Component
Formula
Direct Materials Used
Beginning Raw Materials Inventory
+ Raw Materials Purchased
- Ending Raw Materials Inventory
- Indirect Materials (part of Overhead)
= Direct Materials Used
Total Manufacturing Costs
+ Direct Labor
+ Applied Overhead (including Indirect Labor, Indirect Materials)
= Total Manufacturing Costs
Cost of Goods Manufactured (COGM)
+ Beginning Work in Process Inventory
- Ending Work in Process Inventory
= Cost of Goods Manufactured (COGM)
Explanation:
Indirect Materials and Indirect Labor are not directly part of the Direct Materials or Direct Labor costs, but they are included in manufacturing overhead. These indirect costs are accounted for when you apply the predetermined overhead rate.
Applied Overhead: Includes both indirect materials and indirect labor alongside other manufacturing overhead costs (e.g., depreciation, utilities).
Raw Materials Available for Use
= Raw Materials Available for Use
- Indirect Materials (Transferred to Manufacturing Overhead)
= Direct Materials Used in Production
Indirect Materials: These are materials that cannot be traced directly to specific jobs but are used in the manufacturing process (e.g., supplies or factory maintenance materials). Indirect materials are not part of Direct Materials Used; they are included in manufacturing overhead.
Usage Example:
If indirect materials are $5,000, you subtract this from the total raw materials available, as it is considered part of overhead.
This account tracks the flow of raw materials into production, including the separation of direct materials (transferred to WIP) and indirect materials (transferred to manufacturing overhead).
Raw Materials (RM)
Debit (Increase)
Credit (Decrease)
Beginning Balance
$X (Given)
Purchases
$Y (Given)
Indirect Materials (to Overhead)
$Z (Amount of Indirect Materials)
Direct Materials (to WIP)
$A (Transferred to WIP)
Ending Balance
Balance Left = Beginning + Purchases - Direct - Indirect
Breakdown:
Direct Materials are transferred to WIP, reducing RM.
Indirect Materials are transferred to manufacturing overhead, reducing RM.
The ending balance is what remains after accounting for these transfers.
Total Manufacturing Overhead
Indirect Labor
+ Indirect Materials
+ Depreciation
+ Factory Rent
+ Utilities, Maintenance, etc.
= Total Manufacturing Overhead
Applied Overhead
Direct Materials Used × Predetermined Overhead Rate
Overhead Variance
Applied Overhead - Actual Overhead
Indirect Labor: Represents labor that is not directly traceable to specific jobs (e.g., supervisors, janitors).
Indirect Materials: Includes supplies and other materials that support production but aren't directly tied to finished goods.
Applied Overhead: Includes all overhead components (e.g., indirect materials, indirect labor, rent, utilities), and the total applied overhead is compared to actual overhead for variance analysis.
Manufacturing Overhead (MOH)
Debit (Actual Overhead Incurred)
Credit (Overhead Applied to WIP)
Indirect Materials Used
$X
Indirect Labor Incurred
$Y
Factory Utilities Incurred
$Z
Depreciation on Factory Equipment
$A
Other Indirect Factory Costs
$B
Total Debits (Actual Costs Incurred)
Total $ (X + Y + Z + A + B)
Applied Overhead to WIP
$C (Calculated via predetermined rate)
Total Credits (Applied Overhead)
Total $C
Ending Balance (Overapplied/Underapplied)
Overapplied: ($X) / Underapplied: $Y
Cost of Goods Available for Sale
Beginning Finished Goods Inventory
+ Cost of Goods Manufactured (COGM)
= Cost of Goods Available for Sale
Unadjusted Cost of Goods Sold (COGS)
- Ending Finished Goods Inventory
= Unadjusted Cost of Goods Sold
Adjusted COGS
Unadjusted COGS
+ Underapplied Overhead (if any)
- Overapplied Overhead (if any)
= Adjusted Cost of Goods Sold (COGS)
Underapplied or Overapplied Overhead: If overhead is underapplied (actual overhead > applied overhead), you need to add the variance to COGS. If overhead is overapplied (actual overhead < applied overhead), subtract the variance from COGS.
Indirect Costs: Indirect labor, indirect materials, and other overhead costs have already been accounted for in the applied overhead within the COGM schedule.
This account tracks the flow of costs from FG to COGS and the adjustment for underapplied or overapplied overhead.
Cost of Goods Sold (COGS)
Goods Sold (from FG)
$G (Transferred from FG)
Overapplied Overhead (Adjustment)
$H (Subtract overapplied OH)
Underapplied Overhead (Adjustment)
$I (Add underapplied OH)
Final Balance
Adjusted COGS = Goods Sold ± OH Adjustment
Goods Sold are transferred from Finished Goods (FG) to COGS.
Underapplied overhead is added to COGS, while overapplied overhead is subtracted.
Direct Labor Costs
Given or Calculated Direct Labor Amount
+ Any Allocated Costs (e.g., Bonuses)
= Total Direct Labor Costs
Direct Labor Hours Worked
Total Hours Worked on Production
Direct Labor Rate
Total Direct Labor Costs ÷ Labor Hours Worked
Direct Labor: This schedule isolates direct labor costs to ensure they are correctly separated from indirect labor, which is part of overhead.
