MODULE 1

BASIC CONCEPTS OF COST ACCOUNTING

Overview

According to Chartered Institute of Management Accountants ICIMA), cost is any amount

of expenditure incurred on or attributable to a specified thing or activity. This cost maybe
related to rendering services for a revenue, acquiring goods or services for resale,
manufacturing of products for delivery to ultimate consumers. These costs may be
grouped accordingly to their common characteristics.

Module Objectives

After thorough discussion of the topic, the learner will be able to:

 Explain the relationship between financial accounting and cost accounting

 Identify the different classification of costs
 Compare flow of costs in service, trading and manufacturing firms
 Distinguish actual costing method from normal costing method
 Separate the variable and fixed components of a mixed cost
 Prepare cost of goods manufactured and sold in good form including Income
Statement and Balance Sheet of a manufacturing concern
 Compare/distinguish income statement of service, trading and manufacturing
terms

Course Materials
Difference between Cost Accounting & Financial Accounting
COST ACCOUNTING FINANCIAL ACCOUNTING
AS TO NATURE
It relates to the different costing methods It relates to the classifying, recording and
and techniques in accumulating the cost of analyzing of business transactions and
a product, process, project or service and events, the end product of which are
also the processes in reducing total costs financial statements. The books required
to improve the profitability of the entity. to maintain are the general journals,
general ledgers and special journals.
It considers items with no monetary values
like units produced or hours utilized. Only items with monetary values are used
in recording and also it deals with actual
It deals with both actual facts and data.
estimated figures and standards.
The users of accounting information are
The users of cost accounting information the internal users such as stockholders,
are generally the production managers officers and employees and external users
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Module 1 – Cost Accounting Concepts & Classification

and senior officials of the company. such as financial institutions, creditors,

suppliers and government regulatory
bodies.
AS TO OBJECTIVE
The main objective is to determine the cost Its objective is to reflect the correct
to produce a unit, process or project or cost financial picture/information of the entity to
to deliver a service. The actual costs the different stakeholders.
incurred is usually compared with
estimates or budgeted costs to guide the
management in making relevant decisions.
AS TO REPORTS/FINANCIAL STATEMENTS
The reports required by management are The basic financial statements as the end
the Cost of Production Report and product of financial accounting are (1)
Statement of Cost of Goods Manufactured Statement of Financial Position or Balance
and Sold. The Cost of Production Report Sheet, (2) Statement of Comprehensive
summarizes the total costs incurred in Income or simply Income Statement, (3)
production like the direct materials, direct Statement of Changes in Equity, and (4)
costs and overhead. There is no standard Statement of Cash Flows. The
format in presenting the cost information accountants are guided by International
Financial Reporting Standards in the
preparation of financial reports.

CLASSIFICATION OF COSTS
1. By nature of expenses
1.1 Material costs
1.2 Labor costs (Employee)
1.3 Expenses

2. By nature of traceability to a cost object

2.1 Direct costs
2.2 Indirect costs

3. By function
3.1 Production/Project costs.
The elements of product costs in a manufacturing business are the following:

1. Materials. Materials include the raw materials and other factory

supplies used in manufacturing operation. They are classified as:
(a) Direct Materials.
(b) Indirect materials

2. Labor. Labor represents the compensation and other benefits paid

to the workers in the factory. They are classified as:
a) Direct labor
b) Indirect labor

Prime costs – is the sum of direct materials and direct labor.

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Module 1 – Cost Accounting Concepts & Classification

3. Manufacturing overhead. Manufacturing overhead is an indirect

product cost and it includes productions costs other than direct
materials and direct labor. They include:

Conversion costs = Direct labor + Manufacturing

Overhead
3.2 General & Administrative costs
3.3 Selling/marketing/distribution costs

4. By nature of production or operation process

4.1 Joint costs

These are costs incurred in a single process that yields two or more products.
They are production costs (direct materials, direct labor and factory overhead)
incurred up to the point where products are separately identified. Example of joint
costs: Cost of dough, labor of baker, and overhead incurred by a bakeshop.
4.2 Contract costs
Cost of a contract agreed upon between the contractee and the contractor.

4.3 Batch costs

Batch Cost shall be the aggregate cost related to a cost unit which consist of a
group of similar articles or services which maintain its identity throughout one
or more stages of production or operation.

4.4 Operation costs

Operation Cost shall be the cost a specific operation involved in production of
goods or rendering of services.

