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COST ACCOUNTING AND COST MANAGEMENT 1

CHAPTER 1 – REVIEW OF THE NON-COST SYSTEM

REVIEW OF THE NON-COST SYSTEM


Non-cost accounting system – the accounting system adopted by the management of a manufacturing
firm if they are interested only in the total production cost and the year-end financial statements

NATURE AND CHARACTERISTICS OF A MANUFACTURING FIRM

Manufacturing firms Trading firms


- Buys raw materials to convert them into Merely procures goods from manufacturers or
finished goods with the use of manpower and from other traders
plant facilities.
- Upon completion, the goods are transferred
to the stockroom for delivery to customers

- In general, a manufacturing firm requires a longer period to make goods available as compared to
a trading concern
Plant facilities – generally consist of machinery, equipment and furniture housed in an edifice called
the factory building which may be owned or leased by the company.
Employees – include factory workers who are directly supervised by foremen (may be
reporting directly to the production manager).
In bigger companies, the production division may be divided into different departments. These
departments may be classified into:
A. Producing Departments – where actual manufacturing operations are performed and

Examples:
 Machining Department
 Assembling Department
 Painting Department

B. Service Departments –facilitate the manufacturing processes by rendering services to the producing
departments and other service departments

Examples:
 Materials handling
 Building maintenance
 Power departments
The manufacturing process is repeated throughout the year with the volume of output dependent on the
estimated demand for the product.
Flow of Cost – this term refers to the movement of items of cost.
See illustration on the next page.

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COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 1 – REVIEW OF THE NON-COST SYSTEM

FLOW OF COST IN A MANUFACTURING FIRM

Stockroom

Finished Goods Invty., Beg. P xxx


Cost of Goods manufactured xxx
Finished goods available for sale P xxx Customers
Finished goods invty., end (xxx) Accounts Receivable (at selling price
Cost of Goods Sold P xxx Cost of Goods Sold ( at cost)

Producing Departments

Work in process invty., beg. P xxx


Manufacturing cost:
Materials
Materials cost P xxx
Labor cost xxx
Factory overhead xxx xxx
P xxx
Work in process invty., end (xxx)
Cost of goods manufactured P xxx

Labor

Factory Overhead

Materials are placed in process with labor and factory overhead added to convert them into finished
goods.

While still uncompleted, the goods are called work in process.

Upon sale of finished goods, they become part of cost of goods sold which is matched against revenue
in income measurement.

THE NON-COST SYSTEM


Under the non-cost system,

- Flow of cost is not accounted for in detail.


- Periodic inventory method is used - so that cost of goods manufactured and cost of goods sold
can only be arrived at after an inventory taking of raw materials, work in process and finished
goods.
- Paper work is minimal – perpetual records of the flow of cost are non-existent.
- Product unit cost = Cost of Goods Manufactured
Total number of units produced
- Not expensive to maintain inasmuch as internal transactions are not recorded and volume of
paper work is not as much as that under the cost system.
- Ineffective in controlling costs and in assisting management in the decision making process
considering the delay in the determination of unit and inventory costs.
o May even result in
 undetected pilferages of materials,
 unnecessary wastages
 inefficiency of manpower

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COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 1 – REVIEW OF THE NON-COST SYSTEM

- Note: The voucher system may be used under both non-cost and cost systems inasmuch as it is
a tool in controlling payables and disbursements and does not affect inventory accounts.

MATERIALS COST

- Refers to the cost of the different items needed to produce the finished product.
- Examples:
o Lumber, varnish and glue in the manufacture of furniture
o Metal parts, lubricant and paint in car assembly
o Sulphate ammonia and superphosphate in making fertilizer

LABOR COST

- Refers to the cost of labor expended in the manufacturing processes.


- Under non-cost system, the account “factory salaries and wages” often substitutes for labor cost
- Examples:
o Wages of sewers (in garments factory)
o Wages of Carpenters ( in housing projects)
o Wages of lathe machine operators ( in machine shops)
- Payroll Account- a temporary account used for the total amount earned by employees.
o Its use facilitates the recording of payroll vouchers pending their analysis and subsequent
recording of their breakdowns.

MANUFACTURING EXPENSES ( Factory overhead / Factory burden)

- Refers to the different factory costs not classified as raw materials or as labor cost.
- Examples:

Factory supplies – refers to those items that are used in keeping the factory in
workable condition and the machinery, in working condition.

