Under what costing method are the materials on hand considers to be from

the first ones purchased?

A. FIFO
B. LIFO
C. Weighted Average
D. Moving Average

The purchasing department performs all of the following functions except:

A. Compares quantities received with the supplier’s packing list

B. Receive purchase requisitions for materials
C. Keeps informed concerning sources of supply, prices and delivery
schedule
D. Prepares and places purchase orders

05/03/2023 1
Accounting
for Materials
 Periodic Inventory System
: direct and indirect materials is recorded in an account “PURCHASES”
: the cost of the materials is not directly determined

Perpetual Inventory System

: purchase of direct and indirect materials is recorded in an account “MATERIALS
INVENTORY”
: when direct materials are issued = Work in Process is debited
: when indirect materials are issued = Factory Overhead is debited
: the cost of the materials can be directly determined.

05/03/2023 3
COMMONLY USED CONTROL PROCEDURES:

1.Order cycling – materials on hand are reviewed on a regular or periodical

cycle.
2. Min-Max method – based on the assumption that materials inventory have
minimum and maximum levels.
3. Two-Bin method – used for materials that are considered inexpensive and/or
nonessential.
4. Automatic Order System – an order is automatically placed when the level of
inventory reaches a predetermined order point quantity.
5. ABC Plan – systematic way of grouping materials into separate classification
and determining the degree of control that each group requires.
Material Control:

a. Physical control or safeguarding materials

• Limited access
• Segregation of duties
• Accuracy in recording
b. Control of the investment materials
• When orders should be placed and how many units should be ordered.

ORDER POINT : point at which an item should be ordered. It occurs when the predetermined minimum
level of inventory on hand is reached.
 USAGE
 LEAD TIME
 SAFETY STOCK

ECONOMIC ORDER QUANTITY – purchase order which results in the minimum total inventory cost.
 Cost of placing the order
 Carrying cost
Method of Calculating EOQ
1. Tabular Method:

2. Formula Method:
Documents Used:
a. Purchase Requisition
b. Purchase Order
c. Receiving Report
d. Materials Requisition Slip
e. Disbursement Voucher

Method of Costing Materials:

a. First In – First Out

b. Last In – Last Out
c. Average Cost
a. Weighted Average Cost – periodic system
b. Moving Average Cost – perpetual system
Oct 1 Inventory 400 units @ P 10 P 4,000
12 Purchase 600 units @ P 12 P 7,200
16 Issued 500 units
18 Purchase 300 units @ P 15 P 4,500
20 Issued 200 units
25 Purchase 400 units @ P 14 P 5,600
28 Issued 400 units

FIFO: Ending Inventory: PHP 8,600.00

Weighted Average: Ending Inventory: PHP 7,517.65

Moving Average: Ending Inventory: PHP 7,905.00

MATERIALS ACCOUNTING:

DISCOUNTS:
a. Trade Discounts – when materials are purchased in bulk. Given in
percentages like 10%, 20%, 30%
b. Cash Discounts – granted to customers to pay promptly
FREIGHT IN:
a. Direct Charging – cost is added to the invoice price
B. Indirect Charging – cost is charged to factory overhead

ACCOUNTING FOR SPOILED UNITS, DEFECTIVE UNITS, SCRAP MATERIALS and

WASTE MATERIALS:

• Spoiled Units – units that don’t meet the production standards. Taken out of
production and no additional rework.
• Defective Units - units that don’t meet the production standards and additional
work is done
• Scrap Materials – left over from production, sold to outsiders or being used to
other purpose
• Waste Materials – left over from production and for disposal already.
(1) Abner Company has an annual demand of 13,000 units of Material A. The cost per unit is P14. The order cost
is P200 per order; and the annual inventory carrying cost per unit is P5.20. Assume that the
units will be required evenly throughout the year.

Required: Compute for the following:

A. Economic order quantity
B. Number of orders in a year.
C. Total carrying cost and total ordering costs at economic order quantity.

The following information is to be used in costing inventory on August 31.

