COST ACCOUNTING REVIEWER
(PRELIM)
Prepared by: Junior Philippine Institute of
Accountants (JPIA)
A. MANAGEMENT,
CONTROLLER, AND COST
ACCOUNTING; ACCOUNTING
SYSTEMS.
MANAGEMENT FUNCTIONS (POLC)
PLANNING – must be SMART and
futuristic. *Planning is future oriented and
determines an organization’s direction.
ORGANIZING – managing Human
Resources, Facilities, and Finances.
*Organizing requires a formal structure of
authority and the direction and flow of such
authority through which work subdivisions
are defined, arranged and co-ordinated so
that each part
relates to the other part in a united and
coherent manner so as to attain the
prescribed objectives.
LEADING - issuing of instructions and
guiding the subordinates about procedures
and methods.
COORDINATING – involvement
COST ACCOUNTING - the recording of
all the costs incurred in a business in a way
that can be used to improve its management.
Types of Businesses that use Cost
Accounting
•All types of business entities-
manufacturing, merchandising, and
service businesses-require cost
accounting information systems to track
their activities.
•Manufacturers convert purchased raw
materials into finished goods by using
labor, technology, and facilities.
•Merchandisers purchase finished goods for
resale.
•For profit service businesses, such as
health clubs, accounting firms, and NHL
hockey teams, sell services rather than
products.
•Not-for-profit service agencies, such as
charities, governmental agencies, and
some health care facilities, provide at little
or no cost the user.
Uses of Cost Accounting Information
•Principles of cost accounting have been
developed to enable manufacturers to
process the many different costs associated
with manufacturing and to provide built-in
control features.
•The information produced by a cost
accounting system provides a basis for
determining product costs and selling
prices, and helps management to plan and
control operations.
•Cost Accounting Information is used for;
Determining Product Costs and
Pricing; Planning and Control
Cost Accounting Systems
A cost accounting system (also called
product costing system or costing system) is
a framework used by firms to estimate the
cost of their products for profitability
analysis, inventory valuation and cost
control.
Estimating the accurate cost of products is
critical for profitable operations. A firm
must know which products are profitable
and which ones are not, and this can be
ascertained only when it has estimated the
correct cost of the product. Further, a
product costing system helps in estimating
the closing value of materials inventory,
work-in-progress and finished goods application of overhead costs to products
inventory for the purpose of financial based on their respective activity usage.
statement preparation.
Based on whether the fixed manufacturing
There are two main cost accounting overheads are charged to products or not,
systems: the job order costing and the cost accounting systems have two variations:
process costing. variable costing and absorption costing.
Variable costing allocates only variable
Job order costing is a cost accounting manufacturing overheads to inventories,
system that accumulates manufacturing while absorption costing allocates both
costs separately for each job. It is variable and fixed manufacturing overheads
appropriate for firms that are engaged in to products. Variable costing calculates
production of unique products and special contribution margin, while absorption
orders. For example, it is the costing costing calculates the relevant gross profit.
accounting system most appropriate for an
event management company, a niche B. FINANCIAL VS.
furniture producer, a producer of very high MANAGEMENT
cost air surveillance system, etc. ACCOUNTING; THE ROLE OF
TODAY’S COST AND
Process costing is a cost accounting system MANAGEMENT
that accumulates manufacturing costs ACCOUNTANT.
separately for each process. It is appropriate
for products whose production is a process
involving different departments and costs FINANCIAL VS. MANAGEMENT
flow from one department to another. For ACCOUNTING
example, it is the cost accounting system
FINANCIAL MANAGEMENT
used by oil refineries, chemical producers, ACCOUNTING ACCOUNTING
etc.
PURPOSE Communication Decision Making
of Financial
There are situations when a firm uses a Position
REQUIREMENT Mandatory Optional
combination of features of both job-order
costing and process costing, in what is
PRIMARY EXTERNAL INTERNAL
called hybrid cost accounting system. AUDIENCE

