Cost and management accounting: formula sheet

Key formulas

Total cost

Total cost = Fixed cost + (Variable cost per unit × Activity level)

Valid only within the relevant range. Use it for forecasting once you have the split.

High-low: variable cost per unit

Variable cost per unit = (Cost at highest activity − Cost at lowest activity) ÷ (Highest activity − Lowest activity)

Use the highest and lowest activity levels, not the highest and lowest costs. Both must be within the relevant range.

High-low: fixed cost

Fixed cost = Total cost at either activity level − (Variable cost per unit × that activity level)

Using the high or low point gives the same answer.

Fixed cost per unit

Fixed cost per unit = Total fixed cost ÷ Activity level

Falls as activity rises. Total fixed cost does not change.

Prime cost

Prime cost = Direct materials + Direct labour + Direct expenses

Adding indirect production costs gives total production cost.

Overhead absorption rate (OAR)

OAR = budgeted production overhead ÷ budgeted activity level (e.g. labour hours or machine hours)

Use budgeted figures for both. Pick the basis that best drives the overhead.

Overhead absorbed

Overhead absorbed = OAR × actual activity

Compare with actual overhead to find under- or over-absorption.

Under/over-absorption

Over/(under)-absorbed = overhead absorbed − actual overhead incurred

Under-absorption is added to cost of sales, over-absorption is deducted from it.

Contribution

Contribution = sales − variable costs

Marginal costing profit = total contribution − fixed costs for the period.

Profit difference between methods

Absorption profit − marginal profit = change in inventory units × fixed overhead absorbed per unit

Absorption profit is higher when inventory rises and lower when inventory falls. Assumes the same fixed overhead rate per unit in the period.

ABC cost driver rate

Cost driver rate = cost of activity pool ÷ total driver volume

Product overhead = Σ (driver rate × driver units used by that product).

Material price variance

(Standard price − Actual price) × Actual quantity purchased

Positive = favourable. Use quantity purchased if materials are recorded at standard on purchase; otherwise quantity used.

Material usage variance

(Standard quantity for actual output − Actual quantity used) × Standard price

Positive = favourable.

Labour rate variance

(Standard rate − Actual rate) × Actual hours paid

Positive = favourable.

Labour efficiency variance

(Standard hours for actual output − Actual hours worked) × Standard rate

Positive = favourable.

Idle time variance

Idle hours × Standard rate

Always adverse. Efficiency is then based on hours worked, not hours paid.

Variable overhead variances

Expenditure = (Standard rate × Actual hours) − Actual cost; Efficiency = (Standard hours for actual output − Actual hours) × Standard rate

Positive = favourable.

Fixed overhead expenditure variance

Budgeted fixed overhead − Actual fixed overhead

Positive = favourable.

Fixed overhead volume variance (absorption costing)

(Actual output − Budgeted output) × Standard fixed overhead per unit

Positive = favourable. Not used under marginal costing.

Sales price variance

(Actual price − Standard price) × Actual units sold

Positive = favourable.

Sales volume variance

(Actual units sold − Budgeted units) × Standard profit per unit

Use standard contribution per unit under marginal costing. Positive = favourable.

Reconciliation

Budgeted profit ± sales variances ± cost variances = Actual profit

Adverse variances reduce profit.

Budget variance

Variance = Actual − Budget (label as favourable or adverse)

Favourable if it raises profit. Adverse if it lowers profit. Always state which.

Incremental budget

New budget = Last period base × (1 + inflation) ± known changes

Check whether the base is last budget or last actual.

Flexed budget

Flexed budget = Budgeted cost per unit × actual activity (variable costs); fixed costs unchanged

Compare actual with the flexed budget, not the original, to judge cost control.

Rolling budget

Each period: drop the period just ended, add a new period at the end

Keeps a constant forecast horizon, such as 12 months.

Relevant cost test

Relevant = future + cash + incremental (differs between options)

Exclude sunk costs, committed costs, depreciation and unchanged overheads.

Contribution per unit

Selling price per unit − variable cost per unit

Variable cost includes direct materials, direct labour if truly variable, and variable overheads.

Break-even point (units)

Fixed costs ÷ contribution per unit

Use the weighted average contribution for a multi-product mix with a fixed sales mix.

Break-even point (sales value)

Fixed costs ÷ contribution to sales ratio

Contribution to sales ratio = contribution ÷ selling price.

Target profit volume

(Fixed costs + target profit) ÷ contribution per unit

Useful for what-if questions.

Margin of safety

(Budgeted sales − break-even sales) ÷ budgeted sales

Can be shown in units, value or as a percentage.

Limiting factor ranking

Contribution per unit ÷ units of scarce resource per unit

Rank products highest first and allocate the scarce resource in that order, up to demand.

Make or buy

Compare relevant cost of making with the buy-in price

Make cost uses only avoidable costs. Buy if the buy-in price is lower, subject to non-financial factors.

