Cost accounting related to financial and management account

Introduction:
What is cost?
Is all disbursement of cash (the commitment to pay cash in the future for the purpose of
generating revenue.)
What is the difference between cost and expense?

Cost

Asset expense
(Unused portion of cost) (Used portion of cost)

Benefits more than one period benefits only current period

Cost accounting is the process of determining and accumulating the cost of product /
activity. Is the process of accounting from the point at which expenditures is incurred
Scope of cost accounting
1. Cost book- keeping : it is maintaining complete records of all costs incurred
from their incurrence to their charge to department, products and services
2. Cost system : systems and procedures are devised for proper accounting for
costs
3. Cost ascertainment: ascertaining / determining cost of products, process or
services. it is basis for decision making such as pricing, planning and controlling
4. Cost analysis : is the process of finding out the casual factors of actual costs
varying from the budgeted costs and fixation of responsibility for cost increases
5. Cost reports : presentation of cost is ultimate function of cost accounting
Objectives of cost accounting
Cost accounting has the following main objectives to serve
 Determining selling prices

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  Controlling cost
 Providing information for decision making
 Determination of cost-volume-profit relationship
 Make or buy a component
 Shut down or continue operation
 Continuing with existing machinery or replacing them by improved
and economical machines
 Facilitating preparation of financial and other statements
Classification of costs
A single cost can be classified and used in several ways depending on the purpose of the
analysis
1. Manufacturing and non-manufacturing costs
Manufacturing: is the process of transferring raw materials into finished goods by
using labour and other factory facilities
 Manufacturing : are all costs incurred in the manufacturing of products up
to the point at which the product is ready for sale
Manufacturing cost can be divided in two
A. Direct material cost
A direct cost is a cost that can be directly traced to a cost object / production
process such as direct material and direct labour are examples of direct costs. A cost
object is anything for which managers need a separate breakdown of its component
of costs
 Direct material cost : the acquisition of costs of those materials that become
an integral part of the finished product and whose costs can be conveniently
traced to the finished products
 Direct labour cost : consists of compensations to workers who directly and
physically involved in the conversion process
Labour costs that can be easily traced to individual units of product. Direct
labour is sometimes called touch labour because direct labour workers
typically touch the product while its being made.
2. Indirect costs/ manufacturing over head cost(MOH)

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  Are costs that cannot be traced directly to a cost object. Indirect costs are
required to make finished products but are not as easy / cost effective to track to
one specific finished product
 Various names are used for MOH such as indirect manufacturing cost, factory
over head and factory burden. All of these are synonyms for manufacturing over
head
 Includes items such as indirect materials, indirect labour and other MOH
costs
 Indirect materials: are materials that will not become an integral part of
the finished product but used in factory.
 Indirect labour : labour costs that cannot physically traced to particular
products
 Other manufacturing over head cost: includes maintenance and repair
on production equipment and heat and light etc
Variable factory over head
 Supplies  Spoilage
 Fuel  Communication cost
 Power  Over time payment
Fixed factory over head
 Salaries of production  Property tax
 Depreciation  Insurance
None- manufacturing cost or period cost or selling and administrative cost
Period costs are those costs that are expensed in the period in which they are incurred.
Therefore period costs are expenses that are not part of inventor able product cost.
They are divided into two categories
A. Selling or marketable costs
Selling cost:
 all costs that are incurred to secure customer orders and get the finished
product to the customer
 sometimes called order getting and order filling costs
Marketing costs
 salaries, commission and travelling costs of sales personnel

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  cost of marketing information system including market research, advertising
and promotion
 bad debt expense, finished good delivery and warehousing expenses
B. Administration costs
 All costs associated with the general management of a firm (running the firm as a
whole)
 Are aggregate of the costs of formulating the policies, directing the organizations
and controlling the overall operations of the organizations
 Examples includes
 Executive and administrative staff compensation
 Cost of general accounting system, legal service, secretarial, public relation,
audit fees, bank service charge and other similar costs
 Administration of office supplies, rents, cleaning, telephone, printing and
stationary
 Depreciation on administrative building, cars, furniture and equipment
NB. Selling and administrative costs are called operating cost
Nonmanufacturing costs incurred in order to get operating funds are called financing
costs and are not operating cost
Variable cost and fixed cost
Variable cost:
 Costs that vary in total in direct proportion to changes in the level of activity
 Is constant if expressed on per unit basis
 Example direct material, the cost of direct materials used during period will vary
in total, in direct proportion to the number of that are produced
Examples:-
No. of tables TVC (tables MFG. cost) Per unit (TVC/no. of tables)
1 10 10/1= 10
2 20 20/2=10
3 30 30/3=10
4 40 40/4=10

