ACC 122 Soft

ACC 122: Cost Accounting and Control
Student Activity Sheets Module # 3
Name: ____________________________________________________________ Class number: _______

Section: ____________ Schedule: _____________________________________ Date: _______________
Lesson title: Job-order: Direct Materials, part 1 Materials:

Lesson Objectives: Textbook, SAS, & calculator
At the end of this module, I should be able to References:
1. Recognize the two basic aspects of material control and Cabrera; Cost Accounting & Control;
specify the internal control procedures. 2018-2019 Edition
Hansen & Mowen; Cost Accounting &
2. Account for material cost flow methods. Control; 2019 Edition
Vanderbeck, Edward J.; Principles of
th
Cost Accounting; 15 edition
Brewer, Garisson & Noreen;
Introduction to Managerial Accounting;
th
7 edition
Productivity Tip:
Start with a big smile!  Organize your study place before going through with the activities. �
A. LESSON PREVIEW/REVIEW
1) Activity 1 : Introduction/Review (10 mins)

Hello there!  Do you still remember what you learned last time? Let’s just have a quick recap.
Encircle the best answer and let’s see if your memory is sharp. Check if you got it right under the Key to
Corrections part at the end of this module. You may start.
1. Cost accounting differs from financial accounting in that financial accounting:

a. Is mostly concerned with external financial reporting.
b. Is mostly concerned with individual departments of the company.
c. Provides the additional information required for special reports to management.
d. Puts more emphasis on future operations.
2. Actual costing and normal costing have the same directs costs.
a. True
b. False
3. Standardized products are accounted for using
a. Job-order costing
b. Process Costing
c. Operation Costing
d. None of the above
4. It is defined as the tracing of direct costs and allocating indirect costs to cost objects.
a. Cost driver
b. Cost accumulation
c. Cost measurement
d. Cost assignment
5. A firm that produces the following characteristics of product which are intangibility, inseparability,
heterogeneity, and perishability is a
a. Service
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b. Merchandising
c. Manufacturing
d. None of the above
2) Activity 2 (LO1 & LO2): What I Know Chart, part 1 (5 mins)
Alright! Let’s see what you already know, answer the first column (What I know). Leave the third column
(What I Learned) blank at this time.
What I Know Questions What I Learned (Activity 5)

1. What are the controls needed
for materials?
2. What are the internal control

procedures?
3. Identify the three cost flow

methods.
B. MAIN LESSON
1) Activity 3 (LO1 & LO3): Content Notes (40 mins)
Make sure to highlight or underline the important parts!
TOTAL COSTS OF A MANUFACTURING FIRM
MANUFACTURING (PRODUCT) COST NON-MANUFACTURING (PERIOD)

Prime Cost Manufacturing Overhead COST
Indirect
Direct Direct Indirect Indirect Administrative
Manufacturing Selling Expenses
Materials Labor Materials Labor Expenses
Expenses
Conversion Cost
Materials:
 Direct materials – those material which are easily identified, conveniently measured and directly
charged to the cost of production. Also known as “raw materials”. Timber would be a direct material in
the production of furniture.
 Indirect materials - those materials which cannot be conveniently identified & allocated to the cost
center or cost unit. The cost is included in the manufacturing overhead. In furniture production, wood,
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glue, and nails may be classified as indirect materials.
LO1: Recognize the two basic aspects of material control and specify the internal control procedures
The major function of a cost control system is to keep expenditures within the limits of a
preconceived plan. The control system should also encourage cost reductions by eliminating waste and
operational inefficiencies.
Effective cost control system:

 A specific assignment of duties and responsibilities.
 A list of individuals who are authorized to approve expenditures.
 An established plan of objectives and goals.
 Regular reports showing the differences between goals and actual performance.
 A plan or corrective action designed to prevent unfavorable differences from recurring.
 Follow-up procedures for corrective measures.
Basic Aspects of Materials Control:

 Physical control or safeguarding of materials
 Limited Access to materials storage area
 Segregation of duties of personnel
 Accuracy in Recording
 Control over the investment of materials
 Order Point
 Economic Order Quantity (EOQ)
Order Point
 A minimum level of inventory should be determined for each type of raw material, and inventory
records should indicate the cost and quantity of items on hand.
 Order point is the point at which an item should be ordered.
 The following items need to be taken into consideration when ordering:
 Usage – anticipated rate at which the material will be used.
 Lead time – estimated time interval between the placement of an order and the receipt of
the material ordered.
 Safety stock – estimated minimum level of inventory needed to protect against stockouts.
Order point = (Daily usage X Lead time) + Safety stock
Economic Order Quantity

 The optimal quantity to order at one time.
 Minimizes the total order and carrying costs over a period of time.
 Ordering costs may include the salaries and wages of purchasing personnel,
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communication costs, and materials accounting and record keeping.

 Carrying costs are the costs that a company may incur in storing materials. These costs
may include materials storage and handling costs, interest, insurance, and property taxes,
loss due to theft, deterioration, or obsolescence, and records and supplies associated with
carrying inventory.
EOQ = Economic Order Quantity

C = Cost of placing an order EOQ = 2CN
N = Number of units required annually K
K = Annual carrying cost per unit of inventory
Material Control Procedures

(1) Purchase and receipt of materials
(2) Storage of materials, and
(3) Requisition and consumption of materials.
Materials Control Personnel

 Purchasing Agent – employee who does the buying of raw materials.
 Receiving Clerk – employee who is responsible for the receipt of incoming shipments.
 Storeroom Keeper – employee who has charge of the materials after they have been received.
 Production Department Supervisor – employee who is responsible for the operational functions
within the department.
Control During Procurement/Acquisition

 When the order point is reached the procurement process begins.
 Supporting documents are essential to maintain control during the procurement process.
 Common documents needed:
Purchase Requisition – the form used to notify the purchasing agent that materials are ne eded.
Purchase Order – the purchase requisition that gives the purchasing agent authority to order the
materials.
Vendor’s Invoice – the invoice from the vendor that should be compared to the purchase order.
Receiving Report – the form that the receiving clerk uses to count and identify the materials
received.
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Debit-Credit Memorandum – the document that is used when the shipment of materials does not
match the order and/or the invoice.
Control During Storage and Issuance

Materials Requisition
 Prepared by the authorized factory personnel to withdraw materials from the storeroom.
Returned Materials Report
 Describes the materials being returned to the storeroom and the reason for the return.
LO2: Account for material cost flow methods
Determining the Cost of Materials Issued

 In selecting the method to be used, the company should review their accounting policies and the
tax regulations.
 The flow of materials does not dictate the flow of costs.
Flow of materials – the order that materials are issued for use in the factory.
Flow of costs – the order in which unit costs are assigned to materials.
Therefore, a cost flow method must be employed in accounting for materials inorder to fix the problem
on how much the cost of the raw materials will be. Employing a cost flow method will properly account all
the cost of materials since not everytime that the cost of a raw material is the same as what was
purchased before. Variation of costing of materials differs because of discou nts, change of supplier,
change of raw materials used with higher quality, etc.
Material Cost Flow Methods
a. First – In, First – Out Method (FIFO)

Assumes that materials used in production are costed at the prices paid for the oldest materials
and the ending inventory is costed at the prices paid for the most recent purchases.
b. Last – In, Last – Out Method (LIFO)
Assumes that materials used in production are costed at the prices paid for the most recently
purchased prices, and the ending inventory is costed at prices paid for the earliest purchases.
c. Moving Average Method
Material issued and the ending inventory are costed at the average price. This average unit
price is computed every time a new lot of materials is received and it continues to be used until
another lot is purchased.
To illustrate:
ABC Company has the following transactions for the year.
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Date Transaction No. of Units Purchase Price Per Unit

Jan-01 Beginning Balance 100 PHP 20.00
Mar-01 Purchase 20 PHP 32.00
Apr-01 Issuance 70 -
Jun-01 Purchase 30 PHP 14.00
Oct-01 Issuance 40 -
Requirement: How much will be cost of materials issued and ending balance of materials if ABC
Company employed
a. FIFO method
b. LIFO method
c. Moving Average method
a. FIFO Method
No. of Purchase Price Inventory Total On-hand

Date Transaction Classification Cost of Materials Notes
Units Per Unit Balance Units
Jan-01 Beginning Balance Beg. Balance 100 PHP 20.00 PHP 2,000.00 PHP 2,000.00 100
Mar-01 Purchase Purchase Price 20 PHP 32.00 PHP 640.00 PHP 2,640.00 120
Apr-01 Issuance Cost per Unit (70) PHP 20.00 PHP (1,400.00) PHP 1,240.00 50 1
Jun-01 Purchase Purchase Price 30 PHP 14.00 PHP 420.00 PHP 1,660.00 80
Oct-01 Issuance Cost per Unit (30) PHP 20.00 PHP (600.00) PHP 1,060.00 50 2
Issuance Cost per Unit (10) PHP 32.00 PHP (320.00) PHP 740.00 40 3 & 4
NOTES
1 Purchase price came from the oldest stock which is from January 1 purchase
2 Purchase price came from the remaining 30 (100-70) units from January 1 purchase
3 Purchase price came fromthe units from March 1 purchase
4 Ending Inventory maybe checked from remaining units for each purchase
Date Transaction Units Price Cost of Materials
Jun-01 Purchase 30 PHP 14.00 PHP 420.00
Mar-01 Purchase 10 PHP 32.00 PHP 320.00
Ending Balance 40 PHP 740.00
Cost Materials Issued Computation
Beginning Balance PHP 2,000.00 100 units x P20
Add: Purchases PHP 1,060.00 640+420
Less: Ending Inventory PHP 740.00 Refer to the table
Cost Materials Issued PHP 2,320.00 Beg. Inventory + Purchases - Ending Inventory
b. LIFO Method
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No. of Purchase Price Inventory Total On-hand

Date Transaction Classification Cost of Materials Notes
Units Per Unit Balance Units
Jan-01 Beginning Balance Beg. Balance 100 PHP 20.00 PHP 2,000.00 PHP 2,000.00 100
Mar-01 Purchase Purchase Price 20 PHP 32.00 PHP 640.00 PHP 2,640.00 120
Apr-01 Issuance Cost per Unit (20) PHP 32.00 PHP (640.00) PHP 2,000.00 100 1
Issuance Cost per Unit (50) PHP 20.00 PHP (1,000.00) PHP 1,000.00 50 2
Jun-01 Purchase Purchase Price 30 PHP 14.00 PHP 420.00 PHP 1,420.00 80
Oct-01 Issuance Cost per Unit (30) PHP 14.00 PHP (420.00) PHP 1,000.00 50 3
Issuance Cost per Unit (10) PHP 20.00 PHP (200.00) PHP 800.00 40 4 & 5
NOTES
1 Purchase price came from the lastest stock which is from March 1 purchase
2 Purchase price of the 50(70-20) units to be issued came from the remaining units from the January 1 purchase
3 Purchase price came from latest stocks which is from June 1 purchase
4 Purchase price of the 10(40-30) units to be issued came from the remaining units from the January 1 purchase
5 Ending Inventory maybe checked from remaining units from January 1
Date Transaction Units Price Cost of Materials
Jan-01 Purchase 40 PHP 20.00 PHP 800.00
Ending Balance 40 PHP 800.00

c. Moving Average Method
No. of Purchase Price Cost of Inventory Total On-hand Cost per

Date Transaction Classification Units Per Unit Materials Balance Units Unit*
Jan-01 Beginning Balance Beg. Balance 100 PHP 20.00 PHP 2,000.00 PHP 2,000.00 100 PHP 20.00
Mar-01 Purchase Purchase Price 20 PHP 32.00 PHP 640.00 PHP 2,640.00 120 PHP 22.00
Apr-01 Issuance Cost per Unit (70) PHP 22.00 PHP (1,540.00) PHP 1,100.00 50 PHP 22.00
Jun-01 Purchase Purchase Price 30 PHP 14.00 PHP 420.00 PHP 1,520.00 80 PHP 19.00
Oct-01 Issuance Cost per Unit (40) PHP 19.00 PHP (760.00) PHP 760.00 40 PHP 19.00
*Cost per Unit is computed by the weighted average of the total cost of materials from the the total units on-hand. Cost per
unit of issuance is based from the latest cost per unit.
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Under the three cost flow method, FIFO method is the only method that will produce the same result
(cost of materials used and ending inventory) at all times under the periodic and perpetual system.
Activity 4: Skill-building Activities (70 mins) SCORE: ________________
Let’s try to practice what you have learned! Check your answers against the Key to Corrections found
at the end of this SAS. Write your score on the space provided.
Part I (LO1): Control of Materials. Choose the best answer for the given question.
1. An effective cost control system should include:

a. An established plan of objectives and goals to be achieved.
b. Regular reports showing the difference between goals and actual performance.
c. Specific assignment of duties and responsibilities.
d. All of these are correct.
2. To effectively control materials, a business must maintain:

a. Limited access.
b. Combination of duties.
c. Safety stock.
d. None of these are correct.
3. The Hotdog Company predicts that 3,200 units of material will be used during the year. The expected daily
usage is 15 units, there is an expected lead time of 10 days, and there is a safety stock of 200 units. The
material is expected to cost P4 per unit. It is estimated that it will cost P25 to place each order. The
annual carrying cost is P1 per unit.
Requirements:
a. Compute the order point.
b. Determine the most economical order quantity by use of the formula.
c. Compute the total cost of ordering and carrying at the EOQ point.
ANS:
(a) Order point = Expected usage during lead time + Safety stock
= (______ units x _____ days) + ________
= ___________ units
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(b)
EOQ = 2 x Order Costs x Annual Demand
Annual carrying cost per unit
EOQ = 2 x ___________ x __________

_________________
EOQ = __________________ units
(c) Annual ordering cost = Number of orders x Cost per order
= Annual usage
X _______ cost per order
EOQ
= Annual usage X _______ cost per order

_________ EOQ
= ______ x ________
= ________________
Annual carrying cost = Average inventory x Carrying cost per unit
Average inventory = (1/2 x EOQ) + Safety Stock

= (1/2 x _____) + __________ = ________
Annual carrying cost = ______ x ______ = ___________
PART II (LO1): Internal Control Procedures
Match the materials control form in the left column with the person responsible for its
preparation in the right column. (A selection may be used more than once.)
a. Purchase requisition 1. Production department supervisor

b. Purchase order 2. Storeroom keeper
c. Receiving report 3. Purchasing agent
d. Materials requisition 4. Receiving clerk
e. Debit-credit memo 5. Accountant
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PART III (LO2): Cost Flow Method
The materials account of Tina Company reflected the following changes during May:
Balance, May 1 500 units @ P10

Received, May 5 300 units @ P12
Issued, May 10 400 units
Received, May 15 200 units @ P15
Issued, May 25 300 units
Using the back page of this activity sheet or in a separate paper, calculate the ending inventory at May
31 and the cost of the units issued in May using each of the following methods:
(a) First in, first out (FIFO)
(b) Last in, first out (LIFO)
(c) Moving average
2) Activity 5: What I Know Chart, part 2 (5 mins)

It’s time to answer the questions in the “What I Know Chart” in Activity 2. Write your answers in
the “What I Learned” column. Let’s see your improvement!
3) Activity 6 (LO1 & LO2): Check for Understanding (60 mins)

To better test your knowledge on the topic, answer the given four problems to enhance your learning. To
check if you got it right, your teacher will provide you the correct answer.
Problem 1
Lanztech Company expects daily usage of 500 pounds of material Inca, an anticipated lead time of
seven days, and a desired safety stock of 2,500 pounds.
a. Determine the order point.

b. Determine the number of pounds to be issued from safety stock if the new order is four days late.
Problem 2
Pet Company predicts that it will use 360,000 gallons of material during the year. The material is
expected to cost P5 per gallon. Patriot anticipates that it will cost P72 to place each order. The annual
carrying cost is P4 per gallon.
a. Determine the most economical order quantity by using the EOQ formula.
b. Determine the total cost of ordering and carrying at the EOQ point.
Problem 3 (Multiple Choice)

________1. The personnel involved in the physical control of materials includes all of the following
except the:
a. Purchasing agent.
b. Receiving clerk.
c. Cost accountant.
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d. Production department supervisor.
________2. The form prepared by the purchasing agent and sent to the vendor to obtain materials is
known as a:
a. Materials requisition.
b. Purchase requisition.
c. Purchase order.
d. Vendor's invoice.
________3. The form that serves as authorization to withdraw materials from the storeroom is known
as the:
a. Stores requisition.
b. Purchase order.
c. Purchase requisition.
d. Returned materials report.
________4 The form used to notify the purchasing agent that additional materials are needed is
known as a:
a. Purchase order.
b. Vendor's invoice.
c. Receiving report.
d. Purchase requisition.
Problem 4
Use the following information for the next five questions
The Benson Corporation uses Raw Material A in a manufacturing process. Information as to balances
on hand, purchases, and requisitions of Raw Material A is given in the following table.
Raw Material A
________1. If a perpetual inventory record of Raw Material A is maintained on a FIFO basis, the
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September 6 issue will consist of:

a. 10 units @ P1.40, 80 units @ P1.55 and 20 units @ P1.62.
b. 50 units @ P1.40 and 60 units @ P1.55.
c. 110 units @ P1.55.
d. 50 units @ P1.55 and 60 units @ P1.62.
________2. If a perpetual inventory record of Raw Material A is maintained on a LIFO basis, the
September 6 issue will consist of:
b. 110 units @ P1.55.
c. 50 units @1.55 and 60 units @ 1.62.
d. 20 units @ P1.62 and 90 units @ P1.55.
________3. If a perpetual inventory record of Raw Material A is maintained on a FIFO basis, 200 units
on hand on August 18 will consist of:
c. 150 units @ P1.62 and 50 units @ P1.55.
d. 200 units @ P1.55.
________4. If a perpetual inventory record of Raw Material A is maintained on a LIFO basis, the 200
units in inventory at August 18 will consist of:
a. 50 units @ P1.62 and 150 units @ P1.55.
c. 20 units @ P1.62, 80 units @ P1.55 and 100 units @ P1.40.
d. 100 units @ P1.40, 60 units @ P1.55 and 40 units @ P1.62.
________5. If a perpetual inventory record of Raw Material A is maintained on a moving average basis,
the 330 items in inventory on June 11 will have a unit cost of:
a. P1.51.
b. P1.5233.
c. P1.4856.
d. P1.5125.
C. LESSON WRAP-UP
1) Activity 7: Thinking about Learning (10 mins)
1. Work Tracker
You are done with this session! Let’s track your progress. Shade the session number you just
completed.
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2. Think about your Learning
From a rating of 1-10, determine if you have learned all the learning objectives. What is the reason of
your rating?
__________________________________________________________________________________
__________________________________________________________________________________
What part of the module gave you a hard time to comprehend?

__________________________________________________________________________________
__________________________________________________________________________________
Any other questions or concerns you want to raise?

__________________________________________________________________________________
__________________________________________________________________________________
FAQs
1. Why is EOQ important in inventory management and control?

EOQ is an important cash flow tool. The formula can help a company control the amount of cash tied
up in the inventory balance. For many companies, inventory is its largest asset other than its human resources,
and these businesses must carry sufficient inventory to meet the needs of customers.
2. Why is LIFO prohibited under the IFRS?
The Last-In-First-Out (LIFO) method of inventory valuation, while permitted under the Generally
Accepted Accounting Principles (GAAP), is prohibited under the International Financial Reporting Standards
(IFRS). As IFRS rules are based on principles rather than exact guidelines, usage of LIFO is prohibited due to
potential distortions it may have on a company’s profitability and financial statements. In principle, LIFO may
create a distortion to net income when prices are rising (inflation); LIFO inventory amounts are based on
outdated and obsolete numbers, and LIFO liquidations may provide unscrupulous managers with the means to
artificially inflate earnings.
KEY TO CORRECTIONS
Activity 1:
1. A
2. A
3. B
4. D
5. A
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Activity 4: Skill-building Activities.

Part I (LO1):
1. D
2. A
3. See computation below
PART II (LO3)
Forms Source
a. Purchase requisition Storeroom keeper
b. Purchase order Purchasing agent
c. Receiving report Receiving clerk
d. Materials requisition Production supervisor
e. Debit-credit memorandum Purchasing agent
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PART III (LO3): Cost Flow Method
15

Activity 6 (LO1 & LO2):
Problem 1
a. 500 lbs. x 7 days ........... 3,500 lbs.
Required safety stock .... 2,500
Order point ..................... 6,000 lbs.
b. 500 lbs. x 4 days = ........ 2,000 lbs.
Problem 2
2 CN
a. EOQ =
K
2  $72  360,000
=
$4
$51,840,000
=
$4
= 12,960,000
= 3,600 units
b. 360,000 units (annual usage)  3,600 units (per order) = 100 orders
Ordering cost: 100 orders @ P72 per order ............................................. P 7,200
Carrying cost: (3,600 units  2) @ P4.00 per unit .................................... 7,200
Total order and carrying cost ................................................................... P14,400
16

Problem 3
1. c
2. c
3. a
4. d
Problem 4
1. D
2. A
3. C
17

4. C
5. C
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 Journal entry if the value of scrap is of small value or the quantity and market
value is unknown.
Cash xxx
Scrap Revenue xxx
Spoiled Units
 Spoiled units have imperfections that cannot be economically corrected. They are sold as
items of inferior quality or „„seconds.‟‟
 The loss can be treated as part of the cost of the job or charge to Factory Overhead.
Journal Entries
Case 1: If the spoilage will be charged to all jobs through the Factory Overhead account.
Spoiled Goods Inventory xxx
Factory Overhead xxx
Work in process (Job A) xxx
Notes:
1) Spoiled Goods Inventory was recognized based on the expected realizable value of the spoilage.
2) Loss on the spoilage was charged to Factory overhead
3) Work-in process for a job was reduced based on its manufacturing cost less the value of the spoilage if sold (direct labor, direct
materials, and factory overhead)
Case 2: If the spoilage will be charged to a specific job.

