Managerial Accounting
ACC-Mahmood AL-Assaf
Accounting Graduate from the University of Jordan
‫لجميع الجامعات االردنية التي تقوم‬
: ‫بتدريس المادة حسب منهاج‬
Garrison, Noreen, Brewer
This include:
Chapter 1: Managerial Accounting: An Overview
Chapter 2: Managerial Accounting and Cost Concepts
Chapter 5: Cost-Volume-Profit Relationships
Chapter 6: Variable Costing and Segment Reporting: Tools for Management
Chapter 7: Activity-Based Costing: A Tool to Aid Decision Making
Chapter 8: Profit Planning
Chapter 12: Differential Analysis: The Key to Decision Making
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Managerial Accounting: An Overview
‫ما هي المحاسبة اإلدارية‬
What Is Managerial Accounting?
Managerial accounting: is concerned with providing information to managers for use within the
organization.
.‫ تعنى بتوفير المعلومات للمديرين الستخدامها داخل المنظمة‬:‫المحاسبة اإلدارية‬
Managerial accounting for internal users.
We learned about the principles of financial accounting. So this chapter shows the difference
between managerial and financial accounting.
.‫ لذلك هذا الفصل يبين الفرق بين المحاسبة اإلدارية والمالية‬.‫لقد تعلمنا مبادئ المحاسبة المالية‬
Financial accounting: is concerned with reporting financial information to external parties, such
as stockholders, creditors, and regulators.
.‫ والمنظمين‬،‫ والدائنين‬،‫ مثل حاملي األسهم‬،‫ تهتم بإبالغ المعلومات المالية إلى أطراف خارجية‬:‫المحاسبة ا لمالية‬
There are seven key differences between financial and managerial accounting:
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A segment: is a part or activity of an organization about which managers would like cost,
revenue, or profit data.
.‫ او بيانات الربح‬, ‫ االيرادات‬, ‫هو جزء او نشاط من انشطة المنشاة والذي يبين ان المديرين يفضلون التكلفة‬
Examples of business segments include product lines, customer groups (segmented by age,
ethnicity, gender, volume of purchases, etc.), geographic territories, divisions, plants, and
departments.
Managerial accounting helps managers perform three vital activities—planning, controlling, and
decision making.
A) Planning: involves establishing goals and specifying how to achieve them.
✓ Plans are often accompanied by a budget. ‫وغالبا ما تكون الخطط مصحوبة بميزانية‬.
✓ A budget is a detailed plan for the future that is usually expressed in formal quantitative
terms.
.‫الميزانية هي خطة مفصلة للمستقبل يتم التعبير عنها عادة بعبارات كمية رسمية‬
B) Controlling: involves gathering feedback to ensure that the plan is being properly executed
or modified as circumstances change.
‫يتضمن جمع المالحظات للتأكد من أن الخطة يتم تنفيذها أو تعديلها بشكل صحيح مع تغير الظروف‬.
1- This process would involve gathering, evaluating, and responding to feedback to ensure
that this year’s recruiting process meets expectations.
2- It would also include evaluating the feedback in search of ways to run a more effective
recruiting campaign next year.
3- Part of the control process includes preparing performance reports.
4- A performance report compares budgeted data to actual data in an effort to identify
and learn from excellent performance and to identify and eliminate sources of
unsatisfactory performance.
‫يقارن تقرير األداء البيانات المدرجة في الميزانية بالبيانات الفعلية في محاولة لتحديد األداء الممتاز والتعلم منه وتحديد مصادر‬
.‫األداء غير المرضي والقضاء عليها‬
5- Performance reports can also be used as one of many inputs to help evaluate and
reward employees.
C) Decision making: involves selecting a course of action from competing alternatives.
.‫ ينطوي على اختيار مسار عمل من البدائل المتنافسة‬:‫صنع القرار‬
1- Perhaps the most basic managerial skill is the ability to make intelligent, data-driven
decisions.
.‫ربما المهارة اإلدارية األساسية هي القدرة على اتخاذ قرارات ذكية تعتمد على البيانات‬
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Multiple choice questions:
1- Management accounting focuses primarily on providing data for:
A) Internal uses by managers.
B) External uses by stockholders and creditors.
C) External uses by the Internal Revenue Service.
D) External uses by the Securities and Exchange Commission.
2- Managerial accounting:
A) Is more future oriented than financial accounting
B) Tends to summarize information more than financial accounting
C) Is primarily concerned with providing information to external users.
D) is more concerned with precision than timeliness.
3- Compared to financial accounting, managerial accounting places more emphasis on:
A) The flexibility of information.
B) The precision of information.
C) The timeliness of information.
D) Both A and C above.
4- Managerial accounting information
A. pertains to the entity as a whole and is highly aggregated.
B. pertains to subunits of the entity and may be very detailed.
C. is prepared only once a year.
D. is constrained by the requirements of generally accepted accounting principles.
5- What activities and responsibilities are not associated with management's functions?
a. Planning
b. Accountability
c. controlling
d. Decision making
6-Planning is a function that involves
A. hiring the right people for a particular job.
B. coordinating the accounting information system.
C. setting goals and objectives for an entity.
D. analyzing financial statements.
7-The managerial function of controlling
A. is performed only by the controller of a company.
B. is only applicable when the company sustains a loss.
C. is concerned mainly with operating a manufacturing segment.
D. includes performance evaluation by management.
8-The management function that requires managers to look ahead and establish objectives
Is
A. controlling.
B. directing.
C. planning.
D. constraining.
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9. In determining whether planned goals are being met, a manager is performing the function of
A. planning.
B. follow-up.
C. directing.
D. controlling.
10-Which of the following is not one of the three basic activities of a manager:
A) Planning
B) Controlling
C) Compiling management accounting reports.
D) None of the above
11- The function of management that compares planned results to actual results is known as:
A) Planning.
B) Directing and motivating.
C) Controlling.
D) Decision making.
12- A detailed financial plan for the future is known as a:
A) Budget.
B) Performance report.
C) Organization chart.
D) Segment.
13- A performance report is:
A) A detailed report comparing budgeted data to actual data for a specific time period.
B) A formal statement of plans for the upcoming period.
C) Required to be filed monthly by the Securities and Exchange Commission.
D) Not used in decentralized organizations.
End chapter 1
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Managerial Accounting and Cost Concepts
2- In accounting, costs can be classified differently depending on the needs of
management.
‫ يمكن تصنيف التكاليف بشكل مختلف حسب احتياجات اإلدارة‬،‫في المحاسبة‬
3- For example, the chapter1 mentioned that financial accounting is concerned with
reporting financial information to external parties, such as stockholders, creditors, and
regulators.
‫ تم بالفصل االول ذكر أن المحاسبة المالية تعنى بإبالغ األطراف الخارجية‬،‫فعلى سبيل المثال‬
.‫ مثل حملة األسهم والدائنين والمنظمين‬،‫بالمعلومات المالية‬
4- In this context, costs are classified in accordance with externally imposed rules to enable
the preparation of financial statements.
.‫ تصنف التكاليف وفقا للقواعد المفروضة من الخارج للتمكين من إعداد البيانات المالية‬،‫وفي هذا السياق‬
5- Conversely, managerial accounting is concerned with providing information to managers
within an organization so that they can formulate plans, control operations, and make
decisions.
‫ فإن المحاسبة اإلدارية معنية بتوفير المعلومات للمديرين داخل المنظمة حتى‬،‫وعلى العكس من ذلك‬
.‫ واتخاذ القرارات‬،‫ ومراقبة العمليات‬،‫يتمكنوا من وضع الخطط‬
6- In these contexts, costs are classified in diverse ways that enable managers to predict
future costs, to compare actual costs to budgeted costs, to assign costs to segments of
the business (such as product lines, geographic regions, and distribution channels), and
to properly contrast the costs associated with competing alternatives.
،‫ تصنف التكاليف بطرق متنوعة تمكن المديرين من التنبؤ بالتكاليف المستقبلية‬،‫وفي هذه السياق‬
‫ وتخصيص التكاليف لقطاعات من‬،‫ومقارنة التكاليف الفعلية بالتكاليف المدرجة في الميزانية‬
‫ والمقارنة بشكل صحيح بين‬،)‫األعمال (مثل خطوط اإلنتاج والمناطق الجغرافية وقنوات التوزيع‬
.‫التكاليف المرتبطة بالبدائل المتنافسة‬
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Cost Classifications for Assigning Costs to Cost Objects
Cost classification ‫تصنيف التكاليف‬
•
•
•
Costs are assigned to cost objects for a variety of purposes including pricing, preparing
profitability studies, and controlling spending.
A cost object is anything for which cost data are desired—including products,
customers, and organizational subunits.
For purposes of assigning costs to cost objects, costs are classified as either direct or
indirect.
Summary of Cost Classifications
‫ملخص تصنيفات التكاليف‬
1- Direct Cost: A direct cost is a cost that can be easily and conveniently traced to a
specified cost object.
.‫ التكلفة المباشرة هي التكلفة التي يمكن تتبعها بسهولة‬:‫التكلفة المباشرة‬
2- Indirect Cost: An indirect cost is a cost that cannot be easily and conveniently traced to a
specified cost object.
.‫ التكلفة غير المباشرة هي تكلفة ال يمكن تتبعها بسهولة‬:‫التكلفة غير المباشرة‬
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7- To be traced to a cost object such as a particular product, the cost must be caused by
the cost object.
8- The factory manager’s salary is called a common cost of producing the various products
of the factory.
9- A common cost is a cost that is incurred to support a number of cost objects but cannot
be traced to them individually.
10- A common cost is a type of indirect cost.
11- A particular cost may be direct or indirect, depending on the cost object.
Cost Classifications for Manufacturing Companies
➢ Manufacturing companies separate their costs into two broad categories—
manufacturing and nonmanufacturing costs.
Manufacturing cost ‫تكاليف مصنعية‬
➢ Most manufacturing companies further separate their manufacturing costs into two
direct cost categories, direct materials and direct labor, and one indirect cost category,
manufacturing overhead.
‫ وهما المواد‬،‫تقوم معظم شركات التصنيع بفصل تكاليف التصنيع الخاصة بها إلى فئتين من فئات التكلفة المباشرة‬
.‫ وهي تكاليف التصنيع العامة‬،‫ وفئة واحدة من فئات التكلفة غير المباشرة‬،‫المباشرة والعمالة المباشرة‬
1- Direct materials
➢ Direct Materials The materials that go into the final product are called raw materials.
.‫المواد المباشرة تسمى المواد التي تدخل في المنتج النهائي التي تسمى المواد الخام‬
➢ This term is somewhat misleading because it seems to imply unprocessed natural
resources like wood pulp or iron ore.
.‫هذا المصطلح مضلل إلى حد ما ألنه يبدو أنه يعني موارد طبيعية غير مجهزة مثل لب الخشب أو خام الحديد‬
➢ Actually, raw materials refer to any materials that are used in the final product; and the
finished product of one company can become the raw materials of another company.
➢
Direct materials refers to raw materials that become an integral part of the finished
product and whose costs can be conveniently traced to the finished product.
‫تشير المواد المباشرة إلى المواد الخام التي تصبح جز ًءا ال يتجزأ من المنتج النهائي والتي يمكن تتبع تكاليفها بشكل مريح إلى‬
.‫المنتج النهائي‬
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2- Direct labor
❖ Direct labor consists of labor costs that can be easily traced to individual units of
product.
❖ Direct labor is sometimes called touch labor because direct labor workers typically touch
the product while it is being made.
❖ Managers occasionally refer to their two direct manufacturing cost categories as prime
costs.
❖ Prime cost is the sum of direct materials cost and direct labor cost.
.‫التكاليف الرئيسية هي مجموع تكلفة المواد المباشرة وتكلفة العمالة المباشرة‬
3- Manufacturing overhead ‫ رح تتغلب بعرف بس رح يساعدك‬,‫رح يكون في كثير حكي صراحة لكن جداااا مهم‬
.‫كثييييير‬
✓ Manufacturing overhead, the third manufacturing cost category, includes all
manufacturing costs except direct materials and direct labor.
✓ Manufacturing overhead includes a portion of raw materials know as indirect materials
as well as indirect labor.
✓ Indirect materials are raw materials costs cannot be easily or conveniently traced to
finished products.
‫المواد غير المباشرة هي تكاليف المواد الخام ال يمكن أن تتبع بسهولة أو مريح إلى المنتجات النهائية‬.
✓ Indirect labor refers to employees, such as janitors, supervisors, materials handlers,
maintenance workers, and night security guards, which play an essential role in running
a manufacturing facility.
،‫ وعمال الصيانة‬،‫ ومعالجي المواد‬،‫ والمشرفين‬،‫ مثل عمال النظافة‬،‫العمالة غير المباشرة تشير إلى الموظفين‬
.‫ الذين يلعبون دوراً أساسيا ً في إدارة منشأة التصنيع‬،‫وحراس األمن‬
✓
However, the cost of compensating these people cannot be easily or conveniently
traced to specific units of product.
.‫ فإن تكلفة تعويض هؤالء الناس ال يمكن أن تتبع بسهولة أو مريح إلى وحدات محددة من المنتج‬،‫ومع ذلك‬
✓ Since indirect materials and indirect labor are difficult to trace to specific products, their
costs are included in manufacturing overhead.
‫ فإن تكاليفها مدرجة في‬،‫وبما أن المواد غير المباشرة والعمالة غير المباشرة يصعب تتبعها في منتجات محددة‬
.‫النفقات العامة للتصنيع‬
✓ Manufacturing overhead also includes other indirect costs that cannot be readily traced
to finished products such as depreciation of manufacturing equipment and the utility
costs, property taxes, and insurance premiums incurred to operate a manufacturing
facility.
‫تشمل النفقات العامة للتصنيع أيضا ً تكاليف أخرى غير مباشرة ال يمكن تتبعها بسهولة إلى المنتجات النهائية مثل‬
‫استهالك معدات التصنيع وتكاليف المرافق والضرائب على الممتلكات وأقساط التأمين المتكبدة لتشغيل منشأة‬
.‫تصنيع‬
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✓ Although companies also incur depreciation, utility costs, property taxes, and insurance
premiums to sustain their nonmanufacturing operations, these costs are not included as
part of manufacturing overhead.
‫ وأقساط التأمين‬،‫ والضرائب العقارية‬،‫ وتكاليف المرافق‬،‫وعلى الرغم من أن الشركات تتكبد أيضا ً تكاليف االستهالك‬
.‫ فإن هذه التكاليف ال تدرج كجزء من النفقات العامة للتصنيع‬،‫لدعم عملياتها غير المصنعة‬
✓ Only those indirect costs associated with operating the factory are included in
manufacturing overhead.
.‫وال ت شمل النفقات غير المباشرة المرتبطة بتشغيل المصنع إال التكاليف غير المباشرة في النفقات العامة للتصنيع‬
✓ In practice, managers use various names for manufacturing overhead, such as indirect
manufacturing cost, factory overhead, and factory burden. All of these terms are
synonyms for manufacturing overhead.
✓ Another term that managers frequently use in practice is conversion cost. Conversion
cost refers to the sum of direct labor and manufacturing overhead.
‫ تشير تكلفة التحويل إلى مجموع النفقات‬.‫وهناك مصطلح آخر يستخدمه المديرون في الممارسة العملية وهو تكلفة التحويل‬
.‫العامة المباشرة للعمالة والتصنيع‬
✓ The term conversion cost is used to describe direct labor and manufacturing overhead
because these costs are incurred to convert direct materials into finished products.
‫يتم استخدام مصطلح تكلفة التحويل لوصف العمل المباشر والنفقات العامة للتصنيع ألن هذه التكاليف يتم تكبدها لتحويل المواد‬
.‫المباشرة إلى منتجات تامة الصنع‬
✓ Opportunity cost is the potential benefit that is given up when one alternative is
selected over another.
.‫تكلفة الفرصة البديلة هي الفائدة المحتملة التي يتم التخلي عنها عند تفضيل بديل واحد على آخر‬
, ‫مثال في مثال الكل بسمع فيه انه لو انا اشتغلت وما دخلت جامعة كان انا بكون معي مصاري بدل ما ادفع مصاري‬
.‫وهون احنا فضلنا الدراسة الجامعية النه ملحقين على الشغل !!! على اساس في شغل بالبلد‬
✓ A sunk cost is a cost that has already been incurred and that cannot be changed by any
decision made now or in the future .
.‫التكلفة الغارقة هي تكلفة تم تكبدها بالفعل وال يمكن تغييرها من خالل أي قرار يتخذ اآلن أو في المستقبل‬
.‫يعني هيك هيك دافعها‬
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Prime cost = DM + DL
CONVERSION COST = DL + MOH
Total MFG cost = DM + DL + MOH
Total MFG cost = Prime cost +conversion cost – DL (‫)النها دخلت مرتين‬
Example 1: Use the following information for questions 1-3
The following costs were incurred in February:
Direct materials......................... $43,000
Direct labor ............................... $16,000
Manufacturing overhead........... $37,000
Selling expenses........................ $17,000
Administrative expenses........... $26,000
1) Conversion costs during the month totaled:
A) $59,000
B) $80,000
C) $53,000
(16000+37000)
D) $139,000
2) Prime costs during the month totaled:
A) $59,000
B) $80,000
C) $53,000
(43000+16000)
D) $139,000
3) Manufacturing cost during the month totaled:
A) $59,000
B) $112,000
C) $53,000
(43000+16000+37000) OR (53,000 + 59,000 – 16,000)
D) $96,000
Example 2: During the month of January, direct labor cost totaled $17,000 and direct labor cost
was 60% of prime cost. If total manufacturing costs during January were $82,000, the
manufacturing overhead was:
A) $11,333
B) $53,667
C) $28,333
D) $65,000
→ DM = 0.40 of prime cost
0.60 = 17000
0.40 =??? → 17000*0.40/0.60 = 11333 DM
82000=17000+11333+X → X=53667
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Multiple choice questions:
1. Both direct materials and indirect materials are
A. raw materials.
B. manufacturing overhead.
C. merchandise inventory.
D. sold directly to customers by a manufacturing company.
2. The work of factory employees that can be physically and directly associated with converting
raw materials into finished goods is
A. manufacturing overhead. B. indirect materials. C. indirect labor. D. direct labor.
3. Which one of the following would not be classified as manufacturing overhead?
a. Indirect labor
b. direct materials c. Insurance on factory building d. indirect materials
4. Indirect labor is a part of:
A) Prime cost. B) Conversion cost. C) Period cost.
D) Nonmanufacturing cost.
5. The cost of lubricants used to grease a production machine in a manufacturing company is an
example of a (n):
A) Period cost. B) Direct material cost. C) Indirect material cost. D) None of the above.
6. Manufacturing costs include
A. direct materials and direct labor only.
B. direct materials and manufacturing overhead only.
C. direct labor and manufacturing overhead only.
D. direct materials, direct labor, and manufacturing overhead.
7. Which one of the following is not a cost element in manufacturing a product?
a. Manufacturing overhead b. direct materials c. Office salaries d. direct labor
8. Which of the following is not another name for the term manufacturing overhead?
a. Factory overhead b. Pervasive costs c. Burden d. indirect manufacturing costs
9. The product cost that is most difficult to associate with a product is
A. direct materials. B. direct labor. C. manufacturing overhead. D. advertising.
10. Manufacturing costs that cannot be classified as either direct materials or direct labor are
known as
A. period costs.
B. nonmanufacturing costs.
C. selling and administrative expenses.
D. manufacturing overhead.
11. Which one of the following costs would not be inventoriable?
a. Period costs b. Factory insurance costs c. indirect materials
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12. Which one of the following is an example of a period cost?
a. A change in benefits for the union workers who work in the New York plant of a Fortune 1000
manufacturer
b. Workers' compensation insurance on factory workers' wages allocated to the factory
c. A box cost associated with computers
d. A manager's salary for work that is done in the corporate head office
13. Assaf Company's manufacturing overhead is 20% of its total conversion costs. If direct labor
is $45,000 and if direct materials are $53,000, the manufacturing overhead is:
A) $11,250
B) $13,250
C) $180,000
D) $24,500
14. Lina Company's direct labor cost is 30% of its conversion cost. If the manufacturing overhead
cost for the last period was $49,000 and the direct materials cost was $20,000, the direct labor
cost was:
A) $ 6,000
B) $14,700
C) $21,000
D) $34,000
15. A manufacturing company has provided the following cost data for a recent period:
Direct materials............................................... $8,000
Manufacturing overhead .................................. $12,000
Direct labor ...................................................... $10,000
Increase in work-in-process............................. $4,000
Prime cost for the period was:
A) $18,000
B) $26,000
C) $30,000
D) $34,000
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Non-manufacturing cost ‫تكاليف غير مصنعية‬
Nonmanufacturing costs are often divided into two categories: (1) selling costs and (2)
administrative costs.
1- Selling costs
▪
▪
▪
▪
▪
Include all costs that are incurred to secure customer orders and get the finished
product to the customer.
These costs are sometimes called order-getting and order-filling costs.
Examples of selling costs include advertising, shipping, sales travel, sales commissions,
sales salaries, and costs of finished goods warehouses. {Freight out}.
Selling costs can be either direct or indirect costs.
For example, the cost of an advertising campaign dedicated to one specific product is a
direct cost of that product, whereas the salary of a marketing manager who oversees
numerous products is an indirect cost with respect to individual products.
‫ في حين أن راتب مدير‬،‫ تكلفة حملة إعالنية مخصصة لمنتج محدد واحد هي تكلفة مباشرة لهذا المنتج‬،‫على سبيل المثال‬
.‫التسويق الذي يشرف على العديد من المنتجات هو تكلفة غير مباشرة فيما يتعلق بالمنتجات الفردية‬.
2- Administrative costs
• Include all costs associated with the general management of an organization rather than
with manufacturing or selling.
.‫وتشمل جميع التكاليف المرتبطة باإلدارة العامة لمؤسسة بدال من تصنيع أو بيع‬
•
Examples of administrative costs include executive compensation, general accounting,
secretarial, public relations, and similar costs involved in the overall, general
administration of the organization as a whole.