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Fixed cost
 Costs that remain constant in total regardless of changes in the level of activity
 Fixed cost per units increases and decreases inversely with change in activity
 Example : rent is good example of fixed cost
Examples:
No. of tables Total fixed cost Per unit (TFC/Q)
1 3000 3000/1=3000
10 3000 3000/10=300
100 3000 3000/100=30
1000 3000 3000/1000=3

Average cost: is computed by dividing total cost by units of production

Total Cost = Unit cost x Total unit
Average Cost= Total cost
Total Units produced
Product name Units produced Unit cost Total cost Average cost
A 10 50 500 50
B 20 10 200 10
C 50 70 3500 70
Total 80 4,200 52.5

Common cost related terminologies

a. Cost: scarified resource to achieve a specific objective
b. Actual cost : a cost that are occurred
c. Cost object : anything of interest for which a cost is desired
d. Differential cost (incremental cost): a difference in cost between any two
alternatives
e. Opportunity cost : is selected over another, the potential benefit that is given up
when one alternative
f. Sunk cost : a cost that has already been incurred and that cannot be changed
now or in the future
g. Budgeted cost : is the predicted cost or forecasted (future) amount of cost

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 h. Cost accumulation : is the collection of cost data in some organized manner by
means of an accounting system
i. Cost tracing : is the process of assigning costs to a cost object
j. Prime cost(PC) : is the summation of direct material and direct labour
PC= DL +DM
k. Conversion cost (CC): is direct labour plus factory over head. It is cost of
converting the materials into a finished product
CC= DL + FOH
l. Inventor able costs: product manufacturing costs. These costs are capitalized as
assets (inventory) until they are sold and transferred to cost of goods sold
m. Period cost : have no future value and are expensed in the period incurred
Job order costing system
Two costing systems are commonly used in manufacturing companies. These two
systems are known as process costing and job order costing

Process costing
 Is used in situation where the company produces many units of single product
for long periods of time. In this situation cost object is masses of identical or
similar units of product.
 A process costing is most commonly used in industries that produce essentially
homogeneous (i.e. uniform) products on a continuous basis.
 Is most commonly used in industries such as chemicals, oil, textile, plastics etc.
Job order costing

 Is used in situation where many different products are produced each period.
 Firms producing distinct and unique products use job order costing where as
firms producing similar or identical units use process-costing system.
 Industries that commonly use job order method includes furniture, printing,
construction etc.

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Similarities between job-Order and Process Costing

1. The same basic purposes exist in both systems, which are to assign material,
labour, and overhead cost to products and to provide a mechanism for
computing unit costs.
2. Both systems maintain and use the same basic manufacturing accounts,
including MO, Raw Materials, Work in Process, and Finished Goods.
3. The flow of costs through the manufacturing accounts is basically the same in
both systems.
Differences between Job-Order and Process Costing

Job-Order Costing Process Costing

1. Many different jobs are worked on 1. A single product is produced either on

during each period, with each job having a continuous basis for long periods of
different production requirements. time. All units of product are identical.

2. Costs are accumulated by identical job. 2. Costs are accumulated by department.

3. The job cost sheet is the key document
controlling the accumulation of costs by
a job.
4. Unit costs are computed by job on the
job cost sheet.
3. The department production report is
the key document showing the
accumulation and disposition of costs by
a department.
4. Unit costs are computed by
department on the department
production report.

JOB ORDER COSTING SYSTEM

Cost Accounting System

 The cost accounting system uses the perpetual inventory system, and achieves
greater accuracy in the determination of product costs than is possible with the
general accounting system.
 There are two extremes of cost accounting systems for manufacturing operations
– job order cost system, and process cost system.

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  A job order cost system provides a separate record of the cost of each particular
quantity of product that passes through the factory. The system accumulates
costs for a particular batch of production, commonly referred as a Job. A job has a
definite starting and completion time as would, for example, the production of 10
pieces of windows, or 50 coffee tables.
 In job order costing system, costs are accumulated by job. For each job, the firm
maintains a separate job cost sheet, which is a record on which manufacturing
costs of the job are accumulated.
Work and cost flow in job order costing cycle

The physical flow of production is the sequence of operating activity that begins with
the decision to order direct materials and ends with finished product being sold to
customers.

The intervening steps may vary from firm to firm, but they share a common thread. The
following may show the steps of the physical flow of production.

1. Purchase requisition – For commonly used direct materials, organizations have a

reorder level.

Reorder level: is the minimum amount of stock that can be on hand at any given
time before another purchase is made to meet the lead time demand.

