This document provides an overview of cost accounting, including key definitions and concepts. It discusses: 1) Cost accounting identifies, measures, records, classifies, summarizes, interprets, and communicates the costs of manufacturing firms. 2) Costs are classified in various ways, including by relationship to products (direct vs indirect), behavior (fixed vs variable), and traceability. 3) Job order costing is used when products are made to customer order. It accumulates costs by job and uses a work in process account for each job.

1. P. by Fekadu Gafassu
(Cost Accounting)
CHAPTER ONE
over view of cost accounting
Cost:- is the resource used up / given up /or consumed for the exchange of a given goods or
services . The consumption of the resources should be results in reduction of assets or
incurrence of liability/ increse in liability/.
ex.1 payment of salaries Br. 20,000 . Here the asset account cash decreases.
ex. 2 purchase of supplies on account for Br.10000. here the liability account A/P
increases.
Cost accounting: - is the process of identifying, measuring, recording, classifying,
summarizing, interpreting and communicating the cost of manufacturing firms in order to make
sound decisions.
key functions in the definitions
Identifying:- cost accounting identifies cost related transactions.
Measuring; - cost accounting checks weather the identified transactions are expressed in
terms of money or not.
Recording: - cost related transactions which are expressed interims of money or which can
be measured must be recorded in accounting records .
Classifying: - similar or related transactions should be grouped together.
Summarizing :- it is the method of determining the total sum of related or similar or classified
transactions.
Interpreting: - is the techniques of attaching the meaning to the summarized data.
Communicating: - is the process of forwarding the information to the users in order to
make sound decision.
Purpose of cost accounting
From its definition the purpose of cost accounting is mostly applied in manufacturing
enterprise .Manufacturing firms are firms engaged in manufacturing of the products by
changing the shape, the form and the nature of the product. These are:-
- For planning
- For the purpose of decision making
- To determine and control manufacturing process and manufactured products
- In order to gather and explain cost data.
cost related terms
Cost object: - is any thing in which the separate measurement of cost is made or it is any thing
to which cost traced or allocated.
ex. product ,service etc.
Cost objective :- it is the purpose for which cost is measured or assigned or allocated.
It is used for: - 1. Financial statement preparation - for external users.
2. Special report preparation - for internal users.
Objectives of cost accounting
 Cost accounting has some importance these are:-
- To control the costs of manufacturing products
- To determine the selling price of products
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2. P. by Fekadu G
(Cost Accounting)
- It provides basis for formulating orating price
- In order to determine profit and loss of various products
cost accumulation and cost assignment
Cost accumulation: - Is the collection of cost data in some organized way through an
accounting system.
ex. lab our cost ,material cost and indirect cost
Cost assignment: - Is the general term which includes both cost tracing and cost
allocation
Cost tracing: - Is assigning direct cost to a given cost object
Cost allocation: - is assigning indirect cost to a given cost object.
cost concept and cost classification
Cost: - means price paid for something or amount of expediter incurred to obtain production.
it is an economic resource scarified or given up to acquired goods or services or
cost is incurred on benefit to be used in the future . When benefit is used up the cost
becomes an expense. Cost represents an asset
 an expense is called an expired amount of cost resulting from a productive
usage of an asset .Loss :- is reduction of a firm equity for which no
compensation value is received.
Expired and unexpired cost
At the time of acquisition the cost is incurred for future or present benefits when the benefit. is
utilize the cost become an expense and is called expired cost.
Costs that may give future benefits are classified as assets and are called unexpired costs.
 Classification of costs in manufacturing forms:- For the development of cost
data which aid management to achieve its objective cost classifications are necessary.
These classifications based on the following:-
1. Based on the relation ship of cost (s) to the elements of the product.
i) Material cost:- Materials are principal substances used in production and that are changed in
to finished goals by the addition of direct labour and factory over head
(FOH). The cost incurred for materials is called material cost. Material
costs can be classified in to direct and indirect material costs.
A/ Direct materials:- Materials that can be identified specifically and exclusively with a
production of finished goods. These are expressed interims of output.
Ex. Birr 10/chair. The cost attached to direct materials is called direct material cost.
2