‫ والتكاليف‬،‫ والعالقات العامة‬،‫ والسكرتارية‬،‫ والمحاسبة العامة‬،‫وتشمل األمثلة على التكاليف اإلدارية التعويضات التنفيذية‬
.‫المماثلة التي تنطوي عليها اإلدارة العامة العامة للمنظمة ككل‬
• Administrative costs can be either direct or indirect costs.
•
For example, the salary of an accounting manager in charge of accounts receivable
collections in the East region is a direct cost of that region, whereas the salary of a chief
financial officer who oversees all of a company’s regions is an indirect cost with respect
to individual regions.
‫ فإن راتب مدير محاسبة مسؤول عن تحصيل الحسابات المدينة في المنطقة الشرقية هو تكلفة‬،‫فعلى سبيل المثال‬
‫ في حين أن راتب كبير الموظفين الماليين الذي يشرف على جميع مناطق الشركة هو تكلفة‬،‫مباشرة لتلك المنطقة‬
.‫غير مباشرة فيما يتعلق بالمناطق الفردية‬
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Cost Classifications for Preparing Financial Statements
When preparing a balance sheet and an income statement, companies need to classify their
costs as product costs or period costs.
Product Costs
•
For financial accounting purposes, product costs include all costs involved in acquiring or
making a product.
.‫ تشمل تكا ليف المنتج جميع التكاليف التي ينطوي عليها الحصول على منتج أو صنعه‬،‫ألغراض المحاسبة المالية‬
•
Product costs: “attach” to a unit of product as it is purchased or manufactured and they
stay attached to each unit of product as long as it remains in inventory awaiting sale.
•
When units of product are sold, their costs are released from inventory as expenses
(typically called cost of goods sold) and matched against sales on the income statement.
•
Because product costs are initially assigned to inventories, they are also known as
inventoriable costs.
.‫ فإنها تُعرف أيضا ً بالتكاليف القابلة للجرد‬،‫وألن تكاليف المنتجات تُسند في البداية إلى المخزونات‬
•
For manufacturing companies, product costs include direct materials, direct labor, and
manufacturing overhead.
•
A manufacturer’s product costs flow through three inventory accounts on the balance
sheet—Raw Materials, Work in Process, and Finished Goods—prior to being recorded in
cost of goods sold on the income statement.
•
Raw materials: include any materials that go into the final product.
.‫تشمل المواد الخام أي مواد تدخل في المنتج النهائي‬
•
Work in process: consists of units of product that are only partially complete and will
require further work before they are ready for sale to the customer.
‫ يتكون من وحدات من المنتج التي هي كاملة جزئيا فقط وسوف تتطلب المزيد من العمل قبل أن‬:‫العملية قيد التشغيل‬
.‫تكون جاهزة للبيع للعميل‬
•
Finished goods: consist of completed units of product that have not yet been sold to
customers.
.‫ تتكون من وحدات كاملة من المنتج التي لم يتم بيعها بعد للعمالء‬:‫السلع التامة الصنع‬
•
When direct materials are used in production, their costs are transferred from Raw
Materials to Work in Process.
•
Direct labor and manufacturing overhead costs are added to Work in Process to convert
direct materials into finished goods.
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•
Once units of product are completed, their costs are transferred from Work in Process
to Finished Goods.
•
When a manufacturer sells its finished goods to customers, the costs are transferred
from Finished Goods to Cost of Goods Sold.
•
Product costs are not necessarily recorded as expenses on the income statement in the
period in which they are incurred.
.‫ال تسجل تكاليف المنتجات بالضرورة كنفقات في قائمة الدخل في الفترة التي يتم تكبدها فيها‬
•
They are recorded as expenses in the period in which the related products are sold.
.‫يتم تسجيلها كنفقات في الفترة التي تباع فيها المنتجات‬
Period Costs
•
Period costs are all the costs that are not product costs. All selling and administrative
expenses are treated as period costs.
•
For example, sales commissions, advertising, executive salaries, public relations, and the
rental costs of administrative offices are all period costs .
•
Period costs are not included as part of the cost of either purchased or manufactured
goods; instead, period costs are expensed on the income statement in the period in
which they are incurred using the usual rules of accrual accounting.
Summarizes the product and period cost flows for manufacturers
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Multiple choice questions:
1. Which of the following are period costs?
a. Raw materials
C. direct labor and manufacturing overhead
b. direct materials and direct labor
d. Selling expenses
2. Product costs consist of
A. direct materials and direct labor only.
B. direct materials, direct labor, and manufacturing overhead.
C. selling and administrative expenses.
D. period costs.
3. Product costs are also called
A. direct costs. B. overhead costs.
C. inventoriable costs.
D. capitalizable costs.
4. for inventoriable costs to become expenses under the matching principle,
A. the product must be finished and in stock.
B. the product must be expensed based on its percentage-of-completion.
C. the product to which they attach must be sold.
D. all accounts payable must be settled.
5. Depreciation on a personal computer used in the marketing department of a manufacturing
firm would be classified as:
A) A product cost that is fixed with respect to the company's output.
B) A period cost that is fixed with respect to the company's output.
C) A product cost that is variable with respect to the company's output.
D) A period cost that is fixed with respect to the company's output.
6. All of the following would be classified as product costs except:
A) Property taxes on production equipment.
B) Insurance on factory machinery.
C) Salaries of the advertising staff.
D) Wages of machine operators.
7. Product costs appear on the balance sheet:
A) Only if goods are partially completed at the end of the period.
B) Only if goods are unsold at the end of a period.
C) Only if goods are partially completed or are unsold at the end of a period.
D) Only in merchandising firms.
8. A cost incurred in the past that is not relevant to any current decision is classified as a (n):
A) Period cost.
B) Opportunity cost.
C) Sunk cost. D) Differential cost.
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9. Mahmood decided to leave his former job where he earned $12 per hour to go to a new job
where he will earn $13 per hour. In the decision process, the former wage of $12 per hour
would be classified as a (n):
A) Sunk cost. B) Direct cost.
C) Fixed cost.
D) opportunity cost.
10. For a manufacturing company, which of the following is an example of a period cost rather
than a product cost?
a. Depreciation on factory equipment
b. Wages of salespersons
c. Wages of machine operators
d. Insurance on factory equipment
11. Consider the following costs incurred in a recent period:
Direct material 33,000
Depreciation of equipment 12,000
Factory janitor salary 23,000
Direct labor 28,000
Utilities for factory 9,000
Selling expenses 16,000
Production salary 34,000
Administrative expenses 21,000
What was the total amount of the period costs listed above for the period?
A) $ 76,000
B) $41,000
C) $37,000
D) $63,000
12. The cost of lubricants used to grease a production machine in a manufacturing company is
an example of a (n):
A) Period cost. B) Direct material cost. C) Indirect material cost. D) None of the above.
13. The salary paid to the president of King Company would be classified on the income
statement as a (n):
A) Administrative expense.
B) Direct labor cost.
C) Manufacturing overhead cost.
D) Selling expense.
14. Prime cost and conversion cost share what common element of total cost?
A) Direct materials. B) Direct labor. C) Variable overhead. D) Fixed overhead.
15. Property taxes on a company's factory building would be classified as a (n):
A) Product cost.
B) Opportunity cost.
C) Period cost.
D) Variable cost.
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16. The nursing station on the fourth floor of Central Hospital is responsible for the care of
patients who have undergone orthopedic surgery. The costs of drugs administered by the
nursing station to patients would be classified as:
A) Direct costs of the patients.
B) Indirect costs of the patients.
C) Overhead costs of the nursing station.
D) Period costs of the hospital.
17. Which of the following would most likely be included as part of manufacturing overhead in
the production of a wooden table?
A) The amount paid to the individual who stains the table.
B) The commission paid to the salesperson who sold the table.
C) The cost of glue used in the table.
D) The cost of the wood used in the table
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Cost Classifications for Predicting Cost Behavior
•
•
•
•
Cost behavior refers to how a cost reacts to changes in the level of activity.
As the activity level rises and falls, a particular cost may rise and fall as well—or it may
remain constant.
To help make such distinctions, costs are often categorized as variable, fixed, or mixed.
The relative proportion of each type of cost in an organization is known as its cost
structure.
Variable Cost
‫التكاليف المتغيرة‬
A variable cost varies, in total, in direct proportion to changes in the level of activity.
Common examples of variable costs include cost of goods sold for a merchandising company,
direct materials, direct labor, variable elements of manufacturing overhead, such as indirect
materials, supplies, and power, and variable elements of selling and administrative expenses,
such as commissions and shipping costs.
❖ For a cost to be variable, it must be variable with respect to something. That
“something” is its activity base.
❖ An activity base is a measure of whatever causes the incurrence of a variable cost. An
activity base is sometimes referred to as a cost driver.
‫ يشار إلى قاعدة النشاط أحيانًا‬.‫قاعدة النشاط هي مقياس ألي سبب من األسباب التي تتسبب في تكبد تكلفة متغيرة‬
.‫على أنها عامل تكلفة النشاط‬
❖ (Cost drivers) include the number of miles driven by salespersons, the number of
pounds of laundry cleaned by a hotel, the number of calls handled by technical support
staff at a software company, and the number of beds occupied in a hospital.
❖ The activity base under consideration is the total volume of goods and services provided
by the organization.
❖ Total Variable Cost ‫متغيرة‬
❖ Variable Cost per unit ‫ثابتة‬
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Fixed Cost
2020/2021
‫التكاليف الثابتة‬
❖ A fixed cost is a cost that remains constant, in total, regardless of changes in the level of
activity.
.‫ بغض النظر عن التغيرات في مستوى النشاط‬،‫ في المجموع‬،‫التكلفة الثابتة هي تكلفة ثابتة‬
❖ Manufacturing overhead usually includes various fixed costs such as depreciation,
insurance, property taxes, rent, and supervisory salaries.
❖ Similarly, selling and administrative costs often include fixed costs such as
administrative salaries, advertising, and depreciation of nonmanufacturing assets.
❖ Unlike variable costs, fixed costs are not affected by changes in activity.
❖ For planning purposes, fixed costs can be viewed as either committed or discretionary.
.‫ يمكن اعتبار التكاليف الثابتة إما تكاليف ُملتزمة أو تقديرية‬،‫وألغراض التخطيط‬
❖ Committed fixed costs represent organizational investments with a multiyear planning
horizon that can’t be significantly reduced even for short periods of time without
making fundamental changes.
‫تمثل التكاليف الثابتة الملتزمة استثمارات تنظيمية ذات أفق تخطيطي متعدد السنوات ال يمكن تخفيضه بشكل كبير حتى لفترات‬
.‫قصيرة من الزمن دون إجراء تغييرات أساسية‬
❖ Discretionary fixed costs (often referred to as managed fixed costs) usually arise from
annual decisions by management to spend on certain fixed cost items.
‫وعادة ما تنشأ التكاليف الثابتة التقديرية (التي يشار إليها في كثير من األحيان بالتكاليف الثابتة المدارة) من القرارات السنوية‬
.‫التي تتخذها اإلدارة لإلنفاق على بنود معينة من بنود التكلفة الثابتة‬
❖ TOTAL fixed costs ‫ثابتة‬
❖ fixed costs per unit ‫متغيرة‬
❖ A mixed cost contains both variable and fixed cost elements. Mixed costs are also
known as semi variable costs.
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The Linearity Assumption and the Relevant Range
❖ Management accountants ordinarily assume that costs are strictly linear; that is, the
relation between cost on the one hand and activity on the other can be represented by
a straight line within a narrow band of activity known as the relevant range.
‫يفترض المحاسبون اإلداريون عادة أن التكاليف خطية تماما ً؛ أي أن العالقة بين التكلفة من ناحية والنشاط من ناحية أخرى‬
.‫يمكن أن يمثلها خط مستقيم ضمن نطاق ضيق من النشاط يعرف باسم النطاق ذي الصلة‬
❖ The relevant range is the range of activity within which the assumption that cost
behavior is strictly linear is reasonably valid.
❖ The concept of the relevant range is important in understanding fixed costs.
Summary of Variable and Fixed Cost Behavior
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‫‪Managerial accounting‬‬
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‫‪High –low method‬‬
‫‪The following equation for a straight line can be used to express the relationship between a‬‬
‫‪mixed cost and the level of activity:‬‬
‫بستخدم هذه المعادلة عشان احسب قيمة ‪.Total mixed cost‬‬
‫اذا بدي احسبها الزم استخدم القانون اللي تحت ‪Variable cost per unit‬‬
‫وال تنسى انه اختصارها حرف ‪.B‬‬
‫عشان اطلع قيمة ‪ a‬بكتب المعادلة ومكان ‪ y‬بعوض اعلى تكلفة و مكان ‪ x‬بعوض اعلى عدد وحدات انتاج‬
‫طبعا قيمة ‪ B‬احنا بنكون حسبناها على القانون اللي فوق في حالة عدم وجودها بالسؤال ‪.‬‬
‫في حالة كان طالب بالسؤال ‪ Total variable cost‬الجواب عبارة عن حاصل ضرب ‪B * X‬‬
‫‪22‬‬
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Example 1: Use the following to answer questions 1- 2
Mahmood Company would like to estimate the variable and fixed components of its
maintenance costs and has compiled the following data for the last five months of operations.
Month
January
February
March
April
May
Labor hours
160
130
180
190
110
Maintenance Cost
$617
$553
$596
$623
$532
1) Using the high-low method of analysis, the estimated variable cost per labor hour for
Maintenance is closest to:
A) $0.83 B) $1.84
C) $1.30
D) $1.14
(623-532)/ (190-110) = 1.14
2) Using the high-low method of analysis, the estimated total fixed cost per month for
maintenance is closest to:
A) $440
B) $407
C) $470
D) $406.4
623=x +1.14(190) = 406.4
3) Using the high-low method of analysis, the estimated total mixed cost if the expected direct
labor hour is 210:
a) 645.8
b) 239.4
c) 445.8
d) 339.4
Multiple choice questions:
1-Discretionary fixed costs:
A) Cannot be changed since they are fixed.
B) Have a long-term planning horizon, generally encompassing many years.
C) Are made up of facilities, equipment, and basic organization.
D) Responses b and c are both correct.
E) None of these.
2- Shipping costs at Lina Company are a mixture of variable and fixed components. The company
shipped 8,000 tons of coal for $400,000 in shipping costs in February and 10,000 tons for
$499,000 in March. Assuming that this activity is within the relevant range, expected shipping
costs for 11,000 tons would be:
A) $544,500
B) $548,500
C) $422,222
23
D) $554,000
Managerial accounting
2020/2021
3-Given the cost formula Y = $12,500 + $5.00X, total cost for an activity level of 4,000 units
would be:
A) $20,000
B) $12,500
C) $16,000
D) $32,500
4-The following data pertains to activity and maintenance costs for two recent years:
Year 2; Year 1 Activity level in units (11,125; 6,000) Maintenance cost ($6,250; $4,200)
respectively .If the high-low method is used to separate fixed and variable components of the
cost, which of the following statements is correct:
A) The variable cost is $0.70 per unit of activity
B) The fixed cost is $2,050
C) The variable cost is $2.50 per unit of activity
D) The fixed cost is $1,800
5- In describing the cost formula equation, Y = a + bX, which of the following is correct:
A) “Y” is the independent variable.
B) “a” is the variable cost per unit.
C) “a” and “b” are valid for all levels of activity.
D) In the high-low method, “b” equals the change in cost divided by the change in activity.
6-The high-low method is used with which of the following types of costs?
A) Variable.
B) Mixed.
C) Fixed.
D) Step-variable.
7-malekeh Corporation has provided the following production and average cost data for two
levels of monthly production volume. The company produces a single product.
Production volume.............................
4,000 unit’s
5,000 units
Direct materials ..................................
$85.80 per unit
$85.80 per unit
Direct labor.........................................
$56.10 per unit
$56.10 per unit
Manufacturing overhead .....................
$73.60 per unit
$62.10 per unit
The best estimate of the total cost to manufacture 4,300 units is closest to:
A) $877,200 B) $909,400
C) $901,920
D) $926,650
Explanation:
[($62.10) * (5000)-($73.60) * (4000)] / (5000-4000) = (310500-294000) / 1000 = 16.10
✓ (4300) * (85.80 + 56.10 + 16.10) + [310500 –(5000)*(16.10)
✓ 679400 + 230000 = 909400
8-Given the cost formula, Y = $7,000 + $1.80X, total cost for an activity level of 4,000 units would be:
A) $7,000
B) $14,200
C) $19,920
D) $26,650
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9-Assaf Corporation has provided the following production and average cost data for two levels
of monthly production volume. The company produces a single product.
Production volume .........................
4,000 unit’s
5,000 units
Direct materials ..............................
$99.20 per unit
$99.20 per unit
Direct labor ....................................
$45.50 per unit
$45.50 per unit
Manufacturing overhead ................
$94.00 per unit
$77.60 per unit
The best estimate of the total monthly fixed manufacturing cost is:
A) $388,000
B) $954,800
C) $376,000
D) $328,000
Explanation: Both direct materials and direct labor are variable costs.
Total manufacturing overhead at 4,000 units = $94.00 per unit × 4,000 units = $376,000
Total manufacturing overhead at 5,000 units = $77.60 per unit × 5,000 units = $388,000
Variable element of manufacturing overhead = Change in cost ÷ Change in activity
= ($388,000 - $376,000) ÷ (5,000 units - 4,000 units)
= $12,000 ÷ 1,000 units
= $12 per unit
Fixed cost element of manufacturing overhead = Total cost - Total variable cost
= $388,000 - ($12.00 per unit × 5,000 units)
= $388,000 - ($60,000)
= $328,000
10- Assaf Corporation has provided the following production and average cost data for two
levels of monthly production volume. The company produces a single product.
Production volume .........................
1,000 unit’s
2,000 units
Direct materials ..............................
$15.20 per unit
$15.20 per unit
Direct labor ....................................
$30.50 per unit
$30.50 per unit
Manufacturing overhead ................
$54.10 per unit
$37.40 per unit
The best estimate of the total monthly fixed manufacturing cost is:
A) $74,800
B) $54,100
C) $99,800
D) $33,400
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11- Lina Corporation has provided the following production and average cost data for two levels
of monthly production volume. The company produces a single product.
Production volume..........................
1,000 unit’s
3,000 units
Direct materials ...............................
$30.90 per unit
$30.90 per unit
Direct labor .....................................
$40.20 per unit
$40.20 per unit
Manufacturing overhead.................
$64.60 per unit
$33.80 per unit
The best estimate of the total variable manufacturing cost per unit is:
A) $89.50
B) $18.40
C) $71.10
D) $30.90
Explanation:
Total manufacturing overhead at 3,000 units = 3,000 units × $33.80 per unit = $101,400
Total manufacturing overhead at 1,000 units = 1,000 units × $64.60 per unit = $64,600
Variable manufacturing overhead per unit = Change in cost ÷ Change in activity
= ($101,400 - $64,600) ÷ (3,000 units - 1,000 units)
= $36,800 ÷ 2,000 units
= $18.40 per unit
Total variable manufacturing cost = Direct materials + Direct labor + Variable manufacturing
overhead
= $30.90 per unit + $40.20 per unit + $18.40 per unit
= $89.50 per unit
12- Lina Corporation has provided the following production and average cost data for two levels of
monthly production volume. The company produces a single product.
Production volume ...........................
3,000 unit’s
4,000 units
Direct materials................................
$86.30 per unit
$86.30 per unit
Direct labor .......................................
$26.40 per unit
$26.40 per unit
Manufacturing overhead ...................
$75.90 per unit
$60.40 per unit
The best estimate of the total variable manufacturing cost per unit is:
A) $126.60
B) $86.30
C) $13.90
D) $112.70
13- Leen Corporation has provided the following production and average cost data for two levels
of monthly production volume. The company produces a single product.
Production volume ..............................
7,000 unit’s
8,000 units
Direct materials...................................
$87.40 per unit
$87.40 per unit
Direct labor ..........................................
$20.20 per unit
$20.20 per unit
Manufacturing overhead ......................
$101.50 per unit
$90.80 per unit
The best estimate of the total cost to manufacture 7,300 units is closest to:
A) $1,487,375
B) $1,448,320
C) $1,500,750
D) $1,526,430
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14- The following data relate to two levels of activity at an out-patient clinic in a hospital:
Number of patient-visits .............
4,500
5,750
General overhead ........................
$269,750
$289,125
The best estimate of the variable general overhead cost per patient-visit is closest to:
A) $15.50
B) $44.44
C) $59.94
D) $50.28
15- Within the relevant range, variable costs can be expected to:
A) Vary in total in direct proportion to changes in the activity level.
B) Remain constant in total as the activity level changes.
C) Increase on a per unit basis as the activity level increases.
D) Increase on a per unit basis as the activity level decreases.
E) None of these.
16- Which of the following is not correct when referring to fixed costs?
A) Whether a cost is committed or discretionary will depend in large part on management's
strategy.
B) Discretionary fixed costs arise from annual decisions by management.
C) Fixed costs remain constant in total throughout the relevant range.
D) Committed fixed costs can often be reduced to zero for short periods of time without
seriously impairing the long-run goals of the company.
E) The trend in companies today is toward greater fixed costs relative to variable costs.
17- Which of the following statements is true when referring to fixed costs?
A) Committed fixed costs arise from the annual decisions by management.
B) As volume increases, unit fixed cost and total fixed cost will change.
C) Fixed costs increase in total throughout the relevant range.
D) Discretionary fixed costs can often be reduced to zero for short periods of time without
seriously impairing the long-run goals of the company.
18- Which of the following is unlikely to be classified as a fixed cost with respect to the number
of units produced and sold?
A) Property taxes on a headquarters building.
B) Legal department salaries.
C) Cost of leasing the company's mainframe computer.
D) Production supplies.
19- Fixed costs expressed on a per unit basis:
A) Will increase with increases in activity.
