COST
ACCOUNTING
FORMULAS
An Essential List &
Examples
Benjamin Wann - CMA
Owner CFO Consultants LLC
01 Total Cost (TC)
Total Cost (TC) is calculated by summing
up all the costs incurred in producing
goods or providing services within a
specific period. It includes direct costs
(costs directly attributed to the
How to production) and indirect costs (which
cannot be directly traced to a specific
Calculate: product or service).
Example:
TC = Direct Let’s consider a manufacturing company
that produces widgets. In a given
Materials + month, the company incurs the
following costs:
Direct Labor
+ Factory Direct Materials: $10,000
Overhead Direct Labor: $5,000
Factory Overhead: $3,000
When calculating the Total Cost (TC) for
the month, we add up these costs:
TC = $10,000 + $5,000 + $3,000
Benjamin Wann
CMA, CSCA, MBA, PMP = $18,000
Average Cost
02 (AC)
The Average Cost formula is used to
determine the average cost per unit of
production or service. It provides
How to valuable insights into the cost efficiency
and profitability of operations. Average
Calculate: Cost is essential for pricing decisions,
financial analysis, budgeting, and
assessing the impact of costs on
AC = Total profitability.
Costs / Example:
Number of Let’s consider a software development
company that incurs total costs of
Units $100,000 in a month for developing 500
software applications.
Produced
To calculate the Average Cost (AC) per
software application, we divide the total
costs by the number of software
applications:
AC = $100,000 / 500
Benjamin Wann = $200
CMA, CSCA, MBA, PMP
Marginal Cost
03 (MC)
The Marginal Cost formula is used to
understand the additional cost incurred
by producing one additional unit of
output. It is crucial in decision-making
How to processes, especially for determining the
optimal level of production, pricing
Calculate: strategies, and evaluating the impact of
production changes on costs and
profitability.
MC = Change
Example:
in Total Cost / Let’s consider a manufacturing company
Change in that produces widgets. The company
incurs a total cost of $10,000 for
Quantity producing 100 widgets. When it
produces an additional unit, the total
cost increases to $10,100.
To calculate the Marginal Cost (MC) for
the additional unit, we determine the
change in total cost:
= ($10,100 – $10,000) / (101 – 100)
Benjamin Wann = $100
CMA, CSCA, MBA, PMP
Contribution
04 Margin (CM)
The Contribution Margin formula is used
to determine the portion of revenue that
contributes to covering fixed costs and
generating profit after accounting for
variable costs. It is a crucial metric for
assessing the profitability of individual
How to products or services, making pricing
decisions, conducting breakeven
Calculate: analysis, and evaluating the financial
impact of production or sales volume
changes.
CM = Total
Example:
Revenue – Consider a company that manufactures
and sells a product. The total revenue
Variable generated from selling the product is
Costs $10,000, and the variable costs
associated with production and sales
amount to $6,000.
To calculate the Contribution Margin
(CM), we subtract the variable costs from
the total revenue:
= $10,000 – $6,000
Benjamin Wann
CMA, CSCA, MBA, PMP
= $4,000
05 Gross Profit (GP)
The Gross Profit formula is used to
determine the profitability of a
business’s core operations before
considering other expenses such as
operating expenses, taxes, and interest.
How to It represents the amount of revenue that
remains after deducting the direct costs
Calculate: associated with producing or delivering
goods or services.
GP = Total Example:
For example, consider a retail store that
Revenue – sells clothing. The total revenue
generated from clothing sales is
Cost of $50,000, and the cost of goods sold
Goods Sold (COGS) amounts to $30,000.
To calculate the Gross Profit (GP), we
subtract the COGS from the total
revenue:
= $50,000 – $30,000
= $20,000
Benjamin Wann
CMA, CSCA, MBA, PMP
Break-Even Point
06 (BEP)
The Break-Even Point formula is used to
determine the level of sales or
production volume at which a business
neither makes a profit nor incurs a loss.
How to It represents the point where total
revenue equals total costs, including
Calculate: both fixed costs and variable costs. The
Break-Even Point is a crucial metric for
assessing the minimum level of sales or
BEP (in units) production required to cover costs and
start generating a profit.
