Thursday, March 25th, 1999
Announcements: none

Lecture notes:

	1/1/98	12/31/98
Raw Material	10,000	15,000
WIP	39,000	31,000
Finished Goods	74,000	87,000

98 Raw Material Purchases = 20,000
Raw Materials Used in Production = 20,000 - (15,000 - 10,000) = 15,000

COGS = $120,000

FINISHED GOODS
COGM	COGS
Change = 13,000

COGM > COGS by 13,000
COGM = $133,000

COGM > Manuf. Costs by 8,000
Manufacturing Costs = $125,000

Predetermined Overhead Rate

Estimated Overhead / Estimated Activity Level

Page 753, Exercise 5

19X8 Predetermined Overhead Rate = 1,145,000 / 90,000 = $12.72

Job 16A4 = $31,673
Job 21C2 = $66,394
Job 17H3 = $54,314

Page 753, Exercise 6

Total Overhead Applied = 89,920 x 12.72 =	1,143,782
Actual Overhead =	1,143,400
Overapplied Overhead =	382

3 accounts affected: WIP, finished goods, COGS

Activity Based Costing

• Multiple overhead rates
• More accurate than using a single predetermined overhead rate

New Income Statement Format

Sales
- Variable Costs
Contribution Margin
- Fixed Costs
Net Income
Sales in units = 10,000
Sales	100,000
- Variable Costs	- 60,000
Contribution Margin	40,000
- Fixed Costs	- 20,000
Net Income	20,000

Contribution Margin per Unit

Cont. Marg. / Units Sold = 40,000 / 10,000 = $4

Cont. Marg. / Sales = 40,000 / 100,000 = 40%

Net Income = 0
Contribution Margin = Fixed Costs

Fixed Costs / Cont. Marg. per Unit = 20,000 / 4 = 5,000 units

5,000 units x $10 = $50,000
OR
Fixed Costs / Cont. Marg. Ratio = 20,000 / .4 = $50,000

What is the change in Net Income if sales were to increase 20%?

Change in Net Income = Change in Cont. Marg., so:

40,000

x .20

$8,000

How many units must be sold to earn a Net Income of $50,000?

Cont. Marg.	70,000
- Fixed Costs	- 20,000
Net Income	50,000

Cont. Marg. / Cont. Marg. per Unit = 70,000 / 4 = 17,500 units

Example

Sales = 30,000 Units
Sales	300,000
- Variable Costs	- 210,000
Cont. Marg.	90,000
- Fixed Costs	- 60,000
Net Income	30,000

Breakeven Point in Units

Fixed Costs / Cont. Marg. per Unit = 60,000 / 3 = 20,000 units

20,000 x 10 = $200,000 OR 60,000 / .3 = $200,000

What is the change in Net Income as a result of 40% increase in sales volume?

90,000

x .4

36,000

How many units need to be sold in order to achieve a $75,000 Net Income?

Cont. Marg.	135,000
- Fixed Costs	- 60,000
Net Income	75,000

Cont. Marg. / Cont. Marg. per Unit = 135,000 / 3 = 45,000

Page 850, Problem B2

Sales Price / Unit	435
- Variable Costs / Unit	- 210
Cont. Marg. / Unit	225

Contribution Margin Ratio

225 / 435 = .517

1. Breakeven Point in Units = 166,500 / 225 = 740 units
2. Breakeven Point in Sales Dollars = 740 x 435 = $321,900 OR 166,500 / .517 = $322,050
3. (166,500 + 10,125) / 225 = 785 units

Sales Price	425
- Variable Costs	- 195
Cont. Marg.	230
(166,500 + 15,200) / 230 = 790 units