The document discusses various accounting concepts related to costing, including: - The cost of goods manufactured, which includes direct materials, direct labor, and allocated overhead for units completed or in process at the end of a period. It differs from cost of goods sold. - Mixed costs, which have both fixed and variable components. The total cost is calculated as the fixed costs plus variable costs that increase with activity levels. - The contribution margin income statement, which separates revenues, variable costs, and fixed costs to show contribution margin. - The high-low method, which uses the highest and lowest data points to estimate variable and fixed costs and calculate costs at different production levels graphically.

1. COST OF GOODS MANUFACTURED
MIXED COST
Contribution Margin Income Statement
HIGH-LOW METHOD INCOME STATEMENT
ZAHID HAFEEZ GONDAL
UNIVERSITY OF MANAGEMENT AND TECHNOLOGY

2. COST OF GOODS MANUFACTURED
The cost of goods manufactured is the cost
assigned to units either completed or still in
the process of being completed at the end
of an accounting period. The concept is
useful for examining the cost structure of a
company's production operations.

3. COST OF GOODS MANUFACTURED
The best approach to examining
the cost of goods manufactured is
to disaggregate it into its
component parts and examine
them on a trend line.

4. COST OF GOODS MANUFACTURED
By doing so, one can determine
the types of costs that a company
is incurring over time to produce a
certain mix and quantity of goods.

5. COST OF GOODS MANUFACTURED
This cost structure usually includes all of the
following:
 The cost of direct materials used in the
manufacturing process during the period.
 The cost of direct labor used in the
manufacturing process during the period.
 The amount of overhead allocated to
manufactured goods during the period.

6. COST OF GOODS MANUFACTURED
A retail operation has no cost of
goods manufactured, since it only
sells goods produced by others.
Thus, its cost of goods sold is
comprised of merchandise that it
is reselling.

7. COST OF GOODS MANUFACTURED
The cost of goods manufactured is not the
same as the cost of goods sold. Goods
manufactured may remain in stock for many
months, especially if a company experiences
seasonal sales. Conversely, goods sold are
those sold to third parties during the
accounting period.

8. COST OF GOODS MANUFACTURED
There can be numerous
reasons for the cost of goods
manufactured and cost of
goods sold to differ from each
other, including:

9. COST OF GOODS MANUFACTURED
 There may be no sales at all during the period, while production has
continued. The cost of goods sold is therefore zero, while the cost of goods
manufactured may be substantial.
 There may be lots of sales during the month from inventoried reserves,
while there is no manufacturing going on at all. The cost of goods sold may
therefore be substantial, while the cost of goods manufactured is zero.
 The cost of goods sold may contain charges related to obsolete inventory.
 The most likely reason for differences between the costs of goods
manufactured and sold is simply that the mix of products sold does not
exactly match the mix of products manufactured.

10. COST OF GOODS MANUFACTURED
The cost of goods manufactured is a component of the calculation for the
cost of goods sold. The calculation is:
 Beginning inventory + Cost of goods manufactured - Ending inventory
= Cost of goods sold
This calculation is used for the periodic inventory method. It is not needed
for the perpetual inventory method, where the cost of individual units that
are sold are recognized in the cost of goods sold.

11. MIXED COST
A mixed cost is a cost that contains both a
fixed cost component and a variable cost
component. It is important to understand
the mix of these elements of a cost, so that
one can predict how costs will change with
different levels of activity.

12. MIXED COST
Typically, a portion of a mixed
cost may be present in the
absence of all activity, in addition
to which the cost may also
increase as activity levels
increase.

13. MIXED COST
As the level of usage of a mixed
cost item increases, the fixed
component of the cost will not
change, while the variable cost
component will increase.

14. MIXED COST
 The formula for this relationship is:
Y = a + bx
 Y = Total cost
 a = Total fixed cost
 b = Variable cost per unit of activity
 x = Number of units of activity

15. MIXED COST
For example, if a company owns a
building, the total cost of that building in a
year is a mixed cost. The depreciation
associated with the asset is a fixed cost,
since it does not vary from year to year,
while the utilities expense will vary
depending upon the company's usage of
the building.

16. MIXED COST
 The fixed cost of the building is $100,000 per year, while the variable cost
of utilities is $250 per occupant. If the building contains 100 occupants,
then the mixed cost calculation is:
 $125,000 Total cost = $100,000 Fixed cost + ($250/occupant x 100
occupants)
 As another example of a mixed cost, a company has a broadband contract
with the local cable company, which it pays $500 per month for the first
500 megabytes of usage per month, after which the price increases by $1
per megabyte used. The following table shows the mixed cost nature of
the situation, where there is a baseline fixed cost, and above which the
cost increases at the same pace as usage:

17. MIXED COST

18. MIXED COST
 Mixed costs are common in a corporation, since
many departments require a certain amount of
baseline fixed costs in order to support any
activities at all, and also incur variable costs to
provide varying quantities of services above the
baseline level of support. Thus, the cost structure
of an entire department can be said to be a mixed
cost.