3. P. by Fekadu G
(Cost Accounting)
B) Indirect materials:- Are all materials that can not be identified specifically and
exclusively with the production of finished product.
ii) Labour cost:- Labour is the mental and physical effort expended in the production of a
product. The cost incurred for labour is called labour cost and
classified in to two:-
A/ Direct labor cost:- The wage or salary of all labourer that can be traced specifically and
exclusively to the manufactured goods in an economically feasible
way. i.e. in the way that the probable benefit should exceeds the
cost incurred.
B/ Indirect lab our cost:- All labour involvement out side direct labour is an indirect
labour. Indirect labour cost is the part of FOH cost together with
indirect material costs.
iii) Factory Overhead costs:- are also called manufacturing over head or factory burden . It is
in cost pool to accumulate indirect material, indirect labour and
other indirect manufacturing costs which can not be specifically
and exclusively identified with specific product.
Manufacturing cost = DM cost + DL cost + FOH cost
FOH = Factory over head
DM = Direct material
DL = Direct labour
2. Based on the relationship of cost to production process:- Based on this r/s costs are
categorized into:-
1. Prime cost:- are all direct material and direct labour or costs which are directly related
with production.
Prime cost = DM + DL
2. Conversion costs:- are also colled processing costs. These costs are concerned with
transforming (converting) direct materials into finished goods.
CC = DL + FOH
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4. P. by Fekadu G
(Cost Accounting)
-Total manufacturing cost = DM + DL + FOH PC- prime cost
= PC + FOH DM -direct material cost
= DM + CC CC- conversion cost
3. Based on the relation ship of cost to the volume of production (output):- In relation
ship to change in the volume of production or output, costs can be classified as variable
cost , fixed cost and mixed cost.
Variable costs:- are these in which the total cost changes or varies with the volume of
production.
TVC = UVC x Q
TC = TVC + TFC
TFC - total fixed cost
UVC - unit variable cost
TVC - total variable cost
Or output in the same direction, where as the unit variable cost remains constant regardless
of change in the volume of production.
Example:-
Q = 1000 unit
UVC = Br 10/unit
TVC = Q . UVC
1000 unit . Br 10/unit = Br 10,000.00
Fixed costs:- are these in which the total fixed cost is fixed or constant regardless of change
in volume of production over a given relevant rang, where as the unit fixed
cost varies with the volume of production. The variation is in the opposite
direction.
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5. P. by Fekadu G
(Cost Accounting)
Relevant range:- It is the limited activity of time period over which the fixed cost is
constant.Mixed costs:- are those costs which contains the characteristics if
variable and fixed costs over relevant range.
Cost
TC
B C TVC
A D TFC TC
TFC
O E
units (out put)
4. Based on the relationship of cost to traceability to a product:-
Based on management ability to trace costs to a product, specific job, department, costs
may be classified direct and indirect costs
i) Direct cost:- is the cost that can be economically and directly traced (assigned) to a
given cost object.
ii) Indirect cost:- is the cost that is not directly traceable to a cost object and it asassociated
with the manufacturing of more than one product.
5. Based on the relationship of cost to management function:-
A given manufacturing organization may be separated in to different functional areas. A
manufacturing company functional areas generally include manufacturing, marketing &
general administration. Accordingly costs are classified into three categories based on
these functional areas.
i) Manufacturing costs (production costs):- include all costs from acquisition of raw
materials until the completion of the production process.
ii) Marketing costs:- are all costs associated with marketing & selling of the finished
product. These cost include all costs incurred by the marketing department from
the time the production process is completed until the good is delivered to
customers.
iii) Administration costs:- are all costs associated with the management of the company
and includes. Expenditures for accounting, legal & administration activity.
6. Based on the relationship of costs to the period charged (reported) on income
statement:-
1- period cost
2- product cost
5