The reason for maintaining such a minimum stock level is to hedge against the risk of
stock shortages due to reasons like unexpected heavy usage, delays and other reason
that results in stock out situations. When the stock level reaches such a point, the
storeroom clerk fills a purchase requisition, a form requesting the purchase of the
needed material. After the form is duly filled, it will be sent to the purchasing
department.
 No journal entry is required when a purchase requisition is prepared
2. Purchase order – the purchasing department following purchase requisitions
from the storeroom clerk will prepare a purchase order. A purchase order is a
document that authorizes the supplier to ship the specified merchandise ordered.
 No journal entry is required when a purchase order is filled.

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 3. Receiving report – which lists the description, and quantities of goods received.
when the ordered materials are received, the receiving department prepares a
receiving report,. A copy of the document will be sent to the storeroom clerk along
with the materials. The receiving report, together with the invoice of the supplier
forms the basis for recording the purchase of the materials.
 Journal entries are required

4. Production order – a manufacturer can produce in response to a customer order

or just for stock. Whatsoever, when the decision to produce is made, productions
order will be prepared and approved by the manager in charge.
 No journal entries are required on the company’s books when the
production order is issued.

5. Material requisition – to commence production, evidently the production

department needs direct materials. The materials required for production are
requested through a document called material requisition form. The material
requisition form should contain specific description of the direct and indirect
materials required for production.
 Journal entries are required

NB. Direct materials that are sent for manufacturing process are no more direct
materials since they are soon to be processed to become finished goods Thus, the cost
is charged to work in process account
Job Cost Sheet

 Right after the materials are received from store, a job cost sheet will be
prepared. The job cost sheet is used to accumulate the manufacturing costs
incurred in producing that particular job.
 The key source document in a job costing system is a job cost record, also called
a job cost sheet, a document that records and accumulates all the costs assigned
to a specific job. The job cost record is started as soon as work begins in a
particular job.
 After being notified that the production order had been issued, the Accounting
Department prepares a job cost sheet. A job cost sheet is a form prepared for

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 each separate job that records the materials, labour, and overhead costs charged
to the job.
 In addition to serving as a means for chagrining costs to jobs, the job cost sheet
also serves as a key part of a firm’s accounting records. The job cost sheet form a
subsidiary ledger to the Work in Process account. A separate cost sheet is
maintained for each job. Thus, the value of work in process at any time can be
found by adding the different job cost sheet.
6. Job time ticket: A job time ticket is used to record how much time is spent on a
particular job. When a particular job is started, the employee fills the time the job is
started on the job time ticket, and he punch out the card and fills the time he
stopped when he left the job.
7. Manufacturing overhead – costs other than direct material and direct labour that
are necessary to transform the raw materials into finished goods are called
manufacturing overhead.
 Such Manufacturing costs are common costs – costs shared by more than one
cost object- that should be apportioned among the cost objects sharing the
cost.
 However, the total overhead costs cannot be known exactly until the end of
the year. Thus, organizations should wait up to the end of the year if they are
to charge the actual amount.
 Yet, many jobs are completed but the job cost sheet remains open waiting for
the actual overhead cost. Thus, interim financial statements are impossible
which in turn affect managerial decision purposes.
 A predetermined overhead rate is determined to allocate such costs to
individual jobs, which is found by dividing estimated overhead cost to the
estimated amount of allocation base.
 The allocation base is assumed to be a cost driver of manufacturing overhead
costs.
 In other words, there has to be a cause and effect relationship between the
allocation base and manufacturing overhead costs. For instance, a labor
intensive firm should use a labor oriented base, and a machine base should
use a machine oriented base since most these overhead costs may respond to
a change to the allocation base.

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  Costs include factory rent, electricity, and depreciation on machinery. Most of
these costs are common to more than one batch of job and hence cannot be
directly traced to a specific job.
 Thus, such costs must be assigned to the different cost objects in some way.
However, assigning MO to units of product is a difficult task; because of three
reasons:
 MO is an indirect cost, it is difficult to trace to a particular job.
 MO consists of many different items ranging from the grease used in
machines to the annual salary of production manager.
 MO costs tend to remain relatively constant due to the presence of fixed
costs.
 Therefore, the only way to assign overhead costs to products is to use an
allocation process. This allocation overhead cost is accomplished by selecting an
allocation base that is common to all of the company’s products and services.
 An allocation base is a measure such as direct labour hours (DLH) or machine
hours (MH) that is used to assign overhead costs to products and services. The
allocation base is used to compute the predetermined overhead rate:
Predetermined overhead rate = Estimated total manufacturing overhead cost

Estimated total units in the allocation base

 The predetermined overhead rate is based on estimated rather than an actual

figure. This is because the predetermined overhead rate is computed before the
period begins and is used to apply overhead cost to jobs throughout the period.
The process of assigning overhead cost to jobs is called overhead application.

