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Must Know Formulas for Cost Accounting

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Must Know Formulas for Cost Accounting
To reduce and eliminate costs in a business, you need to know the formulas that are most
often used in cost accounting. When you understand and use these foundational formulas,
you’ll be able to analyze a product’s price and increase profits.
Breakeven Formula
Profit ($0) = sales variable costs fixed costs
Target Net Income
Target net income = sales variable costs fixed costs
Gross Margin
Gross margin = sale price cost of sales (material and labor)
Contribution Margin
Contribution margin = sales variable costs
Pre-Tax Dollars Needed for Purchase
Pre-tax dollars needed for purchase = cost of item ÷ (1 - tax rate)
Price Variance
Price variance = (actual price - budgeted price) × (actual units sold)
Efficiency Variance
Efficiency variance = (Actual quantity budgeted quantity) × (standard price or rate)
Variable Overhead Variance
Variable overhead variance = spending variance + efficiency variance
Ending Inventory
Ending inventory = beginning inventory + purchases cost of sales

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Important Terms and Principles Cost Accountants Should Know
Many accountants will tell you that cost accounting is the most difficult accounting subject to
learn. That's because cost accounting has many terms that are not used in other areas of
accounting (financial accounting and management accounting, to name a few). If you're
looking for an overview of the most important terms and principles for this subject, you've
found it! These concepts provide a foundation for learning cost accounting.
Reviewing accounting basics
Accountants use many principles to guide their decision-making process, such as the
matching principle and the principle of conservatism.
Matching principle: This principle states that your company’s revenue should be matched
with the expenses that relate to that revenue. If you sell lamps in May, you create revenue
for that month. The May revenue should be matched with the expenses you incurred for the
lamps sold in May. So, the cost of the lamp is matched with the sales proceeds for the
lamp’s sale.
Principle of conservatism: Accountants often need to make
judgments. Conservatism means that the decision should generate the least attractive
financial result. If there’s a decision about revenue, the conservative choice is to delay
recognizing revenue in the financial statements. Expenses should be posted to the financial
statements sooner rather than later. These choices generate financial statements that are
less optimistic, which is why the approach is calledconservative.
There are four basic types of cost that accountants need to keep in mind direct, indirect,
fixed, and variable costs. They are defined as follows:
Direct costs: Direct costs can be directly traced to the product. Material and labor costs are
good examples.
Indirect costs: These can’t be directly traced to the product; instead, these costs
are allocated, based on some level of activity. For example, overhead costs are considered
indirect costs.
Fixed costs: Fixed costs don’t vary with the level of production. A good example is a lease
on a building.
Variable costs: Unlike fixed costs, variable costs change with the level of production. For
example, material used in production is a variable cost.
Every cost can be defined with two of these four costs. For example, the cost to repair
machinery is anindirect variable cost. You decide if the cost is direct or indirect, and if the
cost is fixed or variable.
Checking out cost accounting basics
Just like in any discipline, you use specific cost accounting terms and ideas to communicate
meaning and understand procedures. Understanding basic concepts in crucial, so to start
using cost accounting analysis, you should be familiar with these terms:

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Must Know Formulas for Cost Accounting To reduce and eliminate costs in a business, you need to know the formulas that are most often used in cost accounting. When you understand and use these foundational formulas, you’ll be able to analyze a product’s price and increase profits. Breakeven Formula Profit ($0) = sales – variable costs – fixed costs Target Net Income Target net income = sales – variable costs – fixed costs Gross Margin Gross margin = sale price – cost of sales (material and labor) Contribution Margin Contribution margin = sales – variable costs Pre-Tax Dollars Needed for Purchase Pre-tax dollars needed for purchase = cost of item ÷ (1 - tax rate) Price Variance Price variance = (actual price - budgeted price) × (actual units sold) Efficiency Variance Efficiency variance = (Actual quantity – budgeted quantity) × (standard price or rate) Variable O ...
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