6. P. by Fekadu G
(Cost Accounting)
Costs that are expired in the period in which they are incurred are called period cost.
Period costs posses no future benefits and are generally associated with the non
manufacturing activity of the business.
Costs associated with manufacturing function, which are directly or indirectly identified
with the product, are called product costs (inventor able costs).
These costs provide future benefits and can not be expendable until the product in sold.
7. Based on the relationships of cost to planning. In their relation to planning costs are
classified as:-
1- Standard cost:- costs which should be incurred in a particular production process
under normal circumstance standard cost is usually concerned with unit cost.
2- Budgeted cost:- is the cost maintained for future or forecasted activity or total cost
base rather than unit basis.
8. Based on the relationship of cost to decision signification:-
Decision involves making choice among alternative courses of action. The decision
generally collects cost information to assist him or herself in making decision.
In their impact or importance for decision costs are classified in to relevant and
irrelevant costs.
A) Relevant costs:- are costs that differ or vary among alternatives corises of action i.e.
they make in difference among the existing alternative can uses of action.
B) Irrelevant costs:- are those costs which do not make in different among alternative, i.e.
they are the same among the existing courses of action.. Those, costs general exclude
from the analysis in decision making.
Example:- buying or making a machine.
buy make
Cost of machine Br. 1000 Br 1000
Cost of maintenance Br 500 Br 100
Cost of operating Br 200 Br 100
♦ Making the machine is the beast alternative.
♦ Cost of machine and cost maintenance is the irrelevant cost
♦ Cost of operating the machine is relevant cost.
Generally the account which are used in manufacturing operations are materials
inventory, payroll, FOH control accounts, WIP control accounts, finished goods
inventory, cost of good sold accounts.
Illustrations: - To illustrate the flow of costs in manufacturing enterprise assume that ABC
Company (manufacturing enterprise) which began anew physical year in January
completed the following transactions during the month of January.
A. purchased materials on account for Br 100,000.
B. Total gross payroll for the month was Br 160,000. Payroll was paid to employs after
deducting 12% income tax and 7% pension contribution.
C. Materials requisitioned during the month for production amounts to be 80,000 and
indirect materials used for the factory amounts to be BR 12,000.
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7. D. The distribution of payroll is as follows.
P. by Fekadu G
(Cost Accounting)
Direct lob our ------------------------ 60%
Indirect lobour ---------------------- 15%
Marketing salaries --------------------18%
Administration salaries ---------------7%
E. FOH costs consisting of Br 8,500depreciation and Br 1,200inssurance was paid
F. Other FOH costs (which are not itemized totaled Br 26,340 was paid
G. Amount received from customers in in settlements of their accounts Br 205,000
H. FOH are transferred to the work in pross account
I. Work completed and transferred to finished goods inventory.
J. Sale of the month amounts to Br 384,000 of which 40% was received in cash and the
remaining account's Assumed all the goods manufactured during the month were sold.
Required: - Journalize the above transactions.
Solutions:- a, materials inventory -----------100,000
A/P ---------------------------100,000
b, payroll----------------------------160,000
Income tax payable --------------------------19200
Pension contribution payable ----------------11,200
Cash----------------------------------------------129,600
c, WIP control account --------------80,000
FOH account ---------------------12,000
Materials inventory-------------------92,000
d, WIP control account (DL)--------96,000
FOH control account (IDL)------------24,000
Marketing salary expense -------------28,800
Administrative salary expense-----------11,200
Payroll------------------------------------------160,000
e, FOH control----------------------9,700
Accumulated depreciation--------------8,500
Prepaid insurance------------------------1,200
f, FOH control --------26,340
Cash-----------------------26,340
g, cash -----------205,000
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8. A/R------------------205,000
P. by Fekadu G
(Cost Accounting)
h, WIP control ----------------72,040
FOH control-------------------72,040
i, Finished goods inventory -----248,040
WIP control-----------------------248,040
j, Cash------------------153,600
A/R--------------------230,400
Sales ----------------------------384,000
2- Cost of good sold ----------------248,040
Finished goods inventory -----------------248,040
Reporting the results of operation
The result of operations of manufacturing enterprise s are reported by conventional financial
statements . These statements summarizes the flow of costs and revenues and shows the flow
of costs and revenues and show the financial positions at specific date and for specified period
of time. These statements are balance sheet and income, statement statements .
ABC company
Income statement
For the month ended jan 31,19x1
Sales------------------------------------------- 384,000
Less: - CGS------------------------------------------- 248,040
Gross margin--------------------------------- 135,960
Less: - Operating expense
Marketing expense-------------28,800
Administrative expense-------11,200 40,000
Net income--------------------------------- 95,960
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9. P. by Fekadu G
(Cost Accounting)
CHAPTER TWO
JOB ORDER COSTING
 There are different types of cost accounting systems used to assign costs to a given cost
object these in cludes:-
o Job order costing system
o Process costing system
o Activity based costing system( ABC)
Job order costing system is used when a single product or batch of products are
manufactured or produced as per customers specification or order.
Characteristics of JOP order costing
 The cost object is an individual product or batch of products or services called job.
 The Main objectives of job order costing is to determine the total cost of batch of
products or services .
 Products are produced based on customer order or specification.
 Costs are accumulated by job type or job order number .
 work in process (WIP) is set up for each job to accumulate costs.
 Jobs are assumed to be physically identifiable.
 The product produced under job order costing are heterogeneous ( dlt).
1. Accounting procedures for materials
♦ A manufacturing enterprises materials and supplies are usually recorded in control
account called materials inventory account.
♦ cost accounting procedures that affect materials accounts are :-
1) The Purchase or storage of materials :- As materials are
purchased received and stored they are recorded as a debit to materials inventory and
credit to cash (A/p) the quantity received unit cost and total cost is entered to #materials
ledger card $ w/h is maintained for each material item and functions as subsidiary ledger.
material inventory-----------------XX
cash (A/P)----------------------------XX
Materials ledger card
Received Issued Balance
Unit Price Qx Unit Price
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10. 2) The issuance of materials for uses:- it is recorded as a debit to
WIP identifying the job order number.
P. by Fekadu G
(Cost Accounting)
 When Materials are requisitioned and issued or when materials flow from the store
room to the factory the quantity, the unit cost and the total cost of each item is entered
on the reqursion form and posted to the material ledger card.
Ex. WIP ....................................... xx
Materials inventory .......................... xx
 When Materials originally requisitioned for a job and are not used a returned materials
report is prepared and materials are returned to the store room.
Ex. Material Inventory ............................ xx
WIP ......................................................xx
 Material requision may also include, indirect materials or supplies for the store room.
Supplies which are not used by the factory are changed to Marketing or adimins trative
expense account and supplies to be used by the factory are charged to factory over head
accounts.
Ex. supplies issued for factory use:-
FOH ..................................... xx
Materials inventory .........................xx
Ex. Indirect Materials ( supplies) that are issued for non-factory use:-
Marketing ( administrative expense )..................xx
Materials inventory .........................................xx
Adjusting Materials ledger card to confirm to inventory count when the inventory count
differce from the balance of the materials ledger card the ledger card is adjusted to confirm
to the actual count.
1. If the actual count is less than the amount on the materials ledger card:-
P. by Fekadu G.
(Cost Accounting)
Entry for Materials inventory shortage ....................xx
Adjustment Materials inventory ................................xx
2. If the amount on the ledger card less than the actual count:-
Adjusting Material Inventory .......................................xx
entry Material inventory overage .........................xx
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11. P. by Fekadu G
(Cost Accounting)
Year end Verification of Materials
 There are two systems of accounting to determine the cost of materials at the ends of
the physical period.
1. Perpetual inventory accounting system