August 1 Beginning balance 1,600 units at P6.00
5 Purchased 400 units at P7.00
9 Purchased 400 units at P8.00
16 Issued 800 units
24 Purchased 600 units at P9.00
27 Issued 1,000 units

Required: The cost of materials used and the cost assigned to the August 31 inventory
by each of these perpetual inventory costing methods:
1. First-in, first-out
2. Average (Weighted and Moving Average)
The following are the transactions of Eagle Company for the month of October 2022:

4: Purchase Requisition for 4,800 units of Material X-54 is prepared by the storeroom clerk.
The material is to be ordered from the Veteran Corp. for P 21.50 per unit. Terms 1/10, n/30.
5: Purchase Order is prepared for materials requisition last Oct 04, 2022.
21: Materials ordered from Veteran Corp was received. Of the 4,800 units, 510 units are
rejected for imperfections and returned at once. Receiving Report is prepared. The purchased
invoice is included in the cartoon.
21: A debit memorandum to the Veteran Corp for materials returned is prepared.
21: Materials received today are transferred to storeroom and entered to the materials
ledger.
24: Disbursement Voucher to Veteran Corp. is prepared for the amount owed on the firm's
invoice.
25: A check to Veteran Corp for the amount due, less discount, is prepared and mail.

Prepare the Journal Entries.

On January 1, 2022, Malaya Company changed to average method. The cumulative effect of this change is not
determined, as a result, the ending inventory of 2021 and for which FIFO method was used is also the beginning
inventory for 2022 for the average method.

The following data was available from the materials ledger card for the two most recent years:

Materials AB   Materials XY
Units Unit Cost Units Unit Cost
2021 Purchase         1. FIFO inventory
January 5,000 P40.00 22,000 P20.00 Dec 31, 2021
April 12,000 45.00     2. FIFO inventory
November 17,000 50.00 18,500 25.00 Dec 31, 2022
December 10,000 60.00     3. Average
        Inventory Dec 31,
2022 Purchase         2022
February 3,000 P70.00 35,000 P30.00 4. Effect on the net
May 12,000 75.00     income of the
October 20,000 80.00     change from
December     30,500 35.00 FIFO to average
        costing on Dec
Units on Hand         31, 2022
31-Dec-21 15,000  14,500 
31-Dec-22 16,000  20,000 
Kai Company manufactures golf carts and other recreational equipment.  Ine order for RACG
Corporation for 2,000 carts showed the following cost per unit:  direct materials - P400; direct
labor P200; and factory overhead applied at 140% of direct labor cost if defective work is
charged to a specific job and 150% if defective work is charged to all jobs.
Final inspection revealed that wheels were assembled with improper bearings.  The wheels
were disassembled, and the proper bearings inserted.  The cost of correcting each defective
cart consists of P20 added cost for bearings, P40 for labor, and factory overhead at
predetermined rate.

Required:
A.  Prepare journal entries to record correction of the defective units and transfer of the work
in process to finished goods if:
1.  the RACG is to be charged with the cost of defective units.
2.  the cost of correcting the defective units is not charged to RACG.
B.  Compute the cost per unit of finished goods if:
1.  the RACG is to be charged with the cost of defective units. 
2.  the cost of correcting the defective units is not charged to RACG.
 Accounting
for
Labor

05/03/2023 14
 Labor – the price paid in using human resources
FACTORY PAYROLL : Direct
: Indirect
Wage Plans:
1. Hourly-Rate Plan
2. Piece-Rate Plan
3. Modified Wage Plan – combination of hourly rate and piece rate

Controlling Labor Cost

1. Timekeeping = Clock cards, Time tickets, Production Reports
2. Payroll = Payroll records, Employee’s earning records, Payroll summaries

Government Contributions
1. Philhealth Contribution
2. SSS Contribution
3. Pag-ibig Contribution
4. Withholding taxes
05/03/2023 15
To Record the Payroll:
Payroll P 30,000
Withholding Taxes Payable P 4,812.58
SSS Premiums Payable 833.30
PhilHealth Contri. Payable 375.00
Pag-ibig Contri. Payable 200.00
Accrued Salaries/Wages Payable 23,779.12
To Record the payment to employees:
Accrued Salaries/Wages Payable P 23,779.12
Cash P 23,779.12
To Record the distribution of payroll, assuming factory payroll is P10,000; 3,000 is
for indirect labor

Work in Process P 7,000

Factory Overhead 3,000
Salaries and Expense 20,000
Payroll P 30,000
Classification of Labor:
1. Direct labor
2. Indirect Labor
3. Labor Overhead
• Waiting Time or Idle Time
• Make-up pay = the difference between actual pay and guaranteed pay
• Overtime Premium
• Shift Premium
• Employer’s Payroll taxes
 The general ledger of the JG Manufacturing Company showed these balances at the end of
July. Factory labor of P480,000 which includes P288,000 of direct labor: P66,000 of indirect
labor; sales salaries of P72,000 and office salaries of P54,000

