Midterm #1

Review
ACCT 2230

Be prepared to do the following:

Prepare an income statement including the calculation of cost of goods sold

Prepare a schedule/calculate cost of goods manufactured
Creating a model for predicting costs using the high low method
Calculate contribution margin and prepare a contribution margin format income statement
Calculate break even point in dollars and units
Calculate target profit in dollars and units
Calculate after tax target profit
Calculate indifference point between competing alternatives
Prepare journal entries using a absorption cost inventory system
Calculate predetermined overhead rate, reconcile for actuals at year end, post adjustment
Prepare a schedule of cost of goods sold and cost of goods manufactured
Explain the difference between an ABC costing system and an absorption costing system
Perform first and second stage cost allocations of manufacturing overhead in an ABC system
Compute the cost of various jobs using activity rates in an ABC cost system

Mark's best guess:

If there are four questions, I would anticipate the following:

1) High low method given a data set, build the cost formula and apply the formula to predict costs
2) Break even point and/or income to reach a target operating profit while considering tax
3) calculate predetermined overhead rates in a multi department rate system
4) ABC costing - perform first and second stage allocations and compute the cost of a job and a performance report to con
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Ch4 Also some other ratio in this chapter
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performance report to conclude on margin

Sales / unit sales price
60,000/10
a. PDOHR 4 per machine hour
Actual Machine hours 6000
OH applied 24000
Actual OH 24800
Difference -800 Underapplied

Dr Cr
24800 24000
800 800
0

Dr. COGS 800

Cr. MOH 800

a)
Activity Centre Estaimted costs Expected activity
Batch setups 20,400 1,200
Material handling 52,800 2,400
General factory 78,000 2,600

Activity Centre Actual activity Activity rate

Batch setups 1,230 17.00
Material handling 2,470 22.00
General factory 2,680 30.00
Total overhead applied to products during the year

b) MOH
Dr Cr
150,690 155,650
4,960
 Overapplied 4,960

Units Cost per unit Total cost

110,000.00 0.0750 8,250.00
60,000.00 0.0875 5,250.00

VC (b) 0.06 /km

Y = a + 0.06x

8250 = a + 0.06(110,000)
8250 6600
FC (a) 1650 a

Y = 1650 + 0.06x

*BEP = break even point

a) BEP $ = Fixed costs / CM ratio 72,000

CM ratio = CM / Sales 0.25

b) Sales 72,000 100%

Variable expense ratio 54,000 75%
Contribution margin ratio 18,000 25%

Variable expenses at BEP 54,000

c) CM ratio is 25%

d) Old values New values

Sales 60,000 66,000
Less: Variable expenses 45,000 49,500
Contribution margin 15,000 16,500
Less: fixed expenses 18,000 16,000
Operating income(loss) - 3,000 500
 Sold 6,000 6,600
Variable expense / unit 7.50 7.50

Sales / unit sales price

 Dr. Work in process
Cr. Manufacturing overhead

b. Schedule of COGM

Direct materials 5,000

Purchases 15,000
RM available 20,000
Dedcut RM ending - 4,400
RM used in prod 15,600
Direct labour 22,000
MOH applied to WIP 24,000
Total manuf costs 61,600
Add begg WIP 3,500
Less: end WIP - 4,500
COGM 60,600

Activity rate
17.00
22.00
30.00

MOH applied
20,910
54,340
80,400
155,650
 =(8,250 - 5,250) / (110,000 - 60,000)
0.06

(72,000*75%)
24000
24000
Predetermined overhead rate = Estimated Manufacturing overhead / Estimated units in the allocation base

Used to allocate overhead to products

MOH is all indirect costs of manufacturing
Difficult to allocate OH to our inventory

Normal drivers that drive the cost of overhead

Machine hours
Labout hours

So at the beginning of the year

Management will estimate what the MOH wil lbe for the whole year
AND they will estimate the denominator level of activity which is your estimated units in the allocations base

MOH 1,000,000
MH 100,000 PDOHR 10 per MH

Therefore each time a unit of inventory uses 1 machine hour, we will allocate $10 of overhead to that unit of in

1 MH 10
DM 20
DL 20
cost 50

MOH
Dr. Cr.
Actual costs Overhead we are applying to inventory
Based on predetermined overhead rate

ABC costing

Alternate method for allocating overhead

Allocate overhead to PRODUCTS or to CUSTOMERS
Analysis purposes
CANNOT be used for financial reporting purposes

Differs from job order costing/absorption/traditional costing

1. Non-manufacturing costs can be assigned to products

2. ABC costing assigns any costs as long as they arise from a CAUSE and EFFECT basis to either the inventory or t
3. we use cost pools - these cost pools represent activities to complete our product or service our customer
4. we allocate the costs in these pools based on activity rates
5. some manufacturing costs are not assigned to products.

