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Cost Accounting Week 2

Prepared by: John D. Vargas

Cost principle requires that all production or
acquisition costs be attached to the units
produced, service rendered or units purchased
How do you assign OVERHEAD to
a specific cost object?
1. Actual Cost System- actual production
overhead costs are accumulated
separately in an Overhead control account
and are assigned to Work in Process
Inventory at the end of the period

2. Normal Cost System- requires a

predetermined overhead rate
Reasons why use Predetermined Overhead rate

1. Improves the timeliness of information

2. Adjusts for variations in actual overhead costs that
are unrelated to the activity
3. Overcomes the problem of fluctuations in activity
levels that have no impact on actual fixed
overhead costs
4. Allows managers to be more aware of individual
product or product line or particular
1. Total Budgeted Overhead Costs at a Specified
Activity Level divided by Volume of Specified
Activity Level

1. Mostly direct labor hours and dollars are common

activity measures except if the company is highly
2. Once determined the rate will be used for the entire
Elmer’s glue budgeted the following amounts for 2017:
• 50,000 machine hours
• Variable Overhead cost- PHP 375,000
• Fixed Overhead cost- PHP 630,000

During March 2017, the company incurred the following:

• 4,300 machine hours
• PHP 31,385 actual variable overhead cost
• PHP 55,970 actual fixed overhead cost
What if actual is lower/higher vs. budgeted?

Actual FOH cost > Expected FOH cost = Underapplied

Actual FOH cost < Expected FOH cost = Overapplied
Actual Utilization> Expected Utilization= Overapplied
Actual Utilization> Expected Utilization= Overapplied

Immaterial – adjust in COGS

Material- requires proration
Actual FOH PHP 220,000
Applied FOH PHP 260,000

Account Balances
WIP PHP 45,640
Finished Goods PHP 78,240
COGS PHP 528,120
Absorption vs. Variable Costing

• Treats the cost of ALL • Treats Fixed Overhead
manufacturing as PERIOD cost
components as
inventoriable cost
• Presents expenses in
• Presents expenses in the income statement
the income statement according to cost
according to functional behavior
Absorption vs. Variable Costing

Less: COGS XXX Less: Variable COGS XXX
Gross Sales XXX Contribution Margin XXX
Less: Period Cost XXX Less: Variable NonM XXX
Net Income (Loss) XXX Total Contribution Margin XXX
Less: Fixed Expenses XXX
Net Income (Loss) XXX
Comparison between the Two
• If production equals sales, absorption costing will
equal variable costing income
• If production is more than sales, absorption costing
income is greater than variable costing income.
• Some manufacturing overhead cost is deferred as part
of inventory cost is deferred in the balance under
absorption costing
Costing Systems
Job Order Costing System
Is used by companies that make relatively small
quantities or distinct batches of identifiable, tailor-
made products that conform to specifications
designated by the purchaser
Kotse Inc., bills its customers on a cost-plus basis, with profit equal to 30% of costs. The firm uses job
order costing system based on normal costs. Overhead is applied in the Chassis department at a
predetermined rate of $95 per machine hour. In the interior department, overhead is applied at
predetermined rate of $30 per professional labor hour.
1. Direct materials were purchased on account: $110,000
2. Direct materials were requisitioned by Chassis for use in three jobs: Job 1 $40,000, Job 2
$28,000, Job 3 $18,000. Materials were issued to the interior department Job 1 $3,000, Job 2
$6,000 and Job 3 $9,600.
3. Time sheets and payroll summaries indicated that the following direct cost were incurred:
Chassis Interior
Job 1 $8,000 $4,000
Job 2 $6,000 $9,000
Job 3 $7,000 $6,500
4. The following indirect cost were incurred
Chassis Interior
Labor $9,200 $4,500
Utilities/Fuel $5,900 $1,300
Depreciation $13,300 $1,600
5. Overhead was applied based on the predetermined overhead rates. The Chassis department had
360 MHS (Job 1 90, Job 2 170, Job 3 100). Interior worked 230 PLH (Job 1 50, Job 2 140, Job 3 40).
6. Job 1 was completed and cash was collected for the agreed upon selling price. At month-end, Jobs 2
&3 were only partially complete.
7. Any underapplied or overapplied overhead is assigned to Cost of Goods Sold.