Overhead applied to a particular job = Predetermined * Amount of the allocation

Overhead rate base incurred by the job

For instance, assume that the projected overhead cost for the upcoming year is Birr
80,000.00, and the direct labor hour is estimated to be 4,000 hrs, the predetermined
overhead rate can thus be calculated as follows:

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 Predetermined overhead cost = Estimated overhead cost
Estimated activity base (direct labour hr.)
POR = 80,000 = 20 per direct labor hour.
4,000
If we assume that the direct labour hours spent on the job are 90, the manufacturing
over head applied will therefore be 90 X 20 =1800. The entry to record the
manufacturing overhead applied is as follows:

March 18, 2003 Work in process 1,800.00

Manufacturing overhead 1,800.00

applied

 The manufacturing overhead applied is a contra account to the actual

manufacturing cost.
 Although actual costs are not assigned, they should be recorded as incurred.
Suppose that factory rent, utilities, and other manufacturing costs totalled Birr
22,000.00. The following entry is required to record the actual manufacturing
cost.
March 20, 2003 Manufacturing over head 22,000.00

Various accounts 22,000.00

Self check: A company estimated that 40,000 direct labour hours would be acquired to
support the production planned in the coming year and total manufacturing costs will
be br. 320,000 at this level of activity. Assuming that the job cost sheet indicated that 27
direct labour hours were changed to job. What is the amount of MOH applied to job.

8. Finished goods inventory ledger card – when work in process is completed and
transferred to the finished goods inventory warehouse, the following journal entry
is required:
March 20, 2003 Finished goods 21,400.00

Work in process 21,400.00

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 9. Cost of goods sold – two records are maintained when sale is made under the
perpetual inventory system: one for sales and the other for cost of goods sold.
Assume that half of the coffee tables produced are sold for birr 180 each on with a
40% down payment. The entry to record the sales looks the following:
April 10, Cash 5,400.00
2003
Account receivable 8,100.00

Sales 13,500.00

 The total units produced are 150 as shown in the production order. Half of that
amount is 75, and 75 units at 180 is equal to 13,500.00. When we come to the
cost of goods sold, the total cost of goods produced is Birr 21,400.00. Thus, the
unit cost of each coffee table is Birr 142.67. The cost of the 75 units that are sold
is Birr 10,700.00.
 The following entry is necessary to record the cost of goods sold.

April 10, Cost of goods sold 10,700.00

2003
Finished goods 10,700.00

 In general, a firm’s cost accounting system parallels its flow of operation. The
nine steps followed in the previous illustration are summarized below in a
concise manner.
1. Procurement – raw materials and supplies needed for manufacturing are
ordered, received, and stored.
2. Production – raw materials are transferred from storeroom to factory. Labor,
tools, machines, power, and other costs are applied to transform the raw
material into finished product.
3. Warehousing – finished goods are moved from the factory to the ware house to
be held until they are sold.
4. Selling – customers are found. Merchandises are shipped from the warehouse,
and customer accounts are charged.

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The following diagram shows the above points:

Procurement Production Warehousing Selling

Raw materials Work in process Finished good CGS

In Out In Out In Out In

Direct labour

Out MOH

Out

 DM used : BDM+ Purchase -EDM

 Total manufacturing cost (TMC): = DM + DL + FOH
 Cost of goods manufactured (CGM)= BWIP + TMC - EWIP
 Cost of goods sold (CGS)= BFG +CGM- EFG
 GP= sales – CGS
 NIBT= GP- operating expense

General journal entry

When raw materials are purchased

Raw material xx
Cash (A/P) xx
Example1. Raw materials are purchased during the month at a cost of birr 180,000 on
credits
Raw material 180,000
A/P 180,000
When the material moved from warehouse to production process (factory)
A. For direct material
WIP xx
Raw material xx
B. For indirect material

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 FOH xx
Raw material xx
Example2. During September raw materials costing birr 135,000 were used of which
birr 15,000 are the cost of indirect cost
WIP 120,000
FOH 15,000
Raw material 135,000
When goods are produced
Finished goods xx
WIP xx
When finished goods are sold
Two journal entries are required
1. To record sales
Cash (A/R) xx
Sale xx
2. To record cost of goods sold
CGS xx
FG xx
Finished goods sold and shipped to customers birr 198,000 and birr 297,000 all sales
were on credit.
Cost of goods sold 198,000
Finished goods 198,000
Account receivable 297,000
Sales 297,000
To record direct labour cost incurred in the production process
WIP xx
Wage payable xx
Self check: during the month of January the following transaction will occur to produce
three products
1. Purchase of raw material on account
Sand 500
Steel 790
Chemical 4500

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To record purchase of raw material
Sand 500
Steel 790
Chemical 4500
Account payable 5,790
2. Direct Material issued(used) and labour used
Material direct labour
Job 1. 227.5 160
Job 2. 780 210
Job 3. 3,900 175

