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Activity 1 - Introduction to Cost Accounting
Cost Accounting And Cost Management (Far Eastern University)
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INTRODUCTION TO COST ACCOUNTING
COST ACCOUNTING – This field of accounting informs management with the cost of rendering a particular service, buying and
selling a product, and producing a product.
COST CONCEPTS AND CLASSIFICATION
I. Cost classified as to relation to a product
A. Manufacturing cost
1. Direct Material
2. Direct Labor
3. Factory Overhead
B. Non – manufacturing cost
1. Marketing or selling expense
2. General or administrative expense
II. Cost classified as to variability
A. Variable cost
B. Fixed cost
C. Mixed cost (semi-variable cost)
Methods of separating Mixed Cost into fixed and variable components:
1. Scatter graph
2. High-low point
3. Method of lease square
III. Cost for planning, controlling, and analytical processes
A. Standard cost – Predetermined cost for direct materials, direct labor, and factory overhead. In essence, it is a budget for the production
of one unit of a product or service
B. Opportunity cost – the benefit given up when one alternative is chosen over another. This cost should be considered when evaluating
alternatives for decision-making
C. Differential cost – cost that is present under one alternative but is absent in whole or in part under another alternative.
- Incremental cost is an increase in cost from one alternative to another.
- Decremental cost is a decrease in cost from one alternative to another.
D. Relevant cost – a future costs that changes across alternatives
E. Sunk cost – cost for which an outlay has already been made and it cannot be changed by present or future decision
F. Controllable cost - a cost is considered to be a controllable cost at a particular level of management if that level has a power to
authorize the cost
PROBLEM 1 (Seatwork Midterm)
Classify the following items as direct or indirect materials
DM 1. Gold to make jewelry
IM 2. Sandpaper used in furniture making PROBLEM 3 (Seatwork Midterm)
DM 3. Paper used in printing books Classify each of the following costs of Bug Company in two ways:
DM 4. Milk to make ice cream (a) as variable (V) or fixed cost (F);
DM 5. Seats to be installed in a car (b) as inventoriable cost (I) or period cost (P).
DM 6. Leather to make gloves (a) V or F (b) I or P
IM 7. Tape measure used by tailor Example: Direct Labor V I
Salary of company controller F P
PROBLEM2 (Seatwork Midterm) Fire insurance on direct materials V I
Classify the following as manufacturing (M), selling (S), or Direct materials used V I
administrative (A). Factory rent F I
M 1. Factory supplies Sales commissions V P
S 2. Advertising Overtime premium of machine V I
M 3. Rent on factory building operators
S 4. Freight – out Straight line depreciation of F I
A 5. President’s salary factory equipment
A 6. Legal expenses Straight line depreciation of trucks F P
S 7. Samples used for delivery of sales
A 8. Bad debts to customers
S 9. Travel expenses of salesmen Salary of factory supervisor F I
WAGES V
PROBLEM 4 (Seatwork Midterm)
Johnson Corporation is preparing a flexible budget and desires to separate its electricity expense which is semi-variable and
fluctuates with total machine hours, into its fixed and variable components. Information for the first three months of 2013 is as
follows:
Machine hours Electricity Expense
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January 3, 500 P31, 500
February 2, 000 P20, 000
March 4, 000 P35, 600
Requirements: Using the least square method,
1. Compute the variable rate per machine hour
Variable Cost per hour= Change in Cost/Change in Machine hours
= (35 600-20 000) / (4 000-2000)
= P7.8 per machine hour
2. Compute the fixed portion of Johnson’s electricity expense
Fixed portion= 35 600 - (4 000 x 7.8)
= P4 400
3. Compute the total manufacturing cost if actual machine hours is 6, 000
Total manufacturing cost = (Machine hour x Variable Cost) + Fixed Portion
