CMA Foundation · Fundamentals of Financial and Cost Accounting

Cost, Cost Centre, Cost Unit and Cost Drivers: formula sheet

Full chapter guide

Key formulas

Scope order of terms: Cost < Costing < Cost Accounting < Cost Accountancy; Each term is wider than the one before. Cost accountancy is the widest.
Main objectives of cost accounting: Ascertain cost + Control cost + Fix selling price + Help decision-making + Measure profitability; Also remember cost reporting to management and helping with budgets and cost reduction.
Cost accounting vs financial accounting: users: Cost accounting → internal management; Financial accounting → owners, lenders, tax authorities and other outsiders; Financial accounting is also governed by law and accounting standards. Cost accounting is mostly for internal use.
Cost accounting vs financial accounting: focus: Cost accounting → products, jobs, departments, processes; Financial accounting → whole business; Cost accounting looks at parts of the business. Financial accounting looks at the whole.
Cost centre classification by nature: Personal centre = person or group of persons; Impersonal centre = location or equipment; Use this when the question asks for personal versus impersonal.
Cost centre classification by function: Production centre = directly makes the product; Service centre = supports production; Stores, canteen, maintenance, power house and HR are service centres.
Cost centre vs cost unit: Cost centre = where cost is incurred; Cost unit = what cost is measured per; Cost centre is a place, person or item. Cost unit is a unit of product or service.
Cost centre vs profit centre: Cost centre: only costs are measured; Profit centre: revenue and costs are both measured; A profit centre can contain several cost centres.
Cost per unit: Cost per unit = Total cost ÷ Number of cost units; Use the same cost unit for the cost and the output. Example: ₹60,000 ÷ 300 tonnes = ₹200 per tonne.
Composite unit: tonne-km (absolute): Absolute tonne-km = Total tonnes carried × Distance in km (for each trip, then add); Used in goods transport. Add trip by trip when loads or distances differ.
Composite unit: tonne-km (commercial): Commercial tonne-km = Average load × Total distance travelled; Average load = (sum of loads at each stage) ÷ number of stages. Total distance is the full distance travelled, including the empty leg. Illustration: a truck carries 10 tonnes over 200 km and returns empty over 200 km. Average load = (10 + 0) ÷ 2 = 5 tonnes. Total distance = 400 km. Commercial tonne-km = 5 × 400 = 2,000. This simple average gives the same result as the absolute figure only when the legs are of equal length, as here. If the legs differ in distance, weight the average load by distance, or use the stage method given in the question.
Composite unit: passenger-km: Passenger-km = Number of passengers × Distance in km; Used for buses, trains, airlines.
Cost driver rate: Cost driver rate = Total cost of the activity pool ÷ Total quantity of the cost driver; Used in ABC. For example, ₹ per set-up or ₹ per purchase order.
Overhead assigned to a cost object: Overhead assigned = Cost driver rate × Quantity of driver used by the cost object; Do this for each activity pool and add the results.
Overhead per unit: Overhead per unit = Total overhead assigned to the product ÷ Number of units produced; Use the units of that product only.
Profit centre performance: Profit = Revenue − Costs; Used to judge a profit centre. The manager controls both revenue and costs.
Return on investment (ROI): ROI = (Profit ÷ Capital invested) × 100; Main measure for an investment centre. Profit is divided by the capital employed in that division.
Control ladder: Cost centre: costs | Revenue centre: revenue | Profit centre: costs + revenue | Investment centre: costs + revenue + capital; Identify the centre by what the manager controls.
Relationship rule: Every cost centre is a cost object; not every cost object is a cost centre; Products, jobs and customers are cost objects but not responsibility centres.

Quick revision

Cost is the amount of resources sacrificed to get a product or service.
Costing is the technique of finding cost. Cost accounting is the process of recording and reporting it.
A cost centre is a place, person or item for which costs are collected.
A cost unit is the unit of product or service to which cost is related.
Cost centres can be personal (a person) or impersonal (a place or item).
Cost centres can also be production, service, or other types based on function.
Choose a cost unit that fits the business, such as per tonne, per kilometre or per bed.
A cost driver is the factor that causes a cost to change.
Activity based ideas assign cost using the activities that cause it.
A cost object is anything for which cost is measured, such as a product, job or department.
A profit centre is responsible for revenue and cost, so it is judged on profit.
An investment centre is judged on profit in relation to the capital invested.

Common mistakes

Treating cost and price as the same thing. Fix: In the exam, cost is the resources spent to make or provide something. Price is what the seller charges. The gap between them is profit or loss.
Using costing and cost accounting as exact synonyms. Fix: Costing is the technique of finding cost. Cost accounting also includes recording, classifying, reporting and using the data for control and decisions.
Treating a cost centre and a cost unit as the same thing. Fix: Remember: centre is where, unit is per what. A machine shop is a centre. A tonne of steel is a unit.
Calling the stores or canteen a production centre. Fix: If the product does not pass through it, it is a service centre. Stores, canteen, maintenance and power house support production.
Ignoring that the empty return leg contributes zero to absolute tonne-km, or averaging load across legs for absolute tonne-km. Fix: Multiply the actual load by the distance for each leg and add. An empty leg gives 0 × distance = 0.
Treating cost unit and cost centre as the same thing. Fix: Cost centre is where cost is collected. Cost unit is what the cost is measured for.
Treating a cost driver and a cost object as the same. Fix: A cost object is what you cost (product, job). A cost driver is what causes the cost (set-ups, hours).
Assuming every driver is based on units produced. Fix: Remember that ABC uses activity drivers, such as number of orders, which can be unrelated to units.
Treating cost object and cost centre as the same thing. Fix: Remember that a cost object is anything whose cost you measure. A cost centre is one kind of cost object that is also a responsibility area.
Calling a division a profit centre when its manager also decides on capital investment. Fix: Check for capital or ROI. If the manager controls investment, it is an investment centre.

Exam tips

Learn the four terms as a ladder: cost, costing, cost accounting, cost accountancy. Many MCQs test the order of scope.
For differences, memorise users, purpose, level of detail and legal requirement. Most options come from these.
Watch for options that swap cost accounting and financial accounting. Check who the user is before you pick.
Do not spend more than a minute on these questions. They are quick marks. Save time for numerical questions.
There is no negative marking, so always attempt every question. Eliminate two options and guess if unsure.
Learn one example for each type: sales manager (personal), a lathe machine (impersonal), assembly shop (production), canteen (service).
In 'which is NOT' questions, test each option against the definition one by one. Do not rely on the first that looks right.
Watch for revenue in the question. That one word turns a cost centre into a profit centre.