COST ACCOUNTING FORMULAS & IMPORTANT

TERMINOLOGIES

1. Prime Cost = Direct Material + Direct Labor

2. Total Production Cost = Prime Cost + FOH Cost
3. Conversion Cost = Direct Labor + FOH Cost
4. Raw Material Consumed =
= Raw Material Opening + Material Purchases – Material Closing
5. Manufacturing Cost = Prime Cost + FOH Cost {Same as Sr. No.2}
6. Cost Of Goods Manufactured =
= Manufacturing Cost + Opening WIP – Closing
WIP
7. Goods Available for Sale =
= Cost Of Goods Manufactured + Opening Finished Goods
8. Cost of Goods Sold = Goods Available for Sale – Closing Finished Goods
9. Contribution Margin = Sales – Variable Cost
10. Income Statement = Gross Profit – Operating Expenses
11. Income Statement = (Sale-COGS) – (Selling + Admin + Marketing
Expenses)

12. Applied FOH Rate

13. FOH Rate = Total FOH Cost x 100 = Answer % {Based on Labor Cost}
Labor Cost
14. FOH Rate = Total FOH Cost x 100 = Answer % {Based on Material}
Material Cost
15. FOH Rate = Total FOH Cost x 100 = Answer % {Based on Prime Cost}
Prime Cost
16. FOH Rate = Budgeted FOH Cost = Answer Rupees {Based on Labor
Hours}

17. FOH Rate = Budgeted FOH Cost = Ans Rupees {Based on Machine
Hours}

18. Per Unit Cost = Cost of Goods Manufactured

No. of Units Produced
19. Re-Order Period = Lead Time
20. EOQ = Re-Order Quantity
21. Re-Order Level = (Max Consumption) x (Max Lead Time)
22. Max Stock Level =
= Re-Order Level – (Min Consumption) x (Min Lead Time) + EOQ
23. Min Stock Level = Re-Order Level – (Avg Consumption) x (Avg Lead
Time)
24. Danger Stock Level = (Avg Consumption) x (Emergency Lead Time)
25. Average Stock Level = Min Stock Level + Max Stock Level
2
26. Average Stock Level = Min Stock Level + Re-Order Quantity
2
27. Average Stock Level = Min Stock Level + EOQ
2
28. EOQ = 2 (Annual Units Consumption) x (Cost per Order)
(Cost per unit of Material) x (Carrying Cost Percentage)

29. Safety Stock = (Annual Demand) x (Max Lead Time – Min Lead Time)
365 x (Avg Lead Time)
30. Inventory Turnover Ratio = Material Consumed = Answer Times
Avg Inventory
31. Inventory Holding Period = No. of days in year = 365
Inventory Turnover Ratio Inventory
Turnover Ratio

Labor
Premium Bonus Plans
32. Halsey Bonus Plan = (Time Allowed – Time Saved) x (Rate per Labor Hour)
2
33. Halsey-Weir Premium Bonus Plan =
= (Time Allowed – Time Saved) x (Rate per Labor Hour)
3
34. Rowan Premium Plan
Step-I
Bonus Rate = Time Saved x 100 = Answer %
Time Allowed
Step-II
Bonus Pay = (Basic Pay) x (Bonus Rate %) = Answer Rupees
Step-III
Now Total Pay = Basic Pay + Bonus Pay

Piece Rate System

35. Taylor's Differential Piece Rate Plan
If Efficiency > Standard then 120 % of Normal Piece Rate
= (Units Produced)x(Normal Piece Rate) + (1.20)x(Normal Piece Rate)
If Efficiency < Standard then 80 % of Normal Piece Rate
= (Units Produced)x(Normal Piece Rate) + (0.80)x(Normal Piece Rate)

30. Merrick's Differential Piece Rate Plan

If Efficiency 0 - 80% then Normal Piece Rate
= (Units Produced) x (Normal Piece Rate) + (Units Produced) x (Normal Piece Rate)
If Efficiency 81 - 100% then 10 % of Normal Piece Rate
= (Units Produced)x(Normal Piece Rate) + (Units Produced)x(0.10)x(Normal Piece Rate)
If Efficiency 100% - Above% then 20 % of Normal Piece Rate
= (Units Produced)x(Normal Piece Rate) + (Units Produced)x(0.20)x(Normal Piece Rate)
31. Cost Of Goods Manufactured & Sold Statement
(Source: See Page 22 of PIPFA Cost Accounting Book)

32. Marginal Costing / Direct Costing

Sales XXXX
Less Variable Cost of Goods Sold
Opening Stock (Opening Stock x Variable FOH Rate/unit) XXXX
+ Production (Produced Units x Variable FOH Rate/unit) XXXX
(-) Closing Stock (Closing x Variable FOH Rate/unit) (XXXX)
Variable COGS XXXX (XXXX)
Gross Contribution Margin XXXX
(Less) Variable Marketing Expenses (if any) (XXXX)
Net Contribution Margin XXXX
Less Fixed Costs (if any)
Period Cost (Sales x Fixed FOH Rate) XXXX
+ Fixed Marketing Expenses XXXX
Total Fixed Costs XXXX (XXXX)

Net Profit by Marginal Costing XXXX

Notes to Marginal Costing:-

a. Fixed Cost are for one month only then they will be treated as Period Cost.
b. Inventory is multiplied to only Variable FOH Rate per unit.
c. Marginal Costing shows higher profits .
 d. Marginal Costing leads to Contribution Margin (CM) then Net Profit.

33. Absorption Costing

Sales XXXX
Less Cost of Goods Sold
Opening Stock XXXX
{Opening Stock x (Fixed FOH Rate/unit +Variable FOH Rate/unit)}

+ Production XXXX
{Units Produced x (Fixed FOH Rate/unit +Variable FOH Rate/unit)}

(-) Closing Stock (XXXX)

{Closing Stock x (Fixed FOH Rate/unit +Variable FOH Rate/unit)}

Cost of Goods Sold XXXX

+Under / (-)Over Applied FOH XXXX
Cost of Goods Sold at Actual XXXX (XXXX)

Gross Profit XXXX

Less Marketing Expenses (if any)
Fixed Marketing Expenses XXXX
+ Variable Marketing Expenses XXXX
Total Marketing Expenses XXXX (XXXX)

Net Profit by Absorption Costing XXXX

Notes to Absorption Costing:-

e. Over/Under Applied FOH

Budgeted Production (Budgeted units x Fixed FOH Rate/unit) XXXX
(-) Actual Production (Actual units x Fixed FOH Rate/unit) (XXXX)
Over/Under Applied FOH XXXX
 If Actual Production > Budgeted Production ^ Over Applied FOH
  If Actual Production < Budgeted Production ^ Under Applied FOH
f. If Over – Applied FOH ^ Minus from COGS at Actual
g. If Under – Applied FOH ^ Add in COGS at Actual
h. Absorption Costing leads to Gross Profit (GP) then Net Profit .

Confusing Terminologies of Cost Accounting

1. Inventory = Stock
2. Re-Order Period = Lead Time
3. EOQ = Re-Order Quantity
4. Standard = Budgeted
5. Marginal Costing = Direct Costing
6. Absorption Costing = Full Costing = Factory Cost = Production Cost
7. Total Production Cost = Manufacturing Cost

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Best Regards,

(DILAWAR ABBAS)
B. Com (IT), MBA (Finance)

digital_darwaish@hotmail.com