Introduction to Basic Cost Flows: The Non Cost System

The Non Cost System

Its past 12 am. Still hungry. My coffee is cold, and outside... is colder. Salamat kay Fiji at mainit ang mga paa ko (Fiji is the Alpha cat in our house). I'm half awake and would like to sleep asap but I'm afraid i might snore myself to death.

AND just to point out that this is not a serious page, here is my kid hugging a tree...

  

Im not really sure why its called a Non cost system when all the necessary costs are there, but...spare me, here we go.

Normally, when the management of a manufacturing firm wants to simplify the preparation of the year end financial statements, they may only be interested in the total production cost, the total cost of goods manufactured and the total cost of goods sold. At these times, the management may want to adopt the non-cost system. (Mejorada,2000)

Under this system, the flow of costs are not accounted for in detail and paperwork is minimal. The periodic inventory system is used to arrive at the ending balances of the inventories (raw materials, work in process, finished goods) so that the cost of goods manufactured and sold can be computed. Unit costs are usually computed by dividing the total cost of goods manufactured by the number of units produced.

In this system, there is poor control over costs and inventories. Pilferage and wastage may go undetected and will be absorbed by the cost of goods sold.

Before we begin, you should know the following:

1.       Types of inventories: Raw materials, Work in process, Finished goods

2.       Manufacturing costs: Direct materials, Direct labor, Factory overhead

3.       Items affecting raw materials inventory: Purchases, Freight-in, Purchase returns, allowances, and discounts, materials used/issued (direct materials)

4.       Items affecting work in process inventory: Direct materials, Direct labor, Factory overhead, cost of goods manufactured.

5.       Items in our finished goods: Cost of goods manufactured, cost of goods sold.

6.       What are net purchases, total materials available for use, total cost placed in process, total goods available for sale, prime cost, conversion cost, total manufacturing cost.

7.       Addendum: producing department, servicing department, payroll account, Factory overhead control account

IT STARTS IN THE STORE ROOM OF RAW MATERIALS

Normally, our operations would start from the purchase of raw materials which will go to our store room. The value of such will be increased by the amount of freight incurred and will be reduced by our purchase returns, allowances, and discounts. The net purchase will be computed as follows:

Purchases		P xxx
Add: Freight-in		Xxx
Gross Purchase		P xxx
Less: Purchase returns	P xxx
Purchase allowances	Xxx
Purchase discounts	Xxx	Xxx
Net Purchases		P xxx

               

The net purchase is the net increase in our inventory for the period.

Under the periodic inventory system, you can get the value of the beginning raw materials inventory in the ledger (or last year’s trial balance/Balance sheet) and the ending raw materials inventory during our inventory count. Now you can compute your direct materials (Raw Materials Used) as follows:

Net Purchases ( from above)	P  xxx
Add: Beginning Raw Materials Inventory	Xxx
Total Materials available for use	P  xxx
Less: Ending Raw Materials Inventory	xxx
Direct materials (Raw materials used)	P  xxx

 The Direct Material is the value of materials used in production. This amount represents how much materials were transferred from the storeroom going to our factory or production facility. (Others would prefer to use Direct Materials Used, but that would be redundant,would be redundantly redundant and redundant...20 jumping jacks naman dyan para magising ka!)

FROM STOREROOM TO FACTORY

To be transformed to its saleable state, the direct materials should be converted in the factory. In the process, we will be incurring Conversion cost (Direct labor and Factory Overhead). These costs when incurred and put together will give us the total manufacturing cost for the current period.

Direct Materials	P xxx
Direct Labor	Xxx
Factory Overhead	Xxx
Total Manufacturing cost	P  xxx

Now add this to your work in process beginning inventory ( that’s the amount of inventories you did not finish last period) and you will get the Total Cost Placed In Process. This is how much you can finish for the current period. From that amount, if you deduct your work in process ending inventory (from your inventory count though most of the time its just estimated, we”ll get back on that soon), you will arrive at the Cost of Goods Manufactured. This is the value of your completed goods for the current period, and now ready for sale.

Total Manufacturing cost	P xxx
Add: Beginning WIP Inventory	Xxx
Total cost placed in process	P Xxx
Less: Ending WIP Inventory	Xxx
Cost of Goods Manufactured	P  xxx

(as of this point, i would like to emphasize na ang hirap namang mag ingles, sana tinagalog ko nlang mula sa umpisa)

FROM FACTORY TO SALES ROOM

Once these goods are completed, they are now transferred to the sales room or to another room where finished goods are stored. In the same manner, they have to be reclassified from work in process to finished goods inventory. These inventories will be expensed at the time they are sold accounted under the Cost of Goods Sold, computed as follows:

Cost of Goods Manufactured	P xxx
Add: Beginning FG Inventory	Xxx
Total Goods Available for Sale	P Xxx
Less: Ending FG Inventory	Xxx
Cost of Goods Sold	P  xxx

  

Tadaaa! Congratulations! You’ve just finished the basic cost flow of manufacturing cost… But wait, there’s more! If that’s too long for you, I will provide below not 1, not 2…but 3 T-accounts which may serve as your cheat sheet….

(zoom in zoom in nlang pag masyadong maliit)P.S. pardon my grammar and spelling, they are everywhere,dont care..
P.S.S. Please leave your comments below so I could update/revise based on  my mood. Thanks.
PSSS: If you want me to continue creating these kinds of contents, support by sharing in facebook.
 (tho, a free cup of coffee would be great!)