# Must Know Formulas for Cost Accounting

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.

BreakevenFormula

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