Investors, Management and

In a cost accounting system, cost allocation Regulators, Tax Decision Makers
Authorities, etc.
is carried out based on either traditional
REGULATIONS GAAP, IFRS, NONE
costing system or activity-based costing OR IAS
system. GUIDELINES
FREQUENCY Quarterly, As needed and
Annual or per ongoing
Traditional costing system calculates a Period
EXTERNAL Auditors, NONE
single overhead rate and applies it to each REVIEW Regulators
job or in each department.
FOCUS Past Information to
Transaction aid decisions for
Activity-based costing on the other hand, the future.
SCOPE Company Wide Narrow per
involves calculation of activity rate and segment,
product, etc. as
needed
The role of management accountant
- include collecting, recording and reporting
financial data from several units of an
organization, observe and analyze their
budget and suggest their funding and
allocation. This includes estimation of cost
of raw material, labor, manufacturing, sales
and advertising, social media networking,
lobbying and company’s internal operation
cost. A management accountant need to
coordinate with all concerned departments to
make an overall analysis of company’s
functioning capital and availability of funds
and then he or she has to report all the
information to senior management and board
of directors. Thus a CFO is a source of
information required by directors and CEOs
to take decisions.
* Management accounting’s main role is
budgeting.
Relationship of Cost
Accounting to Financial and
Management Accounting
•Financial accounting meets the needs of
investors, creditors, and other external users
of financial information.
•Management accounting focuses on
historical and estimated data that
management needs to conduct ongoing
operations and do long-range planning.
•Cost accounting includes those parts of
financial and management accounting
that collect and analyze cost
information.
C. NATURE AND
CLASSIFICATION OF COSTS;
BASICS OF COSTS IN
MANUFACTURING, TRADING
AND SERVICE COMPANIES;
SPLITTING MIXED COSTS –
HIGH-LOW-POINT MENTHOD,
LEAST SQUARES METHOD,
SCATTERGRAPH METHOD.
Nature of Cost:
(a) Fixed Costs:
Fixed costs, policy costs or period costs are
those which tend to remain constant
irrespective of the volume of output or sales.
- Total Fixed Costs – These are
supplementary costs and are those
costs of production which do not
change with the change in
productivity. They are rent and
interest payments, depreciation
charges, wages and salaries of
permanent staffs etc.
Examples of fixed costs:
i. Staff salaries.
ii. Administration expenses.
iii. Rent and establishment charges.
iv. Depreciation, etc.
(b) Variable Cost:
Variable costs tend to vary directly with the
volume of output.
 Total Variable Costs – Those
expenses of production which
change with the change in the
firm’s output. Larger outputs
require larger inputs of labour,
raw materials, power, fuel etc.
Examples of variable costs:
i. Direct productive labour.
ii. Direct materials.
iii. Direct expenses.
(c) Semi-Variable Costs:
These costs are partly fixed and partly
variable. Semi-variable costs vary with
changes in output but the variation is
irregular.
Examples of semi-variable costs are:
i. Indirect hourly labour which varies more
less with output but not in direct proportion
to it, for example, wages of maintenance
men.
ii. Grease and oil.
iii. Water and electricity, etc.
(d) Controllable Cost:
Controllable cost is one which can be
influenced by the action of a specified
member of an undertaking.
(e) Uncontrollable Cost:
Uncontrollable cost is one which cannot be
influenced by the action of a specified
member of an undertaking.
Classification of Costs
Classification of Costs essentially means the
grouping of costs according to their similar
characteristics. Now, in costing there are a
dozen ways to classify costs as per their
nature, functions, traceability etc. Here we
will be focussing on five such classifications.
Let us learn this in detail.
Classification of Costs
1. Classification by Nature
This is the analytical classification of costs.
Let us divide as per their natures. So basically
there are three broad categories as per this
