ACCA Applied Knowledge · Management Accounting

Cost accounting methods: formula sheet

Full chapter guide

Key formulas

Total job cost: Direct materials + Direct labour + Direct expenses + Absorbed overheads; Direct materials, labour and expenses together are the prime cost of the job.
Direct labour cost: Hours worked × Labour rate per hour; If overtime premium is not caused by this job, it is usually treated as overhead. Follow the wording of the question.
Overhead absorption rate (OAR): Budgeted overheads ÷ Budgeted activity level; Activity is often direct labour hours or machine hours. Use budgeted figures, not actual.
Overhead absorbed by a job: OAR × Actual activity used by the job; Use the job's own hours, not the total hours.
Selling price with mark-up: Total cost × (1 + mark-up %); Mark-up is based on cost.
Selling price with margin: Total cost ÷ (1 − margin %); Margin is based on selling price. A 20% margin means cost is 80% of price.
Total batch cost: Total batch cost = direct materials + direct labour + direct expenses + setup costs + absorbed overheads; Include only costs for that batch. Setup costs are usually a batch cost, whether stated directly or as an overhead.
Cost per unit: Cost per unit = total batch cost ÷ number of units in the batch; Use the number of good units produced if the question says some units are rejected and the cost must be spread over good output.
Setup cost per unit: Setup cost per unit = setup cost per batch ÷ batch size; This falls as batch size rises, because the setup cost is fixed per batch.
Overhead absorbed: Overhead absorbed = absorption rate × activity (e.g. labour hours); Use the rate given and the hours or other base for the batch.
Selling price with mark-up: Selling price per unit = cost per unit × (1 + mark-up %); Use when the question asks for price based on cost plus a percentage on cost.
Normal loss units: Normal loss = normal loss % × units input; Apply the percentage to input, unless the question says it applies to something else. Check the wording.
Expected output: Expected output = input units − normal loss units; This is the denominator for cost per unit.
Cost per unit: Cost per unit = (total process costs − scrap value of normal loss) ÷ expected output units; Only the scrap value of normal loss is deducted here. Do not deduct abnormal loss scrap.
Abnormal loss or gain units: Abnormal loss = expected output − actual output (if positive). Abnormal gain = actual output − expected output (if positive); Compare actual good output with expected output.
Valuing abnormal items: Value = abnormal units × cost per unit; Abnormal loss account: debit at this value, credit scrap proceeds. Abnormal gain account: credit at this value, debit scrap lost.
Normal loss value: Normal loss value = normal loss units × scrap value per unit; Debit scrap account or cash, credit process account. If there is no scrap value, the value is nil.
Equivalent units: Equivalent units = number of units × percentage complete (for each cost element); Do this separately for materials, labour and overhead, or for materials and conversion if the question groups them.
Cost per equivalent unit: Cost per equivalent unit = cost ÷ equivalent units; Calculate it for each cost element separately, then add them for a total cost per complete unit.
Units reconciliation: Opening WIP + units started = units completed + closing WIP (+ normal loss/abnormal loss, if any); Check this first. It tells you the units completed if the question does not give them.
Weighted average equivalent units: Units completed (all, including those from opening WIP) + closing WIP × % complete; Cost to divide = opening WIP cost + current period cost.
FIFO equivalent units: Opening WIP × % still to complete + units started and completed + closing WIP × % complete; Cost to divide = current period cost only. Opening WIP cost is added to the finished units separately.
Cost reconciliation: Opening WIP cost + current period costs = cost of completed units + cost of closing WIP; Use this as your final check on any answer.
Physical units apportionment: Cost to product = (Product units ÷ Total units of joint products) × Joint cost to be apportioned; Use only the joint products' units. Leave out the by-product and any waste.
Sales value at split-off apportionment: Cost to product = (Product sales value at split-off ÷ Total sales value of joint products) × Joint cost to be apportioned; Sales value = units × selling price at split-off. If a product is sold only after further processing, you must work back to a split-off value (see net realisable value).
Joint cost to be apportioned: Total process cost − net income from by-product (± any opening and closing WIP or normal loss adjustments); By-product income is normally deducted before the apportionment.
Net by-product income: By-product sales revenue − further processing costs − selling and distribution costs; Only this net figure reduces the joint cost.
Cost per unit of a joint product: Apportioned joint cost ÷ Units of that product (+ any separable processing cost per unit); Add separable costs after split-off to the product they relate to, not to the joint pool.
Cost per composite unit: Cost per unit = Total costs for the period ÷ Number of composite units; Use total costs of the service for the same period and the same service as the units.
Passenger-miles: Passenger-miles = Number of passengers × Miles travelled; Sum across trips if passenger numbers differ by trip. Do not average blindly.
Average passengers carried: Passenger-miles ÷ Miles run = Average passengers per mile; Useful when the question gives total passenger-miles and vehicle miles.
Tonne-miles: Tonne-miles = Tonnes carried × Miles travelled; For a round trip with an empty return, only count the loaded leg unless told otherwise.
Occupancy rate: Occupancy % = Units used ÷ Units available × 100; Example: rooms occupied ÷ rooms available. Also applies to bed-days and seat-miles.