For direct material

Job 1 WIP 227.5
Raw material 227.5
Job2 WIP 780
Raw material 780
Job 3 WIP 3,900
Raw material 3,900
For direct labour
Job 1
WIP 160
Wage payable 160
Job 2 WIP 210
Wage payable 210
Job 3 WIP 175
Wage payable 175
3. Factory over head applied is 80% of direct labour cost
Job 1 WIP 128
FOH 128
Job2 WIP 168
FOH 168
Job 3 WIP 140
FOH 140

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 4. Sold finished goods for birr 7,800
Cash 7,800
Sales 7,800
5. All goods produced are sold
5.1. Calculate the cost of each job
TMC= DM + DL+FOH of each job
Job1. 227.5 + 160 + 128 = 515.5
Job 2. 780 + 210 + 168 = 1,158
Job 3. 3,900 + 175 + 140= 4,215
TMC of All Job = 515.5 + 1,158 + 4,215 = 5,888.50
5.2 calculate total amount of gross profit
GP= Net Sales – CGS
7,800- 5,888.5 = 1,911.50
3. prepare the necessary journal entry for the following given information
a. Purchased raw materials on account 46,300
b. Raw materials of 36,000 were requisitioned to the factor. An analysis of the
material requisition slips indicated that 8,800 was classified as indirect materials
c. factory labour costs incurred were 53,900 of which 49,000 pertained to factory
wages payable and 4900pertains to employees payroll tax payable
d. time tickets indicated that 50,000 was direct labour and 3,900 was indirect
labour (no journal entry)
e. over head costs incurred on account were 80,500
f. manufacturing overhead was applied at the rate of 150% of the direct labour
cost (based on question d)
g. goods costing 88,000 were completed and transferred to finished goods
h. finished goods costing 75000 to manufacture were sold on account for 103,000

Exercise: during the month of February the following transaction was occurred to
produce products
1. raw materials purchases birr 25,000
2. raw materials issued (used) birr 21,000
3. direct labour cost birr 35,000
Inventory

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  Beginning inventory finished goods units birr 16,000
 Beginning inventory raw materials birr 21,000
 Ending inventory finished goods units 18,000
4. Factory over head is 80% of direct labour cost
5. Sales are birr 117,000
Required
1. Calculate cost of goods manufactured
2. Calculate cost of goods sold
3. Calculate the of gross profit
Test : the following data is related to Tulu wood work shop for the month of march
2014.
Beginning material inventory 100,000
Ending direct material inventory 17,000
Beginning work in process inventory 31,000
Ending work in process inventory 29,000
Beginning finished goods inventory 62,000
Ending finished goods inventory 48,000
Direct labour 80,000
Direct material used 142,000
Indirect material used 9,000
Indirect labour 12,000
Manufacturing overhead 27,000
Required: calculate costs of goods manufactured and calculate cost of goods sold for
the given company
Superior manufacturing co. Has the following cost and expense data for the year ending
December 21, 2005
Raw materials 1/1/05 $30,000 insurance factory $ 14,000
Raw materials 12/31/05 $20,000 property taxes factory building $6000
Raw materials purchased $ 205,000 sales (net) $1,500,000
Indirect materials $15,000 delivery expense $100,000
Work in process 1/1/05 $ 80,000 sales commission 150,000
Work in process 12/31/05 $50,000 indirect labour $90,000
Finished goods 1/1/05 $110,000 factory machinery rent $ 40,000

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Finished goods 12/31/05 $120,000 factory utilities $65,000
Direct labour $ 350,000 depreciation factory building $24,000
Factory managers salary $35,000 administrative expense $300,000
Instruction
A. Prepare cost of goods manufactured schedule for superior company for 2005
B. Prepare an income statement for superior company for 2005
C. Assume that superior co. Ledgers shows the balance of the following current
asset account: cash $17,000, accounts receivables (net) $120,000, prepaid
expense $13,000 and short term investment $26,000. Prepare the current asset
section of the balance sheet for superior co. For 2005
Exercise: incomplete manufacturing costs, expenses and selling data for two different
cases are as follows
Case
1 2
Direct material used 8,000 (g)
Direct labour 3000 4000
Manufacturing over head 4,000 5,000
Total manufacturing costs (a) 20,000
Beginning work in process inventory 1,000 (h)
Ending work in process inventory (b) 2,000
Sales 21,500 (I)
Sales discount 1,500 1,200
Cost of goods manufactured 12,800 21,000
Beginning finished goods inventory (c) 4,000
Cost of goods available for sale 15,300 (j)
Cost of goods sold (d) (k)
Ending finished goods inventory 1,200 2,500
Gross profit (e) 7,000
Operating expense 2,700 (l)
Net income (f) 2,800
Instruction
A. Indicate the missing for each letter
B. Prepare a condensed cost of goods manufactured schedule for case 1

