Cost accounting formulas
/Certain cost accounting formulas should be monitored on a regular basis in order to spot spikes or drops in the performance of an organization. These issues can then be investigated to see if remedial action should be taken, with the intent of enhancing profits. The most important cost accounting formulas are noted below.
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Net Sales Percentage
To calculate the net sales percentage, divide net sales by gross sales. The result should be close to 1. If not, the company is losing an inordinate percentage of its sales to sales discounts, sales returns, and sales allowances. It may be necessary to tighten company rules on accepting returns from customers. The formula is:
Net sales ÷ Gross sales = Net sales percentage
Gross Margin Ratio
To calculate gross margin, subtract the cost of goods and services from net sales. The result as a percentage of net sales should be quite consistent from period to period. If not, the mix of products has changed, the sales department has altered prices, or the cost of materials or labor has changed. A prolonged downward trend in the gross margin percentage should be cause for concern. The formula is:
(Revenue - Cost of goods sold) ÷ Net sales = Gross margin Ratio
Breakeven Point
To calculate the breakeven point, divide total fixed expenses by the contribution margin. This calculation shows the sales level that must be attained in order to earn profits of zero. Management must then determine the organization's ability to meet that minimum sales level on a regular basis; otherwise, the company will lose money. Driving down the breakeven point should be considered a best practice. The formula is:
Total fixed expenses ÷ Contribution margin % = Breakeven point
Net Profit Percentage
To calculate the net profit percentage, divide net profits by net sales. Compare the result to what was generated in each month for the past few years. A steady downward trend is cause for action, since it implies that expenses have increased or sales margins have declined. The formula is:
(Net profit ÷ Net sales) x 100 = Net profit percentage
Selling Price Variance
To calculate the selling price variance, subtract the budgeted price from the actual price, and multiply by the actual unit sales. If the variance is unfavorable, it means the actual selling price was lower than the standard selling price. This may indicate an excessive usage of sales discounts or other promotions. The formula is:
(Actual price - Budgeted price) x Actual unit sales = Selling price variance
Purchase Price Variance
To calculate the purchase price variance, subtract the budgeted purchase price from the actual purchase price, and multiply by the actual quantity. If the variance is unfavorable, it can indicate that the company is buying materials at a higher cost than anticipated, or that it is buying in smaller volumes than expected. The formula is:
(Actual price - Standard price) x Actual quantity = Purchase price variance
Material Yield Variance
To calculate the material yield variance, subtract the standard unit usage from actual unit usage, and multiply by the standard cost per unit. If the variance is unfavorable, there may be an excessive amount of scrap in the production process or spoilage in the warehouse, or a lower quality of materials being acquired. The formula is:
(Actual unit usage - Standard unit usage) x Standard cost per unit = Material yield variance
Labor Rate Variance
To calculate the labor rate variance, subtract the standard labor rate from the actual labor rate, and multiply by the actual hours worked. If the variance is unfavorable, the company is paying more than expected for its direct labor, perhaps because higher-grade people are being used, or because a labor contract has increased the labor rate. The formula is:
(Actual rate - Standard rate) x Actual hours worked = Labor rate variance
Labor Efficiency Variance
To calculate the labor efficiency variance, subtract the standard hours from actual hours incurred, and multiply by the standard labor rate. If the variance is unfavorable, employees are being less efficient than expected. This could be due to poor training, hiring less experienced personnel, or problematic production equipment. The formula is:
(Actual hours - Standard hours) x Standard rate = Labor efficiency variance
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