The following rates are available for payroll distribution:

Withholding taxes 1%
SSS Contribution 10% (40% employee and 60% employer)
Employees’ Compensation Contri 2% (employer only)
PhilHealth Contri 2% (50% employee and 50% employer)
PAG-IBIG Contri 3% (50% employee and 50% employer)

Required:
A.  The journal entry to record labor incurrence
B. The journal entry to record labor distribution and the related employer’s contribution.

05/03/2023 21
Jin, an employee of the Hybe Company is paid P200 per hour for a regular week for 40 hours.
During the week ended November 14, the employee worked for 48 hours and earned time and
half (0.5) for overtime hours.

1. Prepare the journal entry to record the labor cost if the overtime premium is charges to the
jobs worked on during the overtime hours.
2. Prepare the journal entry to record the labor cost if the overtime premium is not charged to
specific jobs.

Eight factory workers and a supervisor comprise a team in the Blending Department. The
supervisor earns P200 per hour and the combined hourly direct wages of the eight workers is
P1,280. Each employee is entitled to a two-week paid vacation and a bonus equal to four weeks’
wages per year. Vacation pay and bonuses are treated as an indirect cost and are accrued over
the 50-week work year. A provision in the collective bargaining agreement does not allow these
employees to work in excess of 40 hours per week.

1. Prepare the journal entry to record the vacation and bonus pay applicable to one week’s
production
 The data below pertains to the earnings of DK for the week ended June 16, 2022:

Hours and rate 42 hours worked at P40 an hour

Earning to date P 14.00
Overtime Rate One and a half times the regular rate for
hours worked in excess of 40 hours
Withholding tax 3% of gross earnings
SSS Contribution 2 % of gross earnings
PhilHealth Contribution 1% of gross earnings
Pag-ibig Contribution 1% of gross earnings

What is the net pay for DK for the week?

05/03/2023 23
 Accounting for
Factory
Overhead

05/03/2023 24
Three categories of Factory Overhead based on their behavior in relation to production:
(1) Variable Overhead – varies in direct proportion with production
(2) Fixed Overhead – remains constant
(3) Mixed Overhead

Factors in Computation of Factory Overhead Rate:

1. Base to be used
 Physical Output (units of production)
 Direct Materials Cost
 Direct Labor Cost
 Direct Labor hours
 Machine Hours
2. Activity Level to Use
 Normal Capacity
 Expected Actual Capacity
3. Inclusion or exclusion of Fixed Factory Overhead
 Absorption Costing
 Direct Costing
4. Use of single rate or several rates
 Plant Wide or Blanket Rate
 Departmentalized rate
 Manufacturing Overhead Costs P 96,000
Number of Units of Production 24,000 units
Direct Materials Costs P480,000
Machine Hours 12,000 hours
Direct Labor Hours 40,000 hours
Direct Labor Costs P200,000
1. Base to be used
 Physical Output (units of production)

Estimated Manufacturing Overhead Costs = Overhead cost per

Estimated Units of Production unit of production

96,000 = P 4 per unit

24,000

1. Base to be used
 Direct Materials Cost

Estimated Manufacturing Overhead Costs = Percentage of

Estimated Direct Materials Costs Materials Cost

96,000 = 20% of materials Cost

480,000
05/03/2023 26
 Manufacturing Overhead Costs P 96,000
Number of Units of Production 24,000 units
Direct Materials Costs P480,000
Machine Hours 12,000 hours
Direct Labor Hours 40,000 hours
Direct Labor Costs P200,000
1. Base to be used
 Direct Labor Cost

Estimated Manufacturing Overhead Costs = Percentage of Labor

Estimated Direct Labor Cost Cost

96,000 = 48% of direct labor cost

200,000

1. Base to be used
 Direct Labor hours

Estimated Manufacturing Overhead Costs = Rate per Direct

Estimated Direct Labor Hours Labor Hour

96,000 = P 2.40 per direct labor hr

40,000 hrs
05/03/2023 27
 Manufacturing Overhead Costs P 96,000
Number of Units of Production 24,000 units
Direct Materials Costs P480,000
Machine Hours 12,000 hours
Direct Labor Hours 40,000 hours
Direct Labor Costs P200,000
1. Base to be used
 Machine hours

