BALIUAG UNIVERSITY

CPA Review Program

Advanced Financial Accounting and Reporting
Luisito V. Correa Jr., CPA, CAT, MBA
Module 8: Cost Accounting Part 1 LVC

I. Job Order Costing

✓ Cost accumulation systems (Cost accounting systems)
1. Job Order Costing – A system for allocating costs to groups of heterogeneous (customized or unique) products
made to customer specifications. It is applicable where goods or services result from production processes
which are distinct from each other. Product cost is accumulated per job or batch.
2. Process Costing – A system for allocating costs to homogeneous (similar or identical) units of a mass-produced
product. It is applicable where goods or services result from a sequence of continuous or repetitive operations
or processes. Product cost is accumulated per process or department.
✓ Costing systems (Measurement of costs)
1. Actual Costing – Valuation method that uses actual direct materials, direct labor and overhead charges in
determining product cost.
2. Normal Costing – Valuation method that uses actual direct materials and direct labor, and predetermined
overhead rates in determining product cost.
3. Standard Costing – Valuation method that uses predetermined or expected cost of direct materials, direct
labor and overhead in determining product cost.
✓ Ledgers in cost accounting
Direct Materials Work-in-Process
Beginning balance Ending balance Beginning balance Ending balance
Materials purchased Materials used Materials used Cost of goods
manufactured
Direct labor incurred
Applied FOH
Finished Goods Factory Overhead - Applied
Beginning balance Ending balance Closing of FOH applied Applied FOH
Cost of goods Cost of goods sold
manufactured
Factory Overhead - Control Over or (under) Applied FOH
Actual FOH incurred Closing of FOH control Closing of FOH control Closing of FOH applied
Under-applied FOH Over-applied FOH
✓ Manufacturing costs
1. Direct materials – Materials that are traced directly to jobs/products.
2. Direct labor – Labor costs incurred directly on specific jobs.
3. Factory overhead – Indirect costs that must be allocated to jobs (i.e. indirect materials, indirect labor, etc.)
• Factory overhead control – Account used to initially record actual factory overhead incurred.
• Factory overhead applied – Account used to record applied factory overhead based on pre-determined
rate. Predetermined rate is based on estimated or budgeted data.
• Over/(under) applied FOH – Closed to cost of goods sold if immaterial. If material, allocated among work-
in-process, finished goods, and cost of goods sold.

II. Spoilage, Rework and Scrap

✓ Definition
a. Normal spoilage – The cost of spoiled units caused by the nature of the manufacturing process (product
costs). Charged to cost of goods sold.
b. Abnormal spoilage – The cost of spoiled units which were spoiled through some unnecessary act, event, or
condition (period costs). charged to loss account.
c. Defective units – Inferior goods reworked and sold as normal product
d. Scrap – Salable materials left over from product manufacturing.
✓ Accounting for spoilage
Method Reason for Spoilage Journal Entry Effect on Unit
Cost
Charged to Due to job itself, exacting Spoiled goods xx Increase
specific job specifications, intricate process. WIP xx
FOH, no allowance for spoilage.
Charged to all Normal spoilage, not exceed the Spoiled goods xx No effect
production normal limit set by company. FOH Control xx
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Method Reason for Spoilage Journal Entry Effect on Unit
Cost
FOH, with allowance for spoilage WIP xx
Abnormal Exceed the limit set by company Loss account xx No effect
spoilage Amount is period cost. WIP xx
✓ Accounting for rework
Method Reason for Spoilage Journal Entry Effect on Unit Cost
Charged to Due to job itself, exacting WIP xx Increase
specific job specifications, intricate process. Materials xx
FOH, no allowance for rework. Payroll xx
FOH Applied xx
Charged to all Normal rework, not exceed the FOH Control xx No effect
production normal limit set by company. Materials xx
FOH, with allowance for Payroll xx
rework. FOH Applied xx
✓ Accounting for scrap
Method Accounting Journal Entry
Immaterial Not inventoriable. Recorded as revenue AR/Cash xx
amount only when sold, Other income (scrap) xx
Traced to specific Inventoriable. Deduction from work-in- Scrap inventory xx
job process inventory. Increase unit cost. WIP xx
Not traced to a Inventoriable. Accounted as other income Scrap inventory xx
specific job Miscellaneous income xx
Recovered from Inventoriable. Credited to factory overhead Scrap inventory xx
indirect materials control FOH Control xx