Examples:
Rags, floor wax, lubricants, brushes, room deodorants
Depreciation – factory building
Depreciation – factory machinery and equipment

Factory employee benefits – this account is charged for all the cost of benefits accruing to
factory employees such as the employers’ contributions for SSS
and cost of vacation and sick leaves.

 The employers’ contributions to SSS, Medicare and Pag-IBIG and the employees
compensation premiums may also be charged to “ SSS Contributions”, Medicare
Contributions”, “Pag-IBIG Contributions” and “Employees’ Compensation
Premiums”, respectively.

- Each manufacturing expense account may be provided for in the general ledger or a controlling
account (such as factory overhead, manufacturing expenses or factory burden) may be used.

Factory Overhead Control – This account is used as a controlling account for all factory overhead
items so that it must be supported by subsidiary records often
called the factory overhead analysis sheet.

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COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 1 – REVIEW OF THE NON-COST SYSTEM

INVENTORIES IN A MANUFACTURING FIRM


Comparison of inventory accounts: Manufacturing vs Trading Firms
Manufacturing firms Trading firms
- Raw Materials Inventory – consists of all the - Merchandise Inventory ( goods purchased
items of materials that are needed in the and made available for sale)
manufacture of the finished product
- Work in Process Inventory – refers to goods still
in the factory and not yet completed
- Finished Goods Inventory – refers to goods
already processed and are ready for sale.

Cost of Goods Sold – generally used for the items manufactured and sold.
Cost of Sales – terms used for items sold in a trading business.
In computing for cost of goods sold, cost of goods manufactured
substitutes for net purchases
Cost of Goods Manufactured – arrived at by deducting the accumulated cost of ending work in
process from the total of manufacturing (or factory) costs incurred
during a period and cost of beginning work in process. (Refer to the
illustration)
Materials Used – arrived at by deducting the ending inventory of raw materials from
total raw materials available for use. (Refer to the illustration on the
next page)
<

EQUATIONS IN THE STATEMENT OF COST OF GOODS SOLD


Based on the discussions in the preceding paragraphs, the equations must be as follows:

} {
Materials invty., beg. Materials invty., end.
Work in process invty., beg Work in process invty., end
Net purchases
Direct labor cost = Cost of goods manufactured
Factory overhead

Cost of Goods Manufactured


Finished goods invty., beg.
} { =
Finished goods invty., end
Cost of goods sold

The foregoing equations are observed in the preparation of the manufacturing worksheet and can serve
as guides in solving problems with unknowns.

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COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 1 – REVIEW OF THE NON-COST SYSTEM

Illustration: Comparison of Cost of Goods Sold of Manufacturing Firm and Cost of Sales of
Trading/Merchandising firm
COST OF GOODS SOLD – COST OF SALES –
Manufacturing firms Merchandising/Trading firms
Hangya Manufacturing Corp. ABC Trading Co.
Statement of Cost of Goods Sold Cost of Sales
For the Year Ended December 31, 2013 For the Year Ended December 31, 2013

Raw materials cost Merchandise Invty., Jan 1 P 5,000


Inventory, Jan 1 P 8,500 Add: Net Purchases
Add: Net Purchases Purchases P 50,000
Purchases P 50,000 Add: Freight in 2,000
Add: Freight-in 1,200 Less: Purchase ret. 1,000 51,000
Less: Purchase Returns and allo 2,500 48,700 Total Goods Available for Sale P 56,000
Raw materials available for use P 57,200 Less: Merchandise Invty. Dec 31 7,000
Less: Inventory, Dec 31 6,000 COST OF SALES P 49,000
Raw materials used P 51,200
Labor Cost 13,400
Factory Overhead/ Manufacturing expenses:
Depreciation expense P 19,000
Factory repairs 6,000
Employees’ benefits 1,200
Factory supplies 1,500 27,700
Manufacturing Cost P 92,300
Add: Work in Process Invty., Jan 1 10,000
Total Goods Placed in Process P 102,300
Less: Work in Process Invty., Dec 31 12,500
COST OF GOODS MANUFACTURED P 89,800
Add: Finished Goods Inventory, Jan 1 5,500
Total Goods Available for Sale P 95,300
Less: Finished Goods Inventory, Dec. 31 9,000
COST OF GOODS SOLD P 86,300

In computing for unit cost, the figure for cost of goods manufactured is simply divided by the number of produced
so that if there were 10,000 units of output, unit cost must be 8.98 (89,800 divided by 10,000 units).

