COST ACCOUNTING

AND
CONTROL
2019 Edition

NORMA D. DE LEON
BSC, CPA, MBA
CPA REVIEWER
Professional Review and Training Center, Inc. (PRTC) FACULTY MEMBER
La Consolacion College — Manila
San Reda College

ELLERYD. DELEON t f
BSC, CPA, MBA , 7
CPA REVIEWER j,<
Professional Review and Training Center, Inc. (PRTC) DEAN
ABE International School of Business
FACULTY MEMBER ’
ABE International School of Business
La Consolacion College - Manila
National University

GUILLERMO M. DE LEON, JR.

BSC,CPzVMBA
CPA REVIEWER
’ Professional Review and Training Center, Inc. (PRTC)
Formerly - CPA Review School of the Philippines (CPAR)
University of the East Center for Review & Studies (UECRSS)
FACULTY MEMBER
La Consolacion College — Manila
PHILIPPINE COPYRIGHT, 2019
 COST ACCOUNTING
AND
CONTROL

By

NORMA D. DE LEON
ELLERY D. DE LEON
GUILLERMO M. DE LEON, JR.

Any copy of this book not bearing the signature of the authors on this page
is unauthorized and shall be considered as coming from an illegal source.

All Rights Reserved

ISBN; 978-621-416-058-7

Published & Printed by:

GIC ENTERPRISES & CO., INC.

^National Book Development Board Registered
2017 C.M. Recto Avenue, Sampaloc
Manila, Philippines

PREFACE

This text is designed for a dual purpose. First, it is intended to introduce

undergraduate students to the financial aspects of Cost Accounting.
Second, it is organized to serve the needs of reviewees foi the CPA board
 examinations in Advanced Financial Accounting and Reporting (AFAR)

The discussions and illustration are focused not only on product -

costing — cost accumulation and cost allocation but also on the
managerial uses of cost accounting information

Major discussions are on such topics as job order costing, process

costing, joint-products, and standard costing, all of which adequately
illustrate concepts and procedures in cost accumulation and cost
allocation. Also now included are a discussion of Just=in=Time
technology, Activity Based Costing and Cost Volume Profit analysis

All three types of business organizations need cost accounting

information for decision-making fonctions. However, manufacturing
organizations offer a more intricate network of cost concepts and
procedures that it is chosen as basis for much of the discussions- To
serve the needs of CPA reviewees, materials often tested in the board
examinations are adapted. Some items are also taken fi'om other
published sources to bring added comprehensiveness with the problem-
solving exercises. It is made certain that concepts addressing these varied
accounting situations are found in the text to allow self-instructional
learning methods

It is hoped this little effort will serve the needs of interested users.

NDL, EDL & GDL

 TABLE OF CONTENTS

Chapter 1 ^TRODUCTION TO COST ACCOUNTING 1

Definiiion
Scope of Cost Accounting
Objective of Cost Accounting
Uses of Cost Accounting Data
Recent Developments in Cost Accounting

Chapter 2 ~ COSTS - CONCEPTS AND CLASSIFICATIONS 19

Definition
Classification of Costs
Cost Formulas

Chapters - COST ACCOUNTING CYCLE 51

Parts of Cost of Goods Sold Statement
Preparation of Cost of Goods Sold Statement
Preparation of Financial Statements

Chapter 4 - COST VOLUME PROFIT ANALYSIS 91

Definition
Computation of Break -even sales (units)
Computation of Break-even sales (pesos)
Margin of Safety
Degree of Operating Leverage

Chapter 5 - JOB ORDER COSTING 115

Job Cost Sheet
Source Documents for Job Order Costing
Accounting Procedures for Materials
Accounting Procedures for Labor
Accounting Procedures for Factory Overhead

Chapter 6 - JUST IN TIME AND BACKFLUSH ACCOUNTING 161

Definition
Characteristics of Just in Time
Operation of JIT System

Chapter 7 - ACCOUNTING FOR MATERIALS 173

Objectives of Materials Control
' Methods of Costing Materials
Accounting for Defective Units
Accounting for Spoiled Units
V