classification, namely Labor Cost, Materials
Cost and Expenses. These heads make it
easier to classify the costs in a cost sheet.
They help ascertain the total cost and
determine the cost of the work-in-progress.
Material Costs: Material costs are the costs
of any materials we use in the production of
goods. We divide these costs further. For
example, let’s divide material costs into raw
material costs, spare parts, costs of
packaging material etc.
Labor Costs: Labor costs consists of the
salary and wages paid to permanent and
temporary employees in the pursuit of the
manufacturing of the goods
Expenses: All other expenses associated with
making and selling the goods or services.
2. Classification by Functions
This is the functional classification of costs.
So the classification follows the pattern of
basic managerial activities of the
organization.
The grouping of costs is according to the
broad divisions of functions such as
production, administration, selling etc.
 Production Costs: All costs concerned
with actual manufacturing or
construction of the goods
 Commercial Costs: Total costs of the
operation of an enterprise other than the
manufacturing costs. It includes the
admin costs, selling and distribution
costs etc.
3. Classification by Traceability
This aspect one of the most important
classification of costs, into direct costs and
indirect costs. This classification is based on
the degree of traceability to the final product
of the firm.
 Direct Costs: So these are the costs
which are easily identified with a
specific cost unit or cost centers. Some
of the most basic examples are the
materials used in the manufacturing of a
product or the labor involved with the
production process.
 Indirect Costs: These costs are incurred
for many purposes, i.e. between many
cost centers or units. So we cannot
easily identify them to one particular
cost center. Take for example the rent of
the building or the salary of the
manager. We will not be able to
accurately determine how to ascertain
such costs to a particular cost unit.
4. Classification by Normality
This classification determines the costs as
normal costs and abnormal costs. The norms
of normal costs are the costs that usually
occur at a given level of output, under the
same set of conditions in which this level of
output happens.
 Normal Costs: This is a part of the cost
of production and a part of the costing
profit and loss. These are the costs that
the firm incurs at the normal level of
output in standard conditions.
 Abnormal Costs: These costs are not
normally incurred at a given level of
output in conditions in which normal
levels of output occur. These costs are
charged to the profit and loss account,
they are not a part of the cost of
production.
SCATTERGRAPH METHOD
The scattergraph method is a visual
representation of the cost and activity data
associated with an expense. The resulting
chart is used to identify and separate the
fixed and variable components of a cost.
The method is most useful for gaining
insight into the nature of mixed costs,
which can then be used to project costs in a
company forecast or budget, based on
expected activity levels. A cost that has
both fixed and variable components is
considered a mixed cost.
Example:
HIGH-LOW POINT METHOD
High-low point method is a technique used
to divide a mixed cost into its variable and
fixed components.
Sometimes it is necessary to determine the
fixed and variable components of a mixed
cost figure. Several techniques are used for
this purpose such as scatter graph method,
least squares regression method and high-
low point method. On this page I will
explain the use of high-low point method.
Under high-low point method, an estimated
variable cost rate is calculated first using the
highest and lowest activity levels and mixed
costs associated with them. This estimated
variable cost rate is used to calculate total
estimated variable cost included in the
mixed cost figures at highest and lowest
activity levels. The estimated variable cost is
then subtracted from the total mixed cost
figures at highest and lowest activity levels
to find the fixed cost component.
Example:
The Western Company presents the