2. Periodic inventory accounting system.
 During perpetual inventory system an entry is made each time when the material
inventory is received or issued thus, the system disclose the materials used and left in
the store even after each receipts and issues.
 During periodic inventory accounting system:- purchase of materials are added to the
beginning materials inventory less the ending material inventory count counted and the
difference is coasted and it is the cost of materials used.
Material costing Method
The Most common Methods of costing materials issued and materials inventory left in the
store are:-
1. FIFO Method
2. LIFO Method
3. Weighted average Method
Example: - the following information is to be used in costing the inventory of ABC
manufacturing on February 28.
Feb. 1-. Beging balance of 800 units at br 6/ unit
4- Received 200 units of br 7/unit
10- Received 200 units at br 8/units
11- Issued 800 units
12- Received 400units at br 8/units
20 - Issued 500units
25 - Returned 100 excess units from the factory to store room to be recorded at
the latest issued price
28 - Received 600 units at br 8/units
Required: - determine :-
a- the cost of inventory left in the store on feb 28.
b- Cost of materials issued ?
c- Costing of materials used by using
1 - FIFOP method
2- LIFO method
1. FIFO method
feb. 1 beging balance ----Q 800 x 6 br = 4800
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12. 4 Received materials 200 x 7 = 1400
10 Received materials 200 x 8 = 1600 7800
P. by Fekadu G
(Cost Accounting)
11 issued materials 800 x 6 = (4800)
Balance ................200 x 7 = 1400
.............................200 x 8 = 1600
12 received materials 400 x 8 = 3200 6200
20 Issued materials 200 x 7 = 1400
200 x 8 = 1600
100 x 8 = 800 (3800)
Balance ............... 300 x 8 = 2400
25 Returned 100 X 8 = 800
28 Received 600 x 8 = 4800 8000
A) Cost of inventory left in the store room on feb 28 is 8000 Br .
B) Cost of materials issued 4800 +3800 = 8600 Br .
C) Cost of materials used up = issued - returned
= 8600 - 800 = 7800 Br.
2. LIFO method
Feb. 1 Beginning material inventory 800 x 6 = 4800
4 Received material inventory 200 x 7 = 1400
10 Received material inventory 200 x 8 = 1600 7800
11 issude material inventory 200 x 8 = 1600
................................ 200 x 7 = 1400
................................ 400 x 6 = 2400 (5400)
Balance .......................... 400 x 6 = 2400
12 Received material inventory 400 x 8 = 200 5600
20 issude material inventory 400 x 8 = 3200
.............................. 100 x 6 = 600 (3800 )
Balance ......................... 300 x 6 = 1800
25 returne of material inventory 100 x 8 = 800
28 received material inventory 600 x 8 = 4800
A) Cost of inventory left in the store room on feb 28 is 7400 Br .
B) Cost of materials issued 5400 + 3800 = 9200 .
C) Cost of materials used up = issued - returned
= 9200 - 800 = 8400 Br.
2. Accounting Procedures for job order costing(for labour) :-
Accounting Procedures for Labor:- It may divided in to two phase.
Collection of payroll data, collections of deductions and payments.
P. by Fekadu G.
(Cost Accounting
Entery Payroll ....................................xx
Income tax Payable ..............................xx
Pension tax payable .............................xx
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13. Other deduction Payable ......................xx
cash .......................................................xx
P. by Fekadu G
(Cost Accounting)
Clock card ( time card):- it is the Mechanical instrument for recording exact amount of
time purchased from employees for a given job.
 The worker should punch (affix his /her signature) as they leave and enter the
factory. The clock card is used by the time keeper for mainating are record of the
days or hours worked by each employee. It is the basis for computing gross
earnings for each employee.
B. Allocation or distribution of Labor cost to specific job or cost object.
entry WIP for job ............................. xx
FOH control account .................xx
payroll .........................................xx
 Time ticket ( Job ticket):- it shows the specific use of lab our for a given job that
has been made of the time purchased and is compute the direct and indirect lab
our cost, the time spent on each job during a day must be recorded on a lab our
time ticket for each worker.
3. Accounting procedures for FOH costs:-
 The amount of FOH which should be charged to a job is more difficult to
determine. this is because of:-
1. Some of the FOH costs such as Rent, depreciation Insurance... etc are fixed
regardless of the amount of production ( No. of jobs performed)
2. Some FOH cost may not be known until the end of the fiscal period.
To overcome this problem the over head may be changed to jobs using a rate based on
common activity (cost allocation basis such as DL - cost, DL horse, or machine hours).
 The amount of FOH cost for any job known as FOH applied
(allocated) should be recorded on the cost sheet through the following entry.
Entry WIP JOB ...............................xx
FOH applied ........................xx
 FOH applied is the amount of FOH cost estimated for a given job based on
predetermined FOH rate where the predetermined FOH rate (PDR) is found by
PDR = Budgeted total FOH Cost
Total budgeted cost allocation basis
FOH applied = PDR X actual cost allocation basis
Consumed by specific job
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14. P. by Fekadu G.
(Cost Accounting)
 At the end of the fiscal period the FOH applied account is closed to the FOH
control account.
Closing FOH applied ....................................xx
Entry FOH control account ...........................xx
 Note:- The FOH cost that are charged or applied during the period using
predetermined rate ( PDR) are accumulated in FOH applied account,
where as actual FOH cost incurred ( paid) are accumulated in FOH control
account.
ILLUSTRATION:- Summarized cost data for the Year ended sane 30,1999 are
presented below for commercial printing press to illustrate job order costing system.
 Assume that the printing press has two jobs in process during the year job#1 and
job#2 Job#1 was started in the pervious year and has beginning balance of Br
4000 on Hamle 1998.
 Job #2 was started in the accounting period. The following transactions where
conducted by the printing press in the current period.
1. Materials where Purchased during the fiscal year at a total cost of Br 70,000 on
account on Hamele 1,1998 . the materials inventory account shows a balance of Br
15,000 (Dr).
2. During the year the amount of materials requisitioned for production on both jobs
amount to Br 60,000 of these amount the direct material cost traceable to job #1 and
job #2 are Br 32,000 and 25,000 respectively the remainder is cost of indirect
materials used up during the year on both jobs.
3. Total wages and salaries of manufacturing employees accrued amounted Br 85,000
for the year. The wages and salaries traceable for job # 1. and job #2 are Br 45,000
and 25,000 respectively. The reminder is considered as indirect labor cost.
4. The company incurred the following general factory costs applicable to both jobs
during the year.
Utilities (heat, light, Power) ............................ Br 25,000
Rent on factory equipment................................. Br 20,000
Miscellaneous Factory cost ................................ Br 2,000
5. During the year the company recognizes Br 12,000 in accrued property taxes on
factory equipment Br 10,000. Insurance expired on factory building and non rent
equipment.
6. The company recognized depreciation of Br 16,000 none rent equipment and
machineries.
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15. 7. The company selected the machine hours as an allocation base for distributing
( allocating) manufacturing over head costs. The yearly budgeted (estimated) FOH
cost amounts in total Br. 630,000. The yearly budgeted (estimated) machine hours
for all jobs is 105,000 machine hours. During the year 10,000 machine hours were
worked on job #1 and 5000 machine hours were worked on job #2.
P. by Fekadu G.
(Cost Accounting
8. By the end of the year 3/4 th of the units in job #1 were shipped to customers have
a total sales value of Br 200,000 the company had no begniging balance of finished
goods for this year.
9. During the year job #1 has 200 units completed by the company and job #2 has still
in process on sene 30,1999.
10. The following non manufacturing costs were incurred during the year ended sane
30, 1999
Office salaries................................................. Br 30,000
Depn of office equipment............................. Br 7,000
Advertising expense ...................................... Br 42,000
Other selling and administrative exp. ............ BR 8,000
Required:-
1. Recouped all the transaction in Journal entry form .
2. Post to T-account and determine the ending balance of WIP account and
material inventory account.
Solution:- # 1
1- Materials inventory....................Br 70,000
A/P............................................Br 70,000
2- WIP jop # 1......................32,000
WIP jop # 2......................25,000
FOH control......................3,000
materials inventory.....................60,000
3- WIP jop # 1......................45,000
WIP jop # 2......................25,000
FOH control......................15,000
payroll...................................85,000
4- FOH control ..............47,000
A/P.............................47,000
5- FOH control ..................................22,000
Property tax payable..............................12,000
prepaid insurance ...............................10,000
6- FOH control................................16,000
15

