Cost Accounting Formulas/Definitions

Contribution Margin (definition)

Shows how much sales rev is left to cover FC, which still needs to be paid and profit after paying VC, often used to determine when a project becomes profitable

Why do you divide fixed costs by the contribution margin per unit to find breakeven units?

BEu = FC / (p-vc)

CM from each unit is what is available to cover fixed costs, so dividing total fixed costs by CM per unit tells you how many units are needed to cover the FC

CMu (Definition)

How much $ for each sold unit contributes toward fixed costs, and once fixed costs are covered, it contributes to profit.

Once fixed costs have been covered at breakeven, the contribution margin from each additional unit increases operating profit by that amount

Company structure with greater profit potential but also greater risk

high fixed costs and low variable costs

Assumptions of CVP Analysis (cost-volume-profit)

• Selling price per unit and costs behave predictably within the relevant range

• Sales mix remains constant for a multi-product company

High Operating Leverage

When a business has relatively large fixed costs and low variable costs per additional sale (Ex: Software Development)

Margin of Safety (Definition)

The amount by which expected/budgeted sales can fall before reaching breakeven; beyond that point, the company begins operating at a loss.

Operating Income (Pre-Tax)

= (Sales Rev - VC) - FC

= (Total CM) - FC

Total Contribution Margin (formula)

= Sales Revenue - Variable Costs

CM%

= CM / Sales

= CMu / P

CMu (per unit)

= Selling Price per unit - VC per unit (P - V)

QBE (Break Even Units)

= FC / (P - V)

RevBE (Break Even Sales)

= FC / CM%

= QBE * Price

Always _____ BE calculation to whole unit or cent

Round Up

Units must be whole, and rounding down would leave the company short of its target income

Target Operating Income (Definition)

Asking how much must be sold to earn a certain operating income

Direct Cost

Cost that can be traced to a specific product

COGS

Beg Inv + Purchases (Manufacturing Costs) - End Inv

Gross Margin

= Rev - COGS

Indirect Cost

A cost shared across product lines rather than traced to one specific product

How to BE at Zero Units…

No FC

Key assumption in a multi-product breakeven analysis

Sales mix remains constant, meaning the products continue to be sold in the same relative proportions.

CM per Bundle

(Units A + CM A) + (Units B + CM B)

Target OI (Formula)

Target NI / (1 - Tax Rate)

QT (Target Quantity)

= (FC + Target OI) / CMu

RevT (Target Revenue)

= (FC + Target OI) / CM%

Operating Income

= Total CM - FC

= Q(P - VC) - FC

High-Low Variable Cost (Slope)

Estimating VC component after calculating slope

B=change in Y / change in X

High-Low Fixed Cost (Intercept)

Estimated FC component after calculating slope

a = Y - Bx

Regression T-Statistic (Formula)

T = Coefficient / Standard Error

Regression T-Statistic (Definition)

Test whether a cost driver coefficient is statically meaningful

A larger absolute T statistic generally provides stronger evidence that the driver matters

Cost Function / Linear Cost Formula

Predicts total cost from a fixed + variable

Y = a + Bx