1.

Direct Material : The raw material, different parts may be standard

or specialised used to assemble or manufacture a product or forms an
integral part are known as Direct material.

2. Indirect Material : The products used in the process of

manufacturing, assembling and production but does not form the main
parts of the product are known as indirect material.

3. Direct labor : The labor which manufactures produce or assemble

the product from the direct material or the indirect material is Direct
labor.

4. Indirect labor : The labor which helps in all the processes with the
direct labor is known as Indirect Labor.

5. Manufacturing overheads : Other than variable expenses the costs

incurred by the company/organisation in manufacturing or other
processes of the a product are manufacturing overheads
Contribution margin ratio of the gross operating margin of an individual
product to the products revenue.

CMR= (Product revenue- product variable cost)/ Product revenue

It is veru useful in planning the business operations as it allows the

planner decide that the produc is profitable or not and should be
continued. It mainly talks of the revenue it is adding in the
organisation and helps compare it between the competitors.
1. The wages of employees who build the sailboats. :Direct Labor
2. The cost of advertising in the local newspapers. :Selling cost
3. The cost of an aluminum mast installed in a sailboat. :Direct material
4. The wages of the assembly shops supervisor :Administration cost
5. Rent on the boathouse :Manufacturing overhead
6. The wages of the companys bookkeeper. :Administration cost
7. Sales commissions paid to the companys salespeople. :Selling Cost
8. Depreciation on power towels. :Manufacturing overhead
 Cups of Coffee Served in a Week
1,800 1,900 2,000

Fixed Cost 1100 1100 1100

Variable costs 26*2000=52000

26*1800=46800 26*1900=49400

Total cost =47900 =50500 =53300

Average cost per cup of =26.61 =26.57 =26.55

coffee served

2. The average cost of per cup served decreases as the number of

cups served in a week increases because with the increase in the
number of units served the fixed average cost of cup keeps on
decreases which leads to final decrease in cost of the cup.
1. sales Volume Increase by 50 units

Total
Per Unit
Sales (8,050 units) $209,300 $26.00

Variable expenses 144,900 18.00

Contribution margin 64400 $8.00

Fixed expenses 5600

Net Operating income $8400

2) Sales volume decrease by 50 units

Total
Per Unit
Sales (7,950 units) $206,700 $26.00

Variable expenses 143,100 18.00

Contribution margin 63600 $8.00

Fixed expenses 56000

Net Operating income $7600

3) sales volume is 7000 units

Total
Per Unit
Sales (8,050 units) $182,000 $26.00

Variable expenses 126,000 18.00

Contribution margin 56000 $8.00

Fixed expenses 56000

Net Operating income $0

1) Direct labor hours required:

Direct labor cost/Direct labor wage rate/ hour =120/12 =10

Total manufacturing Cost

Direct material 200

Direct labour 120

Ovrehead labor(18*10) 180

total manufacturing cost $500

2)

Unit product cost

Total manufacturing cost 500

Units produced 50

Unit product cost $10

In both the costing techniques the mode of handling the manufacturing
overheads are different.

In absorption costing the fixed manufacturing overhedas are

considered as the product cost whereas in variable costing the
manufacturing overhead

is treated as the period cost.

Any task or part of an organisation which leads to financial
transactions like cost, revenue or profits is known as segment of an
organisation.

E.g. operations, sales, manufacturing etc

There are 5 levels in Activity base costing.

1) Unit level activity : When the activities performed are related to the
number of units is known as Unit level Activity.

2) Batch level activity : The cost incurred when a new product batch is
processed is known as batch level activity.

3) Product level activity : When the activities are related to the number
of products produced and not the units produced then it is product
level activity.

4) Customer level activity : The activities that are related to the

customer independently and not any other activity then its is a
customer level activity.

5) Organisation level acivity : The activities are related to the

organisation as a whole and takes care of all the operations are known
as organisation level activity.
in the first stage of allocation in the ABC approach is that the cost are
assigned to the activity pools that are involved and in the

second stage the allocation is done to the product customer and other
cost jobs.