CHART OF ACCOUNTS FOR A MANUFACTURING FIRM, NON-COST SYSTEM

- A list of all the account titles to be used in recording a company’s transactions.


- Classified and listed based on the position of each in the financial statements

SAMPLE CHART OF ACCOUNTS, NON-COST SYSTEM

CHART OF ACCOUNTS FOR A MANUFACTURING FIRM


Balance Sheet Accounts (10-99)
Assets ( 10-99 )
Current Assets (10-99)
11 Cash in Bank 44.1 Accumulated Depreciation – Machinery and
Equipment – Factory
12 Cash on Hand 46 Delivery Equipment
13 Petty Cash Fund 46.1 Accumulated Depreciation – Delivery
Equipment
14 Marketable Securities 51 Automobiles
15 Notes Receivable 52 Accumulated Depreciation – Automobiles
15-1 Notes Receivable – Discounted 56 Office furniture and fixtures
16 Accounts Receivable 56.1 Accumulated Depreciation – Office Furniture
and Fixtures
16-1 Accounts Receivable

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COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 1 – REVIEW OF THE NON-COST SYSTEM

20 Finished Goods inventory Intangible Assests (70-79)


21 Work in Process Inventory 71 Goodwill
22 Materials inventory 72 Patents
26 Prepaid Insurance 79 Other Intangible Assets
39 Miscellaneous Prepaid Items
Plant, Property and Equipment (40-69) Other Assets (80-89)
41 Land
42 Buildings Other Assets (90-99)
42.1 Accumulated Depreciation – Buildings
44 Machinery and Equipment – Factory

Liabilities and Capital (100-199)


Current Liabilities (100-149) Long-Term Liabilities (150-169)
101 Noted Payable 151 Loans Payable
102 Accounts Payable 156 Other Long-Term Debt
103 Vouchers Payable
104 Accrued Payroll Capital (170-199)
105 Other Accrued Liabilities 171 Preferred Stock
106 Withholding Taxes Payable 172 Common Stock
107 Medicare Contributions Payable 172.1 Treasury Stock
108 Pagibig Contributions Payable 176 Premium on Preferred Stock
109 Compensation Insurance Payable 177 Premium on Common Stock
110 Estimated Income Tax Payable 191 Retained Earnings
116 Long- Term Due Within One Year
121 Dividends Payable

Income Statement Accounts (200- 699)


Sales (200-249)
201 Sales 429 Insurance Expense
201.1 Sales Returns and Allowances 431 Store Supplies
201.2 Sales Discounts 435 Gasoline and Oil
436 Repairs and Maintenance-Buildings
Cost of Goods Manufactured (250-269) 437 Repairs and Maintenance – Delivery Van
251 Cost of Goods Manufactured 451 Depreciation Expense – Buildings
251 Materials Purchases 452 Depreciation Expense – Delivery Van
252 Purchase Returns and Allowances 499 Miscellaneous Selling Expense
253 Freight In
General and Administrative Expense (500-599)
Cost of Goods Sold (270-299)
251 Cost of Goods Sold 501 General and Administrative Expense Control
502 Salaries-General and Administrative
Factory Overhead ( 300-399) 503 Salaries – Clerical Help
301 Factory Overhead Control 504 Overtime Premium
302 Salaries-Factory 516 SSS Contributions
306 Overtime Premium 517 Medicare Contributions
316 SSS Contributions 518 Pag-ibig Contributions
317 Medicare Contributions 519 Employees’ Compensation Premiums
318 Pagibig contributions 525 Telephone and Telegraph
319 Employees’ Compensation Premiums 526 Light, Power and Water
325 Telephone and Telegraph 529 Insurance Expense
326 Light, Power and Water 531 Office Supplies
329 Insurance Expense 535 Gasoline and Oil- Buildings
331 Factory Supplies 536 Repairs and Maintenance – Buildings
335 Fuel 537 Repairs and Maintenance – Office Furniture and
Fixtures
336 Repairs and Maintenance – Buildings 551 Depreciation Expense – Buildings
337 Repairs and Maintenance – Machinery and 552 Depreciation Expense – office Furniture and
Equipment Fixtures
351 Depreciation Expense- Buildings 599 Miscellaneous General and Administrative Expenses

