Key Costing Formulas and Financial Statements

Posted on Mar 20, 2025 in Accounting and Finance

Key Costing Formulas

Sales – Variable Expenses (VE) = Contribution Margin (CM)

SP per unit – VE per unit = CM per unit

BE point in units = Fixed Costs (FC) / CM per unit

BE point in dollars = BE units * SP per unit

CM Ratio = CM / Sales

Operating Leverage = CM / Net income

Target Sales in $ = (Fixed Expenses (FE) + Target Operating Profit) / CM ratio

Sales – VE – FE = Operating Income

CM – FC = Operating Profit

Target Sales in units = (FE + Target Operating Profit) / CM per Unit

Safety Margin = Budgeted Sales – Break-Even Sales

Job Costing

  • Actual indirect Cost Rate = Actual indirect costs / Actual direct labor hours
  • Budgeted indirect Cost Rate = Budgeted indirect costs / Budgeted direct labor hours
  • Budgeted direct Cost Rate = Budgeted direct costs / Budgeted direct labor hours

Actual Costing

  • Direct costs = Actual direct Cost Rate * Actual quantity of direct cost inputs
  • Indirect costs = Actual indirect Cost Rate * Actual quantity of cost allocation bases

Normal Costing

  • Direct costs = Actual direct Cost Rate * Actual quantity of direct cost inputs
  • Indirect costs = Budgeted indirect Cost Rate * Actual quantity of cost allocation bases

Variation of Normal Costing

  • Direct costs = Budgeted direct Cost Rate * Actual quantity of direct cost inputs
  • Indirect costs = Budgeted indirect Cost Rate * Actual quantity of cost allocation bases

Cost per professional = Direct professional labor / (Direct professional labor * Support cost per hour)

Activity-Based Costing (ABC)

Budgeted overhead rate = Budgeted Total costs in indirect cost pool / Budgeted Total quantity of cost allocation base

Simple Costing System

ABC allocation rate = Budgeted Cost of activity / Budgeted Total quantity of cost allocation base


Financial Statements

Income Statement (Variable Costing)

Revenues: x

Variable Cost of Goods Sold:

  • Manufacturing cost / unit: Direct Labor (DL) + Direct Materials (DM) + Variable Manufacturing Overhead (VMOH)

Beginning Inventory: a

Variable Manufacturing Cost: b

Cost of Goods Available for Sale: a + b = c

Ending Inventory: (d)

Variable COG sold: c – d = e

Variable Operating costs: f

Contribution margin: x – e – f = g

Fixed Manufacturing costs: h

Fixed Operating costs: i

Operating Income: g – h – i = j

Income Statement (Absorption Costing)

Revenues: x

Cost of Goods Sold:

Beginning Inventory: a

Variable Manufacturing Cost: b

Allocated Fixed Manufacturing Cost: c

Cost of Goods Available for Sale: a + b + c = d

Ending inventory: (e)

Adjustment for production-volume variance: f

Cost of Goods Sold: d – e + f = g

Gross Margin: x – g = h

Variable Operating cost: i

Fixed Operating Cost: j

Operating Income: h – i – j = k

Cost of Goods Purchased

Purchases: x

Freight in: y

x + y = z

Deduct:

Purchase returns and allowances: a

Purchase discounts: b

Cost of Goods Purchased: z – a – b = A

Cost of Goods Sold

Merchandise Inventory, Jan 1, x-year: B

Cost of Goods Purchased: A

Cost of Goods Available for Sale: B + A = C

Merchandise Inventory, Dec 31, x-year: D

Cost of Goods Sold: C – D = E

Income Statement

Revenues (Selling Price * Quantity): F

Cost of Goods Sold: E

Gross Margin: F – E = X

Operating costs:

  • Marketing and Advertising Costs
  • General and Administrative Costs
  • Depreciation on store fixtures
  • Shipping of merchandise to customers

Total Operating Costs (Sum of all): Y

Operating Income (Loss): X – Y