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.
Key Concepts
- 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 Against the Budget: Learning how to set budgets and assess performance relative to those budgets, covered in Weeks 11-12 of the ACCG2000 course.
Important Terms
- Costs: Resources given up to achieve a particular objective, measured in monetary terms.
- 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.
- 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.
- 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.
- 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.
- Cost Flow Process: The flow of costs in a manufacturing business, beginning with raw materials and ending with the cost of goods sold. Stages include:
- Raw Material to Work in Process
- Work in Process to Finished Goods
- Finished Goods to Cost of Goods 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
- Total Costs Formula:
Total Costs = Total Fixed Costs + (Variable Cost per Unit × Number of Units) - High-Low Method Formula:
Variable Cost per Unit = (Cost at Highest Activity Level – Cost at Lowest Activity Level) / (Highest Activity Level – Lowest Activity Level) - Total Product Cost Formula:
Total Product Cost = Direct Materials + Direct Labor + Manufacturing Overhead - Cost of Goods Sold (COGS) Formula:
COGS = Beginning Inventory + Purchases – Ending Inventory - Prime Cost Formula:
Prime Cost = Direct Materials + Direct Labor - Conversion Cost Formula:
Conversion Cost = Direct Labor + Manufacturing Overhead - Total Manufacturing Cost Formula:
Total Manufacturing Cost = Direct Material Cost + Direct Labour Cost + Manufacturing Overhead - Total Cost Formula:
Total Cost = Controllable Costs + Uncontrollable Costs - Steps to Estimate Cost Functions Using High-Low Method:
1. Calculate Variable Cost per Unit: (Cost at Highest Activity Level – Cost at Lowest Activity Level) / (Highest Activity Level – Lowest Activity Level)
2. Calculate Fixed Cost: Total Cost – (Variable Cost per Unit × Number of Units) - Cost of Materials Used Formula:
Beginning Raw Materials Inventory + Purchases – Ending Raw Materials Inventory - Total Manufacturing Costs Formula:
Total Manufacturing Costs = Direct Materials Used + Direct Labor + Manufacturing Overhead - Cost of Goods Manufactured (COGM) Formula:
COGM = Total Manufacturing Costs + Beginning WIP Inventory – Ending WIP Inventory - Cost of Goods Sold (COGS) Formula:
COGS = Beginning FG Inventory + COGM – Ending FG Inventory - Profit Formula:
Profit = (Sales – Variable Expenses) – Fixed Expenses - Profit Formula for Single Product:
Profit = (P × Q – V × Q) – Fixed Expenses (where P = Selling Price per Unit, Q = Quantity Sold, V = Variable Cost per Unit) - Profit Formula Using Unit Contribution Margin (Unit CM):
Profit = Unit CM × Q – Fixed Expenses - Unit Contribution Margin (UCM) Formula:
UCM = Selling Price per Unit – Variable Cost per Unit - Total Contribution Margin (TCM) Formula:
TCM = Total Sales Revenues – Total Variable Costs
TCM = UCM × Number of Units Sold - Contribution Margin Ratio (CMR) Formula:
CMR = UCM / Selling Price per Unit - Contribution Margin Percentage (CMP) Formula:
CMP = CMR × 100% - Breakeven Point in Units Formula:
Breakeven Point (in units) = Fixed Costs / Unit Contribution Margin (UCM) - Breakeven Point in Dollars Formula:
Breakeven Point (in dollars) = Fixed Costs / Contribution Margin Ratio (CMR) - Safety Margin Formula:
Safety Margin = Budgeted Sales Revenue – Breakeven Sales Revenue - Target Profit Before Tax Formula:
Target Profit Before Tax = Net Profit After Tax / (1 – Tax Rate) - Sales Volume (in Units) Formula:
Sales Volume (in units) = (Fixed Costs + Target Profit Before Tax) / Unit CM - Sales Volume (in Dollars) Formula:
Sales Volume (in dollars) = (Fixed Costs + Target Profit Before Tax) / Contribution Margin Ratio - Weighted Average Unit Contribution Margin (WACM) Formula:
WACM = ∑ (Sales Mix × Unit CM) - Breakeven Point with Multiple Products Formula:
Breakeven Point (in units) = Fixed Costs / WACM - Predetermined Overhead Rate Formula:
Predetermined Overhead Rate = Total Budgeted Overhead Costs / Total Budgeted Level of Activity - Applied Overhead Costs Formula:
Applied OH Costs = Pre. OH Rate × Actual Level of Activity - Plantwide Overhead Rate Formula:
Plantwide Overhead Rate = Total Estimated Manufacturing Overhead / Total Estimated Machine-Hours - Activity Rate Formula:
Activity Rate = Total Costs in Each Activity Cost Pool / Total Volume of Activities - Overhead Cost Allocated Formula:
Overhead Cost Allocated = Activity Rate × Actual Amount of Activity Base Used - Variable Costs Allocation Formula:
Variable Costs Charged to Operating Departments = Budgeted Variable Rate × Actual Level of Activity - Predetermined Overhead Rate for Each Department Formula:
Pre. OH Rate for Each Department = Budgeted Overhead Costs of the Department / Budgeted Level of Cost Driver of the Department - Overhead Costs Applied in Each Department Formula:
OH Costs Applied in Each Department = Pre. OH Rate × Actual Cost Driver Consumed in the Department