= Fixed Costs /
Contribution Example:
Let’s consider a company that produces
Margin per and sells a product. The fixed costs for
Unit the company amount to $50,000, and
the contribution margin per unit is $10.
To calculate the Break-Even Point (BEP)
in units, we divide the fixed costs by the
contribution margin per unit:
= $50,000 / $10
Benjamin Wann
CMA, CSCA, MBA, PMP = 5,000 units
Return on
07 Investment (ROI)
Return on Investment is a widely used
financial metric to evaluate the
profitability and efficiency of an
investment. It measures the return or
gain generated from an investment
relative to its cost. ROI allows investors
and businesses to assess the
How to performance of their investment.
Calculate: Example:
Let’s consider an investor who purchases
stocks for $10,000 and sells them later
ROI = (Net for $12,000. The investor also receives
$500 in dividend income during the
Profit / Cost of
holding period.
Investment) x
To calculate the Return on Investment
100 (ROI), we first determine the net profit or
gain by subtracting the cost of
investment from the total proceeds:
Net Profit = Total Proceeds – Cost of
Investment
= ($12,000 + $500) – $10,000 = $2,500
Benjamin Wann
CMA, CSCA, MBA, PMP
ROI = ($2,500 / $10,000) x 100 = 25%
08 Cost of Goods Sold
(COGS)
How to
Cost of Goods Sold (COGS) refers to the
Calculate: direct costs incurred in producing or
acquiring the goods that are sold by a
business during a specific period. It
COG= includes the expenses directly
Beginning associated with the production or
procurement of the goods, such as the
Inventory + cost of raw materials, direct labor, and
direct overhead costs.
Total
Purchases on Example:
the Specified The beginning inventory recorded for
Period – the the fiscal year ended in 2023 is $3,000.
There is also an additional inventory
Ending purchased during the 2023-2024 fiscal
Inventory year amounting to $2,000 and $1500
ending inventory recorded at the fiscal
year ended 2024. Based on the COG
formula, the cost of goods sold will be:
COG = $3,000 + $2,000 – $1,500 = $3,500
Benjamin Wann
CMA, CSCA, MBA, PMP
09 Overhead
Allocation
Overhead Allocation is used to fairly and
accurately allocate indirect costs to the
How to relevant cost objects based on a
predetermined allocation method or
Calculate: cost driver. It helps businesses
determine the true cost of products.
Overhead Example:
Allocation = Let’s consider a manufacturing company
that produces multiple products in a
(Total Indirect shared production facility. The company
incurs various overhead costs, such as
Cost / Total
rent, utilities, and equipment
Direct Labor maintenance, totaling $10,000 per
month. To allocate these overhead costs
Hours) x to each product, the company uses the
Direct Labor direct labor hours as the allocation base.
Hours for Product A requires 100 direct labor hours
Specific and Product B requires 200 direct labor
hours:
Product
Overhead Allocation for Product A
= ($10,000 / (100 + 200)) x 100 = $2,000
Benjamin Wann Overhead Allocation for Product B
CMA, CSCA, MBA, PMP
= ($10,000 / (100 + 200)) x 200 = $4,000
10 Cost Variance
Cost Variance is used to assess the cost
performance and control of a project or
activity. It helps businesses evaluate
deviations from the budgeted or
How to standard costs and identify areas where
Calculate: costs are over or under budget. Cost
variances can indicate inefficiencies, cost
overruns, or cost savings.
Cost Variance Example:
= Actual Cost Let’s consider a construction project
where the budgeted cost for completing
– Budgeted a building is $500,000. However, the
Cost actual cost incurred in completing the
project amounts to $550,000.
To calculate the Cost Variance, we
subtract the budgeted cost from the
actual cost:
= $550,000 – $500,000
= $50,000
Benjamin Wann
CMA, CSCA, MBA, PMP
11 Price Variance
Price Variance is used to assess the
impact of changes in prices on the
overall cost of production. It helps
businesses evaluate the efficiency of
How to cost management and control by
identifying variations in the prices of
Calculate: inputs. Price variances can highlight
opportunities for cost savings or indicate
unfavorable price fluctuations
Price
Example:
Variance = Let’s consider a manufacturing company
(Actual Price – that produces widgets. The standard cost
of producing one widget is $10, but due
Standard to changes in the market, the company
Price) x Actual had to purchase materials at a higher
price, resulting in an actual cost of $12 per
Quantity widget. The company produced 1,000
widgets.
