CMA Cost Accounting Formulas with Practical Examples

CMA Cost Accounting Formulas with Practical Examples and Illustrations

This article is designed for CMA students who want to master the most important formulas in Cost Accounting. Below you’ll find detailed explanations, worked examples, and real-world illustrations to help you understand how these formulas apply in actual business scenarios.

📘 Table of Contents

1. Prime Cost
2. Factory/Works Cost
3. Cost of Production
4. Total Cost
5. Cost of Sales
6. Profit
7. Break-even Point
8. Contribution
9. P/V Ratio
10. Margin of Safety
11. EOQ
12. Material Cost Variance
13. Labour Cost Variance
14. Overhead Cost Variance
15. Activity-Based Costing
16. Inventory Turnover
17. Capacity Ratios
18. Cost Sheet Format
19. Reconciliation
20. Relevant Costing

1. Prime Cost

Formula: Prime Cost = Direct Materials + Direct Labour + Direct Expenses

Example: A furniture factory spends ₹80,000 on wood (material), ₹40,000 on labour, and ₹10,000 on custom tools. Prime Cost = ₹80,000 + ₹40,000 + ₹10,000 = ₹130,000

Illustration: In a shoe factory, leather, shoemakers’ wages, and design-specific tools like molds directly contribute to product creation — these are all prime costs.

2. Factory/Works Cost

Formula: Works Cost = Prime Cost + Factory Overheads + Opening WIP – Closing WIP

Example: Prime Cost = ₹130,000; Factory OH = ₹25,000; Opening WIP = ₹5,000; Closing WIP = ₹3,000 → Works Cost = ₹130,000 + ₹25,000 + ₹5,000 – ₹3,000 = ₹157,000

Illustration: A textile mill incurs machine depreciation and electricity. These are factory overheads added to prime cost. Adjusting for WIP reflects the true cost incurred.

3. Cost of Production

Formula: Cost of Production = Works Cost + Administration Overheads (related to production)

Example: Works Cost = ₹157,000; Admin OH = ₹18,000 → Cost of Production = ₹157,000 + ₹18,000 = ₹175,000

Illustration: Supervisor salaries and maintenance of design software are production-related admin overheads added here.

4. Total Cost

Formula: Total Cost = Cost of Production + Selling & Distribution Overheads

Example: Cost of Production = ₹175,000; S&D OH = ₹25,000 → Total Cost = ₹200,000

Illustration: Transportation of goods to retailers, advertising costs, and commission to agents are S&D expenses added to calculate total cost.

5. Cost of Sales

Formula: Cost of Sales = Total Cost + Opening Finished Goods – Closing Finished Goods

Example: Total Cost = ₹200,000; Opening FG = ₹10,000; Closing FG = ₹15,000 → Cost of Sales = ₹195,000

Illustration: Unsold shoes from the previous year (opening stock) are included and unsold current stock (closing) is removed to determine actual cost of sold goods.

6. Profit

Formula: Profit = Sales – Cost of Sales

Example: Sales = ₹250,000; Cost of Sales = ₹195,000 → Profit = ₹55,000

Illustration: Shows whether selling price is sufficient to cover costs. A higher profit margin implies better pricing or lower cost efficiency.

7. Break-even Point (Units)

Formula: BEP (Units) = Fixed Costs / Contribution per Unit

Example: Fixed Costs = ₹100,000; SP = ₹200; VC = ₹120 → Contribution = ₹80 → BEP = ₹100,000 / ₹80 = 1,250 units

Illustration: A mobile phone company must sell 1,250 units to recover its fixed expenses like rent, equipment, etc.

8. Contribution

Formula: Contribution = Sales – Variable Costs

Example: Sales = ₹300,000; VC = ₹180,000 → Contribution = ₹120,000

Illustration: Contribution helps cover fixed costs and profit. Higher contribution = better profit potential per sale.

9. Profit/Volume Ratio (P/V Ratio)

Formula: P/V Ratio = (Contribution / Sales) × 100

Example: Contribution = ₹120,000; Sales = ₹300,000 → P/V Ratio = (120,000 / 300,000) × 100 = 40%

Illustration: The higher the P/V ratio, the more profitable the business per rupee of sales.