Spoiled Goods Inventory xxx
Work in process (Job A) xxx
Notes:
1) Spoiled Goods Inventory was recognized based on the expected realizable value of the spoilage.
2) Loss on the spoilage will not be removed from the manufacturing cost of the job. Only the net realizable value of the spoilage will
be removed by decreasing the Work-in process account of the specific job.
Defective Units
 Defective units have imperfections considered correctable because the increase in market
value by correcting the unit exceeds the cost to correct it.
 The extra costs are either charged to the job or Factory Overhead.
Journal Entries
Case 1: Rework cost of the defective products are applied to all jobs.
Materials xxx
Payroll Xxx
Case 2: Rework cost of the defective products are applied to a specific job.
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Work-in process xxx

Materials xxx
Payroll Xxx
The additional cost of direct materials, direct labor, and factory overhead of reworking the
product are recorded either by spreading over the cost all of the jobs (case 1) or to a specific job
(case 2)
2) Activity 4: Skill-building Activities (75 mins) SCORE: ________________
Let‟s try to practice what you have learned! Check your answers against the Key to Corrections found
Problem 1 (LO1)
Milano‟s Specialty Clothing, Inc., uses a job order cost system. A partial list of the accounts
being maintained by the company, with their balances as of November 1, follows:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P82,250
Materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,500
Work in process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,000
Accounts payable (credit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,000
Factory overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . none
The following transactions were completed during the month of November:

a. Materials purchases on account during the month, P74,000.
b. Materials requisitioned during the month:
1. Direct materials, P57,000.
2. Indirect materials, P11,000.
c. Direct materials returned by factory to storeroom during the month, P1,100.
d. Materials returned to vendors during the month prior to payment, P2,500.
e. Payments to vendors during the month, P68,500.
Required:
1. Prepare general journal entries for each of the transactions.
2. Post the general journal entries to T-accounts.
3. Balance the accounts and report the balances of November
30 for the following:
a. Cash
b. Materials
c. Accounts Payable
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It‟s time to answer the questions in the “What I Know Chart” in Activity 2. Write your answers in
the “What I Learned” column. Let‟s see your improvement!
To better test your knowledge on the topic, provide what is being asked. To check if you got it right,
your teacher will provide you the key answers. Be honest in checking. 
PROBLEM 1
The following accounts are maintained by the Sprague Manufacturing Company in its general ledger:
Materials, Work in Process, Factory Overhead, and Accounts Payable. The materials account had a
debit balance of P40,000 on November 1. A summary of material transactions for November shows:
(1) Materials acquired on account, P62,000
(2) Direct materials issued, P58,500
(3) Direct materials returned to storeroom, P1,200
(4) Indirect materials issued, P3,600
(5) Indirect materials returned to storeroom, P550
(6) Materials on hand were P200 less than the stores ledger balance
Requirements:
a. Prepare journal entries to record the materials transactions.
b. Post the journal entries to T-accounts.
c. What is the balance of the materials account on November 30?
PROBLEM 2
The Reardon Company manufactures novelty toys. In June, 400 of these toys were completed on Job
Order No. 2525. On final inspection, 20 toys were rejected and transferred to the spoiled goods
inventory to be sold at P2 each.
Costs recorded on Job Order No. 2525 follow:
Direct materials P1,600

Direct labor 1,400
Factory overhead 800
Prepare the journal entries to record the following:
a. Charges for materials, labor, and factory overhead for Job Order No. 2525
b. Cost of the spoiled work, the transfer of the cost of the good toys to Finished Goods, and the
sale of the imperfect toys, if the loss on spoilage is charged to all jobs worked on during the period
c. Cost of the spoiled work, the transfer of the cost of the good toys to Finished Goods, and the
sale of the imperfect toys, if the loss on spoilage is to be charged to Job Order No. 2525 only. (Round
the new unit cost to the nearest whole cent, and assume part b, above, has not occurred.)
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C. LESSON WRAP-UP
1. Work Tracker
You are done with this session! Let‟s track your progress. Shade the session number you just
completed.
your rating?
__________________________________________________________________________________
__________________________________________________________________________________

__________________________________________________________________________________
__________________________________________________________________________________

__________________________________________________________________________________
__________________________________________________________________________________
FAQs
1. Can I use Materials, Materials Inventory, Raw Materials, Raw Materials Inventory account titles in
journalizing?
Yes, you may pick one of the following account titles as long as it is consistent all throughout the
accounting process to avoid confusion to users.
KEY TO CORRECTIONS
Activity 1:
1. Investment Control
2. Materials requisition
3. Flow of costs
4. LIFO method
5. Production supervisor
6. Purchase requisition
7. False; order point
8. True
9. True
10. True
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Problem 1
1.
a. Materials....................................................................... 84,000
Accounts Payable ................................................... 84,000
b. Work in Process ........................................................... 57,000
Factory Overhead......................................................... 11,000
Materials ................................................................. 68,000
c. Materials....................................................................... 1,100
Work in Process ...................................................... 1,100
d. Accounts Payable ........................................................ 3,500
Materials ................................................................. 3,500
e. Accounts Payable ........................................................ 63,500
Cash ....................................................................... 63,500
2.
Cash Accounts Payable
Bal. 82,250 (e) 63,500 (d) 3,500 Bal. 21,000
18,750 (e) 63,500 (a) 84,000
67,000 105,000
38,000
Materials Factory Overhead
Bal. 29,500 (b) 68,000 (b) 11,000
(a) 84,000 (d) 3,500
(c) 1,100 71,500
114,600
43,100
Work in Process
Bal. 27,000 (c) 1,100
(b) 57,000
84,000
82,900
3. a. Cash balance ................................................................................... P18,750

b. Inventory of materials on hand ......................................................... 43,100
10

c. Accounts payable ............................................................................. 38,000
Problem 2
1.
a. Work in Process ........................................................... 7,000
Materials ................................................................. 3,500
Payroll ..................................................................... 1,500
Factory Overhead ................................................... 2,000
b. Spoiled Goods .............................................................. 300
Factory Overhead (Loss Due to Spoiled Goods) .......... 120
Work in Process ...................................................... 420
c. Cash ............................................................................. 300
Spoiled Goods ........................................................ 300
2.
a. Same as 1a above.
b. Spoiled Goods .............................................................. 300
Work in Process ...................................................... 300
c. Same as 1c above.
Problem 3
1. Spoiled Goods Inventory (18 x P75) ................................ 1,350

Work in Process .......................................................... 1,350
2. Work in Process ............................................................... 4,350

Materials ..................................................................... 1,650
Payroll ......................................................................... 1,500
Factory Overhead ....................................................... 1,200
3. Work in Process ............................................................... 5,400
Materials (18P117) .................................................. 2,106
Payroll (18P100)...................................................... 1,800
Factory Overhead (18P83) ...................................... 1,494
4. Cash ................................................................................ 1,350
Spoiled Goods Inventory ............................................. 1,350
11

PART I
PROBLEM 1
(a) Work in Process (P3,800/400 = P9.50) 3,800

Materials 1,600
Payroll (direct labor) 1,400
Factory Overhead 800
(b) P2) 40
P9.50) 190
P9.50) 3,610
Work in Process 3,610
Cash 40
Spoiled Goods 40
(c) Spoiled Goods 40

Work in Process 40
P9.90*) 3,762
Cash 40
Spoiled Goods 40
* P3,800 - P40 = P9.895 rounded

380
PROBLEM 2
(a) (1) Materials 62,000
Accounts Payable 62,000
(2) Work in Process 58,500

Materials 58,500
(3) Materials 1,200

(4) Factory Overhead 3,600

Materials 3,600
(5) Materials 550
12

(6) Factory Overhead 200

Materials 200
(b)
Materials Accounts Payable
Bal. 40,000 | (2) 58,500 | (1) 62,000
(1) 62,000 | (4) 3,600
(3) 1,200 | (6) 200
(5) 550 |
103,750 | 62,300
Work in Process Factory Overhead

(2) 58,500 | (3) 1,200 (4) 3,600 | (5) 550
(6) 200 |
(c) The balance of the materials account = P103,750 - P62,300

= P 41,450
13

Lesson title: Job-Order: Direct Labor Materials:

1. Explain the different wage plans. Cabrera; Cost Accounting & Control;
2. Account for labor costs and special payroll cost problems. 2018-2019 Edition
Control; 2019 Edition
th
Productivity Tip:
Try explaining the process to someone you know who is already working (this is because of the topic
itself). Check your module materials again later if your explanation is correct.
Ready for another learning? You will enjoy the next topic because someday, you’ll be earning and you’ll
meet the term ―payroll‖. Payroll refers to the total amount of wages and salaries paid by a company to
its employees. Excited to earn someday?  Hold on for a sec, you need to develop the necessary skills
today before you will provide your professional services. It’s okay to commit mistakes now, rather than
face a bigger problem in the future because of not taking the lessons seriously!
In this module, you’ll have the perspective of an accountant who’s responsible in accounting for the
labor costs on how it will affect the unit cost of products/services provided by the company. You may
now start.

1. What are the different wage
plans can a company provide to
its employees?
2. Provide the entry when payroll
is incurred. Include the
deductions.
B. MAIN LESSON
1) Activity 3 (LO1 and LO2): Content Notes (13 mins)
1

Make sure to highlight or underline the important parts! Refer to chapter 6 of your book for additional
discussion found on page 181.

Indirect
Expenses
Conversion Cost
Payroll Costs:
1. Direct Labor
 Represents payroll costs traced directly to an individual job.
 Also known as ―touch labor‖. Wages of machinists, assemblers, and other workers who
physically convert raw materials to finished goods—thus the term ―touch labor‖.
 Direct labor costs are debited to the work in process account.
2. Indirect Labor
 Labor consists of labor costs incurred for a variety of jobs related to the production
process but not readily traceable to the individual jobs worked on during the period.
 Salaries and wages of the factory superintendent, supervisors, janitors, clerks, and
factory accountants who support all jobs worked on during the period.
 Indirect labor costs are charged to factory overhead.
Payroll Accounting System for a Manufacturer
1. Record the hours worked or quantity of output by employees in total and by job, process,
or department.
2. Analyze the hours worked by employees to determine how labor time is to be charged.
3. Charge payroll time to jobs, processes, departments, and factory overhead.
4. Prepare the payroll.
LO1: Explain the different wage plans
Common Wage Plans

1. Hourly rate plan
 The employee’s wages are calculated by multiplying the established rate per hour by the
number of hours worked.
 This plan does not provide an incentive for the employee to achieve a high level of
productivity.
2

2. Piece-rate plan
 Employee’s wages based on the employer’s quantity of production.
 Number of units produced is multiplied by a predetermined rate.
 May be referred to as incentive wage plan or piece-rate plan.
 Quality may be sacrificed in order to maximize quantity.
3. Modified Wage plan

 Minimum hourly wage is set even if an established quota is not attained.
 If quota is exceeded, a bonus is added to the minimum wage level.
 On days when the quota is not met, the difference (make-up guarantee) would be
charged to factory overhead.
 When production work teams are utilized, a single incentive for the group would be
appropriate.
Labor Time Records

 Given the magnetic card reading technology available today, the time record typically
takes the form of a computer file.
 The labor hours recorded should be reviewed by a production supervisor for accuracy
Payroll Function
 Primary responsibility is to compute the wages and salaries earned by the employees.
 Forms should include a payroll record and employees’ earnings records.
 A summary of the payroll is sent to accounting to record the payroll in the accounting
records.
 The payroll record is sent to the treasurer’s department for making payments to
employees.
LO2: Account for labor costs and special payroll cost problems
Accounting for Labor Costs

 Labor-time records are sent to the payroll department on a daily basis.
 The labor costs are charged to the appropriate jobs or departments and factory overhead.
 This analysis is recorded on a labor cost summary, in the job cost ledger, and in the
factory overhead ledger.
 Earnings of salaried employees are recorded in the factory overhead ledger accounts and
on the labor cost summary.
Journal entry to record Payroll

Payroll* xxx
Income Tax Payable (employees) xx
SSS Payable xx
Philhealth Payable xx
PAG-IBIG Payable xx
Other employee deductions xx
3

Wages Payable xx
*Payroll will be distributed to different accounts that is applicable for the incurrence.
Payment of earnings to employees

 Accounting department sends the payroll record to the treasurer’s office.
 The treasurer’s office is responsible for making the payments to employees.
Journal entry for payment of earnings

Wages Payable xx
Cash xx
Flow of Costs from Subsidiary Records to General Ledger
Labor Cost Summary

 Hourly workers should be recording their time on a labor time record.
 Labor costs are recorded on a labor cost summary.
 This summarizes the direct labor and indirect labor charges to a department for the
period.
 Salaried employees are often not required to prepare labor time records.
 The labor cost summary becomes the source for making a general journal entry, shown
below, to distribute payroll to the appropriate accounts.
Work-in-process xx
Factory Overhead xx
Sales Salaries xx
Administrative Salaries xx
Payroll xxx
4

Payroll Accrual
 When the end of the period does not coincide with the ending date for a payroll period, an
accrual for payroll earnings should be made.
Payroll xx
Wages Payable xx
Special Labor Cost Problems

 Shift Premiums – additional pay to employees because of shifts other than the regular
daytime shift.
 Employee Pension - originate from an agreement between a company and its employee
group, by which the company promises to provide income to employees after they retire.
 Bonuses – higher than usual company profits, exceeding departmental quotas for selling
or production, or for any other achievement that the company feels merits additional pay.
 Vacation and Holiday pay - Vacation pay is earned by the employee for daily service on
the job over the course of the year. Holiday pay is an agreement that stipulates that
certain holidays during the year will be paid for by the company, but they are nonworking
days for the employees.
Work in Process XX
Factory Overhead (Bonus) XX
Factory Overhead (Vacation) XX
Factory Overhead (Holiday) XX
Payroll XX
Bonus Liability XX
Vacation Pay Liability XX
Holiday Pay Liability XX
Incurred payroll and bonus, vacation, and holiday pay.
2) Activity 4: Skill-building Activities (18 mins + 2 mins checking) SCORE: ________________
Let’s try to practice what you have learned! Check your answers against the Key to Corrections
found at the end of this SAS. Write your score on the space provided.
Part I (LO1): Wage Plans

1. What is the difference between direct and indirect labor?
5

2. Discuss the advantages and disadvantages between hourly rate wag plans and piece-rate plans.
3. Does a modified wage plan promotes effectiveness and efficiency at the same time? Why or why
not?
PART II (LO2): Let’s Practice!
Problem 1
An employee earns P20 per hour for up to 200 units of production per day. An employee who produces
more than 200 units per day receives an additional piece rate of P.50 per unit. Assume that an
employee worked eight hours per day with the following unit production for the week: Monday, 200;
Tuesday, 175; Wednesday, 225; Thursday, 250; and Friday, 150. Calculate the employee’s gross
earnings for the week.
B
A Total
Piece-rate Earnings
Day Hours Units Hourly Earnings Earnings
(units in excess of
(fixed rate) (A+B if any)
200 x P.50)
Monday 8 160
Tuesday 8 160
Wednesday 8 160
Thursday 8 160
Friday 8 160
Total 40 800
Problem 2
The total wages and salaries earned by all employees of Dilbert Mfg. Co. during the month of April, as
shown in the labor cost summary and the schedule of fixed administrative and sales salaries, are
6

classified as follows:
Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P312,563
Indirect labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81,060
Administrative salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .70,100
Sales salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 86,250
Total wages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P549,973
Prepare a journal entry to distribute the wages earned during April.
Problem 3
Larry Riester earns P1,000 per week for a five-day week, and he is entitled to 10 paid holidays and four
weeks of paid vacation per year.
a. What is the amount of the total holiday pay and how much of it should be expensed per week?
Holiday pay = ______ rate per day x _______ paid holidays = P _______________
Expense per week = _______ holiday pay / _____ weeks worked in a year = P___________
b. What is the total vacation pay and how much of it should be expensed per week?
Vacation pay = _______ rate per week x ______ weeks of paid vacation = P ____________
Expense per week = _______ vacation pay / ____ weeks worked in a year = P __________.

It’s time to answer the questions in the ―What I Know Chart‖ in Activity 2. Write your answers in
the ―What I Learned‖ column. Let’s see your improvement!
To the teacher:
 This serves as the student’s review and summary of what was learned from the session.
 Ask students to monitor how their knowledge has changed by reviewing the questions in the
What I Know Chart from Activity 1 and write their answers to the questions based on what they
now know in the third column of the chart.
4) Activity 6 (LO & LO): Check for Understanding (5 mins)
To better test your knowledge on the topic, encircle the best answer for each question.
1. Under a modified wage plan, an employee earns P.75 for each finished unit and is guaranteed P10
per hour as a minimum wage. If the daily quota is 100 units, on a particular day when an employee
completes 85 units and works 8 hours, the amount of the make-up guarantee will be:
a. P80.00
b. P72.25
c. P16.25
7

d. P5.00
2. An employee regularly earns P12 per hour for an 8-hour day with time-and-a-half for overtime hours.
Assuming that the employee works a 10-hour day, the amount of overtime premium is:
a. P36.
b. P18.
c. P12.
d. P6.
3. A factory worker earns P500 per week and will receive a P2,000 bonus at year-end, a 2-week paid
vacation, and 5 paid holidays. The combined amount of the accruals for bonus, vacation, and holiday
pay in the weekly payroll would be:
a. P20.00.
b. P70.00.
c. P40.00.
d. None of the above.
4. Western Industries pays employees on a weekly basis on Tuesday for the week ended the previous
Friday. Employees’ compensation is earned evenly each day over a 5-day work week. This year, April
30 fell on Thursday. Payroll costs for the week ended May 1 follow:
Non Factory:
Sales P 5,000
Administrative 10,000
P15,000
Factory:
Direct labor P25,000
Overtime premium 2,500
Indirect labor 15,000
P42,500
P57,500
Excluding payroll taxes, what amount should be accrued to the payroll account for the period ended
April 30?
a. P57,500
b. P46,000
c. P42,500
d. P34,000
C. LESSON WRAP-UP
To the teacher:
8

 Direct the student to mark their place in the work tracker which is simply a visual to help
students track how much work they have accomplished and how much work there is left to do.
In addition, let the students think about their learning by asking the questions below.
1. Work Tracker
completed.
your rating?
__________________________________________________________________________________
__________________________________________________________________________________

__________________________________________________________________________________
__________________________________________________________________________________

__________________________________________________________________________________
__________________________________________________________________________________
FAQs
1. What purpose do digital records and remote computer terminals serve in a payroll system?
Many companies issue magnetic cards to direct laborers who use them to “log on” and “log off” to
specific job assignments. They slide the card through a magnetic card reader that is connected to a computer
terminal. The computer sends this information to the accounting department for the preparation of the payroll
and the distribution of the labor costs to the appropriate jobs.
2. Are employers required to provide retirement plans to its employees?

According to Republic Act no. 7641, “In the absence of a retirement plan or agreement providing for
retirement benefits of employees in the establishment, an employee upon reaching the age of sixty (60) years
or more, but not beyond sixty-five (65) years which is hereby declared the compulsory retirement age, who has
served at least five (5) years in the said establishment, may retire and shall be entitled to retirement pay
equivalent to at least one-half (1/2) month salary for every year of service, a fraction of at least six (6) months
being considered as one whole year.
9

Unless the parties provide for broader inclusions, the term one-half (1/2) month salary shall mean fifteen (15)
days plus one-twelfth (1/12) of the 13th month pay and the cash equivalent of not more than five (5) days of
service incentive leaves.
Retail, service and agricultural establishments or operations employing not more than (10) employees or
workers are exempted from the coverage of this provision.
Violation of this provision is hereby declared unlawful and subject to the penal provisions provided under
Article 288 of this Code."
KEY TO CORRECTIONS
Activity 4: Skill-building Activities
Part I (LO1):
1. Direct labor is that part of factory wages earned by employees who perform work on the item manufactured;
it is charged directly to the job or product. Indirect labor is that part of factory wages earned by employees
engaged in the manufacturing process who do not work directly on the units being manufactured; it cannot be
charged to any particular job or product but must be treated as overhead.
2. An advantage of the hourly rate plan is that there is no temptation on the part of the workers to speed up
their work at the sacrifice of quality or perfection. On the other hand, it provides no incentive for increased
production. Whereas, the principal advantage of the piece-rate plan is that it provides an incentive for
increased production. The more units produced under such a plan, the higher the employee's earnings.
However, there may be a temptation to strive for a high level of output at a sacrifice of quality. A greater degree
of supervision is required and more detailed records must be maintained when a piece-rate plan is used.
3. Yes. A modified wage plan combines certain features of both the hourly rate and piece-rate plans.
Employees are paid a regular hourly wage (not sacrificing quality) plus an additional incentive rate if
established quotas are exceeded (efficiency incentive of an employee who exceeds the required production
per period).
PART II (LO2): Let’s Practice!

Problem 1
B
A Total
Piece-rate Earnings
Day Hours Units Hourly Earnings Earnings
(units in excess of
(fixed rate) (A+B if any)
200 x P.50)
Monday 8 200 160 160.00
Tuesday 8 175 160 160.00
Wednesday 8 225 160 12.50 172.50
Thursday 8 250 160 25 185.00
Friday 8 150 160 160.00
Total 40 1,000 800 37.50 837.50
Problem 2
10

Work in process 312,563

Factory Overhead (indirect labor) 81,060
Administrative salaries 70,100
Sales Salaries 86,250
Payroll 549,973
Problem 3
A.
Holiday pay = (P1000 / 5 days) x 10 paid holidays = P 2,000
Expense per week = P2000 holiday pay / 48 weeks worked in a year = P 41.67 per week
B.
Vacation pay = P1000 rate per week x 4 weeks of paid vacation = P 4,000
Expense per week = 4,000 vacation pay / 48 weeks worked in a year = P 83.33 per week

1. C. Make-up guarantee = (P10 x 8 hours) - (P.75 x 85 pieces) = P16.25
2. C. Overtime premium = 2 hours x P6 = P12
3. B
Bonus: Bonus: P2,000 / 50 weeks = P40
Vacation pay: P500 x 2 weeks = P1,000 / 50 weeks = P20
Holiday pay: P500 / 5 days = P100 per day x 5
= P500 / 50 weeks
= P10
Total accrual = P40 + P20 + P10 = P70
4. B. If April 30 is Thursday, four days of the payroll fall in April and one in May.
P57,500 / 5 days = P11,500 per day x 4 days = P46,000
11

Lesson title: Job-Order: Accounting for Overhead Materials:

1. Identify cost behavior patterns and apply factory overhead Cabrera; Cost Accounting & Control;
using pre-determined overhead rates 2018-2019 Edition
2. Account for actual and applied factory overhead. Hansen & Mowen; Cost Accounting &
th
Introduction to Managerial Accounting;
th
7 edition
https://www.accountingtools.com/articl
es/2017/5/9/factory-overhead
Productivity Tip:
Create flashcards for key terms and concepts you learned today.
Quiz yourself using these flashcards every few days!

