Lesson: Cost Accounting Terms and Formulas

Instructor: Nick Palazzolo

In this lesson, delve into the essentials of cost accounting as Nick Palazzolo, CPA, clarifies key terms and formulas pivotal to understanding the financial landscape of production. Grasp the nuances between fixed, variable, and mixed costs and how each behaves differently as production levels fluctuate. Get ready to untangle the concepts of prime costs and conversion costs with Nick’s straightforward examples and the importance of memorizing these fundamental formulas for effective cost analysis. Moreover, Nick differentiates between product and period costs, casting light on the critical decision-making process regarding capitalizing versus expensing costs - knowledge that serves as the bedrock for savvy financial management in any business operation.<br>

Updated: May 31, 2022 Create an account

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Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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All right. Now we got some terms and formulas for our cost accounting and super basic bare bones. We got fixed costs and variable costs. Mixed costs is just both of these. But really the two big cajunas that you need to know fixed cost and variable costs.

I mean you're probably viewing this if you're viewing it in order. This is going to be one of the later lessons and we've definitely mentioned these throughout the whole B C course but we're going to really go into depth with them here. Right? Fixed costs are just pay a month for electricity. Variable costs are you use $10 of material per unit that you produce.

Now fixed costs are variable per unit. Variable costs are fixed per unit. What does that mean? Well that means let's say fixed costs are $1,000 per month, right? And then let's say that variable costs are $10 per unit.

Okay? Now what happens? Well let's say we produce 1000 units, okay? Fixed costs are variable per unit because at this level of activity fixed costs are a dollar per unit. But let's say we produce 2000 units.

Well now fixed costs vary because now we have fifty cents per unit. Right? It's going down the more you make. However, variable costs, these are fixed per unit because it's tied to the price of the unit. It's tied to the unit.

Right. For every unit it's $10 for that unit. This is fixed per unit. This is variable per unit. That's what we mean by there.

And you'll see questions trying to trick you up with the terminology. Right? It's confusing because fixed and variable. Variable fixed now. Yeah.

Fixed costs are costs that do not change with an increase or decrease in the amount of goods or services produced or sold.

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