III. Joint Costs and By-Products

✓ Definition
a. Joint costs – Costs common to multiple products that emerge at a split-off point.
b. Joint products – Products produced simultaneously by a common process. Relatively high sales value and
not individually identifiable until split-off point. Also known as main products.
c. By product – A product produced from the joint process with relatively small sales value compared with the
main products or joint products.
d. Split-off point – The point in the manufacturing process at which joint products are first identifiable or can
be separated as individual products.
✓ Accounting for joint products
Method Allocation Procedure
Market or sales value Allocation based on the selling price of the joint products at split-off point.
Net realizable Allocation based on the net selling price (final selling price minus further processing
value/Hypothetical costs and other costs necessary to dispose the products at split off point.
market value
Average unit cost Allocation based on the average unit cost (Joint cost divided by aggregate units
produced)
Weighted average Allocation based on the units produced weighted by factors assigned to the
individual products.
Quantitative Allocation based on some common unit of measurement.
✓ Accounting for by-products
Allocation from Joint Costs Method Accounting
No joint cost allocation Other income Income other than sales
Measurement: Additional sales revenue Included in the total product sales
a. Revenue from sales Deduction from cost of Decrease overall cost of goods sold.
b. Net realizable value goods sold
(Revenue less any Deduction from total Decrease unit cost of main products.
processing and selling manufacturing cost of
costs) main products
With joint cost allocated to by Reversal cost method Joint cost assigned equals final sales value
product minus cost to complete, cost to sell and
desired profit.

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Module 8: Cost Accounting Part 1 LVC
Allocation from Joint Costs Method Accounting
Market value/sales value Joint cost is allocated to joint and by products
method using the net realizable value (sales value
minus subsequent costs)
IV. Service Cost Allocation
✓ Allocation methods
Method Allocation Procedure
Direct method Allocates each service department’s cost to producing department. Ignores allocation of
service department to another service department.
Step method Allocate the cost of a service department serving the most number of other service
departments.
When more than one service department services an equal number of service
departments, select the service department with the highest costs.
Costs of service departments are not allocated back to service departments whose costs
have already been allocated.
Reciprocal Allocates service costs by including mutual services rendered among service
method departments.
Also called algebraic method. Uses simultaneous equation to compute the allocation.

❖ Multiple Choice Questions

1. Under job order cost accumulation, the factory overhead control account controls:
a. Factory overhead analysis sheets. c. Cost reports by process.
b. Job order cost sheets. d. Material inventories.
2. Supplies needed for use in the factory are issued on the basis of:
a. Job cost sheet c. Time tickets
b. Material requisitions d. Factory overhead analysis sheet
3. In job order costing, when materials are returned to the storekeeper that were previously issued to the factory
for cleaning supplies, the journal entry should be made to
a. Material c. Purchase returns
Factory overhead Work in process
b. Materials d. Factory overhead
Work in process Work in process
4. In a traditional job order cost system, the issuance of factory supplies to a production department increases
a. Stores control c. Factory overhead control
b. Work in process control d. Factory overhead applied
5. In a job order cost system, direct labor costs usually are recorded initially as an increase in
a. Factory overhead applied c. Finished goods control
b. Factory overhead control d. Work in process control
6. In a job order cost system, the application of factory overhead is usually reflected in the general ledger as an
increase in
a. Factory overhead control c. Work in process control
b. Finished goods control d. Cast of goods sold
7. A direct labor overtime premium should be charged to a specific job when the overtime is caused by the
a. Increased overall level of activity.
b. Customer’s requirement for early completion of job.
c. Management’s failure to include the job in the production schedule.
d. Management’s requirement that the job be completed before the annual factory vacation closure.
8. Under a job order cost system, the peso amount of the general ledger entry involved in the transfer of
inventory from work in process to finished goods is the sum of costs charged to all jobs
a. Started in process during the period. c. Completed and sold during the period.
b. In process during the period. d. Completed during the period.
9. In job order cost system, payroll taxes paid by the employer for factory employees are usually accounted for as
a. Direct labor c. Indirect labor
b. Factory overhead d. Administrative costs
10. In a job order cost system, factory (manufacturing) overhead is
An Indirect Cost of Jobs A Necessary Element of Production
a. No Yes
b. No No
c. Yes Yes
d. Yes No
11. Over applied factory overhead would result if