Let’s begin this module by reviewing what you have learned in the previous modules. Answer
what is being asked.
a. If the cost of materials that can be directly traced to the product is called direct materials, then
the cost of materials that cannot be directly traced to the product is called ______________.
b. Touch labor is also referred as _____________.
c. Materials and labor costs that are not directly traceable to the creation of the product is charged
to what account? ______________
Already done? Check your answers at the end of the module under the Key to Correction part.
Write your score here _______________.
For this module, you will learn the last component of manufacturing costs which is the factory
overhead. Costs that are not direct traceable to the product but are incurred to manufacture are
charged to this account. You will know the cost behavior patterns, computing for the predetermined
overhead rates and how to account for actual and applied overheads.
You may now start.
1


1. What are the cost behavior
patterns?
2. What is the formula of

predetermined overhead rate?
3. Does the actual overhead cost

enter the work-in-process
inventory account?
B. MAIN LESSON

Indirect
Expenses
Conversion Cost
Factory overhead or manufacturing overhead is the cost incurred during the manufacturing
process, not including the costs of direct labor and direct materials. Factory overhead is normally
aggregated into cost pools and allocated to units produced during the period.
Examples:
 Production supervisor salaries
 Quality assurance salaries
 Materials management salaries
 Factory rent
 Factory utilities
 Factory building insurance
 Fringe benefits
 Depreciation
 Equipment setup costs
 Equipment maintenance
 Factory supplies
2

 Factory small tools charged to expense

 Insurance on production facilities and equipment
 Property taxes on production facilities
Accounting for Factory Overhead

1. Identify cost behavior patterns.
2. Budget factory overhead costs.
3. Accumulate actual overhead costs.
4. Apply factory overhead estimates to production.
5. Calculate and analyze differences between actual and applied factory overhead.
LO1: Identify cost behavior patterns & Apply factory overhead using pre-determined rates
Cost Behavior Patterns

1) Variable costs are costs that vary in proportion to volume changes.
2) Fixed costs remain constant within the relevant range of production.
3) Semivariable costs (or mixed cost) have characteristics of both fixed and variable costs.
a. Type A – remain constant over a range of production, then change abruptly.
b. Type B – vary continuously but not in direct proportion to volume changes.
Applying Factory Overhead to Production

 Factory overhead costs may not be known until the end of the accounting period.
 The cost of a job is needed soon after completion, so a method to estimate the amount of
factory overhead applied must be established using pre-determined overhead rates.
 This enables companies to bill customers on a timelier basis and to prepare bids for new
contracts more accurately.
Methods of Predetermined Overhead Rates
3

Direct Labor Cost Method Direct Labor Hour Method

 Uses the amount of direct labor cost  Estimated factory overhead cost is
that has been charged to the product as divided by the estimated direct labor
the basis for applying factory overhead. hours to be worked.
 Example, factory overhead is applied  Example, factory overhead is applied
50% of direct labor cost. P4 per direct labor cost.
JOB 100 JOB 100

Direct Materials P 1,000 Direct Materials P 1,000
Direct Labor 3,000 Direct Labor (500 hrs) 3,000
Factory Overhead (50% of Direct 1,500 Factory Overhead (500 hrs x P4) 2,000
Labor Php) Total Cost of Completed Job P 6,600
Total Cost of Completed Job P 5,500
Machine Hour Method Activity-Based Costing (ABC) method

 This method best serves highly  The company must first identify
automated departments where the activities in the factory that create
amount of factory overhead cost costs.
incurred on a job primarily is a function  Then a basis or cost driver must be
of the machine time that a job requires. decided upon to allocate each of the
 Example, factory overhead is applied activity cost pools.
based on machine hours at P10 per  This approach is best when the
machine hours. There were a total of company has significant nonvolume-
300 machine hrs. related costs in its plant which are not
caused by traditional cost drivers such
JOB 100 as labor hours and machine hours.
Direct Materials P 1,000
Direct Labor (500 hrs) 3,000 Go to chapter 4 of your book for a more detailed
Factory Overhead (300 hrs xP10) 3,000 discussion found on page 142.
Total Cost of Completed Job P 7,000
LO2: Accounting for Actual and Applied Factory Overhead
Accounting for Actual and Applied Factory Overhead
 Under a normal costing approach, actual overhead costs are never assigned to jobs.
Overhead is applied to each individual job using a predetermined overhead rate.
Nevertheless, the company must still account for actual overhead costs incurred.
Journal Entries
Work in process xx
Applied Factory Overhead xx
Entry to apply estimated factory overhead to production
4

Factory Overhead xx
Lease Payable – factory xx
Utilities Payable – factory xx
Accumulated depreciation – factory equipment xx
Wages Payable xx
Entry when actual overhead cost is incurred
Applied Factory Overhead xx

Factory overhead xx
At the end of the period, the applied factory overhead account is closed to Factory
Overhead.
Under- and Over-applied Factory Overhead

 After the applied factory overhead account is closed, the under-applied (debit) or over-
applied (credit) balance in the factory overhead account is moved to cost of goods sold if
the amount is immaterial to affect net income. But the amount of under or over application is
significant enough to distort net income, an adjustment is required to restate the balances of
the Work in Process, Finished Goods Inventory, and Cost of Goods Sold.
Under and over-applied overhead application xx

Factory Overhead xx
Closed debit balance (under-applied) in factory overhead control account.
Cost of Goods Sold xx

Closed debit balance in Under- and Overapplied Factory Overhead when the
amount is insignificant
Cost of Goods Sold xx

Work in process xx
Finished Goods xx
Closed debit balance in Under- and Overapplied Factory Overhead when the
amount is significant to distort net income.
 Under or over application of overhead will be distributed based on the ending balances of
Cost of goods sold, Finished Goods, and Work in Process.
 The amount allocated to Cost of Goods Sold becomes a period cost that directly reduces
net income for the current period. The amounts allocated to Work in Process and Finished
Goods become part of the product cost of the inventories and will be deferred, along with
the other inventory costs, to the next period when the inventories are completed and sold.
Period costs - All costs that are not assigned to the product, but are recognized as expense and
charged against revenue in the period incurred.
Product costs - Costs that are included as part of inventory costs and expensed when goods are
sold.
5

Go to Chapter 6 of your book on pages 168-193 for additional discussions.
Part I (LO1): Applying Overhead with Various Bases
Karter Company manufactures shelving units. The company receives pre-cut wood, drills holes in the
wood so that movable shelves may be installed, then assembles and paint the units. Classify each of
the following items of factory overhead as either fixed or variable cost.
a. Janitorial service (an outside service, not company employees)

b. Supervisor of the Drilling Department
c. Oil used to lubricate drill press machines
d. Propane for forklift trucks used to move the material from the Drilling Department to the
Assembly Department
e. Natural gas used to heat the plant
f. Security guard
g. Drill bits used in the drilling department
h. Insurance on factory building
i. Electricity to power drill press machines
j. Rent of factory building
Part II (LO1 & LO2): Overhead Rate and Application
Flamingo Manufacturing Company is studying the results of applying factory overhead to production.
The following data have been used: estimated factory overhead, $60,000; estimated materials costs,
$50,000; estimated direct labor costs, $60,000; estimated direct labor hours, 10,000; estimated
machine hours, 20,000; work in process at the beginning of the month, none.
The actual factory overhead incurred for the month of November was $80,000, and the production
statistics on November 30 are as follows:
Job Materials Cost Direct Labor Direct Labor Machine Hours Date Jobs
Cost Hours Completed
101 P 5,000 P 6,000 1,000 3,000 Nov. 10
102 7,000 12,000 2,000 3,200 Nov. 14
103 8,000 13,500 2,500 4,000 Nov. 20
104 9,000 15,600 2,600 3,400 In process
105 10,000 29,000 4,500 6,500 Nov. 26
106 11,000 2,400 400 1,500 In process
Total P 50,000 78,500 13,000 21,600
6

Required:
1. Compute the predetermined rate, based on the following:
a. Direct labor cost
b. Direct labor hours
c. Machine hours
2. Using each of the methods, compute the estimated total cost of each job at the end of the month.
3. Determine the under- or overapplied factory overhead, in total, at the end of the month under each of
the methods.
4. Which method would you recommend? Why?
Part III (LO2): Accounting for Actual and Applied Factory Overhead
TITA Company had a remaining credit balance of $20,000 in its under- and overapplied factory overhead
account at year-end. The balance was deemed to be large and, therefore, should be closed to Work in
Process, Finished Goods, and Cost of Goods Sold. The year-end balances of these accounts, before
adjustment, showed the following:
Work in Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,000
Finished Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Cost of Goods Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $200,000
a. Determine the prorated amount of the overapplied factory overhead that is chargeable to each of the
accounts.
b. Prepare the journal entry to close the credit balance in Under- and Overapplied Factory Overhead.

To better test your knowledge on the topic, answer the following individually. If you need help, you may
seek help from you teacher for additional guidance. To check your answer, ask your teacher for the key
answer after you are done with the activity.
Part I (LO1): Applying Overhead with Various Bases

Please go to chapter 6 of your book, pages 196-197 answer Exercise # 3 & #4(Requirement 1 & 2
only).
Assignment:
Kindly answer Test-Material 6-1 on Chapter 6 pages 208-209 of you book. Use separate sheet of paper
in answering this problem. The teacher will provide the answers after the students submitted their
assignments.
7

C. LESSON WRAP-UP
1. Work Tracker
completed.
your rating?
__________________________________________________________________________________
__________________________________________________________________________________

__________________________________________________________________________________
__________________________________________________________________________________

__________________________________________________________________________________
__________________________________________________________________________________
FAQs
1. Why can’t manufacturing firms wait until the end of the period to determine overhead costs per unit for the
costing to be more accurate?
Accuracy of costing is important, however, timely unit cost information is also needed throughout the
year, both for interim financial statement and to help managers make decisions such as pricing. Waiting until
the end to determine overhead costs per unit is unacceptable.
2. If a building is composed of different areas such as the factory area of the product, physical store of the
company, and administration office, will all the depreciation of the building or rental expense (assuming the
building was rented) be included in the factory overhead?
No. The depreciation or rental expense will be allocated proportionately according to the function of the
building and the cost that will be charged to the factory overhead will be the factory area that is only applicable
to the manufacturing of the product.
8

KEY TO CORRECTIONS

PART I (LO1)
a. Fixed. A janitorial service is most likely hired for a nightly cleaning, regardless of production volume.
b. Fixed. The cost of supervisors is likely to remain constant unless production volumes increase significantly.
c. Variable. The higher the production volume, the more the presses will run and more oil will be required to
lubricate them.
d. Variable. The higher the production volume, the more the forklifts will be needed to move materials to the
Assembly Department.
e. Fixed. Heating costs will not vary in proportion to production volumes.
f. Fixed. Increased production volumes will not necessitate additional security, which is dictated more by plant
size, location and type of business.
g. Variable. Drill bits wear out as they are being used. Increased production volumes will call for an increased
number of drill bits.
h. Fixed. Insurance premium based on value of building, not on production volumes.
i. Variable. Increased production volumes will necessitate increased electricity usage.
j. Fixed. Building rental determined by contract, not production volumes.
PART II (LO1 & LO2)

1. Predetermined rates:
a. Direct labor cost
rate = Estimated overhead  Estimated labor cost
100% = $60,000  $60,000
b. Direct labor hour
rate = Estimated overhead  Estimated labor hours
$6.00 = $60,000  10,000
c. Machine hour rate = Estimated overhead  Estimated machine hours
$3.00 = $60,000  20,000
2. Total Cost of jobs
9

3. Under- and overapplied overhead:

Direct Direct
Labor Labor Machine
Cost Hour Hour
Actual factory overhead .................................. P75,000 P75,000 P75,000
Applied overhead:
Direct labor cost—(P78,500  100%) ......... 78,500
Direct labor hour—(13,000  P6.00) ........... 78,000
Machine hour—(21,600  P3.00) ................ 64,800
Underapplied (overapplied)
Overhead ............................................... P(3,500) P (3,000) P10,200
4. Either the direct labor cost or direct labor hour method. The machine- hour method results in applied
overhead that is far different than actual overhead.
Part III (LO2): Accounting for Actual and Applied Factory Overhead
a. Work in Process ...................................................................... P 25,000 12.50%

Finished Goods ....................................................................... 50,000 25.00
Cost of Goods Sold ................................................................. 125,000 62.50
Total ........................................................................................ P 200,000 100.00%
Work in Process (P20,000  12.50%) ...................................... P 2,500
Finished Goods (P20,000  25.00%) ....................................... 5,000
Cost of Goods Sold (P20,000  62.50%) ................................. 12,500
P 20,000
b. Under-and Overapplied Factory Overhead 20,000
Work in Process…………………………………………… .... 2,500
Finished Goods ................................................................... 5,000
Cost of Goods Sold ............................................................. 12,500
10


Exercise # 3
Requirement #1 (Pre-determined Overhead Rates)
Company X: Pre-determined OH rates = Total Manufacturing Overhead Cost/Direct Labor Hours

Pre-determined OH rates = 432,000/60,000
Pre-determined OH rates = P7.20 per DLHs
Company Y: Pre-determined OH rates = Total Manufacturing Overhead Cost/Machine Hours

Pre-determined OH rates = P3.00 per MH
Company Z: Pre-determined OH rates = Total Manufacturing Overhead Cost/Raw Material Cost

Pre-determined OH rates = 160% of materials
Requirement #2
Actual overhead costs incurred P420,000

Overhead cost applied to Work in Process
(58,000 actual hours X P7.20 per hour) 417, 600
Under-applied overhead cost P 2, 400
*7,000 + 30,000 + 21, 000 = 58,000 hours
Exercise #4
Requirement 1
Milling Department: Pre-determined OH rates = Total Manufacturing Overhead Cost/Machine Hours
Pre-determined OH rates = P8.50 per MHs
Assembly Department :Pre-determined OH rates = Total Manufacturing Overhead Cost/Machine Hours

Pre-determined OH rates = 125% of direct labor cost
Requirement 2
Overhead Applied
Milling department: 90 MHs x P8.50 per MH P 765
Assembly department: P160 x 125% 200
Total overhead cost applied P 965
11

Lesson title: Statement of Goods Manufactured and Sold Materials:

1. Prepare statement of goods manufactured and sold Cabrera; Cost Accounting & Control;
2018-2019 Edition
https://www.investopedia.com/ask/ans
wers/112614/whats-difference-
between-cost-goods-sold-cogs-and-
cost-sales.asp
Productivity Tip:
Try doing a Picture Walk before starting this module. Take a quick look at the captions, activities,
diagrams, etc. This is to give your brain an idea of what’s coming - it’s like watching a trailer of a movie.
Doing this for a minute will help your brain organize your thoughts before studying.

Hello there! This is the last module for the 1st grading period, wasn’t that quick? Let us summarize the
discussion by combining what you have learned from the past by preparing Statement of Cost of Goods
Manufactured and Statement of Cost of Goods Sold. But before that, try to fill up the boxes below, can you
still recall?

COST

1


1. What is the formula of cost of
goods manufactured?
2. What is the formula of cost of

goods sold?
3. How to compute for operating

income in a manufacturing firm?
B. MAIN LESSON
1) Activity 3 (LO1): Content Notes (45 mins)
Make sure to highlight or underline the important parts! Refer to chapter 6 of your textbook.
LO1: Prepare statement of goods manufactured and sold
Terminologies
 Work in process – refers to a component of a company’s inventory that is partially completed.
The value of that partially completed inventory is sometimes also called goods in process on the
balance sheet (particularly if the company is manufacturing tangible items rather than providing
services).
 Finished Goods – refers to the number of manufactured products in stock that ar e available for
customers to purchase.
 Cost of Goods Manufactured - refers to a schedule or statement that shows the total
production costs for a company during a specific period of time. Just like the name implies,
COGM is the total cost incurred to manufacture products and transfer them into finished goods
inventory for retail sale.
 Goods Available For sale – The cost of goods available for sale is the total recorded cost of
beginning finished goods or merchandise inventory in an accounting period, plus t he cost of any
finished goods produced or merchandise added during the period.
 Cost of goods sold - refers to the direct costs of producing the goods sold by a company.
 Gross Margin - is a company's net sales revenue minus its cost of goods sold (COGS).

2

Indirect
Expenses
Conversion Cost
3

4


Part I (LO1): Be A-MAZE!

There are 3 mazes to solve. Answer first the START and choose your answer from the given
choices. After choosing your answer, maze your way from start to your chosen answer. Enjoy! 
MAZE 1
START = Direct Materials +

Direct Labor + Factory
Overhead + Work in process,
beg.
CHOICES
A Total manufacturing
Costs
B Cost of goods
manufactured
C Total cost of goods
placed into process
5

MAZE 2
START = Cost of goods sold +

finished goods, end.
CHOICES
A Finished goods, beg.
B Goods available for sale
C Cost of goods
manufactured
MAZE 3
START = Sales – (Cost of

goods manufactured +
Finished goods, beg. –
Finished goods, end.)
CHOICES
A Operating Income
B Net Margin
C Gross profit
6

PART II (LO1): Journal Entries, T-accounts, Cost of Goods Manufactured and Sold
During May, the following transactions were completed and reported by Jerico Company:
a. Materials purchased on account, $60,100.

b. Materials issued to production to fill job-order requisitions: direct materials, $50,000; indirect
materials,$8,800.
c. Payroll for the month: direct labor, $75,000; indirect labor, $36,000; administrative, $28,000; sales,
$19,000.
d. Depreciation on factory plant and equipment, $10,400.
e. Property taxes on the factory accrued during the month, $1,450.
f. Insurance on the factory expired with a credit to the prepaid insurance account, $6,200.
g. Factory utilities, $5,500.
h. Advertising paid with cash, $7,900.
i. Depreciation on office equipment,$800; on sales vehicles,$1,650.
j. Legal fees incurred but not yet paid for preparation of lease agreements,$750.
k. Overhead is charged to production at a rate of $18 per direct labor hour. Records show 4,000 direct
labor hours were worked during the month.
l. Cost of jobs completed during the month, $160,000.
The company also reported the following beginning balances in its inventory accounts:
Materials Inventory $7, 500

Work-in-Process Inventory 37, 000
Finished Goods Inventory 50, 000
Requirement:
1. Prepare journal entries to record the transactions occurring in May.
2. Prepare T-accounts for Materials Inventory, Overhead Control, Work-in-Process Inventory, and
Finished Goods Inventory. Post all relevant entries to these accounts.
3. Prepare a statement of cost of goods manufactured.
4. If the overhead variance is all allocated to cost of goods sold, by how much will cost of goods sold
decrease or increase?

4) Activity 6 (LO1): Check for Understanding (60 mins)
To better test your knowledge on the topic, answer the Multiple Choice questions (21 items) on
Chapter 6 of your book pages 198-205. Try to answer first the questions before checking your
answer on the Key to Correction section.
7

C. LESSON WRAP-UP
1. Work Tracker
completed.
your rating?
__________________________________________________________________________________
__________________________________________________________________________________

__________________________________________________________________________________
__________________________________________________________________________________

__________________________________________________________________________________
__________________________________________________________________________________
FAQ
1. When to use the terms Cost of Goods Sold and Cost of Sales?
Retailers typically use the cost of sales, whereas manufacturers use the cost of goods sold. Since
service-only businesses cannot directly tie any operating expenses to something tangible, they cannot list any
cost of goods sold on their income statements. Instead, service-only companies typically show the cost of
sales or cost of revenue. Businesses that might have no cost of goods sold include attorneys, painters,
business consultants, and doctors.
Some service providers offer secondary products to their customers; for example, airlines offer food
and beverages, and some hotels sell souvenirs. The costs associated with these items can also be listed as
cost of goods sold.
KEY TO CORRECTIONS
Activity 1:
Please refer to the content notes.

Part I (LO1):
8

Maze 1 – C
Maze 2 – B
Maze 3 - C
Part II (LO1)
Requirement 1
a. Materials .................................................................... 60,100
Accounts Payable ............................................. 60,100
b. Work in Process .................................................... 50,000
Overhead Control .................................................. 8,800
Materials ........................................................... 58,800
c. Work in Process .................................................... 75,000
Overhead Control .................................................. 36,000
Administrative Expense ......................................... 28,000
Selling Expense ..................................................... 19,000
Wages Payable ................................................. 158,000
d. Overhead Control .................................................. 10,400
Accumulated Depreciation................................. 10,400
e. Overhead Control .................................................. 1,450
Property Taxes Payable .................................... 1,450
f. Overhead Control .................................................. 6,200
Prepaid Insurance ............................................. 6,200
g. Overhead Control .................................................. 5,500
Utilities Payable ................................................. 5,500
h. Selling Expense ..................................................... 7,900
Cash ................................................................. 7,900
i. Administrative Expense ......................................... 800
Selling Expense ..................................................... 1,650
Accumulated Depreciation................................. 2,450
j. Administrative Expense ......................................... 750
Accounts Payable ............................................. 750
k. Work in Process ($18 × 4,000) .............................. 72,000
Overhead Control .............................................. 72,000
l. Finished Goods ..................................................... 160,000
Work in Process ................................................ 160,000
2. Materials Work in Process
9

Bal. 7,500 (b) 58,800 Bal. 37,000 (l) 160,000

(a) 60,100 (b) 50,000
8,800 (c) 75,000
(k) 72,000
74,000
Finished Goods Overhead Control

Bal. 50,000 (b) 8,800 (k) 72,000
(l) 160,000 (c) 36,000
210,000 (d) 10,400
(e) 1,450
(f) 6,200
(g) 5,500
3,650*
*Overapplied overhead.
3. Jerico Company
Statement of Cost of Goods Manufactured
For the Month Ended May 31, 20XX
Direct materials ....................................................................... $ 50,000
Direct labor .......................................................................... 75,000
Overhead:
Supplies ........................................................................ $ 8,800
Indirect labor...................................................................... 36,000
Depreciation, plant, and equipment ................................... 10,400
Property taxes ................................................................... 1,450
Utilities, factory .................................................................. 5,500
Insurance .......................................................................... 6,200
$68,350
Plus: Overapplied overhead .............................................. 3,650
Overhead applied .......................................................... 72,000
Manufacturing costs added ..................................................... $197,000
Add: Beginning work in process .............................................. 37,000
Less: Ending work in process ................................................. (74,000)
Cost of goods manufactured ................................................... $160,000
4. Cost of goods sold decreases by $3,650.
10

Activity 6 and Lesson Wrap-up (Assignment)
1. D 6. A 11. C 16. C 21. D

2. C 7. D 12. C 17. A
3. C 8. B 13. D 18. D
4. D 9. B 14. B 19. C
5. C 10.A 15. C 20. A
11

Lesson title: Process Costing Materials:

1. Describe the basic characteristics of process costing, Cabrera; Cost Accounting & Control;
including cost flows, journal entries, and the cost of 2018-2019 Edition
production report Hansen & Mowen; Cost Accounting &
2. Describe process costing for settings with or without work-in- Control; 2019 Edition
process inventories th
Lanen, Anderson & Maher;
th
Fundamentals of Cost Accounting; 5
edition
Productivity Tip:
Using a calendar, choose 2 days this week when you’ll review the content of this module. Set aside
20-30 minutes for this review.

Done with the 1st period, say hello to 2nd period! I hope you did well last grading period. If you did,
always put your feet on the ground because as they say ―You are only as good as the last grading
period‖. But if things didn’t go well, don’t give up! Everyone has an equal footing here, you have another
chance to learn and develop your cost accounting knowledge and skills.
In this module, you will learn another cost accounting system which is the process costing.
Process costing is quite different from a job-order costing system particularly the cost flow system
which will be discussed in a while.
To give you a jumpstart, let’s just have a quick activity. Within 3 mins, write as much as you can
the products that you know that tends to be homogeneous ones. Don’t forget to set your timer. �
3….2….1….go!
Examples: cement, shampoo, screw
1


1. What is the difference between
process costing and job-order
costing?
2. What is equivalent units of

production?
3. What is the usual

manufacturing firm that employs
process costing with no work in
process inventories?
B. MAIN LESSON
Make sure to highlight or underline the important parts! Go to chapter 7 of your textbook found
on pages 211-243 for a more detailed discussion regarding the topic.
LO1: Describe the basic characteristics of process costing, including cost flows, journal
entries, and the cost of production report
Process Costing is defined as a branch of operation costing, that determines the cost of a
product at each stage, i.e. process of production. It is an accounting method which is adopted by
the factories or industries where the standardized identical product is produced, as well as it
passes through multiple processes for being transformed into the final product.
BASIC FEATURES OF PROCESS COSTING

1. Homogeneous units pass through a series of similar processes.
2. Each unit in each process receives a similar dose of manufacturing costs.
3. Manufacturing costs are accumulated by a process for a given period of time.
4. There is a work-in-process account for each process.
5. Manufacturing cost flows and the associated journal entries are generally similar to job-order
costing.
6. The departmental production report is the key document for tracking manufacturing activity
and costs.
7. Unit costs are computed by dividing the departmental costs of the period by the output of the
period.
Differences in the Cost Flows For Process-Costing System and Job-Order Costing System
2

JOB ORDER SYSTEM PROCESS COSTING SYSTEM

Job order cost system is appropriate when Process cost system is appropriate when
products are manufactured on a special order similar goods are manufactured in a
basis. continuous or mass production operation.
Accumulates production costs by job Accumulates production costs by process
account Has a work-in-process (W I P) account for
every process
Transferred-in cost: Cost transferred from a
prior process to a subsequent process
PRODUCTION REPORT
 Traces the flow of units through a department and identifies the costs charged
 Shows the computation of unit costs and reveals the disposition of the
department’s costs for the reporting period
 Divided into unit information and cost information sections
 Unit information section
 Units to account for
 Units accounted for
 At the end of the period, the department manager submits a report showing the following:
1. Number of units in the beginning work in process.