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COST ACCOUNTING AND COST MANAGEMENT 1
CHAPTER 1 – REVIEW OF THE NON-COST SYSTEM

352 Depreciation Expense- Machinery and Equipment Other Income (600-619)


399 Miscellaneous Factory Overhead 601 Income from Investments
602 Interest Income
Selling Expenses (400-499) 603 Rental Income
401 Selling Expenses Control 604 Commission Income
402 Salaries – Sales Supervision 605 Miscellaneous Income
403 Salaries – Salesgirls
404 Salaries – Clerical Help Other Expense (620-629)
405 Sales Commissions 621 Interest Expense
411 Delivery Expense
416 SSS Contributions Income Deductions (630-639)
417 Medicare Contributions 631 Provisions for Income Tax
418 Pagibig Contributions
419 Employees’ Compensation Premiums Temporary Account
425 Telephone and Telegraph 700 Payroll
426 Light, Power and Water

JOURNAL ENTRIES UNDER THE NON-COST SYSTEM

The entries under the non-cost system are the following

a. Materials purchases on account by Hangya Mfg. Corp for 2013 amount to P 50,000.
Materials Purchases P 50,000.00
Vouchers Payable P 50,000.00

b. Purchase returns and allowances, P 2,500.


Vouchers Payable 2,500.00
Purchase Returns and Allo. 2,500.00
c. Freight in P 1,200.
Freight in 1,200.00
Vouchers Payable 1,200.00
d. Payment of payroll for P 22,400, net of the following deductions: withholding taxes - P 2,200;
SSS premiums - P 1,100; medicare premiums - P 500; Pag-IBIG - P 300; advances to employees - P 700;
and union check-off - P 1,200.
Payroll 28,400.00
Withholding Taxes Payable 2,200.00
SSS Premiums Payable 1,100.00
Medicare Premiums Payable 500.00
Pag-IBIG Premiums Payable 300.00
Advances to Employees 700.00
Union Fees Payable 1,200.00
Vouchers Payable 22,400.00
Vouchers Payable 22,400.00
Cash 22,400.00
e. Breakdown of the payroll: Factory - P 13,400; sales - P 8,000; and, office - P 7,000.
Factory Salaries and Wages 13,400.00
Sales Salaries and Wages 8,000.00
Office Salaries and Wages 7,000.00
Payroll 28,400.00
f. Payment of the following: factory supplies - P 1,500; factory repairs - P 6,000; and, store furniture -
P 12,000.
Factory Supplies 1,500.00
Factory Repairs 6,000.00
Store Furniture 12,000.00

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COST ACCOUNTING AND COST MANAGEMENT 1
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Vouchers Payable 19,500.00


Vouchers Payable 19,500.00
Cash 19,500.00

g. Remittance of SSS, Medicare and Pag-IBIG premiums together with the employer's counterpart
contributions and workmen's compnesation insurance premiums ( SSS - P 1,300; Medicare - P 500;
Pag-IBIG - P 300; and compensation premiums - P 300). The employer's contributions are to be
charged as follows: factory - 50%; office - 30%; and sales, 20%.
Employees' Benefits - Factory 1,200.00
Employees' Benefits – Sales 720.00
Employees' Benefits – Office 480.00
SSS Premiums Payable 1,300.00
Medicare Premiums Payable 500.00
Pag-IBIG Premiums Payable 300.00
Workmen's Compensation Premiums Payable 300.00

SSS Premiums Payable 2,400.00


Medicare Premiums Payable 1,000.00
Pag-IBIG Premiums Payable 600.00
Workmen's Compensation Premiums Payable 300.00
Vouchers Payable 4,300.00
Vouchers Payable 4,300.00
Cash 4,300.00
h. Sales, P 150,000
Accounts Receivable 150,000.00
Sales 150,000.00
i. Sales returns and allowances, P 5,500
Sales returns and allowances 5,500.00
Accounts Receivable 5,500.00
j. Payment of the following expenses: office supplies - P 600; advertisements - P 800; delivery expense
P 2,000; rentals for store space - P 3,000; and, rentals for office space - P 2,000.