16. Accumulated depreciation ....................16,000
P. by Fekadu G.
(Cost Accounting
7- Predetermind rate = Budgeted total FOH cost
(PDR) Budgeted total cost allocation base
= Br 630,000
105,000 Mash. hrs
= 6 Br /mah.hrs
♦ FOH applied = PDR . Actual cost allocation base
FOH Applied # 1 = Br 6/mash. hrs. . 10,000 mash /hrs
Br 60,000
FOH Applied # 2 = Br 6/mash. hrs. . 5000 mash /hrs
Br 30,000
WIP Jop # 1...............................60,000
WIP Jop # 2...............................30,000
FOH applied ........................................90,000
8- Finished good inventory..........................141,000
WIP Jop # 1.......................................................141,000
9- Cash.......................................................200,000
Cost of goods sold.................................105,750
Sales ....................................................................200,000
Finished goods inventory.....................................105,750.
10- Salaries expense...........................................30,000
Depreciation expense...................................7000
Advertising expense ....................................42,000
Other selling and adm. expenses..................8000
A/P.........................................................................87,000
3 Prepare Income statement
Commercial printing press
Income statement
For the year ended sane 30 1999
16

17. Sales ...............................................Br 200,000
Less Cost of good sold ........................... 105,750
Gross margin ................................. 94,250
Less Operating expense ...................... . 87,000
Net income ........................... 7,250
P. by Fekadu G.
(Cost Accounting)
CHAPTER - 3
Process costing system
 A process costing system is accosting system in which the cost of the production or
service is obtained by assigning costs to mass of products or similar units.
DM
DL TC Similar units
FOH
Process costing is used when products are produced under the conditions of continuous
processing or under mass production methods for homogeneous types of products. In
industries where process costing is used, relatively products are produced in a very
similar manner and hence assume to receive the same amount of DM,DL,FOH.
Manufacturing enterprises in which the use of process costing is suitable includes:-
o Textile industrial
o Cement industrial
o Soft drink
o Flour factories
o Paint factories
o Chemical factories
Objectives of process costing system
- The Ultimate goal of process costing system is the calculation of unit cost.
Accumulation of cost by responsibility area ( department or cost center) is only an
intermediate step leading to computation of total unit costs.To do this cost of units still
in process ( WIP) and the cost of completing units ( units transfers to another dept or to
finished goods) is needed.
CHARACTERSTICS OF PROCESS COSTING SYSTEM.
1. Costs are accumulated for each departement or cost center.
2. WIP accounts are maintained for each department to accumulate costs incurred
in that each departement.
3. Cost of production report is prepared for each dept to collect, Summarize and
compute total and unit costs.
4. Unit cost must be completed by department or cost Center i.e in process costing
costs are charged to departments. ( cost centers rather than to jobs) and of more
then one department is required to manufacture the product costs are transferred
17

18. to the next step . If the process in one department is completed. The completed
units and their associated cost are transferred to the next processing departement
and in the last departement total cost is completed and charged to finished
goods.
P. by Fekadu G.
(Cost Accounting)
Equivalent Units
Are the Partialy completed units which are converted in to proportional completed units
at the ends of the fiscal period in order to prepare cost of production report for equivalent
department . It is common to find that in a process some of the units are in complete at
the end of the fiscal period. , the question is as to how properly account for these
uncompleted units.
Example if 75 units were put in process and 60% of it is completed at the end of the
fiscal period in a given department , then ending work in process ( Uncompleted units) is
converted to:-
75X60%= 45 Units (equivalent Units).
The cost of production Report
It is a work sheet presenting the amounts of costs accumulated and assigned to production
during a month or other period. The cost of production report includes:-
• Total and unit cost of materials, labor and FOH added by the department.
• Total and unit cost of work received from one or more departements.
• The cost of beginning and ending WIP inventory.
• The cost transferred to the succeeding departement or finished goods.
Note:- For assigning costs for products, process costing system separate costs in to
two categories. i.e. Direct material and conversion costs. The reason is that
conversions costs will be added to the process at about the same time through out the
production process were as direct material costs are added to the beginning of the
production process.
Key steps in process costing
1. Summarize the flow of physical units:- in this step the units added during the
period, units still in process ( ending WIP) and units completed and transferred
out to the next department should be summarized.
2. Compute outputs interims of equivalent units.
3. Compute equivalent unit cost.
4. Summarize total cost to account for and assign these costs to units completed and
transferred out and to the units in the ending WIP inventory.
18

