Cost Accounting Essentials: Key Concepts and Calculations

Chapter 2: Predetermined Overhead Rate

Predetermined Overhead Rate = Estimated Total Manufacturing Overhead (MOH) / Estimated Total MOH Driver (e.g., Direct Labor hours, Direct Labor costs, Machine Hours)

Prime Cost = Direct Materials + Direct Manufacturing Labor

Conversion Cost = Direct Manufacturing Labor + Indirect Manufacturing Overhead

Cost Accumulation: Data is collected in an organized way (also known as cost pools).

Cost Assignment: Systematically links an actual cost pool to a distinct cost object (e.g., Tires, engine, labor assigned to car cost).

Activity Base: Examples include kilometers driven in a car, units produced, units sold, machine hours.

Product Cost: Costs tied to creating a product (Direct Materials, Direct Labor, Manufacturing Overhead).

Period Cost: Costs not tied to production (Selling, Administrative).

Differential Cost: Cost difference between two choices.

Opportunity Cost: Value lost from not choosing the next best option.

Sunk Cost: Irrecoverable cost; ignore in future decisions.

Irrelevant Cost: Costs that don't impact current decisions.

Chapter 3: Cost Behavior/Analysis (Y = mx + b)

Where:

• Y = Total Cost
• m = Variable Cost per Unit
• x = Activity Level
• b = Fixed Cost

Variable Cost (VC) = (Cost at High Activity Level - Cost at Low Activity Level) / (High Activity Level - Low Activity Level)

Total Cost (TC) = Fixed Costs (FC) + (Variable Cost per Unit (VC) × Quantity of Units Produced (Q))

Fixed Cost per Unit = Total Fixed Cost / Production Units

Chapter 4: CVP Analysis

Contribution Margin (CM) per unit = Selling Price (S) - Variable Cost per unit (Vc)

Breakeven (units) = Fixed Costs (Fc) / CM per unit

Target Sales Equation = (Target Profit + Fc) / CM per unit

Contribution Margin Ratio or Percent = CM per unit / Selling Price per unit

Breakeven Quantity (units) = Fc / CM per unit

Breakeven Quantity (sales) = Fc / CM %

Margin of Safety = Expected Sales - Breakeven Sales

Margin of Safety % = (Expected Sales - Breakeven Sales) / Expected Sales

Operating Income = Total Revenue - Total Variable Costs - Total Fixed Costs

Contribution Statement Order: Revenue > Variable Cost > Contribution Margin > Fixed Cost > Operating Income

Chapter 5: Job Costing

Cost Tracing: Assigning direct costs.

Cost Allocation: Assigning indirect costs.

Cost Pool: Grouping of related costs (e.g., all manufacturing plant costs or operating a specific machine).

Cost Allocation Example: If a machine costs $500,000 and was operated for 10,000 hours, the allocation rate is $500,000 / 10,000 = $50/hour to operate the machine.

Companies follow the Normal Costing Method (7-Step Method):

1. Identify Job: Define the specific job.
2. Identify Direct Costs: Find direct costs for the job.
3. Select Cost Base: Choose the base for cost allocation.
4. Group Indirect Costs: Pool indirect costs together.
5. Calculate Allocation Rate: Divide total indirect costs by the cost base.
6. Allocate Indirect Costs: Apply the rate to the job's base.
7. Calculate Total Cost: Add direct and allocated indirect costs.

Actual costs will rarely equal budgeted costs for accounting for overhead.