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 C. Prepare income statement and current asset section of the balance sheet for case
1. Assume that in case 1 the other items in the current assets section are as
follows cash 3,000, Account receivables (net) 10,000, raw materials 700 and
prepaid expenses 200
Exercise
Olando Manufacturing Company
Costs of Goods Manufactured Schedule
For the year ended December 31, 2005
Work in process (1/1) 200,000
Direct material
Raw materials inventory (1/1) ?
Add: raw materials purchases 178,000
Less: raw materials inventory (12/31) (7,500)
Direct material used 190,000
Direct labour ?
Manufacturing overhead
Indirect labour 18,000
Factory depreciation 36,000
Factory utilities 68,000
Total over head 122,000
Total manufacturing cost ?
Less: work in process (12/31) (151,000)
Costs of goods manufactured 560,000

What is the difference between manufacturing and merchandising company?

There are plenty of differences between two companies
1. based on nature of inventory
Merchandising Company: inventories are items held for sale in the ongoing business
activity or items.
 in case of merchandising company inventories are named as “ merchandise
inventory ” or goods held for sale
 items held for use are not inventory like building, land and truck they are plant
asset

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 Manufacturing company: inventories are items held for use in producing finished
goods
In case of manufacturing firms inventories are classified into 3(three)
A. raw material : are items held for use in the manufacturing process to produce
finished goods
B. Work in process: are items that are not fully completed. It is cost of RM, Labour
& FOH
C. Finished goods : fully completed items and which are ready for sale
2. Based on financial statement
a. Balance sheet: balance sheet of manufacturing firm differs from balance sheet
of merchandising firm principally by the types of inventory reports. In
manufacturing asset section consists of those three inventory types RM, WIP &
FG while in merchandising inventory section consists only merchandise
inventory
b. Income statement : their differences are also true based on income statement
specially based on computation of cost
 For merchandising firm :
 cost of Goods Sold = BI+NP-EI

 For manufacturing company :

 Total manufacturing cost (TMC): = DM + DL + FOH
 Cost of goods manufactured (CGM)= BWIP + TMC – EWIP
 Cost of goods sold (CGS)= BFG +CGM- EFG

Contribution margin
Contribution margin indicates why operating income changes as the number of units
sold changes
Total contribution margin (TCM): shows the amount contributed to profit after
deducting total variable cost from sales
TCM= sales – TVC alternative 1

Where: Sale= PQ and TVC = Vc/unit x Q

TCM= PQ –Vc/unit x Q

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Prepared by inst. Tilahun Girma 2019 G.C
 TCM= Q (P – Vc/unit) NB: CM/unit= P-V/unit
TCM= Q (CM/unit) alternative 2

Contribution margin per unit (CM/unit): shows by how much TCM increase for every
unit sold
CM/unit = P – V/unit alternative 1

Where TCM/Q = Q (CM)/Q

CM/unit = TCM/Q alternative 2

Contribution margin ratio (CMR): shows by how much TCM increase for each birr sold
CMR = TCM/sale alternative 1
Where TCM= CM/unit (Q) and Sales = PQ
CMR = CMQ/PQ
CMR = CM/unit alternative 2
P

Where TCM = PQ – Vc/unit x Q sales = PQ

CMR= PQ – Vc/unit (Q)

PQ
CMR = Q (P – VC/unit)
PQ
CMR = P – VC/unit alternative 3
P

CMR = 1-VCR alternative 4

Variable cost ratio (VCR)

VCR= TVC/sales alternative 1

VCR = V/P alternative 2

VCR = 1- CMR alternative 3

Gross margin I/S contribution margin I/S

Sales Sales
Less CGS less TVC

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Prepared by inst. Tilahun Girma 2019 G.C
Gross profit Total contribution Margin
Less operating expense Less Total fixed cost
Net income/ Loss Net income/loss
Example: assume the following data for X- company
P= 10 find : a. Sales
V= 5 b. TVC
Q= 100 c. TCM
TFC= 500 d. CM/unit
e. CMR and VCR
f. prepare contribution margin I/S
Exercise 2:assume the following data for Y-company the units sold was
A. 8000 units P=15
B. 8001 units V=12
C. 8002 units TFC= 24000
Required: prepare contribution margin for 3 cases
Exercise 3: assume the following CM income statement
Total per unit ratio

