,560 d. P543.20 and P2,776.00

AFAR – Cost Accounting – Job order, Backflush, and ABC Costing Page 5 of 7
 PHILIPPINE REVIEW INSTITUTE FOR ACCOUNTANCY (PRIA)
ADVANCED FINANCIAL ACCOUNTING AND REPORTING (AFAR)

Job Order Costing (Accounting for scrap, waste, spoilage and rework)

21. MJ Company manufactures picture frames of all sizes and shapes and uses a job order
costing system. There is always some spoilage in each production run. The following costs
relate to the current run: Estimated overhead (exclusive of spoilage) P160,000; Spoilage
(estimated) P25,000; Sales value of spoiled frames P11,500; Labor hours 100,000 hours.
The actual cost of a spoiled picture frame is P7.00. During the year 170 frames are
considered spoiled. Each spoiled frame can be sold for P4. The spoilage is considered a
part of all jobs. Labor hours are used to determine the predetermined overhead rate.
What is the journal entry needed to record the spoilage?
a. Spoiled goods 680
Factory overhead control 510
Work in process inventory 1,190
b. Spoiled goods 680
Work in process inventory 680
c. Spoiled goods 1,190
Work in process inventory 1,190
d. Spoiled goods 680
Loss on spoiled goods 510
Work in process inventory 1,190

22. RTW Company, in producing Lot No. 647 which called for 2,500 dresses, Style No. 34,
incurred costs as follows: Materials, P240 per dress; Labor, P165 per dress; Factory
overhead, P135 per dress. When the lot was completed, inspection rejected 200 spoiled
dresses which were sold for P324 each. Assuming spoilage is normal what is the cost per
unit of good output?
a. P540 b. P324 c. P558.78 d. P586.96

23. Refer to No. 22. Assuming spoilage is abnormal, what is the cost per unit of good output?
a. P540 b. P324 c. P558.78 d. P586.96

24. The Products Company manufactures, among other items, a unique nutcracker. One
order from the Specialty Company for 1,000 nutcrackers showed the following costs per
unit: Materials P140; Labor P44; Factory overhead 125% of labor cost. Final inspection
revealed that 120 units were improperly machined. These units were broken down,
properly machined, and reassembled. Cost of correcting the defective nutcrackers
consists of P30 per unit labor plus overhead at the normal rate. Assuming the company’s
predetermined overhead rate includes allowance for normal rework costs, how much is
the cost per unit of good output?
a. P306.50 b. P239 c. P247.10 d. P230.90

25. Refer to No. 24. Assuming spoilage is abnormal, how much loss is to be reported in the
income statement?
a. P8,100 b. P28,680 c. P972 d. P36,780

Backflush Costing System (JIT System) Job Order Costing

26. Molly Memories is a company that makes dolls. The product’s standard production cost
is P130.50. The company has a long-term contract with its direct material supplier for raw
materials at P58.50 per unit. Beginning inventories for July are assumed to be zero.
Standard conversion cost per unit is P92. Transactions for the month follow: Purchases
P756,000; Conversion costs incurred P1,843,500; Units completed 20,000; Sales 19,800
units @ P225 each.

Required: Give all the entries to record the transactions for the month using the basic
entries and the four alternatives.

27. The Fat Manufacturing Company uses Raw and In Process (RIP) Inventory account and
expense all conversion costs to the Cost of Goods Sold account. At the end of each month,
all inventories are counted, their conversion costs components are estimated, and
inventory aaccount balances are adjusted accordingly. Raw material cost is backflushed
from RIP to Finished Goods Inventory. The following information is for the month of
August:
Beginning balance for RIP Inventory account including P4,500
of conversion costs ……………………………. P 43,500
Raw materials received on credit ………………………… 680,000

AFAR – Cost Accounting – Job order, Backflush, and ABC Costing Page 6 of 7
 PHILIPPINE REVIEW INSTITUTE FOR ACCOUNTANCY (PRIA)
ADVANCED FINANCIAL ACCOUNTING AND REPORTING (AFAR)

Ending RIP inventory per physical count, including P5,300 47,200

conversion cost estimate ……………………………….

The amount to be backflushed from RIP Inventory to Finished Goods Inventory at the end
of August would be
a. P680,000 b. P718,700 c. P676,800 d. P676,300

28. In backflush costing, if the conversion cost in the Raw and In Process Inventory was P500
on July 1 and P1,000 on July 31, the account to be credited at the end of July for the P500
increase would be
a. Raw and In Process Inventory c. Raw Materials Inventory
b. Finished Goods Inventory d. Cost of Goods Sold

29. In backflush costing, if the conversion cost in the Raw and In Process Inventory was P1,000
on March 1 and P400 on March 31, the account to be credited at the end for the P600
decrease would be
a. Raw and In Process Inventory c. Raw Materials Inventory
b. Finished Goods Inventory d. Cost of Goods Sold

30. Cheeta Company has materials cost in the June 1 Raw and In Process Inventory of P10,000,
materials received during June of P205,000, and materials cost in the June 30 Raw and In
Process Inventory of P12,500. The amount to be backflushed from Raw and In Process
nventory to Finished Goods Inventory at the end of June would be
a. P215,000 b. P202,500 c. P207,500 d. P217,500

End.

AFAR – Cost Accounting – Job order, Backflush, and ABC Costing Page 7 of 7