Management Accounting Concepts and Formulas

• Management Accounting:

  The processes and techniques that focus on the effective and efficient use of organizational resources to support managers in their tasks of enhancing both customer value and shareholder value.

• Costing Techniques:

  Methods of costing and their applications, covered in Weeks 1-8 of the ACCG2000 course.

• Using Costing for Decision Making:

  Applying costing information to make informed business decisions, covered in Weeks 9 and 10 of the ACCG2000 course.

• Budget Setting and Evaluating Performance:

  Learning how to set budgets and assess performance relative to those budgets, covered in Weeks 11-12 of the ACCG2000 course.

• Costs:

  Resources given up to achieve a particular objective, measured in monetary terms.

• Total Costs Formula:

  Total Costs = Total Fixed Costs + (Variable Cost per Unit × Number of Units)

• Cost Object:

  An item for which management wants a separate measure of costs, such as products, services, customers, departments, or projects.

• Cost Driver:

  A factor or activity that causes a cost to be incurred.

• High-Low Method Formula:

  Variable Cost per Unit = (Cost at Highest Activity Level – Cost at Lowest Activity Level) / (Highest Activity Level – Lowest Activity Level)

• Level of Activity:

  The amount of work performed in the organization, such as hours worked or units produced.

• Relevant Range:

  The range of activity over which a particular cost behavior pattern is assumed to be valid.

• Variable Costs:

  Costs that change in total in proportion to changes in the level of activity.

• Fixed Costs:

  Costs that remain unchanged in total despite changes in the level of activity.

• Direct Costs:

  Costs that can be directly identified with or traced to a cost object in an economic manner.

• Indirect Costs:

  Costs that cannot be identified with or traced to a cost object in an economic manner.

• Product Costs:

  Costs assigned to goods/services that were manufactured or purchased for resale.

• Period Costs:

  Costs expensed in the accounting period in which they are incurred rather than being attached to units purchased or produced.

• Cost of Goods Sold (COGS) Formula:

  COGS = Beginning Inventory + Purchases – Ending Inventory

• Direct Material:

  Materials that are a part of the final product and can be directly traced to the product in an economic manner.

• Direct Labor:

  All manufacturing labor that can be directly traced to the cost object, such as wages paid to production workers.

• Manufacturing Overhead:

  All manufacturing costs other than direct material and direct labor, including the cost of indirect material, indirect labor, and other indirect costs like depreciation and insurance on factory equipment.

• Prime Cost Formula:

  Prime Cost = Direct Materials + Direct Labor

• Conversion Cost Formula:

  Conversion Cost = Direct Labor + Manufacturing Overhead

• Upstream Costs:

  Costs incurred before the manufacturing process, such as research and development and design costs.

• Manufacturing Costs:

  Costs incurred during the production process, including direct materials, direct labor, and manufacturing overhead.

• Downstream Costs:

  Costs incurred after the manufacturing process, such as marketing, distribution, and customer service costs.

• Controllable Costs:

  Costs that a specific manager can control or significantly influence.

• Uncontrollable Costs:

  Costs that a manager cannot control or significantly influence.

• High-Low Method:

  A method used to estimate cost functions by considering data at the highest and lowest levels of activity within a certain range.

• Relevant Range:

  The range of activity over which a particular cost behavior pattern is assumed to be valid.

• Cost Flow Process:

  The flow of costs in a manufacturing business, beginning with raw materials and ending with the cost of goods sold.

• Raw Material to Work in Process:

  The transfer of costs from the Raw Materials inventory to the Work in Process inventory when materials are requisitioned for production.

• Work in Process to Finished Goods:

  The transfer of costs from the Work in Process inventory to the Finished Goods inventory once production is complete.

• Finished Goods to Cost of Goods Sold:

  The transfer of costs from the Finished Goods inventory to the Cost of Goods Sold account when finished goods are sold.

• Cost-Volume-Profit (CVP) Analysis:

  An analytical tool used in managerial accounting to understand how changes in costs, volume, and selling prices influence a business’s profitability.

• Unit Contribution Margin (UCM):

  The difference between the selling price per unit and the variable cost per unit.

• Total Contribution Margin (TCM):

  The total contribution margin for all units sold.

• Contribution Margin Ratio (CMR):

  The ratio of the contribution margin to the selling price per unit.

• Contribution Margin Percentage (CMP):

  The contribution margin ratio expressed as a percentage.

• Breakeven Point in Units:

  The number of units that must be sold to cover all fixed and variable costs.

• Breakeven Point in Dollars:

  The amount of sales revenue required to cover all fixed and variable costs.

• Safety Margin:

  The difference between the budgeted sales revenue and the breakeven sales revenue.

• Weighted Average Contribution Margin (WACM):

  The average of the products’ unit contribution margins, weighted by the sales mix.

• Job Order Costing System:

  A costing system designed for environments where production is based on specific customer orders or where the manufactured items are distinct from one another.

• Process Costing:

  A method used in manufacturing environments where production is continuous, and the products are indistinguishable from one another.

• Plantwide Rate:

  A single overhead rate calculated for the entire production plant.

• Departmental Overhead Rates:

  Overhead rates calculated for each department, recognizing that overheads in each department may be driven by different cost drivers.

• Activity-Based Costing (ABC):

  A method that assigns overhead costs to products based on the activities they require.