= (6 000 x 7.8) + 4 400
= P51 000
PROBLEM 5 (Seatwork Midterm)
Mighty Muffler Inc. operated an automobile service facility, which specializes in replacing mufflers on cars. The following table
shows the cost incurred during a month when 750 mufflers were replaced. Fill in the missing amount
Number of Muffler Replacements
500 750 1, 000
Total Fixed cost P60 000 P60, 000 P60 000
Total Variable cost 500X50= P25 000 P37, 500 1000X50= P50 000
Total cost P85 000 P97, 500 P110 000
Fixed cost per replacement 60K/500= P120 60K/500= P80 60K/500= P60
Variable cost per replacement P50 37500/750=P50 P50
Total cost per replacement 120+50=P170 80+50=P130 60+50=P110
PROBLEM 6 (Seatwork Midterm)
The financial statements of Mother Goose Company include these items:
Marketing Cost P160, 000
Direct Labor Cost P245, 000
Administrative Cost P145, 000
Direct Materials used P285, 000
Fixed Factory overhead costs P175, 000
Variable Factory Overhead Costs P155, 000
Compute:
1. Prime Cost
PC = DMU + DLC
= 285K + 245K
= P530 000
2. Conversion Cost
CC = DLC + FFOC + VFOC
= 245K + 175K + 155K
= P575 000
3. Total inventoriable/ product cost
TIC = DMU + DLC + FFOC + VFOC
= 285K + 245K + 175K +155K
= P860 000
4. Total period cost
TPC = MC + AC
= 160K +145K
= P305 000
PROBLEM 7 (Seatwork Midterm)
Valdez Motors Co. makes motorcycles. Management wants to estimate overhead costs to plan its operations. A recent trade
publication revealed that overhead costs tend to vary with machine hours. To check this, they collected the following data for the
past 12 months.
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Month no. Machine Hours Overhead costs
1 175 P4, 500
2 170 P4, 225
3 160 P4, 321
4 190 P5, 250
5 175 P4, 800
6 200 P5, 100
7 160 P4, 450
8 150 P4, 200
9 210 P5, 475
10 180 P4, 760
11 170 P4, 325
12 145 P3, 975
Required:
1. Using the high-low method to estimate the fixed and variable portion of overhead costs based on machine hours
VARIABLE COST = (high OC – low OC) / (high MH – low MH)
= (P5 475 – 3 975) / (210 – 145)
= P23.08 per machine hour
Overhead Cost High OC (5 475) Low OC (3 975),
Variable Cost
High MH (210hrs) x 23.08 4, 847
Low MH (145hrs) x 23.08 3 347
Fixed Cost = OC - VC 628 628
2. If the plant is planning to operate at a level of 450 machine hours next period, what would be the estimated overhead
cost?
= (Machine hours x per machine hour) + Fixed Cost
= (450 x 23.08) + 628
= P11 014
COST ACCOUNTING CYCLE
Merchandising Companies
beginning balance of inventory Purchase
Purchase raw
raw materials
materials
Purchase (add inventory) Used
Used materials
materials for
for production
production
Sold
Sold inventory
inventory (COGS)
(COGS)
Incurred
Incurred Labor
Labor and
and Overhead
Overhead for
for production
production
Computation of COGS:
Beg
Beg WIP
WIP ++ DM,
DM, DL,
DL, OH
OH
Beginning inventory
Plus: Net Purchases cost
cost of
of completed
completed units
units be
be transferred
transferred from
from WIP
WIP to
to FG
FG
Total goods available for sale
Less: Ending Inventory
Cost of Goods Sold cost
cost of
of sold
sold units
units be
be transferred
transferred from
from FG
FG to
to COGS
COGS
Manufacturing Company Computation of COGS:
Direct Materials Used
Add: Direct Labor used
Add: Factory Overhead
Total Manufacturing Cost
Add: WIP, Beginning
Cost of Goods put into process
Less: WIP, Ending
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Cost of goods manufactured Less: FG, Ending
Add: FG, Beginning Cost of Goods Sold
Total goods available for sale
QUIZ 1 MIDTERM
Provide solution and final answer.
PROBLEM 8 (Quiz 1 Midterm)
The Ram Manufacturing Company produced P100, 000 units during the year ended December 31, 2009. It incurred the following
costs for the year
Materials P75, 000 (10% is indirect materials) = 67 500
Labor P97, 000 (7% is indirect labor) = 90 210
Factory Overhead 125% of direct labor cost = 121 250
WIP – January 1 P25, 500
WIP – December 31 P27, 000
Required: How much is the Company’s cost of goods manufactured?
