30 Questions
In a CVP graph, what is usually represented on the horizontal (X) axis?
Unit volume
What can the unit contribution margin (Unit CM) be useful for expressing?
The simple profit equation
What does the equation $200 = 401 imes P - 401 imes V$ represent?
Profit equation
How can the relationships among revenue, cost, profit, and volume be expressed?
Graphically by preparing a CVP graph
What does the line parallel to the volume axis represent in a CVP graph?
Total fixed expenses
What type of income statements did Racing Bicycle develop at 0, 200, 400, and 600 units sold?
Contribution margin income statements
What is the predetermined overhead rate for the Assembly Department based on the given information?
$3 per direct labor-hour
What is the total predetermined overhead cost for the Milling Department?
$480,000
How much overhead cost is applied from both departments to Job 407?
$30,000
What is the total cost of Job 407?
$220,000
What is the markup percentage used by the company to establish selling prices?
75%
What factor is used as the predetermined overhead rate allocation base in the Milling Department?
Machine-hours
What is the formula for the contribution margin ratio (CM ratio)?
$rac{Contribution hinspace margin hinspace per hinspace unit}{Selling hinspace price hinspace per hinspace unit}$
How is the variable expense ratio calculated?
$rac{Variable hinspace expenses}{Sales}$
What is the formula for calculating unit sales at break-even using the equation method?
$Break-even hinspace point = rac{Fixed hinspace expenses}{Contribution hinspace margin hinspace per hinspace unit}$
What does an increase in sales volume do to the contribution margin?
Increases contribution margin
In Example 4, what change resulted in a $12,375 increase in net operating income?
Switching from fixed salaries to sales commission
What is the dollar sales at break-even computed using?
Both the equation and formula methods
Which method uses a specific equation to determine the number of units that must be sold to earn a target profit?
The formula method
What does the margin of safety measure?
Excess of actual sales over the break-even volume
What does operating leverage measure?
Sensitivity of net operating income to sales changes
How does structuring sales commissions based on contribution margin affect conflicts and profits?
Reduces conflicts and increases profits
When a company sells more than one product, how does it affect break-even analysis?
It becomes more complex
How does the sales mix affect break-even point and contribution margin?
It affects break-even point and contribution margin
What is the purpose of using predetermined overhead rates in job-order costing?
To apply overhead to jobs before the period begins based on estimated data
What is the purpose of using an allocation base in job-order costing?
To assign manufacturing overhead to individual jobs
Why are predetermined overhead rates used in job-order costing?
Actual overhead for the period may not be known until the end
What are examples of companies using job-order costing?
Boeing, Bechtel International, and Walt Disney Studios
What is the purpose of an allocation base in assigning manufacturing overhead?
To assign manufacturing overhead to individual jobs
Why are predetermined overhead rates computed before the period begins?
To apply overhead to jobs based on estimated data
Study Notes
Job-Order Costing: Calculating Unit Product Costs
- Job-order costing systems are used for producing multiple products, manufacturing to order, and tracing costs to each job.
- Examples of companies using job-order costing include Boeing, Bechtel International, and Walt Disney Studios.
- Product costs are related to manufacturing and can be inventoried, while period costs are non-manufacturing and go directly to the P/L.
- Direct material and direct labor are easily associated with the job order, but allocating manufacturing overhead is more complex.
- An allocation base, such as direct labor hours or machine hours, is used to assign manufacturing overhead to individual jobs.
- Predetermined overhead rates are used to apply overhead to jobs before the period begins, based on estimated data.
- The predetermined overhead rate is computed using a four-step process, including estimating total fixed and variable manufacturing overhead costs.
- Overhead costs can be fixed (e.g., depreciation) or variable (e.g., consumption and electricity bills) and are applied using a predetermined overhead rate.
- PearCo estimates it will require 160,000 direct labor-hours, with total fixed manufacturing overhead at $200,000 and variable manufacturing overhead costs of $2.75 per direct labor hour.
- The allocation base is a cost driver that causes overhead, and the predetermined overhead rate is based on estimated levels of production.
- Predetermined overhead rates are used because actual overhead for the period may not be known until the end, inhibiting the ability to estimate job costs.
- Actual overhead costs can fluctuate seasonally, misleading decision makers, so predetermined rates relying on estimated data are often used.
Test your understanding of job-order costing and learn how to calculate unit product costs with this quiz. Explore topics such as allocation bases, predetermined overhead rates, and the computation of manufacturing overhead costs.
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