Consequences of Incorrect Job Order Costing
Causes of Failure of Job Order Costing: The following is the list of the most probable causes that would cause the job order costing system of the company to fail: Adequate System Not In Place: Job order costing requires an elaborate system in place. In earlier times this was done with the help of paperwork…
Constraints and Contribution Margin Analysis
Hidden Assumption: The cost volume profit analysis has a rogue assumption. This rogue assumption believes that the cost volume profit analysis is completely scalable. We know that this is not the case. We operate in a finite world and have finite resources. We show this in our analysis when we write down the relevant range…
Allocating Overheads in Job Order Costing
Tracking direct labor and materials that have been used in a job can be done with a fair degree of precision. That is not the real problem when it comes to costing. The real problem is with allocation of overheads. Usually, they have very little correlation to any specific activity. They are the result of…
It begins with the same old way. Companies have to compute the contribution margin for each of their products. This is a possibility if a company has a couple of hundred products. If there are thousands of products, we may have to use the sales based approach mentioned in the end of this article.
So, for each of the products find the contribution margin and divide it by the selling costs, to derive the contribution margin ratio.
The next step is to find the relative weights of each of these products. The common way to do this is to estimate the relative proportion of sales that different products have. For instance, if for every 1 product A, we sell two product B’s, their ratio is 1:2. We will need a ratio of the sales of all the products. This is found out by going into the empirical sales data that the company has. On the other hand, we can also find out if the sales are expected to change in the future period and make adjustments in our ratio based on this expectation.
The final step is to calculate a weighted average. This is done by multiplying each contribution margin ratio of every item with its relative weight, adding all of them together and then dividing them by the total number of weights. The number we obtain is our multiproduct contribution margin.
Now, this calculation is completely based on our assumption about the relative weights of the sales. If the weights change too much, the contribution of the weights will also completely change. So we need to understand that if the proportion of sales is changing, our contribution margin is obsolete.
For large companies like Wal-Mart where there are thousands of products, the multiproduct contribution margin is calculated based on the sales dollars. Instead of finding contribution margin ratio for each item, one ratio is found out for increase in every sales dollar. This number is pretty accurate, if it is computed using the correct empirical estimates.
Article Written by
Himanshu Juneja, the founder of Management Study Guide (MSG), is a commerce graduate from Delhi University and an MBA holder from the esteemed Institute of Management Technology (IMT). He has always been someone deeply rooted in academic excellence and driven by a relentless desire to create value. Recently, he was honored with the “Most Aspiring Entrepreneur and Management Coach of 2025 (Blindwink Awards 2025)” award, a testament to his hard work, vision, and the value MSG continues to deliver to the global community.
Article Written by
Himanshu Juneja, the founder of Management Study Guide (MSG), is a commerce graduate from Delhi University and an MBA holder from the esteemed Institute of Management Technology (IMT). He has always been someone deeply rooted in academic excellence and driven by a relentless desire to create value. Recently, he was honored with the “Most Aspiring Entrepreneur and Management Coach of 2025 (Blindwink Awards 2025)” award, a testament to his hard work, vision, and the value MSG continues to deliver to the global community.
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