COST ACCOUNTING

BASIC CONCEPTS AND JOB ORDER COST CYCLE

ACCOUNTING SYSTEM

 (1) Internal reporting to managers, for use in planning and controlling

operations
 (2) Internal reporting to managers, for use in formulating plans and
policies
 (3) External reporting to stockholders, government and other outside
parties.
COST ACCOUNTING
 Cost Accounting is a system that records, summarized, analyses, and
interprets the details of the costs of materials, labor and overhead
necessary to produce and sell and article.
 Cost accounting now refers to the gathering and providing of
information for decision needs of all sorts, ranging from the management
of recurring operations to the making of strategic decisions and the
formulation of major organization policies.
 Cost accounting then, refers to recording, classifying and reporting all
costs aspects of company performance during a particular period of
time.
PURPOSE OF COST ACCOUNTING

REACH DECISION AND

EVALUATE RESULTS
PLANNING

CONTROLLING

BUDGETS
 BUDGET is the overall financial plan for future
activities.
 The cost of making a product or providing a service is one of
the most critical factors in a firm’s ability to meet the
competition. With this information to support the decisions,
management can issue directives, perform follow-up activities,
and obtain the operating results that ensure prosperity and
growth for the enterprise.
MANUFACTURING COSTS

 (1) DIRECT MATERIALS

 (2) DIRECT LABOR
 (3) MANUFACTURING OVERHEAD
 (4) INDIRECT MATERIALS
 (5) INDIRECT LABOR
 OTHER MANUFACTURING OVERHEAD
Manufacturing is the process of converting materials into finished goods
by using labor and incurring other costs, generally called the manufacturing
overhead.
DIRECT MATERIALS

 These are also called the “raw materials” . Theses are materials used in the manufacturing process that become
a significant part of the finished goods. Example, the metal frame and the lumber used in manufacturing a chair and
the cloth and buttons used in manufacturing clothing are direct materials.
Beginning, Raw Materials XXX
Add: Purchases XXX
Total Goods Available for Use XXX
Less: Ending, Raw Materials XXX
Raw Materials Used XXX
DIRECT LABOR

 The employees who work directly with the raw materials in converting
them to finished goods represent the Direct Labor.
MANUFACTURING OVERHEAD

 All costs incurred in the factory that cannot be considered direct materials or direct
labor are classified as manufacturing overhead (sometimes called factory
overhead, manufacturing expenses, factory burden).
 It can be subdivided into three categories: Indirect Materials, Indirect Labor and
Other manufacturing Overhead.
 Indirect Materials – materials that are used in small amounts in the
manufacturing process or that cannot easily be traced to specific
products.
Anonther type of indirect material sometimes called factory
supplies or operating supplies.
 Indirect Labor – the wages of factory personnel who do not
work directly on raw materials.
 Example:
Wages and salaries of janitor in the factory, superintendent in the factory,
maintenance crew and factory supervisors.
 Other Manufacturing Overhead – it includes such costs as payroll
taxes on factory wages, rent, depreciation, taxes and insurances on
factory buildings and machinery.
PRIME COST VERSUS CONVERSION COSTS

 Prime cost reflects the primary sources of costs for unis in production.
 Conversion cost indicates the costs required to convert the raw
materials into finished goods.
Prime cost = Direct material + Direct Labor
Conversion cost = Direct Labor + Manufacturing overhead
INVENTORIES FOR A MANUFACTURING COMPANY

RAW MATERIALS WORK IN PROCESS FINISHED GOODS

INVENTORY INVENTORY INVENTORY
 SYSTEM OF COST ACCUMULATION
 (1) ACTUAL COST SYSTEM (Historical) – Under this system, direct materials, direct labor
and factory overhead costs are determined as they occur simultaneously with the
manufacturing operation but the total of these costs is known only after the operation has
been completed.
 (2) STANDARD COST SYSTEM (Predetermined) – Under this system, costs are
determined in advance from analysis and forecasts made before the actual production
begins. In a standard cost system, standard unit costs are computed for the direct
materials, direct labor and factory overhead.
 (3) NORMAL COST SYSTEM – This system is a combination of the actual cost system and
the standard cost system. This system accumulates only the actual amounts of direct
material and direct labor costs. Factory overhead costs are accumulated on the basis of a
predetermined rate.
TYPES OF COST SYSTEMS
 JOB ORDER COST SYSTEM – accumulates costs applicable to each specified job
order or lot of similar goods manufactured on a specific order for stock or for a
customer.
*Job cost sheet

 PROCOEOSS COST SYSTEM – accumulates costs without attempting to allocate

them during the accounting period to specific units of goods being manufactured.
Also referred to as the average costing.
 DUAL SYSTEMS
INTRODUCTION TO THE JOB ORDER COST CYCLE – NORMAL
COSTING

 WORK FLOW
 1. Procurement – Materials and supplies needed for manufacturing are ordered,
received and stored. Direct and indirect factory labor and services are obtained.
 2. Production – Materials are transferred from the storeroom to the factory.
 3. Warehousing – Finished goods are moved from the factory to the warehouse to be
held until they are sold.
 4. selling – Customers are found. Merchandise is shipped from the warehouse.
ILLUSTRATION:

 Jinjin Printer, Incs is using job order cost accounting system for some time. Assume
that on June 1 these nalances appear in the following accounts:
Materials P50,00
Work in Process 40,000
Finished Goods 30,000
ADDITIONAL INFORMATION:

 Additional raw materials were purchased during the month of June at a cost of 86,900.
 During the month, wages and salaries totalling 102,300 were earned by the factory employees and charged from
the factory payroll register to the Factory Payroll account. It also shows that these labor accounts were charged
as follows:
 Direct Labor, Chargeable to Work in Process 66,500
 Indirect Labor, chargeable to Manufacturing 35,800
 During the month, raw materials costing 90,400 were used as follows:
 Direct Materials, chargeable to Work in Process 84,600
 Indirect Materials, chargeable to Manufacturing OH 5,800
 In addition to the indirect materials and indirect Labor, other overhead costs such as, utilities, insurance and
depreciation totalling 23,500 were incurred during the year.
 It is estimated that 80 percent of the direct labor cost is chargeable to jobs worked on during the month of June.
 During the month, some jobs were completed and transferred to the finished goods warehouse, These jobs cost
225,100.
 During the month, finished goods costing 221,500 were sold to various customers.
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