COST ACCOUNTING MIDTERM REVIEWER

CHAPTER 4: COST-VOLUME-PROFIT RELATIONSHIPS

Total Fixed Costs + Desired profit
Cost-volume-profit (CVP) analysis Sales (units) = Contribution Margin per unit
- Understand interrelationship of cost, volume,
Total Fixed Costs + Desired profit
and profit Sales(pesos) = Contribution Margin ratio
- Five elements:
1. Prices of products Break-even graph
2. Volume or level of activity within relevant - Sales, variable costs, and fixed costs are on
range VERTICAL AXIS
3. Variable costs per unit - Volume is on HORIZONTAL AXIS
4. Total fixed costs
5. Mix of products sold ASSUMPTIONS AND LIMITATIONS OF CVP
ANALYSIS
A. Contribution margin per unit or marginal 1. Analysis is valid to a limited range of values-
income per unit “relevant”- and limited period of time
- Excess of unit selling price over unit variable 2. All cost categorized as VC and FC; VC –
costs change proportionally with volume within
- FORMULA: relevant range; FC – constant
CM per unit = unit selling price – unit variable 3. Revenues change proportionally with volume
cost with selling price is constant
B. Contribution margin ratio 4. Constant product mix
- Percentage of contribution margin to sales 5. Changes in volume alone are responsible for
- Shows how contribution margin will be changes in costs and revenues
affected by a given peso change in total sales 6. No significant change in inventories
- FORMULA: 7. Operation leverage questions can be dealt
Contribution Margin with CVP framework
CM RATIO = 8. Analysis is deterministic and appropriate data
Sales
can be found
Break-even point
- Revenues and expenses are equal Margin of Safety
- neither profit nor loss - Potential effect of the risk that sales will fall
- FORMULAS: short of planned levels
- Excess of actual or budgeted sales over
Total Fixed Costs
Break-even point = break-even sales and indicates amount sales
Contribution Margin
(units) should decrease to avoid losses
per unit
- Comparing risk of two alternative products
Total Fixed Costs
Break-even point = - Low margin of safety is riskier
(pesos)
1- Variable
Sales
Costs - FORMULA:
Margin of Safety
Break-even sales for Margin of Safety Ratio =
Total Fixed Costs Actual or Planned Sales
multi-product Weighted Average
(combined units) = Operating Leverage
Contribution Margin
- Potential effect of the risk that sales will fall
Weighted contribution short of planned levels as influenced by
margin per unit = relative proportion of fixed to variable
Unit CM x No. manufacturing costs
Unit CM x No.
of Units per mix - If sales are strong, high level of leverage
of Units per mix
- If sales are weak, low level of leverage
Total number of units per sales mix - Higher operating leverage means higher risk
- FORMULA:
Break-even sales for multi- Total Fixed Costs Contribution Margin
product (combined pesos) = Operating Leverage =
Weighted CM ratio Profit or Net Operating
Income
Total weighted CM (P)
Weigthed CM Ratio =
Total Weighted sales
(P)

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 CHAPTER 5: ACCOUNTING FOR COST FLOWS Figure 5.4. Flow of Costs in a Manufacturing
Merchandising Companies Company
- Purchase the sell tangible products
- Inventory Account: Merchandising
Inventory
Manufacturing Companies
- Purchase materials then convert into finished
products
- Inventory Accounts: Direct Materials /
Supplies Inventory, Work-In Process
Inventory, Factory Supplies Inventory, and
Finished Goods Inventory
Service Companies
- Provides services or intangible products
Categories of manufacturing costs:
- Inventory Accounts: Direct Materials /
1. Direct materials – raw materials
Supplies Inventory, and Work-In Process
2. Direct labor – workers directly involved in
Inventory
product making
- WIP Inventory is the costs incurred for work
3. Manufacturing overhead – other cost in
which are unbilled as of reporting date
producing product
Production Costs
a. Indirect labor – cost of workers not directly
- Includes all manufacturing costs incurred to
related to product making
produced products
b. Indirect materials – not part of finished
Marketing Costs
product but necessary in product making
- Promoting, selling, and delivering the
c. Other manufacturing costs – depreciation,
product
taxes, etc.,
Administrative Costs
- Directing and controlling the firm for
Figure 5.6. Flow of Manufacturing Costs through
personnel and legal functions
Manufacturing Accounts
Period Costs
- Charged against revenue in each period
- Includes marketing and administrative costs
Product Costs
- Do not become the COS charged against
revenue until sales on which cost were
incurred

