Manufacturing Cost = Direct materials + Direct Labor + Manufacturing Overhead
Manufacturing Overhead = Indirect Materials + Indirect Labor + Any other costs associated with
manufacturing (depreciation of manufacturing asset, rent for manufacturing plant)
Depreciation of manufacturing equipment, Utility costs, Property taxes, Insurance premiums incurred to
operate a manufacturing facility are all examples of Manufacturing Overhead.
Raw Materials Work In Process Finished Goods
Includes Direct Includes Direct Labor and Includes cost coming from WIP
Manufacturing Overhead after subtracting end inventory
Material Cost
Cost of WIP
COGM = Cost transferred from WIP to Finished Goods after subtracting end inventory of WIP
COGS = Cost transferred from Finished Goods to Sales after subtracting end inventory of Finished Goods.
COS or Cost of Sales = COGS + Any selling and distribution overheads given + Any office and
administration overheads given.
EBITD = Sales – COS
Cost Allocation – Departmental or Conventional
1. Direct
2. Step Down Method
3. Reciprocated Method
Cost Allocation – ABC Method
Depreciation is considered as Indirect Cost
Plant Rent is considered as Indirect Cost
Job-order costing
1. Identify the job that is the chosen cost object.
2. Identify the direct costs of the job.
3. Select the cost-allocation base(s) to use for allocating indirect costs to the job.
4. Identify the indirect costs associated with each cost-allocation base. (Determine the appropriate
cost pools that are necessary.)
5. Compute the Rate per Unit of each cost-allocation base used to allocate indirect costs to the job
(normal costing so use budgeted values)
Budgeted Manufacturing Overhead Rate = Budgeted Manufacturing Overhead Costs /
Budgeted Total Quantity of the Cost-Allocation Base
6. Compute the indirect costs allocated to the job:
Budgeted Allocation Rate * Actual Base Activity For
the Job
7. Compute total job costs by adding all direct and indirect costs together.
Accounting for Overhead
If Overhead Control > Overhead Allocated, this is called UNDER-ALLOCATED overhead
If Overhead Control < Overhead Allocated, this is called OVER-ALLOCATED overhead.
Over/Under-applied Overhead:
Adjusted allocation rate approach – all allocations are recalculated with the actual, exact
allocation rate.
Proration approach – the difference is allocated between cost of goods sold, work-in-process, and
finished goods based on their relative sizes.
Write-off approach – the difference is simply written off to cost of goods sold.
If over allocated by 25K, Writing off the over-allocated overheads implies that the cost of goods sold will
be reduced by $25,000.
Sales Revenue – Variable Costs – Fixed Costs = Profit
Sales Revenue – Variable Costs = Contribution Margin
Contribution Margin – Fixed Costs = Profit
When contribution margin > fixed costs => profit
When contribution margin < fixed costs => loss
Hence, when contribution margin = fixed costs, it is a situation of no- profit-no-loss, i.e., break-even point.
BEP = FC / CM p.u
Direct Material and Direct Labor is considered as Variable Cost while calculating Contribution
Margin.
How will an increase in the unit variable costs or fall in the selling price or decrease in total fixed costs
affect the BEP?
Increase in unit variable cost or fall in the selling price will increase the BEP. Decrease in total
fixed costs will reduce the BEP.
The business wants to know how many boxes it has to sell in order to get a profit of Rs. 60,000 in a month.
Can you help?
(Fixed costs + desired profits)/contribution margin p.u = (30000+60000)/150 = 600 units
Make or Buy Decision
Opportunity Cost is added to total of Making Cost.
High Low Method
1. Calculate the slope coefficient (the variable cost per unit of activity).
Slope coefficient = Difference between costs associated with highest and lowest observations of
the cost driver / Difference between highest and lowest observations of the cost driver.
2. The second step is to calculate the constant (the total fixed costs).
Total cost from either the highest or lowest activity level – (Variable Cost per unit of activity X
Activity associated with above total cost) = Fixed Costs
3. The third and final step in the high-low method is to summarize by writing a linear equation:
Y = Fixed Costs + (Variable cost per unit of Activity * Activity) or Y = FC + (VC/U * X)
