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
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