Cornerstone 1.

1
CORNERSTONES
Basic Cost Calculations and the Contribution-Margin-Based Income Statement
1.1 Basic Cost Calculations and the Contribution-Margin-Based Income Statement
1.2 Calculating the Units Needed to Break Even and to Achieve a Target Profit
1.3 Calculating Revenue for Break-Even and for a Target Profit 1. Calculations
1.4 Calculating the Number of Units to Generate and After-Tax Target Profit
Variable product cost per unit = Direct materials + Direct labor + Variable overhead
1.5 Calculating the Break-Even Number of Units in a Multiproduct Firm
Selling expense per unit = Selling price x Percentage
1.6 Calculating Margin of Safety Variable cost per unit = Direct materials + Direct labor + Variable overhead
1.7 Calculating Degree of Operating Leverage and Percent Change in Profit + Variable selling expense
Contribution margin per unit = Price – Variable cost per unit
Contribution margin ratio = (Price – Variable cost per unit)/Price or
2.1 Calculating a Markup on Cost (Sales – Total variable cost)/Sales
2.2 Calculating Cost and Profit by Customer Class Total fixed expenses = Fixed factory overhead + Fixed selling and
Calculating Inventory Cost and Preparing the Income Statement Using administrative expenses
2.3
Absorption Costing
Calculating Inventory Cost and Preparing the Income Statement Using Variable
2.4 2. Contribution-margin-based income statement
Costing
Calculating the Sales Price Variance, the Sales Volume Variance, and the Total
2.5
Overall Sales Variance Sales xx
2.6 Calculating the Contribution Margin Variance Total variable expenses xx
2.7 Calculating the Contribution Margin Volume Variance Total contribution margin xx
2.8 Calculating the Sales Mix Variance Total fixed expenses xx
2.9 Calculating the Market Share Variance and the Market Size Variance Operating income xx

3.1 Structuring a Make-or-Buy Decision 3. Increase in operating income

3.2 Structuring a Keep-or-Drop Product Line Decision
3.3 Structuring a Special-Order Decision Increase in sales xx
3.4 Structuring a Sell at Split-Off or Process Further Decision Less: Increase in variable cost xx
Increase in fixed cost xx
Increase in operating income xx
Cornerstone 1. 2 Cornerstone 1.4
Calculating the Units Needed to Break Even and to Achieve a Target Profit Calculating the Number of Units to Generate and After-Tax Target Profit

1. Break-even units 1. Before-tax income

Break-even units = Total fixed costs / (Price – Unit variable cost) Before-tax income = After-tax income / (1 – Tax rate)

2. Units to achieve target operating income 2. Units to achieve target operating income
Units for target profit = (Total fixed costs + Target profit) / (Price – Unit variable cost) Units for target profit = (Total fixed costs + Target profit) / (Price – Unit variable cost)

3. Income statement
Total
Sales xx
Total variable expenses xx
Cornerstone 1.3 Total contribution margin xx
Total fixed expenses xx
Calculating Revenue for Break-Even and for a Target Profit Operating income xx
Less: income taxes xx
1. Contribution margin per unit Net income xx

Contribution margin per unit = Price – Unit variable cost

Contribution margin ratio = (Price – Variable cost per unit)/Price

2. Breakeven sales revenue

Breakeven sales revenue = Total fixed cost / Contribution margin ratio

3. Target sales revenue = (Total fixed cost + Target profit) / CM ratio

Cornerstone 1.5 Cornerstone 1. 6
Calculating the Break-Even Number of Units in a Multiproduct Firm Calculating Margin of Safety

1. Sales mix 1. Margin of safety in units

Product A units : Product B units Margin of safety in units = Current sales units – Breakeven point units

2. Break-even number of units (2 products) 2. Breakeven sales & Margin of safety in sales
Unit CM x Breakeven sales = Breakeven units x Sale price
Product Price Unit VC Unit CM Sales Mix
Sales Mix
Margin of safety in sales = (Current sales units x Sale price) – Breakeven sales
Product A xx xx xx xx xx
Product B xx xx xx xx xx
Package CM xx

Breakeven packages = Total fixed cost / Package contribution margin

Breakeven Product A = (Sales mix x Breakeven packages)
Cornerstone 1.7
Breakeven Product B = (Sales mix x Breakeven packages)
Calculating Degree of Operating Leverage and Percent Change in Profit

