COST ACCOUNTING by Raiborn and Kinney

CHAPTER 2: Cost Terminology and Cost Behaviors

Chapter Summary
1. Costs are classified as
direct and indirect costs
depending
on
their
relationship to a cost
object.
variable, fixed, or mixed
depending
on
their
reaction to changes in an
activity level.
unexpired
(assets)
or
expired (expenses and
losses)
depending
on
whether they have future
value to the company.
product (inventoriable) or
period
(selling,
administration,
and
financing) depending on
their association with the
revenue-generating items
sold by the company.
2. To estimate production cost
within a relevant range of
activity, accountants assume
that
variable
costs
are
constant per unit and will
change
in
direct
proportion to changes in
activity.
fixed costs are constant in
total
and
will
vary
inversely in a per-unit
basis with changes in
activity.
step costs are either
variable
or
fixed,
depending on the size of
the changes that occur
with changes in activity.

mixed costs will fluctuate

in total with changes in
activity
and
can
be
separated
into
their
variable
and
fixed
components.
3. The conversion process differs in
manufacturers,
service
companies, and retailers in that

manufacturers
require
extensive
activity
to
convert raw material into
finished
goods;
the
primary costs in these
companies
are
raw
material, direct labor, and
overhead; manufacturers
use
three
inventory
accounts (Raw Material,
Work in Process, and
Finished Goods).
service companies often
require extensive activity
to perform a service; the
primary costs in these
companies are direct labor
and
supplies;
service
companies
may
use
Supplies Inventory and
Works in Process Inventory
accounts, but goods that
are completed are usually
transferred immediately to
customers.
retailers require little, if
any, activity to ready
purchased goods for sale;
the primary costs in these
companies are generally
purchase prices for goods
and labor wages; retailers

COST ACCOUNTING by Raiborn and Kinney

CHAPTER 2: Cost Terminology and Cost Behaviors

use
a
Merchandise
Inventory account.
4. The product costs categories are
direct material, which is
physically
and
conveniently traceable to
the product or service.
direct labor, which reflects
people whose work is
physically
and
conveniently traceable to
the product or service.
overhead, which is any
cost
incurred
in
the
production (or conversion)
area that is not direct
material or direct labor;
overhead includes indirect
material and indirect labor
costs.
5. Cost of goods manufactured
reflects the costs that
were in the production
area at the beginning of
the period plus those
production costs (direct
materials, direct labor,
and overhead) incurred
during the period minus
the costs of incomplete
goods that remain in the
production area at the end
of the period.
is shown on an internal
management report.
is added to beginning
Finished Goods Inventory
to determine the cost of
goods available (CGA) for
sale for the period; CGA is
reduced
by
ending
Finished Goods Inventory
to determine cost of goods

sold
on
statement.

the

income

COST ACCOUNTING by Raiborn and Kinney

CHAPTER 2: Cost Terminology and Cost Behaviors

Solution Strategies
PRODUCT COST_______________________
Direct Material
+ Direct Labor
+ Overhead_____
= Total Product cost
COST OF GOODS MANUFACTURED________
Beginning balance of Work in Process inventory
PXXX
Manufacturing cost for the period:
Raw material (all direct):
Beginning balance
PXXX
Purchases of materials
_XXX
Raw material available for use
PXXX
Ending balance
(XXX)
Direct materials used
PXXX
Direct labor
XXX
Variable overhead
XXX
Fixed overhead
XXX
Total current period manufacturing costs
XXX
Total costs to account for
Ending balance of Work in Process Inventory
(XXX)
Cost of goods manufactured
COST OF GOODS SOLD___________________
Beginning balance of Finished Goods Inventory
Cost of goods manufactured
Cost of goods available for sale
Ending balance of finished Goods Inventory
(XXX)
Cost of goods sold