production and cost data for the first six
months of the 2015.
Required: Determine the estimated variable
cost rate and fixed cost using high-low point
method.
Solution:
Variable cost rate
(66,000 – 45,000)/(29,000 – 15,000)
= $21000/14,000
= $1.5 per unit
Variable cost:
 Highest activity level (May): 29,000
units × $1.5 = $43,500
 Lowest activity level
(January): 15,000 × $1.5 = $22,500
Fixed cost:
 Highest activity level (May):
$66,000 – $43,500 = $22,500
 Lowest activity level
(January): $45,000 – $22,500 =
$22,500
LEAST-SQUARE REGRESSION
METHOD
The least-squares method of cost estimation
involves using mathematical regression
techniques to calculate the slope and
intercept of the best-fit line for the costs
used in estimation. In order to determine
these estimates, a manager will assemble
cost data by cost and level of production.
Once the manager has put together these
ordered pairs, spreadsheet software can be
used to calculate the slope and intercept. The
intercept represents the company's fixed cost
and the slope represents the variable cost per
unit.
Formula:
∑y = na + b∑x
∑xy = ∑xa + b∑x
a – Fixed Cost
x – Activity Level
y – Total Cost
b – Variable Cost per Unit
n – Number of Activity Level
HOW TO GET:
Variable Cost per Unit (b) = n∑xy - ∑x∑y
n∑x 2 – ( ∑x ) 2
Fixed Cost (a) = ∑y - b∑x
n
Example: Page 189 (Principles of Cost
Accounting)
a – $ 961.86
x – 9,100
y – 24,500
b – $ 2.06
n– 6
∑ 24, 500 = 6 (961.86) + 2.06 (9,100)
24, 500 = 5,771.16 + 18,746
24,500 = 24,517.16 (24,500)
Elements of manufacturing costs
1. Material Cost (Direct Material):
It is the cost of commodities supplied to an
undertaking.
It is of two types:
(a) Direct material cost:
A direct material is one which goes into a
salable product or its use is directly essential
for the completion of that product (Ito ‘yong
mga visible material na makikita directly sa
product)
*Its cost becomes part of the prime cost, the
direct material cost can be controlled in a
positive way.
(b) Indirect material cost:
An indirect material is one which is
necessary in the production process but is
not directly used in the product itself
*Some direct materials are in certain cases,
used so little that it is not worth-while to
identify and charge them as direct materials.
Nails, glue and sometimes paints, are a few
examples. Under such conditions, these
materials are generally charged as indirect
materials, or overheads.
2. Labour Cost (Direct Labor):
It is the cost of remuneration (Wages,
salaries, commissions, bonuses, etc.) of the
employees of a concern or enterprise.
Direct Labour Cost: is the cost of labour
that can be identified directly with the
manufacture of the product and allocated to,
cost centres or cost units. A direct labourer
is one who converts the direct material into
salable products; the wages, etc. of such
employees constitute Direct labour cost.
Indirect labour cost: is that labour cost
which cannot be allocated but which can be
apportioned to, or absorbed by, cost centres
or cost units. This is the cost of the labour
that does not alter the construction,
conformation, composition or condition of
the direct material but is necessary for the
progressive movement and handling of the
product to the point of despatch.
3. Overhead (FOH):
Also called manufacturing overhead, factory
indirect costs, or factory burden.
Flow of Costs
What Is Flow Of Costs?
Flow of costs refers to the manner or path in
which costs move through a firm. Typically,
the flow of costs is relevant with
manufacturing companies whereby
accountants must quantify what costs are
in raw materials, work in process, finished
goods inventory, and cost of goods sold.
Flow of costs does not only apply to
inventory but also factors in other processes
to which a cost is attached, such as labor and
overhead.
Direct Material + Direct Labor + FOH
 your total direct labor costs and your total
manufacturing overhead costs that you
Total Manufacturing Cost incurred during the period to determine your
+ total product costs. Divide your result by
the number of products you manufactured
Work in Process, beginning during the period to determine your product
= cost per unit.