3. Contribution-margin-based income statement

1. Degree of operating leverage
Product A Product B Total
Sales xx xx xx Degree of operating leverage = Total contribution margin / Operating income
Less: variable expenses xx xx xx
Contribution margin xx xx xx
Less: Direct fixed expenses xx xx xx 2. Percentage change in operating income
Product margin xx xx xx Percentage change = Degree of operating leverage x Percent change in sales
Less: Common fixed expenses xx
Operating income xx
Cornerstone 2.1 Cornerstone 2.3
Calculating a Markup on Cost Calculating Inventory Cost and Preparing the Income Statement Using Absorption
Costing

1. Markup on COGS
Markup on COGS = (Selling & admin. expenses + Operating income) / COGS 1. Unit product cost under absorption costing
Direct materials xx
Direct labor xx
2. Price for new product Variable overhead xx
Fixed overhead xx
Price for new product = Product cost per unit + Markup per unit Total cost xx

3. Markup on direct materials

2. Units in ending inventory & Cost of ending inventory
Markup on direct materials = (Direct labor + Overhead + Selling and administrative
Units in ending inventory = Units, beginning inventory + Units produced – Units sold
expenses + Operating income) / Direct materials
Cost of ending inventory = Unit product cost x Units in ending inventory
Bid price = Direct materials cost + (Markup on direct materials x Direct materials cost)
Unit product cost = Direct materials + Direct labor + Variable OH + Fixed OH
Fixed OH = Fixed manufacturing cost / Units manufactured

3. Absorption-costing income statement

Sales xx
Less: cost of goods sold xx
Cornerstone 2.2 Gross profit xx
Less:
Calculating Cost and Profit by Customer Class Variable marketing expenses xx
Fixed marketing & administrative expenses xx
Operating income xx
Cornerstone 2.4 Cornerstone 2.5
Calculating Inventory Cost and Preparing the Income Statement Using Variable Calculating the Sales Price Variance, the Sales Volume Variance, and the Overall
Costing Sales Variance

1. Unit product cost under variable costing 1. Sales price variance

Direct materials xx Sales price variance = (Actual price – Standard price) x Quantity sold
Direct labor xx
Variable overhead xx
Total cost xx 2. Sales volume variance
Sales volume variance = (Actual volume – Expected volume) x Expected price
2. Units in ending inventory & Cost of ending inventory
Units in ending inventory = Units, beginning inventory + Units produced – Units sold 3. Overall sales variance
Cost of ending inventory = Unit product cost x Units in ending inventory Overall sales variance = Sales price variance + Sales volume variance
Unit product cost = Direct materials + Direct labor + Variable OH

3. Variable-costing income statement

Sales xx
Less:
Cornerstone 2.6
Variable cost of goods sold xx
Variable marketing expense xx Calculating the Contribution Margin Variance
Contribution margin xx
Less:
Fixed factory overhead xx 1. Contribution margin variance
Fixed marketing & administrative expenses xx
Contribution margin variance = Actual CM – Expected CM
Operating income xx
Contribution margin = Sales – variable expenses
Cornerstone 2.7 Cornerstone 2.9
Calculating the Contribution Margin Volume Variance Calculating the Market Share Variance and the Market Size Variance

1. Budgeted average unit contribution margin 1. Market share variance

Budgeted average unit contribution margin Market share variance = [(Actual market share percentage – Budgeted market share
= Budgeted contribution margin / Budgeted total units percentage) x Actual industry sales in units] x Budgeted average unit CM

2. Contribution margin volume variance 2. Market size variance

Contribution margin volume variance Market size variance = [(Actual industry sales in units – Budgeted industry sales in
units) x Budgeted market share percentage] x Budgeted average unit CM
= (Actual qty sold – Budgeted qty sold) x Budgeted average unit CM

Cornerstone 2.8
Calculating the Sales Mix Variance

1. Sales mix variance = [(Product 1 actual units – Product 1 budgeted units) x Product
1 budgeted CM – Budgeted average CM)] + [(Product 2 actual units – Product 2
budgeted units) x Product 2 budgeted CM – Budgeted average CM)]