B) Will decrease with increases in activity.
C) Are not affected by activity.
D) Should be ignored in making decisions since they cannot change.
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Cost Classifications for Decision Making
1. In business decisions, each alternative will have costs and benefits that must be
compared to the costs and benefits of other available alternatives.
2. A future cost that differs between any two alternatives is known as a differential cost.
.‫وتُعرف التكلفة المستقبلية التي تختلف بين أي بديلين بالتكلفة التفاضلية‬
3. Differential costs are always relevant costs.
4. Future revenue that differs between any two alternatives is known as differential
revenue.
5. Differential revenue is an example of a relevant benefit.
6. Any future cost or benefit that does not differ between the alternatives is irrelevant and
should be ignored.
7. A differential cost is also known as an incremental cost
8. Incremental cost should refer only to an increase in cost from one alternative to
another, whereas decreases in cost should be referred to as decremental costs.
9. The revenue that can be obtained from selling one more unit of product is called
marginal revenue.
10. The cost involved in producing one more unit of product is called marginal cost.
11. Differential costs can be either fixed or variable.
28
Managerial accounting
2020/2021
Using Different Cost Classifications for Different Purposes
Prepare income statements for a merchandising company using the traditional and contribution
formats
. ‫القائمتين يعطون نفس الجواب لكن مطالب بالثنتين‬
✓ Traditional income statements are prepared primarily for external reporting purposes.
✓ They rely on cost classifications for preparing financial statements (product and period
costs) to depict the financial consequences of past transactions.
‫وهي تعتمد على تصنيفات التكاليف إلعداد القوائم المالية (تكاليف المنتجات والفترة) لتصوير العواقب المالية‬
.‫للمعامالت السابقة‬
✓ Contribution format income statements are prepared for internal management
purposes.
✓ They use cost classifications for predicting costs behavior (variable and fixed costs) to
better inform decisions affecting the future.
‫وهي تستخدم تصنيفات التكاليف للتنبؤ بسلوك التكاليف (التكاليف المتغيرة والثابتة) لتحسين توجيه القرارات التي‬
.‫تؤثر على المستقبل‬
✓ The two different purposes served by these income statements highlight what is
arguably the most important difference between financial accounting and managerial
accounting:
‫ويبرز الغرضان المختلفان اللذين تخدمهما قائمة الدخل حتى انه يمكن القول إنه أهم فرق بين المحاسبة المالية‬
:‫والمحاسبة اإلدارية‬
1. An emphasis on recording past performance versus an emphasis on making
predictions.
.‫التركيز على تسجيل األداء السابق مقابل التركيز على صنع التنبؤات‬
2. Decisions that affect future performance.
.‫القرارات التي تؤثر على األداء المستقبلي‬
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The Traditional Format Income Statement
Sales or sales revenue
Less : cost of goods sold
= Gross margin
Less: operating expenses
= net operating income
****
(****)
****
(****)
****
✓ Operating expenses → is the selling and administrative ( variable and fixed )
The Contribution Format Income Statement
Sales or sales revenue
Less : cost of goods sold
Less: variable cost selling and administrative
= Contributions margin
Less: fixed cost selling and administrative
= net operating income
****
(****)
(****)
****
(****)
****
✓ A traditional income statement format for merchandising companies.
✓ This type of income statement organizes costs into two categories—cost of goods sold
and selling and administrative expenses.
✓ The cost of goods sold reports the product costs attached to the merchandise sold
during the period.
✓ The selling and administrative expenses report all period costs that have been expensed
as incurred.
✓ The crucial distinction between fixed and variable costs is at the heart of the
contribution approach to constructing income statements.
✓ The unique thing about the contribution approach is that it provides managers with an
income statement that clearly distinguishes between fixed and variable costs and
therefore aids planning, controlling, and decision making.
✓ The contribution approach separates costs into fixed and variable categories.
✓ The contribution margin is the amount remaining from sales revenues after all variable
expenses have been deducted.
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Example 1: Use the following information for questions 1-4
Sales ( 30,000 unit)
Begging inventory
Ending inventory
Purchased
Fixed cost
Variable Selling expense
Variable Administrative expense
1) The contribution margin is:
A) $ 263,000
B) $ 256,000
2) The gross profit is:
A) $ 263,000
B) $ 256,000
$300,000
4,000
12,000
45,000
130,000
4,000
3,000
C) $ 126,000
D) none of the above
C) $ 126,000
D) none of the above
3) The Net income under contribution Approach is:
A) $ 263,000
B) $ 256,000
C) $ 126,000
D) None of the above
4) The net income under traditional Approach is:
A) $ 263,000
B) $ 256,000
C) $ 126,000
D) None of the above
Explanation: traditional
Sales or sales revenue
Less : cost of goods sold
= Gross margin
Less: operating expenses
= net operating income
300,000
37,000 (45000+4000-12000)
263,000
137,000 (130000+4000+3000)
126,000
Explanation: contribution
Sales or sales revenue
Less : cost of goods sold
Less: variable cost selling and administrative
= Contributions margin
Less: fixed cost selling and administrative
= net operating income
300,000
37,000
7,000(4000+3000)
256,000
130,000
126,000
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Example 2: Last month the Mahmood company merchandise purchases totaled $68,000. The
company's beginning merchandise inventory was $17,000 and its ending merchandise inventory
was $13,000 what was the company's cost of goods sold for the month:
A) $72,000
B) $68,000
C) $98,000
D) $64,000
Example 3: Last month the Lina company cost of goods sold was $86,000. The company's
beginning merchandise inventory was $20,000 and its ending merchandise inventory was
$21,000. What was the total amount of the company's merchandise purchases for the month?
A) $86,000
B) $127,000
C) $87,000
D) $85,000
Multiple choice questions:
1. The contribution approach income statement:
A) Organizes costs on a functional basis.
B) Provides owners with more cash flows.
C) is particularly helpful to the manager in planning and decision making.
D) Provides a gross margin figure from which selling and administrative expenses are deducted.
E) None of these.
2. Contribution margin is:
A) Sales less cost of goods sold.
B) Sales less variable production, variable selling, and variable administrative expenses.
C) Sales less variable production expense.
D) Sales less all variable and fixed expenses.
E) None of the above.
3. The contribution approach to income statement preparation:
A) Organizes costs according to the functions of production, administration, and sales.
B) Is used for external reporting.
C) Organizes costs according to their variable and fixed cost behavior.
D) Both b and c are true.
E) Both a and b are true.
4. Lina Corporation is a wholesaler that sells a single product. Management has provided the
following cost data for two levels of monthly sales volume. The company sells the product for
$133.60 per unit.
Sales volume (units) ..............................................
4,000
5,000
Cost of sales ..........................................................
$383,600
$479,500
Selling, general, and administrative costs .............
$124,400
$136,000
The best estimate of the total contribution margin when 4,300 units are sold is:
A) $112,230
B) $162,110
C) $28,380
D) $45,150
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5. At a sales level of $365,000, Lewis Company's gross margin is $20,000 less than its
contribution margin, its net operating income is $70,000, and its selling and administrative
expenses total $130,000 at this sales level, its contribution margin would be:
A) $295,000
B) $180,000
C) $220,000
D) $200,000
Use the following to answer questions 6-7:
Assaf, Inc. has accumulated the following data for the cost of maintenance on its machinery for
the last four months:
Month
Maintenance Cost
Machine Hours
September
$26,020
21,000
October
$24,600
18,500
November
$22,300
15,000
December
$25,100
19,000
Assume that the relevant range includes all of the activity levels mentioned in this problem
6. Assuming Assaf Company uses the high-low method of analysis, the fixed cost of
maintenance would be estimated to be:
A) $14,500
B) $ 5,020
C) $13,000
D) $12,320
7. Assuming Assaf Company uses the high-low method of analysis, if machine hours are
budgeted to be 20,000 hours then the budgeted total maintenance cost would be expected to
be:
A) $25,400
B) $25,560
C) $23,700
D) $24,720
End Chapter 2
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CHAPTER 5
Cost-Volume-Profit Relationships
✓ Cost-volume-profit(CVP) analysis helps managers make many important decisions such
as what products and services to offer, what prices to charge, what marketing strategy
to use, and what cost structure to maintain.
‫ وما هي‬، ‫يساعد المديرين على اتخاذ العديد من القرارات الهامة مثل المنتجات والخدمات التي يجب تقديمها‬
.‫ وهيكل التكلفة للحفاظ عليها‬، ‫ واستراتيجية التسويق التي يجب استخدامها‬، ‫األسعار التي يجب فرضها‬
✓ Its primary purpose is to estimate how profits are affected by the following five factors:
1. Selling prices.
2. Sales volume.
3. Unit variable costs.
4. Total fixed costs.
5. Mix of products sold.
To simplify CVP calculations, managers typically adopt the following assumptions with respect to
these factors:
:‫لتبسيط حسابه يعتمد المديرون عادةً االفتراضات التالية فيما يتعلق بهذه العوامل‬
1. Selling price is constant. The price of a product or service will not change as volume changes.
.‫ لن يتغير سعر المنتج أو الخدمة مع تغير حجم المنتج‬.‫سعر البيع ثابت‬
2. Costs are linear and can be accurately divided into variable and fixed components. The
variable costs are constant per unit and the fixed costs are constant in total over the entire
relevant range.
‫ والتكاليف المتغيرة ثابتة لكل وحدة والتكاليف الثابتة ثابتة في‬.‫التكاليف خطية ويمكن تقسيمها بدقة إلى مكونات متغيرة وثابتة‬
.‫مجموعها على النطاق المعني بأكمله‬
3. In multiproduct companies, the mix of products sold remains constant.
.‫ المزيج من المنتجات المباعة ال تزال ثابتة‬،‫في الشركات متعددة المنتجات‬
‫معلومات عامة‬
While these assumptions may be violated in practice, the results of CVP analysis are often “good
enough” to be quite useful. Perhaps the greatest danger lies in relying on simple CVP analysis
when a manager is contemplating a large change in sales volume that lies outside the relevant
range. However, even in these situations the CVP model can be adjusted to take into account
anticipated changes in selling prices, variable costs per unit, total fixed costs, and the sales mix
that arise when the estimated sales volume falls outside the relevant range.
‫ نتائج تحليله غالبا ما تكون "جيدة‬،‫في حين أن هذه االفتراضات قد تكون انتهكت في الممارسة العملية‬
‫ ربما يكمن الخطر األكبر في االعتماد على تحليله بسيط عندما يفكر‬.‫بما فيه الكفاية" لتكون مفيدة جدا‬
‫ حتى في هذه‬،‫ ومع ذلك‬.‫المدير في تغيير كبير في حجم المبيعات التي تقع خارج النطاق ذات الصلة‬
‫ والتكاليف المتغيرة لكل‬،‫ يمكن تعديل نموذجه لمراعاة التغيرات المتوقعة في أسعار البيع‬،‫الحاالت‬
‫ ومزيج المبيعات التي تنشأ عندما يقع حجم المبيعات المقدر خارج‬،‫ والتكاليف الثابتة اإلجمالية‬،‫وحدة‬
.‫النطاق ذي الصلة‬
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The Basics of Cost-Volume-Profit (CVP) Analysis
Contribution Margin
✓ Contribution margin is the amount remaining from sales revenue after variable
expenses have been deducted.
✓ The contribution income statement emphasizes the behavior of costs and therefore is
extremely helpful to managers in judging the impact on profits of changes in selling
price, cost, or volume.
✓ Thus, it is the amount available to cover fixed expenses and then to provide profits for
the period.
✓ Notice the sequence here—contribution margin is used first to cover the fixed expenses,
and then whatever remains goes toward profits.
✓ If the contribution margin is not sufficient to cover the fixed expenses, then a loss occurs
for the period.
Assume X Company had the following contribution income statement he prepared last month:
Notice that sales, variable expenses, and contribution margin are expressed on a per unit basis
as well as in total on this contribution income statement.
The per unit figures will be very helpful to you in some of his calculations.
Assume that X Company sells only one speaker during a particular month. The company’s
income statement would appear as follows:
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For each additional speaker the company sells during the month, $100 more in contribution
margin becomes available to help cover the fixed expenses. If a second speaker is sold, for
example, then the total contribution margin will increase by $100 (to a total of $200) and the
company’s loss will decrease by $100, to $34,800
What is enough speakers can be sold to generate $35,000 in contribution margin?
The answer is 350 speaker, then all of the fixed expenses will be covered and the company will
break even for the month— that is, it will show neither profit nor loss but just cover all of its
costs.
Computation of the break-even point is discussed in detail later in the chapter.
The break-even point is the level of sales at which profit is zero.
.‫صفرا‬
‫ ونقطة التعادل هي مستوى المبيعات التي يكون الربح عندها‬.‫ويُناقش حساب نقطة التعادل بالتفصيل الحقا ً في الفصل‬
ً
Once the break-even point has been reached, net operating income will increase by the amount
of the unit contribution margin for each additional unit sold.
.‫ سيزداد صافي إيرادات التشغيل بمقدار هامش مساهمة الوحدة لكل وحدة إضافية تباع‬،‫وبمجرد الوصول الى نقطة التعادل‬
If 352 speakers are sold (2 speakers above the break-even point), the net operating income for
the month will be $200. If 353 speakers are sold (3 speakers above the break-even point), the
net operating income for the month will be $300, and so forth.
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To estimate the profit at any sales volume above the break-even point, multiply the number of
units sold in excess of the break-even point by the unit contribution margin.
✓ The result represents the anticipated profits for the period.
✓ Or, to estimate the effect of a planned increase in sales on profits, simply multiply the
increase in units sold by the unit contribution margin. The result will be the expected
increase in profits.
For example: if X company is currently selling 400 speakers per month and plans to increase
sales to 425 speakers per month, the anticipated impact on profits is?
Answer is: 25 * 100 = 2500
EXPLANATION
To summarize, if sales are zero, the company’s loss would equal its fixed expenses. Each unit
that is sold reduces the loss by the amount of the unit contribution margin. Once the break-even
point has been reached, each additional unit sold increases the company’s profit by the amount
of the unit contribution margin.
‫ فإن خسارة ر‬،‫إذا كانت المبيعات صفر‬
‫ وكل وحدة يتم بيعها تقلل الخسارة‬.‫الشكة ستساوي تكاليفها الثابتة‬
‫ فإن كل وحدة إضافية تباع تزيد من أرباح‬،‫ وبمجرد الوصول إىل نقطة التعادل‬.‫بمقدار هامش مساهمة الوحدة‬
‫ر‬
.‫الشكة بمقدار هامش مساهمة الوحدة‬
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‫الحك كله الل فوق يمكن حسابه عل شكل معادلة حسب موضوع‬
CVP Relationships in Equation Form
Net operating income = (Sales − Variable expenses) − Fixed expenses
Sales = Selling price per unit × Quantity sold = S.P × Q
Variable expenses = Variable expenses per unit × Quantity sold = V × Q
Net operating income = (S.P × Q − V × Q) − Fixed expenses
You can do all of the calculations of the previous section using this simple equation.
For example, earlier we computed that the net operating income (profit) at sales of 351
speakers would be $100.
We can arrive at the same conclusion using the above equation as follows:
Profit = (S.P × Q − V × Q) − Fixed expenses
Profit = ($250 × 351 − $150 × 351) − $35,000
= ($250 − $150) × 351 − $35,000
= ($100) × 351 − $35,000
= $35,100 − $35,000
= $100
It is often useful to express the simple profit equation in terms of the unit contribution margin
(Unit CM) as follows:
Unit CM = Selling price per unit − Variable expenses per unit = P − V
Profit = (S.P × Q − V × Q) − Fixed expenses
Profit = (S.P − V) × Q − Fixed expenses
Profit = Unit CM × Q − Fixed expenses
You could also have used this equation to determine the profit at sales of 351 speakers as
follows:
Profit = Unit CM × Q − Fixed expenses
= $100 × 351 − $35,000 = $35,100 − $35,000 = $100
‫ المهم يطلع معك‬, ‫ استخدم الطريقة المناسبة الك‬, ‫كل الطرق تؤدي الى روما‬
. ‫الجواب صح‬
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CVP Relationships in Graphic Form (not required by all universities).
The relationships among revenue, cost, profit, and volume. Are on a cost volume-profit (CVP)
graph.
A CVP graph highlights CVP relationships over wide ranges of activity.
In a CVP graph (sometimes called a break-even chart), unit volume is represented on the
horizontal (X) axis and dollars on the vertical (Y) axis.
The anticipated profit or loss at any given level of sales is measured by the vertical distance
between the total revenue line (sales) and the total expense line (variable expense plus fixed
expense).
Contribution Margin Ratio (CM Ratio) and the Variable Expense Ratio
The contribution margin as a percentage of sales is referred to as the contribution margin ratio
(CM ratio).
This ratio is computed as follows:
OR
Contribution margin per unit / selling price
Similarly, the variable expenses as a percentage of sales is referred to as the variable expense
ratio.
This ratio is computed as follows
OR
Variable cost per unit / selling price
By the way you can also calculate it using this formula:
CM ratio = 1 − Variable expense ratio
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Applications of the Contribution Margin Ratio
The CM ratio shows how the contribution margin will be affected by a change in total sales.
For example:
CM ratio of 40% means that for each dollar increase in sales, total contribution margin will
increase by 40 cents ($1 sales × CM ratio of 40%). Net operating income will also increase by 40
cents, assuming that fixed costs are not affected by the increase in sales.
Generally, the effect of a change in sales on the contribution margin is expressed in equation
form as:
Change in contribution margin = CM ratio × Change in sales
Additional Applications of CVP Concepts
There are many changes in sales volume, selling price, fixed cost and
variable cost.
Example 1: assume that Assaf Company sold 400 unit with the selling price $250 and
the variable cost $150. The fixed cost is 35,000. The income contribution format income
statements as shown below:
If the company decided to increase unit sales to 600 and selling price decrease $20. And
Additional monthly advertising budget of $15,000. And the other unchanged what is the net
operating income? And what the amount changed of net operating income?
‫حاول حلها والجواب الصفحة القادمة‬
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THE ANSWER IS:
Additional monthly advertising budget of $15,000 is a fixed cost.
The change in net operating income is (7000).
Example 2: assume that Assaf Company sold 400 unit with the selling price $250 and
the variable cost $150. The fixed cost is 35,000. The income contribution format income
statements as shown below:
If the company decided to increase unit sales to 650 and variable cost decrease $20. And
Additional monthly advertising budget of $15,000. And the other unchanged what is the net
operating income? And what the amount changed of net operating income?
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Break-Even and Target Profit Analysis
Break-Even Analysis
1. Earlier in the chapter we defined the break-even point as the level of sales at
which the company’s profit is zero.
.‫صفرا‬
‫في وقت سابق من الفصل حددنا نقطة التعادل بأنها مستوى المبيعات التي يكون فيها ربح الشركة‬
ً
2. To calculate the break-even point (in unit sales and dollar sales), managers can
use either of two approaches, the equation method or the formula method.
‫ اال اذا كان االمتحان كتابي‬. ‫براي الشخصي انك تستخدم طريقة وحدة منهم وهي االسهل النه الثنتين بعطوا نفس الجواب‬
.‫اعرف الطريقتين‬
The Formula Method ‫وهي االسهل‬
The formula method is a shortcut version of the equation method.
Break-even point per unit sales = fixed cost / C.M per unit
Break-even point sales = fixed cost / C.M ratio
The Equation Method
The equation method relies on the basic profit equation
Break-even point per unit = Sales = variable cost + fixed cost
Break-even point Sales = variable cost ratio + fixed cost
Example 1: If Mahmood Company had the following F.C $7500 and Selling price $10 and VC per
unit $7 find BEP UNIT and SALES using formula and equation method.
BEP per unit = F.C / CM Per unit → 7500 / X
Contribution margin (CM) = Selling price – V.C per unit → 10-7 =3
7500/3 = 2,500
BEP sales = F.C / CM% → 7500/ X
CM% = CM per unit \ selling price OR = 1- V.C%
CM = 10 – 7 = 3 → 3/10 = 30%
7500/ 30% = 25,000
EQUATION ‫عليكم والزم يطلع نفس الجواب‬
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Target Profit Analysis
Target profit analysis is one of the key uses of CVP analysis. In target profit analysis, we estimate
what sales volume is needed to achieve a specific target profit.
Break-even point with profit.
Fixed cost ‫ الى مجموع ال‬Target profit ‫القوانين نفسها لكن نقوم باضافة‬
The Formula Method ‫وهي االسهل‬
The formula method is a shortcut version of the equation method.
Break-even point per unit sales = fixed cost + target profit / C.M per unit
Break-even point sales = fixed cost + target profit / C.M ratio
The Equation Method
The equation method relies on the basic profit equation
Break-even point per unit = Sales = variable cost + fixed cost + target profit
Break-even point Sales = variable cost ratio + fixed cost + target profit
EXAMPLE 2: If Lina Company had the following F.C $10000 and Selling price $10 and VC per unit
$7 and profit $17,000 find Target profit sales and unit using formula and equation method.
BEP /Sales = F.C + Target profit / CM%
→(10,000+17,000)/ 0.30 = 90,000
BEP / U = F.C + Target profit / CM Per unit
(10,000+17,000) / 3 = 9,000
EQUATION ‫عليكم والزم يطلع نفس الجواب‬
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The Margin of Safety
2020/2021
‫هامش األمان‬
1) The margin of safety is the excess of budgeted or actual sales dollars over the breakeven
volume of sales dollars.
2) It is the amount by which sales can drop before losses are incurred.
.‫وهو المبلغ الذي يمكن أن تنخفض المبيعات به قبل تكبد الخسائر‬
3) The higher the margin of safety, the lower the risk of not breaking even and incurring a
loss.
The formula for the margin of safety is:
.‫مالحظة مهمة ما بقدر اطلع هامش االمان اذا ما طلعت نقطة التعادل للمبيعات‬
Example1: Assaf Company sales is $100,000 and the Break-even point sales is $87,500. What is
the Margin of safety in dollars? And the Margin of safety percentage?
