Final Review

Formulas To Know

Calculate 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 part of 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 – report on balance sheet
Cost of Good Sold: The cost of product sold this period – report on income statement

Calculate 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


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

Predetermined Overhead Rate:

Total Estimated Manufacturing Overhead Costs This Period = $ cost per activity
                           Estimated Total Annual Activity

This is 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 (easy to determine what went into the product)
+ Direct Labor (easy to determine what it cost to work to make)
+ Manufacturing Overhead (indirect, can’t trace, must allocate/apply)
= Total Cost of the Job

High – Low Method: – to find the fixed and variable parts of the cost
1st – Identify the period with the lowest level of activity and the highest level of activity
2nd – Put the dollars on the top that are in the same period as the high and low activity

Variable Cost     =     Cost at high activity level – cost at the low activity level
per activity                            High activity level – Low activity level

Do not just use the highest and the lowest cost.

Cost Formula:

Total Cost $ = Total Fixed Cost $ + (variable cost $ per activity X # activity)

Use the formula to find fixed dollars. Either high or low will give the same answer

Use this formula for any level of activity to estimate the total cost at that level.


Contribution Margin = Sales – All Variable Costs

Contribution Margin Ratio =
Contribution Margin

Break Even
When profit = 0,
Contribution margin = fixed expenses

To Get Break Even Quantity in Units:

            Fixed Expenses             
Contribution Margin Per Unit

To Get Break Even in Sales $

              Fixed Expenses            
Contribution Margin Ratio (%)

To determine what is required to make a desired profit before tax use the break even formula and add the desired profit to the fixed cost in the formula.

Margin of Safety
Total Budgeted or Current Sales – Break Even Sales

Margin of Safety %
Margin of Safety
Total Budgeted or Current

Operating Leverage: (a multiplier factor)

Contribution Margin
Operating Income

Take the factor times the % increase in sales to determine the % increase in profits that should occur

To get the expected income in dollars for a given % sales increase use this formula:

Operating leverage factor
x % increase in sales
= % increase in profits
x current profits
= added profits
+ current profits
= expected profits if sales increase by the given %

Steps to take to implement ABC cost:

1) Identify activities and then cost drivers –
Do to support products or services

2) Identify the cost pools that match the activity (put costs in cost pools)
Divide your total overhead costs into groups of costs.

3) Calculate the rate per: Total cost pool $ / total cost driver = $ rate per activity
You will have several activity rates, one for each activity.

4) Assign costs to cost objects using the rate per and quantity of cost driver:
A cost object is normally a product or a 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

Total Annual Estimated Manufacturing Overhead $ in Group (Pool)    =    $ rate per activity
                      Total Annual Activity Base                                                        (each time it occurs)

Variable Cost Variances:

Actual Quantity

X Actual Price
    (AQ  X  AP)

Actual Quantity

X  Standard Price
    (AQ  X  SP)

Actual Units Made X Quantity
it should take to make one = SQ
         X  Standard Price           
          (SQ  X  SP)

$ _________ $ _________               $
Variance Variance
Materials Price Materials Quantity
Labor Rate Labor Efficiency
Overhead Spending Overhead Efficiency

Fixed Overhead Variances:

Actual Fixed
Overhead Costs
Budgeted Fixed
Overhead Costs
Fixed Overhead Cost
Applied to the Product
(Given) Budget Activity Actual Units produced
x standard quantity per unit
x standard OH $ Rate x standard OH $ Rate
per activity or
Activity actually used
x predetermined rate per
the same activity

Absorption Cost: Sorts costs by product and period

– CGS ( DM, DL, FOH + VOH)
=Gross Profit
– Period Expenses
=Income Before Tax

Variable Cost: Sorts costs by variable and fixed

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

Total variable costs for both statements are computed: 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 is calculated as

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