2. Number of units completed.
3. Number of units in the work in process and their estimated stage of completion.
UNIT COST
 Key input to the cost of production report
 Presence of significant work-in-process inventories complicates cost and output
definitions needed for unit cost calculation
Cost of Production Summary-One Department
 The reporting of production and related costs in each department involves the following:
1. Accumulating costs for which the department is accountable.
2. Calculating equivalent production for the period.
3. Computing the unit cost for the period.
4. Summarizing the disposition of the production costs.
Journal entry to record factory operations
3

Work in Process xx
Materials xx
Payroll xx
Factory Overhead xx
Factory Overhead xx
Various Accounts xx
Journal entry to record cost of goods completed

Finished Goods xx
Work in Process xx
Cost of Production Summary-Multiple Departments
 When there is more than one department, it is necessary to keep separate control
accounts in the general ledger for recording the costs of operating each department.
 A cost of production summary must be prepared for each department along with separate
journal entries to record the operations of each department and the transfer of costs.
 Costs accumulated in each department are transferred to the next department in the
production cycle.
 The transferred units and their related costs are treated as completed units in the on e
department and as raw materials in the next department.
 The transferred-in costs and units from the prior department are not included in the
calculation of unit cost and equivalent units on the next department’s cost of production
summary.
 If there is still another department, the first department’s costs must be considered in
transferring cost to the next department.
 The first department’s costs are also considered in the costing of the ending work in
process inventory in the second department.
Blanking Forming Finishing

Department Department Department
Journal entry to record issuance of materials in the process

Work in Process – Blanking xx
Work in Process – Forming xx
Work in Process – Finishing xx
Factory Overhead – Materials xx
Materials xx
4

Journal entry to record labor in the process

Factory Overhead – Materials xx
Materials xx
Journal entry to record factory overhead

Factory Overhead – Blanking xx
Factory Overhead – Forming xx
Factory Overhead – Finishing xx
Factory Overhead xx
Various Accounts xx
Factory Overhead – Blanking xx

Factory Overhead – Forming xx
Factory Overhead – Finishing xx
Factory Overhead xx
Journal entry to record transfers to various departments


Journal entry to record cost of goods completed

Finished Goods xx
LO2: Describe process costing for settings with or without work-in-process inventories
Process Costing with No Work-In-Process Inventories
• Adopted by:
o Companies that provide homogeneous, repetitively produced services
5

o Just-in-time (J I T) manufacturing firms

• Emphasize continuous improvement and the elimination of waste
• Strive to minimize inventories
• Objective - Simplification
• Create work cells that produce a product or subassembly from start to finish
• Unit costs are computed by dividing the costs of the period by output of the
period
This will be discussed further on the following modules, you may refer to chapter 11 of your textbook
o A unit completed and transferred out during the period is not identical to one in
ending work-in-process (W I P) inventory
o Cost attached to the two units should not be the same
o Both completed units and partially completed units should be considered while
computing the unit cost
Role of Activity-Based Costing (A B C) in Manufacturing Process

• Assign overhead shared by processes or cells to the individual processes and cells
o Overhead located within the cell belongs exclusively to the product, and activities
may be shared by processes (cells)
• Activity rates are used to assign overhead to individual processes
You may refer to chapter 4 of your textbook for a more detailed discussion about this topic.
Process Costing with Work-In-Process Inventories
When a company has its work in process inventory, costing of the inventor ies should be
properly valued. But since the products produced in this kind of process are homogeneous
products it is difficult to assign costs individually since there are numerous products placed into
process unlike a job-order product that can be easily traced directly by just referring to the job
cost sheet. Products that are already started but not yet finished in the production will be valued
using equivalent units of production (EUP).
Equivalent Units of Production

• Complete units that could have been produced given the total amount of productive effort
expended for the period under consideration
• Every transferred-out unit is an equivalent unit
•
Steps in Building a Production Report for Process Costing
1. Preparation of a physical flow schedule
o Physical flow schedule: Provides an analysis of the physical flow units
2. Calculation of the period’s equivalent units
3. Unit cost calculation
4. Valuation of inventories
5. Cost reconciliation
o Costs in beginning W I P and costs incurred during the current period should equal
the total costs assigned to goods transferred out and to goods in ending W I P
6

Approaches That Help deal with Prior-Period Output and Costs

• First-in, first-out (F I F O) costing method
• Weighted average method
2) Activity 4: Skill-building Activities (60mins) SCORE: ________________
Part I (LO1)
Answer Exercise #1 in chapter 7 found on page 244 of your textbook.
Answer Exercise #2 in chapter 7 found on page 245 of your textbook.
PART II (LO2)
Cornerstone Exercise 6.1
Lising Therapy has a physical therapist who performs electro-mechanical treatments for its
patients. During April, Lising had the following cost and output information:
Direct Materials $750

Hygienist’s Salary 4,250
Overhead 5,000
Number of treatments 100
Requirements:
1. Calculate the cost per treatment for April.
2. Calculate the cost of services sold for April.
3. What if Lising found a way to reduce overhead costs by 20 percent? How would this affect the profit
per treatment?

Fleming, Fleming and Johnson, a local CPA firm, provided the following data for individual
returns processed for March (output is measured in number of returns):
Units, beginning work in process -

Units started 6,000
Units completed 5,000
Units, ending work in process 1,000
Total production costs $5,500
Requirements:
1. Prepare a physical flow schedule.
2. Prepare an equivalent units schedule. Explain why output is measured in equivalent units.
7

3. What if EWIP is 80 percent complete? How would this change affect the physical flow schedule? The
equivalent units schedule?

4) Activity 6 (LO & LO): Check for Understanding (30 mins)
To better test your knowledge on the topic, answer individually the following activities below. To check if
you got it right, your teacher will provide you with the key answers. Be honest in checking your
answers. 
Exercise # 1
Tomar Company produces vitamin energy drinks. The Mixing department, the first process department,
mixes the ingredients required for the drinks. The following data are for April:
Work in process, April 1 -

Quarts started 90, 000
Quarts transferred out 75,000
Quarts in EWIP 15,000
Direct Material Cost $84,000
Direct Labor Cost $168,000
Overhead applied $336,000
Direct materials are added throughout the process. Ending inventory is 60 percent complete with
respect to direct labor and overhead.
Requirements:
1. Why would a manager want a production report?
2. Prepare a production report for the Mixing department for April.
C. LESSON WRAP-UP
1. Work Tracker
completed.
8

your rating?
__________________________________________________________________________________
__________________________________________________________________________________

__________________________________________________________________________________
__________________________________________________________________________________

__________________________________________________________________________________
__________________________________________________________________________________
FAQs
1. What industries use process costing?
Paper, petroleum, chemical, textile, lumber and food processing industries commonly use process
costing. The weighted average method is the most common process costing system used in practice. This
method includes a few basic steps when costing products.
2. Does Coca Cola use process costing?

Coca-Cola uses process costing to track product and customer costs such as direct materials, direct
labor, and factory overhead costs incurred in three major processes: (1) concentrate and syrup manufacturing,
(2) blending, and (3) packaging.
KEY TO CORRECTIONS

PART I (LO1)
Exercise # 1 (Process Costing and Job Order Costing)

a.Job-order costing f. Process costing
b.Process costing g. Process costing
c.Process costing h. Job-order costing
d.Job-order costing i. Job-order costing
e.Job-order costing j. Job-order costing
*Some of the listed companies might use either a process costing or a job-order costing system, depending on
how operations are carried out and how homogeneous the final product is. For example, a plywood
manufacturer might use job-order costing if plywood are constructed of different woods or come in markedly
different sizes.
9

Exercise # 2 (Process Costing Journal Entries)
1. Work in Process—Mixing ............................................ 330,000

Raw Materials Inventory ...................................... 330,000
Work in Process—Mixing ............................................ 260,000
Work in Process—Baking………………………………. 120,000
Wages Payable ................................................... 380,000
Work in Process—Mixing ............................................ 190,000
Work in Process—Baking………………………………. 90,000
Manufacturing Overhead ..................................... 280,000
Work in Process—Baking ........................................... 760,000

Work in Process—Mixing .................................... 760,000
Finished Goods........................................................... 980,000

Work in Process—Baking .................................... 980,000
2.
WIP—Mixing WIP—Encapsulating WIP—Bottling
86,400 64,800 64,800 126,000 126,000 194,400
79,200 72,000
21,600 18,000 3,600
Finished Goods
194,400
PART II (LO2)

1. Unit cost = Costs of the period/Output of the period
= ($750 + $4,250 + $5,000)/100 = $100 per treatment
2. Cost of services sold = Unit cost × Output produced = $100 × 100 = $10,000
3. Reduction in unit cost (profit change) = Savings of the period/Output of the period = $1,000/100 = $10 per
treatment increase in profitability
10


1. Units started and completed = Units completed – Units, BWIP = 5,000 – 0 = 5,000
Units started = Units, EWIP + Units started and completed = 1,000 + 5,000 = 6,000
Physical flow schedule:

Units to account for:
Units in BWIP .................................................................... 0
Units started ...................................................................... 6,000
Total units to account for ................................................... 6,000
Units accounted for:
Units completed:
From BWIP ................................................................... 0
Started and completed .................................................. 5,000 5,000
Units in EWIP .................................................................... 1,000
Total units accounted for ................................................... 6,000
2. Equivalent units schedule:

Units completed ...................................................................... 5,000
Units in EWIP × Fraction complete:
1,000 × 0.50 ...................................................................... 500
Equivalent units ...................................................................... 5,500
Output for the period must take into consideration the work done on units fully completed as well as the
work done on partially completed units. Thus, equivalent units become the relevant output measure.
3. Changing the degree of completion does not affect the physical flow schedule. This schedule
measures the flow of the units, regardless of their stage of completion. However, the equivalent units
schedule is affected. There would now be 800 (0.80 × 1,000) equivalent units for EWIP, increasing the
total output for the period to 5,800.
Activity 6: Check for Understanding
Exercise # 1
1. Since a production report summarizes the manufacturing and costing activity for a given period, it
provides information for decision making and control. For example, successive production reports can be
used to measure trends in unit costs.
11

2. Tomar Company
Mixing Department
Production Report for April
Unit Information
Units in beginning work in process .............................. 0
Units started ................................................................ 90,000
Total units to account for ............................................. 90,000
Physical Flow Equivalent Units

Units completed .............................. 75,000 75,000
Units in ending work in process
(60% complete) .......................... 15,000 9,000
Total units accounted for ................ 90,000
Work completed.............................. 84,000
Cost Information
Costs to account for:
Beginning work in process ........................................... $ 0
Incurred during the period............................................ 588,000
Total costs to account for............................................. $588,000
Divided by equivalent units ............................................... ÷ 84,000
Cost per equivalent unit .................................................... $ 7
Costs accounted for:

Goods transferred out ($7 × 75,000) ............................ $525,000
Ending work in process ($7 × 9,000) ........................... 63,000
Total costs accounted for............................................. $588,000
12

Lesson title: Process Costing under FIFO method Materials:

1. Prepare a departmental production report using the F I F O Cabrera; Cost Accounting & Control;
method 2018-2019 Edition
th
th
edition
Productivity Tip:
Schedule doing practice drills similar to the ones in this module two more times this week. Doing
short drills on different days will help you master the process!

Another day, another module, another learning to be thankful for! Ready to learn how to prepare a
departmental production report using the method? But before that, let’s try to recall some of the things
you have learned last time. Answer the following.
I. Is the statement true or false? Write it on the space provided.
_______1. Process costing is most appropriate when manufacturing large batches of homogenous
products.
_______2. Equivalent units are computed to assign costs to partially completed units
_______3. Continuous production losses are assumed to occur uniformly throughout the process.
II. Enumerate the 5 steps in making a production report

1. ___________________________________
2. ___________________________________
3. ___________________________________
4. ___________________________________
5. ___________________________________
Are you done? Check your answer if you got it right, refer to the Key to Correction found at the end
of this module. If you got a perfect score, you did great! If you got 5-7 correct answers, you did well! If
you got 3-4 correct answers, study a bit more my friend. If you got 1-2 correct answers, you have a lot
of catching up to do! But don’t worry, slow progress is still a progress, you’ll get there as long as
you won’t quit. 
1

2) Activity 2 (LO1): What I Know Chart, part 1 (10 mins)

1. True or false. Equivalent units
and manufacturing costs in
beginning work in process are
excluded from the current period
unit cost calculation
2. What are the categories of
completed units under the FIFO
method?
B. MAIN LESSON
1) Activity 3 (LO1) :Content Notes (45 mins)
Make sure to highlight or underline the important parts! Refer to chapter 7 of your book for a more
detailed discussion regarding the topic found on pages 224-235.
LO1: Prepare a departmental production report using the FIFO method
FIFO Costing Method

• Equivalent units and manufacturing costs in beginning work in process are excluded from
the current period unit cost calculation
• Recognizes that the work and costs carried over from the prior period legitimately belong
to that period
• Categories of completed units
o Beginning work-in-process units
o Units started and completed during the current period
• No need to break down the beginning WIP into its cost elements.
• If there is no beginning inventory, total equivalent production figures will differ from those
for the average method because the output required to complete the beginning inventory
must be calculated.
• When there is no beginning inventory, both methods yield the same results.
• If units are lost, a decision must be made as to whether the units lost came from the
beginning inventory or from the units started during the process.
Equivalent Production - First-In, First-Out (FIFO) Method

 This method assumes that the costs of the current period are first applied to complete the
beginning units in process, then to start and finish a number of units, and finally to start
other units that are still in process.
2

Example:
The production of Bienestar’s antihistamine product begins in the Blending Department
o The production data for May are as follows:
o Prepare a physical flow schedule for May
o Prepare an equivalent units schedule for May using the F I F O method
Particulars Units
Units in process, May 1, 70% complete* 15,000
Units completed and transferred out 90,000
Units in process, May 31, 40% complete* 30,000
*With respect to conversion costs
Units started and completed = Units completed – Units, B W I P

= 90,000-15,000=75,000
Units started = Units started and Completed + Units, E W I P
= 75,000+30,000=105,000
Step 1: Physical Flow Schedule: Blending Department

Units, beginning work in process (70% complete) 15,000
Units started during May 105,000
Total units to account for 120,000
Units completed and transferred out:
Started and completed 75,000
From beginning work in process 15,000 90,000
Units in ending work in process (40% complete) 30,000
Total units accounted for 120,000
Step 2: Equivalent Units Schedule: Blending Department

Direct Materials Conversion Costs
Units started and completed 75,000 75,000
3

Add: Units in beginning work in

Process ×
Percentage complete:
15,000 × 0% direct materials
15,000 × 30% conversion costs 4,500
Add: Units in ending work in process ×
30,000 × 100% direct materials 30,000
Equivalent units of output 105,000 91,500
Cost data from the Wichita plant’s Blending Department for the month of May:
Costs:
Work in process, May 1:
Direct materials $1,500
Conversion costs 525
Total work in process $2,025
Current costs:
Conversion costs 4,575
Total current costs $23,475
o Calculate the unit cost for May using the F I F O method

o Calculate the cost of goods transferred out and the cost of E W I P
• Reconcile the costs assigned with the costs to account for
Step 3: Unit Cost Calculation
4

Step 4: Valuation of Inventories

Using unit cost information and the information from the equivalent units schedule:
Cost of goods transferred out:
From B W I P $2,025
To complete BWIP ($0.05 × 4,500) 225
Started and completed ($0.23 × 75,000) 17,250
Total $19,500
E W I P:
($0.18 × 30,000) + ($0.05 × 12,000) $6,000
Total costs assigned (accounted for) $25,500
Step 5: Reconciliation (comparing costs assigned to costs to account for)

Cost to account for:
BWIP $ 2,025
Current (May) 23,475
Total $25,500
5

6

Exercise 1 (Unit Information with BWIP, FIFO Method)
Jackson Products produces a barbeque sauce using three departments: Cooking, Mixing, and Bottling.
In the Cooking department, all materials are added at the beginning of the process. Output is measured
in ounces. The production data for July are as follows:
Production:
Units in process, July 1, 60% complete* 10,000
*with respect to conversion costs
Required:
1. Prepare a physical flow schedule for July.
2. Prepare an equivalent units schedule for July using the FIFO method.
3. What if 60 percent of the materials are added at the beginning of the process and 40 percent were
added at the end of the process? How many equivalent units of materials would there be?
Exercise 2 (FIFO Method, Valuation of Goods Tranferred Out and Ending Work in Process)
K-Briggs Company uses the FIFO method to account for the costs of production. For Crushing, the first
processing department, the following equivalent units schedule has been prepared:

Units started and completed 28,000 28,000
Units, beginning work in process:
10,000 x 0% - -
10,000 x 40% - 4,000
Units, ending work in process:
6,000 x 100% 6,000 -
6,000 x 75% - 4,500
The cost per equivalent unit for the period was as follows:
Direct materials $2.00

Conversion costs 6.00
Total $8.00
7

The cost of the beginning work in process was direct materials, $40,000 and conversion costs,
$30,000.
Required:
1. Determine the cost of ending work in process and the cost of goods transferred out.

4) Activity 6: Check for Understanding (60 mins)
answers. 
LO1: Answer Exercise # 4 in chapter 7 found on pages 246,of your textbook.
C. LESSON WRAP-UP
1. Work Tracker
completed.
your rating?
__________________________________________________________________________________
__________________________________________________________________________________

__________________________________________________________________________________
__________________________________________________________________________________

__________________________________________________________________________________
__________________________________________________________________________________
8

FAQs
1. What is the operational procedure when companies employ FIFO method?
 Locate products with the soonest best before or use-by dates.
 Remove items that are past these dates or are damaged.
 Place items with the soonest dates at the front.
 Stock new items behind the front stock; those with the latest dates should be at the back.
 Use/sell stock at the front first.
2. How do you find the equivalent units of production using FIFO?

Costs of units started and completed: you will take the equivalent units calculated for units started and
completed x the cost per equivalent unit for materials, labor and overhead (or conversion). The sum of these 3
will be the cost of units completed and transferred which is also known as cost of goods manufactured.
KEY TO CORRECTIONS
Activity 1
I. All of statements are true.
II. Enumeration
1. Preparation of a physical flow schedule
2. Calculation of the period’s equivalent units
3. Unit cost calculation
4. Valuation of inventories
5. Cost reconciliation

Exercise 1
1. First, two calculations are needed:
Units started and completed = Units completed – Units, BWIP = 80,000 – 10,000 = 70,000
Units started = Units started and completed + Units, EWIP = 70,000 + 15,000 = 85,000
Step 1: Physical Flow Schedule: Cooking Department

Units, beginning work in process (60% complete).............. 10,000
Units started during July .................................................... 85,000
Started and completed .................................................. 70,000
From beginning work in process .................................... 10,000 80,000
Units in ending work in process (80% complete)................ 15,000
9

2. Step 2: Equivalent Units Schedule: Cooking Department

Direct Conversion
Materials Costs
Units started and completed ................................................... 70,000 70,000
Add: Units in beginning work in process
× Percentage to complete:
10,000 × 0% direct materials ......................................... —
10,000 × 40% conversion costs..................................... 4,000
Add: Units in ending work in process
× Percentage complete:
15,000 × 100% direct materials ..................................... 15,000 —
15,000 × 80% conversion costs..................................... — 12,000
Equivalent units of output ........................................................ 85,000 86,000
3. Equivalent units of materials = 70,000 + (0.40 × 10,000) + (0.60 × 15,000) = 83,000
Exercise 2
1. Ending work in process:
Direct materials (6,000 × $2.00)................................... $ 12,000
Conversion costs (4,500 × $6.00) ................................ 27,000
Total ending work in process ....................................... $ 39,000
Units started and completed (28,000 × $8.00) ............. $224,000
Prior-period costs .................................................... 70,000
Current costs to finish (4,000 × $6.00)..................... 24,000
Total cost of goods transferred out .............................. $318,000
2. Physical flow schedule:

Units, beginning work in process ....................................... 10,000
Units started ...................................................................... 34,000
Units completed:
Units, beginning work in process ................................... 10,000
Units, ending work in process ............................................ 6,000
10

Exercise # 4
Requirement # 1
FIFO Method
Quantity
Schedule
Gallons to be accounted for:
Work in process, May 1
(materials 80% complete,
labor and overhead 75%
complete) ............................................................................................
80,000
Started into production ...........................................................................
760,000
Total gallons accounted for ........................................................................
840,000
Equivalent Units
Materials Labor Overhead
Gallons accounted for as follows:
Transferred to the next department:
From the beginning inventory . 80,000 16,000* 20,000* 20,000*
Started and completed this month**....................................................
710,000 710,000 710,000 710,000
Work in process, May 31 (materials 60%
complete, labor and overhead 20% complete) ....................................
50,000 30,000 10,000 10,000
Total gallons accounted for ............ 840,000 756,000 740,000 740,000
* Work required to complete the beginning inventory.

** 760,000 gallons started – 50,000 gallons in ending work in process = 710,000 gallons started and
completed.
Requirement # 2
Total Costs Materials Labor Overhead Whole Unit

Cost to be accounted for:
Work in process, May 31 .............. P 146,600
Cost added during the
month (a) ................................... 1,869,200 P907,200 P370,000 P592,000
Total cost to be accounted for .......... P2,015,800
Equivalent units (b)........................... 756,000 740,000 740,000
Cost per equivalent unit
(a) ÷ (b) ..................................... P1.20 + P0.50 + P0.80 = P2.50
11

Lesson title: Process Costing under the Average method Materials:

1. Prepare a departmental production report using the Average Cabrera; Cost Accounting & Control;
method 2018-2019 Edition
th
th
edition
Productivity Tip:
Act it out! Try doing a demonstration of the process you just learned. You can try to take a video of
yourself and watch it later on to review if you did the process correctly.
Hello! Can you still remember what you have studied last time? In the
rectangular shape on the right, write the formula of equivalent units of
production using the FIFO method.
Already done? Now, what I want you to do is to raise your hand and
imagine that you are holding a cup. Imagine that the cup contains your
learnings in process costing under the FIFO method. While holding the
cup, move your hand in circular motion for 5 seconds. Next, put it down,
get the lid of the cup and cover it, then set it aside for now. Do you know
what you just did? You emptied your cup.  This will allow you to focus
more and will not be confused on the next topic which is the Average
Method. You are now ready for this module. Go for it!