Direct Materials Used 67 500
Add: Direct Labor used 90 210
Add: Factory Overhead 112 762.50
Total Manufacturing Cost 270 472.50
Add: WIP, Beginning 25 500
Cost of Goods put into process 295 972.50
Less: WIP, Ending 27 000
Cost of goods manufactured 268,972.50
Problem 9 (Quiz 1 Midterm)
Donna Company submits the following data for May 2013
Direct labor cost P80, 000
Purchases P100, 000
Factory overhead Applied at 150% of direct labor cost
Inventories May 1 May 31
Finished goods P45, 000 P24, 000
Work in Process P25, 800 P18, 000
Materials P22, 000 P25, 000
Required: How much is the Company’s Cost of goods sold?
Direct Materials Used May 1 22 000
ADD: Purchases 100 000
Less Direct Materials Used May 31 25 000
DM, used 97,000
Add: Direct Labor used 80 000
Add: Factory Overhead (80k x 1.50) 120 000
Total Manufacturing Cost 297 000
Add: WIP, Beginning 25 800
Cost of Goods put into process 322 800
Less: WIP, Ending 18 000
Cost of goods manufactured 304 800
Add: FG, Beginning 45 000
Total goods available for sale 349 800
Less: FG, Ending 24 000
Cost of Goods Sold P325 800
Problem 10 (Quiz 1 Midterm)
Kyle Manufacturing Company produces various types of fertilizers. No beginning work in process or finished goods were on hand
on January 1, 2012. The following are data provided by the company:
30, 000 finished goods were on hand on December 31, 2012.
95, 000 units were sold during the year
No units in work in process inventories on December 31, 2012.
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Materials put into production amounts to P300, 000, 75% were direct materials DM = 225 000 IDM = 75 000
(No beginning or ending materials inventory)
Labor costs were P350, 000, 40% was for indirect labor DM = 210 000 IDM = 140 000
Factory overhead costs other than indirect material and indirect labor were the following:
Heat, light, water P120, 000
Depreciation P75, 000
Property Taxes P65, 000
Repairs and maintenance P40, 000
Selling Expenses were P80, 000 and general and administrative expenses were P50, 000.
Required: Compute the following:
1. Cost of goods manufactured 7. Net Income
Direct Materials Used Sales 3 325 000
P225 000 Less: COGS 722 000
Add: Direct Labor used Gross Profit 2 603 000
P210 000 Less: Selling Cost 80 000
Add: Tot. Factory Overhead Less: Administrative Cost 50 000
P515 000 NET INCOME 2 473 000
Indirect Material Used P75 000
Indirect Labor Used P140 000
Heat, light, water P120, 000
Depreciation P75, 000
Property Taxes P65, 000
Repairs and maintenance P40, 000
Cost of goods manufactured P950 000
2. Unit Cost (cost per unit of goods manufactured)
Unit Cost = COGS Manufactured / units
= 950 000 / 125 000
= 7.60 per unit of goods manufactured
3. Prime Cost
Prime Cost = Direct Material Used + Direct Labor Used
= 225 000 + 210 000
= P435 000
4. Conversion cost
CC= Direct Labor Used + Factory Overhead Cost
=210 000 + 515 000
= P725 000
5. Period cost
Period Cost = Selling Cost + Administrative Cost
= 80 000 + 50 000
= P130 000
6. Cost of Goods Sold
Direct Materials Used 225 000
Add: Direct Labor used 210 000
Add: Tot. Factory Overhead P515 000
Indirect Material Used P75 000
Indirect Labor Used P140 000
Heat, light, water P120, 000
Depreciation P75, 000
Property Taxes P65, 000
Repairs and maintenance P40, 000
Total Manufacturing Cost 950K/125K=7.6units
WIP. BEG 0 0
WIP, END 0 0
FG, BEG 0 0
Less: FG, Ending ? 30K
Cost of Goods Sold (950k x 7.6) P722k 950k
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