Cost Volume Profit Analysis & Job Order Costing 11 9

COST VOLUME PROFIT
ANALYSIS & JOB ORDER

COSTING
Report by:
MR. ELMIN FRANCHEZKO F. VALDEZ
Financial Management and Managerial Accounting
MBA 105
Course Professor:
ATTY. ANTONIO F. MARZAN
Cost Volume Profit Analysis
 CVP Analysis is a powerful tool that help
managers to understand the interrelationship
between COST, VOLUME and PROFIT in an
organization.
Usage of Cost Volume Profit Analysis
 Product Pricing
 Accepting/Rejecting Sales Order
 What product lines to promote?
 What level of output is required to achieve a
set level of net profit?
 Feasibility of profit plan
 Technology Usage
Cost Volume Profit Analysis
 Effect on future profit due to changes in fixed
cost, variable cost, sale price, quantity and
mix.
 Assumptions:
• Sales price per unit is constant
• Variable costs per unit are constant
• Total Fixed costs are constant
• Everything produced is sold
• Costs are only affected because activity changes
• If a company sells more than one product, they are sold
in the same mix
Elements of CVP Analysis
 Prices of products
 Volume or level of activity
 Variable costs per unit
 Total Fixed Costs
 Mix of Products Sold
Contribution Margin per unit
 This is the excess of Selling Price per unit
(SPu) over variable unit costs (VCu) and the
amount each unit sold contributes toward
FIXED COSTS and OPERATING PROFITS.
 Formula:
• CMu = SPu – VCu
Contribution Margin Ratio
 This is the percentage of Contribution Margin
to Total Sales.
 Formula:
• CMr = Contribution Margin / Total Sales
CVP Analysis for Break-even Planning
 Break – even point is the level of sales volume
where total revenues and total expenses are
equal, that is, there is neither profit or loss.
Break – even point formulas
 Break – even point (single product)
• BEP(u) = Total Fixed Costs / CMu
• BEP(P) = Total Fixed Costs / CMr
 Break – even point (multiple products)

• BEP(u) = Total Fixed Costs / Weighted Average
Cmu
• BEP(P) = Total Fixed Costs / WACMr
Example of Break – Even Point
 EFV Corporation has the following P/L
Presentation:
Total
Net Sales P500,000
Variable Cost 300,000
CM P200,000
Fixed Cost 150,000
Net Profit P 50,000
Number of Units Sold – 50,000
Example of Break – Even Point
Presentation:
Total Per Unit
Net Sales P500,000 P10
Variable Cost 300,000 6
CM P200,000 P 4
Fixed Cost 150,000 3
Net Profit P 50,000 P 1
Number of Units Sold – 50,000
 Compute for the BEP
• BEP(u) = P150,000 / 4
= 37,500 units
• BEP(P) = P150,000 / 40%

= P375,000
Break – even Graph
 Under the graphical approach, sales revenue,
variable costs and fixed costs are plotted on the
vertical axis while volume is plotted on the
horizontal axis.
 The BEP is the point where the Total Sales line

intersects the total cost line.
CVP Analysis for Revenue and Cost
Planning
 CVP Analysis can be used to determine the
level of sales needed to achieve a desired level
of profit.
 Formula:
• Sales(u) = (Total Fixed Costs + DESIRED PROFIT)
Contribution Margin per Unit
• Sales(P) = (Total Fixed Costs + DESIRED PROFIT)
Contribution Margin Ratio
Determining Sales based on Desired Profit
Presentation:
Per Unit
Net Sales P10
Variable Cost 6
CM P 4
Fixed Cost 150,000
 Desired Profit: P175,000
• Sales (u) = (150,000+175,000) / 4
= 81,250 units
• Sales (P) = (150,000+175,000) / 40%

= P812,500
Sample Problem: BEP (Multiple Products)
 EFV Corporation sells two products, X and Y
at a rate of 2 and 3 units, respectively. The
following data are available:
X Y
SPu 10 5
VCu 6 3
CMu 4 2
Total Fixed Costs P420,000
Problem Cont.
 Requirements:
• CBEP(u) = P420,000 / [(4*2/5)+(2*3/5)]
= 150,000 units
• CBEP(P)
= P420,000 / [(1.6/2.8*40%)+(1.2/2.8*40%)]
= P1,050,000
Sensitivity Analysis of CVP Results
 To examine the sensitivity o profits to changes
in sales, either of the measures may be used:
the MARGIN OF SAFETY or OPERATING
LEVERAGE.
Margin of Safety
 It measure the potential effect of the risk that
sales will fall short of planned levels.
 Formula:
• MoS = Sales – Break even Sales
• MoS Ratio = Margin of Safety / Sales
Operating Leverage
 OL determine the sensitivity of profit to
changes in the level of activity.
 Formula:
• OL = CM / NI
Job Order Costing
 Products and services are often produced
according to a customer's order. Because every
job is different, the cost of each product or
service will be different. Because of this
difference in cost, you have to keep track of
the cost of every job separately.
Job Order Costing
 A job is a single unit or group of units
identifiable as being produced to distinct
customer specifications.
 A job can be a
• Client
• Engagement
• Project
• Contrast
Job Order Costing
 Features:
• It is a specific order costing
• The job is carried out or the product is produced to meet
the specific requirement of the order
• It is concerned with the cost of an individual job or batch
regardless of the time taken to produce it, but normally
short duration of time.
• Cost are collected to each job at the end of it’s completion
• The cost of job is ascertained by adding material, labor
and overhead
• Work in process may or may not exist at the end of the
accounting years
Advantages of Job Order Costing
 The profit or loss made on each job can be
measured.
 It generates the cost data which is useful for
the analysis and control by management.
 It highlights whether the job is profitable or
not.
 Job Costing enable a comparison to be made
with performance on other job so that
inefficiencies are identified and rectified.
Disadvantages of Job Order Costing
 Time consuming process (recording of every
transaction in the job cycle)
 Expensive (requires additional cost to maintain