Labor Efficiency Variance: In cases where labor efficiency or rate variances are calculated, this schedule helps break down the direct labor data needed for such calculations.
This account tracks the flow of costs into WIP, including direct materials, direct labor, and applied overhead, and the transfer of completed goods to Finished Goods (FG).
Work in Process (WIP)
$B (Given)
Direct Materials (from RM)
$A (Transferred from RM)
Direct Labor
$C (Given or Calculated)
$D (Applied OH)
Goods Completed (to FG)
$E (Transferred to FG)
Balance Left = Beginning + DM + DL + OH - Goods Completed
Direct Materials from RM are debited to WIP.
Direct Labor is debited directly into WIP.
Applied Overhead is added to WIP based on the predetermined overhead rate.
The completed goods are transferred to Finished Goods (FG), reducing the WIP account.
The ending balance is the cost of goods that are still in production but not yet completed.
This account tracks the flow of completed goods from WIP and the transfer of sold goods to COGS.
Finished Goods (FG)
$F (Given)
Completed Goods (from WIP)
$E (Transferred from WIP)
Goods Sold (to COGS)
$G (Transferred to COGS)
Balance Left = Beginning + Goods Completed - Goods Sold
Completed goods are debited from WIP into FG.
When goods are sold, they are credited out of FG into COGS.
The ending balance is the cost of goods that have been completed but not yet sold.
How to calculate the Contribution Margin and -Ratio ?
Contribution Margin (CM) per Unit:
CM per Unit = Selling Price per Unit – Variable Expense per Unit.
Contribution Margin Ratio (CMR):
CMR = Contribution Margin per Unit / Selling Price per Unit, or CMR = (Sales – VariableCosts) / Sales.
How to calculate the break-even point in dollar and in units?
Break-even Point (in Units):
Break-even (Units) = Fixed Expenses / Contribution Margin per Unit.
Break-even Point (in Dollars):
Break-even (Dollars) = Fixed Expenses / CM Ratio.
How to calculate the target profit in units and in dollar ?
Target Profit (in Units):
Target Profit (Units) = (Fixed Expenses + Target Profit) / Contribution Margin per Unit.
Target Profit (in Dollars):
Target Profit (Dollars) = (Fixed Expenses + Target Profit) / CM Ratio.
Wich formulars do you need for the high low method ?
Variable Cost per Unit:
Variable Cost per Unit = (Cost at High Activity – Cost at Low Activity) / (High Activity Level – Low Activity Level).
Fixed Cost:
Fixed Cost = Total Cost – (Variable Cost per Unit × Activity Level).
Cost Equation:
Total Cost = Fixed Cost + (Variable Cost per Unit × Activity Level).
Unit product cost absorption and variable costing.
Unit Product Cost (Absorption Costing):
Unit Product Cost (Absorption)
= Direct Materials + Direct Labor + Variable
Manufacturing Overhead + Fixed Manufacturing Overhead.
or
Fixed Manufacturing Overhead per Unit
=Total Fixed Manufacturing Overhead/units produced
Operating Income (Absorption Costing):
Operating Income = (Sales – Cost of Goods Sold) – Selling and Administrative Expenses.
Unit Product Cost (Variable Costing):
Unit Product Cost (Variable) = Direct Materials + Direct Labor + Variable Manufacturing Overhead.
Operating Income (Variable Costing):
Operating Income = (Sales – Variable Costs) – Fixed Costs.
How do you calculate the predetermined overhead rate?
Predetermined Overhead Rate (POHR):
POHR = Total Estimated Overhead / Total Estimated Activity Base.
This format highlights the contribution margin by separating variable and fixed costs.
Contribution Format Income Statement
Formula Structure
Sales
Sales price × Units sold
- Variable Expenses:
Cost of Goods Sold
Variable production cost × Units sold
Sales Commissions
Sales commission % × Sales
Variable Shipping
Variable shipping cost × Units sold
= Total Variable Expenses
Contribution Margin
Sales - Total Variable Expenses
- Fixed Expenses:
Advertising
Fixed advertising costs
Administrative Salaries
Fixed administrative salaries
Fixed Shipping
Fixed portion of shipping
Depreciation
Fixed depreciation costs
Insurance
Fixed insurance costs
= Total Fixed Expenses
Net Operating Income
Contribution Margin - Total Fixed Expenses
This format organizes costs into cost of goods sold and operating expenses.
Traditional Income Statement
- Cost of Goods Sold (COGS):
= Gross Profit
Sales - Total COGS
- Operating Expenses:
= Total Operating Expenses
Gross Profit - Total Operating Expenses
Contribution Format separates costs into variable and fixed categories, focusing on Contribution Margin.
Traditional Format organizes costs into COGS and Operating Expenses, focusing on Gross Profit.
By studying both structures, you'll get a clear understanding of the focus of each statement:
The contribution format emphasizes how much of the sales revenue contributes to covering fixed costs and generating profit.
The traditional format emphasizes the relationship between sales, cost of goods sold, and operating expenses.
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