10. Margin of Safety

Formula: Margin of Safety = Actual Sales – Break-even Sales

Example: Actual Sales = ₹300,000; BEP Sales = ₹250,000 → MOS = ₹50,000

Illustration: A higher margin of safety shows how much sales can drop before the company starts losing money.

11. Economic Order Quantity (EOQ)

Formula: EOQ = √((2 × Annual Demand × Ordering Cost) / Carrying Cost per Unit)

Example: Demand = 10,000 units, Ordering Cost = ₹200, Carrying Cost = ₹5 → EOQ = √((2 × 10000 × 200)/5) = √(4,00,000) = 632.45 ≈ 632 units

Illustration: EOQ helps minimize total inventory costs. A pharma distributor uses EOQ to order stock in optimal batches.

12. Material Cost Variance (MCV)

Formula: MCV = (Standard Price – Actual Price) × Actual Quantity

Example: SP = ₹50, AP = ₹45, AQ = 1,000 → MCV = (50 – 45) × 1,000 = ₹5,000 (Favourable)

Illustration: Indicates cost-saving in raw material procurement. A textile unit buying cotton at cheaper rate gets a favourable MCV.

13. Labour Cost Variance (LCV)

Formula: LCV = (Standard Rate – Actual Rate) × Actual Hours

Example: SR = ₹100, AR = ₹90, AH = 500 → LCV = (100 – 90) × 500 = ₹5,000 (Favourable)

Illustration: A packaging unit negotiates better rates for part-time staff, reducing labour costs.

14. Overhead Cost Variance

Formula: Overhead Variance = Absorbed Overheads – Actual Overheads

Example: Absorbed = ₹70,000, Actual = ₹75,000 → Overhead Variance = ₹5,000 (Adverse)

Illustration: Power bill hikes or machine breakdowns may cause actual overheads to exceed estimated ones.

15. Activity-Based Costing Rate (ABC Rate)

Formula: ABC Rate = Total Activity Cost / Total Activity Driver Units

Example: Setup Cost = ₹60,000 for 30 setups → ABC Rate = 60,000 / 30 = ₹2,000/setup

Illustration: Used to assign costs more accurately. For example, different products may require different setup times.

16. Inventory Turnover Ratio

Formula: Inventory Turnover = Cost of Goods Sold / Average Inventory

Example: COGS = ₹500,000; Avg Inventory = ₹100,000 → Turnover = 5 times

Illustration: A high turnover in an FMCG business reflects efficient inventory movement and lower holding costs.

17. Capacity Utilization Ratios

Capacity Ratio: = Actual Hours / Budgeted Hours × 100

Efficiency Ratio: = Standard Hours / Actual Hours × 100

Activity Ratio: = Standard Hours / Budgeted Hours × 100

Example: Actual = 950 hrs, Budgeted = 1,000 hrs, Standard = 900 hrs

Capacity = 950/1000×100 = 95%
Efficiency = 900/950×100 = 94.74%
Activity = 900/1000×100 = 90%

Illustration: These ratios help factories identify underutilization or over-exertion of production resources.

18. Cost Sheet Format

Structure:

Prime Cost
+ Factory Overheads
= Works Cost
+ Admin OH
= Cost of Production
+ S&D OH
= Total Cost
+ Profit
= Selling Price

Illustration: Used in manufacturing to summarize all costs incurred in producing and selling a product.

19. Reconciliation of Cost and Financial Accounts

Purpose: To match profits in cost books and financial books.

Key Adjustments: Under/Over-absorbed OH, stock valuation differences, purely financial incomes/expenses

Illustration: Financial profits might include interest income which cost accounts ignore. Hence, reconciliation is needed.

20. Relevant Costing in Decision Making

Definition: Only costs that change under different decisions are relevant.

Example: For a special order, ignore sunk costs; consider variable costs, opportunity costs.

Illustration: If idle capacity exists, a one-time order at lower price can be accepted if contribution is positive.

📌 Conclusion

These 20 formulas are not just for exams — they are essential tools for real-world financial decisions in manufacturing, production, and corporate strategy. Practice each with at least 3 variations to truly master them.