Exam 2

The contribution margin method is a variation of the equation method.

Break-even point in *units sold* = Fixed expenses / Unit contribution margin Break-even point in *total sales dollars* = Fixed expenses / CM ratio

Activity based Costing - *Step Two*:

Identify cost drivers appropriate to each activity and allocate overhead to the *products*. (from cost pool to each product)

Activity based Costing - *Step one*:

Identify significant *activities* and assign overhead costs to each activity in proportion to resources used. (from total MOH to each activity as cost pool)

DL:

Labor the employees and temporary staff who work directly on a manufacturer's products.

MOH:

Manufacturing overhead Indirect cost that did not help created the product but are still needed Ex: security

OP. WIP

Open work in process

PC:

Prime Cost total direct costs of creating the finished production, including raw materials and labor.

Total Cost Equation:

Prime cost (PC) + Manufacturing Overhead (MOH) = Total Cost

Break-even Analysis:

Profit = Sales - Costs VVV Profit = Sales - (Fixed Cost + Variable Cost) VVV Sales = (Fixed Cost + Variable Cost) + Profit At the break-even point profits equal zero.

CM ratio equation

Sales - variable expenses

Unit contribution Margin equation

Selling price per unit - variable cost per unit

Unit contribution Margin equation

Selling price per unit - Variable cost per unit

Hayward Industries manufactures dining chairs and tables. The following information is available: Dining / Chair / Table / Total Cost MS......./ 200....../ 600..../ $48,000 Inspec/ 250....../ 470..../ $72,000 LH........./ 2,600 / 2,400/ $5,000 •What is the total amount of overhead costs assigned to the chairs using the traditional costing method?

Single overhead rate ($48,000 + $72,000) ÷ 5,000 = $24 per labor hour Dining chairs: 2,600 × $24 = *$62,400*

Total CM equation

Total sales/revenue - Variable cost

partially-processed/complete at the end of the period equation:

Units Completed and Transferred out + Equivalent Units of Ending Work in Process (% completed)

Total units equation

Units transferred out + Closing work in process

Process costing:

Used for products which are indistinguishable (not finding differents) from each other regardless of job order, like coca-cola. - not used for construction.

What are the basic components needed a CVP analysis:

- Volume or level of activity - Unit selling prices - Variable costs per unit (cost per unit will be fixed) - Total fixed costs (Total cost will be fixed) - Sales mix

•Lowman Painting Company has the following production data for March: -Beginning work in process, 2,000 units -Units transferred out, 42,000 -Units in ending work in process, 15,000, which are 80% complete for conversion costs •Materials are added only at the beginning of the process. •Compute equivalent units of production for both materials and conversion costs. 0:10:30

1. Total units (Units transferred out + Closing work in process) = Opening work in process + Units introduced VVV (42,000 + 15,000) = 2,000 + x VVV 57,000 = 2,000 + x VVV 55,000 = x 2. Eq. Units for DM = Units transferred out + Closing work in process VVV 42,000 + 15000 = 57,000 3. Eq. Units for CC = Units transferred out + (Closing work in process X % completed) VVV 42,000 + (15,000 X .8) VVV 54,000 4. DM = Eq. units for DM Total X DM VVV 57,000 X 10 = 570,000 5. CC = Eq. units for CC Total X Conversion cost = 1,080,000 6. Total units of production cost = DM + CC VVV 570,000 + 1,080,000 = *1,650,000*

Sales total $500,000 when variable costs total $300,000 and *fixed costs total $100,000*. The *breakeven point in sales dollars is* ________. 1:02:35

Break-even point/sales = Fixed Costs / CM ratio 1. Identity: - Fixed cost: 100,000 - CM ratio: (Sales - variable expenses) ÷ Sales 2. CM ratio: (500,000 - 300,000) / 500,000 VVV 200,000 / 500,000 = 0.4 3. Break even point: Break-even point/sales = Fixed Costs / CM ratio VVV x = 100,000 / 0.4 VVV *x = 250,000*

•Lupin's Burgers sells gourmet hamburgers. These burgers are so good, it is the only item on the menu. In recent years, Lupin's *breakeven point has been 25,000 burgers*. *Annual fixed cost are $250,000* and the burgers have a sales price of $15. •What is the Variable Cost per unit? 1:12:02

