Cost of Goods Manufactured:

   Beginning Raw Materials Inventory
+ Purchases of Raw Materials
– Ending Raw Materials Inventory
= Materials Used in Production
+ Direct Labor
+ Manufacturing Overhead (list all costs)
= Total Manufacturing Costs
+ Beginning Work in Process Inventory
– Ending Work in Process Inventory
= Cost of Goods Manufactured – Finished Goods

Material used is included in the cost to make the products.
Direct labor used to assemble the products or operate the machines

Manufacturing overhead costs are costs with the word “plant”, “manufacturing”, “factory”,
and “indirect” in the description.

Inventory: Materials or product not yet sold reported on balance sheet
Cost of Good Sold: The cost of product sold in the current period; report on income statement

Cost of Goods Sold for the Income Statement:

   Beginning Finished Goods Inventory
+ Cost of Goods Manufactured
= Goods Available for Sale
– Ending Finished Goods Inventory
= Cost of Goods Sold

Income Statement:

   Sales
– Cost of Goods Sold
= Gross Profit
– Operating Expenses (Sell/ G&A/ Warehouse)
= Operating Income

Predetermined Overhead Rate:

Total Estimated Manufacturing Overhead Costs
Estimated Total Annual Activity

= $ cost per activity

The estimated cost in overhead dollars every time the activity occurs.

Apply Overhead:

Predetermined overhead rate ($ per activity)
x the actual amount of the activity used for the job or period
= the estimated amount of manufacturing overhead costs added

The Cost of Producing a Job:

   Direct Material
+ Direct Labor
+ Manufacturing Overhead
= Total Cost of the Job

High Low Method: Use to find the fixed and variable parts of the cost

1st Write the lowest level of activity and the highest level of activity on bottom line

2nd Write the dollars on the top that are in the same period as the high and low activity

Cost at high activity level – cost at the low activity level
High activity level – Low activity level

= Variable Cost per Activity

   Total Mixed Cost
– Total Variable Cost (cost per x quantity)
= Total Fixed Cost

High – Low Cost Formula:
Total Cost $ = Total Fixed Cost $ + (variable cost $ per activity X # activity)

Contribution Margin

   Sales
– All Variable Costs
= Contribution Margin

Contribution Margin Ratio

Contribution Margin
          Sales

Break Even
Profit = 0
Contribution margin = fixed expenses

Break Even Quantity in Units

          Fixed Expenses  
Contribution Margin Per Unit

To Get Break Even in Sales $

         Fixed Expenses  
Contribution Margin Ratio (%)

Add the desired profit to the fixed cost in the break-even formula to determine required sales or units to achieve a desired profit before tax.

Margin of Safety

  Total Budget or Current Sales
– Break Even Sales

Margin of Safety %

Margin of Safety
Total Budget or Current

Operating Leverage Factor:

= Contribution Margin
Operating Income

% Increase in Profits from % Sales Increase

Factor
x % increase in sales
= % increase in profits

Operating leverage factor
x % increase in sales
= % increase in profits
x Current profits
= Added profits
+ Current profits
= Expected profits

Steps to take to implement ABC costing:

1) Identify activities (cost drivers) to support products or services

2) Identify the cost pools that match the activity (group costs in cost pools)

3) Calculate the rate per:

Total cost pool $
Total cost driver

= $ Rate per activity

Many activity rates per (one for each activity).

4) Assign costs to cost objects (product or customer)

     $ rate per activity
x # actual activity for that product/customer
= total costs assigned to the product or customer

Total overhead costs assigned
Number of total units
= overhead cost per unit

Variable Cost Variances:

Fixed Overhead Variances:

Absorption Costing:
Sorts costs by product and period

   Sales
– CGS (DM, DL, FMOH + VMOH)
=Gross Profit
– Period Expenses (ALL)
=Income Before Tax

Variable Costing:
Sorts costs by variable and fixed

  Sales
– Variable Product Costs (DM + DL + VOH)
= Product Contribution Margin
– Variable nonmanufacturing period expenses
= Total Contribution Margin
– Fixed Expenses (ALL – including manufacturing overhead)
= Income Before Taxes

Total Variable costs =
Cost per unit
x Quantity of units sold

Calculate units sold if not given:

   Beginning Finished Goods Inventory in Units
+ Units Produced This Period
– Ending Finished Goods Inventory in Units
= Quantity of Units Sold

Also use to get units produced if not given to you, put in what you know and plug to find units.

The difference in income reported on the two income statements

  Units Made
– Units Sold  
= Change in Inventory in units
x Fixed Overhead Rate per unit (see below)
= Difference in Income for the two statements

Allocate Joint Costs

Quantity:

Total Joint Cost
Total physical base

= $ Cost Per x quantity related to each product

Sales Value at Split-Off:

Sales value at split-off
x Units sold

Net Realizable Value:

Sales price at split off
– Cost to sell/dispose

Approximate Net Realizable Value:

Final Sales Price
– Incremental processing and selling costs