1. How is beginning inventory
costs and accompanying
equivalent output treated in
weighted average costing
method?
1


FIFO method and Weighted
Average method in process
costing?
B. MAIN LESSON
1) Activity 3: Content Notes (13 mins)
Make sure to highlight or underline the important parts! Refer to chapter 7 of your book for a more
detailed discussion found on pages 217-223.
LO1: Prepare a departmental production report using the Average method
Weighted Average Costing Method

• Treats beginning inventory costs and accompanying equivalent output as if they belong to
the current period
• Merges prior period output and manufacturing costs found in beginning work in process with
the current period output and manufacturing costs
Physical Flow Analysis and Calculation of Equivalent Units: Weighted Average Method
Prepare a physical flow schedule and an equivalent units schedule for Bienestar’s Blending
Department for the month of May using the weighted average method
Solution
Units started and completed = Units completed − Units, B W I P
= 90,000 − 15,000 = 75,000
Units started = Units started and completed + Units, E W I P
= 75,000 + 30,000 = 105,000
Step 1: Physical Flow Schedule: Blending Department

Units, beginning work in process (70% complete) 15,000
Units started during May 105,000
2

Units in ending work in process(40% complete) 30,000

Step 2: Equivalent Units Schedule: Blending Department

Direct Conversion
Materials Costs
Units completed 90,000 90,000
Add: Units in ending work in process ×
30,000 × 100% direct materials 30,000
• Calculate the unit cost for May using the weighted average method
o Calculate the cost of goods transferred out and the cost of E W I P
o Reconcile the costs assigned with the costs to account for
Step 3: Unit Cost Calculation

Unit cost = Unit materials cost + Unit conversion cost

 $1,500 $18,900 

 $525 $4,575 
= $0.17 + $0.05 = $0.22 per ounce
120,000 102,000

Using unit cost information and the information from the equivalent units schedule
Units completed ($0.22 × 90,000) $19,800
E W I P:
($0.17 × 30,000) + ($0.05 + 12,000) 5,700
Total costs assigned (accounted for) $25,500
Step 5: Reconciliation (comparing costs assigned to costs to account for)

Cost to account for:
BWIP $2,025
3

Current (May) 23,475

Total $25,500
Production Report: Blending Department
4

COST INFORMATION
Comparison of Method
First-in, First-out Average Cost

 Cost is determined by dividing the current  Cost is determined by dividing the merged
period’s cost of each element by the unit costs of the current period and those carried
output for the period. over as WIP by the unit output.
 Total costs to charge to the beginning WIP
is the balance from the prior month plus the
costs incurred to complete these units in the
current period.
Example comparison of computation:

 Beginning Work in Process 3,000 units ⅔ complete
 5,000 units started and completed.
 Ending Work in Process 4,000 units ½ complete.
First-in, First-out Average Cost

Work Done to Complete Beginning Units in Beginning Work in Process 3,000
Work in Process (3,000 x 1/3) 1,000 Units Started and Completed 5,000
Units Started and Completed 5,000 Units Completed & Transferred Out
(3,000 + 5,000) 8,000
Work Done this Period on Ending Ending Work in Process
5

Work in Process (4,000 x ½) 2,000 (4,000 x ½) 2,000

Equivalent Units in Production 8,000 Equivalent Units in Production 10,000
2) Activity 4: Skill-building Activities (15 mins checking) SCORE: ________________
Part I (LO1):
Exercise 1 (Unit Information with BWIP, Weighted Average Method)
Jackson Products produces a barbeque sauce using three departments: Cooking, Mixing, and Bottling.
In the Cooking department, all materials are added at the beginning of the process. Output is measured
in ounces. The production data for July are as follows:
Production:
*with respect to conversion costs
Required:
1. Prepare a physical flow schedule for July.
2. Prepare an equivalent units schedule for July using the FIFO method.
3. What if 60 percent of the materials are added at the beginning of the process and 40 percent were
added at the end of the process? How many equivalent units of materials would there be?
Exercise 2 (Weighted Average Method, FIFO Method, Physical Flow, Equivalent Units)
Heap Company manufactures a product that passes through two processes: Fabrication and Assembly.
The following information was obtained for the Fabrication Department for September:
a. All materials are added at the beginning of the process.

b. Beginning work in process had 80,000 units, 30 percent complete with respect to conversion costs.
c. Ending work in process had 17,000 units, 25 percent complete with respect to conversion costs.
d. Started in process, 95,000 units.
Required:
2. Compute equivalent units using weighted average method.
3. Compute equivalent units using FIFO method
6


It’s time to answer the questions in the ―What I Know Chart‖ in Activity 2. Write your answers in the
―What I Learned‖ column. Let’s see your improvement!
answers. 
Answer Exercise 3 in chapter 7 found on pages 245-246 respectively, of your textbook.
C. LESSON WRAP-UP
To the teacher:
1. Work Tracker
completed.
your rating?
__________________________________________________________________________________
__________________________________________________________________________________

__________________________________________________________________________________
__________________________________________________________________________________

__________________________________________________________________________________
__________________________________________________________________________________
7

FAQs
1. Why is weighted average better than FIFO?

In a time of decreasing inflation, the profit margins for a company will be higher under weighted
average method as compared to FIFO method because the cost of goods sold will be an average figure under
weighted average method which will be lower if costs are recorded under FIFO method.
2. What companies use weighted average cost?

Fuel Companies. The gas and petroleum industries utilize the weighted average costing method for
inventory purposes. The extraction, collection and storage of liquid fuels and related products makes it
necessary for those involved in both the manufacture and sale of these products to use this inventory method.
KEY TO CORRECTIONS
Part I (LO1)
Exercise 1
1. First, two calculations are needed:
Units started and completed = Units completed – Units, BWIP = 80,000 – 10,000 = 70,000
Units started = Units started and completed + Units, EWIP = 70,000 + 15,000 = 85,000
Step 1: Physical Flow Schedule: Cooking Department

Units, beginning work in process (60% complete).............. 10,000
Units started during July .................................................... 85,000
From beginning work in process .................................... 10,000 80,000
Units in ending work in process (80% complete)................ 15,000
2. Step 2: Equivalent Units Schedule: Cooking Department

Direct Conversion
Materials Costs
Units completed ...................................................................... 80,000 80,000
Add: Units in ending work in process
× Percentage complete:
15,000 × 100% direct materials ..................................... 15,000 —
8

15,000 × 80% conversion costs..................................... — 12,000

Equivalent units of output ........................................................ 95,000 92,000
3. Direct Conversion
Materials Costs
WA Equivalent units of output ................................................. 95,000 92,000
Less equivalent units in BWIP ................................................. 10,000 6,000
FIFO equivalent units ........................................................ 85,000 86,000
Exercise 2
1. Physical flow schedule:
Units, beginning work in process ....................................... 80,000
Units started ...................................................................... 95,000
From beginning work in process .................................... 80,000
Units, ending work in process........................................ 17,000
Total units accounted for ............................................... 175,000
2. Equivalent units—Weighted average method:
Units completed ............................................... 158,000 158,000
17,000 × 100% ........................................... 17,000
17,000 × 25% ............................................. 4,250
Equivalent units of output ................................. 175,000 162,250
3. Equivalent units—FIFO method:

Units started and completed ............................ 78,000 78,000
80,000 × 0% ............................................... 0
80,000 × 70% ............................................. 56,000
17,000 × 100% ........................................... 17,000
17,000 × 25% ............................................. 4,250
Equivalent units of output ................................. 95,000 138,250
9

Exercise 3 (Quantity Schedule, Equivalent Units, and Cost per Equivalent Unit – Weighted Average
Method)
Requirement 1
Weighted-Average Method
Quantity
Schedule
Gallons to be accounted for:
Work in process, May 1
(materials 80% complete,
labor and overhead 75%
complete) ............................................................................................
80,000
Started into production ...........................................................................
760,000
Total gallons accounted for ........................................................................
840,000
Equivalent Units
Materials Labor Overhead
Gallons accounted for as follows:
Transferred to the next department ........................................................
790,000 790,000 790,000 790,000
Work in process, May 31 (materials 60%
complete, labor and overhead 20% complete) ....................................
50,000 30,000 10,000 10,000
Total gallons accounted for ............ 840,000 820,000 800,000 800,000
Requirement 2
Total Costs Materials Labor Overhead Whole Unit

Cost to be accounted for:
Work in process, May 1 ................ P 146,600 P 68,600 P 30,000 P 48,000
Cost added during the
month ......................................... 1,869,200 907,200 370,000 592,000
Total cost to be accounted for (a) ..... P2,015,800 P975,800 P400,000 P640,000
Equivalent units (b)........................... — 820,000 800,000 800,000
Cost per equivalent unit (a) ÷ (b) P1.19 + P0.50 + P0.80 = P2.49
10

Lesson title: Treatment of Transferred-In Goods in a Process Materials:

Costing System, and Operational Costing System Textbook, SAS, & calculator
Lesson Objectives: References:
At the end of this module, I should be able to Cabrera; Cost Accounting & Control;
1. Prepare a departmental production report with transferred-in 2018-2019 Edition
goods and changes in output measures
2. Describe the basic features of operation costing Vanderbeck, Edward J.; Principles of
th
th
edition
Productivity Tip:
After finishing this module, write some tips on what helped you learn on your Learning Tracker in
Thinking About Learning.

How are you? You’re now in Module 15! How time flies fast when you’re learning so much, right? 
Before going to the main topic of this module, let just have a recall about average cost method. Answer the
given problem below:
Dani Siopao, Inc. incurred the following cost in the month of October:
Material P 55,000
Labor P 46,000
Factory Overhead P 23,000
There was no beginning inventory. Ending work in process was 10,000 units at 50 percent complete.
15,000 units were completed and transferred out.
Requirement: Prepare a cost of production summary for the month, assuming Dani uses the average cost
method of process costing. Use the back part of this module for your answers.
Are you done? Check your answer by referring to the Key to Correction at the end of this module.
1


1. What is the treatment of
transferred-in goods in a process
costing system?
2. What is an operational costing

system?
B. MAIN LESSON
LO1: Prepare a departmental production report with transferred-in goods and changes in output
measures
Treatment of Transferred-In Goods

• Cost of this material is the cost of the goods transferred out computed in the prior
department
• Units started in the subsequent department correspond to the units transferred out from the
prior department
• Units of the transferring department may be measured differently than the units of the
receiving department
o Goods transferred in must be converted to the units of measure used by the second
department
Production and Cost Data: Encapsulating Department
Bienestar Company, Wichita Plant Encapsulating Department Production and Cost Data for
May Production:
Units in process, May 1, 80% completeª 24,000 (capsules)

Units in process, May 31, 30% completeª 45,000
2

Costs:
Work in process, May 1:

Transferred-in costs $ 1,200
Direct materials (gelatin capsules) 450
Conversion costs 270
Total work in process $ 1,920
Step 1: Physical Flow Schedule
Dependence of the Encapsulating Department on the Blending Department must be considered:

Units, beginning work in process 24,000
Units transferred in during May 396,000*
Units, ending work in process 45,000
Step 2: Calculation of Equivalent Units
Equivalent Units of Production: Weighted Average Method
Transferred-In Direct Materials Conversion

Materials Added Costs
Units completed 375,000 375,000 375,000
Add: Units in ending work in
3

process × Percentage
complete:
45,000 × 100% 45,000
45,000 × 100% 45,000
45,000 × 30% 13,500
Equivalent units of output 420,000 420,000 388,500
Step 3: Computation of Unit Costs
• Unit cost is computed by calculating the unit cost for each input category
Unit transferred- in cost =

 $1,200 + $19,800  = $0.05
420,000
Unit direct materials cost =

 $450 + $3,750  = $0.01
420,000
Unit conversion costs =

 $270 + $7,500  = $0.02
388,500
Total unit cost = $0.05 + $0.01 + $0.02 = $0.08
Cost of goods transferred out = $0.08 × 375,000 = $30,000
Transferred-in materials: $0.05 × 45,000 $2,250
Direct materials added: $0.01 × 45,000 450
Conversion costs: $0.02 × 13,500 270
4

Total $2,970
PRODUCTION REPORT: Encapsulating Department
5

COST INFORMATION
LO2: Describe the basic features of operation costing
Operation Costing
• Blend of job-order and process-costing procedures applied to batches of homogeneous

products
o Uses job-order procedures to assign direct materials costs to batches
o Uses process procedures to assign conversion costs
• Work orders are used to collect production costs for each batch and initiate production
6

Panel A:Physical Flows
Panel B: Cost flows (Shown by letter in Panel A and in dollars below)
7

Exercise 1 (Weighted Average Method, Equivalent Units, Unit Cost, Multiple Departments)
Fordman Company has a product that passes through two processes: Grinding and Polishing. During
December, the Grinding Department transferred 20,000 units to the Polishing Department. The cost of
the units transferred into the second department was $40,000. Direct materials are added uniformly in
the second process. Units are measured the same way in both departments.
The second department (Polishing) had the following physical flow schedule for December:

Units, beginning work in process 4,000 (40% complete)
Units started ?
Total units to account for ?

Units, ending work in process 8,000 (50% complete)
Units completed ?
Units accounted for ?
Cost in beginning work in process for the Polishing department were direct materials, $5,000;
conversion costs,$6,000; and transferred in,$8,000. Costs added during the month: direct
materials,$32,000; conversion costs,$50,000 and transferred in,$40,000.
Required:
1. Assuming the use of the weighted average method, prepare a schedule of equivalent units.
2. Compute the unit cost for the month.
Exercise 2 (FIFO Method, Equivalent Units, Unit Cost, Multiple Departments)

Using the same data found in Exercise 1, assume the company uses the FIFO method.
Required:
1. Prepare a schedule of equivalent units, and compute the unit cost for the month of December.
It’s time to answer the questions in the “What I Know Chart” in Activity 2. Write your answers in the
“What I Learned” column. Let’s see your improvement!
8

answers. 
Exercise 1 (Operation Costing: Bread Manufacturing)

Tasty Bread makes and supplies bread throughout the state of Kansas. Three types of bread are
produced: loaves, rolls and buns. Seven operations describe the production process.
a. Mixing: Flour, milk, yeast, salt, butter and so on, are mixed in a large vat.
b. Shaping: A conveyor belt transfers the dough to a machine that weighs it and shapes it into loaves,
rolls or buns depending on the type being produced.
c. Rising: The individually shaped dough is allowed to sit and rise.
d. Baking: The dough is moved to a 100 foot-long funnel oven,
e. Cooling: The bread is removed from the oven and allowed to cool.
f. Slicing: For loaves and buns, the bread is sliced.
g. Packaging: The bread is wrapped.
Tasty produces its products in batches. The size of the batch depends on the individual orders that
must be filled. Usually, as soon as one batch is mixed, a second batch begins the mixing operation.
Required:
1. Identify the conditions that must be present for operation costing to be used in this setting. If these
conditions are not met, explain how process costing would be used. If process costing is used, would
you recommend the weighted average method or the FIFO method? Explain.
2. Assume that operation costing is the best approach for this bread manufacturer. Describe in detail
how you would use operation costing. Use a batch of dinner rolls and a batch of whole wheat loaves as
examples.
C. LESSON WRAP-UP
To the teacher:
1. Work Tracker
completed.
9

your rating?
__________________________________________________________________________________
__________________________________________________________________________________

__________________________________________________________________________________
__________________________________________________________________________________

__________________________________________________________________________________
__________________________________________________________________________________
FAQs
1. How are transferred-in costs treated in the calculation of equivalent units?
Transferred-in costs are treated as a separate input category when equivalent units are computed. The
category is viewed as a material that is always added at the beginning of the process.
2. When is operation costing used?

Operation costing is a blend of job-order and process-costing procedures. It is used where batches of
homogeneous products are produced.
KEY TO CORRECTIONS
Activity 1
Dani Siopao, Inc.
Cost of Production Summary
For the Month Ended October 31, 2005
Cost of production for month:

Materials P 55,000
Labor 46,000
Factory Overhead 23,000
Total cost to be accounted for P 124,000
Unit output for the month

Finished during month 15,000
10

Equivalent units of work in process, end

of month (10,000 units, one-half completed) 5,000
Total equivalent production 20,000
Unit cost for month:

Material (P55,000 /20,000) 2.75
Labor (46,000 / 20,000) 2.30
Factory Overhead (23,000 / 20,000) 1.15
Total 6.20
Inventory Costs:
Cost of goods finished during month (15,000 x 6.20) P 93,000
Cost of work in process, end of month:
Material (10,000 x 1/2 x 2.75) P 13,750
Labor ( 10,000 1/2 2.30) 11,500
Factory Overhead ( 10,000 1/2 1.15) 5,750 31,000
Total production cost accounted for P124,000
Part I (LO1)
Exercise 1
1. Equivalent units schedule:

Direct Conversion Transferred
Materials Costs In
Units completed ........................... 16,000 16,000 16,000
Ending WIP:
8,000 × 50% ........................... 4,000 4,000
8,000 × 100% ......................... 8,000
Total equivalent units ................... 20,000 20,000 24,000
2. Costs charged to the department:

Materials Costs In Total
Costs in BWIP................................. $ 5,000 $ 6,000 $ 8,000 $ 19,000
Costs added by department ............ 32,000 50,000 40,000 122,000
Total costs ...................................... $37,000 $56,000 $48,000 $141,000
Unit cost = Unit direct materials cost + Unit conversion costs + Unit
transferred-in cost
= $37,000/20,000 + $56,000/20,000 + $48,000/24,000
11

= $1.85 + $2.80 + $2.00

= $6.65
Exercise 2
Equivalent units schedule:
Materials Costs In
Units started and completed ........................ 12,000 12,000 12,000
Units to complete in BWIP:
4,000 × 60% .......................................... 2,400 2,400
Units in EWIP:
8,000 × 100% ........................................ 8,000
8,000 × 50% .......................................... 4,000 4,000
Total equivalent units ................................... 18,400 18,400 20,000
Unit cost = Unit direct materials cost + Unit conversion costs +

Unit transferred-in cost
= $32,000/18,400 + $50,000/18,400 + $40,000/20,000
= $1.74* + $2.72* + $2.00
= $6.46
*Rounded.
Exercise 1
1. For operation costing to be appropriately applied, products must be produced in batches where there are
significant differences in direct materials costs but similar demands on conversion resources. This company
produces in batches, and it seems reasonable that the products would make similar demands on the conversion
resources for the operations used. Thus, for operation costing to be used, the cost of direct materials must
differ significantly per pound of output—whether the output is loaves, buns, or rolls.
For example, if the direct materials for a 7,500-pound batch of 1.6-pound loaves of wheat bread differ
significantly in cost from the direct materials for a 7,500-pound batch of 0.6-pound packages of hamburger
buns (consisting of eight buns per package), then operation costing is likely to be needed. Thus, job-order
costing procedures to assign direct materials costs and process-costing procedures to assign conversion costs
(for each operation) would be appropriate. However, if the cost of direct materials per pound of dough
produced is about the same, then process costing could be used. Output could be measured in pounds for all
operations, and the costing
procedures would be much simpler. The use of the FIFO or weighted average method is not an issue for this
setting. The inventory is perishable, so there would never be significant levels of work-in-process inventories.
2. A work order would be needed for each batch, which identifies the direct
materials, operations, and size of batches. The batch of whole wheat loaves would use all operations, but the
12

batch of dinner rolls would not use the slicing operation. The cost of direct materials would be traced to each
batch using job procedures. (Materials requisition forms would identify the type of batch, quantities, and type of
direct materials assigned to each batch and the associated cost.) Conversion rates for each process would be
used to assign conversion costs. For example, for baking, the cost of energy, depreciation, other overhead,
and labor would be assigned by multiplying a predetermined conversion rate by the batch’s baking time. The
same application approach would be used for each operation, although some of the lesser operations such as
rising and cooling may not use many resources, and they may need to be combined with more significant
operations. For example, cooling and packaging could be defined as one operation.
TEACHER-LED ACTIVITIES
{These are standard instructions for teachers.}
A. If this session happens to be a face-to-face, in-classroom learning session:
1) Collect completed work in the SAS.
2) Allocate your contact time with students to individual or small group mentoring, monitoring, and
student consultations.
3) You may administer summative assessments (quizzes, demonstrations, graded recitation,
presentations, performance tasks) during face-to-face sessions.
4) You may also explore supplementary activities that foster collaboration, provided that social
distancing is observed.
5) You may provide supplementary content via videos, etc.
It is important to remember that students who cannot make it to face-to-face, in-classroom sessions for
health and safety reasons, should not be given lower grades for missing in-class activities and should
be given alternative summative tests.
B. If this session happens to be an at-home learning session for the students:

1) Check and grade collected SAS and other input from students.
2) Schedule phone calls/virtual calls/virtual chats to individual students or small groups of students to
monitor work, provide guidance, answer questions, and check understanding.
13

Lesson title: Accounting for Lost Units Materials:

1. Explain how spoilage is treated in a process costing system Hansen & Mowen; Cost
Accounting & Control; 2019 Edition
Vanderbeck, Edward J.; Principles
of Cost Accounting; 15th edition
https://www.accountingformanage
ment.org/process-costing-normal-
loss/
Productivity Tip:
Try playing some music while doing the exercises on this module. �

Feeling excited for the last learning module for this grading period? I bet you are! But before going to
the main topic, let’s just have a quick recap what you have studied last time. Answer the following:
I. True or False
_______1. In a process-costing system, the costing of goods transferred out in BWIP inventory is
difficult because there are multiple categories of completed units.
_______2. Transferred-in goods, must be converted to the units of measure used by the current
department.
_______3. For the receiving department of a process-costing manufacturer, transferred-in goods are
materials that are added at the end of the process.
_______4. In calculating equivalent units of production using the weighted average method, the
transferred-in goods are treated as materials added at the beginning of the process.
_______5. Operation costing uses a blend of job-order and process-costing procedures whenever batches
of dissimilar products are produced.
_______6. In operation costing, job-order procedures are used to assign direct materials costs and process
procedures are used to assign conversion costs.
I. Problem
Outrageous Cups Corp. manufactures cups. The company's manufacturing operations and costs applied to
products for April were:
Molding Heat-treat Finishing
1

Direct labor P25,000 P12,500 P 7,500
Factory overhead 30,000 17,500 12,600
Total P55,000 P30,000 P20,100
Three types of cups were produced in April. The quantities and direct materials costs were:
Type Quantity Direct Materials
Casts 5,000 P15,000
Cups 7,000 22,470
Mugs 8,000 32,500
Casts are produced in the Molding Department. Cups pass through the Molding and Finishing
Departments. Mugs pass through all three departments. An operations costing system is used. What is
Outrageous Cups' conversion cost per unit for the heat-treat operation, rounded to two decimal places?


1. What are the factors why there
is an occurrence of spoilage?

normal spoilage and abnormal
spoilage?
B. MAIN LESSON
1) Activity 3 (LO1): Content Notes (45 mins)

2

LO1: Explain how spoilage is treated in a process costing system
The normal loss is the unavoidable loss of units in a processing department that occurs
majorly due to the nature of production operation or the nature of raw materials being processed.
This loss cannot be avoided under normal and efficient production environment and is
considered within the normal or acceptable tolerance limit for machines and human errors.
In many industries, the normal loss is a highly expected or anticipated loss and is
sometimes also termed as the standard loss. It is a known loss and in many situations its
quantum can be easily estimated in advance of the start of production process. Since, the
normal losses are inherent in certain manufacturing processes, the companies mostly make a
provision for such losses before starting their manufacturing processes.
The normal loss is not presented as a separate cost element on the cost of production
report (CPR) of the concerned department. The cost of lost units is just spread over the number
of good units which results in an increased per unit cost for total output of the relevant
processing department.
Treatment of Normal Losses in process costing
 Are treated as products costs and are spread over the units finished and still in process.
 On the cost of production summary, the lost units are ignored in the calculation of
equivalent production and in the determination of inventory costs.
 If lost at the end of the production cycle, the cost of lost units may be absorbed by the
completed units only.
 The lost units are included in the number of units used to determine equivalent
production.
 Unit cost is applied to units finished, units in process, and units that were lost.
 Cost of lost units is added to the cost of goods completed, and the total is transferred to
the next department or to Finished Goods.
Additional suggested reading: https://bit.ly/normal-losses
Difference between normal and abnormal loss
The core factor considered for differentiating between normal and abnormal loss or spoilage is
the degree of controllability. The degree of controllability in case of a normal loss is much
smaller than in case of an abnormal loss.
Normal loss is referred to as uncontrollable because it is inherently attached to certain

production processes and can’t be avoided even under most efficient working conditions.
Examples of such losses include weight loss, evaporation and shrinkage of materials. We c an’t
3

do too much to stop these losses from occurring as the degree of controllability is usually very
small to zero in case of normal losses.
The abnormal loss, on the other hand, is referred to as controllable loss because it can be
avoided under normal and efficient working conditions. It is essentially an unnecessary loss
because it occurs due to carelessness, use of low quality materials, use of inefficient or faulty
machines in manufacturing process and other similar factors that are controllable in na ture.
Treatment of abnormal loss in process costing
 These are losses that are not inherent in the manufacturing process and are not
expected.
 The lost units are included in the calculation of equivalent production and unit costs.
 Abnormal losses are not included in the cost of transferred or finished goods and are
charged to a separate expense account.
 There are two methods for the treatment of abnormal loss in a process costing system. It
is either charged to factory overhead or an expense account for the current period and is
presented as a separate line item on the cost of goods sold statement. Under first
treatment, the abnormal loss causes an additional unfavorable factory overhead variance.
Additional suggested reading: https://bit.ly/abnormal-losses
2) Activity 4 (LO1): Skill-building Activities (60 mins) SCORE: ________________

Problem 1 (Normal and Abnormal Spoilage)

Larkin Company produces leather strips for western belts using three processes: cutting, design, and
coloring, and punching. The weighted average method is used for all three departments. The following
information pertains to the Design and Coloring Department for the month of June:
a. There was no beginning work in process.

b. There were 400,000 units transferred in from the Cutting department.
c. Ending work in process, June 30: 50,000 strips, 80 percent complete with respect to conversion
costs.
d. Units completed and transferred out:330, 000 strips. The following costs were added during the
month:
Transferred in $2,000,000
Direct materials 600,000
Conversion costs 780,000
e. Direct materials are added at the beginning of the process.