4.5 Process costs

Process cost shall be the cost of production or operation process where goods
are produced or services rendered from a sequence of continuous or repetitive
operations or processes during a period.

5. For Decision making purposes

5.1 Controllable costs

Controllable costs are costs that are primarily subject to the influence of a given
responsibility center manager for a given period of time. Examples are:
5.2 Non-controllable costs

These are costs that cannot be controlled or influenced by a responsibility

center manager. Examples are: Cost of renting equipment
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Module 1 – Cost Accounting Concepts & Classification

5.3 Opportunity costs

These are benefits foregone because one course of action is chosen over
another, expressed in other words, these are future cash inflow that will be
sacrificed as a result of a particular management decision. Examples are

5.4 Sunk costs or past costs

These are costs that have already been incurred in the past and will not be
changed or avoided by any decision in the future. It is not relevant in decision
making. Examples are:

5.5 Relevant cost.

This refers to costs that change with each decision that a company makes. It
includes incremental, opportunity and avoidable costs. Examples are: Future
cash flows, avoidable costs,

5.6 Incremental costs.

Where different alternatives are being considered, relevant cost is the

incremental or differential cost between the various alternatives being
considered.

5.7 Period Cost

Period costs are operating expenses that are associated with time
periods, rather than with the production of goods and services.
Period costs are charged directly to expense accounts on the
assumption that their benefit is recognized entirely in the period when
the cost is incurred. They are non-manufacturing costs and non
inventoriable costs. They include:
a) Marketing and Selling Costs.
b) Distribution costs.
c) Administrative Costs.

5.8 Product cost

The product costs include costs of direct materials, direct labor and factory
overhead.

5.9 Avoidable

Avoidable costs are those costs that are avoided by making one choice over
another.
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Module 1 – Cost Accounting Concepts & Classification

5.10 Unavoidable costs

These are the costs not change in the future when a manager makes one
decision versus another. They are costs that will continue to happen.

6. By nature of behavior

6.1 Fixed costs

These are costs that are constant in total within the relevant range of activity
but variable on a per unit basis. These costs do not change as activity
changes. As the activity level increases or decreases, total fixed cost
remains constant but unit cost declines or goes up.

6.2 Variable costs

These are costs that vary in total in direct proportion to changes in the volume of
production. Variable cost is constant amount on a per unit basis as activity
changes within a relevant range. As activity changes, total variable costs
increases or decreases proportionately with the activity change, but unit variable
costs remain the same.
6.3 Mixed costs

These are costs that contain fixed and variable cost.

7. According to time

7.1 Historical costs are actual costs incurred in the past.

7.2 Pre-determined costs are estimated costs.

8. According to planning and control

8.1 Budgeted costs are expected costs to acquire goods or services or to

manufacture products
8.2 Standard costs are predetermined cost of materials, labor and overhead to
product a unit of product.

HIGH-LOW METHOD OF SEPARATING MIXED COSTS

When cost is classified as mixed, it is appropriate to separate the fixed cost from
the variable cost. Variable cost per unit is completed as:

Cost at high level – cost at lowest level (within relevant range)

Highest activity – lowest activity

Or: Change in total costs / Change in activity level = VC per unit

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Module 1 – Cost Accounting Concepts & Classification

Procedures:
1. Select the highest and lowest levels of activity and costs (within relevant
range)
2. Compute the variable cost element
3. Compute the variable cost at the highest and lowest level of activity.
4. Determine the fixed cost at each level of activity.

3 Inventory Accounts in a manufacturing business

1. Finished Goods inventory. Goods ready for sale
2. Work in Process inventory. Unfinished jobs at the end of a period
3. Raw Materials inventory. Unused raw materials at the end of a period

Inventory Systems
1. Perpetual inventory systems. It requires stock card to record the in and out of
inventory. The movement of inventory is recorded in the inventory account
itself.
2. Periodic inventory systems. No stock card is required but a mandatory
physical counting is done at the end of the period.