Figure 5.1. Flow of Costs in a Merchandising

Company

Methods of accounting inventories:

1. Perpetual Method
- Continuing and on-going record of in-and-out
of inventories
2. Periodic Method
- Only a periodic count and valuation of
inventories
Unused materials, work-in process and finished
goods not yet sold are still part of firm’s ASSETS.

Costs of finished goods sold and selling, and

administrative expenses are deducted from revenue
in the INCOME STATEMENT.

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Figure 5.6. Flow of Costs in a Service
Organization
Service organizations DO NOT have input materials
like manufacturing and merchandising companies.
CHAPTER 6: SYSTEM DESIGN-JOB ORDER COSTING
Product Costing – process of accumulating,
classifying, and assigning direct materials, direct
labors, and manufacturing overhead costs to products
or service.
The cost system should never dictate the choice of
strategy or process.
Four points in designing product costing system:
1. The cost-benefit approach is essential in
designing and choosing costing systems
2. Costing systems should be tailored to the
underlying operations; the operations should
not be tailored to fit the costing systems
3. Costing systems accumulate costs to
facilitate decisions
4. Costing systems are only one source of
information for managers
Categories of Costing Methods
I. Cost Accumulation Method
a. Job costing
- jobs or batches of products or
services are the cost objects
- all manufacturing costs are
assigned to jobs
- appropriate in a situation in
which most cost incurred can
be readily identified with
specific customer, contracts, or
projects
- found in medium to small firms
- e.g., construction, printing,
special treatment
manufacturing, shipbuilding,
etc.
- General Rule: more costly
than process system
- Companies producing
relatively large, heterogenous
items, additional benefits of
job-order costing justify the
additional recordkeeping costs
b. Process Costing
- found in a firm that produces
one or a homogenous product
- firms have continuous mass
production
- e.g., chemical industry, bottling
companies, plastics, foods
products and paper products
- less detailed recordkeeping,
hence, between job-order and
process costing,
recordkeeping costs under
process costing is lower
- does not provide as much
information as job-order
Note: If recordkeeping costs between job-order and
process costing, job-order systems is preferable
II. Cost Measurement Method
a. Actual costing system
- actual costs incurred for all
product cost including
manufacturing costs
- rarely use, can produce unit
product costs that fluctuate
significantly causing potential
errors
- cannot provide accurate unit
product cost information on a
timely basis
b. Normal costing system
- actual costs for direct materials
and direct labor, normal cost
for factory overhead
- involves estimating portion of
overhead to be assigned to
each product
- provides a timely estimate of
the cost of producing each
batch of products
c. Standard costing system
- standard cost and quantities
for all manufacturing costs
- target costs the firm should
attain
- provides a basis for cost
control, performance
evaluation and improvement
III. Overhead Assignment Method
a. Volume-Based Method
→ numbers of units produced
→ direct labor hours
- volume based product costing
method
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 - allocate overhead to products Figure 6.4. Flow of Documents in a job-order
or jobs using a volume-based costing system in a Manufacturing company
driver, such as units produced
- Assumption: each product Customer’s
uses the same amount of PO
overhead, since each product
is charged the same amount
- overhead in each product must Sales
A sales order is Order
be proportional to direct labor prepared as a basis
hours for issuing a… A production order
- units produced = same amount initiate work on a job,
- direct labor hours = Production whereby costs are
proportional Order charged through…