4

f. Inspection takes place at the end of the process. All spoilage is considered normal.
Required:
1. Calculate equivalent unit of production for transferred-in materials, direct materials added, and
conversion costs.
2. Calculate unit costs for the three categories in requirement 1.
3. What is the total cost of units transferred out? What is the cost of ending work in process inventory?
How is the cost of spoilage treated?
4. Assume that all spoilage is considered abnormal. Now, how is spoilage treated? Give the journal
entry to account for the cost of the spoiled units. Some companies view all spoilage as abnormal.
Explain why.
5. Assume that 80 percent of the units spoiled are abnormal and 20 percent are normal spoilage. Show
the spoilage treatment for this scenario.


answers. 
Exercise 1 (Normal and Abnormal Spoilage in Process Costing)

Novel Toys, Inc., manufactures plastic water guns. Each gun’s left and right frames are produced in the
Molding department. The left and right frames are then transferred to the Assembly Department where
the trigger mechanism is inserted and the halves are glued together. In June, the Molding Department
reported the following data:
a. In the Molding Department, all direct materials are added at the beginning of the process.
b. Beginning work in process consisted of 3,000 units, 20 percent complete with respect to direct labor
an overhead. Costs in beginning inventory included direct materials, $450; and conversion costs, $138.
c. Costs added to production during the month were direct materials, $950; and conversion costs,
$2,174.50.
d. Inspection takes place at the end of the process. Malformed units are discarded. All spoilage is
considered abnormal.
e. During the month, 7,000 units were started, and 8,000 good units were transferred out to Finishing.
All other units finished were malformed and discarded. There were 1,000 units that remained in the
ending work in process, 25 percent complete.
Required:
2. Calculate equivalent units of production using the weighted average method
3. Calculate the unit cost.
4. What is the cost of goods transferred out? Ending work in process? Loss due to spoilage?
5

5. Prepare the journal entry to remove the spoilage from the Molding Department.
C. LESSON WRAP-UP
1. Work Tracker
completed.
your rating?
__________________________________________________________________________________
__________________________________________________________________________________

__________________________________________________________________________________
__________________________________________________________________________________

__________________________________________________________________________________
__________________________________________________________________________________
FAQs
1. Between normal spoilage and abnormal spoilage, which of the two can be controlled?
Abnormal spoilage is a controllable loss because it can be avoided under normal and efficient working
conditions. It is essentially an unnecessary loss because it occurs due to carelessness, use of low quality
materials, use of inefficient or faulty machines in manufacturing process and other similar factors that are
controllable in nature. Whereas spoilage is uncontrollable because it is inherently attached to certain
production processes and can’t be avoided even under most efficient working conditions
KEY TO CORRECTIONS
Activity 1
I. True or False
1. False
6

2. True
3. False
4. True
5. False
6. True
II. P 30,000/8,000 = P 3.75
Problem 1
1. Transferred Direct Conversion
In Materials Costs
Transferred out ................................................ 330,000 330,000 330,000
Normal spoilage ............................................... 20,000 20,000 20,000
Ending work in process .................................... 50,000 50,000 40,000
Equivalent units ............................................... 400,000 400,000 390,000
2. Transferred in = $2,000,000/400,000 = $5.00

Unit direct materials = $600,000/400,000 = $1.50
Unit conversion costs = $780,000/390,000 = $2.00
Total unit cost = $5.00 + $1.50 + $2.00 = $8.50
3. Cost of units transferred out = ($8.50 × 330,000) + ($8.50 × 20,000)
= $2,805,000 + $170,000
= $2,975,000
Note: Normal spoilage is added to the cost of goods transferred out.
Cost of ending work in process:
($5.00 × 50,000) + ($1.50 × 50,000) + ($2.00 × 40,000) = $405,000
4. If all spoilage is abnormal, it would not be added to the cost of goods transferred out. It would be assigned
to a loss account and treated as a loss of the period. The following journal entry is required:
Loss from Abnormal Spoilage ..................................... 170,000
Work in Process—Design and Coloring .............. 170,000
Viewing all spoilage as abnormal is consistent with a total quality management view. All waste is bad and
should be eliminated. There is no “normal waste.”
5. If there is 80% abnormal spoilage, then the cost of 16,000 units ($8.50 × 16,000)—$136,000—would be
assigned to the abnormal loss account, and the cost of the other 4,000 units would be assigned to the
cost of goods transferred out ($8.50 × 4,000), or $34,000.
To the teacher: Please refer to the solution manual of the textbook.

7

Lesson title: Backflush Costing System (JIT system) Materials:

1. Explain the Backflush Costing System used in a Just-In-Time Hansen & Mowen; Cost Accounting &
Inventory System. Control; 2019 Edition
2. Familiarize with the journal entries in a Backflush Costing Introduction to Managerial Accounting;
th
System. 7 edition
Pedro P. Guerrero
Practical Accounting 2
Productivity Tip:
Schedule doing practice drills similar to the ones in this module two more times this week. Doing short drills
on different days will help you master the process!

Hello there! We are getting close to the end of this course, so don’t lose focus  To start this
module, let us read the introduction of the JIT system and in comparison to the traditional systems for
you to understand more about this module. So if you are ready, you may start.
One of the main differences of JIT systems with traditional systems is the method of this system
about its accounting records. This concept helps to reduce the cost, it also helps to reduce the
accounting records. Journal records of traditional systems start from purchasing raw materials and
inventories of raw materials that requires keeping multiple inventory accounts such as inventory of raw
materials, inventory of work in process, and inventory of built goods along with keeping materials and
direct labor accounts. It should be noted that manufacturing companies that produce different products
using traditional systems, need to register thousands of documents in journals and ledger when buying
and using materials.
Thus making traditional accounting systems are very expensive in comparison with the JIT
system because the JIT system has reduced the number of records and used accounts, and
therefore reduces and simplifies accountant’ work. This record system is called backflush costing.
Backflush costing is appropriate for JIT environments because in this environment work in process and
manufactured goods is minimum. In the backflush costing system, there is no attempt to trace
raw materials and their components from depot to work during construction and finished goods.
Backflush costing system omits the events related to record of raw materials movement to work
during production, and in addition, movements of inventories to the completion of finished goods are
not reported (Swenson & Cassidy, 1993).
1

2) Activity 2 (LO1& LO2): What I Know Chart, part 1 (5 mins)
1. What is Just-In-Time Inventory

System?
2. The inventory account under

backflush costing combines
___________ and ____________.
3. What happens to underallocated

or overallocated conversion costs
in backflush costing?
B. MAIN LESSON
1) Activity 3: Content Notes (50 mins)

LO1: Explain the Backflush Costing System used in a Just-In-Time Inventory System.
Just-In-Time (JIT) System is a management strategy that minimizes inventory, increases efficiency and
productivity through elimination of specific causes of rework, scrap, and wastes . Non-value-added activities
are a major source of waste, such activities are either unnecessary or necessary but inefficient and
improvable. JIT System is also a management approach that maintains that goods should be pulled through
the system by present demand rather than pushed through the system on a fixed schedule based on
anticipated demand. A Just-In-Case System is a push-system wherein the business keeps stocks of
inventory and finished goods as high as possible.
JUST-IN-TIME SYSTEM VS. JUST-IN-CASE SYSTEM
Characteristics
● Production Precision ---------- Production Approximation
2

● Actual Demand------------------ Demand Forecast

● Small Lots ------------------------ Large Lots
● Small Inventories --------------- HIgh Inventories
● Less Waste ----------------------- More Wastes
● Better Communication --------- Poor Communication
●
Note: For additional reading about Just-In-Time and Just-In-Case Inventory System, please refer to
your book, Chapter 8 pg. 261-273. And for more discussion, you may visit this link
https://bit.ly/What-Is-Just-In-Time.
Backflush Costing is a product costing system generally used in a just-in-time ( JIT ) inventory
environment. It is an accounting method that records the costs associated with producing a good or service
only after they are produced, completed, or sold.
It omits recording some or all of the journal entries relating to the cycle from purchase of direct
materials (stage 1) to production resulting in work-in-process (stage 2) to manufacture of finished
goods(stage 3) and to the sale of finished goods (stage 4). Actual conversion costs are recorded as incurred
and applied to products at various trigger points. Trigger points are stages in the cycle, from the purchase
of direct materials and incurring of conversion costs (stage 1) to the sale of finished goods (stage 4), at
which journal entries are made in the accounting system.
The output trigger point reaches back and pulls ("flushes") the standard direct material costs from
Materials and In-Process Inventory Control and the standard conversion costs for manufacturing the finished
goods, that explains how backflush costing gets its name at the completion of good finished units.
LO2: Familiarize with the journal entries in a Backflush Costing System.
In backflush costing, there are three methods used and these are illustrated below. The three methods
differ in the number of trigger points at which journal entries are made in the accounting system.
Method 1 Method 2 Method 3
Trigger 1. Purchase of raw 1. Purchase of raw materials. -

Points materials. -
2. Completion of finished 1. Completion of finished
goods. 2. Sale of finished goods. goods.
3. Sale of finished goods. 2. Sale of finished goods.
Inventory 1. Raw and In Process (RIP) 1. Raw and In Process (RIP) 1. Finished Goods
Account Account Account Account.
2. Finished Goods Account
3

Main 1. Three trigger points. 1. Two trigger points. 1. Two trigger points.
Features 2. Use of combined raw 2. Use of combined raw 2. Simplest of all.
materials and in process materials and in process
account. account.
3. No finished goods account.
No journal entries in the accounting system for work in process (stage 2) in all the three methods
illustrated above as these methods are usually used where the amounts of work in process are small.
The following data will be used to illustrate the three methods:
Materials purchased on credit for the period P 195,000

Conversion costs for the period 120,000
Number of units manufactured 10,000 units
Number of finished units sold 9,900 units
The cost per unit is P31 (P19 materials + P12 conversion costs). There are no opening stocks and for
simplicity it is assumed that there are no variance. Using the backflush costing the journal entries under the
three methods are:
Method 1: Three Trigger Points
Transactions Journal Entries
(a). Purchases of raw materials Raw and In Process (RIP) 195,000

(b). Incur conversion costs Conversion Costs 120,000

Various Accounts 120,000
(c). Completion of finished goods Finished Goods 310,000

(10,000 units x P31 = P310,000) Raw and In Process (RIP)* 190,000*
Conversion Cost 120,000
(d). Cost of goods sold Cost of Goods Sold 306,900

(9,900 units x P31 =P306,900) Finished Goods 306,900
*10,000 units manufactured x P19 cost of materials = 190,000.
Entry (c) gives backflush costing its name. Note, costs have not been recorded sequentially with the flow of
product along its production route through work in process and finished goods. Instead, the output trigger point reaches
back and pulls the direct materials costs from Raw and In Process account and the conversion costs for manufacturing
the finished goods.
4

Method 2: Two Trigger Points



(c). Completion of finished goods No entry

Raw and In Process* 188,100
Conversion Costs** 118,800
The cost of finished units is computed only when finished goods are sold [which corresponds to entry (d)]: 9,900
units sold x P31 per unit =P306,900, which is comprised of direct materials costs (9,900 units sold x P19 material cost
per unit =P188,100) and conversion cost (9,900 units x P12 conversion cost per unit =P118,800). The under-allocated
conversion costs of P1,200 (120,000-118,800) is closed to the Cost of Goods Sold account.

(a). Purchases of raw materials No entry



Finished Goods 306,900
The third method doesn’t record Accounts Payable for direct materials until the products being manufactured are
completed. This method of backflush costing is feasible only if there is a short log between receipt of direct materials
and completion of production.
found at the end of this SAS. Write your score on the space provided
5

Part I (LO1): Backflush Costing System (JIT system)

1. The objective of reducing inventory to zero is possible if all of the following conditions are present, except:
a. low or insignificant setup costs c. long setup times
b. minimum lead times d. balanced and level work loads
2. Advantages that result from reducing raw materials inventory include all of the following except:
a. a decreased possibility of not being able to produce a unit when required
b. a need for less storage space
c. a reduced risk of obsolescence
d. a reduced risk of damaged materials
3. All of the following are obstacles to JIT purchasing, except:

a. the layout of the production process
b. the frequency of schedule changes
c. the attitudes of purchasing agents and suppliers
d. all of the above are obstacles
4. All of the following are JIT performance measures, except:
a. capacity utilization c. inventory turnover
b. cycle time efficiency d. unscheduled maintenance downtime
5. In backflush costing, if the conversion cost in the Raw and In Process was $500 on July 1 and $1,000 on
July 31, the account to be credited at the end of July for the $500 increase would be:
a. Raw and In Process c. Raw Materials
b. Finished Goods d. Cost of Goods Sold
6. To backflush materials cost from Raw and In Process (RIP) to Finished Goods, the calculation would be:
a. Ending RIP Inventory + Materials Received during the period - Beginning RIP Inventory
b. Ending Finished Goods Inventory + Materials Cost Transferred from RIP - Beginning Finished
Goods Inventory
c. Beginning Finished Goods Inventory + Materials Cost Transferred from RIP - Ending Finished
Goods Inventory
d. Beginning RIP Inventory + Materials Received during the period - Ending RIP inventory
7. Cheetah Company has materials cost in the June 1 Raw and In Process of P10,000, materials received
during June of P205,000 and materials cost in the June 30 Raw and In Process of P12,500.
Requirement:
a. Compute the amount to be backflushed from Raw and In Process (RIP) to Finished Goods at the
end of June.
ANS:
(a) Materials on June 1 Raw and In Process Account……………….. P_________
Materials Received in June…………………………………………..__________
Materials on June 30 Raw and In Process Account……………....__________
Amount Backflushed from RIP to Finished Goods Account……...P_________
6

PART II (LO2): Journal Entry

1. Backflush Costing with a Finished Goods Account. The LanFat Manufacturing Company uses a Raw
and In Process (RIP) inventory account and expenses all conversion costs to the Cost of Goods Sold
account. At the end of each month, all inventories are counted, their conversion cost components are
estimated, and inventory account balances are adjusted accordingly. Raw material cost is backflushed
from RIP to Finished Goods. The following information is for the month of August:
Beginning balance for RIP account, including P4,800 of conversion cost……...P 43,500
Raw materials received on credit……………………………………………………… 680,000
Ending RIP inventory per physical count, including P5,300 conversion
cost estimate……………………………………………………………………… 47,200
Requirement: Prepare all journal entries involving the RIP account.
ANS: Journal entries involving the RIP account are:

Account Explanation Debit Credit
To record all receipts of raw materials on credit for the

month of August.
To record the material cost to be backflushed from RIP

to Finished Goods.
To offset the conversion cost (RIP account) to the

Cost of Goods Sold account.
2. Backflush Costing with No Finished Goods Account. The ATM Manufacturing Company produces only
for customer order, and most work is shipped within twenty-four hours of the receipt of an order. ATM uses
a Raw and In Process (RIP) inventory account and expenses all conversion costs to the Cost of Goods
Sold account. At the end of each month, inventory is counted, its conversion cost component is estimated,
and the RIP account balance is adjusted accordingly. Raw material cost is backflushed from RIP to Cost of
7

Goods Sold. The following information is for the month of June:
Beginning balance of RIP account, including P900 of conversion cost………. P 8,500

Raw materials received on credit…………………………………………………. 187,000
Ending RIP inventory per physical count, including P1,100 conversion
cost estimate……………………………………………………………………….. 7,900
Required: Prepare all journal entries involving the RIP account.


month of June.

to Cost of Goods Sold.

3. Backflush Costing; Entries in RIP and Finished Goods. The Clifton Manufacturing Company has a
cycle time of 1.5 days, uses a Raw and In Process (RIP) account, and charges all conversion costs to Cost
of Goods Sold. At the end of each month, all inventories are counted, their conversion cost components
are estimated, and inventory account balances are adjusted. Raw material cost is backflushed from RIP to
Finished Goods. The following information is for May:
Beginning balance of RIP account, including P600 of conversion cost………… P 5,500

Beginning balance of finished goods account, including P2,000 of
conversion cost……………………………………………………………………….. 6,000
Raw materials received on credit …………………………………………………… 173,000
8

Ending RIP inventory per physical count, including P850 conversion

cost estimate………………………………………………………………………….. 6,200
Ending finished goods inventory per physical count, including P1,550
conversion cost estimate…………………………………………………………….. 4,900
Required: Prepare all the journal entries that involve the RIP account and/or the finished goods account.

month of June.

to Finished Goods.
To record the material cost to be backflushed from

Finished Goods to Cost of Goods Sold.
To offset the conversion cost (in RIP account and in

Finished Goods account) to the Cost of Goods Sold
account.
9


To better test your knowledge on the topic, answer the given two problems to enhance your learning.
To check if you got it right, your teacher will provide you the key answers. Be honest in checking your
answers. 

1. In backflush costing, if the conversion cost in the Raw and In Process was P500 on July 1 and
P1,000 on July 31, the account to be credited at the end of July for the P500 increase would be:
a. Raw and In Process c. Raw Materials
b. Finished Goods d. Cost of Goods Sold.
2. One of the requirements for a JIT system to be successful is:

a. Cyclical production. c. Adequate inventory stock
b. Coupling it with job order d. High quality and balanced
costing work loads.
3. The continuing reduction of inventories is achieved by all of the following steps except:
a. Inventories are reduced until a problem is discovered
b. Once the problem is defined the inventory level is increased to keep the system
operating smoothly
c. Once the problem is removed, the inventory level is increased until another
a problem is discovered.
d. The problem is analyzed and practical ways are identified to reduce it
4. The costs to be offset against the savings from lower work in process levels in a JIT system
include all of the following, except:
a. handling a larger number of small batches of work in process
b. the higher probability of shutdowns due to the smaller safety stock
c. the possibility that setup costs cannot be reduced enough to offset the larger number of
setups
d. the possibility of customer dissatisfaction due to slower response time to orders.
5. In backflush costing, if the conversion cost in Raw and In Process was P1,000 on March 1 and
P400 on March 31, the account to be credited for the P600 decrease would be:
a. Raw and In Process. c. Raw Materials
Problem 2
1. Cersei Company has a cycle time of 3 days, uses a Raw and In Process (RIP) account, and
charges all conversion costs to Cost of Goods Sold. At the end of each month, all inventories
10

are counted, their conversion costs components are estimated, and inventory account balances
are adjusted. Raw material cost is backflushed from RIP to Finished Goods. The following
information is for June:
Beginning balance of RIP account, including P3,000 of

conversion costs……………………………………………………… P 29,250
Beginning balance of Finished Goods account, including
P10,000 of conversion costs………………………………………… 30,000
Raw materials received on credit……………………………………….. 562,500
Direct Labor cost, P375,000; Factory Overhead applied,
P450,000………………………………………………………………. 825,000
Ending RIP inventory per physical count, including P4,500
of conversion costs…………………………………………………… 32,000
Ending finished goods inventory per physical count,
including P8,750 of conversion costs……………………………… 26,250
What is the conversion cost of units sold in June? ______________
Problem 3 (Journal Entry)

The Futaba Manufacturing Company uses a Raw and In Process inventory account. The following data is
for the month of December:
Materials Received on credit ……………….. P 600,000
Conversion costs……………………………... 240,000
Number of units manufactured …………….. 20,000 units
Number of finished units sold……………….. 19,000 units
Cost per unit (P28 materials + P12
conversion costs).................................... P40/unit
There are no opening stocks and for simplicity it is assumed that there are no variance.
Requirement: Using the backflush costing, prepare the journal entries under the three methods:
a. Method 1: Three Trigger Points
b. Method 2: Two Trigger Points
c. Method 3: Two Trigger Points
C. LESSON WRAP-UP
To the teacher:
● Direct the student to mark their place in the work tracker which is simply a visual to help
1. Work Tracker
11

completed.
2. Think about your Learning:

your rating?
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________
__________________________________________________________________________________

__________________________________________________________________________________
__________________________________________________________________________________
2) Assignment
To better enhance your knowledge about the topic, answer the following. Your teacher will
provide you the key answers after you are finished.
1. Michael Ross, general manager of a highly automated coffee production plant in Bulacan has provided
the following information for transactions that occurred during October. The production plant uses a JIT
costing system.
● Raw materials costing P300,000 were purchased.
● All materials costing P300,000 were requisitioned for production.
● Direct Labor costs of P200,000 were incurred.
● Actual factory overhead costs amounted to P995,000/
● Conversion costs allocated totaled P1,300,000. This includes the direct labor cost.
● All units are completed and immediately sold.
Requirement:
(a) What is the overallocated or under-allocated conversion costs for the month?
______________.
(b) What is the balance of cost of goods sold account on October 31 assuming no
adjustment has been made for overallocated or under-allocated conversion costs?
______________.
FAQs
1. Does backflush costing comply with GAAP?

-No. Backflush costing does not comply with GAAP and cannot be used for external reporting
requirements. In this costing, work-in-process inventory, which is an asset, exists but is not recognized;
however, its breakdown from inventories is necessary to represent in Profit and Loss condition
12

2. What are the implications of JIT and backflush costing systems for activity-based costing (ABC) systems?
-Simplifying the production process, as a JIT system does, makes more of the costs direct and reduces
the extent of overhead cost allocations
KEY TO CORRECTIONS

Part I (LO1): Backflush Costing System (JIT system)
1. C 4. A
2. A 5. D
3. E 6. D
7. See computation below
Materials on June 1 Raw and In Process Account………………...….. P 10,000
Materials Received in June………………………………………...…….. 205,000
Materials on June 30 Raw and In Process Account…………..……….. (12,500)
Amount Backflushed from RIP to Finished Goods Account…….. P 202,500
PART II (LO2) Journal Entry

1. Backflush Costing with FInished Goods Account.
Raw and In Process 680,000

month of August.
*As direct materials are used, no entry is needed, because they remain a part of RIP.
Finished Goods 676,800*

to Finished Goods.
*The computation is:
Material in August 1 RIP balance P 38,700
Material received during August 680,000
P 718,700
Material in August 31 RIP, per physical count 41,900
Amount to be backflushed P 676,800
Raw and In Process 500*
Cost of Goods Sold 500

13

*Conversion cost in RIP is adjusted from the P4,800 of August 1 to the P5,300 estimate at
August 31. The offsetting entry is made to Cost of Goods Sold, where all conversion costs
were charged during August.
2. Backflush Costing with no Finished Goods Account

To record all receipts of raw materials on credit for June

*As direct materials are used, no entry is needed, because they remain a part of RIP.
Cost of Goods Sold 187,800

to Cost of Goods Sold.
Material in June 1 RIP balance P 7,600
Material received during June 187,000
P 194,600
Material in June 30 RIP, per physical count 6,800
Raw and In Process 200*

*Conversion cost in RIP is adjusted from the P900 of June 1 to the P1,100 estimate at
June 30.The offsetting entry is made to Cost of Goods Sold, where all conversion costs
were charged during June.
3. Backflush Costing; Entries in RIP and Finished Goods Account.


month of June.
14


to Finished Goods.
Material in May 1 RIP balance P 4,900
Material received during May 173,000
P 177,900
Material in May 31 RIP, per physical count 5,350
Cost of Goods Sold 173,200
FInished Goods 173,200
To record the material cost to be backflushed from

Finished Goods to Cost of Goods Sold.

Material in May 1 Finished Goods (FG) P 4,000
Material backflushed from RIP 172,550
P 176,550
Material in May 31 FG per physical count 3,350
Raw and In Process 250
Finished Goods 450
To offset the conversion cost (in RIP account and in

Finished Goods account) to the Cost of Goods Sold
account.
*Conversion cost in RIP is adjusted from P600 of May 1 to the P850 estimate on May 31.
Conversion cost in Finished Goods is adjusted from the P2,000 at May 1 to the P1,550
estimate on May 31.