Breakeven Volume/unit = Fixed costs / Unit contribution Margin 1. Identify: - Breakeven volume/unit: 25,000 burgers - Fixed costs: 250,000 - Unit contribution Margin: ? 2. Unit contribution Margin: Selling price per unit - Variable cost per unit VVV 15 - X 3. Find x: 25,000 = $250,000 / ($15 - X) VVV Both side multiplied by (15 - x) VVV 25000 (15 - x) = 250,000 VVV Both side divide by 25,000 VVV 15 - x = 10 VVV Minus 15 both sides VVV -x = -5 VVV Both side multiplied by -1 VVV *x = 5*

CL. WIP

Closing work in process

PamCo. sells 1000 units resulting in $200,000 of sales revenue, $120,000 of variable costs, and $50,000 of fixed costs. The contribution margin percentage is ________. 0:50:39

Contribution Margin (CM) Ratio/percentage = Total CM / Total sales VVV 1. Identify - Total CM: (Total sales/revenue - Variable cost) - Total Sales: 200,000 2. Total CM: (Total sales/revenue - Variable cost) VVV X = 200,000 - 120,000 VVV x = 80,000 3. Contribution Margin (CM) Ratio/percentage = Total CM / Total sales VVV x = ($200,000 - $120,000) / $200,000 VVV x = 0.4 or x = 40%

CC:

Conversion Cost

Costs equation

Fixed cost + Variable cost

For which situation(s) below would an organization be more likely to use a process costing system of rather than a job-order costing system? A. Framing shop that builds picture frames for individual customers B. Shop that restores old cars C. Company that builds brick walls designed by architects D. Paper mill producing rolls of paper

D. Paper mill producing rolls of paper it will have the same amount of cost because every roll of paper is and will cost the same.

Conversion Cost Equation:

Direct Labor + Manufacturing over heads

DM:

direct materials

DM:

direct materials - Those materials and supplies that are consumed during the manufacture of a product, and which are directly identified with that product.

Hayward Industries manufactures dining chairs and tables. The following information is available: Dining / Chair / Table / Total Cost MS......./ 200....../ 600..../ $48,000 Inspec/ 250....../ 470..../ $72,000 LH........./ 2,600 / 2,400/ $5,000 What is the total amount of overhead costs assigned to the chairs using Activity Based costing method?

•Activity-based costing rates: Machine setups: $48,000 ÷ 800 = $60 per setup Inspections: $72,000 ÷ 720 = $100 per inspection • Dining chairs: (200 × $60) + (250 × $100) = *$37,000*

Contribution Margin Ratio

•Shows the percentage of each sales dollar available to apply toward fixed costs and profits. •Formula for *contribution margin ratio* and the computation for Vargo Video are: CM Ratio = Total CM / Total sales = Unit CM / Unit Sale

•Hayward Industries manufactures dining chairs and tables. The following information is available: Dining / Chair / Table / Total Cost MS......./ 200....../ 600..../ $48,000 Inspec/ 250....../ 470..../ $72,000 LH........./ 2,600 / 2,400/ $5,000 0:26:54

•What is the total amount of overhead costs assigned to the chairs using the traditional costing method? *Step 1 - Using DL hours* 1. Total MOH = MS Total Cost + Inspection Total Cost VVV 48,000 + 72,000 = 120,000 2. Total DL Hours = Labor hours chairs + Labor hours tables VVV 2,600 + 2,400 = 5,000 3. POH Rate = Total MOH / Total DL Hours VVV 120,000 / 5,000 = 24 4. Total Over Head Cost = (Labor hours Chairs X 24) + (Labor hours Tables X 24) VVV (2,600 X 24) + (2,400 X 24) = 120,000 *Step 2 - ABC* 1. Total cost driver - Setups: 48000 / 800 = 60 per setup - Inspections: 72,000 / 720 = 100 per inspection 2. Set up cost: - Chairs: 60 x 200 = 12,000 - Tables: 60 X 600 = 36,000 3. Inspection cost: - Chairs: 100 x 250 = 25,000 - Tables: 100 x 470 = 47000 4. Total OH Allocated: - Chairs: 12,000 + 25,000 = 37,000 - Tables: 36,000 + 47,000 = 83,000 Total: 120,000