Margin of safety in dollars = 100,000 – 87,500 = $12,500
Margin of safety percentage = (100,000 – 87,500) / 100,000 = 12.5%
Or 12,500 / 100,000 = 12.5%
This margin of safety means that at the current level of sales and with the company’s current
prices and cost structure, a reduction in sales of $12,500, or 12.5%, would result in just breaking
even.
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EXAMPLE2: If Mahmood Company had the following F.C $7,500 and Selling price $10 and VC per
unit $7 and the sales $100,000 what the margin of safety in dollars and ratio?
Margin of safety sales = Actual sales – BEP Sales
100,000 – (7500 / 30%) = 75,000
Margin of safety % = (100,000 – 25,000) / 100,000 = 75%
Change in income
∆ 𝒊𝒏𝒄𝒐𝒎𝒆 = ∆𝒔𝒂𝒍𝒆𝒔 ∗ 𝑪𝑴%
‫ بجمع القديم مع لجديد‬New income ‫في حالة طلب‬
Q1: If the old sales $40,000 and sales increased by 60,000 how much would you expect net
operating income to increase if the V.C 70% of sales?
20000*0.30=6,000
Operating leverage
✓ A lever is a tool for multiplying force.
✓ Using a lever, a massive object can be moved with only a modest amount of force. In
business, operating leverage serves a similar purpose.
✓ Operating leverage is a measure of how sensitive net operating income is to a given
percentage change in dollar sales.
✓ If operating leverage is high, a small percentage increase in sales can produce a much
larger percentage increase in net operating income.
The degree of operating leverage at a given level of sales is computed by the following formula:
EXAMPLE 1: If the net operating income $40,000 and the C/M 160,000 What the operating
leverage?
160,000 /40,000 = 4
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Sales Mix
The Definition of Sales Mix
The term sales mix refers to the relative proportions in which a company’s products are sold.
❖ Most companies have many products, and often these products are not equally
profitable.
❖ Hence, profits will depend to some extent on the company’s sales mix.
❖ Profits will be greater if high-margin rather than low-margin items make up a relatively
large proportion of total sales.
،‫ وبالتالي‬.‫ وغالبا ما تكون هذه المنتجات ليست مربحة كما هو مرغوب بالربح‬،‫معظم الشركات لديها العديد من المنتجات‬
ً‫ وستكون األرباح أكبر إذا كانت البنود ذات الهامش المرتفع بدال‬.‫فإن األرباح تعتمد إلى حد ما على مزيج مبيعات الشركة‬
.‫من البنود ذات الهامش المنخفض تشكل نسبة كبيرة نسبيا ً من إجمالي المبيعات‬
A shift in the sales mix from high-margin items to low-margin items can cause total profits to
decrease even though total sales may increase
Conversely, a shift in the sales mix from low-margin items to high-margin items can cause the
reverse effect—total profits may increase even though total sales decrease.
: ‫طريقة الحل‬
(Sales – variable cost) / Sales :‫ حسب القانون التالي‬CM% ‫اوال نقوم بحساب ال‬
Break-even point ‫ثانيا نقوم بحساب ال‬
‫ثالثا نقوم باستخراج نسبة كل منتج من المبيعات‬
Break-even point ‫اخر خطوة بنضرب نسبة كل منتج ب‬
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Q6: If Lina corporations produce two products A, B. Product A sales 30,000 and V.C 10,000,
products B sales 70,000 and V.C 30,000 and total F.C 30,000 what the BEB in dollars for the
corporation for each product ?
Sales
(V.C)
Product A
30,000
10,000
Product B
70,000
30,000
TOTAL
100,000
40,000
60,000
CM% = (100,000 – 40,000)/ 100,000 = 0.60
BEP = 30,000 / 0.60 = 50,000
‫نسبة كل منتج من المبيعات‬
A = 30,000 /100,000 = 0.30
B = 70,000 /100,000 =0.70
1- Product A = 0.30 * 50,000 = 15,000
2- Product B = 0.70 * 50,000 = 35,000
Multiple choice questions:
1. The contribution margin ratio always increases when the:
A) Break-even point increases.
B) Break-even point decreases.
C) Variable expenses as a percentage of net sales decrease.
D) Variable expenses as a percentage of net sales increase.
2. A $2.00 increase in a product's variable expense per unit accompanied by a $2.00 increase in
its selling price per unit will:
A) Decrease the degree of operating leverage.
B) Decrease the contribution margin.
C) Have no effect on the break-even volume.
D) Have no effect on the contribution margin ratio.
3. Which of the following would not affect the break-even point?
A) Number of units sold
B) Variable expense per unit
C) Total fixed expenses
D) Selling price per unit
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4. Lina Corporation has a degree of operating leverage of 8. This means that a 1% change in
sales dollars at Lina will generate an 8% change in:
A) Variable expenses. B) Fixed expenses. C) Contribution margin. D) Net operating income.
5. The following information relates to X Corporation:
Sales at the break-even point ......... $312,500
Total fixed expenses ...................... $250,000
Net operating income.................... $150,000
What is X margin of safety?
A) $62,500
B) $187,500
C) $100,000
D) $212,500
6. The following information relates to Leen Corporation for last year:
Sales........................................................... $500,000
Net operating income................................ $25,000
Degree of operating leverage.................... 5
Sales at Leen are expected to be $600,000 next year. Assuming no change in cost structure, this
means that net operating income for next year should be:
A) $30,000
B) $45,000
C) $50,000
D) $125,000
7. for an activity base to be useful in cost behavior analysis,
A. the activity should always be stated in dollars.
B. there should be a correlation between changes in the level of activity and changes in costs.
C. the activity should always be stated in terms of units.
D. the activity level should be constant over a period of time.
8. A variable cost is a cost that
A. varies per unit at every level of activity.
B. occurs at various times during the year.
C. varies in total in proportion to changes in the level of activity.
D. may or may not be incurred, depending on management's discretion.
9. A cost which remains constant per unit at various levels of activity is a
A. variable cost.
B. fixed cost.
C. mixed cost.
D. manufacturing cost.
10. A fixed cost is a cost which
A. varies in total with changes in the level of activity.
B. remains constant per unit with changes in the level of activity.
C. varies inversely in total with changes in the level of activity.
D. remains constant in total with changes in the level of activity.
11. Changes in activity have a (n) _________ effect on fixed costs per unit.
A. positive
b. negative
c. inverse
d. neutral
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12. Clark Company produces flash drives for computers, which it sells for $20 each. Each flash
drive costs $12 of variable costs to make. During April, 1,000 drives were sold. Fixed costs for
March were $2 per unit for a total of $1,000 for the month. How much is the contribution
margin ratio?
a. 30%
b. 40%
c. 60%
d. 70%
13. Contribution margin
A. is always the same as gross profit margin.
B. excludes variable selling costs from its calculation.
C. is calculated by subtracting total manufacturing costs per unit from sales revenue per unit.
D. equals sales revenue minus variable costs.
14. If a company had a contribution margin of $500,000 and a contribution margin ratio of
40%, total variable costs must have been
A. $750,000.
B. $300,000.
C. $1,250,000.
D. $200,000.
15. A company has contribution margin per unit of $45 and a contribution margin ratio of 40%.
What is the unit selling price?
A. $75.00
b. $112.50
c. $18.00
d. Cannot be determined.
16. Disney’s variable costs are 30% of sales. The company is contemplating an advertising
campaign that will cost $22,000. If sales are expected to increase $40,000, by how much will the
company's net income increase?
a. $18,000
b. $28,000
c. $12,000
d. $6,000
17. At the break-even point of 2,000 units, variable costs are $55,000, and fixed costs are
$32,000. How much is the selling price per unit?
a. $43.50
b. $11.50
c. $16.00
d. Not enough information
18. Sutton Company produces flash drives for computers, which it sells for $20 each. The
variable cost to make each flash drive is $6. During April, 700 drives were sold. Fixed costs for
April were $2 per unit for a total of $1,400 for the month. How much is the monthly break-even
level of sales in dollars for Sutton Company?
A. $100
B. $2,000
C. $7,000
D. $4,200
19. Sonoma Winery has fixed costs of $10,000 per year. Its warehouse sells wine with variable
costs of 80% of its unit selling price. How much in sales does Sonoma need to break even per
year?
A. $8,000
B. $2,000
C. $12,500
D. $50,000
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20. The amount by which actual or expected sales exceeds break-even sales is referred to as
A. contribution margin. B. unanticipated profit. C. margin of safety. D. target net income.
21. In evaluating the margin of safety, the
A. break-even point is not relevant.
B. higher the margin of safety ratio, the greater the margin of safety.
C. higher the dollar amount, the lower the margin of safety.
D. higher the margin of safety ratio, the lower the fixed costs.
22. Y Corporation expected to sell 150,000 games during the month of November.
The following budgeted data are based on that level of sales:
Revenue (150,000 games) ..................................... $2,400,000
Variable expenses.................................................. 1,425,000
Fixed manufacturing overhead expenses.............. 250,000
Fixed selling & administrative expenses ............... 500,000
Net operating income............................................ 225,000
Y actual sales during November were 180,000 games. What should the actual net operating
income during November have been?
A) $450,000
B) $270,000
C) $420,000
D) $510,000
23. Lina Company produces a product which sells for $40. Variable manufacturing costs are $18
per unit. Fixed manufacturing costs are $5 per unit based on the current level of activity, and
fixed selling and administrative costs are $4 per unit. The contribution margin per unit is:
A) $7
B) $17
C) $22
D) $16
24. X Company sells a single product at a selling price of $15.00 per unit. Last year, the
company's sales revenue was $225,000 and its net operating income was $18,000. If fixed
expenses totaled $72,000 for the year, the break-even point in unit sales was
A) 15,000
B) 9,900
C) 14,100
D) 12,000
25. Assaf Company manufactures and sells two types of beach towels, standard and deluxe.
Assaf expects the following operating results next year for each type of towel:
Standard
Deluxe
Sales............................................... $450,000
$50,000
Variable expenses (total) ............... $360,000
$20,000
Assaf expects to have a total of $57,600 in fixed expenses next year. What is Assaf break-even
point next year in sales dollars?
A) $72,000
B) $144,000
C) $192,000
D) $240,000
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26. Cindy, Inc. sells a product for $10 per unit. The variable expenses are $6 per unit, and the
fixed expenses total $35,000 per period. By how much will net operating income change if sales
are expected to increase by $40,000?
A) $16,000 increase B) $5,000 increase C) $24,000 increase D) $11,000 decrease
27. Shoman Corporation is a single-product company that expects the following operating
results for next year:
Sales........................................................... $320,000
Contribution margin per unit ..................... $0.20
Contribution margin ratio.......................... 25%
Degree of operating leverage.................... 8
How many units would Shoman have to sell next year to break-even?
A) 50,000
B) 200,000
C) 280,000
D) 350,000
28. Given the following data:
Selling price per unit ................................. $2.00
Variable production cost per unit.............. $0.30
Fixed production cost................................ $3,000
Sales commission per unit ......................... $0.20
Fixed selling expenses ............................... $1,500
The break-even point in dollars is:
A) $6,000
B) $4,500
C) $2,647
D) $4,000
29. Alpha Company reported the following data for its most recent year: sales, $500,000;
variable expenses, $300,000; and fixed expenses, $150,000. The company's degree of operating
leverage is:
A) 10
B) 2
C) 4
D) 2.5
30. A cement manufacturer has supplied the following data:
Tons of cement produced and sold
220,000
Sales revenue
$924,000
Variable manufacturing expense
$297,000
Fixed manufacturing expense
$280,000
Variable selling and administrative expense $165,000
Fixed selling and administrative expense
$82,000
Net operating income
$100,000
If the company increases its unit sales volume by 5% without increasing its fixed expenses, then
total net operating income should be closest to:
A) $5,000
B) $123,100
C) $105,000
D) $102,500
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31. A manufacturer of premium wire strippers has supplied the following data:
Units produced and sold.................................................. 560,000
Sales revenue ................................................................... $4,704,000
Variable manufacturing expense ..................................... 2,436,000
Fixed manufacturing expense......................................... 1,200,000
Variable selling and administrative expense ................... 616,000
Fixed selling and administrative expense....................... 272,000
Net operating income ...................................................... $180,000
The company's margin of safety in units is closest to:
A) 384,762
B) 263,704
C) 61,017
D) 522,740
32. A manufacturer of cedar shingles has supplied the following data:
Bundles of cedar shakes produced and sold.................... 280,000
Sales revenue ................................................................... $2,072,000
Variable manufacturing expense ..................................... $1,134,000
Fixed manufacturing expense......................................... $436,000
Variable selling and administrative expense ................... $238,000
Fixed selling and administrative expense....................... $164,000
Net operating income ...................................................... $100,000
93. The company's break-even in unit sales is closest to:
A) 130,149
B) 81,081
C) 25,038
D) 240,000
Use the following to answer questions 33-35:
Lina, Inc., has provided the following budgeted data:
Sales .................................. 10,000 units
Selling price ...................... $50 per unit
Variable expense ............... $30 per unit
Fixed expense.................... $180,000
33. What is the company's break-even point in sales dollars?
A) $450,000
B) $180,000
C) $300,000
D) $500,000
34. How many units would the company have to sell in order to have a net operating income of
$40,000?
A) 20,000 units
B) 9,000 units
C) 11,000 units
D) 7,333 units
35. At the budgeted sales level of 10,000 units, what is the company's degree of operating
leverage?
A) 10.0
B) 6.0
C) 22.5
D) 5.0
End chapter 5
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CHAPTER 6
Variable Costing and Segment Reporting: Tools for Management
1) This chapter describes two applications of the contribution format income
statements that were introduced in Chapters 2 and 5.
2) First, it explains how manufacturing companies can prepare variable costing
income statements, which rely on the contribution format, for internal decision
making purposes.
3) The variable costing approach will be contrasted with absorption costing income
statements, which are generally used for external reports.
4) Ordinarily, variable costing and absorption costing produce different net operating
income figures, and the difference can be quite large.
5) Second, the chapter explains how the contribution format can be used to prepare
segmented income statements.
6) In addition to companywide income statements, managers need to measure the
profitability of individual segments of their organizations.
7) A segment is a part or activity of an organization about which managers would like cost,
revenue, or profit data.
Overview of Variable and Absorption Costing
As you begin to read about variable and absorption costing income statements in the coming
pages, focus your attention on three key concepts.
1) Both income statement formats include product costs and period costs, although they
define these cost classifications differently.
2) Variable costing income statements are grounded in the contribution format.
❖ They categorize expenses based on cost behavior—variable expenses are
reported separately from fixed expenses.
❖ Absorption costing income statements ignore variable and fixed cost
distinctions
3) Variable and absorption costing net operating incomes often differ from one another.
The reason for the difference always relates to the fact that variable costing and
absorption costing income statements account for fixed manufacturing overhead
differently.
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Variable Costing
I.
II.
III.
IV.
V.
VI.
Under variable costing, only those manufacturing costs that vary with output are
treated as product costs.
This would usually include direct materials, direct labor, and the variable portion of
manufacturing overhead.
Fixed manufacturing overhead is not treated as a product cost under this method.
Fixed manufacturing overhead is treated as a period cost and, like selling and
administrative expenses (variable and fixed), it is reported as an expense on the income
statement in its entirety each period.
The cost of a unit of product in inventory or in cost of goods sold under the variable
costing method does not contain any fixed manufacturing overhead cost.
Variable costing is sometimes referred to as direct costing or marginal costing.
Absorption Costing
1) Absorption costing treats all manufacturing costs as product costs, regardless of
2)
3)
4)
whether they are variable or fixed.
The cost of a unit of product under the absorption costing method consists of direct
materials, direct labor, and both variable and fixed manufacturing overhead.
Thus, absorption costing allocates a portion of fixed manufacturing overhead cost to
each unit of product, along with the variable manufacturing costs.
Because absorption costing includes all manufacturing costs in product costs, it is
frequently referred to as the full cost method.
Selling and Administrative Expenses
Selling and administrative expenses are never treated as product costs, regardless of the costing
method.
Thus, under absorption and variable costing, variable and fixed selling and administrative
expenses are always treated as period costs and are reported as expenses on the income
statement as incurred.
‫جميع المالحظات فوق مهمة جداااااا عشان الحل‬
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Variable Costing versus Absorption Costing
Under variable costing → product cost = DM + DL + V.MOH
Under variable costing → Period cost = F.MOH + selling and administrative (variable and fixed)
Under Absorption costing → product cost = DM + DL + V.MOH + F.MOH
Under Absorption costing → Period cost = selling and administrative (variable and fixed)
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Variable Costing Contribution Format Income Statement
1 – Absorption statement (traditional):
Sales
Less: cost of goods sold
= Gross margin
Less: selling and administrative (variable and fixed )
= Net operating income
$$$$$$
$$$$$$
$$$$$$
$$$$$$
$$$$$$
COST OF GOODS SOLD ‫ النها دخلت في حساب‬FMOH ‫ما رح نطرح ال‬
2- Variable statement (contribution):
Sales
Less: cost of goods sold
Less :variable selling and administrative
= Contributions margin
Less: fixed selling and administrative
Less: fixed manufacturing overhead
= Net operating income
$$$$$$
$$$$$$
$$$$$$
$$$$$$
$$$$$$
$$$$$$
$$$$$$
COST OF GOODS SOLD ‫ النها ما دخلت في حساب‬FMOH ‫رح نطرح ال‬
: ‫ في حالة عدم وجودها بالسؤال باستخدام القانون التالي‬Cost of goods sold ‫انا بدي اطلع قيمة‬
Cost of goods sold = Unit sold * Unit product cost
Unit product cost under absorption = DM + DL +V.MOH per unit + F.MOH per unit
Unit product cost under variable = DM + DL +V.MOH per unit
F.MOH per unit = Total FMOH / Unit produced
The difference between absorption & variable in product cost is (F.MOH).
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Q1: USE the following information for questions 1- 8
Lina Company, which has only one product, has provided the following data concerning its most
recent month of operations:
Selling price....................................................... $129
Units produced ................................................... 6,300
Units sold........................................................... 6,100
Variable costs per unit:
Direct materials............................................... $32
Direct labor..................................................... $50
Variable manufacturing overhead................... $5
Variable selling and administrative................. $11
Fixed costs:
Fixed manufacturing overhead........................ $88,200
Fixed selling and administrative ..................... $97,600
1) What is the unit product cost for the month under variable costing?
A) $87
B) $101
C) $112
D) $98
DM + DL +V.MOH per unit = 32+50+5=87
2) What is the unit product cost for the month under absorption costing?
A) $101
B) $98
C) $87
D) $112
DM + DL +V.MOH per unit + F.MOH per unit = 32+50+5+ (88,200/6,300)
= 87+14 = 101
3) What is the net operating income for the month under variable costing?
A) $3,300
B) $2,800
C) ($14,100)
D) $6,100
4) What is the net operating income for the month under absorption costing?
A) $3,300
B) $2,800
C) ($14,100)
D) $6,100
5) The total contribution margin for the month under the variable costing approach is:
A) $170,800
B) $256,200
C) $100,900
D) $189,100
6) The total gross margin for the month under the absorption costing approach is:
A) $189,100
B) $6,100
C) $170,800
D) $191,000
7) What is the total period cost for the month under the variable costing approach?
A) $252,900
B) $164,700 C) $88,200
D) $185,800
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8) What is the total period cost for the month under the absorption costing approach?
A) $88,200
B) $252,900
C) $97,600
D) $164,700
Explanation:
1 – Absorption statement (traditional):
Sales
Less: cost of goods sold
= Gross margin
Less: selling and administrative (variable and fixed )
= Net operating income
786,900
616,100
170,800
164,700
6,100
164,700? = 97600+ (11 * 6100) = 164,700
2- Variable statement (contribution):
Sales
Less: cost of goods sold
Less :variable selling and administrative
= Contributions margin
Less: fixed selling and administrative
Less: fixed manufacturing overhead
= Net operating income
786,900
530,700
67,100
189,100
97,600
88,200
3,300
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Reconciliation of Variable Costing with Absorption Costing Income
❖ As noted earlier, variable costing and absorption costing net operating incomes may not
be the same.
❖ These differences occur because under absorption costing some fixed manufacturing
overhead is capitalized in inventories (i.e., included in product costs) rather than being
immediately expensed on the income statement.
In general
1) When the units produced exceed the units sold and hence inventories increase, net
operating income is higher under absorption costing than under variable costing. This
occurs because some of the fixed manufacturing overhead of the period is deferred in
inventories under absorption costing.
2) When the units sold exceed the units produced and hence inventories decrease, net
operating income is lower under absorption costing than under variable costing. This
occurs because some of the fixed manufacturing overhead of previous periods is
released from inventories under absorption costing.
3) When the units produced and the units sold are equal, no change in inventories occurs
and absorption costing and variable costing net operating incomes are the same
Variable costing and absorption costing net operating incomes can be reconciled by determining
how much fixed manufacturing overhead was deferred in, or released from, inventories during
the period:
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Difference in NOI = ∆ inventory * F.MOH per Unit
NOI abs. − NOI var. =( unit produced − unit sold) * total F.MOH / Unit produce
NOI abs. − NOI var. = (Ending inv. – Beginning inv.) * Total F.MOH / Unit produce
Q1: if the NOI under variable 11,000; NOI under absorption 9,000; Begging inventory 4,000;
F.MOH/U 3. What the ending inventory:
A) 3,334
B) 4,576
C) 4,000
D) 3,667
9000 – 11000 = (X – 4000) * 3
= - 2000 = 3x – 12000→
= 10000 = 3x
✓ X= 3,334
Q2: if the NOI under variable 7,000; NOI under absorption 12,000; ending inventory 4,000;
F.MOH/U 2. What the beginning inventory:
A) 3,000
B) 2,500
C) 1,500
D) 3,334
Q3: if the NOI under variable 9,000, NOI under absorption 16,000, ending inventory 4,000.