217
i Chapter 8 - ACCOUNTING FOR FACTORY OVERHEAD
Definition
f
Computation of Factory Overhead Rate
i Allocation of Service Department Cost
Activity-Based Costing
Computation of Factory Overhead Variance
) Chapter 9 ACCOUNTING FOR LABOR 257
1
1 Wage Plans
i ■■ Computation of Payroll and Net Pay
Computation of Employer’s Payroll Taxes
1 Accounting for Labor Cost
i
Chapter 9 PROCESS COSTING 273
Definition
Characteristics of Process Costing
Cost of Production Report
Product Flow
Comparison of Job Order and Process Costing

Chapter 10 316
AVERAGE AND FIFO COSTING
Differences between FIFO and Average
• Characteristics of FIFO costing method Characteristics
of Average costing method Computation of Equivalent
Production Computation of Unit Cost Computation of
Cost Allocation

Chapter
11 JOINT PRODUCTS AND BY-PRODUCTS 361
Joint Costs
Characteristics of Main Products
Characteristics of By-Products
Accounting Methods for Main Products Accounting
Methods for By-Products Replacement Cost Method r

Chapter 397
12 STANDARD COSTING
Definition
Nature of Standard Costs Purposes of Standard
Costs
Types of Variances Computation of Variances
Entries to record different variances
 Chapter 1

INTRODUCTION TO COST ACCOUNTING

LEARNING OBJECTIVES
Upon completion of this chapter, you should be able to:
• Distinguish between financial, managerial, and cost accounting
• Distinguish between merchandising and manufacturing operations
• Identify the uses of cost accounting data
• Distinguish between job order costing and process costing

The main and primary objective of accounting is to provide financial information about an
economic entity to different types of users. First we have internal users — managers for
planning, controlling and decision making. Then we have external users “ the government,
those who provide hinds and those who have various interests in the operations of theof
the entity.
Cost Accounting is an expanded phase of general or financial accounting which informs
management promptly with the cost of rendering a particular service, buying and selling a
product, and producing a product. It is the field of accounting that measures, records, and
reports information about costs.
All types of business entities - manufacturing, merchandising, and service businesses -
require information systems which provide the necessaiy financial data. Because of the
nature of the manufacturing process, the information systems of manufacturing entities
must be designed to accumulate detailed cost data relating to the production process. Thus,
it is common today for small, medium, and large manufacturing companies to have
structured, costs^counting systems. These systems should show what costs were incurred
and where and how these costs were utilized. Cost accounting today is recognized as being
essential to efficient cooperation of business and industry.
In order to, appreciate .the importance of an efficient cost system, it is necessary to
understand the nature of the manufacturing process. In many ways, the activities of a
manufacturing organization are similar to those of a merchandising business. Both are
concerned with purchasing, storing, and selling goods; both must have efficient
management and adequate sources of capital; both may employ hundreds or thousands of
workers. In the manufacturing process itself, we see the distinction
 2 Cost Accounting

between the two: merchandisers, such as SM buy items in marketable form to be resold
to their customers; manufacturers, such as PHILACOR, must make the goods tliey sell.
Once the merchandising organization has acquired and stored goods, it is ready to carry out
the marketing function. The purchase of materials by a manufacturer, however, is only the
beginning of a long, and sometimes complex, • chain of events that will eventually produce
a finished article ready for sale.
The manufacturing process involves the conversion of raw materials into finished .
goods through the ^plication of^ labor and the incurrence of various factory expen^. The
manufacturer must make a major investment in physical facilities, ‘such as factory
buildings and warehouses, and acquire many specialized types of machinery and
equipment. In order to carry out the manufacturing process, the manufacturer must
purchase appropriate quantities of raw materials, Supplies and parts, and build up a work
force to convert these resources into finished goods. Once the goods are completed and
are ready for sale, the manufacturer performs basically the same functions as the
merchandiser in storing and marketing the goods. The methods of accounting for sales,
cost of goods sold, and selling and administrative expenses are also similar to those of the
merchandising organization.
Although^pst accounting developed originally in manufacturing business to satisfy
management's need for product cost information, cost accounting information is useful
for all types of activities in all types of organizations. Cost accounting is essential not
only for profit-seeking entities but also for not-for-profit organizations such as
govemmental agencies, churches, and charities.