Inventory Costing Valuation Methods

1. FIFO method
2. Average method

Journalizing Basic Manufacturing Transactions

(Pro-forma entries)
1. Purchase of raw materials
Raw materials 000
Accountns payable or cash 000

2. Issuance of raw materials.

Work in process 000
Factory overhead 000
Raw materials 000

3. Return of excess materials to store room

Raw materials 000
Work in process 000
Manufacturing overhead 000

4. Factory labor incurred

Work in process 000
Factory overhead 000
Accountns payable or cash (net) 000
WHT Payable 000
SSS Premium Payable 000
Philhealth payable 000
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Module 1 – Cost Accounting Concepts & Classification

5. Manufacturing overhead incurred

Manufacturing overhead 000
Various accounts 000

6. Applied OH to the job

Work in Process 000
Manufacturing overhead 000

7. Completion of the job

Finished goods 000
Work in process 000

8. Sale of the completed jobs

Cash or Accountns Receivable 000
Sales 000

Statement of Cost of Goods Manufactured and Sold

Name of Company
Statement of Cost of Goods Manufactured and Sold
For the Period ________________

Direct Materials used:

Direct Material, beginning P000
Add: Purchases P000
Freight In 000
Gross Purchases 000
Less: Purchase Discounts 000
Net Purchases 000
Direct Materials Available P000
Less: DM inventory, end 000
Direct Materials used P000

(b) Direct Labor 000

(c) Manufacturing overhead 000
(d) Total Manufacturing costs P000
Add: Work in Process, beg 000
(e) Total cost of goods placed into process P000
Less: Work in Process, End 000
(f) Costs of goods manufactured P000
Add: Finished Goods, beginning 000
(g) Total goods available for sale P000
Less: Finished Goods, end 000
(h) Cost of goods sold P000
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Module 1 – Cost Accounting Concepts & Classification

Practical applications.

Instructions: Do the following problems. You are required to pass the solutions in good
form. Use work sheet. Remember, follow the simple rules of using the money columns
correctly, double ruling final figures if necessary, and no entries at the back of your
worksheet. Entries at the back of your worksheet will not be given credit.

Problem 1. During the month of July, the following transactions were completed and
reported by Old Navy Manufacturing Company.

a. Raw materials purchased on account, P240,000

b. Materials requisitioned for the month was P180,000, P12,000 of which
were factory supplies.
c. Factory payroll for the month was P150,000 of which P30,000 was for
indirect laborers.
d. Depreciation on factory plant and equipment for the month is P12, 000.
e. Factory taxes amounted to P1,500.
f. Factory insurance expired amounted to P4,320.
g. Factory utilities for the month amounted to P5,000

Additional information:
a. Actual overhead is charged to production.
b. 75% of the jobs put into process are completed.
c. All beginning inventories plus 75% of the goods completed during the period
were delivered to customers at 50% mark-up on cost. The company’s terms
on all sales are 30 days.

Inventories reported by the company at the beginning of the month are:

Raw Materials P 80, 000
Work in Process 100,000
Finished Goods 60,000

REQUIRED:
(a) Journal Entries to record the above and post the entries to T-Accounts
(b) Prepare a Statement of Cost of Goods Manufactured and Sold, in good form.

Problem 2. M&M Company had raw materials on hand on January 1 of the current year
of P540,000 and on June 30 of P570,000. Work in process inventory was P600,000 on
January 1 and P440,000 on June 30. The balance of finished goods inventory was
P580,000 on January 1 and P400,000 on June 30. The company purchased materials for
the period amounting to P1,640,000. Of the raw materials issued, 20% are indirect
materials. The labor charges for the period were: direct labor, P840,000; indirect labor,
P180,000; office salaries, P140,000, and sales salaries of P80,000. The total factory
utilities expense incurred for the period was P360,000, repair and maintenance of factory
equipment, P20,000 and depreciation on factory equipment was reported to be P120,000.
The company uses the actual costing method of accumulating costs and it maintains a
35% mark up on costs for establishing its selling price.

Required: Reconstruct the entries related to the above problem.

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Module 1 – Cost Accounting Concepts & Classification

Problem 3. Jansport Manufacturing Company currently uses normal costing method in

accumulating the cost of production. The following data were provided for the current
year:
Factory Labor:
Total Factory payroll P2,700,000
Raw Materials:
Inventory, Jan 1 450,000
Purchases on account 4,500,000
Issuance to production 3,600,000
Factory overhead:
Depreciation 220,000
Maintenance 125,000
Utilities 145,000
Indirect materials 230,000
Miscellaneous overhead 105,000
Indirect labor 600,000
Work in process:
Beginning inventory 720,000
Ending inventory 650,000

Required: Prepare a Statement of cost of Goods Manufactured and Sold in good form.
Problem 4. The following cost information is available from the records of
Johnson Company for the year just ended:

Inventories January 1 December 31

Finished Goods P2,400,000 P2,950,000
Work in process 3,000,000 2,400,000
Raw Materials 4,400,000 2,800,000
Store Supplies 850,000 700,000
Office Supplies 150,000 280,000
Purchases:
Raw Materials P9,000,000
Store Supplies 1,200,000
Office Supplies 850,000
Other costs and expenses:
Salaries & Benefits:
Direct labor P6,500,000
Indirect labor 560,000
Supervision fee 1,250,000
Administrative & selling 2,360,000
Depreciation (60%, factory; 40% adm & Sell) 1,500,000
Rent (60% factory; 40% adm & sell) 1,200,000
Utilities (60% factory; 40% adm & sell) 600,000
Advertising 320,000
Factory supplies used 850,000

Additional information:
The company applies actual overhead to production and sells their
produce at a price to give the company a gross profit rate of 25%.
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Module 1 – Cost Accounting Concepts & Classification

/required: Prepare a Statement of Cost of Goods Manufactured and Sold in good form.
Reading materials:

1. https://www.accountingnotes.net/cost-accounting/cost-
classification/classification-of-costs-5-types-accounting/10178
Cost classification
2. https://icmai.in/upload/Students/CAS-1-24-CASB.pdf
Cost Accounting Standards
3. https://www.yourarticlelibrary.com/cost-accounting/cost/study-notes-on-cost-
concept-and-classification-cost-accounting/74316

4. https://www.playaccounting.com/exp-ca/ca-mcqs/cost-concept-analysis-and-
classifications-mcqs/

5. https://www.playaccounting.com/mcqs/manufacturing-accounts/

6. https://www.playaccounting.com/exp-ca/ca-mcqs/introduction-to-cost-accounting-
mcqs-quiz/
 ASSESMENT MATERIALS
QUIZ 1

NAME ________________________________ DATE _________________________

SECTION _____________________________ SC ORE ___________________
Write the final answer on the blanks provided WITH SUPPORTING COMPUTATIONS IN
GOOD FORM in your worksheet.
Maldita Dress Shop makes evening dresses. The following information has been gathered from
the company records of 2016, the first year of company operations. Work in Process Inventory
at the end of the year was P150,000.

Raw materials purchased on account, of which only P2,350,000

75% were paid during the year.
Raw materials issued to production, of which 25% is 1,940,000
indirect materials
Accrued factory payroll (80% is direct labor) 1,350,000
Depreciation of sewing and computer equipment 80,000
Utilities paid 320,000
Factory insurance expired 17,500
Factory rent including P50,000 deposit 960,000

Maldita Dress Shop applies actual overhead to production.

Supply the answer to the following questions:

1. Cost of goods manufactured for the year is ________________

2. Gross profit assuming 80% of the production is sold at a gross profit rate of 35%.
__________________

The cost accountant of M&M Company had noted the following changes in selected accounts:
Raw materials had increased by P30,000; Work in process inventory had decreased by
P120,000; Finished goods had decreased by P80,000. The company had purchased raw
materials for the period amounting to P1,640,000. Of the raw materials issued, 20% are indirect
materials. The labor charges for the period were: direct labor, P840,000; indirect labor,
P180,000; office salaries, P140,000, and sales salaries of P80,000. The total factory utilities
expense incurred for the period was P360,000, repair and maintenance of factory equipment,
P20,000 and depreciation on factory equipment was reported to be P120,000. The company
uses the actual costing method of accumulating costs and it maintains a 35% mark up on costs
for establishing its selling price.

3. The total factory costs for the period amounts to ______________

4. The cost of goods sold for the period is ________________

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Quiz 1 – ACCO 20073

5. The net income or (loss) for the period is ________________

The following costs were actually incurred in the production of 10,000 units of Product A:

Raw materials, of which 10% is indirect P1,200,500

Factory labor, of which 20% is indirect labor 1,045,000
Factory overhead, other than indirect materials 900,000
and indirect labor

Factory overhead charged to production is equivalent to 110% of direct labor costs. At the end
of the period, inspection revealed that the total costs of goods manufactured is equal to
P2,837,500 while costs of unfinished job is 20% of total factory costs.

6. The cost of work in process at the beginning of the period is _____________

West Virginia Company reported a net income of P55,500 for the period just ended. The goods
available for sale was P259,500 of which P237,000 come from goods produced during the current
period.