F.MOH under variable costing is 15 and; F.MOH under absorption costing is 20. What the
beginning inventory?
16000 – 9000 = (4000 – X) * 5
7000 = 20000 – 5 X
5X = 13000 → X = 2600
Explaining Changes in Net Operating Income
The variable costing income statements are clear and easy to understand. When sales go up, net
operating income goes up. When sales go down, net operating income goes down. When sales
are constant, net operating income is constant. The number of units produced does not affect
net operating income.
‫ عندما تنخفض‬.‫ يرتفع صافي دخل التشغيل‬،‫ عندما ترتفع المبيعات‬.‫بيانات الدخل المتغيرة لتحديد التكاليف واضحة وسهلة الفهم‬
‫ وال يؤثر عدد الوحدات‬.‫ يكون صافي دخل التشغيل ثابتًا‬،‫ عندما تكون المبيعات ثابتة‬.‫ ينخفض صافي دخل التشغيل‬،‫المبيعات‬
.‫المنتجة على صافي إيرادات التشغيل‬
Under absorption costing, if inventories increase, fixed manufacturing overhead costs are
deferred in inventories, which in turn increases net operating income. If inventories decrease,
fixed manufacturing overhead costs are released from inventories, which in turn decreases net
operating income. Thus, when absorption costing is used, fluctuations in net operating income
can be caused by changes in inventories as well as changes in unit sales.
.‫ مما يؤدي بدوره إلى زيادة صافي إيرادات التشغيل‬،‫ يتم تأجيل التكاليف العامة الثابتة للتصنيع في المخزون‬، ‫إذا زاد المخزون‬
‫ مما يؤدي بدوره إلى انخفاض صافي إيرادات‬،‫ فإن التكاليف العامة الثابتة للتصنيع تصدرمن المخزون‬،‫وإذا انخفض المخزون‬
‫ يمكن أن تحدث التقلبات في صافي إيرادات التشغيل نتيجة للتغيرات في‬،‫ عندما تستخدم تكاليف االستيعاب‬،‫ وهكذا‬.‫التشغيل‬
.‫المخزون فضال عن التغيرات في مبيعات الوحدات‬
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Segmented Income Statements and the Contribution Approach
Traceable and Common Fixed Costs and the Segment Margin
You need to understand three new terms to prepare segmented income statements using the
contribution approach—traceable fixed cost, common fixed cost, and segment margin.
A traceable fixed cost of a segment is
1) A fixed cost that is incurred because of the existence of the segment
2) If the segment had never existed, the fixed cost would not have been incurred.
3) If the segment were eliminated, the fixed cost would disappear.
A common fixed cost is a fixed cost that supports the operations of more than one segment, but
is not traceable in whole or in part to any one segment.
‫ ولكنها غير قابلة للتتبع بشكل كامل أو جزئي إلى أي‬،‫التكلفة الثابتة الشائعة هي تكلفة ثابتة تدعم عمليات أكثر من قطعة واحدة‬
.‫قطعة واحدة‬
Even if a segment were entirely eliminated, there would be no change in a true common fixed
cost.
.‫ فلن يكون هناك أي تغيير في التكلفة الثابتة المشتركة الحقيقية‬،‫وحتى لو تم القضاء على جزء من هذه الفئات تماما‬
✓ The segment margin is obtained by deducting the traceable fixed costs of a segment
from the segment’s contribution margin.
✓ The segment margin is the best gauge of the long-run profitability of a segment because
it includes only those costs that are caused by the segment.
✓ If a segment can’t cover its own costs, then that segment probably should be dropped
(unless it has important side effects on other segments).
✓ Notice, common fixed costs are not allocated to segments.
✓ The distinction between traceable and common fixed costs is crucial in segment
reporting because traceable fixed costs are charged to segments and common fixed
costs are not.
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Segment income statement
Sales
Less: Variable cost
=Contribution margin
Less: traceable fixed costs
= Segment margin
Less: common fixed costs ‫ على‬total only
= Net income
$$$$$$$$$$$
$$$$$$$$$$$
$$$$$$$$$$$
$$$$$$$$$$$
$$$$$$$$$$$
$$$$$$$$$$$
$$$$$$$$$$$
Question: Ahmad Company produce two products A, B; in product A the sales 1000; V.C 300;
traceable F.C 200. In product B, sales 2,000; V.C 500; Traceable F.C 350. What the net operating
income if the common F.C 500.
Sales
(V.C)
= CM
(Traceable F.C)
= Segment margin
( common F.C)
= Net income
Product A
1,000
300
700
200
500
Product B
2,000
500
1,500
350
1,150
total
3,000
800
2,200
550
1,650
500
1,050
Multiple choice question:
1. Under variable costing, fixed manufacturing overhead is:
A) Carried in a liability account.
B) Carried in an asset account.
C) Ignored.
D) Immediately expensed as a period cost.
2. Which of the following is true of a company that uses absorption costing?
A) Net operating income fluctuates directly with changes in sales volume.
B) Fixed production and fixed selling costs are considered to be product costs.
C) Unit product costs can change as a result of changes in the number of units manufactured.
D) Variable selling expenses are included in product costs.
3. Under absorption costing, fixed manufacturing overhead costs:
A) Are deferred in inventory when production exceeds sales.
B) Are always treated as period costs.
C) Are released from inventory when production exceeds sales.
D) None of these.
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4. Which of the following are included in product costs under variable costing?
I. Variable manufacturing overhead.
II. Fixed manufacturing overhead.
III. Selling and administrative expenses.
A) I, II, and III.
B) I and III.
C) I and II.
D) I.
5. under variable costing:
A) Net operating income will tend to move up and down in response to changes in levels of
production.
B) Inventory costs will be lower than under absorption costing.
C) Net operating income will tend to vary inversely with production changes.
D) Net operating income will always be higher than under absorption costing.
6. In an income statement prepared using the variable costing method, fixed selling and
administrative expenses would:
A) Be used in the computation of the contribution margin.
B) Be used in the computation of net operating income but not in the computation of the
contribution margin.
C) Be treated the same as variable manufacturing expenses.
D) Not be used.
7. in an income statement prepared using the variable costing method, fixed manufacturing
overhead would:
A) Not be used.
B) Be used in the computation of the contribution margin.
C) Be used in the computation of net operating income but not in the computation of the
contribution margin.
D) Be treated the same as variable manufacturing overhead.
8. In an income statement prepared as an internal report using variable costing, variable selling
and administrative expenses would:
A) Not be used.
B) Be used in the computation of the contribution margin.
C) Be used in the computation of net operating income but not in the computation of the
contribution margin.
D) Be treated the same as fixed selling and administrative expenses.
9. When production exceeds sales, the net operating income reported under absorption costing
generally will be:
A) Less than net operating income reported under variable costing.
B) Greater than net operating income reported under variable costing.
C) Equal to net operating income reported under variable costing.
D) Higher or lower because no generalization can be made.
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10. When sales exceed production, the net operating income reported under variable costing
generally will be:
A) Less than net operating income reported under absorption costing.
B) Greater than net operating income reported under absorption costing.
C) Equal to net operating income reported under absorption costing.
D) Higher or lower because no generalization can be made.
11. The type of costing that provides the best information for breakeven analysis is:
A) job-order costing. B) Variable costing. C) Process costing. D) Absorption costing.
12. A manufacturing company that produces a single product has provided the following data
concerning its most recent month of operations:
Selling price........................................................... $143
Units in beginning inventory ................................. 0
Units produced ...................................................... 8,200
Units sold ............................................................... 7,800
Units in ending inventory...................................... 400
Variable costs per unit:
Direct materials.................................................. $49
Direct labor ......................................................... $42
Variable manufacturing overhead ...................... $3
Variable selling and administrative.................... $7
Fixed costs:
Fixed manufacturing overhead ........................... $270,600
Fixed selling and administrative ........................ $46,800
What is the total period cost for the month under the variable costing approach?
A) $101,400
B) $372,000
C) $317,400
D) $270,600
13. A manufacturing company that produces a single product has provided the following data
concerning its most recent month of operations:
Selling price........................................................... $100
Units produced ...................................................... 2,400
Units sold ............................................................... 2,100
Units in ending inventory...................................... 300
Variable costs per unit:
Direct materials.................................................. $31
Direct labor ......................................................... $11
Variable manufacturing overhead ...................... $1
Variable selling and administrative.................... $8
Fixed costs:
Fixed manufacturing overhead ........................... $79,200
Fixed selling and administrative ........................ $8,400
What is the total period cost for the month under the absorption costing approach?
A) $79,200
B) $8,400
C) $104,400
D) $25,200
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14. The following data pertain to last year's operations at Lina Corporation, a company that
produces a single product:
Units in beginning inventory ........................... 0
Units produced ................................................ 20,000
Units sold ......................................................... 19,000
Selling price per unit ....................................... $100.00
Variable costs per unit:
Direct materials............................................ $12.00
Direct labor ................................................... $25.00
Variable manufacturing overhead ................ $3.00
Variable selling and administrative.............. $2.00
Fixed costs per year:
Fixed manufacturing overhead ..................... $500,000
Fixed selling and administrative .................. $600,000
What was the variable costing net operating income last year?
A) $12,000
B) $57,000
C) $2,000
D) $27,000
15. A manufacturing company that produces a single product has provided the following data
concerning its most recent month of operations:
Selling price............................................... $103
Units in beginning inventory ..................... 0
Units produced .......................................... 1,700
Units sold ................................................... 1,400
Units in ending inventory.......................... 300
Variable costs per unit:
Direct materials...................................... $39
Direct labor ............................................. $32
Variable manufacturing overhead .......... $6
Variable selling and administrative........ $5
Fixed costs:
Fixed manufacturing overhead ............... $6,800
Fixed selling and administrative ............ $8,400
What is the net operating income for the month under absorption costing?
A) $14,200
B) ($8,900)
C) $1,200
D) $15,400
16. Mahmood Company produces a single product. Last year, the company's net operating
income computed by the absorption costing method was $6,400, and its net operating income
computed by the variable costing method was $9,100. The company's unit product cost was $17
under variable costing and $20 under absorption costing. If the ending inventory consisted of
2,100 units, the beginning inventory in units must have been:
A) 1,200
B) 2,100
C) 3,000
D) 4,800
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17. Number1 Company produces a single product. During March, the company had net
operating income under absorption costing that was $3,500 lower than under variable costing.
The company sold 7,000 units in March, and its variable costs were $7 per unit, of which $3 was
variable selling expense. If fixed manufacturing overhead was $2 per unit under absorption
costing, then how many units did the company produce during March?
A) 5,250 units
B) 8,750 units
C) 6,500 units
D) 6,125 units
18. Number1 Company produces a single product. Last year, the company had 25,000 units in its
ending inventory. Number1 variable production costs were $10 per unit and fixed
manufacturing overhead costs were $5 per unit. The company's net operating income last year
was $10,000 higher under variable costing than it was under absorption costing. Given these
facts, the number of units of product in beginning inventory last year must have been:
A) 24,000 units
B) 27,000 units
C) 23,000 units
D) 24,333 units
19. A company that produces a single product had a net operating income of $85,500 using
variable costing and a net operating income of $90,000 using absorption costing. Total fixed
manufacturing overhead was $150,000, and production was 100,000 units. Between the
beginning and the end of the year, the inventory level:
A) Increased by 4,500 units
B) decreased by 4,500 units
C) Increased by 3,000 units
D) decreased by 3,000 units
20. The contribution margin ratio always increases when the:
A) Break-even point increases.
B) Break-even point decreases.
C) Variable expenses as a percentage of net sales decrease.
D) Variable expenses as a percentage of net sales increase.
21- Which of the following statements is true?
A. When production exceeds sales, a manufacturing company's variable costing net operating
income will usually be greater than its absorption costing net operating income.
B. The variable costing method is usually not used for external reporting purposes.
C. The absorption costing method treats fixed production costs as period costs.
D. All of these
22- Which of the following statements is true for a company that uses variable costing?
A. The unit product cost changes as a result of changes in the number of units manufactured.
B. Both variable selling costs and variable production costs are included in the unit product cost.
C. Net operating income moves in the same direction as sales.
D. Net operating income is greatest in periods when production is highest
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23- A cost that would be included in product costs under both absorption costing and variable
costing would be:
A. supervisory salaries.
B. equipment depreciation.
C. variable manufacturing costs.
D. variable selling expenses
24- Which of the following costs at a manufacturing company would be treated as a product
cost under the absorption costing method?
A. sales commissions
B. fire insurance cost on factory building
C. advertising costs
D. All of these
25- Assuming that direct labor is a variable cost, product costs under variable costing include
only:
A. direct materials and direct labor.
B. direct materials, direct labor, and variable manufacturing overhead.
C. direct materials, direct labor, variable manufacturing overhead, and variable selling and
administrative expenses.
D. direct material, variable manufacturing overhead, and variable selling and administrative
expenses
26- Weber Company computes net operating income under both the absorption costing
approach and the variable costing approach. For a given year the absorption costing net
operating income was greater than the variable costing net operating income. This fact suggests
that:
A. variable manufacturing costs were less than fixed manufacturing costs.
B. more units were produced during the year than were sold.
C. more units were sold during the year than were produced.
D. common costs were greater than variable costs for the year
7- Net operating income computed using variable costing would exceed net operating income
computed using absorption costing if:
A. units sold exceed units produced.
B. units sold are less than units produced.
C. units sold equal units produced.
D. the average fixed cost per unit is zero.
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8- Silver Company produces a single product. Last year, the company's variable production costs
totaled $7,500 and its fixed manufacturing overhead costs totaled $4,500. The company
produced 3,000 units during the year and sold 2,400 units. There were no units in the beginning
inventory. Which of the following statements is true?
A. Under variable costing, the units in the ending inventory will be costed at $4 each.
B. The net operating income under absorption costing for the year will be $900 lower than the
net operating income under variable costing.
C. The ending inventory under variable costing will be $900 lower than the ending inventory
under absorption costing.
D. Under absorption costing, the units in ending inventory will be costed at $2.50 each
29- Atlantic Company produces a single product. For the most recent year, the company's net
operating income computed by the absorption costing method was $7,400, and its net
operating income computed by the variable costing method was $10,100. The company's unit
product cost was $17 under variable costing and $22 under absorption costing. If the ending
inventory consisted of 1,460 units, the beginning inventory must have been:
A. 920 units
B. 1,460 units
C. 2,000 units
D. 12,700 units
30. Roberts Company produces a single product. During the year just ended, the company's net
operating income under absorption costing was $3,000 lower than under variable costing. The
company sold 9,000 units during the year, and its variable costs were $9 per unit, of which $3
was variable selling expense. If production cost is $11 per unit under absorption costing every
year, then how many units did the company produce during the year?
A. 8,000
B. 10,000
C. 9,600
D. 8,400
31. Lyons Company consists of two divisions, A and B. Lyons Company reported a contribution
margin of $50,000 for Division A, and had a contribution margin ratio of 30% in Division B, when
sales in Division B were $200,000. Net operating income for the company was $25,000 and
traceable fixed expenses were $40,000. Lyons Company's common fixed expenses were:
A. $85,000
B. $70,000
C. $45,000
D. $40,000
32. Anspach Corporation has two divisions: the Governmental Products Division and the
Consumer Products Division. The Governmental Products Division's divisional segment margin is
$11,800 and the Consumer Products Division's divisional segment margin is $155,500. The total
amount of common fixed expenses not traceable to the individual divisions is $142,200. What is
the company's net operating income?
A. ($167,300)
B. $25,100
C. $309,500
D. $167,300
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Use the following information to answer question 33-35
Kulp Corporation has two major business segments-East and West. In July, the East business
segment had sales revenues of $900,000, variable expenses of $441,000, and traceable fixed
expenses of $171,000. During the same month, the West business segment had sales revenues
of $450,000, variable expenses of $234,000, and traceable fixed expenses of $45,000. The
common fixed expenses totaled $321,000 and were allocated as follows: $180,000 to the East
business segment and $141,000 to the West business segment.
33. The contribution margin of the West business segment is:
A. $108,000
B. $675,000
C. $288,000
D. $216,000
34. A properly constructed segmented income statement in a contribution format would show
that the segment margin of the East business segment is:
A. $288,000
B. $279,000
C. $108,000
D. $441,000
35. A properly constructed segmented income statement in a contribution format would show
that the net operating income of the company as a whole is:
A. $138,000
B. $675,000
C. $459,000
D. -$183,000
End chapter 6
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Activity-Based Costing: A Tool to Aid Decision Making
1) This chapter introduces the concept of activity-based costing which has been embraced
by a wide variety of organizations.
.‫يقدم هذا الفصل مفهوم تحديد التكاليف على أساس األنشطة الذي تستخدمه مجموعة واسعة من المنظمات‬
2) Activity-based costing (ABC) is a costing method that is designed to provide managers
with cost information for strategic and other decisions that potentially affect capacity
and therefore “fixed” as well as variable costs.
‫هي طريقة تحديد التكاليف التي تم تصميمها لتزويد المديرين بمعلومات التكلفة عن القرارات االستراتيجية وغيرها من‬
.‫القرارات التي يحتمل أن تؤثر على القدرة وبالتالي "التكاليف الثابتة" وكذلك التكاليف المتغيرة‬
3) Most organizations that use activity-based costing have two costing systems:
a- the official costing system that is used for preparing external financial reports.
b-the activity-based costing system that is used for internal decision making and for
managing activities.
Activity-Based Costing: An Overview
Activity-based costing differs from traditional absorption costing in three ways. In activity-based
costing:
1. Nonmanufacturing as well as manufacturing costs may be assigned to products, but only on a
cause-and-effect basis.
.‫ ولكن فقط على أساس السبب والنتيجة‬، ‫قد يتم تخصيص تكاليف عدم التصنيع وكذلك تصنيع للمنتجات‬
2. Some manufacturing costs may be excluded from product costs.
.‫قد تُستثنى بعض تكاليف التصنيع من تكاليف المنتجات‬
3. Numerous overhead cost pools are used, each of which is allocated to products and other
cost objects using its own unique measure of activity.
‫ وكل منها مخصص للمنتجات وغيرها من األشياء ذات التكلفة باستخدام مقياس‬،‫وتستخدم العديد من مجمعات التكاليف العامة‬
.‫فريد من نوعه للنشاط‬
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Nonmanufacturing Costs and Activity-Based Costing
✓ ABC includes manufacturing and nonmanufacturing costs when calculating the entire
cost of a product rather than just its manufacturing cost.
.‫تتضمن تكاليف التصنيع والتكاليف غير المصنعة عند حساب التكلفة الكاملة للمنتج بدالً من تكلفة التصنيع‬
.
✓ There are two types of nonmanufacturing costs that ABC systems assign to products:
1) ABC systems trace all direct nonmanufacturing costs to products. Commissions paid to
salespersons, shipping costs, and warranty repair costs are examples of
nonmanufacturing costs that can be directly traced to individual products.
،‫ وتكاليف الشحن‬،‫ العموالت المدفوعة إلى مندوبي المبيعات‬.‫تتبع جميع التكاليف غير المصنعة المباشرة للمنتجات‬
.‫وتكاليف إصالح الضمان هي أمثلة على التكاليف غير المصنعة التي يمكن إرجاعها مباشرة إلى المنتجات الفردية‬
2) ABC systems allocate indirect nonmanufacturing costs to products whenever the
products have presumably caused the costs to be incurred.
‫وتُخصص نظم المؤسسة المصرفية تكاليف غير ُمنتجة غير مباشرة للمنتجات كلما كان من المفترض أن تكون المنتجات قد‬
.‫تسببت في تكبد التكاليف‬
✓ In summary, ABC product cost calculations include all direct costs that can be traced to
products and all indirect costs that are caused by products.
Manufacturing Costs and Activity-Based Costing
✓ Activity based costing systems purposely do not assign two types of manufacturing
overhead costs to products—organization-sustaining costs and unused capacity costs
(also called idle capacity costs).
✓ Organization-sustaining costs include costs such as the factory security guard’s wages,
the plant controller’s salary, and the cost of supplies used by the plant manager’s
secretary.
✓ These types of manufacturing overhead costs are assigned to products in a traditional
absorption costing system even though they are totally unaffected by which products
are made during a period.
✓ In contrast, activity-based costing systems treat these types of organization-sustaining
costs as period expenses rather than arbitrarily assigning them to products.
✓ Additionally, in a traditional absorption costing system, the cost of unused capacity is
assigned to products.
✓ In contrast, in activity-based costing, products are charged only for the cost of the
capacity they use—not for the cost of the capacity they don’t use.
✓
This provides more stable unit product costs and is consistent with the goal of assigning
to products only the costs of the resources that they use.
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Differences between Traditional Absorption Costing and Activity-Based Costing
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Cost Pools, Allocation Bases, and Activity-Based Costing
.‫ندخل على الموضوع اللي فعليا مهم بالتشابتر وبده تركيز وسهل مش صعب لكن ركز‬
1) In activity-based costing, an activity is any event that causes the consumption of
overhead resources.
.‫ يكون النشاط هو أي حدث يتسبب في استهالك موارد النفقات العامة‬،‫في التكاليف المستندة إلى النشاط‬
2) An activity cost pool is a “bucket” in which costs are accumulated that relate to a single
activity measure in the ABC system.
.‫مجمع تكلفة النشاط هو الذي يتم تجميع التكاليف التي تتعلق بمقياس نشاط واحد في النظام‬
3) An activity measure is an allocation base in an activity-based costing system.
4) The term cost driver is also used to refer to an activity measure because the activity
measure should “drive” the cost being allocated.
5) The two most common types of activity measures are transaction drivers and duration
drivers.
.‫النوعان األكثر شيوعا ً من مقاييس النشاط هي برامج تشغيل العمليات وبرامج تشغيل المدة‬
6) Transaction drivers are simple counts of the number of times an activity occurs, such as
the number of bills sent out to customers.