Relevant cost of materials

Replacement cost if the material is regularly used; otherwise higher of resale value and alternative-use value

Materials with no other use and no resale value cost nil.

Target cost

Target cost = Target selling price − Target profit margin

Cost gap = Estimated current cost − Target cost. A positive gap must be closed.

Throughput

Throughput = Sales revenue − Totally variable costs (usually direct materials)

Labour is normally treated as a fixed cost in the short term.

Throughput per bottleneck hour

Return per factory hour = Throughput per unit ÷ Bottleneck hours per unit

Rank products on this, not on contribution per unit.

Total factory cost (TPAR input)

Cost per factory hour = Total factory cost ÷ Total bottleneck hours available

Factory cost is labour plus overheads, excluding materials.

Throughput accounting ratio

TPAR = Return per factory hour ÷ Cost per factory hour

TPAR above 1 means the product earns more than it costs. Below 1 means it loses money.

Life cycle cost

Life cycle cost = Design and development + Production + Marketing + Distribution + Service + Disposal costs

Discounting may be applied if the question gives a cost of capital.

Quick revision

• Fixed costs stay constant in total across the relevant range, while variable costs change in total with activity.
• Marginal costing treats fixed production overheads as a period cost, while absorption costing includes them in product cost.
• When inventory rises, absorption costing usually reports higher profit than marginal costing. When inventory falls, it reports lower profit.
• Activity-based costing assigns overheads using cost drivers and often changes product profitability and pricing views.
• Variance = actual result compared with standard or budget, labelled favourable or adverse by its effect on profit.
• Always ask why a variance happened. Variances can be linked, such as cheap material causing a usage or quality problem.
• A budget has several roles: planning, coordination, communication, motivation and control.
• Participative budgeting can improve motivation, but it risks slack and takes longer.
• Relevant costs are future, incremental cash flows. Ignore sunk costs, committed costs and non-cash items.
• Include opportunity costs in decisions where resources are scarce.
• Target costing starts with the market price and works back to the cost allowed. Lifecycle costing looks at costs across the whole product life.
• The balanced scorecard looks beyond finance to customers, internal processes and learning and growth.

Common mistakes

• Choosing the highest and lowest costs instead of the highest and lowest activity levels in the high-low method. Fix: Always scan the activity column first. Take the costs that belong to those activity levels, even if they are not the highest or lowest costs.
• Saying fixed cost per unit is fixed. Fix: Total fixed cost is constant in the relevant range. Fixed cost per unit falls as activity rises. Variable cost per unit is constant, but total variable cost rises.
• Using actual overhead or actual hours to calculate the OAR. Fix: Use budgeted overhead divided by budgeted activity. Use actual activity only when absorbing the overhead.
• Including fixed overheads in marginal cost per unit. Fix: Unit cost in marginal costing has variable costs only. Deduct fixed costs once in total.
• Using budgeted output instead of actual output to find the standard quantity. Fix: Always multiply actual units produced by the standard per unit. This gives the flexed standard.
• Getting the sign wrong and calling a variance favourable when it is adverse. Fix: Ask whether actual cost is above or below standard. Higher cost is adverse. For sales, higher revenue or profit is favourable.
• Listing textbook features of incremental, ZBB and rolling budgets without using the scenario. Fix: Tie every point to a named fact in the case, such as a volatile market or a bloated head office.
• Saying ZBB is always better than incremental budgeting. Fix: Weigh its time and cost. Recommend it where costs are discretionary or unchecked, and consider using it only periodically.
• Including depreciation or apportioned fixed overheads as relevant costs. Fix: Ask if the cash will actually change. Depreciation is non-cash and general overheads usually stay the same, so leave them out.
• Using the original purchase price of materials already in stock. Fix: Original cost is sunk. Use replacement cost if the material is used regularly, otherwise the higher of resale value and alternative use value.

Exam tips

• In SBL, cost behaviour is a tool, not a topic on its own. Expect it inside a case task on pricing, restructuring, outsourcing or profitability. Always tie your numbers to the scenario.
• Write the cost equation clearly before forecasting. Markers award method marks, so every step should be visible even if you slip on arithmetic.
• State assumptions out loud: relevant range, linear behaviour, constant prices. A one-line caveat shows scepticism, which supports professional skills marks.
• Comment on the cost structure. A high fixed-cost business has higher operating risk when demand is uncertain. A variable-heavy structure gives flexibility. This is the commercial insight markers look for.
• Do not over-polish numbers. Use the exam's currency, round sensibly, and spend the saved time on the recommendation.
• Show every driver rate and check that the allocated total equals the overhead pool. Markers reward visible workings.
• Always add a short comment after calculations. State what the figures mean for pricing, mix or profitability.
• When asked to evaluate ABC, give both advantages and disadvantages, then tie them to the scenario's business type.