To calculate the Price Variance, we
subtract the standard price from the
actual price:
Price Variance = ($12 – $10) x 1,000
Benjamin Wann
CMA, CSCA, MBA, PMP
= $2,000
Labor Efficiency
12 Variance
This refers to the difference between the
actual hours of labor used and the
standard hours that should have been
used, multiplied by the standard hourly
labor rate.
How to
Example:
Calculate: A manufacturer estimates that it should
take 3 hours to produce one unit of a
product, with a standard labor cost of $20
Labor per hour. So, the standard labor cost per
unit is 3 hours/unit * $20/hour = $60/unit.
efficiency In a month, they produce 1000 units.
variance = According to the standard, it should have
taken 3,000 hours of labor (3 hours/unit *
(Standard 1000 units).
hours – Actual However, the company actually used
hours) x 3,200 hours of labor to produce these 1000
units.
Standard rate
The labor efficiency variance =
(Standard hours – Actual hours) *
Standard rate =
(3,000 hours – 3,200 hours) * $20/hour
Benjamin Wann
CMA, CSCA, MBA, PMP = -200 hours * $20/hour
= -$4,000 Unfavorable Variance
13 Predetermined
Overhead Rate
(POR)
The Predetermined Overhead Rate is
used to allocate indirect manufacturing
costs to the products or services being
How to produced. These costs include expenses
such as factory rent, utilities,
Calculate: maintenance, and supervision.
Example:
POR = Let’s consider a manufacturing company
Estimated that estimates its total annual
manufacturing overhead costs to be
Total $500,000. The company also estimates
that it will produce 10,000 units of a
Overhead particular product during the year.
Costs /
To calculate the Predetermined
Estimated Overhead Rate, divide the estimated
Activity Base total overhead costs by the estimated
activity base (in this case, the number of
units produced):
POR = $500,000 / 10,000 units
Benjamin Wann
CMA, CSCA, MBA, PMP
= $50 per unit
14 Economic Order
Quantity (EOQ)
EOQ is used to optimize inventory
management by identifying the ideal
How to quantity to order at each reorder point.
By calculating the EOQ, businesses can
Calculate: minimize holding costs associated with
excess inventory while avoiding
stockouts and associated costs. EOQ is
EOQ = √[(2 * widely used in supply chain
management to enhance efficiency,
Annual reduce costs, and ensure a smooth flow
Demand * of inventory.
Ordering Example:
Cost) / Let’s consider a retailer with an annual
demand of 10,000 units, an ordering cost
Holding Cost of $100 per order, and a holding cost of
$5 per unit per year.
per Unit per
Year] EOQ = √[(2 * 10,000 * $100) / $5]
= √[200,000 / $5]
= √40,000
Benjamin Wann
≈ 200 units
CMA, CSCA, MBA, PMP
15 Cost of Quality
(COQ)
Cost of Quality (COQ) is a financial
metric that measures the overall
expense a business incurs to prevent,
How to identify, and correct flaws or quality
Calculate: issues in its goods or services. It
encompasses the costs associated with
ensuring quality, including prevention
costs, appraisal costs, and failure costs.
COQ =
Prevention Example:
Let’s consider a manufacturing company
Costs + that produces electronic devices. In a
Appraisal specific period, the company incurs the
following costs related to quality:
Costs +
Prevention Costs: $50,000
Internal
Failure Costs Appraisal Costs: $20,000
+ External Internal Failure Costs: $30,000
Failure Costs
External Failure Costs: $10,000
COQ = $50,000 + $20,000 + $30,000 +
$10,000
Benjamin Wann
CMA, CSCA, MBA, PMP
= $110,000
16 Production Volume
Variance
Production Volume Variance is used to
How to evaluate the efficiency and effectiveness
Calculate: of production activities. It provides
insights into the relationship between
production volume and costs, allowing
businesses to understand the impact of
Production volume fluctuations on their financial
Volume results.
