Introduction to Cost and Management Accounting: formula sheet

Key formulas

Cost accounting vs financial accounting: purpose

Cost accounting = cost ascertainment and control (internal); Financial accounting = profit and financial position (mainly external)

Start every difference answer with the purpose.

Cost accounting vs management accounting: nature

Cost accounting = records and analyses cost; Management accounting = uses data for planning and decisions

Management accounting is wider. It draws on cost accounting but is not limited to cost data.

Core objectives of cost accounting

Ascertain cost; fix price; control and reduce cost; measure profitability; support decisions

Use these five as your standard list.

Total cost

Total cost = Total fixed cost + Total variable cost

Fixed cost is constant in total within the relevant range; variable cost per unit is constant.

Variable cost

Total variable cost = Variable cost per unit × Units

Total changes with activity; per unit stays the same.

Fixed cost per unit

Fixed cost per unit = Total fixed cost ÷ Units

Per unit falls as output rises and rises as output falls.

Semi-variable cost

Total cost = Fixed element + (Variable rate × Units)

Split using the high-low method: variable rate = (Cost at high − Cost at low) ÷ (Units at high − Units at low).

Prime cost and overheads

Prime cost = Direct material + Direct labour + Direct expenses

All indirect costs of material, labour and expenses form overheads.

Relevant cost rule

Relevant cost = Future, differential, cash (avoidable) cost

Exclude sunk and committed costs; include opportunity cost.

Job cost (basic structure)

Job cost = Direct material + Direct labour + Direct expenses + Overheads absorbed

Cost is collected separately for each job on a job cost sheet.

Process cost per unit

Cost per unit = (Total process cost − Scrap value of normal loss) ÷ Normal output units

Normal output = input − normal loss. Abnormal items are treated separately.

Marginal cost and contribution

Contribution = Sales − Variable (marginal) cost

Fixed cost is charged against total contribution for the period, not to units.

Standard costing variance

Cost variance = Standard cost for actual output − Actual cost

This form applies to costs only. A positive result is Favourable (F) and a negative result is Adverse (A). Sales and profit variances use the reverse form: Actual − Standard.

Budgetary control comparison

For costs/expenses: Budget variance = Budgeted − Actual. For sales and profit: Budget variance = Actual − Budgeted.

In both forms a positive result is Favourable (F) and a negative result is Adverse (A). Always label the result F or A, and use the right form for the type of item.

Cost control in one line

Cost control = Set target → Measure actual → Find variance → Take corrective action

Target is accepted as fixed. Works through standards and budgets.

Cost reduction in one line

Cost reduction = Permanent lowering of unit cost, quality maintained

Challenges the standard itself. Needs real, lasting savings, not a temporary dip.

Target costing

Target cost = Target selling price − Desired profit margin

A cost management technique. Price is set by the market, so cost must be fitted to it.

Cost audit versus financial audit

Cost audit: cost records and cost statements. Financial audit: true and fair view of financial statements.

Use this contrast for any difference question.

Direct material consumed

Opening stock of raw material + Purchases + Carriage inward (and other purchase costs) − Closing stock of raw material

Use net purchases after returns and trade discount. Carriage outward does not belong here.

Prime cost

Direct material consumed + Direct employee cost + Direct expenses

Only direct items. Indirect wages and indirect materials go to factory overheads.

Gross factory cost

Prime cost + Factory overheads

Factory overheads include indirect material, indirect employee cost and indirect factory expenses such as factory rent, power and depreciation of plant.

Factory cost (works cost)

Gross factory cost + Opening WIP − Closing WIP

WIP is adjusted only at this stage.

Cost of production

Factory cost + Administration overheads related to production (+ quality control and R&D cost, where the question gives them)

Divide by units produced to get cost of production per unit.

Cost of goods sold

Cost of production + Opening finished goods − Closing finished goods

Closing finished goods are valued at the cost of production per unit, unless the question says otherwise.

Cost of sales

Cost of goods sold + Administration overheads (not related to production) + Selling and distribution overheads

This is the total cost against which sales are compared.

Profit

Sales − Cost of sales

If profit is given as a percentage of cost, sales = cost of sales × (100 + profit %) ÷ 100.

Quick revision

• Cost accounting records, classifies and analyses costs; management accounting uses cost and other data for decisions and control.
• Cost centre is a location, person or item for which costs are collected; cost unit is the unit of measurement for cost.
• Direct costs can be traced to a cost unit economically; indirect costs cannot and are treated as overheads.
• Fixed cost stays constant in total over a relevant range; variable cost changes in total with activity.
• Per unit, fixed cost falls as output rises; variable cost per unit stays constant.
• Controllable costs can be influenced by a given manager; uncontrollable costs cannot.
• Sunk costs are past costs and are irrelevant to future decisions; opportunity cost is the benefit given up.
• Methods suit the type of work (job, batch, process, service); techniques are used for analysis and control (marginal, standard, budgetary).
• Cost reduction is a permanent real saving without hurting quality; cost control keeps costs within a set target.
• Prime cost = direct material + direct labour + direct expenses.
• Prime cost + factory overheads = gross factory cost; add opening WIP, deduct closing WIP = factory cost; factory cost + administration overheads = cost of production.
• Cost of production + opening finished goods - closing finished goods = cost of goods sold; add selling and distribution overheads = cost of sales; add profit = sales.

Common mistakes

• Treating cost accounting and management accounting as the same thing. Fix: Remember that management accounting is wider, uses non-cost data too, and focuses on decisions and planning.
• Saying cost accounting is only for manufacturing. Fix: State that cost accounting also applies to services, such as transport and hospitals, and to other sectors.
• Treating cost unit and cost centre as the same thing. Fix: Cost centre is where cost is collected. Cost unit is what cost is measured per. Give one example of each in the answer.
• Saying fixed cost per unit is constant. Fix: Fixed cost is constant in total only. Per unit it changes with output. Variable cost is the opposite.
• Calling marginal costing or standard costing a method of costing. Fix: Remember: methods depend on the type of production; techniques are ways of analysing or using cost and can be applied with any method.
• Using job costing for continuous production. Fix: Ask if output is made to a customer's order. If production is continuous and standardised, use process costing.
• Saying cost control and cost reduction are the same thing. Fix: Control works toward a given target. Reduction questions and lowers the target itself.
• Treating a temporary saving as cost reduction. Fix: Write that true reduction is real and lasting, and that quality and use are not affected.
• Including carriage outward or selling costs in direct material or in cost of production. Fix: Carriage inward goes into material cost. Carriage outward is a distribution cost and enters only at the cost of sales stage.
• Adjusting finished goods stock at the factory cost stage or WIP at the cost of goods sold stage. Fix: Raw material stock goes in direct material consumed, WIP in factory cost, and finished goods in cost of goods sold. Each stock belongs to its own stage.

Exam tips

• Practise the difference questions between cost accounting and financial accounting, and between cost accounting and management accounting. These are the most likely theory questions.
• In the MCQ section, decide the user, internal or external, first. It removes two options quickly.
• Write every difference as a table-style list with the basis named, even when time is short.
• Add one example from services to show you know scope goes beyond factories.
• Write the basis of classification before the answer. Examiners award marks for stating the basis.
• For distinction questions, use a point-by-point two-column format, and give an example for each side.
• In MCQs on relevant cost, first remove sunk and committed costs, then add opportunity cost.
• If a cost can be viewed on several bases, answer only on the basis asked and add one line on the alternate view if time allows.