records)
Companies that use Job Order Costing
 Companies that typically use Job-Order
Costing include print shops, law firms,
accounting firms, doctors, construction
companies, and film studios.
Components of Cost (Trading)
 If you purchased your inventory (retail
business), then all of the costs incurred in order
to get the inventory to your place of business
and have it ready to sell are included in the
cost of the inventory.
Components of Cost (Manufacturing)
 the costs to run the factory can be divided into
three components of inventory that you
produce:
• Direct Materials
• Direct Labor, and
• Manufacturing Overhead.
Direct Materials
 Materials that become part of the product
being made are Direct Materials.
 Materials that are used in the manufacturing

process, but do not become part of the product
itself are Indirect Materials.
Direct Labor
 Labor costs incurred by workers who actually
make the products are Direct Labor.
 Factory labor costs of workers who do not

make the products are Indirect Labor.
Manufacturing Overhead
 Manufacturing Overhead consists of all of the
costs of the factory that are not Direct
Materials and Direct Labor.
Record Keeping
 With Job-Order Costing, every job (order) has
a record of costs called a Job Cost Sheet (also
called a Job Cost Record, Card or File), where
the costs to make the products are recorded.
What is Job Cost Sheet?
 The Job Cost Sheets serve as the subsidiary
ledger for the Work In Process account. You
can determine the amount in Work In Process
by adding up the balances on all of the Job
Cost Sheets for jobs in process.
How this Job Cost Sheet be filled up?
 When materials are needed for a job, the
workers or supervisors fill out a Materials
Requisition Form. The Materials Requisition
Form is then sent to the accounting office,
which notes the materials cost on the Job Cost
Sheet.
 Factory workers fill out Time Sheets or Time
Tickets (noting on what orders or jobs they
worked for a given day), or managers fill out
Labor Requisition Forms (when they use labor
on a job or order). These records are sent to the
accounting office, which notes the labor costs
on the Job Cost Sheet.
 The accounting office adds Manufacturing
Overhead to the Job Cost Sheet using the
selected Cost Driver.
Flow of Costs

Materials

Manufacturing Work in Process

Finished Goods Cost of Good Sold
Overhead Inventory

Labor

Journal Entries
 Direct Materials:
• Purchase of Raw Materials
Raw Materials Inventory xx
Cash/Accounts Payable xx
• Requisition of Direct Materials from warehouse
Work In Process – Job #001 xx
• Requisition of Indirect Materials from warehouse
Manufacturing Overhead xx
 Labor:
• Incur Direct Labor in working Job #001
Work in Process – Job #001 xx
Salaries Payable xx
• Incur Indirect Labor in working Job#001

Salaries Payable xx
 Manufacturing Overhead:
• Depreciation of Factory Assets
Accumulated Dep’n xx
• Incur Utilities Expense for Factory

Cash/Payable xx
How to apply Manufacturing Overhead to
WIP
Work in Process – Job #001xx

Manufacturing Overheadxx
When WIP is completed
Finished Goods Inventory xx

Work in Process xx
When FG is Sold
Cost of Good Sold xx

FG xx
Cash/AR xx
Sales xx
Predetermined Overhead Rate
 While you can measure how much Direct
Labor and Direct Materials are used to produce
an order, it is difficult to measure how much
Manufacturing Overhead is used for each job
(or order). As a result, firms use a measurable
proxy for Manufacturing Overhead. This is the
Cost Driver. Typical Manufacturing Overhead
Cost Drivers include Direct Labor Hours,
Direct Labor Cost, units or machine hours.
MOH Application Rate
Application Rate = Est. MOH / Cost Driver
*If the business expect to incur P300,000 MOH

and 100,000 Direct Labor hours, the MOH is
applied at the rate of P3 per DL hour. So if the
Job has 100 DL hours, then the applied MOH is
P300
Normal Costing
 When the Business used Actual cost to its
Direct Materials and Direct Labor while used
Predetermined rate for its MOH, this is called
normal costing
Under/Over – Applied Overhead
 When there’s a difference between Applied and
Actual MOH, the difference will be close to
COGS.
Cost of Good Sold xx

MOH xx
MOH xx
COGS xx
End of Report
THANK YOU!!

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COST VOLUME PROFIT

ANALYSIS & JOB ORDER

 Break – even point (multiple products)

• BEP(P) = P150,000 / 40%

 The BEP is the point where the Total Sales line

• Sales (P) = (150,000+175,000) / 40%

 Expensive (requires additional cost to maintain

 Materials that are used in the manufacturing

 Factory labor costs of workers who do not

Manufacturing Work in Process

• Incur Indirect Labor in working Job#001

• Incur Utilities Expense for Factory

Work in Process – Job #001xx

Finished Goods Inventory xx

Cost of Good Sold xx

Application Rate = Est. MOH / Cost Driver

*If the business expect to incur P300,000 MOH

Cost of Good Sold xx

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