7. If finished goods at the end is P18,000, the increase or (decrease) in finished goods is
_________________.

8. If sales for the period is P337,500 and sales discounts were reported to be P7,500, the
gross profit amounts to ________________.

Sunset Manufacturing Company currently uses normal costing method in accumulating the cost
of production. The following data were provided for the current year:

Factory Labor:
Direct labor costs (2,500 DLHs) P350,000
Indirect labor 35,000
Raw Materials:
Inventory, Jan 1 P50,000
Purchases on account 550,000
Issuance to production 460,000
Factory overhead:
Depreciation 110,000
Maintenance 50,000
Utilities 31,000
Indirect materials 8,000
Miscellaneous overhead 5,000
Work in process:
Beginning inventory P220,000
Ending inventory 160,500

9. If the factory overhead rate is equal to P125DLH, The total factory costs for the period
amounted to _______________

10. Using the same information in the above question, assuming the finished goods inventory
is increased by P186,000 at the end of the period, how much is the cost of sales? _____
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Quiz 1 – ACCO 20073

At August 31, selected accounts of Old Navy Manufacturing Company show the following:

August 1 inventories:
Finished goods P12,600
Work in process 14,700
Raw Materials 8,200
August 31 inventories:
Finished goods P10,500
Work in process 16,900
Raw Materials 7,100
Debit postings to work in process:
Direct materials P62,400
Direct labor 32,000
Manufacturing overhead 64,000

Sales for the period P200,000

11. The cost of goods manufactured for the period amounts to __________

12. The gross profit for the period amounts to ______________

The following information is available for the Golden Retriever Company for the current year:

Gross profit P968,000

Goods manufactured 3,720,000
Increase in work in process 850,000
Increase in finished goods 560,000

13. The cost of sales for the period amounted to _______________

Sunrise Global Manufacturing Company had the following data for the month of June 2016:
- Raw materials purchased on account is P325,000
- Actual direct labor costs were P235,000
- Actual OH costs were P155,000
- Selling and administrative expenses were P152,500
- Raw and in Process: Beginning were P43,000 including conversion cots of P12,000 while
Ending were P66,000 including conversion costs of P24,000
- Finished Goods: Beginning were P95,000 including conversion costs of P28,000 while
ending were P70,000 including conversion costs of P18,000.

14. The cost of materials backflushed from FG to COGS is _______________

15. The final entry to set up the correct balances of the accounts is:

Madison Ford Co. uses a job order cost system and had the following data available for the year:

Direct materials purchased on account P74,000

Direct materials requisitioned 41,000
Direct labor cost incurred 65,000
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Quiz 1 – ACCO 20073

Factory overhead incurred 73,000

Cost of goods completed 146,000
Cost of goods sold 128,000
Beginning direct materials inventory 13,000
Beginning work in process inventory 32,000
Beginning finished goods inventory 29,000
Overhead application rate 125% of DLC

16. The ending inventory of direct materials, work in process and finished goods is ________

Golden Yellow Manufacturing Company has a cycle time of 5 days, uses Raw and in Process
account and charges all conversion costs to Cost of Sales. At the end of each period, all
inventories are counted, their conversion costs components are estimated and inventory account
balances are adjusted. The following data is available for the current period:

RIP, beg. balance including P5,000 of conversion costs P24,000

FG, beg. balance including P12,000 of conversion costs 40,000
Raw materials purchases on account 700,000
RIP, end balance including P7,500 of conversion costs 30,000
FG, end balance including P8,000 of conversion costs 42,000
Conversion costs for the period are P250,000 for direct labor
and P350,000 for overhead

17. Give the final entry required to update the balances RIP, FG and COS.

Olay Manufacturing Company provided you the following information to help him determine the
balances of some accounts.

Balances as of Oct 1:
Cash P246,750
Raw Materials, 5,000 units 88,500
Work in process 81,000
Accounts payable, credit 63,000
Factory overhead none

Transactions for the last quarter of the current year are summarized below:
a. Raw Material purchases during the quarter, 16,000 @ P18 per unit, on account.
b. Raw materials requisitioned during the quarter, 12,500 units of which 10% is indirect
materials.
c. Excess materials returned to the storeroom,1,200 units, all are direct materials.
d. Raw materials returned to vendor because of defective quality, 500 units.
e. Payment to vendors, P190,000

Olay Manufacturing Company uses the FIFO method of accounting for Raw Materials.

18. Determine the balance of Raw Materials at the end of the quarter.