19. Illustration:- For process costing system ( Case-1) :- process costing with no beginning and
ending WIP inventory. This means all units started fully completed by the ends of the fiscal
period. This case introduces the basic idea of process costing.
Example:- ABC company, manufactures its products in two departments . Dept A and Dept B
the following information's belongs to dept A of the company for the month of December.
 Quantities ( physical Units)
Started in process ..................................................... 80,000 Units
Completed and transferred out ................................. 80,000 Units
WIP begining ........................................................... 0
WIP Ending ............................................................. 0
 Costs added ( incurred) by the department)
Perfect material .................................................... 48,000
Conversion cost ................................................... 56,000
Total cost added ................................................. 104,000
Required :-Determine the average cost ( unit cost) of units completed and transferred
out
Solution Average ( unit ) Cost = total cost added
total no of units
= Br 104,000
80,000 units
= 1.3 ( unit)
OR. DM cost / unit = Br 48,000 = Br 0.6 / unit
80,000 unit
CC/unit = Br 56,000 = Br 0.7 /unit
80,000 Br1.3/unit - Total cost.
Journal Entries
1. WIP dept A .............................................. 48,000
Materials Inventory ................................................48,000
2. WIP dept A ............................................. 56,000
Various accounts ...................................................56,000
3. WIP dept B ............................................... 104,000
WIP dept A ......................................................... 104,000
19

20. Case - 2 Process costing with no beginning but ending WIP inventory. These means
some units started during the accounting (Fiscal) period are in complete (still in
process) at the ends of the period. This case introduces the concept of equivalent units.
Example:- The following information belongs to dept A of ABC Co. For the month of
January Assume that beginning of the process and conversion costs are
added through out the year.
P. by Fekadu G.
(Cost Accounting)
Quantities (physical units)
WIP beginning ................................................................ 0
Started in process ......................................................... 80,000 unit
Completed and transferred out to dept B...................... 56,000 unit
Still in process (Ending WIP) ..................................... 24,000 unit
(100% completed as to pay 40% completed as to ccl. )
Cost added (incurred) by the dept
Direct material ........................ 48,000
Conversion cost ....................... 91,840
Total cost added ....................... 139,840
Required:- A/ Calculate the cost of fully completed units in deprt A
B/ Calculate the cost of partially completed units ( units still in
Process) in deprt- A
Soln. Step 1 and 2 Summary of the flow of physical units and computation of
equivalent units.
Physical Equivalent Unit
Unit DM CC
Completed and transferred out during
the month ...................................... 56,000 56,000 56,000
Add:- WIP ending 24,000
DM (24,000 X100%) 24,000
CC(24,000X 40%) 96,000
Total accounted for 80,000
Work done during the period 80,000 65,600
Beginning WIP + units stated = Units completed and transferred +
During the period
20

21. Delving the period Ending WIP
0 + 80,000 = 56,000 + 24,000
80,000 = 80,000
P. by Fekadu G.
(Cost Accounting)
Step -3 computation of cost per equivalent unit
DM CC
Cost added during the month 48,000 91,840
Divided by:- equivalent units of work
done during the period 80,000 56,000
equivalent units Br 0.60 Br 1.40
Step 4 Summary of total cost account for and assigning these cost to the units completed and
transferred out and to the units in the ending WIP
A/ Total cost of units completed and transferred out =
DM + CC = Br 33,600 + 78,400 Br. 112,000
B/ Total cost of units still in process ( ending WIP )
= DM + CC = 14,400 + 13,440 Br. 27,840
21

22. Direct Materials conversion cost
Equivalent cost per total equivalent cost per total
unit equivalent cost unit equivalent cost
Total cost to account for Total pr. cost
Work done during the month 80,000 Br.0.60 48,000 65,600 1.40 91,840 139,840
Assignment of costs:- 56,000 Br. 0.60 33,600 56,000 1.40 78,400 112,000
- To units completed and transferred out
- To units in ending WIP 24,000 Br. 0.60 14,400 9,600 1.40 13,440 27,840
Total accounted for 80,000 48,000 65,600 91,840 139,840
22

23. Journal A/ WIP dept A ..................................... Br 48,000
Entry Materials inventory ........................................48,000
(Cost of DM incurred)
B/ WIP dept A ....................................... Br 91,840
Various accounts ...........................................91,840
(Conversion cost )
C/ WIP dept B ...................................... Br 112,000
WIP dept A .....................................................112,000
(Cost of units completed and transferred out)
WIP dept A
a. Br 48,000 112,000 (C)
b. Br 91,840
27,840
Unit summary
Job order costing Process costing
- Ultimate goal is determination of total cost - The Ultimate goal is determination of unit cost
- Products produced are heterogeneous - Products produced are homogeneous.
- Products are produced based on customer order - Products are produced under the
or specification condition of continuous processing
- Each Job receivers d/f amounts of DL,DL,PFOH - Each product receives the same amount
of DM,DL,P FOH.
- WIP account is maintained for each job ( costs - WIP Maintained for each department
are accumulated by Job)
23