Good Placed in Process

- Two costing methodologies, ACTUAL
COSTING AND NORMAL COSTING,
Work in Process, end assist businesses in evaluating production
costs. Actual costing uses the actual cost of
=
materials and labor to calculate production
Cost of Goods Manufactured costs. This is beneficial when analyzing a
specific portion of the production process
+ and an exact accounting of costs is needed.
Finished Goods, beginning Normal costing uses indirect materials and
labor costs to estimate production costs. It
= provides a more consistent valuation of
Goods available for sale production costs which eliminates month to
month fluctuations. Understanding how to
- calculate these costs, as well as the
advantages of each, is important in choosing
Finished Goods, end
the appropriate methodology for a given
= production process.
COST OF GOODS SOLD
D. PRODUCT COSTS: ACTUAL NORMAL COSTING is cost allocation
AND NORMAL COST SYSTEM; method that assigns costs to products based
COST CYCLE TRANSACTIONS. on the materials, labor, and overhead used to
produce them. In other words, it’s a way to
find the price of an item that is being
PRODUCT COST refers to produced using three different cost factors
the costs incurred to create a product. (which make up the product cost).
These costs include direct labor, direct
materials, consumable production supplies,
and factory overhead.
ACTUAL COSTING is a cost accounting
*Product cost can also be system that uses actual cost, direct-
considered the cost of the labor cost rates, and actual qualities used in
required to deliver a service to a production to determine the cost of specific
customer. products.

PRODUCT COST FORMULA: Add

together your total direct materials costs,
Calculating Actual Cost
1. Multiply the units of actual material used
in the production run by the material's actual
unit cost. This is the actual material cost.
2. Multiply the actual labor hours invested in
the production run by the actual wage rate
paid per hour. This is the actual labor cost.
3. Add all actual overhead costs expended
(i.e. utilities, insurance, etc.) in the
production run. This is the actual overhead
cost.
4. Add the actual material cost, the actual
labor cost and the actual overhead cost.
Divide by the number of units produced.
This is the actual production cost per unit.
Calculating Normal Cost
1. Estimate the quantity of materials needed
for the production run.
2. Multiply the estimated materials quantity
by the average material cost in the operating
budget. This is the normal materials cost.
3. Estimate the number of labor hours used
in the production run.
4. Multiply the number of labor hours
estimated for the production run by the
average wage rate in the operating budget.
This is the normal labor cost.
5. Divide the total overhead costs in the
operating budget by the number of units
produced. This is the normal overhead cost
per unit.
6. Multiply the normal overhead cost per
unit by the number of units in the production
run. This is the normal overhead cost.
7. Add the normal material cost, the normal
labor cost and the normal overhead cost.
Divide by the number of units produced.
This is the normal production cost per unit.
Prime Costs vs. Conversion Costs
- Prime costs are defined as the expenditures
directly related to creating finished products,
while conversion costs are the expenses
incurred when turning raw materials into a
product.
* Conversion costs is a term used
in cost accounting that represents the
combination of direct
labor costs and manufacturing
overhead costs.
A PERIOD COST is any cost that cannot
be capitalized into prepaid
expenses, inventory, or fixed assets. A
period cost is more closely associated with
the passage of time than with a
transactional event. Since a period cost is
essentially always charged to expense at
once, it may more appropriately be called
a period expense. A period cost is charged
to expense in the period incurred. This
type of cost is not included within the cost
of goods sold on the income statement.
Instead, it is typically included within the
selling and administrative expenses
section of the income statement.
Examples of PERIOD COSTS are:
 Selling expenses
 Advertising expenses
 Travel and entertainment expenses
 Commissions
 Depreciation expense
 General and administrative expenses
 Executive and administrative salaries and
benefits
 Office rent
 Interest expense (that is not capitalized
into a fixed asset)
The preceding list of period costs should
make it clear that most of the
administrative costs of a business can be
considered period costs.
 Items that are NOT PERIOD COSTS To record purchase of materials.
are:

 Costs included in prepaid expenses, such Work in Process(direct materials) xxx

as prepaid rent Factory Overhead(indirect materials) xxx
 Costs included in inventory, such as direct
labor, direct materials, and manufacturing Materials xxx
overhead To record issuance of materials for
 Costs included in fixed assets, such as production.
purchased assets and capitalized interest

