cost accounting formulas

cost accounting formulas

Comprehensive Guide to Cost Accounting Formulas

1. Introduction to Cost Accounting

The objective of the cost accounting methods employed in this guide is to value production in terms of cash outlays, aid in controlling these outlays and lodge outlays, and profits at the center responsible for them. Cost accounting has always had a challenging problem when compared with production control. If a payroll card’s data offer an opportunity for low operating costs and better control of production costs, those costs must be assessed to both basic or entry-transaction accounts and production control-expenditure summary accounts. At periodic short intervals, dated time analysis is made of all production costs, direct labor controls, and production control models. The many shop buildings permit detailed fuel and power analyses, separate costs. Control measurements for each job are posted to the production control-expenditure summary accounts. Intermediate and final cost calculations and entries to basic or entry-transaction accounts are a part of this continuing cost measurement.

Cost accounting is an accounting technique used to determine, convey, and confirm costs. It’s a form of accounting applied to processes, products, and activities. The relationship between financial accounting, management accounting, and error analysis has been discussed clearly. Standard cost accounting provides economic information that can be used by other management functions to facilitate cost reduction and cost control.

2. Basic Cost Accounting Formulas

The next step is determining an activity base, which can be a process that creates a service, units of production, direct labor costs, or a machine’s usage hours. To calculate the overhead expenses allocation, divide these expenses by each respective activity base. To find the product overhead allocation, multiply the allocation rate by the company’s appropriation activity base for each cost category. Whether it be a service company or a product company, add each of the product overhead allocations together. To allocate the overhead to each product, divide the allocated amount by the product’s specific allocation base. Remember that the allocation base is different for companies offering services rather than products. Doing this step will allow for a comparison of overhead to be made as a percentage of revenue for a specific product if it’s compared to the cost of that product.

Basic Cost Accounting Formulas for Calculating Overhead: – Begin with direct cost and sales. Since these only belong where products are involved, exclude direct cost and sales from service companies. – Using a single company rate or a dual allocation rate categorizes indirect costs accordingly. – Calculate total overhead expenses by category. More complex accounting systems may divide three categories of overhead into more.

Cost accounting is a form of managerial accounting used to maintain cost information. It’s an entirely different kind of accounting process from financial accounting because cost accounting focuses on the costs of products, services, and other items a company has to pay for in order to run the business instead of looking outside of the company. It can be used by companies that offer either services or products. Here’s a helpful guide to some of the most basic cost accounting formulas for you to use to begin performing cost accounting for your corporate friends.

3. Advanced Cost Accounting Formulas

Margin of Safety in Sales = Actual Sales – Break-even Point in Sales

The formula for the margin of safety in sales can be derived by subtracting the break-even point in sales from actual sales:

Margin of Safety in Units = Actual Sales – Break-even Point in Units

The formula for the margin of safety in units can be derived by subtracting the break-even point in units from actual sales:

Break-even Point in Sales = Total Fixed Cost / Contribution Margin Ratio

Break-even Point in Units = Total Fixed Cost / Per-Unit Contribution Margin

The formula for the break-even point can be derived by dividing the total fixed cost by the per-unit contribution margin:

Contribution Margin Ratio = Contribution Margin / Total Sales

The formula for the contribution margin ratio can be derived by contrasting the contribution margin with total sales:

Contribution Margin = Total Sales – Variable Cost

The formula for the contribution margin can be derived by subtracting variable cost from total sales:

Variable Cost Ratio = Variable Cost / Total Sales

The formula for the variable cost ratio can be derived by combining both fixed and variable cost components of a cost entity:

4. Application of Formulas in Decision Making

Cost-volume-profit analysis is performed in many organizations as a means to help management in decision-making. Common areas of application involve determining whether a product or a product line should be introduced, whether a service should be performed, whether a market for a product can be expanded or should be contracted, and how much resources to use. Participations in joint ventures, make-or-buy decisions, asset dispositions, and temporary shutdowns can also be assisted by cost accounting information. Other types of decisions are made too, but cost accounting information is not the most important tool used as other relevant information also enters the consideration. This is frequently the case for pricing decisions, for screening investment alternatives, and for labor negotiations where a package deal is involved.

Decision-making process upwards in an organization necessitates an examination of the competitive position of the entire organization in relation to that of other similar organizations. At low levels, decisions determine whether a particular activity can be conducted at a profit. In addition, distinctions are drawn on whether a cost element is specific to a given decision or, from a longer-term point of view, is a sunk element that should be disregarded in the decision process.

5. Case Studies and Examples

Overview Olena Dubovik 5. Case Studies and Examples 5.1. Product Costs Case Study 5.2. Conversion Costs Case Study 5.3. Prime Costs Case Study 5.4. Total Manufacturing Costs Case Study 5.5. Cost Accounting Terminology Case Studies Cash Payments Case Study Costs Case Study Revenue Case Study Multiplier Example Dean Kashiwagi 5. Case Studies and Examples 5.1. Product Costs Case Study Yourango Baking Company 5.2. Conversion Costs Case Study Killer B’s, LLC 5.3. Prime Costs Case Study Yourango Clothing 5.4. Total Manufacturing Costs Case Study Yourango Manufacturing, Inc. 5.5. Cost Accounting Terminology Case Studies IRA Case Study 401K Case Study Consulting Department Elimination-ExampleOurLostLaborDepartmentWeNeedThisMessageExplainThisSimpleConversion.docDocWellBeFiredAren’tYouWorthIt404The page you are looking for might have been removed, had its name changed, or is temporarily unavailable.