The cost formula also known as cost volume formula is an important formula of cost accounting. Cost accounting is a reporting system that describes about the organization to its management so that they may be able to make better decisions regarding the costs of the operations of the organization for a good present and a sustainable future. There are many different types of costs like direct costs, indirect costs, fixed costs, variable costs, marginal costs, differential costs, opportunity cost, relevant cost, replacement cost, shutdown cost and capacity cost. Of all these above mentioned types of costs, there are four basic types of costs that an accountant needs to know about, these are direct costs, indirect costs, fixed costs and variable costs. The direct costs are associated to the products like the material and labor costs whereas the indirect costs are related to the product’s activity like overhead costs. On the other hand, the fixed costs are those which do not change with the production level like the lease whereas the variable costs change with the production level like cost of the material used.

The cost volume formula is used to obtain the total cost incurred on a certain volume of production. It is a simple calculation formula which is very useful to derive the total costs for the purpose of budgeting. It is also very beneficial to get the knowledge of the profit and loss levels that are likely to be obtained at a certain sales volume level. The cost volume formula is as under:

• Y=A+BX

Here,

• Y= Total cost

• A= Total fixed cost

• B= Variable cost per unit

• X= Number of units

The total fixed cost is the sum of pure fixed cost as the rent of the property and of the fixed components of mixed costs as fixed cost on the carried out delivery. The variable cost is sum of pure variable cost incurred per unit as the material cost and variable components of the mixed cost as variable cost of delivery that is fuel expenses. A cost volume formula can be used in its linear equation form or the quadratic form and other related complex forms that give an exact result and so they are more useful to use practically.

The cost volume formula works only at a limited relevant range of given number of units and outside that range the components of cost like the fixed cost and the variable cost are more likely to alter. This may happen because a high volume may result to purchase in bulk that eventually reduces the variable cost per unit. Similarly, it may require an increase in the fixed cost expenses in order to improve on the production line capacity. It is therefore very important to carefully analyze the relevant range while applying the cost volume formula. This formula is very simple in its use and application but a wide range of mixed costs, cost drivers and a wide range of products instead of a single product type may make it a complex matter to deal with. Due to such possible complexities, the cost volume formula needs to be appropriately applied by doing the necessary adjustments. This will help in showing a proper business costing environment.

The cost volume formula is used to obtain the total cost incurred on a certain volume of production. It is a simple calculation formula which is very useful to derive the total costs for the purpose of budgeting. It is also very beneficial to get the knowledge of the profit and loss levels that are likely to be obtained at a certain sales volume level. The cost volume formula is as under:

• Y=A+BX

Here,

• Y= Total cost

• A= Total fixed cost

• B= Variable cost per unit

• X= Number of units

The total fixed cost is the sum of pure fixed cost as the rent of the property and of the fixed components of mixed costs as fixed cost on the carried out delivery. The variable cost is sum of pure variable cost incurred per unit as the material cost and variable components of the mixed cost as variable cost of delivery that is fuel expenses. A cost volume formula can be used in its linear equation form or the quadratic form and other related complex forms that give an exact result and so they are more useful to use practically.

The cost volume formula works only at a limited relevant range of given number of units and outside that range the components of cost like the fixed cost and the variable cost are more likely to alter. This may happen because a high volume may result to purchase in bulk that eventually reduces the variable cost per unit. Similarly, it may require an increase in the fixed cost expenses in order to improve on the production line capacity. It is therefore very important to carefully analyze the relevant range while applying the cost volume formula. This formula is very simple in its use and application but a wide range of mixed costs, cost drivers and a wide range of products instead of a single product type may make it a complex matter to deal with. Due to such possible complexities, the cost volume formula needs to be appropriately applied by doing the necessary adjustments. This will help in showing a proper business costing environment.