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a. The plant were operated at less than normal capacity.
b. Factory overhead costs incurred were less than costs charged to production.
c. Factory overhead costs incurred were unreasonably large in relation to units produce.
d. Factory overhead costs incurred were greater than costs charged to production.
12. In services businesses using job order costing, the most commonly used base for applying overhead to job is
a. Machine hours c. Direct labor cost
b. Direct materials consumed d. Meals, travels, and entertainment
13. In service businesses using job order costing, the hourly rate used to charge costs to a job usually includes
a. Both labor and overhead cost c. Overhead cost only
b. Labor cost only d. Labor, overhead and miscellaneous costs
14. A company experienced a machinery breakdown on one of its production lines. As a consequence of the
breakdown, manufacturing fell behind schedule, and a decision was made to schedule overtime to return
manufacturing to schedule. Which of the following is the proper way to account for the overtime paid to the
direct laborers?
a. The overtime hour times the sum of the straight-time wages and overtime premium would be charged
entirely to manufacturing overhead.
b. The overtime hour times the sum of the straight-time wages and overtime premium would be treated as
direct labor.
c. The overtime hour times overtime premium would be charged as period costs and the overtime hour
times the sum of the straight-time wages would be treated as direct labor.
d. The overtime hour times overtime premium would be charged to manufacturing overhead and the
overtime hour times the sum of the straight-time wages would be treated as direct labor.
15. A job order cost system uses a predetermined factory overhead date based on expected volume and expected
fixed cost. At the end of the year, under-applied overhead might be explained by which of the following
situations?
__Actual Volume__ __Actual Fixed Costs__
a. Greater than expected Greater than expected
b. Greater than expected Less than expected
c. Less than expected Greater than expected
d. Less than expected Less than expected
16. When the amount of over-applied factory overhead is significant, the entry to close overapplied factory
overhead will most likely require
a. A debit to cost of goods sold and finished goods.
b. A credit to cost of goods sold and finished goods.
c. A debit to cost of goods sold, work-in-process and finished goods.
d. A credit to cost of goods sold, work-in-process and finished goods.
17. The automobile company emphasize total quality control and reject approximately 3% of the stereo speakers
received as being part of unacceptable quality. The company inspect the rejected speakers to determine which
ones should be reworked and which ones should be discarded. The discarded speakers are classified as
a. Waste c. Spoilage
b. Scrap d. Rework costs
18. The sale of scrap from a manufacturing process is usually recorded as a (an)
a. Decrease in factory overhead control c. Decrease in work-in-process inventory
b. Increase in work-in-process inventory d. Decrease in finished goods inventory
19. The cost of both normal and normal spoilage are accounted for in the accounting records. The costs associated
with abnormal spoilage are
a. Assigned to goods units transferred to finished goods.
b. Charged to a special abnormal spoilage loss account.
c. Assigned to units transferred to finished goods and those remaining in work-in-process.
d. Charged to factory overhead control account.
20. Which of the following is (are) often subject to further processing in order to be salable? (By-product or Scap)
a. No, No c. Yes, Yes
b. No, Yes d. Yes, No
21. The principal advantage of using physical quantity method of allocating joint costs is that
a. Cost assigned to inventories may have no relationship to value.
b. Physical quantities may be difficult to measure.
c. Additional processing costs affect the allocation base.
d. Joint costs, by definition, should not be separated on a unit basis.
22. Actual sales values at the split-off point for joint products Y and Z are not known. For the purpose of allocating
joint costs to Y and Z, relative sales-method is used. Cost beyond split-off increase for product Z, while those of
product Y remain constant. If the selling prices of Y and Z remain constant, the percentage of the total joint
costs allocated to Y and Z will
a. Decrease for product Y and Z. c. Decrease for product Y and increase for product Z.
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b. Increase for product Y and Z. d. Increase for product Y and decrease for product Z.
23. Several methods are used to allocate support department costs to the production departments. The method
that recognizes support provided by one department to another but does not allow for two-way allocation of
costs among support departments is the
a. Direct method c. Reciprocal method
b. Linear method d. Step-down method
24. The allocation method that would provide the manufacturer with the theoretically best allocation of support