High low method

Take a set of data for costs at different levels of activity

Use that data to create a cost function that will allow us to predict costs

1) Obtain our data - given to you

2) identify the HIGH level of activity and the LOW level of activity and the corresponding costs
3) caluclate the variable component of our cost formula
4) plug in our high or low point to our cost formula to solve for the fixed cost
5) build your equation and estimate costs

Y = a + bx

Y total costs
a fixed costs
b variable cost per unit
x Number of units
 units in the allocation base

d units in the allocations base

10 of overhead to that unit of inventory

basis to either the inventory or the customer

uct or service our customer

ponding costs

Cost at the high level of activity - cost at the low level of activity / high level of a
l of activity / high level of activity - low level of activity
1.

Cost of goods sold

Markup
Markup in dollars
Revenue

2.
Customer deliveries
Manual order processing
Electronic order processing
Line item pircking
Other

3.
City
Customer deliveries
Manual order processing
Electronic order processing
Line item pircking
Total

County
Customer deliveries
Manual order processing
Electronic order processing
Line item pircking
Total

4.
Sales
COGS
Gross margin
MOH costs per above (3)
Customer deliveries
Manual order processing
Electronic order processing
Line item pircking
Total activity costs

Customer margin
City office County office
30,000 30,000
5% 5%
1,500 1,500
31,500 31,500

Total cost Total activity Activity rate

400,000 5,000 80.00
300,000 4,000 75.00
200,000 12,500 16.00
500,000 400,000 1.25
600,000
2,000,000

Activity rate Activity ABC Cost

80 8 640
75 0 -
16 8 128
1.25 80 100
868

80 12 960
75 15 1,125
16 0 -
1.25 100 125
2,210

City County
31,500 31,500
30,000 30,000
1,500 1,500
640 960
- 1,125
128 -
100 125
868 2,210

632 - 710
1) Predetermined overhead rate = Total estimated MOH / Total estimated activity level

1) calculate PDOHR
Estimated MOH 270,000.00
Estimated activity 15,000.00
PDOHR 18.00 per DLH

2) calculate overhead applied

PDOHR 18
actual DLH 12,500
Overhead applied 225,000

3) are we over or under applied

Ocerhead applied 225,000

Actual overhead 230,000
Under - 5,000

2) 4) create adjusting entry

Dr. COGS 5,000

Cr. Manufacturing overhead 5,000
Actual Budget/PDOHR

MOH
Dr Cr
230,000 225,000
5,000 5000
-
1, CM ratio = CM / Sales

Sales 120000
Cm 72000
60%

2. BEP $ = Fixed expenses / CM ratio

Fixed x 54000
CM ratio 60%
90,000

3.
Lawn
CM/u 8
Sales mix 75%
6

4. Fixed expenses
Weighted average CM per hour
BEP in hours

BEP u = fixed costs / unit cm

5.

Lawn
Sales 6,000.00
Sales mix 75%
4,500.00

6. After tax
Tax rate
Before tax profit required

Before tax profit 60,000.00

Fixed costs 54,000.00
114,000.00
CM ratio 60%
Dollar sales 190,000
Garden Weighted average CM / u
12
25%
3 9

54000
9
6000

Garden
6,000.00
25%
1,500.00

42,000
70%
60,000
1. High level of activity 105,000 $ 11,970
Low level of activity 70,000 9,380
Change 35,000 $ 2,590

Variable cost per unit $ 0.074

Total cost $ 11,970

Total variable cost 7,770
Total fixed cost $ 4,200

2. y = 4200 + .074x

3. Total fixed cost $ 4,200

Total variable cost 5,920
Total cost $ 10,120