Office Supplies Expense 600.00


Advertising Expense 800.00
Delivery Expense 2,000.00
Rent Expense – Sales 3,000.00
Rent Expense – Office 2,000.00
Vouchers Payable 8,400.00
Vouchers Payable 8,400.00
Cash 8,400.00
k. Provision for depreciation: factory building - P 11,000; factory machinery and equipment - P 8,000;
store furniture - P 4,500; and, office furniture and equipment - P 5,000.
Depreciation Expense – Factory 19,000.00
Depreciation Expense – Sales 4,500.00
Depreciation Expense – Office 5,000.00
Accum. Depn – Factory Bldg. 11,000.00
Accum. Depn – Factory Machinery and Equipment 8,000.00
Accum. Depn – Store Furniture 4,500.00
Accum. Depn – Office Furniture and Equipment 5,000.00

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COST ACCOUNTING AND COST MANAGEMENT 1
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The closing entries are made considering the following inventory figures:

January 1 December 31
Raw Materials P 8,500 P 6,000
Work in Process 10,000 12,500
Finished Goods 5,500 9,000

l. To close the manufacturing accounts and take up the ending inventories of raw materials and work
in process ( or to set up the cost of goods manufactured):
Manufacturing Summary ( or Cost of goods manufactured) 89,800.00
Work in Process Inventory, Dec 31 12,500.00
Raw Materials Inventory, Dec 31 6,000.00
Purchase Returns and Allo. 2,500.00
Work in Process Inventory, Jan 1 10,000.00
Raw Materials Inventory, Jan 1 8,500.00
Raw Materials Purchases 50,000.00
Freight In 1,200.00
Factory Salaries and Wages 13,400.00
Employees' Benefits – Factory 1,200.00
Factory Supplies 1,500.00
Factory Repairs 6,000.00
Depreciation Expense - Factory 19,000.00

m. To set up cost of goods sold:


Cost of Goods Sold 86,300.00
Finished Goods Inventory, Dec 31 9,000.00
Finished Goods Inventory, Jan 1 5,500.00
Manufacturing Summary (Cost of Goods Manufactured) 89,800.00

n. To close the remaining nominal accounts to income and expense summary:


Sales 150,000.00
Cost of Goods Sold 86,300.00
Sales Return and Allo 5,500.00
Sales Salaries and Wages 8,000.00
Office Salaries and Wages 7,000.00
Employees' Benefits – Sales 720.00
Employees' Benefits - Office 480.00
Rent Expense – Sales 3,000.00
Rent Expense – Office 2,000.00
Office Supplies Expense 600.00
Advertising Expense 800.00
Delivery Expense 2,000.00
Depreciation Expense – Sales 4,500.00
Depreciation Expense – Office 5,000.00
Income and Expense Summary 24,100.00

o. To close net income to retained earnings:


Income and Expense Summary 24,100.00
Retained Earnings 24,100.00

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COST ACCOUNTING AND COST MANAGEMENT 1
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Instead of entries l, m and n, the accounts may simply be closed to income and
expense summary as follows:
Finished Goods Inventory, Dec 31 9,000.00
Work in Process Inventory, Dec 31 12,500.00
Raw Materials Inventory, Dec 31 6,000.00
Sales 150,000.00
Purchase Returns and Allo. 2,500.00
Sales Returns
and Allo. 5,500.00
Finished Goods Inventory, Jan 1 5,500.00
Work in Process Inventory, Jan 1 10,000.00
Raw Materials Inventory, Jan 1 8,500.00
Raw Materials Purchases 50,000.00
Freight In 1,200.00
Factory Salaries and Wages 13,400.00
Employees' Benefits – Factory 1,200.00
Factory Supplies 1,500.00
Factory Repairs 6,000.00
Depreciation Expense – Factory 19,000.00
Sales Salaries and Wages 8,000.00
Office Salaries and Wages 7,000.00
Employees' Benefits – Sales 720.00
Employees' Benefits – Office 480.00
Rent Expense – Sales 3,000.00
Rent Expense – Office 2,000.00
Office Supplies Expense 600.00
Advertising Expense 800.00
Delivery Expense 2,000.00
Depreciation Expense – Sales 4,500.00
Depreciation Expense – Office 5,000.00
Income and Expense Summary 24,100.00

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