department costs would be
a. Dual-rate allocation method c. Direct allocation method
b. Reciprocal method d. Step-down method
25. When allocating support department costs to production departments, the method that does not consider
different costs behavior patterns is the
a. Step-down method c. Single-rate method
b. Reciprocal method d. Dual-rate method
26. Alex Company had the following manufacturing data for the month of January:
Decrease in finished goods P 8,000
Increase in work-in-process 16,000
Decrease in direct materials 10,000
Direct materials purchased 189,000
Purchased returns and allowances 1,000
Transportation in 3,000
Direct labor 300,000
Actual factory overhead 175,000
Alex applies factory overhead at a rate of 60% of direct labor cost, and any over or under-applied deferred until
the end of the year.
A. Prime cost for January
a. 199,000 c. 489,000
b. 501,000 d. 201,000
B. Total manufacturing cost for January
a. 681,000 c. 489,000
b. 665,000 d. 673,000
C. Cost of goods manufactured for January
a. 665,000 c. 673,000
b. 681,000 d. 657,000
D. Cost of goods sold for January
a. 697,000 c. 673,000
b. 681,000 d. 657,000
E. Factory overhead control for January was
a. 5,000 debit, over-applied c. 5,000 debit, under-applied
b. 5,000 credit under-applied d. 5,000 credit over-applied
27. Helper manufactures one product and used job order cost system. The following are the cost data for the year
just ended:
• Total manufacturing costs added during the year was P1 million based on actual direct material, actual
direct labor, and factory overhead applied based on actual direct labor pesos.
• Cost of goods manufactured was P970,000 was based on actual direct material, actual direct labor,
and applied factory overhead.
• Factory overhead was applied at 75% of direct labor costs. This year, it accounted for 27% of the total
manufacturing costs.
• Beginning work-in-process on January 01 was 80% of ending work-in-process on December 31.
A. The direct materials used during the year
a. 360,000 c. 527,500
b. 370,000 d. 430,000
B. The ending work-in-process inventory
a. 120,000 c. 140,000
b. 150,000 d. 30,000
C. The beginning work-in-process inventory
a. 120,000 c. 140,000
b. 150,000 d. 30,000
28. Charming Co. had the following information for the month of September:
August 31 September 30
Raw materials ? 50,000
Work in process 80,000 95,000
Finished goods 60,000 78,000
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Raw materials purchases of P46,000; factory overhead (75% of direct labor cost) P63,000; selling and
administrative expenses(12.5% of sales) P25,000; and net income for the September P25,000.
A. Raw materials on August 31
a. 30,000 c. 46,000
b. 40,000 d. 50,000
B. Cost of goods manufactured during September
a. 120,000 c. 168,000
b. 150,000 d. 183,000
C. Cost of goods sold for September
a. 120,000 c. 168,000
b. 150,000 d. 183,000
29. The following information was taken from Kay Co.’s accounting records for the year ended December 31:
Increase in raw materials inventory 15,000
Decrease in finished goods inventory 35,000
Raw materials purchased 430,000
Direct manufacturing labor payroll 200,000
Factory overhead 300,000
Freight out 45,000
There was no work in process inventory at the beginning or end of the year. Kay’s cost of goods sold is
a. 950,000 c. 975,000
b. 965,000 d. 995,000
30. Following are Mill Co.’s production costs for October:
Direct materials 100,000; Direct labor 90,000; and Factory overhead 4,000
What amount of cost should be traced to specific products in the production process?
a. 194,000 c. 100,000
b. 190,000 d. 90,000
31. Fab Co. manufactured textiles. Among Fab’s manufacturing costs were the following salaries and wages:
Loom operators 120,000
Factory foreman 45,000
Machine mechanics 30,000
What was the amount of Fab’s direct manufacturing labor?
a. 195,000 c. 150,000
b. 165,000 d. 120,000
32. Rudolph Co. makes aluminum fasteners. Among Rudolph’s manufacturing costs for the year were
Materials and supplies:
Aluminum 400,000
Machine parts 18,000
Lubricants for machines 5,000
Direct materials amounted to
a. 23,000 c. 405,000
b. 400,000 d. 418,000
33. X-Files Production Inc. has manufactured 100,000 units of compound X in May at the following costs:
Labor of P242,500 of which 93% represents direct labor.
Materials of P182,500 of which 90% represent direct materials.
Opening work in process of P88,125.
Closing work in process inventory of P67,500.
Factory overhead is 125% of direct labor costs and includes indirect materials and indirect labor.
Compute cost of goods manufactured.
a. 671,150 c. 692,306
b. 651,056 d. 629,900
34. The factory ledger of the WTS Manufacturing Co. contains the following accounts:
_____________________Goods in process_____________________
Materials 40,000 Finished goods 120,000
Labor 100,000
Overhead 80,000
The amount of materials charged to uncompleted job was P28,000. The amount of labor and overhead charges
for the uncompleted job are:
__Labor__ _Overhead_
a. 40,000 32,000
b. 32,000 40,000
c. 72,000 40,000
d. 40,000 72,000

