Selling Price per Unit - Variable Expense per Unit = P - V
Contribution Margin Ratio
CM Ratio = CM/Sales
CM Ratio = Unit CM/ Unit selling Price
1 - Variable Expense Ratio
stated as a %
Change in Contribution Margin
CM Ratio X Change in Sales
Variable Expense Ratio
Variable Expense/ Sales
Contribution Income Statement Format
Unit Sales to break even = Fixed Expenses/Unit CM
Dollar sales to break even = Fixed Expenses/CM Ratio
Unit sales to attain the target profit
Units: Target Profit + Fixed Expenses/ Unit CM Ratio
Dollar: Target Profit + Fixed Expense/ CM Ratio
Margin of Safety in Dollars
Total budgeted (or actual) Sales - Break-Even Sales
Margin of safety in %
Margin of safety in $/ Total budgeted (or actual) Sales in $
Degree of Operating Leverage
CM/Net Operating Income
% change in Net Operating Income
Degree of Leverage X % change in Sales
refers to the relative proportions in which a company's products are sold.
Two types of Job Costing
2. Process Costing
Similarities between Job-Order and Processing Costing
Both systems have the same basic purpose - to assign material, labor, and manufacturing costs to products and to provide a mechanism for computing unit product costs
Both use the same basic manufacturing accounts - Manufacturing Overhead, Raw Materials, Work in Process, and Finished Goods
The flow of costs thru the accounts is basically the same
Differences between Job-Order and Process Costing
1. Process Costing is used when a company produces and continuous flow of units that are indistinguishable from another (ex. soda) vs Job-Order is used when a company produces many different products that have unique production requirements.
2. Process costing identifies costs by departments and assigns these costs uniformly and the end of the period vs Job-Order identifies costs by Material, Labor, and overhead with a particular customer.
3. Process costing computes costs by departments and Job-order computes costs by job.
The Journal entry to record the materials used in the first process department - the formulating dept.
Work in Process -Formulating ........ Debit
The Journal entry to record the materials used in the 2nd process department - the Bottling dept.
Work in Process -Bottling ........ Debit
The Journal entry to record the labor costs in the Formulating Department.
Work in Process-Formulating.....Debit
Salaries and Wages Payable..........Credit
The Journal entry to record the overhead cost applied in the Formulating department.
Work in Process-Formulating....Debit
Completing the Cost Flows:
The journal entry transfers the cost of partially completed units from the Formulating dept. (dept. 1) to the bottling dept. (dept. 2)
Work in Process- Bottling......Debit
Work in Process-Formulating......Credit
Completing the Cost Flows:
Journal entry to record processing has been completed in the last dept. (bottling) and units are transferred to "Finished Goods"
Work in Process- Bottling.....Credit
Completing the Cost Flows:
The Journal entry to record the transfer to Cost of Goods Sold.
Cost of Goods Sold.......Debit
Number of partially completed units X % completion
Weighted Average Method for computing a departments Equivalent Units
Equivalent units of production = Units Transferred to the next department or to Finished Goods + Equivalent Units in ending WIP inventory
Cost per Equivalent Unit - Weighted average Method
cost of beg. WIP + Cost added during the period/ Equivalent Units of production
Cost Reconciliation Report
All manufacturing costs, both fixed and variable, are assigned to units of product- units are said to fully absorb the costs.
Bill of Materials
a document that lists the type and quantity of each direct material needed to complete a unit of product.
Materials requisition form
document that specifies the type and quantity of materials drawn from the store room and identifies the job that will be charged for the cost of the materials.
Job Cost Sheet
records the materials, labor, and manufacturing overhead costs charged to that job.
Job Cost Sheet Example
Predetermined Overhead Rates Formula
POH = Estimated total manufacturing Overhead/Estimated total amount of the allocation base
Steps to compute POH Rate
1. Estimate the total amount of the allocation base (the denominator) that will be required for next periods estimated level of production. (labor hrs or machine hrs)
2. Estimate the total fived manufacturing overhead costs for the coming period and the variable manufacturing overhead costs per unit of allocation base.
3. Use the cost formula Y = a + bX to estimate the total manufacturing overhead costs (the numerator) for the period.
Y = The estimated total MOH cost
a = The estimated total fixed MOH cost
b = The estimated variable MOH costs per unit of the allocation base
X = The estimated total amount of the allocation base.
4. Compute the POH rate.
Formula to determine the amount of overhead to apply to a job
Predetermined Overhead Rate X Amount of the allocation base incurred by the job.
a factor that causes overhead costs.
Examples include machine hours, beds occupied, computer time, ect...
Cost of Goods Manufactured
cost of goods finished that were finished during the period.
Cost of completed units of product that have not yet been sold.
Journal entry to record the purchase of Raw Material on Account
Journal Entry to record the issue of direct and indirect materials to the production departments