Estimated Manufacturing Overhead Costs = Rate per Machine

Estimated Machine Hours Hour

96,000 = P 8.00 per machine hour

12,000

05/03/2023 28
05/03/2023 29
 Overapplied and Underapplied Manufacturing Overhead:

(a) Overapplied Overhead – product costs are overstated; actual is lower than
expected
(b) Underapplied Overhead – product costs are understated; actual is higher than
expected

If amount is material – allocated proportionately to all goods that have been worked on
If amount is immaterial – closed to Cost of Goods Sold

Assume that applied manufacturing overhead showed a total of P540,000, but the actual
Manufacturing cost incurred is P 640,000.
The year end balances of inventories and cost of goods sold were as follows:

  Work In Process Finished Goods Cost of Goods Sold

Direct Materials P10,000 P40,000 P100,000

Direct Labor 15,000 20,000 90,000

Applied Overhead 15,000 20,000 90,000

Total P40,000 P80,000 P280,000

05/03/2023
What is the entry if the variance is (1) Immaterial (2) material? 30
Immaterial:

Cost of Goods Sold P 100,000

Underapplied Mfg. Overhead P 100,000

Material:

Work In Process P 10,000

Finished Goods 20,000
Cost of Goods Sold 70,000
Underapplied Mfg. Overhead P 100,000
 Assume the following data:
Budgeted Manufacturing Overhead:
Fixed Overhead Costs P600,000
Variable Overhead Costs 1,020,000
Total Budgeted Manufacturing Overhead: P1,620,000

Divided by Budgeted Direct Labor Hours 600,000

Predetermined Overhead Rate per Hour P 2.70

Applied Mfg. Overhead (200,000DL hrs x P2.70) P 540,000

Actual Mfg. Overhead P 640,000
Underapplied Overhead P 100,000

Volume Variance:
Fixed Overhead applied (P1x200,000hrs) P 200,000
Fixed Overhead budgeted 600,000
Volume Variance (unfavorable) P400,000
Spending Variance:
Actual Overhead Incurred for the month P 640,000
Budgeted overhead for hours worked:
Fixed P600,000
Variable ( P1.70x200,000hrs) 340,000 940,000
Spending Variance (favorable) 300,000
Net Variance P 100,000
Hoshi Clothing Manufacturers uses the direct labor hours method for applying manufacturing overhead.
The overhead application rate for 2022 is P5.49 per hour, base on anticipated fixed costs of P272,250 and
anticipated variable costs of P633,600 with an expected volume of 165,000 labor hours.
During the year, the company actually operated for 168,630 hours, incurring fixed overhead of P283,400
and variable overhead of P647,426.67

1. Compute for the total underapplied or overapplied overhead for the year
2. Analyze the total overapplied or underapplied overhead into a volume variance and a spending variance
Manufacturing Overhead – Departmentalization
• Service Department
• Producing Department

Allocating Cost:
Direct Method Step Method

Algebraic/Reciprocal Method
 Direct Method

Step Method

05/03/2023 36
 Algebraic Method B&G = 80,000 + 10% (FA)
FA = 120,000 + 20% (B&G)

05/03/2023 37
Big Hit Inc. has two service departments and three producing department.
Data for 2022 are as ff:
Service Department Total Cost
Maintenance P250,000
The cost of Maintenance Department are allocated
Storeroom 180000
on the basis of percent of services rendered while
Producing Department   the costs of the Storeroom department are
Machinery 600,000 allocated on the basis of the number of requisition.
Assembly 892,000
Packaging 436,000 Required: Distribute the service departments’ costs
to the producing departments and compute the
Additional Information:     overhead rates based on direct labor hours.
Services 20,000 for Machinery; 36,000 for Assembly and
Provided by Number of 18,000 for Packaging using the ff method:
Departments Maintenance requisition
Maintenance - 400 1. Direct Method
Storeroom 14%- 2. Step method (Maintenance costs are allocated
Machinery 32% 3500 first)
Assembly 26% 6000 3. Reciprocal Method (Algebraic Method)
Packaging 28% 4100
100% 14000
1. Direct Method
2. Step method (Maintenance costs are allocated first)
3. Reciprocal Method
(Algebraic Method)