Comparison of Financial, Managerial, and Cost Accounting

• There are two major areas of accoun^ - (1) financial accounting and (2) managerial
accounting. ~

. Financial accounting is the use of accounting information for reporting to external

parties, including investors and creditors. Financial accounting_is_..primarily
conceraed with financial statements for.external use by those who supply funds to the
entity and other persons who may have vested interest in the financial operations of the
firm. The suppliers of funds include stockholders (the owners of the corporation)
partners (the owners of the partnership) and sole proprietors. Creditors, who provide
debts are also interested on the financial statements of the entity. The financial
statements are the output from an accounting system. The reports prepared under
financial accounting focus on the enterprise as a whole. Financial accounting is based
on historical transaction data. The information may be historical, quantitative,
monetary and verifiable. The data are historical and are supported by documents
(evidence). The information provided by financial accounting is ^ally of financial
statements, tax returns, and other formal reports • \ ikz t ^external users. The same
 Chapter 1 Introduction to Cost Accounting ■■ 3

information may also be used

mtemally to provide a basis for financial analysis by management.
in^cia accoun mg is required for many firms organized as corporations because of the
requirements of the SccurWes and Exchange Commission.

The Byreau_oXIntemaT Revenue also requires financial accounting information for

compliance with the country’s tax laws. Information based on accounting data is required
for all firms without regard to their size.

Managerial accounting focuses on the needs of parties within the organization, rather
than interested parties outside the organization. Managerial accounting information
commonly addresses individual or divisional concerns rather than those of the enterprise as
a whole. The information may be current or forecasted, quantitative or qualitative, monetaiy
or non-monetary and most of all
futuristic and some of the costs are not recorded on the accounting
books of the organization

Managerial accounting is not separate and distinct from financial accounting. Financial
accounting data are used in the managerial accounting system. Management decisions made
today will affect the financial statement of future periods? There is no requirement or
legislation that mandates the format or use of managerial accounting. Managerial
accounting methods are tools that are available for use to management.

Financial accounting attempts to present some degree of precision in reporting historical

information while at the same time emphasizing verifiability and freedom from bias in the
information, relevance to the general user and some degree of timeliness in reporting which
is not as critical in managerial accounting. The timing ) Jf information and its relevance to
the decision on hand has greater signific^ce to- Xe mtemal decision-maker. Management is
more concerned on the timeliness of the information so management cannot wait until
tomorrow for information that is required for today’s decision.

The measuring based in managerial accounting does not necessarily have to be restricted
to pesos. Various bases may be appropriate to report managerial information. Examples include: (1)
an economic measure such as pesos; (2) a I physical measure such as pounds, gallons, tons, or
units; and (3) a relationship measure such as ratios..
 4 Cost Accounting
Ost accounting is the intersection between financial and managerial accounting. Cost
accounting infonnation is needed and used by both financial and managerial accounting.
Cost accounting provides product cost information ^ external parties, such as
stockholders, creditors and various regulatory boards for credit and investment decisions.
Cost accounting provides product cost information also to internal parties such as
managers for planning and controlling,

Relationship of Financial, Management, and Cost Accounting

Merchandising versus Manufacturing Operations

Much of our accounting education has centered on the merchandising organization. Thus, it is
important here to explain the difference in accounting for manufacturing firms and merchandising
firms. Many types of businesses gather information on costs, but doing so is especially important
in manufacturing.

A merchandising company normally buys a product that is ready for resale when it is received.
Nothing needs to be done to the product to make it salable except possibly to prepare a special
package or display. As shown in Figure 1-1 total beginiiing nierchaiidise inventory plus purchases
is the basis for both the cost, of goods sold ahd'^ ending merchandise inventory (MI) balances.
Costs assigned to unsold items make up the ending inventory balance. The difference between the
cost of goods available for sale and the ending inventory amount is the cost of goods sold during
the period. The following example shows the computation.

Beginning merchandise inventory P 5,000 24,000 29,000

Plus: Total purchases 6,500 ..
Cost of goods available for sale
Less: Ending merchandise inventory Cost of goods sold
 Chapter 1 Introduction to Cost Accounting ■■ 5

Hst Page and Figure 1-1 show how easy it is to compute the
fllflhle sing company. The only expenditure occurs when
'nvpnfnX hoi r* ased. Any item unsold at year end make up the ending T f zn’ u goods sold is
computed by subtracting the ending
Inventory (Ml end) balance from the total of the beginning inventoiy balance and purchases dunng
the periodo

Figure 1-1. Cost of Goods sold for a Merchandising Company

Balance Sheet Transaction Income Statement