To reduce and eliminate costs in a business, you need to know the formulas that are most often used in cost accounting. When you understand and use these foundational formulas, you’ll be able to analyze a product’s price and increase profits.
Breakeven Formula
Profit ($0) = sales – variable costs – fixed costs
Target Net Income
Target net income = sales – variable costs – fixed costs
Gross Margin
Gross margin = sale price – cost of sales (material and labor)
Contribution Margin
Contribution margin = sales – variable costs
Pre-Tax Dollars Needed for Purchase
Pre-tax dollars needed for purchase = cost of item ÷ (1 - tax rate)
Price Variance
Price variance = (actual price - budgeted price) × (actual units sold)
Efficiency Variance
Efficiency variance = (Actual quantity – budgeted quantity) × (standard price or rate)
Variable Overhead Variance
Variable overhead variance = spending variance + efficiency variance
Ending Inventory
Ending inventory = beginning inventory + purchases – cost of sales