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35. National Marketing Corp. uses a job order costing system. It has three production departments, X, Y, and Z. The
manufacturing cost budget for May is as follows:
_Dept. X_ _Dept. Y_ _Dept. Z_
Direct materials 600,000 400,000 200,000
Direct labor 200,000 500,000 400,000
Manufacturing overhead 600,000 100,000 200,000
For Job No. 0198 which was completed in May, direct material cost was P75,000 and direct labor cost was as
follows:
Dept. X 40,000
Dept. Y 100,000
Dept. Z 20,000
The corporation applies manufacturing overhead to each job order on the basis of direct labor cost, using
departmental rates predetermined at the beginning of the year based on the manufacturing cost budget.
The total manufacturing cost of Job No. 0198 which was completed in May?
a. 235,000 c. 385,000
b. 310,000 d. 150,000
36. Mason Co. uses a job order cost system and applies manufacturing overhead to jobs using a predetermined
overhead rate based on direct labor pesos. The rate for the current year is 200% of direct labor pesos. This rate
was calculated last December and will be used throughout the current year. Mason had one job, No. 150, in
process on August with raw materials costs of P2,000 and direct labor costs of P3,000. During August, raw
materials and direct labor added were as follows:
__No. 150__ __No. 151__ __No. 152__
Raw materials P ------ P 4,000 P 1,000
Direct labor 1,5000 5,000 2,500
Actual manufacturing overhead for the month of August was P20,000. During the month, Mason completed
Job Nos. 150 and 151. For August, manufacturing overhead was
a. Overapplied by P4,000. c. Underapplied by P2,000.
b. Underapplied by P7,000. d. Underapplied by P1,000.
37. The Waitkins Co. estimated Department A’s overhead at P255,000 for the period based on an estimated
volume of 100,000 direct labor hours. At the end of the period, the factory overhead control account for
Department A had a balance of P265,500; actual direct labor hours were 105,000. What was the over or
(under) applied overhead for the period?
a. 2,250 c. 15,000
b. (2,250) d. (15,000)
38. The Framers Co. manufactures picture frames and uses a job order costing system. The following cost relate to
the current production run:
Estimated overhead (exclusive of spoilage) 160,000
Spoilage (estimated) 25,000
Sales value of spoilage frames 11,500
Labor hours 100,000
The actual cost of spoilage frame is P7.00. During the period, 170 frames are spoiled. Each spoiled frame can
be sold for P4.00. The spoilage is considered part of all jobs. What is the predetermined overhead rate per
direct labor hour?
a. 1.85 c. 1.60
b. 1.74 d. 1.15
39. Helper Co. Job 501 for the manufacture of 2,200 coats was completed during August at the unit cost presented
as follows:
Direct materials P20
Direct labor 18
Factory overhead (P1 allowance for spoiled work) 18
Unit cost P56
Final inspection of Job 501 disclosed 200 spoiled coats which were sold for P6,000.
A. Assume the spoilage were charged to all production during August. The unit cost of Job 501 would be
a. 57.50 c. 56.00
b. 55.00 d. 58.60
B. Assume the spoilage is attributable to the exacting specifications of Job 501 and charged to specific Job.
The unit cost of Job 501 would be
a. 57.50 c. 56.00
b. 55.00 d. 58.60
40. Diamond Co. incurred the following costs on Job 109 for the manufacture of 200 motors:
Original costs accumulation:
Direct materials P660,000
Direct labor 800,000
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Factory overhead (150% of direct labor) 1,200,000
