Cost Accounting Cycle

Cost Accounting – is an expanded phase of 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.
Types of Manufacturing Costs
Direct Materials – materials used in the manufacturing process that become a significant part of the finished goods.
Ex. Woods used to manufacture a table, flour used to produce cakes, glass to produce windows.
Direct Labor – salaries or wages paid to employees who work directly with the raw materials in converting them to
finished goods. Ex. Bakers in producing cakes.
Factory Overhead – all costs incurred in the factory that cannot be considered as direct materials or Direct labor. Usually
classified into three categories:
A. Indirect Materials – materials that are used in small amounts in the manufacturing process or that cannot be
easily traced to specific products. Ex. Nails used to produce furniture.
B. Indirect Labor – salaries or wages of factory personnel who do not work directly on raw materials. Ex. Salary
of factory supervisor.
C. Other Manufacturing Overhead – includes payroll taxes on factory wages, rent on factory building,
depreciation of factory building, insurance on factory building and machinery, heat, light and power, repairs
and maintenance of machinery and equipment, Many of these relate to physical plant (building, machinery
and equipment.
Prime Cost – sum of DIRECT MATERIALS AND DIRECT LABOR
Conversion Cost – sum of DIRECT LABOR AND FACTORY OVERHEAD
Inventories for a Manufacturing Company
Raw Materials Inventory – this refers to materials still unused at the end of a period
Work in Process Inventory – this inventory represents the cost of goods placed in the production but not yet finished at
the end of the period. Cost of goods means the costs of raw materials, labor, and overhead incurred in the production of
goods.
Finished Goods Inventory – this inventory represents the costs of goods already manufactured and ready for sale during
a period but not yet sold at the end of the period.
Illustration:
Prepare necessary journal entries,
a. Purchased raw materials on account, Php 28,500.
b. Issued materials to production: Php 15,000 of direct materials and Php 3,000 of indirect materials
c. Accrued Payroll of Php 90,000, of which 70% was direct and the remainder was indirect.
d. Incurred and paid other overhead items, Php 36,000.
e. Completed goods costing Php 86,500.
f. Sold Goods costing Php 71,300 on account for Php 124,700.
PRO-FORMA COST OF GOODS SOLD STATEMENT FOR MANUFACTURING COMPANIES:
Raw Materials, Beginning xxx
Raw Materials purchases xxx
Raw Materials available for use xxx
Raw Materials, Ending (xxx)
Raw Materials used xxx
Direct Labor xxx
Factory Overhead xxx
Total Manufacturing Cost xxx
Work in Process, Beginning xxx
Total work placed in process xxx
Work in Process, Ending (xxx)
Cost of Goods Manufactured xxx
Finished Goods, Beginning xxx
Total Goods Available for Sale xxx
Finished Goods, Ending (xxx)
Cost of Goods Sold xxx

Over and Under-Applied Factory Overhead

Over and Under-Applied Factory Overhead is the Difference between the actual and applied factory overhead. If
the factory overhead applied during a period is higher than the actual, it is said to be over-applied and under-applied if
overhead applied is lower than the actual. If the Over or Under-Applied factory overhead is material, this amount is
closed not only to cost of goods sold but also to Work in Process and Finished Goods Allocated based on their amount or
quantity balance. If Immaterial close to cost of goods sold only.