Variance = Example:
(Standard Let’s consider a manufacturing company
that budgets a standard production
Production volume of 1,000 units but actually
Volume – produces 900 units during a period. The
standard cost per unit is $10.
Actual
To calculate the Production Volume
Production Variance, we multiply the difference
Volume) * between the standard and actual
production volume by the standard cost
Standard Cost per unit:
per Unit
Production Volume Variance = (1,000 –
900) * $10
Benjamin Wann
CMA, CSCA, MBA, PMP = 100 * $10 = $1,000
17 Margin of Safety
The difference between the actual sales
volume and the break-even sales
volume is called the margin of safety. It
How to shows the proportion of the current
Calculate: sales that determine the firm's profit.
Example:
Let’s consider Actual sales (4,000 units
Margin of @ $25/unit) = $100,000
safety = Contribution margin per unit = $15
Total fixed costs = $25,000
Actual sales
volume - Break-even sales = Fixed costs /
Contribution margin per unit
Break-even
sales volume = 25,000 / 15 = 1,667 units
= 1,667 x 25 = $41,675
Margin of safety = = 100,000 - 41,675
= $58,325
Margin of safety Ratio = 58,325 / 100,000
Benjamin Wann
CMA, CSCA, MBA, PMP = 0.5832 = 58.32 %
18 AVAILABILITY
It measures the fraction of time a piece
How to of equipment is expected to be
operational (as opposed to being down
Calculate:
for repairs). Availability can range from
zero (never available) to 1.00 (always
Availability = available). Companies that can offer
equipment with a high availability factor
MTBF / have a competitive advantage.
MTBF + MTR Availability is a function of both the
mean time between failures and the
mean time to repair.
Where,
MTBF = Mean Example:
Let’s assume a copier can operate for an
time between average of 200 hours between repairs
failures. and the mean repair time is two hours.
MTR = Mean Determine the copier's availability.
time to repair, MTBF = 200 hours and MTR = 2 hours
including
Availability = 200 / 200 + 2 = 0.99
waiting time
Benjamin Wann
CMA, CSCA, MBA, PMP
19 Reorder Point
The reorder point occurs when the
How to quantity on hand drops to a
Calculate: predetermined amount. That amount
generally includes expected demand
during lead time and perhaps an extra
If demand and lead cushion of stock, which serves to reduce
time are both the probability of experiencing a
constant, the stockout during lead time.
reorder point
ROP = d x LT Example:
Suppose Mr. X takes Two-a-Day vitamins,
which are delivered to his home by a
Where, routeman seven days after an order is
d = Demand rate called in. At what point should Mr. X
(units per day or reorder?
week)
Usage 2 vitamins a day, Lead time 7 days
LT = Lead time in
days or weeks
ROP = Usage x Lead time
Note: Demand and
lead time must be 2 vitamins per day x 7 days = 14 vitamins
expressed in the
same time units Thus, Mr. X should reorder when 14
vitamin tablets are left, which is equal to
Benjamin Wann a seven-day supply of two vitamins a day.
CMA, CSCA, MBA, PMP
20 Takt time
Takt is the German word for musical
meter. It is the cycle time needed in a
production system to match the pace of
production to the demand rate. It is
sometimes said to be the heartbeat of a
How to lean production system.
Calculate:
Example:
Suppose in a production facility, Total
Takt time = Net time per shift is 480 minutes per day, and
time available there are two shifts per day. There are
two 20-minute rest breaks and a 30-
per day / Daily minute lunch break per shift. Daily
demand demand is 80 units.
Net time available per shift = 480 - 40 -
30 = 410 minutes per shift
Net time available per day = 410 x 2
shifts/day = 820 minutes per day
Takt Time = 820 minutes per day / 80
units per day
Benjamin Wann
CMA, CSCA, MBA, PMP = 10.25 minutes per cycle
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Benjamin Wann - CMA, MBA
Manufacturing Product Cost Expert
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Owner CFO Consultants LLC
Manufacturing Profitability Partners
