Cost Accounting Methods
Cost accounting is a critical topic on the BAR section of the CPA exam. You must understand different costing methods, when each is appropriate, and how to calculate costs, variances, and breakeven points.
Costing Method Comparison
| Method | Best For | Cost Object | Key Feature |
|---|
| Job-Order Costing | Custom/unique products (construction, printing, consulting) | Individual job or batch | Costs tracked to specific jobs via job cost sheets |
| Process Costing | Homogeneous products (chemicals, food processing, oil refining) | Department or process | Costs averaged over equivalent units of production |
| Activity-Based Costing (ABC) | Complex operations with diverse products | Activities, then products | Multiple cost drivers; more accurate allocation of overhead |
| Standard Costing | Budgeting and performance evaluation | Products (using predetermined standards) | Variances highlight efficiency and price deviations |
Process Costing: Equivalent Units
| Method | Equivalent Units Formula | Treatment of Beginning WIP |
|---|
| Weighted Average | Units completed + (Ending WIP × % complete) | Blends prior period and current period costs; beginning WIP included in units completed |
| FIFO | (Beg. WIP × % to complete) + Units started and completed + (Ending WIP × % complete) | Separates prior period costs; only current period costs used in unit cost calculation |
Standard Cost Variances
| Variance | Formula | Favorable When |
|---|
| Direct Materials Price | (Actual Price − Standard Price) × Actual Quantity Purchased | Actual price < Standard price |
| Direct Materials Quantity (Usage) | (Actual Quantity Used − Standard Quantity Allowed) × Standard Price | Actual quantity < Standard quantity |
| Direct Labor Rate | (Actual Rate − Standard Rate) × Actual Hours Worked | Actual rate < Standard rate |
| Direct Labor Efficiency | (Actual Hours − Standard Hours Allowed) × Standard Rate | Actual hours < Standard hours |
| Variable OH Spending | (Actual Rate − Standard Rate) × Actual Hours | Actual rate < Standard rate |
| Variable OH Efficiency | (Actual Hours − Standard Hours Allowed) × Standard OH Rate | Actual hours < Standard hours |
| Fixed OH Budget (Spending) | Actual Fixed OH − Budgeted Fixed OH | Actual < Budget |
| Fixed OH Volume | Budgeted Fixed OH − (Standard Hours Allowed × Standard Fixed OH Rate) | Actual production > Expected production |
Cost-Volume-Profit (CVP) Analysis
| Metric | Formula |
|---|
| Contribution Margin (CM) | Sales Revenue − Variable Costs |
| CM per Unit | Selling Price per Unit − Variable Cost per Unit |
| CM Ratio | CM / Sales Revenue |
| Breakeven Units | Fixed Costs / CM per Unit |
| Breakeven Dollars | Fixed Costs / CM Ratio |
| Target Profit Units | (Fixed Costs + Target Profit) / CM per Unit |
| Margin of Safety | Actual Sales − Breakeven Sales |
| Degree of Operating Leverage | CM / Net Operating Income |
Absorption vs. Variable Costing
| Feature | Absorption (Full) Costing | Variable (Direct) Costing |
|---|
| Product costs include | DM + DL + Variable OH + Fixed OH | DM + DL + Variable OH only |
| Fixed OH treatment | Inventoriable (allocated to units) | Period expense (expensed immediately) |
| Required by GAAP? | Yes | No (internal use only) |
| When production > sales | Higher income (fixed OH deferred in inventory) | Lower income |
| When production < sales | Lower income (prior-period fixed OH released) | Higher income |
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