Total costs P2,660,000
Direct costs of reworking 10 units
Direct materials P100,000
Direct labor 160,000
Total P260,000
The rework costs were attributable the exacting specifications of Job 109 and charged to specific Job. The unit
cost of Job 109 would be
a. 15,800 c. 13,800
b. 14,600 d. 13,300
41. Dennis Manufacturing Co. manufactures two joint products. Product A sells at P30, while Product B sells at
P60. The company uses the net realizable value method for allocating joint costs. For the month of June, the
production activities were as follows:
Joint product costs:
Raw materials 30,000
Direct labor 15,000
Factory overhead 10,000
Further processing costs after the split-off point in order to finish the products into their final form were
P24,000 for Product A and P36,000 for Product B. Total number of units produced during the month were
2,000 for Product A and 1,000 for Product B. The joint cost allocated to A was:
a. 22,000 c. 27,500
b. 33,000 d. Answer not given
42. Mig Co. which began operation in Year 1, produces gasoline and a gasoline by-product. The following information
is available pertaining to Year 1 sales and production:
Total production costs to split-off point 120,000
Gasoline sales 270,000
By-product sales 30,000
Gasoline inventory, 12/31/Y1 15,000
Additional by-product costs:
Marketing 10,000
Production 15,000
Mig accounts for the by-product at the time of production (production method). What are Mig’s Year 1 cost of
sales for gasoline and the by-product?
_Gasoline_ _By-product_ _Gasoline_ _By-product_
a. 105,000 25,000 c. 108,000 37,000
b. 115,000 0 d. 100,000 0
43. Lite Co. manufactures Products X and Y from a joint process that also yields a by-product Z. Revenue from sales
of Z is treated as a reduction of joint costs. Additional information is as follows:
_____ PRODUCTS
___X___ ___Y___ ___Z___ _ Total_
Units produced 20,000 20,000 10,000 50,000
Joint costs ? ? ? 262,000
Sales value at split-off 300,000 150,000 10,000 460,000
Joint costs were allocated using the sales value at split-off approach. The joint costs allocated to Product X
were
a. 75,000 c. 150,000
b. 100,000 d. 168,000
44. The managers of Rochester Manufacturing are discussing ways to allocate the cost of service departments such
as : Quality Control and Maintenance to the production departments. To aid them in this discussion, the
controller has provided the following information:
___Budgeted___ Quality Control Maintenance Machining Assembly
Overhead costs
before allocation 350,000 200,000 400,000 300,000
Machine hours 50,000
Direct labor hrs. 25,000
Hours of services:
Quality control 7,000 21,000 7,000
Maintenance 10,000 18,000 12,000
A. If Rochester Manufacturing uses the direct method of allocating service departments, the total service
costs allocated to the assembly department would be
a. 80,000 b. 87,500 c. 167,500 d. 120,000
B. If Rochester Manufacturing uses the step down method of allocating service cost beginning with the
quality control, the maintenance costs allocated to the assembly department would be
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a. 70,000 b. 162,000 c. 108,000 d. 200,000
C. If Rochester Manufacturing uses reciprocal method of allocating service cost, the total amount of quality
costs to be allocated to the maintenance department would be
a. 84,211 b. 76,190 c. 67,368 d. 70,000

“Learn from yesterday, live for today, hope for tomorrow.” Albert Einstein

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