• Direct Method:

  A method that directly assigns all service department costs to operating departments based on predetermined allocation bases.

• Step-Down Method:

  A method that allocates costs sequentially, starting with the service department that provides the most services to other service departments and ending with the one that provides the least.

• Reciprocal Method:

  A method that fully recognizes the provision of services between service departments by solving simultaneous equations to allocate costs accurately among all departments.

Formulas

1. Total Costs Formula

   • Total Costs = Total Fixed Costs + (Variable Cost per Unit × Number of Units)

2. High-Low Method Formula

   • Variable Cost per Unit = (Cost at Highest Activity Level – Cost at Lowest Activity Level) / (Highest Activity Level – Lowest Activity Level)

3. Total Product Cost Formula

   • Total Product Cost = Direct Materials + Direct Labor + Manufacturing Overhead

4. Cost of Goods Sold (COGS) Formula

   • COGS = Beginning Inventory + Purchases – Ending Inventory

5. Prime Cost Formula

   • Prime Cost = Direct Materials + Direct Labor

6. Conversion Cost Formula

   • Conversion Cost = Direct Labor + Manufacturing Overhead

7. Total Manufacturing Cost Formula

   • Total Manufacturing Cost = Direct Material Cost + Direct Labour Cost + Manufacturing Overhead

8. Total Cost Formula

   • Total Cost = Controllable Costs + Uncontrollable Costs

9. Steps to Estimate Cost Functions Using High-Low Method

   • Variable Cost per Unit = (Cost at Highest Activity Level – Cost at Lowest Activity Level) / (Highest Activity Level – Lowest Activity Level)
   • Total Cost = Fixed Cost + (Variable Cost per Unit × Number of Units)

10. Cost of Materials Used Formula

    • The cost of materials used is equal to the beginning raw materials inventory plus purchases minus the ending raw materials inventory.

11. Total Manufacturing Costs Formula

    • Total Manufacturing Costs = Direct Materials Used + Direct Labor + Manufacturing Overhead

12. Cost of Goods Manufactured (COGM) Formula

    • COGM = Total Manufacturing Costs + Beginning WIP Inventory – Ending WIP Inventory

13. Cost of Goods Sold (COGS) Formula

    • COGS = Beginning FG Inventory + COGM – Ending FG Inventory

14. Profit Formula

    • Profit = (Sales – Variable expenses) – Fixed expenses

15. Profit Formula for Single Product

    • Profit = (P × Q – V × Q) – Fixed expenses

16. Profit Formula Using Unit Contribution Margin (Unit CM)

    • Profit = Unit CM × Q – Fixed expenses

17. Unit Contribution Margin (UCM) Formula

    • UCM = Selling Price per Unit – Variable Cost per Unit

18. Total Contribution Margin (TCM) Formula

    • TCM = Total Sales Revenues – Total Variable Costs
    • TCM = UCM × Number of Units Sold

19. Contribution Margin Ratio (CMR) Formula

    • CMR = UCM / Selling Price per Unit

20. Contribution Margin Percentage (CMP) Formula

    • CMP = CMR × 100%

21. Breakeven Point in Units Formula

    • Breakeven Point (in units) = Fixed Costs / Unit Contribution Margin (UCM)

22. Breakeven Point in Dollars Formula

    • Breakeven Point (in dollars) = Fixed Costs / Contribution Margin Ratio (CMR)

23. Safety Margin Formula

    • Safety Margin = Budgeted Sales Revenue – Breakeven Sales Revenue

24. Target Profit Before Tax Formula

    • Target Profit Before Tax = Net Profit After Tax / (1 – Tax Rate)

25. Sales Volume (in Units) Formula

    • Sales Volume (in units) = (Fixed Costs + Target Profit Before Tax) / Unit CM

26. Sales Volume (in Dollars) Formula

    • Sales Volume (in dollars) = (Fixed Costs + Target Profit Before Tax) / Contribution Margin Ratio

27. Weighted Average Unit Contribution Margin (WACM) Formula

    • WACM = ∑ (Sales Mix × Unit CM)

28. Breakeven Point with Multiple Products Formula

    • Breakeven Point (in units) = Fixed Costs / WACM

29. Predetermined Overhead Rate Formula

    • The pre-overhead rate is calculated by dividing the total budgeted overhead costs by the total budgeted level of activity.

30. Applied Overhead Costs Formula

    • Applied OH Costs = Pre. OH Rate × Actual Level of Activity

31. Plantwide Overhead Rate Formula

    • Plantwide Overhead Rate = Total Estimated Manufacturing Overhead / Total Estimated Machine-Hours

32. Activity Rate Formula

    • Activity Rate = Total Costs in Each Activity Cost Pool / Total Volume of Activities

33. Overhead Cost Allocated Formula

    • The overhead cost allocated is equal to the activity rate multiplied by the actual amount of activity base used.

34. Variable Costs Allocation Formula

    • Variable Costs Charged to Operating Departments = Budgeted Variable Rate × Actual Level of Activity

35. Predetermined Overhead Rate for Each Department Formula

    • The pre-overhead rate for each department is calculated as follows:
    • • Pre. OH Rate for Each Department = Budgeted Overhead Costs of the Department / Budgeted Level of Cost Driver of the Department

36. Overhead Costs Applied in Each Department Formula

    • The OH costs applied in each department = Pre. OH rate × Actual cost driver consumed in the department.