Thus, if the entire use to which a cost can Payroll xxx

be put is consumed in the current Wages Payable xxx
accounting period (such as rent or
utilities) it is probably a period cost, Wages Payable xxx
whereas if its use is linked to a product or Cash xxx
is spread over multiple periods, it is
To record the payroll and payments
E. JOB ORDER COSTING VS. to employees.
PROCESS COSTING METHOD; COST
FLOW OF MATERIALS, LABOR AND
OVERHEAD, DOCUMENTS, Work in Process(direct labor) xxx
JOURNAL ENTRIES, AND POSTINGS Factory Overhead(indirect labor) xxx
TO THE JOB ORDER COST SHEETS.
Selling and Administrative
1. Job Order Cost System (Page 32 – Expenses(Salaries) xxx
36) is a cost accounting system that
accumulates manufacturing costs Payroll xxx
separately for each job. It is
To record distribution of payroll.
appropriate for firms that are
engaged in the production of unique
products and special orders. For
example, it is costing accounting Factory Overhead xxx
system most appropriate for an event Accumulated Depreciation xxx
management company, a niche
furniture producer, a producer of To record depreciation expense.
very high cost air surveillance
system, etc.
Selling and Administrative Expenses xxx
Journal Entries for Job Order Cost Accounts Payable xxx
System
To record expenses.
Materials xxx
Accounts Payable xxx
Finished Goods xxx
 Work in Process xxx by oil refineries, chemical producers,
etc.

Accounts Receivable xxx

Flow of Costs in a Process Cost System
Sales xxx
To record sales.

Cost of Good Sold xxx

Finished Goods xxx
To record the finished goods that had
been sold.