.‫ مثل عدد الفواتير المرسلة إلى العمالء‬،‫تعتبر برامج تشغيل العمليات عدد بسيط من عدد مرات حدوث نشاط‬
7) Duration drivers measure the amount of time required to perform an activity, such as
the time spent preparing individual bills for customers.
‫ مثل الوقت الذي يقضيه في إعداد الفواتير الفردية‬،‫يقوم برامج التشغيل بقياس مقدار الوقت المطلوب لتنفيذ نشاط ما‬
.‫للعمالء‬
8) In general, duration drivers are more accurate measures of resource consumption than
transaction drivers, but they take more effort to record. For that reason, transaction
drivers are often used in practice
‫ ولكنها تأخذ المزيد من‬،‫ برامج تشغيل المدة هي مقاييس أكثر دقة استهالك الموارد من برامج تشغيل العمليات‬،‫بشكل عام‬
.‫ كثيرا ما تستخدم في الممارسة العملية برامج تشغيل العمليات‬،‫ ولهذا السبب‬.‫الجهد لتسجيل‬
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Activity-based costing defines five levels of activity, these levels are described as follows:
1. Unit-level activities are performed each time a unit is produced. The costs of unit level
activities should be proportional to the number of units produced. For example, providing
power to run processing equipment would be a unit-level activity because power tends to be
consumed in proportion to the number of units produced.
2. Batch-level activities are performed each time a batch is handled or processed, regardless of
how many units are in the batch. For example, tasks such as placing purchase orders, setting up
equipment, and arranging for shipments to customers are batch-level activities.
3. Product-level activities relate to specific products and typically must be carried out regardless
of how many batches are run or units of product are produced or sold. For example, activities
such as designing a product, advertising a product, and maintaining a product manager and staff
are all product-level activities.
4. Customer-level activities relate to specific customers and include activities such as sales calls,
catalog mailings, and general technical support that are not tied to any specific product.
5. Organization-sustaining activities are carried out regardless of which customers are served,
which products are produced, how many batches are run, or how many units are made. This
category includes activities such as heating the factory, cleaning executive offices, providing a
computer network, arranging for loans, preparing annual reports to shareholders, and so on.
Designing an Activity-Based Costing (ABC) System
Steps for Implementing Activity-Based Costing:
1. Define activities, activity cost pools, and activity measures.
2. Assign overhead costs to activity cost pools.
3. Calculate activity rates.
4. Assign overhead costs to cost objects using the activity rates and activity measures.
5. Prepare management reports
. 5 ‫ الى‬3 ‫اول نقطة وثاني نقطة غير مطالب فيهم الحل يبدا من النقطة‬
. ‫كل نقطة بتعتمد على الثانية‬
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Step 1: Define Activities, Activity Cost Pools, and Activity Measures
✓ The first major step in implementing an ABC system is to identify the activities that will
form the foundation for the system.
✓ This can be difficult and time-consuming and involves a great deal of judgment.
✓ A common procedure is for the individuals on the ABC implementation team to
interview people who work in overhead departments and ask them to describe their
major activities.
Step 2: Assign Overhead Costs to Activity Cost Pools
✓ The first-stage allocation in an ABC system is the process of assigning functionally
organized overhead costs derived from a company’s general ledger to the activity cost
pools.
✓ First-stage allocations are usually based on the results of interviews with employees
who have first-hand knowledge of the activities.
Step 3: Calculate Activity Rates ‫هون بندخل على الحل‬
The activity rates that will be used for assigning overhead costs to products and customers.
𝒄𝒐𝒔𝒕
Activity rate = 𝒂𝒍𝒍𝒐𝒄𝒂𝒕𝒊𝒐𝒏 𝒃𝒂𝒔𝒆
Example1: If the company had the following data
Activity cost
pool
Estimated overhead cost
Order
processing
Shipment
Machine
setups
Amount of cost allocation base
$30,000
1000 order
45,000
15,000
300 shipment
30 machine setup
Calculate the activity rate for each cost pool.
𝑐𝑜𝑠𝑡
Activity rate = 𝑎𝑙𝑙𝑜𝑐𝑎𝑡𝑖𝑜𝑛 𝑏𝑎𝑠𝑒
For order = 30000/1000 = 30 per order
For shipment = 45000/300=150
For machine = 15000/30 =500
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Step 4: Assign Overhead Costs to Cost Objects
The fourth step in the implementation of activity-based costing is called second-stage allocation.
In the second-stage allocation, activity rates are used to apply overhead costs to products and
customers.
OH = activity rate * unit produced
Continue Example1: Assign overhead cost to cost object if the same company have the
following products.
Product A
Product B
Unit produced
100 units
100 units
Order processing
15 order
25 order
Shipment
5 shipment
20 shipments
Machine setup
10 machine setup
15 machine setup
Required: Determine the total overhead cost first would be assigned for each product.
OH = activity rate * unit produced
For product A
Order = 30*15 = 450
Shipment = 150*5 =750
Set up = 500*10=5000
Total OH for A = 6200
For product B
Order = 30*25 = 750
Shipment = 150*20 =3,000
Set up = 500*15=7,500
Total OH for A = 11,250
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Step 5: Prepare Management Reports
‫جدااااااااااا مهمة وتعتمد على كل الخطوات‬
The most common management reports prepared with ABC data are product and customer
profitability reports. These reports help companies channel their resources to their most profitable
growth opportunities while at the same time highlighting products and customers that drain profits.
Product margin (management report) = sales - Total cost
Total cost = DM + DL + OH
Step 5: Prepare the management report if the same company have the following data:
#Units SOLD
SELLING PRICE
DM
DL
Prepare a management report.
Product A
100 units
$200
$56
70
A=
SALES 100*200 = 20000
DM 56*100
= (5600)
DL 70*100
= (7000)
OH
= (6200) → step 4
Product margin = 1200
B=
SALES 100*400 = 40000
DM 77*100
= (7700)
DL 89*100
= (8900)
OH
= (11250) → step 4
Product margin = 12,150
77
Product B
100 units
$400
$77
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Targeting Process Improvements
✓ Activity-based costing can also be used to identify activities that would benefit from
process improvements.
✓ When used in this way, activity-based costing is often called activity-based
management.
✓ Basically, activity-based management involves focusing on activities to eliminate waste,
decrease processing time, and reduce defects.\
✓ Benchmarking is another way to leverage the information in activity rates.
✓ Benchmarking is a systematic approach to identifying the activities with the greatest
room for improvement.
𝑪𝑶𝑮𝑺
Average cost = 𝒏𝒐 𝒐𝒇 𝒖𝒏𝒊𝒕
COGS = DM + DL + MOH
Q: If the cost of goods sold 350,000 and annual unit production and sold 430 what the average
cost of products?
= 350,000 / 430 = 813.95
Price = Cost + Markup
Markup = cost * the effect on price (increase or decrease)
Q: if the MOH 40 and Dl 30 and DM 25 And the rate of price increase over the cost price 30%
Determine the price.
Cost = 40 + 30 + 25 = 95
Markup = 95 * 0.30 = 28.5
Price = 95+ 28.5 = 123.5
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Multiple choice questions:
1. Which of the following costs should not be included in product costs for internal management
reports that are used for decision-making?
A) Costs of unit-level activities.
B) Costs of batch-level activities.
C) Costs of product-level activities.
D) Costs of organization-sustaining activities.
2. The labor time required to assemble a product is an example of a:
A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Organization-sustaining activity.
3. Production order processing is an example of a:
A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Organization-sustaining activity.
4. Assembling a product is an example of a:
A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Organization-sustaining.
5. Setting up a machine to change from producing one product to another is an example of a:
A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Organization-sustaining activity.
6. Designing a new product is an example of a:
A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Organization-sustaining activity.
7. The plant manager's salary is an example of a:
A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Organization-sustaining activity.
8. Machining a part for a product is an example of a:
A) Unit-level activity.
B) Batch-level activity.
C) Product-level activity.
D) Organization-sustaining activity.
9. If substantial batch-level or product-level costs exist, then overhead allocation based on a
measure of volume such as direct labor-hours alone:
A) Is a key aspect of the activity-based costing model.
B) Will systematically over cost high-volume products and under cost low-volume products.
C) Will systematically over cost low-volume products and under cost high-volume products.
D) Must be used for external financial reporting since activity-based costing cannot be used for
external reporting purposes.
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10- Purchase order processing is an example of a: A. Unit-level activity.
B. Batch-level activity.
C. Product-level activity.
D. Organization-sustaining activity .
11. Arranging for a shipment of a number of different products to a customer is an example of
an activity at which of the following levels?
A. Unit-level activity.
B. Batch-level activity.
C. Customer-level activity.
D. Organization-sustaining activity
12- Testing a prototype of a new product is an example of a:
A. Unit-level activity.
B. Batch-level activity.
C. Product-level activity.
D. Organization-sustaining activity .
13. Setting up equipment is an example of a:
A. Unit-level activity.
B. Batch-level activity.
C. Product-level activity.
D. Organization-sustaining activity .
14. Worker recreational facilities is an example of a cost that would ordinarily be considered to
be:
A. Unit-level.
B. Batch-level.
C. Product-level.
D. Organization-sustaining
15. The clerical activity associated with processing purchase orders to produce an order for a
standard product is an example of a:
A. Unit-level activity.
B. Batch-level activity.
C. Product-level activity.
D. Organization-sustaining activity.
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16. Danial Corporation uses an activity-based costing system with the following three activity
cost pools:
The Other activity cost pool is used to accumulate costs of idle capacity and organization
sustaining costs.
The company has provided the following data concerning its costs:
The distribution of resource consumption across activity cost pools is given below:
The activity rate for the Fabrication activity cost pool is closest to:
A. $3.72 per machine-hour
B. $4.44 per machine-hour
C. $7.44 per machine-hour
D. $1.24 per machine-hour
Explanation:
•
222,000/50,000 = 4.44
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17. Assaf Corporation uses an activity-based costing system with the following three activity cost
pools:
The Other activity cost pool is used to accumulate costs of idle capacity and organization
sustaining costs.
The company has provided the following data concerning its costs:
The activity rate for the Order Processing activity cost pool is closest to:
A. $1,050 per order
B. $1,680 per order
C. $1,190 per order
D. $1,350 per order
Explanation:
•
540,000/400 = 1,350
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18. Lina Corporation uses an activity-based costing system with the following three activity cost
pools:
The activity rate for the Assembly activity cost pool is closest to:
A. $4.30 per labor-hour
B. $7.00 per labor-hour
C. $8.60 per labor-hour
D. $12.90 per labor-hour
Explanation:
•
140,000/20,000 = 7
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19. Mahmood Corporation uses an activity-based costing system with three activity cost pools.
The company has provided the following data concerning its costs and its activity based costing
system:
How much cost, in total, would be allocated in the first-stage allocation to the Assembly activity
cost pool?
A. $314,000
B. $272,333
C. $215,000
D. $430,000
Explanation:
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20. Mahmood Corporation uses an activity-based costing system with three activity cost pools.
The company has provided the following data concerning its costs and its activity based costing
system:
How much cost, in total, would be allocated in the first-stage allocation to the Setting Up activity
cost pool?
A. $325,000
B. $312,000
C. $333,000
D. $429,000
Explanation:
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21. Mahmood Corporation uses an activity-based costing system with three activity cost pools.
The company has provided the following data concerning its costs and its activity based costing
system:
How much cost, in total, would be allocated in the first-stage allocation to the other activity cost
pool?
A. $143,000
B. $144,000
C. $108,000
D. $135,000
22. Lina Corporation uses an activity-based costing system with three activity cost pools. The
company has provided the following data concerning its costs and its activity based costing
system:
How much cost, in total, would be allocated in the first-stage allocation to the Fabricating
activity cost pool?
A. $120,000
B. $216,000
C. $161,000
D. $108,000
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23. Lina Corporation has provided the following data from its activity-based costing system:
The company makes 340 units of product P23F a year, requiring a total of 710 machine-hours,
80 orders, and 40 inspection-hours per year. The product's direct materials cost is $40.05 per
unit and its direct labor cost is $14.35 per unit. The product sells for $121.90 per unit. According
to the activity-based costing system, the product margin for product P23F is:
A. $9,223.20
B. $7,853.60
C. $5,401.60
D. $22,950.00
24. Lina Corporation has provided the following data from its activity-based costing system:
According to the activity-based costing system, the product margin for product O11W is:
A. $4,651.80
B. $1,688.10
C. $17,934.00
D. $3,956.10
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25. Wateen Corporation has provided the following data from its activity-based costing system:
The company makes 240 units of product T91H a year, requiring a total of 550 machinehours, 90
orders, and 40 inspection-hours per year. The product's direct materials cost is $16.98 per unit
and its direct labor cost is $12.09 per unit. According to the activity-based costing system, the
average cost of product T91H is closest to:
A. $79.66 per unit
B. $90.81 per unit
C. $29.07 per unit
Explanation:
Activity rate
Assembly = 387,000 / 25,000 = 15.48
Processing order = 68,510 / 1,700 = 40.30
Inspection = 139,117 / 1,930 = 66.90
Then
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D. $75.70 per unit
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26. XYZ Corporation has provided the following data from its activity-based costing system:
According to the activity-based costing system, the average cost of product P58Z is closest to:
A. $113.33 per unit
B. $58.30 per unit C. $123.40 per unit D. $118.30 per unit
27. Lina Corporation has provided the following data from its activity-based costing accounting
system:
The activity rate for the "designing products" activity cost pool is closest to:
A. $124 per product design hour
B. $181 per product design hour
C. $55 per product design hour
D. $1,526,916 per product design hour
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28. M.M.7 Corporation uses the following activity rates from its activity-based costing to assign
overhead costs to products:
How much overhead cost would be assigned to Product X60R using the activity-based costing
system?
A. $5,523.58
B. $87,070.14
C. $115.02
D. $7,212.38
Use the following information to answer question 29-30
Mahmood Corporation has provided the following data from its activity-based costing
accounting system:
The "Other" activity cost pool consists of the costs of idle capacity and organization sustaining
costs that are not assigned to products.
29. How much supervisory wages and factory supplies cost would be assigned to the Batch
Processing activity cost pool?
A. $286,000
B. $520,000
C. $284,000
D. $260,000
30. How much supervisory wages and factory supplies cost would NOT be assigned to products
using the activity-based costing system?
A. $0
B. $280,000
C. $240,000
D. $76,000
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Use the following information to answer question 31-32
The following data have been provided by Number1 Corporation from its activity-based costing
accounting system:
The "Other" activity cost pool consists of the costs of idle capacity and organization sustaining
costs that are not assigned to products.
31. How much factory supervision and indirect factory labor cost would be assigned to the Batch
Set-Up activity cost pool?
A. $680,000
B. $385,000
C. $391,000
D. $340,000
32. How much factory supervision and indirect factory labor cost would NOT be assigned to
products using the activity-based costing system?
A. $220,000
B. $90,000
C. $0
D. $460,000
End chapter 7
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CHAPTER 8
Master Budgeting
In this chapter, we describe how organizations strive to achieve their financial goals by
preparing budgets.
A budget is a detailed plan for the future that is usually expressed in formal quantitative terms
Why and How Do Organizations Create Budgets? ‫لماذا وكيف تقوم المؤسسات بإنشاء الميزانيات؟‬
1) Budgets are used for two distinct purposes—planning and control.
2) Planning involves developing goals and preparing various budgets to achieve those
goals.
3) Control involves gathering feedback to ensure that the plan is being properly executed
or modified as circumstances change.
4) To be effective, a good budgeting system must provide for both planning and control.
5) Good planning without effective control is a waste of time and effort.
Advantages of Budgeting
Organizations realize many benefits from budgeting, including:
1. Budgets communicate management’s plans throughout the organization.
.‫الميزانيات تُبلغ خطط اإلدارة في جميع أنحاء المنظمة‬
2. Budgets force managers to think about and plan for the future. In the absence of the
necessity to prepare a budget, many managers would spend all of their time dealing with dayto-day emergencies.
‫ سيقضي العديد من المديرين‬،‫ وفي غياب ضرورة إعداد ميزانية‬.‫وتجبر الميزانيات المديرين على التفكير والتخطيط للمستقبل‬
.‫كل وقتهم في التعامل مع حاالت الطوارئ اليومية‬
3. The budgeting process provides a means of allocating resources to those parts of the
organization where they can be used most effectively.
.‫وتوفر عملية الميزانية وسيلة لتخصيص الموارد ألجزاء المنظمة التي يمكن استخدامها بأكفأ الطرق‬
4. The budgeting process can uncover potential bottlenecks before they occur.
.‫يمكن لعملية الميزانية الكشف عن االختناقات المحتملة قبل حدوثها‬
5. Budgets coordinate the activities of the entire organization by integrating the plans of its
various parts. Budgeting helps to ensure that everyone in the organization is pulling in the same
direction.
‫ وتساعد الميزانية على ضمان أن الجميع في‬.‫وتنسق الميزانيات أنشطة المنظمة بأسرها من خالل دمج خطط مختلف أجزائها‬
.‫المنظمة في نفس االتجاه‬
6. Budgets define goals and objectives that can serve as benchmarks for evaluating subsequent
performance.
.‫تحدد الميزانيات األهداف والغايات التي يمكن أن تكون بمثابة معايير لتقييم األداء الالحق‬
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Responsibility Accounting
•
•
•
•
The basic idea underlying responsibility accounting is that a manager should be held
responsible for those items only. That the manager can actually control to a significant
extent.
Each line item (i.e., revenue or cost) in the budget is the responsibility of a manager who
is held responsible for subsequent deviations between budgeted goals and actual
results.
In effect, responsibility accounting personalizes accounting information by holding
individuals responsible for revenues and costs.
This concept is central to any effective planning and control system.
Choosing a Budget Period
•
•
•
•
•
•
•
Operating budgets ordinarily cover a one-year period corresponding to the company’s
fiscal year.
Many companies divide their budget year into four quarters. The first quarter is then
subdivided into months, and monthly budgets are developed.
The last three quarters may be carried in the budget as quarterly totals only.
This approach (quarters) has the advantage of requiring periodic review and reappraisal
of budget data throughout the year.
Continuous or perpetual budgets are sometimes used.
A continuous or perpetual budget is a 12-month budget that rolls forward one month
(or quarter) as the current month (or quarter) is completed. In other words, one month
(or quarter) is added to the end of the budget as each month (or quarter) comes to a
close.
This approach keeps managers focused at least one year ahead so that they do not
become too narrowly focused on short-term results.
The Self-Imposed Budget
The success of a budget program is largely determined by the way a budget is developed.
✓ Many managers believe that being empowered to create their own self-imposed
budgets is the most effective method of budget preparation.
✓ A self-imposed budget or participative budget is a budget that is prepared with the full
cooperation and participation of managers at all levels.
Self-imposed budgeting has two important limitations:
First, lower-level managers may make suboptimal budgeting recommendations if they lack the
broad strategic perspective possessed by top managers.
Second, self-imposed budgeting may allow lower-level managers to create too much budgetary
slack.
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Advantages of Self-Imposed Budgets:
1) Individuals at all levels of the organization are viewed as members of the team whose
judgments are valued by top management.
2) Budget estimates prepared by front-line managers are often more accurate than
estimates prepared by top managers.
3) Motivation is generally higher when individuals participate in setting their own goals
than when the goals are imposed from above.
4) A manager who is not able to meet a budget imposed from above can claim that it was
unrealistic. Self-imposed budgets eliminate this excuse.
The Master Budget: An Overview ‫هون بدنا تركيز عالي بلش الجد‬
The master budget consists of a number of separate but interdependent budgets that formally
lay out the company’s sales, production, and financial goals. The master budget culminates in a
cash budget, a budgeted income statement, and a budgeted balance sheet.
The Master Budget Interrelationships
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Preparing the Master Budget
1- The Sales Budget
✓ The sales budget is the starting point in preparing the master budget .
The sales budget is constructed by multiplying budgeted unit sales by the selling price.
Unit sold * selling price ‫القائمة اذا بدي اطلعها على المعادلة التالية‬
EXAMPLE 1: XYZ Company is preparing budgets for the quarter ending June 30th.
Budgeted sales for the next five months are:
April
20,000 units
May
50,000 units
June
30,000 units
July
25,000 units
August
15,000 units
The selling price is $10 per unit. Prepare the sales budget.
Budget sales in unit
*Selling price
Total budget sales
April
20,000
10
200,000
May
50,000
10
500,000
June
30,000
10
300,000
July
25,000
10
250,000
August
15,000
10
150,000
Example 2: If the sales unit 20,000 and 30,000 and 40,000 and 50,000 (Q1, Q2, Q3, Q4) and
Selling price 10 Prepare the sales budget for all quarter.
Budget sales in unit
*Selling price
Total budget sales
Q1
20,000
10
200,000
Q2
30,000
10
300,000
Q3
40,000
10
400,000
95
Q4
50,000
10
500,000
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Prepare a sales budget, including a schedule of expected cash collections.
Cash collection budget
. ‫من هاي القائمة بدي اشوف انا قديش رح احصل مصاري‬
Sales budget ‫القائمة بتعتمد على ال‬
Account receivable ‫بما انه القائمة بتعتمد على المبيعات فاكيد رح يكون عندي‬
. ‫السؤال بيجي انه كم رح احصل من المبيعات لشهر معين او كم قيمة الديون بشهر معين‬
Example 1: Mahmoud Company had the sales for April, May, June and July. All sales are on
account. The sales budget for the company show the total sales as follow:
April 200,000 May 250,000 June 300,000 July 350,000
Mahmoud collection patterns is 70% collected in the month of sale, 25% collected in the month
following sale, 5% uncollectible. In March 31, accounts receivable balance of $30,000 will be
collected in full in April. Prepare the cash collection for April, May and June.