Quick revision

Job costing: total job cost = direct materials + direct labour + direct expenses + absorbed overheads.
Batch costing: cost per unit = total batch cost ÷ units in the batch.
Normal loss is expected and is usually valued at scrap value or nil; its cost is borne by good units.
Abnormal loss is valued at the same cost per unit as good output and the loss is charged to the income statement.
Abnormal gain is valued like good output and the gain is a credit to the income statement.
Cost per unit in a process = (input costs - scrap value of normal loss) ÷ (input units - normal loss units).
Equivalent units = physical units × percentage completion for each cost element.
Materials are often added at the start so closing work-in-progress is 100% complete for materials; conversion costs are often partly complete.
Joint costs are shared at the split-off point; later costs belong to the individual product.
Apportioning joint costs by sales value at split-off gives each product the same gross profit percentage only when there are no further processing costs.
Service costing uses a composite cost unit, such as cost per passenger-kilometre or per bed-night.
Check what the question asks for: total cost, unit cost, value or percentage, and give the answer in the stated units.

Common mistakes

Confusing mark-up and margin. Fix: Mark-up is on cost, so price = cost × (1 + %). Margin is on price, so price = cost ÷ (1 − %). Underline the word in the question.
Using actual overheads instead of budgeted overheads to find the rate. Fix: The OAR is predetermined, so use budgeted overheads and budgeted activity. Actual figures only matter for over or under absorption.
Multiplying the setup cost by the number of units Fix: Add setup cost to the batch total once. Only divide by batch size at the end.
Forgetting to include setup cost in the total Fix: Tick off materials, labour, expenses, setup and overheads before dividing.
Dividing costs by input units instead of expected output units. Fix: Always subtract normal loss first. The divisor is expected output.
Deducting scrap value of abnormal loss when finding cost per unit. Fix: Only the scrap value of normal loss reduces the costs in the rate. Abnormal loss scrap goes to the abnormal loss account.
Using the same percentage for materials and conversion Fix: Always read what the percentage refers to. Materials added at the start means 100% for materials, whatever the conversion percentage is.
Including opening WIP cost in the FIFO cost per unit Fix: With FIFO, divide only current period costs by FIFO equivalent units. Add the opening WIP cost to the finished units afterwards.
Apportioning the by-product a share of joint cost. Fix: Give the by-product no joint cost. Deduct its net income from the process cost instead, unless the question says to show it as other income.
Including the by-product's units or sales value in the apportionment base. Fix: Underline the joint products only and total just those.

Exam tips

Look for the words mark-up and margin first. They decide whether you multiply or divide.
In number entry questions, follow the rounding and unit instructions exactly, such as two decimal places or whole dollars.
In multiple response questions, select exactly the stated number of options and check each statement against the method, such as whether a cost is direct or indirect.
Write the OAR with its unit, such as per direct labour hour, so you do not apply it to the wrong activity.
In longer multi-task questions, build a job cost sheet in order. Part marks are often given for each cost element.
In number entry questions, give the answer in the format asked, such as two decimal places, and do not add a currency sign unless told to.
Scan the question for the setup cost. It is often the item that decides which option is correct.
If an option equals the answer without setup cost, or equals setup cost multiplied by units, it is a likely distractor. Check your working against these traps.