Cost behavior and terminology

1. Manufacturing cost = Direct material + Direct labor + Manufacturing overhead

Manufacturing overhead (MOH) = Indirect material + Indirect labor + others (tax, depreciation etc.)
Period Cost (Non-manufacturing cost/ Selling, general & administrative cost (SGA cost) = Marketing & selling cost +
Administrative costs

2. Prime cost = direct material + direct labor

Conversion cost = Direct labor + Manufacturing overhead

Cost of goods manufactured (COGM) = Beginning work in progress inventory cost + total manufacturing cost - ending
WIP inventory cost
Cost of goods sold (COGS) = beginning finished goods inventory cost + COGM / cost of purchase of finished goods –
ending finished goods inventory cost

3. Mixed costs: Y = a + bX Y = total mixed cost

a = total fixed cost
b = variable cost per unit
X = Activity level or volume

4. Absorption / Full costing: Product cost = Direct material + Direct labor + variable MOH + Fixed MOH
Period cost = Variable selling & administrative cost + Fixed selling & administrative cost

Variable / marginal costing: Product cost = Direct material + Direct labor + variable MOH
Period cost = Fixed MOH + Variable selling and administrative cost + Fixed selling & admin. cost

5. Contribution margin (CM) = Sales – variable expenses

Unit CM = Unit selling price – variable expenses per unit
CM ratio = or CM ratio =
Change in CM = Change in Sales × CM Ratio

6. For break even analysis, CVP analysis and Target profit analysis, equation method is:
Sales = Variable expenses + Fixed expenses + Profit | for break-even point, profit is zero |
Or profit = Unit CM × Q – Fixed expenses

Contribution margin method/ formula method:

Break-even point in units sold =
Break-even point in total sales $ =
Unit sales to gain target profit =
7. Margin of Safety = Total sales - Break-even sales
8. Degree of operating leverage (DOL) =

Accounting basics
Asset = Liabilities + owner’s equity

Asset = Cash + Accounts receivable + Supplies + Equipments

Liabilities = Accounts payable

Owner’s equity = Owner’s capital - owner's drawing + revenue – expenses

Financial Statements:

1. Income statement:
Company Name
Income statement
For Period

Revenues
Service revenue $XXXX
Expenses
Expense 1 (XXXX)
Expense 2 (XXXX)
……… (XXXX)
Total expenses (XXXX)
Net income $XXXX

2. Owner’s equity statement:

Company Name
Owner’s equity statement
For Period

Owner’s capital, Beginning of the period $XXXX

Add:
Investments (XXXX)
Net income (XXXX)
(XXXX)
XXXX

Less: Drawings (XXXX)

Owner’s capital, ending of the period $XXXX

3. Balance sheet:
Company Name
Balance sheet
For Period

Asset
Cash $XXXX
Accounts Receivable XXXX
Supplies XXXX
Equipment XXXX
Total Asset $XXXX
Liabilities and Owner’s equity
Liabilities
Accounts payable XXXX
Owner’s equity
Owner’s capital XXXX
Owner’s drawing (XXXX)
Revenue XXXX
Expenses (XXXX)
Total liabilities and owner’s equity $XXXX
4. Statement of cash flow:
Company Name
Statement of cash flows
For Period

Cash flow from operating activities

Cash receipt from revenues $XXXX
Cash payments for expenses (XXXX)
Net cash provided by operating activities XXXX
Cash flow from investing activities
Purchase of equipments (XXXX)
Purchase of supplies (Bank loan also add here) (XXXX)
Net cash flows from investing activities (XXXX)
Cash flow form financing activities
Investments by owner XXXX
Drawing by owner (XXXX)
Net cash flows from financing activities XXXX
Net increase in cash XXXX
Cash at the beginning of the period XXXX
Cash at the ending of the period XXXX
Cost accounting system
1. Job order cost accounting:

Total cost = Direct material cost + Direct labor cost + MOH

Manufacturing overhead, MOH = POHR × DLH

POHR (Predetermined overhead rate) =

( )

DLH (direct labor hour)

MH (Machine hour)

POHR (allcation based)

POHR (Direct labor hour allocation base) =

( )
POHR (Machine hour allocation base) =

POHR (Direct material cost allocation base) =

2. Process costing accounting:

3. Equivalent unit of production (EUP) costing accounting:

EUP = Number of partially completed units × Percentage of completion

Costing techniques
Variance analysis:

Price variance = (standard price - actual price) *Actual quantity

Quantity variance = (standard quantity- actual quantity) * standard price

Materials price variance MPV = AQ (SP - AP)

Materials quantity variance MQV = SP (SQ - AQ)