Account receivable31/3
April sales
May sales
June sales
Total cash collection
April
30,000
200,000 * 70%
170,000
May
200,000 * 25%
250,000 * 70%
225,000
June
250,000 * 25%
300,000 * 70 %
272,500
‫ ما حصلناها كاملة النه طلبت لعندها هسه الباقي بكون قيمة الديون لهاذ الشهر اللي رح احصلها‬6 ‫بنالحظ انه مبيعات شهر‬
. ‫بالشهر اللي بعده‬
‫وفي طريقة الخطوط بتسهل عليكم الشهر اللي طالب الدين اله بنحط خط بعده بالطول والعرض لحد ما يتقاطعوا والمبالغ اللي‬
.‫بتنحصر بمنطقة التقاطع بتكون عبارة عن قيمة الديون للشهر اللي هو طالبينه‬
What will be the total cash collections for the quarter)‫ شهور‬3 ‫? (يعني ل‬
A. $170,000
B. $225,000
C. $272,500
D. $667,500
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Example 2 : If the sales unit 20,000 and 30,000 and 40,000 and 50,000 ( Q1, Q2 , Q3 , Q4 ) and
Selling price 10 the percentage of sales collected in the period of sales 60% And the percentage
of sales collected in the following period of sales 40% and A/R beginning 40,000 Prepare the
cash collection.
sales budget
200000 300000 400000 500000
Quarter 1 Quarter 2 Quarter 3 Quarter 4
Account receivable
40,000
Quarter 1
120000
80000 120000 160000
Quarter 2
180000 240000 300000
Quarter 3
Quarter 4
total cash collection 160,000 260,000 360,000 460,000
The account receivable at the end of quarter 4 is $200,000 (500,000 * .40)
Example 3 : If the sales unit 20,000 and 30,000 and 40,000 and 50,000 ( Q1, Q2 , Q3 , Q4 ) and
Selling price 10 the percentage of sales collected in the following period of sales 60% And the
percentage of sales collected in the third period of sales 40% and A/R beginning 40,000 Prepare
the cash collection.
sales budget
200000 300000 400000 500000
Quarter 1 Quarter 2 Quarter 3 Quarter 4
Account receivable
40,000
Quarter 1
120000
80000 120000
Quarter 2
180000 240000
Quarter 3
Quarter 4
total cash collection
40,000 120,000 260,000 360,000
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2- The Production Budget
The production budget is prepared after the sales budget. The production budget lists the
number of units that must be produced to satisfy sales needs and to provide for the desired
ending finished goods inventory.
Note the production requirements are influenced by the desired level of the ending finished
goods inventory.
Example 1: Lina Company prepared the production budget for March, April, May and June. The
company had the unit sales for the four month (60,000; 70,000; 80,000; 90,000) respectively. The
management at Lina Company wants ending inventory to be equal to 20% of the following
month’s budgeted sales in units. On February 28, 4,000 units were on hand. (Beginning march)
Prepare the production budget for March, April and May.
March
60,000
14,000(70000*.20)
74,000
(4,000)
70,000
18000? → (90000 * .20) = 18000
90000 → unit sold in June.
Budgeted unit sales
Ending inventory
Total needs
(beginning inventory)
Total production
April
70,000
16,000(80000*.20)
86,000
(14,000)
72,000
May
80,000
18,000
98,000
(16,000)
82,000
: ‫اسئلة على المثال‬
1- What is the required production for May?
a. 70,000 unit’s
b. 72,000 unit’s
c. 82,000 units’
d. 98,000 units
2- What is the total need for April?
a. 70,000 unit’s
b. 86,000 unit’s
c. 82,000 units’
d. 70,000 units
3- What is the required production for March?
a. 70,000 unit’s
b. 72,000 unit’s
c. 82,000 units’
d. 98,000 units
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Example 2: If the sales unit 40,000 and 50,000 and 60,000 and 70,000 (July, August, September
and October) Respectively. Selling price 10 And ending of month inventory must equal 20% of
the next month sales .Inventory at the end of June 30,000 unit. Prepare production budget for
the third months. And answer the following question.
1- What is the required production for September?
a. 62,000 units.
b. 72,000 unit’s
c. 82,000 unit’s
d. 98,000 units
2- What is the total need for July?
a. 70,000 units.
b. 50,000 unit’s
c. 82,000 unit’s
d. 70,000 units
3- What is the required production for August?
a. 70,000 units.
b. 72,000 unit’s
c. 52,000 unit’s
d. 98,000 units
Explanations:
Budgeted unit sales
Ending inventory
Total needs
(beginning inventory)
Total production
July
40,000
10,000
50,000
(30,000)
20,000
August
50,000
12,000
62,000
(10,000)
52,000
99
September
60,000
14,000
74,000
12,000
62,000
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Inventory Purchases—Merchandising Company
✓ Company prepares a production budget because it is a manufacturing company.
✓ If it were a merchandising company, instead it would prepare a merchandise purchases
budget showing the amount of goods to be purchased from suppliers during the period.
✓ A merchandise purchases budget is usually accompanied by a schedule of expected cash
disbursements for merchandise purchases.
✓ The approach used for the schedule of expected cash disbursements for purchases of
materials
The format of the merchandise purchases budget is shown below:
Example1: On January 1, Ahmad Company has 6,500 units of Product A on hand. During the
year, the company plans to sell 15,000 units of Product A, and plans to have 5,000 units on hand
at year end. How many units of Product A must be produced during the year:
15,000 + 5,000 – 6,500 = 13,500
Example2: On January 1, Ahmad Company has 9,500 units of Product A on hand. During the
year, the company plans to sell 20,000 units of Product A, and plans to have 4,000 units on hand
at year end. How many units of Product A must be produced during the year:
20,000 + 4,000 – 9,500 = 14,500
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3- The Direct Materials Budget
✓ A direct materials budget is prepared after the production requirements have been
computed.
✓ The direct materials budget details the raw materials that must be purchased to fulfill
the production budget and to provide for adequate inventories.
✓ Prepare a direct materials budget, including a schedule of expected cash disbursements
for purchases of materials.
The required purchases of raw materials are computed as follows:
Units of raw materials needed per unit of finished goods ‫ضرب‬
Unit cost of raw materials ‫ضرب‬
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Example1: Lina Company prepared the DM budget for March, April, May and June. At Lina
Company, four pounds of material are required per unit of product. The company had the unit
production for the four month (20,000; 25,000; 30,000; 50,000) respectively. The management at
Lina Company wants ending inventory to be equal to 30% of the following month’s budgeted
production in units. On February 28, 13,000 pounds of material are on hand. Material cost is
$0.40 per pound. Prepare the DM budget for March, April and May.
March
April
production
20,000
25,000
material per unit
*4
*4
Production need
80,000
100,000
Ending inventory
30,000
36,000
Total need
110,000
136,000
(Beginning inventory)
(13,000)
(30,000)
Material to be purchased
97,000
106,000
Cost
*0.4
*0.4
Cost of purchased
38,800
42,400
60,000 → 30% of following month’s production needs.
➔ (50000 * 4 ) = 200,000 * 0.30 = 60,000
May
30,000
*4
120,000
60,000
180,000
(36,000)
144,000
*0.4
57,600
Example2: Lina Company prepared the DM budget for March, April, May and June. At Lina
Company, five pounds of material are required per unit of product. The company had the unit
production for the four month (20,000; 35,000; 30,000; 40,000) respectively. The management at
Lina Company wants ending inventory to be equal to 25% of the following month’s budgeted
production in units. On February 28, 15,000 pounds of material are on hand. Material cost is
$0.70 per pound. Prepare the DM budget for March, April and May. And answer the following
question.
. ‫اختبر نفسك االجابة بالصفحة القادمة‬
1-What is the Cost of purchased for May?
a. 81,375.
B. 74,375
c. 113,750
d. 98,000
c. 200,000
d. 212,500
2- What is the total need for April?
a. 125,000
b. 137,500
3- What is the Material to be purchased for March?
a. 116,250.
B. 128,750
c. 52,015
102
d. 98,958
Managerial accounting
production
material per unit
Production need
Ending inventory
Total need
(Beginning inventory)
Material to be purchased
Cost
Cost of purchased
2020/2021
March
20,000
*5
100,000
43,750
143,750
(15,000)
128,750
*0.7
90,125
April
35,000
*5
175,000
37,500
212,500
(43,750)
186,750
*0.7
130,725
103
May
30,000
*5
150,000
50,000
200,000
(37,500)
162,500
*0.7
113,750
Managerial accounting
2020/2021
The cash disbursement
. ‫ بس هون بدي اشوف قديش رح ادفع وكم رح يكون علي ديون وبطريقة الحل نفسها‬Cash collection ‫نفس فكرة ال‬
Account payable ‫بما اني انا الدين علي فبتكون‬
. ‫وبما انه انا اللي رح ادفع فمعناته انا قمت بعمليات شراء‬
Example 1: Mahmood Company had the purchased for April, May, June and July. All purchased
are on account. The DM budget for the company show the total purchased as follow:
April 200,000
May 250,000
June 300,000
July 350,000
Mahmoud Paid pattern is 70% in the month of purchased, 25% in the month following
purchased, 5% not paid. The March 31, accounts payable balance of $30,000. Prepare the cash
disbursement for April, May and June.
Account payable 31/3
April purchased
May purchased
June purchased
Total cash disbursement
April
30,000
200,000 * 70%
May
June
200,000 * 25%
250,000 * 70%
170,000
225,000
250,000 * 25%
300,000 * 70 %
272,500
Example 2: Mahmood Company had the purchased for April, May, June and July. All purchased
are on account. The DM budget for the company show the total purchased as follow:
April 200,000
May 250,000
June 300,000
July 350,000
Mahmoud Paid pattern is 60% in the month of purchased, 40% in the month following
purchased, 5% not paid. The March 31, accounts payable balance of $30,000. Prepare the cash
disbursement for April, May and June.
DM budget
Account payable
Quarter 1
Quarter 2
Quarter 3
Quarter 4
total cash disbursements
200000 250000 300000 350000
Quarter 1 Quarter 2 Quarter 3 Quarter 4
30,000
120000
80000 100000 120000
150000 180000 210000
150,000
230,000
104
280,000
330,000
Managerial accounting
2020/2021
The Direct Labor Budget
1) The direct labor budget shows the direct labor-hours required to satisfy the production
budget.
.‫تظهر ميزانية العمل المباشرة ساعات العمل المباشرة المطلوبة لتلبية ميزانية اإلنتاج‬
2) By knowing in advance how much labor time will be needed throughout the budget
year, the company can develop plans to adjust the labor force as the situation requires.
3) Companies that neglect the budgeting process run the risk of facing labor shortages or
having to hire and lay off workers at awkward times.
‫الشركات التي تهمل عملية وضع الميزانية تواجه خطر مواجهة نقص العمالة أو االضطرار إلى توظيف وتسريح العمال في أوقات‬
.‫صعبة‬
Required production
* ‫ضرب‬DL per hour
= total DLH need
* ‫ضرب‬DL cost per hour
= total DL cost
Example 1: XYZ Company had the unit production for April, May and June. (20,000; 26,000;
32,000) respectively. Each unit require 1.1 DLH. What is the total DL cost if the company
determine the cost per unit is 0.75
Production
DL per hour
Total DLH need
Cost per unit
Total DL cost
April
20,000
May
26,000
1.1
22,000
0.75
16,500
1.1
28,600
0.75
21,450
105
June
32,000
1.1
3.5,200
0.75
26,400
Managerial accounting
2020/2021
Example 2: Mahmoud Company had the unit production for April, May and June. (26,000;
46,000; 29,000) respectively. Each unit require 0.05 DLH. What is the total DL cost if the
company determine workers are paid at the rate of $10 per hour regardless of the hours
worked. For the next three months, the direct labor workforce will be paid for a minimum of
1,500 hours per month.
Production
DL per hour
Total DLH need
Guaranteed LH
LH paid
Rate
Total DL cost
April
26,000
0.05
1,300
1,500
1,500
10
15,000
May
46,000
0.05
2,300
1,500
2,300
10
23,000
June
29,000
0.05
1,450
1,500
1,500
10
15,000
1500 ‫ وباخذ ال‬, ‫ ما باخذه‬1500 ‫ اللي الزم يندفع معناته اي شي اقل من ال‬1500 ‫بالسؤال حاكيلي انه اقل شي‬
1500 ‫ كانوا اقل فلهيك اخذنا ال‬1300 ‫ و‬1450 ‫يعني ال‬
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Managerial accounting
2020/2021
The Manufacturing Overhead Budget
o
The manufacturing overhead budget lists all costs of production other than direct
materials and direct labor.
o The manufacturing overhead budget lists all costs of production other than direct materials
and direct labor.
:‫طريقة الحل‬
Budget DLH
* ‫ ضرب‬variable MOH rate
= total variable MOH
+ Fixed MOH cost
= total MOH cost
Less: non cash cost (such as depreciation)
= cash disbursement for MOH
Example 1: Wateen company had the DLH for the month of June 24,000; July 25,000; august 28,000.
The variable manufacturing overhead is $3; fixed manufacturing overhead is $60,000 included noncash cost for 10,000. Prepare the manufacturing overhead budget.
DLH
Variable MOH
total variable MOH
Fixed MOH cost
total MOH cost
(non-cash cost)
cash disbursement for MOH
June
24,000
3
72,000
60,000
132,000
10,000
122,000
July
25,000
3
75,000
60,000
135,000
10,000
125,000
107
August
28,000
3
84,000
60,000
144,000
10,000
134,000
Managerial accounting
2020/2021
The Selling and Administrative Expense Budget
✓ The selling and administrative expense budget lists the budgeted expenses for areas
other than manufacturing.
✓ In large organizations, this budget would be a compilation of many smaller, individual
budgets submitted by department heads and other persons responsible for selling and
administrative expenses.
.‫ لكن بتغير مسميات‬MOH ‫نفس فكرة ال‬
Budget sales ‫وهاي القائمة بتعتمد على ال‬
Example 1: Omar Company prepared the seeking and administrative budget. The budget sales
for March, April and May is (20,000; 50,000; 30,000) respectively. The variable selling and
administrative expenses are $0.50 per unit sold. Fixed selling and administrative expenses are
$70,000 per month. The fixed selling and administrative expenses include $10,000 in costs –
primarily depreciation – that are not cash outflows of the current month. Prepare the
company’s selling and administrative expense budget.
What are the total cash disbursements for selling and administrative expenses for the quarter?
A. $180,000
b. $230,000
Budget sales
variable S&A
Variable expenses
Fixed S&A
Total S&A
(non-cash
expenses)
Cash S&A expenses
c. $110,000
d. $ 70,000
March
20,000
0.50
10,000
70,000
80,000
10,000
April
50,000
0.50
25,000
70,000
95,000
10,000
May
30,000
0.50
15,000
70,000
85,000
10,000
70,000
85,000
75,000
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Managerial accounting
2020/2021
The Cash Budget
The cash budget is composed of four main sections:
1. The cash receipts section.
2. The cash disbursements section.
3. The cash excess or deficiency section.
4. The financing section.
1) The receipts section lists all of the cash inflows, except from financing, expected during
the budget period.
2) Generally, the major source of receipts is from sales.
3) The disbursements section summarizes all cash payments that are planned for the
budget period. These payments include raw materials purchases, direct labor payments,
manufacturing overhead costs, and so on, as contained in their respective budgets.
4) In addition, other cash disbursements such as equipment purchases and dividends are
listed.
The cash excess or deficiency section is computed as follows:
If a cash deficiency exists during any budget period or if there is a cash excess during any budget
period that is less than the minimum required cash balance, the company will need to borrow
money.
‫إذا كان هناك نقص نقدي خالل أي فترة من فترات الميزانية أو إذا كان هناك فائض نقدي خالل أي فترة أقل من الحد‬
.‫ ستحتاج الشركة إلى اقتراض المال‬،‫األدنى للرصيد النقدي المطلوب‬
Conversely, if there is a cash excess during any budget period that is greater than the minimum
required cash balance, the company can invest the excess funds or repay principal and interest
to lenders.
‫ إذا كان هناك فائض نقدي خالل أي فترة من فترات الميزانية تكون أكبر من الحد األدنى‬،‫وعلى العكس من ذلك‬
.‫ يمكن للشركة استثمار األموال الزائدة أو سداد أصل الدين والفوائد للمقرضين‬،‫للرصيد النقدي المطلوب‬
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Managerial accounting
2020/2021
Example 1: Lina Company prepared the cash budget. For the month of April, May and June. The
ending cash balance in March is 40,000.
The company cash collection in the three month (170,000; 250,000; 300,000) respectively.
The cash disbursement for the three is (230,000; 180,000; 220,000) respectively.
Maintains a minimum cash balance of $30,000.The amount of Borrows on the first day of the
month and repays loans on the last day of the month. Prepare the cash budget if the interest
rate of any borrow is 15%.
April
may
June
Cash balance
40,000
50,000
118,750
Cash collection
170,000
250,000
300,000
Cash disbursement
230,000
180,000
220,000
Excess (deficiency)
(20,000)
120,000
198,750
Borrow
50,000
-----------------------------Interest
------------------1,250
---------------Ending cash balance
50,000
118,750
198,750
Because Lina maintains a cash balance of $30,000, the company must borrow $50,000 on its
line-of-credit.
50,000 * 0.15 * 2/12 =1,250
Interest is = face value * interest rate * time
110
Managerial accounting
2020/2021
‫اللي همه‬.‫اخر ميزانيتين غ ير مطالبين فيهم النه كثير اخذتوهم وما حدا بجيب عليهم اسئلة‬
1- Income statement.
2- Balance sheet statement.
Multiple choice questions:
1. Which of the following represents the normal sequence in which the below budgets are
prepared?
A) Sales, Balance Sheet, Income Statement
B) Balance Sheet, Sales, Income Statement
C) Sales, Income Statement, Balance Sheet
D) Income Statement, Sales, Balance Sheet
2. The budget method that maintains a constant twelve month planning horizon by adding a
new month on the end as the current month is completed is called:
A) An operating budget.
B) A capital budget.
C) A continuous budget.
D) A master budget.
3. In preparing a master budget, top management is generally best able to:
A) Prepare detailed departmental-level budget figures.
B) Provide a perspective on the company as a whole.
C) Point out the particular persons who are to blame for inability to meet budget goals.
D) Responses a, b, and c are all correct.
4. Which of the following is an advantage of implementing a self-imposed budgeting system?
A) Budgeting is quick and easy because only a few individuals are involved in the budgeting
process.
B) Upper level management does not have to review budget estimates.
C) Motivation to meet budget estimates is usually enhanced.
D) All of the above.
5. Which of the following is NOT an objective of the budgeting process?
A) To communicate management's plans throughout the entire organization.
B) To provide a means of allocating resources to those parts of the organization where they can
be used most effectively.
C) To ensure that the company continues to grow.
D) To uncover potential bottlenecks before they occur.
6. The direct labor budget is based on:
A) The desired ending inventory of finished goods.
B) The beginning inventory of finished goods.
C) The required production for the period.
D) The required materials purchases for the period.
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Managerial accounting
2020/2021
7. The materials purchase budget:
A. is the beginning point in the budget process.
B. must provide for desired ending inventory as well as for production.
C. is accompanied by a schedule of cash collections.
D. is completed after the cash budget.
8. The budget or schedule that provides necessary input data for the direct labor budget is the:
A. raw materials purchases budget.
B. production budget.
C. schedule of cash collections.
D. cash budget.
9. The master budget process usually begins with the:
A. production budget. B. operating budget. C. sales budget. D. cash budget.
10. The cash budget must be prepared before you can complete the:
A. production budget.
B. budgeted balance sheet.
C. raw materials purchases budget.
D. schedule of cash disbursements.
11. Which of the following is not a benefit of budgeting?
A. It uncovers potential bottlenecks before they occur.
B. It coordinates the activities of the entire organization by integrating the plans and objectives
of the various parts.
C. It ensures that accounting records comply with generally accepted accounting principles.
D. It provides benchmarks for evaluating subsequent performance.
12. A self-imposed budget or ________________ budget is a budget that is prepared with the
full cooperation of managers at all levels.
A. perpetual
B. master
C. participative
D. responsibility
13. There are various budgets within the master budget. One of these budgets is the production
budget. Which of the following BEST describes the production budget?
A. It details the required direct labor hours.
B. It details the required raw materials purchases.
C. It is calculated based on the sales budget and the desired ending inventory.
D. It summarizes the costs of producing units for the budget period.
14. The excess or deficiency of cash available over disbursements on the cash budget is
calculated as follows:
A. The beginning balance less the expected cash receipts less the expected cash disbursements.
B. The cash available less the expected cash receipts plus the expected cash disbursements.
C. The beginning balance plus the expected cash receipts less the expected cash disbursements.
D. None of these.
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2020/2021
15. Assaf Company's sales are 30% in cash and 70% on credit. Sixty % of the credit sales are
collected in the month of sale, 25% in the month following sale, and 12% in the second month
following sale. The remainder are uncollectible. The following are budgeted sales data:
Total cash receipts in April would be budgeted to be:
A. $38,900
B. $47,900
C. $27,230
D. $36,230
Explanation:
16. The Number1 Company makes collections on credit sales according to the following
schedule:
25% in month of sale
70% in month following sale
4% in second month following sale
1% uncollectible
The following sales have been budgeted:
Cash collections in June would be:
A. $113,400
Explanation:
B. $110,000
C. $111,000
113
D. $115,500
Managerial accounting
2020/2021
17. Lina Company is estimating the following sales for the first six months of next year:
Sales at Lina are normally collected as 70% in the month of sale, 25% in the month following the
sale, and the remaining 5% being uncollectible. Based on this information, how much cash
should Lina expect to collect during the month of April?
A. $281,260
B. $367,000
C. $366,010
D. $393,760
18. X Company plans to sell 12,000 units during the month of August. If the company has 2,500
units on hand at the start of the month, and plans to have 2,000 units on hand at the end of the
month, how many units must be produced during the month?