Sales (10,000 units) 150,000 15 100%

-TVC (120,000) 12 80%
TCM 30,000 3 20%
-TFC (24000)
NI 6000
Required:
A. Find CM/unit
B. CMR
C. prepare CM statement for 8000 units 8001 and 8002
Break even points (BEP): is the point at which there is no profit or loss to the company
and expressed in terms of production quantity & Birr
 Is the point where the profit is zero
Break even quantity (BEQ): shows the units that should be produced and sold to made
profit of zero
BEP = Total Revenue (TR) = Total cost (TC)
 Total Revenue = Price (P) x quantity(Q)

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  Total cost= Total Variable Cost (TVC) + Total Fixed cost(TFC)
 Total Variable Cost(TVC)= VC/unit x Q produced
 BEP = TR=TC
 PQ=VC/unit Q +FC
 PQ-VC/unit Q= FC
 Q(P-VC/unit)= FC
P-VC/unit P-VC/unit
 Q= FC/P-VC or Q= FC/CM
Break even sales (BES): shows the sales in birr when should be generated to earn a
profit of zero
BES = BEQ x P
Example : p= 100 V= 50 Q= 10 TFC= 500 find TCM, CM/unit, CMR, VCR, BEQ and BES
Example: a manufacturing has a total fixed cost birr 5000 and unit variable cost of birr 5.
If company can sell what it produces at a price of birr 10.
Required:
A. Write the revenue, cost and profit function
Total Revenue = PQ
 TR= 10Q
TC= TVC+TFC
TVC= VC/unit x Q
TC= 5Q+ 5,000
Profit = TR-TC
10Q – (5Q+ 5,000)
Profit= 10Q-5Q-5000
Profit = 5Q-5,000
B. Find the breakeven point in terms of quantities and sales volume
At BEP = TR=TC
10Q=5Q+5,000
10Q-5Q= 5,000
5Q=5000
Q= 1000
Example: in its first year Abol Bunna co. Had the following experience
Sales 25,000 units

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Prepared by inst. Tilahun Girma 2019 G.C
Total variable cost birr 1,500,000
Selling price birr 100
Total fixed cost birr 350,000
Required:
A. Calculate total revenue
B. Calculate total variable cost per unit
C. Calculate total cost
D. Calculate cost
E. Compute profit
F. Find breakeven point in terms quantity
Exercise: assume Zoom Company has the following statement
Total per unit ratio
Sales (20,000 units) 1,200,000 60 100%
-TVC (900,000) 45 75%
TCM 300,000 15 25%
-TFC (240,000)
NI 60,000
Required:
a. Find CMR and VCR
b. BEQ
c. BES
Exercise: Bishoftu chambers of commerce is planning to organize Easter trade
exhibitions. There two possible venues/ locations
A. Bishoftu exhibition center which has fixed rental cost of birr 4,000 plus charge of
birr 160/person for its own catering of meals, servicing of drinks and
entertainments.
B. Tommy hotel hall fixed which has fixed rental cost of birr 12,000. The chambers
of commerce can hire a caterer for meals and waiters and waitresses to serve
drink and meals at birr 90/person
The chambers of commerce budgets birr 7000 cost for administration and marketing.
The band will cost a fixed amount of birr 5,000. Tickets to his prestigious event will be
birr 240/person. All the drinks served and the prizes given away at the event will be
donated/ sponsored

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Prepared by inst. Tilahun Girma 2019 G.C
Required
1. Compute the breakeven point for each of location in terms of tickets sold
2. Compute the operating incomes on the event if 300 persons are attend the trade
exhibition
Exercise : XYZ co. Manufactured and sells adding machine. The company income
statement for the most recent year is given below
Total cost Per unit
Sale (40,000) units 1,600,000 40
Less expense 1,200,000 30
Contribution margin 400,000 10
Less fixed expense 240,000
Income 160,000

Based on above data perform the following tasks compute the companies break even
point in unit and sales birr
Self test
1. Given finished goods inventory beginning and ending birr 90,000 and 30,000
respectively and cost of goods manufacture birr 610,000. Determine cost of
goods sold
2. If a manufacturer has beginning and ending raw material of birr 40,000 and
80,000 respectively and has used direct materials of birr 460,000. Determine the
amount of direct materials purchased
3. Assume that 3F manufacturing co. Incurred direct material cost of birr 20,000,
direct cost labour cost of birr 30,000 and manufacturing over head cost 50% of
direct labour cost for a particular month.
Calculate: A. Conversion cost B. Prime cost C. Total manufacturing cost
Self check 2:
1. Goods costing birr 20,000 were shipped to customers at sales price of 26,000
birr. Prepare journal entry
2. Calculate Manufacturing cost, CGM and CGs. The December 31, 19B trial balance
of new hope showed below
Sales birr 14,000,500 sales R & A birr 25,200
Purchase (net) birr 2,400,000 FOH birr 1885,600