PXXX

PXXX
PXXX
XXX
PXXX

PXXX

COST ACCOUNTING by Raiborn and Kinney

CHAPTER 2: Cost Terminology and Cost Behaviors

Demonstration Problems
Willie-Wonka Company had the following account balances as of August 1, 2014:
Raw Material (direct and indirect) inventory
P20,300
Work in Process Inventory
7,000
Finish Goods inventory
18,000
During August, the company incurred the following factory costs:
1. Purchased P 164,000 of raw material on account.
2. Issued P 180,000 of raw material, of which P 134,000 was direct to the product.
3. Accrued factory payroll of P 88,000; P 62,000 was for direct labor and the rest was
for supervisors salaries.
4. Accrued utility costs of P 7,000; of these costs, P 1,600 were fixed.
5. Accrued property taxes on the factory in the amount of P 2,000.
6. Had prepaid insurance of P 1,600 on factory equipment that expired in August.
7. Had straight-line depreciation on factory equipment of P 40,000.
8. Applied actual overhead to Work in Process Inventory.
9. Transferred goods costing P 320,000 to finished Goods Inventory.
10.
Had total sales on account of P 700,000.
11.
Had cost of goods sold of P 330,000.
12.
Had selling and administrative costs of P 280,000 (credit Various
Accounts).
13.
Had ending Work in Process Inventory of P 5,600.
Required:
a. Journalize the transactions for August.
b. Post the transactions to the general ledger accounts for Work in Process Inventory,
Finished Goods Inventory, and Cost of Goods Sold.
c. Prepare a schedule of cost of goods sold manufactured for August using actual
costing.
d. Prepare an income statement, including a detailed schedule of cost of goods sold.

COST ACCOUNTING by Raiborn and Kinney

CHAPTER 2: Cost Terminology and Cost Behaviors

Solution to Demonstration Problem
a.
1. Raw Material Inventory

P 164,000

Accounts Payable
Purchase raw materials in account.

P 164,000

2. Work in Process Inventory

134,000
Variable Overhead Control
46,000
Raw Materials Inventory
Transferred direct and indirect materials to production.
3. Work in Process Inventory
Fixed Overhead Control
Salaries and Wages Payable
To accrue factory wages and salaries.
4. Variable Overhead Control
Fixed Overhead Control
Utilities Payable
To accrue factory utilities expenses.
5. Fixed Overhead Control
Property Taxes Payable
To accrue property tax expense.

62,000
26,000
88,000
5,400
1,600
7,000
2,000
2,000

6. Fixed Overhead Control

1,600
Prepaid Insurance
To record expired insurance on factory equipment.

1,600

7. Fixed Overhead Control

40,000
Accumulated Depreciation-Factory Equipment
To record depreciation on factory equipment.

40,000

8. Work in Process Inventory

Variable Overhead Control
Fixed Overhead Control
To apply or close overhead to Work in Process.

122,600

9. Finished Goods Inventory

Work in Process Inventory
To record cost of goods manufactured.

320,000

Accounts Receivable
Sales
To record sales on account.

180,000

51,400
71,200

320,000

10.

700,000
700,000

11.

330,000
330,000

Cost of Goods Sold

Finished Goods Inventory
To record cost of goods sold for the period.

12.

Selling and Administrative Expenses

280,000

Various Accounts
To record selling and administrative expenses.
b.
Work in Process
BB
7,000
(9) 320,000
(2) 134,000
(3) 62,000
(8) 122,600
EB
5,600

Finished Goods
BB 18,000
(11) 330,000
(9) 320,000

280,000

Cost of Goods Sold

(11) 330,000

EB 8,000

Where BB = beginning balance

EB = ending balance
c.
WILLIE-WONKA
Cost of Goods Manufactured Schedule
For Month Ended August 31, 2014
Beginning balance of Work in Process inventory,
P 7,000
Manufacturing cost for the period:
Raw material (all direct):
Beginning balance
P 20,300
Purchases of materials
164,000
Raw material available for use
P 184,000
Indirect material used
P 46,000
Ending balance
4,300
(50,300)
Total direct materials used

P 134,000

Direct labor
62,000
Variable overhead
51,400
Fixed overhead
71,200
Total current period manufacturing costs
318,600
Total costs to account for
325,600
Ending balance of Work in Process Inventory
(5,600)
Cost of goods manufactured
320,000
d.
WILLIE-WONKA
Income Statement
For the Month Ended August 31, 2014
Sales
Cost Of goods sold

P 700,000

Finished goods, 8/1/14

Cost of goods manufactured
Cost of goods available
Finished goods, 8/31/14
Cost of goods sold
(330,000)
Gross Margin
370,000
Selling and administrative expenses
(280,000)
Income from operations

P 18,000
320,000
P 338,000
(8,000)
P

P 90,000