A. 11,500
B. 12,500
C. 12,000
D. 14,000
19. Lana Company produces and sells Product Alpha. To guard against stock outs, the company
requires that 20% of the next month's sales be on hand at the end of each month. Budgeted
sales of Product Alpha over the next four months are:
Budgeted production for August would be:
A. 62,000 units
B. 70,000 units
C. 58,000 units
Explanation:
114
D. 50,000 units
Managerial accounting
2020/2021
20. Lina Company has budgeted sales and production over the next quarter as follows:
The company has 20,000 units of product on hand at April 1. A minimum of 20% of the next
month's sales needs in units must be on hand at the end of each month. July sales are expected
to be 140,000 units. Budgeted sales for June would be (in units):
A. 188,000
Explanation:
B. 160,000
C. 128,000
D. 184,000
21. Fab Manufacturing Corporation manufactures and sells stainless steel coffee mugs. Expected
mug sales at Fab (in units) for the next three months are as follows:
Fab likes to maintain a finished goods inventory equal to 30% of the next month's estimated
sales. How many mugs should Fab plan on producing during the month of November?
A. 23,200 mugs
B. 26,800 mugs
C. 25,900 mugs
D. 34,300 mugs
22. The Waverly Company has budgeted sales for next year as follows:
The ending inventory of finished goods for each quarter should equal 25% of the next quarter's
budgeted sales in units. The finished goods inventory at the start of the year is 3,000 units.
Scheduled production for the third quarter should be:
A. 17,500
Explanation:
B. 18,500
C. 22,000
D. 13,500
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2020/2021
23. The Tobler Company has budgeted production for next year as follows:
Four pounds of raw materials are required for each unit produced. Raw materials on hand at the
start of the year total 4,000 pounds. The raw materials inventory at the end of each quarter
should equal 10% of the next quarter's production needs. Budgeted purchases of raw materials
in the third quarter would be:
A. 63,200 pounds
B. 62,400 pounds
C. 56,800 pounds D. 50,400 pounds
24. Assaf Company's budgeted production in units and budgeted raw materials purchases over
the next three months are given below:
Two pounds of raw materials are required to produce one unit of product. The company wants
raw materials on hand at the end of each month equal to 30% of the following month's
production needs. The company is expected to have 36,000 pounds of raw materials on hand on
January 1. Budgeted production for February should be:
A. 105,000 units
B. 82,500 units
C. 150,000 units
D. 75,000 units
Explanation:
Budgeted raw material purchases for February (in pounds) =
[30% x (100,000 x 2)] +(February production x 2) - [30% x (February production x 2)
165,000 = 60,000 + (1.4 x February production)
February production = 75,000 units
25. Assaf Corporation is working on its direct labor budget for the next two months. Each unit of
output requires 0.05 direct labor-hours. The direct labor rate is $7.50 per direct labor hour. The
production budget calls for producing 9,100 units in May and 8,800 units in June. If the direct
labor work force is fully adjusted to the total direct labor-hours needed each month, what
would be the total combined direct labor cost for the two months?
A. $3,300.00
Explanation:
B. $3,412.50
C. $6,712.50
D. $3,356.25
May: 9,100 units x 0.05 direct labor-hours x $7.50 per direct labor-hour = $3,412.50
June: 8,800 units x 0.05 direct labor-hours x $7.50 per direct labor-hour = $3,300.00
Total direct labor cost = $6,712.50
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26. Lina Inc. bases its manufacturing overhead budget on budgeted direct labor-hours. The
direct labor budget indicates that 5,400 direct labor-hours will be required in January. The
variable overhead rate is $4.40 per direct labor-hour. The company's budgeted fixed
manufacturing overhead is $77,220 per month, which includes depreciation of $9,720. All other
fixed manufacturing overhead costs represent current cash flows. The January cash
disbursements for manufacturing overhead on the manufacturing overhead budget should be:
A. $67,500
B. $91,260
C. $100,980
D. $23,760
27. Assaf Inc. bases its manufacturing overhead budget on budgeted direct labor-hours. The
direct labor budget indicates that 4,900 direct labor-hours will be required in November. The
variable overhead rate is $8.40 per direct labor-hour. The company's budgeted fixed
manufacturing overhead is $78,400 per month, which includes depreciation of $10,290. All
other fixed manufacturing overhead costs represent current cash flows. The company
recomputed its predetermined overhead rate every month. The predetermined overhead rate
for November should be:
A. $22.30
B. $16.00
C. $24.40
D. $8.40
28. The manufacturing overhead budget at Deeb Corporation is based on budgeted direct laborhours. The direct labor budget indicates that 1,600 direct labor-hours will be required in
December. The variable overhead rate is $4.40 per direct labor-hour. The company's budgeted
fixed manufacturing overhead is $25,120 per month, which includes depreciation of $5,440. All
other fixed manufacturing overhead costs represent current cash flows. The December cash
disbursements for manufacturing overhead on the manufacturing overhead budget should be:
A. $7,040
B. $19,680
C. $26,720
D. $32,160
29. Lina Inc. bases its selling and administrative expense budget on budgeted unit sales. The
sales budget shows 7,800 units are planned to be sold in April. The variable selling and
administrative expense is $3.20 per unit. The budgeted fixed selling and administrative expense
is $95,160 per month, which includes depreciation of $9,360 per month. The remainder of the
fixed selling and administrative expense represents current cash flows. The cash disbursements
for selling and administrative expenses on the April selling and administrative expense budget
should be:
A. $85,800
B. $24,960
C. $120,120
D. $110,760
30. The selling and administrative expense budget of Spurlock Corporation is based on budgeted
unit sales, which are 6,300 units for February. The variable selling and administrative expense is
$9.30 per unit. The budgeted fixed selling and administrative expense is $118,440 per month,
which includes depreciation of $19,530 per month. The remainder of the fixed selling and
administrative expense represents current cash flows. The cash disbursements for selling and
administrative expenses on the February selling and administrative expense budget should be:
A. $98,910
B. $157,500
C. $58,590
D. $177,030
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31. ABC Company has a cash balance of $9,000 on April 1. The company must maintain a
minimum cash balance of $6,000. During April expected cash receipts are $45,000. Expected
cash disbursements during the month total $52,000. During April the company will need to
borrow:
A. $2,000
B. $4,000
C. $6,000
D. $8,000
32. Thiel Inc. is working on its cash budget for October. The budgeted beginning cash balance is
$35,000. Budgeted cash receipts total $166,000 and budgeted cash disbursements total
$162,000. The desired ending cash balance is $50,000. The excess (deficiency) of cash available
over disbursements for October will be:
A. $31,000
B. $39,000
C. $4,000
D. $201,000
33. Guthridge Inc. is working on its cash budget for February. The budgeted beginning cash
balance is $26,000. Budgeted cash receipts total $104,000 and budgeted cash disbursements
total $100,000. The desired ending cash balance is $40,000. To attain its desired ending cash
balance for February, the company needs to borrow:
A. $0
B. $10,000
C. $40,000
D. $70,000
USE THE FOLLOWING INFORMATION TO ANSWER QUESTION 34-36
X Corporation is a merchandising firm. Information pertaining to the company's sales revenue is
presented in the following table
Management estimates that 5% of credit sales are uncollectible. Of the credit sales that are
collectible, 60% are collected in the month of sale and the remainder in the month following the
sale. Purchases of inventory are equal to next month's cost of goods sold. The cost of goods sold
is 70% of the selling price. All purchases of inventory are on account; 25% are paid in the month
of purchase, and the remainder is paid in the month following the purchase
34. X Corporation's budgeted cash collections in July from June credit sales are:
A. $144,000
B. $136,800
C. $96,000
D. $91,200
35. X Corporation's budgeted total cash receipts in August are:
A. $240,000
B. $294,000
C. $299,400
D. $239,400
36. X Corporation's budgeted total cash payments in July for inventory purchases are:
A. $405,000
B. $283,500
C. $240,000
D. $168,000
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USE THE FOLLOWING INFORMATION TO ANSWER QUESTION 37-40
XYZ Farm Supply is located in a small town in the rural west. Data regarding the store's
operations follow:
37. Expected cash collections in December are:
A. $126,500
B. $230,500
C. $104,000
D. $230,000
38. The cost of December merchandise purchases would be:
A. $176,000
B. $208,000
C. $184,000
D. $84,000
39. December cash disbursements for merchandise purchases would be:
A. $184,000
B. $196,000
C. $176,000
D. $84,000
40. The excess (deficiency) of cash available over disbursements for December would be:
A. $12,800
B. $8,600
C. $17,000
D. $4,200
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2020/2021
USE THE FOLLOWING INFORMATION TO ANSWER QUESTION 41-42
Lina Corporation is in the process of preparing its annual budget. The following beginning and
ending inventory levels are planned for the year.
Each unit of finished goods requires 8 grams of raw material.
41. If the company plans to sell 640,000 units during the year, the number of units it would have
to manufacture during the year would be:
A. 670,000 units
B. 640,000 units
C. 690,000 units
D. 590,000 units
42. How much of the raw material should the company purchase during the year?
A. 4,720,000 grams B. 4,700,000 grams
C. 4,730,000 grams D. 4,740,000 grams
End chapter 8
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C.H12
‫هسه احنا بنعرف انه الشركة عشان تتخذ قرار معين يكون مناسب للشركة اول شي بتفكر فيه انه الربح يكون عالي بس‬
. ‫بالمقابل التكلفة تكون قليلة‬
. ‫هسه في عنا نوعين من المعلومات الي بعتمدو على اتخاذ القرار‬
1. Relevant → ‫ → ذات صلة بالقرار مثل‬opportunity cost . → c.h2
2. Irrelevant → ‫ → ليست ذات صلة بالقرار مثل‬sunk cost → c.h2
………………………………………………………………………………………..
A relevant cost is a cost that differs between alternatives.
A relevant benefit is a benefit that differs between alternatives.
An avoidable cost is a cost that can be eliminated, in whole or in part, by choosing one
alternative over another. Avoidable costs are relevant costs. Unavoidable costs are irrelevant
costs.
Two broad categories of costs are never relevant in any decision. They include:
ΠSunk costs.
ΠA future cost that does not differ between the alternatives.
……………………………………
Prepare an analysis showing whether a product line or other business segment should be
added or dropped.
One of the most important decisions managers make is whether to add or drop a business
segment. Ultimately, a decision to drop an old segment or add a new one is going to hinge
primarily on the impact the decision will have on net operating income.
‫ وفي نهاية‬.‫واحدة لجعل المديرين اتخاذ القرارات األكثر أهمية ما إذا كنت تريد إضافة أو إسقاط شريحة األعمال تجارية‬
‫ سوف يكون قرارا بإسقاط قطعة قديمة أو إضافة جديد واحد سوف تتوقف أساسا على األثر القرار على صافي‬،‫المطاف‬
‫إيرادات التشغيل‬.
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Prepare a make or buy analysis.
Providing a product or service to a customer involves many steps.
When a company is involved in more than one activity in the entire value chain, it is vertically
integrated.
A decision to carry out one of the activities in the value chain internally, rather than to buy
externally from a supplier, is called a make or buy decision.
Vertical Integration- Advantages :
Smoother flow of
parts and materials
Better quality
control
Realize profits
The primary disadvantage of vertical integration is that a company may fail to take advantage of
suppliers who can create an economies of scale advantage by pooling demand from numerous
companies.
While the economies of scale factor can be appealing, a company must be careful to retain
control over activities that are essential to maintaining its competitive position.
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F.MOH → IRRELEVANT.
Make or buy example :
Essex Company manufactures part 4A that is used in one of its products. The unit product cost
of this part is:
Direct
Direct materials
materials
Direct
Direct labor
labor
Variable
Variable overhead
overhead
Depreciation
Depreciation of
of special
special equip.
equip.
Supervisor's
Supervisor'ssalary
salary
General
General factory
factory overhead
overhead
Unit
Unit product
product cost
cost
$$
99
55
11
33
22
10
10
$$ 30
30
•
The special equipment used to manufacture part 4A has no resale value.
•
The total amount of general factory overhead, which is allocated on the basis of direct
labor hours, would be unaffected by this decision.
•
The $30 unit product cost is based on 20,000 parts produced each year.
•
An outside supplier has offered to provide the 20,000 parts at a cost of $25 per part.
Should we accept the supplier’s offer?
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Cost
Per
Unit
Outside purchase price
$ 25
Direct materials (20,000 units)
Direct labor
Variable overhead
Depreciation of equip.
Supervisor's salary
General factory overhead
Total cost
$
•
•
•
•
9
5
1
3
2
10
$ 30
Cost of 20,000 Units
Buy
Make
$ 500,000
180,000
100,000
20,000
40,000
$ 340,000
$ 500,000
The avoidable costs associated with making part 4A include direct materials, direct
labor, variable overhead, and the supervisor’s salary.
The depreciation of special equipment represents a sunk cost. Furthermore, the
equipment has no resale value, thus the special equipment and its associated
depreciation expense are irrelevant to the decision.
The general factory overhead represents future costs that will be incurred regardless of
whether Essex makes or buys part 4A; hence, it is also irrelevant to the decision.
Should we make or buy part 4A?
Given that the total avoidable costs are less than the cost of buying the part, Essex
should continue to make the part
……………………………………………………………………………………………..
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Ex2 : if you produced (make ) 15000
Direct
Direct materials
materials
Direct
labor
Direct labor
$10
$10
V.MOH
V.MOH
F.MOH
F.MOH
66
33
22
$21
$21
IF you buy the 15000 unit you will pay $21 /unit .
If the opportunity cost $50000
Ž
Ž
You should make or buy ?
If the company make the product what the effect in net income ?
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Prepare an analysis showing whether a special order
should be accepted.
•
•
A special order is a one-time order that is not considered part of the company’s
normal ongoing business.
When analyzing a special order, only the incremental costs and benefits are relevant.
............................................
•
Jet, Inc. makes a single product whose normal selling price is $20 per unit.
•
A foreign distributor offers to purchase 3,000 units for $10 per unit.
•
This is a one-time order that would not affect the company’s regular business.
•
Annual capacity is 10,000 units, but Jet, Inc. is currently producing and selling only
5,000 units.
•
Should Jet accept the offer?
Jet, Inc.
Contribution Income Statement
Revenue (5,000 × $20)
$ 100,000
Variable costs:
Direct materials
$ 20,000
Direct labor
5,000
Manufacturing overhead
10,000
Marketing costs
5,000
Total variable costs
40,000
Contribution margin
60,000
Fixed costs:
Manufacturing overhead $ 28,000
Marketing costs
20,000
Total fixed costs
48,000
Net operating income
$ 12,000
•
•
A contribution format income statement for Jet’s normal sales of 5,000 units is as
shown.
Assume variable cost is $8 a unit. Total variable cost would be 5,000 units times $8 a
unit.
If Jet accepts the special order, the incremental revenue will exceed the incremental costs. In
other words, net operating income will increase by $6,000. This suggests that Jet should accept
the order.
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Increase
Increase in
in revenue
revenue (3,000
(3,000 ×× $10)
$10)
Increase
in
costs
(3,000
Increase in costs (3,000 ×× $8
$8 variable
variable cost)
cost)
Increase
Increase in
in net
net income
income
$$30,000
30,000
24,000
24,000
$$ 6,000
6,000
If Jet accepts the special order, the incremental revenue of $30,000 will exceed the incremental
costs of $24,000 by $6,000. This suggests that Jet should accept the order. Notice that this
answer assumes that the fixed costs are unavoidable and that variable marketing costs must be
incurred on the special order.
………………………………………………….
Northern Optical ordinarily sells the X-lens for $50. The variable production cost is $10, the fixed
production cost is $18 per unit, and the variable selling cost is $1. A customer has requested a
special order for 10,000 units of the X-lens to be imprinted with the customer’s logo. This special
order would not involve any selling costs, but Northern Optical would have to purchase an
imprinting machine for $50,000.
What is the rock bottom minimum price below which Northern Optical should not go in its
negotiations with the customer? In other words, below what price would Northern Optical
actually be losing money on the sale? There is ample idle capacity to fulfill the order and the
imprinting machine has no further use after this order.
a. $50
b. $10
c. $15
d. $29
Variable production cost
$100,000
Additional fixed cost
+ 50,000
Total relevant cost
$150,000
Number of units
10,000
Average cost per unit
=
$15
……………………………………………………
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Determine the most profitable use of a constrained resource.
•
When a limited resource of some type restricts the company’s ability to satisfy
demand, the company is said to have a constraint
The machine or process that is limiting overall output is called the bottleneck – it is
the constraint
•
Fixed costs are usually unaffected in these situations, so the product mix that
maximizes the company’s total contribution margin should ordinarily be selected.
A company should not necessarily promote those products that have the highest unit
contribution margins.
Rather, total contribution margin will be maximized by promoting those products or
accepting those orders that provide the highest contribution margin in relation to the
constraining resource.
………………………………………………………………………………….………………………..
Assume that Ensign Company produces two products and selected data are as shown.
•
•
Product
2
1
Selling price per unit
Less variable expenses per unit
Contribution margin per unit
$
Current demand per week (units)
Contribution margin ratio
Processing time required
on machine A1 per unit
60
36
$
24
2,000
40%
1.00 min.
$
50
35
$
15
2,200
30%
0.50 min.
Machine A1 is the constrained resource and is being used at 100% of its capacity.
There is excess capacity on all other machines.
Machine A1 has a capacity of 2,400 minutes per week.
…………………………………………………………….
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What generates more profit for the company, using one minute of machine A1 to process
Product 1 or using one minute of machine A1 to process Product 2?
a. Product 1
b. Product 2
c. They both would generate the same profit.
d. Cannot be determined.
Answer B → With one minute of machine A1, Ensign could make 1 unit of Product 1, with a
contribution margin of $24, or 2 units of Product 2, each with a contribution margin of $15 per
unit.
2 × $15 = $30 > $24
……………………………………………………………..
The key is the contribution margin per unit of the constrained resource
Product
1
2
Contribution margin per unit
$ 24
$ 15
Time required to produce one unit ÷ 1.00 min. ÷ 0.50 min.
Contribution margin per minute
$ 24
$ 30
Ensign should emphasize Product 2 because it generates a contribution margin of $30
per minute of the constrained resource relative to $24 per minute for Product 1.
Ensign can maximize its contribution margin by first producing Product 2 to meet
customer demand and then using any remaining capacity to produce Product 1. The
calculations would be performed as follows
...............................................
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Let’s see how this plan would work.
Alloting Our Constrained Resource (Machine A1)
Alloting Our Constrained Resource (Machine A1)
Weekly demand for Product 2
Weekly demand for Product 2
Time required per unit
×
Time required per unit
×
Total time required to make
Total time required to make
Product 2
Product 2
2,200 units
2,200 units
0.50 min.
0.50 min.
Total time available
Total time available
Time used to make Product 2
Time used to make Product 2
Time available for Product 1
Time available for Product 1
Time required per unit
Time required per unit
Production of Product 1
Production of Product 1
2,400 min.
2,400 min.
1,100 min.
1,100 min.
1,300 min.
1,300 min.
1.00 min.
1.00 min.
1,300 units
1,300 units
•
•
•
÷
÷
1,100 min.
1,100 min.
Satisfying the weekly demand of 2,200 units for Product 2 would consume 1,100
minutes of available capacity on machine A1.
This implies that 1,300 constraint minutes would still be available to satisfy demand for
Product 1.
Since each unit of Product 1 requires one minute of A1 machine time, Ensign could
produce 1,300 units of Product 1 with its remaining capacity.
………………………
According to the plan, we will produce 2,200 units of Product 2 and 1,300 of Product 1.
Our contribution margin looks like this.
Production and sales (units)
Contribution margin per unit
Total contribution margin
Product 1
1,300
$
24
$ 31,200
Product 2
2,200
$
15
$ 33,000
The total contribution margin for Ensign is $64,200.
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Determine the value of obtaining more of the constrained resource.
Value of a Constrained Resource
How much should
Ensign be willing
to pay for an
additional minute
of A1 machine
time?
Increasing the
capacity of a
constrained
resource should
lead to increased
production and
sales.
Colonial Heritage makes reproduction colonial furniture from select hardwoods.
Chairs Tables
Selling price per unit
$80 $400
Variable cost per unit $30 $200
Board feet per unit
2
10
Monthly demand
600
100
The company’s supplier of hardwood will only be able to supply 2,000 board feet this month.
Is this enough hardwood to satisfy demand?
a. Yes
b. No
(2
600) + (10
100 ) = 2,200 > 2,000
…………………………………………………………………..
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Prepare an analysis showing whether joint products should be sold at the split-off point or
processed further.
•
In some industries, a number of end products are produced from a single raw material
input.
•
Two or more products produced from a common input are called joint products.
•
The point in the manufacturing process where each joint product can be recognized as a
separate product is called the split-off point.
…………………………….
Joint costs are traditionally allocated among different products at the split-off point.
A typical approach is to allocate joint costs according to the relative sales value of the
end products.
Although allocation is needed for some purposes such as balance sheet inventory
valuation, allocations of this kind are very dangerous for decision making.
Joint costs are irrelevant in decisions regarding what to do with a product from the split-off
point forward. Therefore, these costs should not be allocated to end products for decisionmaking purposes.
With respect to sell or process further decisions, it is profitable to continue processing a joint
product after the split-off point so long as the incremental revenue from such processing
exceeds the incremental processing costs incurred after the split-off point.
Data about Sawmill’s joint products includes:
Sales value at the split-off point
Sales value after further processing
Allocated joint product costs
Cost of further processing
Per Log
Lumber
Sawdust
$ 140
$
40
270
176
50
50
24
20
ASSUME Sawmill has two joint products – lumber and sawdust. Selected financial information is
shown for each joint product.
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‫الحل باالمتحان هيك‬
Analysis of Sell or Process Further
Per Log
Lumber
Sales value after further processing $
Sales value at the split-off point
Incremental revenue
Cost of further processing
Profit (loss) from further processing $
270
140
130
50
80
Sawdust
$
$
50
40
10
20
(10)
The lumber should be processed further and the sawdust should be sold at the split-off point.
………………………………………………..
. ‫انتهت المادة ال تنسوني من صالح دعائكم‬
ACC-Mahmood AL-Assaf .
133