Cost - Volume - Profit Relationships Ch 5

  1. Profit formula
    Ch 5
    • (Sales - Variable Expenses) - Fixed Expenses
    • (P X Q - V X Q) - Fixed Expenses
    • Unit CM X Q - Fixed expenses
    • (CM/Sales) X Sales - Fixed Expense
  2. Sales
    Ch 5
    Selling price X Quantity sold or P X Q
  3. Variable Expenses
    Ch 5
    • Variable Expense per Unit X Quantity sold
    • or V X Q
  4. Unit CM
    Ch 5
    Selling Price per Unit - Variable Expense per Unit = P - V
  5. Contribution Margin Ratio
    Ch 5
    • CM Ratio = CM/Sales
    • CM Ratio = Unit CM/ Unit selling Price
    • 1 - Variable Expense Ratio
    • stated as a %
  6. Change in Contribution Margin

    Ch 5
    CM Ratio X Change in Sales
  7. Variable Expense Ratio
    ch 5
    Variable Expense/ Sales
  8. Contribution Income Statement Format
    Ch 5
    Image Upload 1
  9. Break-Even Formula
    ch 5
    • Unit Sales to break even = Fixed Expenses/Unit CM
    • Dollar sales to break even = Fixed Expenses/CM Ratio
  10. Unit sales to attain the target profit
    ch 5
    • Units:  Target Profit + Fixed Expenses/ Unit CM Ratio
    • Dollar: Target Profit + Fixed Expense/ CM Ratio
  11. Margin of Safety in Dollars
    Ch 5
    Total budgeted (or actual) Sales - Break-Even Sales
  12. Margin of safety in %
    Ch 5
    Margin of safety in $/ Total budgeted (or actual) Sales in $
  13. Degree of Operating Leverage
    Ch 5
    CM/Net Operating Income
  14. % change in Net Operating Income
    Ch 5
    Degree of Leverage X % change in Sales
  15. Sales Mix
    Ch 5
    refers to the relative proportions in which a company's products are sold.
  16. Two types of Job Costing
    Ch 4
    • 1. Job-Order
    • 2. Process Costing
  17. Similarities between Job-Order and Processing Costing
    Ch 4
    • 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
  18. Differences between Job-Order and Process Costing
    Ch 4
    • 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.
  19. Material Costs:
    The Journal entry to record the materials used in the first process department - the formulating dept.
    Ch 4
    • Work in Process -Formulating ........ Debit
    •     Raw Materials...................................Credit
  20. Material Costs:
    The Journal entry to record the materials used in the 2nd process department - the Bottling dept.
    Ch 4
    • Work in Process -Bottling ........ Debit   
    • Raw Materials...................................Credit
  21. Labor Costs:
    The Journal entry to record the labor costs in the Formulating Department.
    Ch 4
    • Work in Process-Formulating.....Debit
    •    Salaries and Wages Payable..........Credit
  22. Overhead Costs:
    The Journal entry to record the overhead cost applied in the Formulating department.
    Ch 4
    • Work in Process-Formulating....Debit
    •    Manufacturing Overhead..............Credit
  23. 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)
    Ch 4
    • Work in Process- Bottling......Debit
    •    Work in Process-Formulating......Credit
  24. Completing the Cost Flows:
    Journal entry to record processing has been completed in the last dept. (bottling) and units are transferred to "Finished Goods"
    Ch 4
    • Finished Goods...........Debit
    • Work in Process- Bottling.....Credit
  25. Completing the Cost Flows:
    The Journal entry to record the transfer to Cost of Goods Sold.
    Ch 4
    • Cost of Goods Sold.......Debit
    •    Finished Goods.................Credit
  26. Equivalent Units
    Ch 4
    Number of partially completed units X % completion
  27. Weighted Average Method for computing a departments Equivalent Units
    Ch 4
    Equivalent units of production = Units Transferred to the next department or to Finished Goods + Equivalent Units in ending WIP inventory
  28. Cost per Equivalent Unit - Weighted average Method
    Ch 4
    cost of beg. WIP + Cost added during the period/ Equivalent Units of production
  29. Cost Reconciliation Report
    Ch 4
    Image Upload 2
  30. Absorption costing
    Ch 3
    All manufacturing costs, both fixed and variable, are assigned to units of product- units are said to fully absorb the costs.
  31. Bill of Materials
    Ch 3
    a document that lists the type and quantity of each direct material needed to complete a unit of product.
  32. Materials requisition form
    Ch 3
    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.
  33. Job Cost Sheet
    Ch 3
    records the materials, labor, and manufacturing overhead costs charged to that job.
  34. Job Cost Sheet Example
    Ch 3
    Image Upload 3
  35. Predetermined Overhead Rates Formula
    Ch 3
    POH = Estimated total manufacturing Overhead/Estimated total amount of the allocation base
  36. 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.
  37. Formula to determine the amount of overhead to apply to a job
    ch 3
    Predetermined Overhead Rate X Amount of the allocation base incurred by the job.
  38. Cost Driver
    Ch 3
    a factor that causes overhead costs.

    Examples include machine hours, beds occupied, computer time, ect...
  39. Cost of Goods Manufactured
    Ch 3
    cost of goods finished that were finished during the period.
  40. Finished Goods
    Ch 3
    Cost of completed units of product that have not yet been sold.
  41. Journal entry to record the purchase of Raw Material on Account
    Ch 3
    • Raw Material...........Debit
    • Account Payable.............Credit
  42. Journal Entry to record the issue of direct and indirect materials to the production departments
    • Work in Process...............Debit
    • Manufacturing Overhead...Debit
    •     Raw Materials........................Credit
Card Set
Cost - Volume - Profit Relationships Ch 5
Chapter 5 Review