19. MIXED COST
This is also a key concern when
developing budgets, since some
mixed costs will vary only partially
with expected activity levels, and so
must be properly accounted for in
the budget.

20. MIXED COST
The best way to deal with mixed costs in a
budget is to use a formula in place of a single
number for a mixed cost, with the cost
automatically varying based on a designated
activity level (such as sales). This approach is
more complicated, but yields budget figures
that are more likely to match actual results.

21. MIXED COST
Similar Terms
Mixed cost is also known as
semi-variable cost or semi-
fixed cost.

22. Contribution Margin Income Statement
 The contribution margin income statement
separates variable and fixed costs in an effect
to show external users the amount of
revenues left over after variable costs are
paid. In other words, this is a special income
statement format that lists variable
costs and fixed costs in order to calculate the
contribution margin of the company.

23. Contribution Margin Income Statement

24. Contribution Margin Income Statement
Depending on the presentation
variable-costs could be broken out
into two categories: production
expenses and selling / administrative
expenses. Likewise, fixed-costs are
often separated into the same two
categories.

25. Contribution Margin Income Statement
As you can see, this format is very
different from the traditional income
statement format because cost of goods
sold is not listed and gross margin is not
calculated on the report. Instead variable-
costs are listed and the contribution
margin is calculated.

26. Contribution Margin Income Statement
Example
This format helps external users see how
much of the revenues are dedicated to
variable-costs and the amount of fixed-
costs that the company is committed to.
Different industries have different benches
for these numbers.

27. Contribution Margin Income
Statement
For example, the soft drink industry
is highly automated. In fact, Coca
Cola’s assembly line only requires
one employee to run the filling
station that fills more than 2,000
soda cans a minute.

28. Contribution Margin Income
Statement
That’s a ton of automation.
Coke’s variable-costs are much
lower than their fixed-costs
because they have so much
invested in automation.

29. Contribution Margin Income
Statement
 Conversely, industries with less automation,
higher labor requirements, and higher material
costs would have much lower variable-costs
than fixed-costs. This distinction is important to
both management and external users because
fixed-costs are constant and variable-costs can
change with the overall production levels.

30. Contribution Margin Income
Statement
For instance, a company with zero
sales would theoretically have zero
variable-costs and no margin. The
fixed-costs would still remain,
however, creating a loss for the year.

31. Contribution Margin Income
Statement
Summary Definition
Define Contribution Margin Income
Statement:
Contribution Profit and Loss means a
P&L statement that separates variable
and fixed costs.

32. HIGH-LOW METHOD INCOME
STATEMENT
The high-low method is a technique
managerial accountants use to
estimate the mixed production costs
at various levels of production by
calculating the variable cost rate and
total fixed costs.

33. HIGH-LOW METHOD INCOME
STATEMENT
In other words, it’s a formula used by
management to split the fixed and
variable costs associated with producing
a good and chart out these data points.
A line is then drawn connecting the
lowest and highest points to represent
the average.

34. HIGH-LOW METHOD INCOME
STATEMENT
 What Does High Low Method Mean?
 This method can also be used to chart out all the
purchases of goods and their prices. A straight line
on the graph connects the highest price and lowest
price of goods. Look at this example. The lowest
price is the fixed price of $20,000. The highest price
is $80,000.

35. HIGH-LOW METHOD INCOME
STATEMENT

36. HIGH-LOW METHOD INCOME
STATEMENT
The variable cost per unit can be
found using a simple slope formula.
Change in y divided by the change
in x. According to the formula
below, the variable cost per unit is
75 cents.

37. HIGH-LOW METHOD INCOME
STATEMENT

38. HIGH-LOW METHOD INCOME
STATEMENT
 Now management can figure out how much
it will cost to produce any amount of
products. All they have to do is look at the
fixed costs plus the variable cost per unit
multiplied by the units produced. Rearranging
this formula, management can also figure out
what total fixed costs are if they were
unknown.

39. HIGH-LOW METHOD INCOME
STATEMENT

40. HIGH-LOW METHOD INCOME
STATEMENT
The high low method is very useful for
helping management determine not only
what total costs will be, but also how
much of a certain product to produce.
There are a few shortfalls to the high low
method. For instance, it does not
recognize any other costs except the
highest and lowest costs.

41. HIGH-LOW METHOD INCOME
STATEMENT
Keep in mind that this method is far less
precise than other cost methods like
the least-squares method. It’s a simply
and easy way to understand the
relationship between fixed and variable
costs at different levels of output.

42. HIGH-LOW METHOD INCOME
STATEMENT
Summary Definition
High-low method means a graphical
approach to determining the average cost
of purchasing a good or producing a
product by plotting all transactions and
connecting the lowest and highest points.

43. THANK
YOU