24. CHAPTER -4
Accounting for spoiled units , reworked units scrap and waste materials
1. Defn- spoiled units:- are units that do not meet production standard and are either sold for their
SV or discarded because no future work is performed on their.
2. Reworked units :- are un acceptable units of production that are subsequently reworked and sold
as acceptable finished goods.
3. Scrap detective) materials are raw materials left over from the production process that can not be
put back in to production for the same purpose but may be useful for different purposes on may
be sold at a lesser amount.
4. Waste materials:- are raw materials left over from production process that has no further use of
resell valve and same times cost disposal may be incurred.
Accounting for spoilage
Spoilage is an important consideration in any production related to planning and controlling decision
management must determine the most efficient production process that will keep spoilage to a
minimum.
Spoilage it divided into two:-
1. Normal spoilage
2. Abnormal spoilage
1. Normal spoilage:- is spoilage that results from efficient operation or a given production process.
The management must decide the rate of spoilage it is willing to accept as a normal.
The cost of normal spoilage is considered as port of the (good units manufactured)
Normal spoilage costs have commonly been accounted for one of the following two methods.
A) Allocated or applied for specific job when normal spoilage is developed only normal the SV
his removed form the WIP inventory living the unsausagable costs in the WIP inventory.
The following entry will made to do that:-
Spoiled unit inventory ........................... xx
WIP - Job # XY ................................ xx
B) Allocated or spoiled to all jobs. When normal spoilage developed from all jobs the total costs
of the spoiled units is removed from the WIP inventory account. The entry presented is:-
Spoiled units inventory ......................... xx
FOH control .......................................... xx
WIP ............................................... xx
24

25. 2. Abnormal spoilage
Spoilage in excess of what is consider normal for a particular production process is known as
abnormal spoilage. Abnormal spoilage usually regarded as avoidable or controllable by
production personnel or supervisor. The cost of abnormal spoilage should be removed from
the WIP inventory account and taken to an account. (" loss from abnormal spoilage").
Example:- Assume the 10,000 units were put into production for job # 109. Where total cost of
production was 300,000. Normal spoilage for the job is estimated to be 50 units.
At the end of the production only 9950 units were good salvage value of the spoiled units were
Br 15 each.
Required:-
Present the Journal entery
a) Assuming that the normal spoilage is allocated to specific job.
b) Assuming that the normal spoilage is allocated to all jobs.
c) Assuming that the spoilage is Abnormal.
So/n Unit cost of production = Br. 300,000 = Br 30/dut
10,000 unit
Total cost of = Br. 30/unit x 50/unit
Spriage unit = Br. 1,500
Salvage value = Br. 5/unit x 50/unit
= Br. 250
Unsalvagable = Br. 25/unit x 50/unit
= 1250 Br
a) Spoiled units inventory .............................. Br. 250
WIP - Job # 109 ........................................ 250
b) Spoiled units inventory ............................... 250
FOH control ............................................... 1250
WIP inventory ........................................... 1500
c) Spoiled units inventory .............................. 250
loss from abnormal spoilage ..................... 1250
WIP inventory ........................................... 1500
Example - 2 Assume that 5000 units were but into production for job # 106 at a total cost of Br
20,000. the unit cost of job # 106 would be br4. 17 20 units are found to spoeld and has salvage
value of Br 0.50 each and no spoilage was anticipated by management for # 106, persent the entery
to account for the cost of abnormal spoilage.
So/n * Unit cost of = Br 20,000 = 4 Br.
Production 5000
* Total cost of = 30 4/unit x 20/unit
= Br. 80
25

26. * Salvage value = 0.5 x 20
= 10 Br.
* Unsalvageable = Br. 3.5/unit x 20/unit
= Br. 70
Spoiled units inventory ......................... 10
loss from abnormal spoilage ................ 70
WIP - inventory .................................. 80
Accounting for reworked ( Deffective units
As spoiled unit reworked unit also classified in to normal and abnormal.
A/ Normal reworked units:- the number of reworked units in a particular production process that can
be expected under efficient operations are known as normal reworked units. Normal reworked
costs can be accounted for by one of the following materials.
1. Allocated to specific job:- When reworked costs are incurred WIP inventory account for
specific job is changed through the following entry.
WIP - # x4 ............................................. xx
Material inventory ............................... xx
Payroll (CL) ......................................... xx
FOH applied ........................................ xx
2. Allocated to all jobs:- When reworked costs incurred for all jobs, FOH control is charged
because reworks cost have been already charged to WIP account as polt of applied FOH. the
following entry will be made.
FOH control ............................................... xx
Material inventory ............................... xx
payroll .................................................. xx
FOH applied ......................................... xx
Example:- Assume that 20 units were found to be reworked on job # 221. The cost of reworking the
unit is as follows:-
DM ............................................................. Br. 300
DL .............................................................. 400
FOH applied .............................................. 50% of DL (200)
Required:- Present the entry to account for normal reworked units.
a) 17 applied to specific job
b) 17 applied to all jobs
26

27. So/n a) WIP # 221 ................................................... Br. 900
Material inventory ............................. 300
Payroll ................................................ 400
FOH applied ...................................... 200
b) FOH control ................................................ 900
Material inventory ............................... 300
Payroll ................................................. 400
FOH applied ....................................... 200
b. Abnormal Re-worked unit
Re-worked units that exceeds what is considered normal are known as abnormal reworked units The
total cost of abnormal reworked unit is changed to " loss from abnormal reworked" account.
Example:- Assume that 14,000 units were ploced in to production for job # 321 normal reworked
units are stimated to be 400 units. Actual un its that need rework were 1000 units the total cost to re-
work the 1000 units were as follows:-
DM ............................................ Br. 300
DL ............................................. 1000
FOH applied ............................. 400
Total ......................................... 1900 Br the cost incurred to rework 100 units.
Required:-
Present the journal entries assuming normal ref-worked unit cost is applied to specific
job.
1000 units 400 Normal
600 Abnormal
So/n:- Cost per unit
- DM/unit =
500 Br. = Br 0.5/unit
1000 unit
- DL/unit = Br 1000 = Br 1/unit
1000 unit
- FOH applied = Br 400 = Br 0.4 unit
1000
Normal reworked unit = 400 units.
27