b. Activity-Based Method
→ multiple cost drivers based on
resource consumption during A
Materials B
various activities Predetermined
Direct Labor
Requisition overhead rate
Time ticket
Form
- activity-based costing (ABC)
systems
- allocate factory overhead cost These production costs
to products using cause-and- are accumulated on a
effect criteria with multiple cost form, prepared by the
drivers accounting department
- -uses both volume-based and known as a… C
Job cost
nonvolume-based cost drivers
sheet
Job-Order Costing System
- Costs are assigned to each job
Job Cost Sheet
- job maybe order, contract, unit of
- used to compute unit product cost
production, batch performed to meet
that in turn are used to value ending
customers’ specifications
inventories and to determine cost of
goods sold
Figure 6.3. Flow of Costs in job-order costing in a
Manufacturing Firm
SUMMARY OF ACCOUNTING PROCEDURES
USING JOB-ORDER COSTING IN A
MANUFACTURING COMPANY

1. Record purchase and issue of materials

(journal entries)

DEBIT CREDIT
Purchase of Materials Accounts
materials Inventory Payable
Issuance of Work-In
Materials
direct Process
Inventory
materials Inventory
Issuance of Factory
Materials
indirect Overhead
Inventory
materials Control
Work-In
Materials Materials
Process
Credit Slip Inventory
Inventory

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 2. Record labor costs (journal entries) - Actual overhead costs include
indirect material, indirect labor, and
DEBIT CREDIT other indirect costs
Incurrence of
direct labor DEBIT CREDIT
Work in
Wages Accounts
Process
(Actual hours payable Payable
Inventory Actual factory Factory
worked x wage Prepaid
rate) overhead Overhead
Expenses
Factory costs Control
Wages Accumulated
Indirect labor Overhead Depreciation
Payable
Control

7. Compute overapplied and underapplied

3. Solve predetermined overhead rate used overhead
to assign overhead cost to a job - If Applied overhead > actual FOH,
- Factory overhead are common costs then OVERAPPLIED
that benefit more than one job. than - If Applied overhead < actual FOH,
in the accounting office gd. then UNDERAPPLIED
- FOH costs incurred on a specific job - Disposal treatment: (1) adjust
cannot be measured COGS (if amount is not significant);
- ratio of total estimated factory (2) prorate to WIP Inventory, FG
overhead costs for the year to the Inventory, and COGS (if amount is
expected manufacturing activity for significant)
the year
Estimated FOH for the period DEBIT CREDIT
FORMULA: UNDERAPPLIED COGS FOH-Applied
Estimated activity of the allocation base for
OVERAPPLIED FOH-Applied COGS
the period

4. Record applied factory overhead (journal

8. Calculate Cost of Goods Manufactured
entries)
and Cost of Goods Sold
DEBIT CREDIT
Applied
Direct Materials Used xx
overhead
Work In Applied Direct Labor xx
Process Factory Applied Factory Overhead xx
(Actual hours
Inventory Overhead Total Manufacturing Cost xx
worked x POH
rate) Beg. Work In Process Inventory xx
End. Work In Process Inventory (xx)
5. Complete job cost sheet and calculate Costs of Goods Manufactured xx
average cost per unit of a job
- Costs of direct materials used, direct Beg. Finished Goods Inventory xx
labor, applied overhead are included Cost of Goods Manufactured xx
in job cost sheet Total Goods Available for Sale xx
- Dividing total cost of the job by End. Finished Goods Inventory (xx)
number of goods units produced is Cost of Goods Sold xx
average cost per unit
Materials Requisition Slip
Direct Materials used xx - Source document of the materials
Direct Labor xx that has been issued
Applied FOH xx Materials Credit Slip
Total manufacturing cost xx - Document of materials returns to the
storeroom
- Used to correct errors in materials
Total manufacturing cost
Average cost per unit = issuance
Number of goods units produced
- Transfers accountability from
6. Record actual factory overhead (journal production department to
entries) storekeeper