Cash xxx
Accounts Receivable xxx
To record cash collections.
Flow of Costs in a Job Order Cost System
2. Process costing is a cost accounting
system that accumulates
manufacturing costs separately for
each process. It is appropriate for
products whose production is a
process involving different
departments and costs flow from one
department to another. For example,
it is the cost accounting system used
F. ACQUISITION AND
USAGE OF MATERIALS;
MATERIALS
REQUISITION.
Materials Control and Materials Control
Procedures
Materials Control
-- Material control is a systematic
control over purchasing, storing and
consumption of materials, so as to maintain
a regular and timely supply of materials, at
the same time, avoiding overstocking. It
refers to the management function
concerned with acquisition, storage,
handling and use of materials so as to
minimise wastage and losses, derive
maximum economy and establish
responsibility for various operations through
physical checks, record keeping, accounting
and other devices.
Two basic aspects of Materials control
1. Physical Control of Materials
A business must control its materials from
the time they are ordered until the time they
are shipped to customers in the form of
finished goods. To effectively control
materials, business must maintain:
Limited Access
Only authorized personnel should
have access to materials storage areas.
Segregation Duties
A basic principle of internal control
is the segregation of employee duties to
minimize opportunities for misappropriation
of assets.
Accuracy in Recording
An effective materials control system
requires the accurate recording of the
purchase and issuance of materials.
Inventory records should document the
inventory quantities on hand, and cost
records should provide the data needed to
assign a cost to inventories for the
preparation of financial statements.
2. Controlling the Investment in
Materials
Maintaining an appropriate level of raw
materials inventory is one of the most
important objectives of materials control. An
inventory of sufficient size and variety for
efficient operations must be maintained, but
the size should not be excessive in relation
to scheduled production needs.
Order Point
It is the point at which an item
should be ordered.
Calculating the order point is based on the
following data:
1. Usage - anticipated rate at which the
material will be used.
2. Lead Time - the estimated time
interval between the placement of an
order and the receipt of the material.
3. Safety stock - the estimated
minimum level of inventory needed
to protect against stockouts.
Economic Order Quantity
The optimal quantity to order at one
time.
Order Costs
The cost of placing an order.
Carrying Costs
The cost of carrying inventory in
stock.
𝐸𝑂𝑄 = √2CN/K
Materials Control Procedure
1. Purchase and receipt of materials
2. Storage of materials
3. Requisition and consumption of
materials
Materials control personnel
a. Purchasing Agent
The one responsible for buying the materials
needed by manufacturer.
b. Receiving Clerk
The one responsible for supervising the
receipt of incoming shipments.
c. Storeroom Keeper
The one being charged of the materials they
have been received, must see that the
materials are properly stored and
maintained.
 d. Production Department
Supervisor
The one who prepare and or approve the
requisitions designing the quantities and
kinds of materials needed for the work to be
done in the department.
Control during Procurement
A. Purchase Requisitions
The form used to notify the purchasing agent
that additional materials are needed.
B. Purchase Order
A buyer-generated document that authorizes
a purchase transaction. When accepted by
the seller, it becomes a contract binding on
both parties.A purchase order sets forth the
descriptions, quantities, prices, discounts,
payment terms, date of performance or
shipment, other associated terms and
conditions, and identifies a specific seller.
Also called order.
C. Vendor’s invoice
A vendor invoice is a document listing the
amounts owed to a supplier by the recipient.
When a customer orders goods and services
on credit, the supplier prepares an invoice
and issues it to the customer. This vendor
invoice contains not only a listing of the
amounts owed, but also any sales taxes and
freight charges, as well as the date by which
payment should be made, and where to send
payment. Upon receipt, the customer enters
the invoice into its accounting software, and
schedules it for payment.
D. Receiving Report
A receiving report is used to document the
contents of a delivery to a business. The
form is filled out by the receiving staff of the
business accepting the delivered goods.
Control during Storage and Issuance
a. Material Requisition
To lessen the chance of theft, carelessness,
or misuse, no materials should be issued
from the storeroom except on written
authorization, material requisition is
provided.
b. Returned Materials Report
This is a written report describing the
materials and the reason for the return.
Electronic Data Interchange (EDI)
The process of business-to-business
electronic communication for the purpose of
expediting commerce and eliminating
paperwork.
G – H. JOURNAL ENTRIES FOR
MATERIALS; MATERIALS COSTING
METHOD; ACCOUNTING FOR
SCRAP MATERIALS, SPOILED
GOODS, AND DEFECTIVE UNITS
Bill of materials
A listing of all the materials and
components that are included in that finished
product.
FIFO (First-in, First-out) Method
The first in, first out (FIFO) method
of inventory valuation is a cost flow
assumption that the first goods purchased
are also the first goods sold. In most
companies, this assumption closely matches
the actual flow of goods, and so is
considered the most theoretically correct
inventory valuation method. The FIFO flow
concept is a logical one for a business to
follow, since selling off the oldest goods
first reduces the risk of inventory
obsolescence.
LIFO (Last-in, Last-out) Method Spoiled Goods Inventory xxx
The last in, first out (LIFO) method Work in Process xxx
is used to place an accounting value on
inventory. The LIFO method operates under To recognized spoiled goods at
the assumption that the last item of estimated market value.
inventory purchased is the first one sold.
Weighted Average Method Defective units
When using the weighted average These are materials that have
method, divide the cost of goods available imperfections considered correctable
for sale by the number of units available for because the increase in market value by
sale, which yields the weighted-average cost correcting the unit exceeds the cost to
per unit. In this calculation, the cost of correct it.
goods available for sale is the sum of
beginning inventory and net purchases. You
then use this weighted-average figure to Accounting for Defective Units
assign a cost to both ending inventory and
the cost of goods sold. Factory Overhead xxx
Materials xxx
Spoiled units Payroll xxx
These are materials that have Factory Overhead xxx
imperfections that cannot be economically
To record costs of defective units.
corrected.
Accounting for Spoiled units
Work in Process xxx
Work in Process xxx
Materials xxx
Materials xxx
Payroll xxx
Payroll xxx
Factory Overhead xxx
Factory overhead xxx
To recognized production costs.
To record the cost of correcting
defective units.
Spoiled Goods Inventory xxx
Factory Overhead xxx
THANK YOU AND GOD BLESS!!
Work in Process xxx
Other Reference:
To record the unrecovered costs of
https://studylib.net/doc/9569580/uses
spoilage.
-of-cost-accounting-information
https://www.accountingtools.com/art
icles/what-is-a-period-cost.html