Problem 1
1. D 4. D
2. D 5. A
3. C
Problem 2
1. P824,750
15

Total conversion costs P825,000

Adjustments:
Increase in conversion costs in RIP
(P 4,500 - P3,000) ( 1,500)
Decrease in conversion costs in FG
(P10,000 - P8,750) 1,250
Conversion costs of units sold in June P824.750
Problem 3
Method 1: Three Trigger Points



(20,000 units x P40 = P800,000) Raw and In Process (RIP) 560,000

(19,000 units x P40 =P760,000) Finished Goods 760,000
*20,000 units manufactured x P28 cost of materials = 560,000.



(c). Completion of finished goods No entry

Raw and In Process* 532,000
Conversion Costs** 228,000
The cost of finished units is computed only when finished goods are sold [which corresponds to entry (d)]: 19,000 units sold x P40
per unit =P760,000, which is comprised of direct materials costs (19,000 units sold x P28 material cost per unit =P532,000) and
conversion cost (19,000 units x P12 conversion cost per unit =P228,000). The under-allocated conversion costs of P12,000 (240,000-
228,000) is closed to the Cost of Goods Sold account.

16

(a). Purchases of raw materials No entry



The third method doesn’t record Accounts Payable for direct materials until the products being manufactured are completed. This
method of backflush costing is feasible only if there is a short log between receipt of direct materials and completion of production.
Assignment
1. Refer to the solution below.
(a) P 105,000
(b) P1,600,000
Actual factory overhead P 995,000
Direct labor costs incurred 1,300,000
Total actual conversion costs 1,195,000
Conversion costs allocated to production 1,300,000
Overallocated Conversion Costs P 105,000
Materials used to be backflushed from RIP to COGS P 300,000

Applied conversion costs to production 1,300,000
Cost of Goods Sold balance, October 31 P1,600,000
17

Lesson title: Service Department Overhead Cost Allocation Materials:

1. Distinguish between support departments and producing Cabrera; Cost Accounting&Control;
departments. 2018-2019 Edition
Hansen & Mowen; Cost
2. Allocate support center costs to the producing departments Accounting&Control; 2019 Edition
using three overhead cost allocation methods. Brewer, Garisson & Noreen; Introduction
th
to Managerial Accounting; 7 edition
Productivity Tip:
Get a head start! Finish all your other important tasks to fully focus on this module.

Hello! I know that you are already excited for the next module but first let us have a quick review
for our last lesson. You may start.
1. In backflush costing, if the conversion cost in Raw and In Process was P2,500 on November 1
and P1,200 on November 30, the account to be credited for the P1,300 decrease would be:
a. Raw and In Process. c. Raw Materials
2. What are the two inventory accounts that are combined in the backflush costing system?
a. Finished Goods and Work-in-Process Inventory
b. Finished Goods and Raw Materials Inventory
c. Raw Materials and Work-in-Process Inventory.
d. Beginning and Ending Inventory
3. Just-In-Time (JIT) System is a management strategy that minimizes inventory, increases

efficiency and productivity through elimination of what?
a. Journal entries
b. Specific causes of rework, scrap, and wastes.
c. Conversion costs and raw materials
d. Communication with the lower management
4. Does Backflush costing comply with the GAAP?

a. Not, but it can be used for external reporting purposes
b. Yes, but with certain limitations.
c. No and cannot be used for external reporting.
d. Yes because it simplifies the production process.
1

5. To backflush materials cost from Raw and In Process (RIP) to Finished Goods, the calculation
would be:
a. materials in ending RIP inventory plus materials received during the period minus
materials in the beginning RIP inventory
b. materials in ending finished goods inventory plus materials cost transferred from RIP
minus materials in beginning finished goods inventory
c. materials in beginning finished goods inventory plus materials cost transferred from RIP
minus materials in ending finished goods inventory
d. materials in beginning RIP inventory plus materials received during the period minus
materials in ending RIP inventory.

What are the two categories of
departments (cost object) in cost
allocation?
Enumerate the three methods of
allocating service overhead costs.
This rate separates fixed and

variable costs in allocating one
department’s cost to another one.
B. MAIN LESSON
Make sure to highlight or underline the important parts! You may also refer on Chapter 7 of your
book on pages 236-237.
LO1: Distinguish between support departments and producing departments.
Cost allocation is the task of identifying, accumulating, and assigning costs to cost objects (such
as products or departments). It is important to realize that allocation does not affect the total cost. The
total cost is neither reduced nor increased by allocation. However, the amount of cost assigned to the
cost objects can be affected by the cost allocation method chosen.
Cost objects in cost allocation are commonly the departments. Two categories of departments are:
1) Producing Departments- are directly responsible for creating the products or services
sold to customers. More specifically, producing departments are those whose costs may be
charged to the product because they have contributed directly to its production, such as the
2

machining, forming, upholstering, or assembling,packing departments.

2) Support (Service) Departments- is one that is not directly engaged in production but
renders a particular type of service for the benefit of other departments. An example that is
common to many industrial concerns are receiving, inspection, storerooms, maintenance,
timekeeping, payroll, cost accounting, budgeting, data processing, general office, cafeteria,
and plant protection.
Major Objectives of Cost Allocation of support department costs to producing departments

identified by the Institute of Management Accountants (IMA) are the following:
● Obtain mutually agreeable prices.
● Compute product-line profitability.
● Value inventory.
● Motivate managers.
● Predict the economic effects of planning and control.
Steps in Allocating Support Department Costs to Producing Departments:

1) Departmentalize the firm (groups activities into different departments).
2) Classify each department as a support department or a producing department.
3) Trace all overhead costs in the firm to a support or producing department.
4) Allocate support department costs to the producing departments.
5) Calculate predetermined overhead rates for producing departments.
6) Allocate overhead costs to the units of individual products through the predetermined
overhead rates.
Allocating One Department’s Costs to Other Departments:

Calculate charging rates, and distinguish between single and dual charging rates.
● Single charging rate combines variable and fixed costs of the support department.
*Single Charge Rate = _Budgeted Fixed and Variable costs_
Budgeted Usage
*Total Amount Charged = Actual Usage per Department X Single Charge Rate
● Dual rates separate the fixed and variable costs.
*Variable rate is based on budgeted usage.
*Fixed support department costs are allocated on the basis of normal capacity:
➢ Allocation Ratio = Producing Department Capacity/ Total Capacity of All Departments
➢ Fixed Cost Allocation per Department = Allocation Ratio X Budgeted Fixed Cost
● Budgeted costs, not actual costs, for the allocation bases in determining charging rates.
*Efficiencies or inefficiencies of the support departments are not passed on to the producing
departments.
*Because the causal factors (activity driver) can differ for fixed and variable costs, these
types of costs should be allocated separately.
3

LO2: Allocate support center costs to the producing departments using three overhead cost
allocation methods.
Service Department Overhead Cost Allocation:

Methods of allocating support or service department cost to the production department include direct
method, step-down method and reciprocal method.
Use this data for the sample illustration for each method:
Support Departments Producing Departments
Power Maintenance Grinding Assembly
Direct Costs P500,000 P200,000 P150,000 P50,000
Normal Activity:
Kilowatt-hours - 200,000 600,000 200,000
Maintenance hours 5,000 - 9,000 6,000

*The costs of the Power Department are allocated on the basis of kilowatt-hours, and the costs
of the Maintenance Department are allocated on the basis of maintenance hours.
1) Direct Method: is the most widely-used method where it allocates each service
department's total costs directly to the production departments. It ignores the fact that
service departments may also provide services to other service departments. Under this
method, there is no interaction between service departments prior to allocation.
● Allocation Ratios:
Proportion of Driver Used by
Power - - 0.75 0.25
Maintenance - - 0.60 0.40

*Proportion of kilowatt-hours used by Grinding= 600,000 (600,000+200,000)= 0.75
*Proportion of kilowatt-hours used by Assembly= 200,000 (600,000+200,000)= 0.25
*Proportion of maintenance hours used by Grinding= 9,000 (9,000+6,000)= 0.60
*Proportion of maintenance hours used by Assembly= 6,000 (9,000+6,000)= 0.40
4

● Cost Allocation using Allocation Ratios:

Allocate:
Power (500,000) - 375,000 125,000
Maintenance - (200,000) 120,000 80,000
Total After Allocation P 0 P 0 P645,000 P255,000

*Grinding = 0.75 x P500,000= P375,000; Assembly = 0.25 x P500,000= P125,000
*Grinding = 0.60 x P200,000= P120,000; Assembly = 0.40 x P200,000= P80,000
Note: All overhead costs are allocated to producing departments resulting in a zero balance to all
support departments.
2) Step-Down (Sequential) Method: Allocates the costs of some service departments to other
service departments. However, once a service department’s costs have been allocated, no
subsequent costs are allocated back to it. The choice of which department to start with is very
important. The sequence in which the service departments are allocated usually affects the
ultimate allocation of costs to the production departments, in that some production
departments gain and some lose when the sequence is changed. Hence, production
department managers usually prefer over the sequence.
The most defensible sequence is to:

a.) start with the service department that provides the highest percentage of its total services
to other service departments, or
b.) the service department with the highest costs, or
c.) the service department that provides services to the most number of service departments,
or some similar criterion.
The ranking procedure to be used is based on the highest percentage of its total services to
other service departments.
Note: Maintenance is allocated first because it provides the highest percentage of its total
services to other service departments (Power).
Maintenance provides 25% = [5,000/ (5,000 + 9,000 + 6,000)]
5

Power provides 20% = [200,000/ (200,000 + 600,000 + 200,000)]
Power - - 0.80 0.20
Maintenance 0.25 - 0.45 0.30

*Proportion of maintenance hours used by Power= 5,000 ( 5,000 + 9,000 + 6,000)= 0.25
*Proportion of maintenance hours used by Grinding= 9,000 (5,000 + 9,000 + 6,000)= 0.45
*Proportion of maintenance hours used by Assembly= 6,000 (5,000 + 9,000 + 6,000)= 0.30
*Proportion of kilowatt-hours used by Grinding= 600,000 (600,000 + 200,000)= 0.75
*Proportion of kilowatt-hours used by Assembly= 200,000 (600,000 + 200,000)= 0.25
● Cost Allocation using Allocation Ratios:

Allocate:
Power 50,000 (200,000) 90,000 60,000
Maintenance (550,000) - 412,500 137,500

*Power= 0.25 x P200,000= P50,000; Grinding= 0.45 x P200,000= P90,000;
Assembly= 0.30 x P200,000= P60,000
*Grinding= 0.75 x P550,000= P440,000; Assembly= 0.25 x P550,000= P110,000
3) Reciprocal Method: The reciprocal method is the most accurate among the three methods
for allocating service department costs. It is because it recognizes reciprocal services among
service departments. However, it is also the most complicated method, because it requires
solving a set of simultaneous linear equations.
The usage of one support department by another is used to determine the total cost
of each support department, where the total cost reflects interactions among the support
departments. Then the new total of support department costs is allocated to the producing
departments. This method fully accounts for support department interaction.
The system of simultaneous linear equations must be solved. Each equation, which is
a cost equation for a support department, is the sum of the department’s direct costs plus the
6

proportion of service received from other support departments.
Total Cost = Direct Costs + Allocated Costs
Power - 0.20 0.60 0.20
Maintenance 0.25 - 0.45 0.30

*Proportion of kilowatt-hours used by Maintenance= 200,000 (200,000+ 600,000 + 200,000)= 0.20
*Proportion of kilowatt-hours used by Grinding= 600,000 (200,000 + 600,000 + 200,000)= 0.60
*Proportion of kilowatt-hours used by Assembly= 200,000 (200,000 + 600,000 + 200,000)= 0.20
*Proportion of maintenance hours used by Power= 5,000 ( 5,000 + 9,000 + 6,000)= 0.25
*Proportion of maintenance hours used by Grinding= 9,000 (5,000 + 9,000 + 6,000)= 0.45
*Proportion of maintenance hours used by Assembly= 6,000 (5,000 + 9,000 + 6,000)= 0.30
● Let P = Fully reciprocated costs for Power; and

Let M = Fully reciprocated costs for Maintenance
P= P500,000 + 0.25M
M= P200,000 + 0.20P
Solve for P by substituting (P200,000 + 0.20P) for M.
P= P500,000 + 0.25M
P= P500,000 + 0.25(P200,000 + 0.20P)
P= P500,000 + P50,000 + 0.05P
P - 0.05P= P500,000 + P50,000
0.95P= P550,000
P= P578,947 (rounded)
Solve for M
M= P200,000 + 0.20P
M= P200,000 + 0.20(P578,947)
M= P200,000 + P115,789
M= P315,789 (rounded)
7

Allocate:
Power (578,947) 115,789 347,368 115,789
Maintenance 78,947 (315,789) 142,105 94,737

*Maintenance= 0.20 x 578,947= 115,789; Grinding= 0.60 x P578,947= P347,368;
Assembly= 0.20 x P578,947= P115,789
*Power= 0.25 x P315,789= P78,947; Grinding= 0.45 x P315,789= P142,105;
Assembly= 0.30 x P315,789= P94,737
Note: For additional reading about service department overhead cost allocation methods,
you may refer to your book, Chapter 7 pg. 316- 339. And for more discussion you may visit this link:
https://bit.ly/Service-Department-Overhead-Cost-Allocation.

found at the end of this SAS. Write your score on the space provided.
Part I (LO1, LO2) Multiple Choice:

1. Pools all costs in one cost pool with the same rate per unit of the single allocation base appear to be in
their own best interest
a. Single rate method. c. Reciprocal allocation method
b. Dual rate method d. Incremental Cost-Allocation method
2. This is the most complicated cost allocation method, because it requires solving a set of simultaneous
linear equations and it recognizes reciprocal services among service departments.
a. Sequential Method c. Single rate method
b. Reciprocal Method. d. Dual rate method
3. This department is directly responsible for creating the products or services sold to customers whose costs
may be charged to the product because they have contributed directly to its production.
a. Service department c. Producing Department
b. Assembly Department d. Grinding Department
4. Institute of Management Accountants (IMA) identified the major objectives of cost allocation of support
department costs to producing departments are the following, except:
a. Compute product-line profitability. c. Motivate managers
b. Value-added engineering d. Obtain mutually agreeable price
5. Rapid Falls Corp. has three producing departments, A, B, and C, with 50, 30, and 20 employees,
respectively, in each department. Factory payroll costs other than direct labor are accumulated in a Payroll
Department account and are assigned to producing departments on the basis of the number of employees.
The total payroll in each department was: A, P300,000; B, P275,000; C, P325,000; and Payroll, P50,000.
8

Other costs accumulated in the Payroll Department amounted to P200,000. The amount of Payroll
Department costs chargeable to Department C is
a. P50,000 c. P40,000
b. P100,000 d. P60,000
6. Classifying Departments as Producing or Support- Manufacturing Firm

Classify each of the following departments in a factory that produces creme-filled snack cakes as a
producing department or a support department.
a. Janitorial- h. Packaging- k. Personnel-
b. Baking- i. Icing (frosts top of snack l. Cafeteria-
c. Inspection- cakes and adds m. General Factory-
d. Mixing- decorative squiggle)- n. Machine Maintenance-
e. Engineering- j. Filling (injects creme o. Bookkeeping-
f. Grounds- mixture into baked
g. Purchasing- snack cakes)-
PART II (LO2): Service Department Overhead Cost Allocation
Problem 1. Carmichael Manufacturing Company has two production departments (Fabrication and Assembly)
and three service departments (General Factory Administration, Factory Maintenance, and Factory Cafeteria).
A summary of the year's costs and other data for each department prior to allocation of service department
costs appears below.
Fabrication Assembly General Factory Factory Factory

Administration Maintenance Cafeteria
Labor Costs 1,950,000 2,050,000 90,000 82,100 87,000
Material Costs 3,130,000 950,000 - 65,000 91,000
Overhead 1,650,000 1,850,000 70,000 56,100 62,000
Direct Labor Hr. 562,000 437,500 31,000 27,000 42,000
Number of Employees 280 200 12 8 20
Square Footage Occupied 88,000 72,000 1,750 2,000 4,800

The costs of the General Factory Administration Department, Factory Maintenance Department,
and Factory Cafeteria are allocated on the basis of direct labor hours, square footage occupied, and
number of employees, respectively. There are no manufacturing overhead variances.
`
Requirement: Assuming that Carmichael elects to distribute service department costs under the direct
method of cost allocation, the amount of Factory Maintenance Department costs that would be
allocated to the Fabrication Department is (round all final calculations to the nearest peso)
9

__________________.
Problem 2
Jasmine Company manufactures both pesticide and liquid fertilizer, with each product manufactured in
separate departments. Three support departments support the production departments: Power, General
Factory, and Purchasing. Budgeted data on the five departments are as follows:
Power General Factory Purchasing Pesticide Liquid Fertilizer
Overhead P90,000 P314,000 P167,000 P78,900 P107,800
Square Feet 1,500 - 1,500 4,200 4,800
Machine Hours - 1,403 1,345 24,000 8,000
Purchase 20 40 7 120 60
Orders
The company does not break overhead into fixed and variable components. The bases for allocation
are power- machine hours; general factory- square feet; and purchasing-purchase orders.
Requirement: Allocate the overhead cost to the producing departments using the sequential method. (Take
allocation ratios out to four significant digits. Round allocated costs to the nearest peso.)


To better test your knowledge on the topic, answer the given two problems to enhance your
learning. To check if you got it right, your teacher will provide the key answers. Be honest in checking
your answers. 

1. Department that would be classified as a service department is:
a. Refining c. Mixing
b. Receiving d. Finishing
2. The method for allocating service department costs that requires the least clerical work is::
a. Sequential Method
b. Reciprocal Method
c. Direct Method
d. Step-up Method
3. A department that would be classified as a producing department is:

10

a. Production Control
b. Utilities
c. Finishing.
d. Medical
4. This method allocates the costs of some service departments to other service departments:
a. Single Rate Method
b. Reciprocal Method
c. Direct Method
d. Step-up Method.
5. The following are steps in allocating support department costs to producing departments, except
a. Classify each department as a support department or a producing department.
b. Trace all overhead costs in the firm to a support or producing department.
c. Allocate support department costs to the producing departments.
d. Predicts the economic effects of planning and control.
Problem 2
Eilers Company has two producing departments and two support departments. The following budgeted
data pertain to these four departments.
General Factory Receiving Assembly Finishing
Direct Overhead P400,000 P160,000 P43,000 P74,000
Square Footage - 2,700 5,400 5,400
Number of Receiving 300 - 1,680 1,020

Orders
Direct Labor Hours 20 - 25,000 40,000
Requirement:
Allocate the overhead costs of the support departments to the producing departments using:
a. Direct Method
b. Step-Down (Sequential) Method
c. Reciprocal Method
C. LESSON WRAP-UP
1. Work Tracker
completed.
11


your rating?
__________________________________________________________________________________
__________________________________________________________________________________

__________________________________________________________________________________
__________________________________________________________________________________

__________________________________________________________________________________
__________________________________________________________________________________
FAQs
1.How allocating support service costs will encourage service departments to operate more efficiently?
- Since the user departments are charged for the services provided, they will monitor the performance of
the service department. If the service can be obtained more cheaply externally, then the user
departments will be likely to point this out to management. Knowing this, a manager of a service
department will exert effort to maintain a competitive level of service.
2. How allocation of support service costs is useful for planning and control and in making pricing
decisions?
- Allocation of service costs aids in planning because it makes users pay attention to the level of service
activity being consumed and also provides an incentive for them to monitor the efficiency of the service
departments. It aids in pricing because sup-port department costs are part of the cost of producing a
product. Knowing the individual product costs is helpful for developing bids and cost-plus prices.
KEY TO CORRECTIONS
Activity 1: Review
1. A 4. C
2. C 5. D
3. B

Part I (LO1 & LO2)
1.) A 5.) A
2.)B Supporting Calculation:
3.)C *(P50,000+200,000)/(50+30+20)=P2,500
4.) B *P2,500/20employee= 50,000
6.)
12

a. support f. support k. support

b. producing g. support l. support
c. support h. producing m. support
d. producing i. producing n. support
e. support j. producing o. support
PART II (LO2)
Problem 1 Ans: P111,760
Supporting Computation:
=Factory Maintenance Costs / Square Footage Occupied
=(P82,100 + 65,000 + P56,100) / (88,000 +72,000)
= P1.27 per Square Footage Occupied
=P1.27 x 88,000 Square Footage Occupied (Fabrication)
=P 111,760
Problem 2
Allocation Ratios:
Pesticide Liquid Fertilizer
Square Feet 0.4667 0.5333
Machine Hours 0.7500 0.2500
Purchase Orders 0.6667 0.3333
Cost Assignment:
Pesticide Liquid Fertilizer
Direct Costs P78,900 P107,800
Power:
(0.7500 × P90,000) 67,500
(0.2500 × $90,000) 22,500
General Factory:
(0.4667 × $314,000) 146,544
(0.5333 × $314,000) 167,456
Purchasing
(0.6667 × $167,000) 111,339
(0.3333 × $167,000) 55,661
13

Total
P404,283 P353,417

Problem 1
1. B 4. D
2. C 5. D
3. C
Problem 2
1. Ask the teacher for the possible answers.
14

Lesson title: Accounting for Joint and By-products Materials:

1. Identify the characteristics of the joint production process. Cabrera; Cost Accounting&
2. Allocate joint costs to the product using different allocation Control; 2019 Edition
methods. Accounting&Control; 2019Edition
Pedro P. Guerrero
Productivity Tip:
Before sleeping tonight, recite three important terms you learned today.