28. 28

29. Course Title:-Cost Accounting
Course number:- Acct. 211
Credit Hourse:-3
Course objective:-
Up on the completion of this course students will:-
- Acquire know logy of cost accounting role in any organization
- Be able to distinguish b/n job order and process costing
- In order to under stand the accounting procedures for spoiled, scrap and waste
materials.
Course outline:-
1. INTRODUCTION.
1.1 Overview of cost accounting.
1.2 Definition and the vole of cost accounting.
1.3 Objectives of cost accounting.
1.4 Cost accumulation and cost assignment.
1.5 Classification of costs in manufacturing firms.
2. CHAP[TER TWO JOB ORDER COSTING
2.1 Characteristics of job order costs.
2.2 Accounting procedures for job order costing.
2.3 Material costing method.
2.4 Accounting procedures for FOH costs.
2.5 Types of over head basis.
3. CHAPTER THREE PROCESS COSTING
3.1 Process costing system.
3.2 Objectives of process costing system.
3.3 Characteristics of process costing system.
3.4 key steps in process costing.
3.5 Difference b/m job order costing and process costing.
4. CHAPER FOUR ACCOUNTING FOR SPOILED UNITS SCRAP AND WEST MATERIALS
4.1 Accounting for spoilage.
4.2 Accounting for reworked / defective units/
29

30. 4.3 Accounting for scrap materials.
4.4 Accounting for Joni product .
REFERENCE:-
 Cost accounting 13th edition.
 Cost accounting 16th edition
 Charles homgre cost accounting.
30

31. Ethiopian Air Force Technical College Cost Accounting Assignment
Department:- Aeronautical management
Summating data 25/08/2002 E.C
1. Define the following terms:-
a) Cost objective
b) Cost object
c) Cost accumulation
d) Cost assignment
2. What is the difference b/n expired cost and un expired cost?
3. Explain the following terms?
a) Pc = DM cost + DL cost
b) Cc = DL cost + FOH cost
4. Differentiate relevant cost and Irrelevant cost using examples?
5. Write at least three characteristics of job order costing systems?
6. Explain the d/c b/n clock card and Job ticket?
7. It is difficult to determine the amount of FOH cost which should be changed to Job why?
1. The following data are extracted form the book of accounts of Zeman company.
Administration exp solids
Direct material cost ……………….. Br 185,480
Direct labour cost …………………. " 241,829
FOH cost …………………………… " 103,641
Required:-
i) What is the prime cost of the company?
ii) What is the conversion cost of the company?
2. The following information is to be used in costing the inventory of Ethiopian Air force supply on
January 30, 2002.
Jan 1. Beginning balance = 4000 units at birr 14/unit
3. Received 1600 units at birr 11/unit
6. Issued - 1400 units
31

32. 8. Issued - 700 units
12. Received 2000 units at the latest received price.
16. Received 1200 units at birr 10/unit
20. Issued 400 units
25. Issued 1000 units
30. Returned 300 defective units from the factory to the store room at 8/unit.
Required:-
a) The cost of inventory left in the store room on Jan 30,2002?
b) Cost of materials issued?
c) Cost of materials used ? using
i) FIFO method
ii) LIFO method
3. The following data are extracted from the book of Zequal steel and rolling factory w/z in found
Deber Ziet.
- Administration expends ……………………………………. $ 2,500
- Sales ……………………………………………………...... 85,600
- Purchase ……………………………………………………. 40,000
- FOH cost ……………………………………………………. 12,400
- Marketing expends ………………………………………….. 1,000
- Direct labour ………………………………………………… 14,000
- Other expense ………………………………………………. 1,000
Inventories Ending Begging
Raw materials inventory ………….. $ 43,000 ………………… 6,000
WIP ………………………………. 15,000 ………………… 8,000
Finished goods …………………… 10,500 ………………… 6,400
Instruction:- Prepare:-
32

33. i) The cost of good sold statement
ii) Income statement
33

34. ETAF Technical College
Cost Accounting Final Result
Dept. Aeronautical Management 3rd Year
Mid Exam Assignment Final Exam Total
No ASFN Rank Name 20% 20% 60% 100%
1 Sgt. Antehugne Biadglgn
2 07643791 Corp. Abinet Dinku
3 01319199 PVT Jemal Abdella
4 01291099 " Berhanu Geremaw
5 01350399 " Deressa Rata
6 01447299 " Markos Mamo
7 01396599 " Gudaye Belay
8 01433599 " Deneke Dagara
9 01357699 " Takele Bikamo
10 01303399 " Awol Mohammed
11 01389999 " Zeleke Asefa
12 01365299 " Demeke Dawit
13 01292499 " Beriso Teko
14 01334399 " Shibabaw Askhale
15 " Dejene Tadege
16 01338099 " Bekele Galcha
Instructor:-
ASFN ___________ Rank __________ Name __________________ Signature _______
CHAPTER ONE
34

35. Wage and Salary Adminstration
Inntroduction
Salary and wage is basically a transaction between employee or the organization the employee works
and the employee. The employee or the organization provides pay and other benefits in exchange for
generally specified time, skills and loyalty. Their for the administration of salary and wage is one of
the most important Human resource management activities. However one has to understand that
salaries and wage are pointes of the whole compensation package employers provide for their
employee in exchange for their work.
Itis a well-known fact that for many organizations employee compensation is the biggest single cost
during business. however itcan helptostrengthen the organizations culture and key values and
facilitete the achivement of its obejective.
35