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 Transportation in birr 32,000 admin exp. Birr 155,000
Direct labour birr 3,204,000 delivery exp. Birr 65,000
Sales salary birr 200,000
3. The following accounts were selected from the account of 3f at sene 30,1996
before adjustment and closing
Direct material inventory 93,000
Work in Process inventory 100,500
Finished goods inventory 137,700
Sales 1,290,000
Direct material purchase 412,000
Direct labour 345,000
Factory over head 138,000
Selling expense 142,000
Administrative expense 101,850
Inventories at sene 30 were as follows
Direct material 97,200
Work in process 107,250
Finished goods 145,800
A. Prepare cost of goods manufacture
4. Partial account balance of ALE. How manufacturers as of December 31,2003 is as
follows
Direct material inventory Jan. 1 90,000
WIP Jan. 1 45,000
Finished Goods inventory Jan. 1 225,000
Direct material purchases 330,000
Direct labour 450,000
Indirect labour 112,500
Factory rent 180,000
Office rent 67,500
Depreciation machinery 90,000
Depreciation office equipment 12,000
Insurance factory 45,000
Sales person salary 135,000

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Prepared by inst. Tilahun Girma 2019 G.C
Repair and maintenance 34,500
Miscellaneous office cost 60,000
Miscellaneous factory cost 180,000

December 31 inventory
Direct material 67,500
Work in process 60,000
Finished goods 202,500
Compute:
A. calculate cost goods manufacture
B. calculate cost of goods sold
C. calculate prime cost
D. calculate conversion cost
Problem
1. the following closing trial balance of Dx -Inc co. Was prepared as of December
31,1990 the end of the current fiscal year
Cash 50,000
A/R 160,000
AFDA 20,000
FG inventory 180,000
WIP 75,000
DM inventory 40,000
Prepaid insurance 12,000
Factory supplies 7000
Land 100,000
Factory building 400,000
Acc. Dep. factory building 220,000
Factory equipment 250,000
Acc. Dep. Factory equipment 125,000
Account payable 30,000
Wage payable 14,000
Income tax payable 10,000

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Prepared by inst. Tilahun Girma 2019 G.C
Common stock 100,000
Retained earnings 711,000
Dividend 20,000
Sales 1,500,000
DM purchase 750,000
DL 300,000
Indirect factory labour 150,000
Dep. Factory equipment 25,000
Factory heat, light & power 20,000
Dep. Factory building 20,000
Factory property tax 18000
Insurance expense factory 12,000
Factory supplies expense 6000
Miscellaneous factory cost 4000
Selling expense 60,000
Administrative expense 50,000
Income tax 21,000
Total 2,730,000 2,730,000

Inventory at December 31, 1990 were as follows

Finished goods 20,000
Work in process 70,000
Direct materials 42,000
Instruction
1. prepare statement of cost of goods manufactured
2. prepare income statement
3. prepare a retained earnings statement
4. prepare balance sheet
Exercise: incomplete manufacturing costs, expense and selling data for two different
cases are as follows
Case
1 2
Direct materials used 7,000 (g)

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Direct labour 6,000 8,000
Manufacturing overhead 5,000 4,000
Total manufacturing costs (a) 21,000
Beginning work in process inventory 1,000 (h)
Ending work in process inventory (b) 3,000
Sales 24,500 (I)
Sales discount 2,500 1,400
Cost of goods (d) (k)
Ending finished goods inventory 2,400 2,500
Gross profit (e) 7,000
Operating expense 2,500 (l)
Net income ( f) 2,000
Instruction
A. indicate the missing amount for each letter
B. prepare a condensed costs of goods manufactured schedule for case 1
C. Prepare an income statement and the current assets section of the balance sheet
for case 1. Assume that in case 1 the other items in the current asset section are
as follows cash 4000 account receivables(net)15,000 raw materials 600 and
prepaid expense 400
Exercise: Garcia manufacturing co. Has following data: direct labour 260,000 direct
materials used 180,000 total manufacturing overhead 208,000 and beginning work in
process 25,000. Compute total manufacturing costs
Exercise: presented below are incomplete 2005 manufacturing cost data for Ling
Corporation. Determine the missing amounts
Direct direct factory total
Materials labour overhead manufacturing
Used used cost
A. 35,000 40,000 50,000 ?
B. ? 75,000 120,000 2,96,000
C. 55,000 ? 111,000 300,000
Exercise: presented below are incomplete 2005 manufacturing cost data for wing
Corporation. Determine the missing amounts
Total work work cost of
Manufacturing in process in process goods
Cost (1/1) (12/31) manufactured

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 A. ? 120,000 86,000 ?
B. 296,000 ? 98,000 321,000
C. 300,000 463,000 ? 515,000

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