Hello there! Before you begin the topic let us have a quick review from the
previous module.
1. A department that would be classified as a producing department is

a. Baking. c. General Factory
b. Cafeteria d. Machine Maintenance
2. The method for allocating service department costs that requires the least clerical
work is::
a. Sequential Method c. Direct Method.
b. Reciprocal Method d. Step-up Method
3. The following are steps in allocating support department costs to producing

departments, except
a. Decentralize the firm.
b. Classify each department as a support department or a producing
department
c. Trace all overhead costs in the firm to a support or producing department
d. Allocate support department costs to the producing departments
4. Major objectives of cost allocation of support department costs to producing

departments identified by the Institute of Management Accountants (IMA) are the
following, except
a. Compute product-line profitability
b. Value inventor
c. Unification of support and producing departments
d. Predict the economic effects of planning and control
5. Pools all costs in one cost pool with the same rate per unit of the single allocation
base appear to be in their own best interest
1

a. Single rate method.

b. Dual rate method
c. Reciprocal allocation method
d. Incremental Cost-Allocation method

Alright! Let’s see what you already know, answer the first column (What I know). Leave
the third column (What I Learned) blank at this time.
Describe the Joint Production
Process.
Explain Split-off point.
What are the differences between

Joint Costs and Separable costs.
B. MAIN LESSON
2

LO1: Identify the characteristics of the joint production process.
In the process of manufacturing one or more products, a company may also produce
other products which may either be joint products or by-products (this will be discussed
on the next module) depending upon their importance to the firm.
Joint Products are the two or more products produced simultaneously by the same
process up to a “split-off” point. The Split-Off Point is the point at which the joint products
become separate and identifiable.
Joint Production Process
Split-Off Pork Meat

Point
Raw Material:
Processing
Hog
Hides/Skins
Joint costs are

costs incurred in a joint process. Joint costs may include direct material, direct labor, and
overhead costs incurred during a joint production process.
Separable Costs
Further
Cream Buttercream
Processing
Material:
Raw Milk Processing
Further Condensed
Liquid Skim
Split-Off Processing Milk
Point
Separable Costs are any costs incurred after the split-off point in a production process
that can be assigned to specific products.
3

Characteristics of Joint Products

Generally, the joint products have the following characteristics:
1. The main objective of manufacturing operations is to produce joint products.
2. The sale value of all the joint products is relatively high and none of the joint
products are significantly greater in value than other joint products.
3. There is no compulsory for further processing after the point of separation. These
types of joint products are sold directly after the split off point.
4. Sometimes, the joint products may require further processing.
5. Joint products require simultaneous common processing.
6. The quality of joint products may not be maintained at the maximum.
7. The management has little or no control over the maintenance of quality of joint
products.
Objectives of Joint Cost Analysis

The following are the objectives of joint cost analysis:
1. Correct collection, compilation and classification of process costs.
2. The profit or loss of joint products manufacture is determined.
3. The method or pattern of production may be determined.
4. Fixing the most profitable product mix may increase the profit.
5. The relationship between the cost and profit can be studied to fix the price of joint
products.
6. The effect of increase or decrease in cost is to be found out due to increase or
decrease in the output of joint products.
7. The profitability in selling of joint products and by-products can be determined.
8. The volume of profit may also be maximized with the help of marginal contribution
analysis.
LO2: Allocate joint costs to the product using different allocation methods.
Accounting for Joint Product Costs

1. Relative Market (Sales) Value Method- the application of this method will depend on
whether the products are sold at the point of separation or whether to be processed
further such as additional costs are incurred as a result of additional processing.
a. Sale Value at Point of Split-off- If the products are sold at the point of
separation, cost is allocated to each product based on the relative market
value at the split-off point.
Sample Illustration:
Assuming Joint Cost is amounting to P2,000.
4

Product Measuremen Selling Price/ Sales Value Relative Allocated

t Unit Measure @ Split-Off Sales Value Joint Costs
Point
Pork Meat 70 kg. P200/kg P14,000 (14k/20k)=70% P1,400
Pig’s Hides 40 sq. ft. P150/sq. ft. P6,000 (6k/20k)=30% P600
Total P20,000 100% P2,000
b. Hypothetical Market Value Approach/Net Realizable Value Method (Sales

Value After Further Processing)- Joint cost is to be allocated on the basis of
each product’s net realizable value.
Net Realizable Value = Final Sales Value- Actual Cost to Complete and Sale
Assuming the Joint cost is 8,000.
Product Sales Separable NRV Relative Allocation
Value Costs NRV
Butter Cream P50,000 P12,000 (50k-12k)= (38k/62k)= P4,880

P38,000 61%
Condensed P30,000 P6,000 (30k-6k)= (24k/62k)=3 P3,120

Milk P24,000 9%
Total P62,000 100% P8,000

Additional Note: For additional reading about joint production process and its method of
allocation,
Joint Process: https://bit.ly/JointProcess
Joint Product Allocation : https://bit.ly/Joint_Cost_Allocation
2) Activity 4: Skill-building Activities (15 mins) SCORE: _____________

Let’s try to practice what you have learned! Check your answers against the Key
to Corrections found at the end of this SAS. Write your score on the space provided.
Part I (LO1, LO2) True or False

1. Joint costs occur before the split-off point in a production process.
2. The point at which individual products are first identifiable in a joint process is referred to
as the split-off point.
3. Joint costs include all materials, labor and overhead that are incurred before the split-off
point.
4. A decision that must be made at split-off is to sell a product or process it further.
5

5. Net realizable value equals product sales revenue at split-off plus any costs necessary
to prepare and dispose of the product
6. If incremental revenues beyond split-off are less than incremental costs, a product
should be sold at the split-off point.
7. If incremental revenues beyond split-off exceed incremental costs, a product should be
processed further.
8. The net realizable value approach requires that the net realizable value of by-products
and scrap be treated as a reduction in joint costs allocated to primary products.
9. Net realizable value is considered to be the best measure of the expected contribution of
each product to the coverage of joint costs.
10. Not-for-profit entities are required to allocate joint costs among fund-raising, program,
and administrative functions.
PART II (LO1&LO2): Complete the following.

1. Sales revenue at split-off less disposal costs equals
______________________________. ANS: net realizable value.
2. The point at which individual products are first identifiable in a joint process is referred to
as the _____________________________. ANS: split-off point
3. A single process in which one product cannot be manufactured without producing others
is referred to as a __________________________. ANS: joint process
4. Costs that are incurred in the manufacture of two or more products from a common
process are referred to as ___________________________. ANS: joint costs
5. Costs that are incurred after the split-off point in a production process are referred to as
______________________________. ANS: separate costs
PART III (LO2): Joint Product Allocation

Problem 1
Alomar Company manufactures four products from a joint production process: barlon, selene,
plicene, and corsol. The joint costs for one batch are as follows:
Direct Labor 34,000
Overhead 25,500
At the spli-off point, a batch yields 1,400 barlon, 2,600 selene,2,500 plicene, and 3,500 corsol.
All products are sold at the split-off point: barlon sells for $15 per unit, selene sells for $20 per
unit, plicene sells for $26 per unit, and corsol sells for $35 per unit. Carry out all percent
calculations to four significant digits.
Required:
1. Allocate the joint costs using the sales-value-at-split-off method.
Problem 2
Pacheco, Inc., produces two products, overs and unders, in a single process. The joint costs of
this process were $50,000 and 14,000 units of overs and 36,000 units of unders were produced.
Separable processing costs beyond the spli-off point were as follows: overs, $18,000; unders,
$23,040. Overs sell for $2.00 per unit; unders sell for $3.14 per unit.
6

Required:
1. Allocate the $50,000 joint costs using the estimated net realizable value method.
2. Suppose that overs could be sold at th spli-off point for $1.80 per unit. Should Pacheco sell
overs at split-off or process them further? Show supporting computations.

It’s time to answer the questions in the “What I Know Chart” in Activity 2. Write
your answers in the “What I Learned” column. Let’s see your improvement!
To better test your knowledge on the topic, answer the given two problems to enhance
your learning. To check if you got it right, your teacher will provide you the key answer.
Be honest in checking your work. 

1. If a company obtains two salable products from the refining of one ore, the
refining process should be accounted for as a(n)
a. mixed cost process
b. joint process.
c. extractive process
d. reduction process
2. Joint costs are allocated to joint products to

a. obtain a cost per unit for financial statement purposes.
b. provide accurate management information on production costs of each
type of product
c. compute variances from expected costs for each joint product
d. allow the use of high-low analysis by the company
3. Joint cost allocation is useful for

a. decision making
b. product costing
c. control.
d. evaluating managers' performance
4. Joint costs are useful for

a. setting the selling price of a product
b. determining whether to continue producing an item
c. evaluating management by means of a responsibility reporting system
d. determining inventory cost for accounting purposes.
5. Which of the following components of production are allocable as joint costs

when a single manufacturing process produces several salable products?
a. direct material, direct labor, and overhead.
7

b. direct material and direct labor only

c. direct labor and overhead only
d. overhead and direct material only
Problem 2
For this part, kindly answer Exercise #8 on Chapter 7 of your book on page 248.
C. LESSON WRAP-UP

1. Work Tracker
You are done with this session! Let’s track your progress. Shade the session number
you just completed.

From a rating of 1-10, determine if you have learned all the learning objectives. What is
the reason for your rating?
______________________________________________________________________
______________________________________________________________________

______________________________________________________________________
______________________________________________________________________

______________________________________________________________________
______________________________________________________________________
FAQs:
1.How do joint costs differ from other common costs?

-Joint costs occur only in cases of joint production. A joint cost is a common cost, but a
common cost is not necessarily a joint cost. Many overhead costs are common to the products
manufactured in a factory but do not signify a joint production process.
2. Is joint cost allocation required in reporting?

-Yes. The primary reason for joint cost allocation is that financial reporting (GAAP) and
federal income tax require it.
KEY TO CORRECTIONS
Activity 1: Review
8

1. B 4. C
2. C 5. A
3. A

Part I (LO1 & LO2)
1. True 5. False 9. True
2. True 6. True 10. True
3. True 7. True
4. True 8. True
PART II (LO1 & LO2)

1. Net realizable value. 4. Joint costs
2. Split-off point 5. Separate/Separable costs
3. Joint process
PART III (LO2)

Problem 1
Units Price at Market Percent Joint Cost Allocated
Split-Off Value at Cost
Split-Off
Barlon… 1,400 $15 $21,000 0.0806 $127,400 $10,268
Selene… 2,600 20 52,000 0.1996 127,400 25,429
Plicene… 2,500 26 65,000 0.2495 127,400 31,786
Corsol… 3,500 35 122,500 0.4702 127,400 59,903
Total… 10,000 127,386*
*Does not equal $127,400 due to rounding of percentages.
Problem 2
Percent Units Price Eventual Market Separable Costs Hypothetical
Value Market Value
Overs… 0.10 14,000 $2.00 $28,000 $18,000 $10,000
Unders… 0.90 36,000 3.14 113,040 23,040 90.000
Total $100,000
Overs… Unders…
Join Cost $50,000 $50,000
Percent of Hypothetical MarketValue X 0.10 X 0.90
Allocated Join Cost $5,000 $45,000
2. Value of overs at split-off (14,000 × $1.80)................... $ 25,200
Value of overs when processed further...................... $ 28,000
Less: Further processing cost........................... 18,000
Incremental value of further processing................... $10,000
*Overs should not be processed further as there will be $15,200 more profit if sold at split-off.
9


Problem 1
1. B 4. D
2. A 5. A
3. C
Problem 2 & Assignment

Method Method
1 2
Sales revenue P35,000 P35,000
Other income 0 445 i.e., P570 –
P125
Total revenue P35,000 P35,445
Cost of goods sold:
Unadjusted 18,000 18,000
Add: costs to process by- 125
products
Less: by-product revenues (570)
Adjusted cost of goods sold P17,555 P18,000
Gross margin P17,445 P17,445
10

Lesson title: Accounting for Joint and By-products Materials:

1. Allocate joint costs to the joint products using different Cabrera; Cost Accounting&Control;
allocation methods. 2019 Edition
2. Explain the treatment of By-products and differentiate its Accounting&Control; 2019 Edition
cost allocation methods. Pedro P. Guerrero
Productivity Tip:
After finishing this module, list down important concepts and terms that you remember. Do
this for about 15 minutes. Compare your list to the module materials after and see what you got right
or if you missed something.

Hi! This is the last topic of this course and for your review from the previous topic,
answer the problem:
A. Manila Inc. manufactures products P, Q and R from a joint process. Additional
information is as follows:
Product
P Q R Total
Units Produced 4,000 2,000 1,000 P7,000
Joint Cost P36,000 ? ? 60,000
Sales Value at Split-off ? ? P15,000 100,000
Additional Costs if processed further P7,000 P5,000 P3,000 15,000
Sales Value if processed further P70,000 P30,000 P20,000 120,000
Assuming the joint costs are allocated using the relative sales value at split-off approach,
what was the sales value at split-off for Product P? _________________________

Alright! Let’s see what you already know, answer the first column (What I know). Leave the
third column (What I Learned) blank at this time.
1


Compare joint product and by-
product.
What are the joint cost allocation

methods for by-products?
Give examples of By-products.
B. MAIN LESSON

LO1: Allocate joint costs to the joint products using the remaining allocation
method from
the previous module.
Accounting for Joint Product Costs

(Continuation of the Joint Cost Allocation Method for Joint Products)
2) Physical Measures (Units Produced) Method- This method allocated joint costs to
products based on physical measure units. If the allocation is based on physical
quantities, each unit of each product is assigned at the same value regardless of the
nature or value of the product.
Assuming Joint Cost is amounting to P10,000 in cutting trees to produce wooden
planks, paper and saw dust.
Product Pounds (Lbs) Percent Allocated Joint Costs
Wooden Planks 3,500 lbs (3.5k/4k)=87.50% P8,750
Paper 300 lbs (300/4k)=7.50% P750
2

Saw Dust 200 lbs (200/4k)=5% P500
Total 4,000 lbs 100% P10,000
3) Weighted Average Method- some difficulties encountered under the physical units
method can be overcome by using weight factors such as diverse elements as amount of
material used, difficulty to manufacture, time consumed, difference in type of labor used,
and size of unit. These factors and their relative weights are usually combined in a
single value, called the weight factor.
Assuming that Joint Cost is P5,000 in purchasing peaches and grades them into fancy,
choice, standard and pie quality; and then cans each grade.
Grades/ Quality Number of Weight Factor Weight Percent Allocated Joint
Cases Number of Cost
Cases
Fancy 100 1.30 130 0.21667 P1,083
Choice 120 1.10 132 0.22000 P1,100
Standard 303 1.00 303 0.50500 P2,525
Pie 70 0.50 35 0.05833 P 292
Total 600 P5,000
LO2. Explain the treatment of By-products and differentiate its cost allocation
methods
A by-product is a secondary product recovered in the course of manufacturing a

primary product.
It is a product whose total sales value is relatively minor in comparison with the sales
value of the main product(s).
Can be characterized by its relationship to the main product

1. By-product resulting from scrap and trimmings
2. Scrap and other residue from joint product types of processes
3. Minor joint product situation
Methods of Accounting for By-Products
3

1. By-Products are Recognized when Sold. Under this method. no income is recorded
from them until they are sold.
Net By-Product Income= (Actual Sales Revenue) - (Actual Additional Processing Costs
and
Marketing and Administrative
Expenses).
a. Treatment of the By-Product as Other Revenue (No Joint Cost Allocated to By-
Product)
- if the by-product can be sold, the company may choose to credit the sale to “Other
Income” or to set up an account for “Sale of By-Product”. All joint cost is allocated to
the main products.
Golden Company manufactures several main products and one by-product from a joint
production process. One production run has the following costs:
Direct Materials P30,000
Direct Labor 7,000
Applied Overhead 9,100
Total Joint Production Cost P52,100
Golden obtains the following products and by-product:

Product A 3,200 lbs.
Product B 800 lbs.
By-Product 60 lbs.
The by-product can be sold for P5 per pound. When the 60 pounds by-product are sold
on account, the journal entry would be:
Accounts Receivable P300
Sale of By-Product P30

0
4

Note: Under this method, no cost is assigned to the by-product and it is not carried in
inventory. All joint production cost (P52,100 per batch) is allocated to the main products.
b. Treatment of the By-Product as a Reduction in the Cost of the Main Products.

- Under this method, to account for any revenue received from sale of the by-
product as a reduction in the joint costs of the main products. Using the
illustration above:
Total Joint Costs P 52,100
Less: Revenue for the sale of By-Product (300)
Joint Costs Allocated to the Main Products P 51,800
- Using Physical Measures (Units Produced) Method in allocating joint costs to

the main
products:
Units Percent Joint Cost Allocation
Product 3,200 80% P41,440

A lbs.
Product 800 lbs. 20% P10,360

B
Total 4,000 lbs 100% P51,800
2. By-Products are Recognized when Produced. Under this method the cost of the by-
product is computed by using the following methods:
a. Net Realizable Value Method - The expected sales value of the by-product
produced is reduced by expected additional processing cost and marketing and
administrative expenses.
5

Expected Additional Processing

Expected Sales Value of By- Cost and Marketing and = Net Realizable Value of By-
Less Administrative Expenses
Product Produced Product
Less Net Realizable Value of By- = Joint Costs to be Allocated to Main

Total Join Costs
Product Products
b. Reversal Cost Method - The expected value of the by-product produced is reduced by
the expected additional processing costs and normal gross profit of the by product (or by
the marketing and administrative expenses and net income). This method is called the
reversal cost method because you have to work backward from the gross revenue to
arrive at the estimated joint cost of the by-product at the point of split-off . The joint cost
allocated to the production of the by-product is deducted from the total production cost of
the main product, and charged to a by-product inventory account. Proceeds from the sale
of by-products are treated the same as sale as sales of the main product.
Joint Product Allocation and By-Product : https://bit.ly/By-Product

Let’s try to practice what you have learned! Check your answers against the Key to
Corrections found at the end of this SAS. Write your score on the space provided.
Part I (LO1, LO2) Multiple Choice

1. The following statement that best describes a by-product is:
A. a product that usually produces a small amount of revenue when compared to the main
product's revenue.
B. a product that does not bear any portion of the joint processing costs
C. a product that is produced from material that would otherwise be scrap
D. a product that has a lower unit selling price than the main product
2. The characteristic that is most often used to distinguish a product as either a joint product or a
by-product is the:
A. amount of labor used in processing the product
B. amount of separable product costs that are incurred in processing
C. amount (i.e., weight, inches, etc.) of the product produced in the manufacturing process
D. relative sales value of the products produced in the process.
6

3. A company produces three main joint products and one by-product. The by-product's relative
market value is quite low compared to that of the main products. The preferable accounting for
the by-product's net realizable value is as:
A. an addition to the revenues of the other products allocated on their respective net
realizable values
B. revenue in the period in which it is sold
C. a reduction in the joint cost to be allocated to the three main products.
D. a separate net realizable value upon which to allocate some of the joint costs
4. Reporting revenue from by-product sales on the income statement as additional sales revenue:
A. allocates costs to by-products on the basis of quantities produced
B. reduces the main product cost by the estimated market value of the by-product
C. credits main product costs only when the by-product is used in further production
D. overstated ending inventory costs of the main product.
5. By-products are
A. allocated a portion of joint production cost
B. not sufficient alone, in terms of sales value, for management to justify undertaking the
joint process.
C. also known as scrap
D. the primary reason management undertook the production process.
PART II (LO1&LO2): Solve the following.

Problem 1. A Manufacturing Company makes three products: A and B are considered
main products and C a by-product.
Production and sales for the year were:
220,000 lbs. of Product A, salable at $6.00
180,000 lbs. of Product B, salable at $3.00
50,000 lbs. of Product C, salable at $.90
Production costs for the year:
Joint costs $276,600
Costs after separation:
Product A 320,000
Product B 190,000
Product C 6,900
Required: Using the by-product revenue as a cost reduction and net realizable
value method of assigning joint costs, compute unit costs:
(a) if C is a by-product of the process and

(b) if C is a by-product of B.
Problem 2.
King’s Landing Corporation manufactures joint products and uses a physical unit
method to allocate joint cost. The joint cost is amounting to P50,000 in shearing a sheep’s
7

wool to produce scarfs, blanket and coats.

Product Pounds (yard)
Scarfs 4,000 yards
Blanket 3,000 yards
Coats 1,000 yards
Total 8,000 yards
Requirement:
Using the physical unit method, what is the joint cost allocated in each product.
It’s time to answer the questions in the “What I Know Chart” in Activity 2. Write
your answers in the “What I Learned” column. Let’s see your improvement!
To better test your knowledge on the topic, answer the given two problems to enhance
your learning. To check if you got it right, you may ask for your teacher for the correct
answer. Be honest in checking. 
Problem 1
Mindanao producers manufacture three joint products, JKA, JKB, and JKC and a by-
product JJD, all in a single process. Results for July were as follows.
Materials used……………………….. 10,000 kgs. (P24,000.00)

Conversion cost……………………… P28,000.00
Output:
No. of Kilos Product Sales Value Per Kilo
4,000 JKA P11
3,000 JKB 10
1,000 JKC 26
2,000 JJD 1
The revenue from the by-product is credited to the sales account. Process costs
are apportioned on a relative sales value approach. What was the cost per kilogram of
JKA for the month?
8

Problem 2
El Propesor is the owner and operator of Heist Bottling, a bulk soft-drink
producer. A single production process yields two bulk soft drinks: Rain Dew (the main
product) and Resi-Dew (the by-product). Both products are fully processed at the split off
point, and there are no separate costs.
For December 2020, the cost of the soft-drink operations is P120,000. Production
and sales data are as follows:
Production (in Liters) Sales (in Liters) Selling Price Per Litter
Main Product: Rain Dew 10,000 8,000 P20
By-Product: Resi- Dew 2,000 1,400 2
There were no beginning inventories on December 1, 2020.

Assuming a by-product is recognized when produced.
Requirement:
a. What is the gross margin for MT Building?
b. What are the inventory costs reported in the balance sheet on December
31,2020, for Rain Dew and Resi-Dew?
c. What is the gross margin for MT Building?
d. What are the inventory costs reported on December 31, 2020, for Rain
Dew and Resi-Dew?
C. LESSON WRAP-UP
1. Work Tracker
You are done with this session! Let’s track your progress. Shade the session number
you just completed.

From a rating of 1-10, determine if you have learned all the learning objectives. What is
the reason for your rating?
______________________________________________________________________
______________________________________________________________________
________________________

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ACC 122: Cost Accounting and Control

Student Activity Sheets Module # 3

Name: ____________________________________________________________ Class number: _______

Lesson title: Job-order: Direct Materials, part 1 Materials:

1) Activity 1 : Introduction/Review (10 mins)

1. Cost accounting differs from financial accounting in that financial accounting:

Name: ____________________________________________________________ Class number: _______

2) Activity 2 (LO1 & LO2): What I Know Chart, part 1 (5 mins)

What I Know Questions What I Learned (Activity 5)

2. What are the internal control

3. Identify the three cost flow

Make sure to highlight or underline the important parts!

TOTAL COSTS OF A MANUFACTURING FIRM

MANUFACTURING (PRODUCT) COST NON-MANUFACTURING (PERIOD)

Name: ____________________________________________________________ Class number: _______

glue, and nails may be classified as indirect materials.

Effective cost control system:

Basic Aspects of Materials Control:

Order point = (Daily usage X Lead time) + Safety stock

Economic Order Quantity

Name: ____________________________________________________________ Class number: _______

communication costs, and materials accounting and record keeping.

EOQ = Economic Order Quantity

Material Control Procedures

Materials Control Personnel

Control During Procurement/Acquisition

Name: ____________________________________________________________ Class number: _______

Control During Storage and Issuance

LO2: Account for material cost flow methods

Determining the Cost of Materials Issued

Material Cost Flow Methods

a. First – In, First – Out Method (FIFO)

ABC Company has the following transactions for the year.

Name: ____________________________________________________________ Class number: _______

Date Transaction No. of Units Purchase Price Per Unit

No. of Purchase Price Inventory Total On-hand

Name: ____________________________________________________________ Class number: _______

No. of Purchase Price Inventory Total On-hand

Cost Materials Issued Computation

c. Moving Average Method

No. of Purchase Price Cost of Inventory Total On-hand Cost per

Name: ____________________________________________________________ Class number: _______

Cost Materials Issued Computation

Activity 4: Skill-building Activities (70 mins) SCORE: ________________

1. An effective cost control system should include:

2. To effectively control materials, a business must maintain:

Name: ____________________________________________________________ Class number: _______

EOQ = 2 x ___________ x __________

EOQ = __________________ units

(c) Annual ordering cost = Number of orders x Cost per order

= Annual usage X _______ cost per order

Annual carrying cost = Average inventory x Carrying cost per unit

Average inventory = (1/2 x EOQ) + Safety Stock

Annual carrying cost = ______ x ______ = ___________

PART II (LO1): Internal Control Procedures

a. Purchase requisition 1. Production department supervisor

Name: ____________________________________________________________ Class number: _______

Name: ______________________________________________________ Class number: _

Name: ______________________________________________________ Class number: _

Name: ______________________________________________________ Class number: _

Name: ______________________________________________________ Class number: _

Name: ______________________________________________________ Class number: _

Name: ______________________________________________________ Class number: _

Name: ______________________________________________________ Class number: _

Name: ______________________________________________________ Class number: _

Name: ______________________________________________________ Class number: _

EOQ = 2 x _ x

Annual carrying cost = x = _______

Name: ______________________________________________________ Class number: _

Name: ______________________________________________________ Class number: _

Name: ______________________________________________________ Class number: _

Name: ______________________________________________________ Class number: _

Name: ______________________________________________________ Class number: _

Name: ______________________________________________________ Class number: _

Name: ______________________________________________________ Class number: _

Name: ______________________________________________________ Class number: _

Name: ______________________________________________________ Class number: _

Name: ______________________________________________________ Class number: _

Name: ______________________________________________________ Class number: _

Name: ______________________________________________________ Class number: _

Name: ______________________________________________________ Class number: _

Name: ______________________________________________________ Class number: _

Name: ______________________________________________________ Class number: _

Name: ______________________________________________________ Class number: _

Name: ______________________________________________________ Class number: _

Name: ______________________________________________________ Class number: _

Name: ______________________________________________________ Class number: _