Managerial Accounting Formulas: Variance, CVP, ROI & Decisions

Posted on Dec 29, 2025 in Accounting and Finance

Direct Materials and Labor Variances

Direct Materials and Labor:

Materials Price Variance = (AP – SP) x AQ
Materials Quantity Variance = (AQ – SQ) x SP
Materials Spending Variance = MPV + MQV
Labor Rate Variance = (AR – SR) x AH
Labor Efficiency Variance = (AH – SH) x SR
Labor Spending Variance = LRV + LEV

Standard Hours and Standard Cost

Standard Hours and Cost:

Standard Hours Allowed = standard hours per unit x actual output
Standard cost allowed = SQ x SP or SH x SR

Variable and Fixed Overhead Variances

Variable and Fixed Overhead:

VOH Spending Variance = AVOH – (AH x SR)
VOH Efficiency Variance = (AH – SH) x SR
FOH Budget Variance = AFOH – BFOH
FOH Volume Variance = BFOH – (SH x POHR)

Overhead Rate and Applied Overhead

Overhead Rate:
Predetermined Overhead Rate = Estimated MOH / Estimated Base
Applied Overhead = POHR x Actual Activity

Cost-Volume-Profit (CVP) Formulas

Cost-Volume-Profit:

Contribution Margin = Sales – Variable Costs
CM per Unit = P – VCU
CM Ratio = CM / Sales
Break Even Units = FE / CMU
Break Even Sales = FE / CMR
Target Profit Units = (FE + Profit) / CMU
Target Profit Sales = (FE + Profit) / CMR

Margins and Operating Performance

Margins and Performance:

Margin of Safety = Actual Sales – BE Sales
MOS% = MOS / Actual Sales
Degree of Operating Leverage = CM / NOI
% Change in NOI = DOL x % Change in Sales

Identification of Relevant Costs

Identification of Relevant Costs:

Costs per mile = add fixed costs, convert variable costs to annual, add the two totals, divide the total by the miles driven = average cost per mile

Abbreviations and Terms

AFOH = Actual Fixed Overhead
AH = Actual Hours
AQ = Actual Quantity
AR = Actual Rate
AC = Absorption Cost
AVOH = Actual Variable Overhead
BE = Break Even
BFOH = Budgeted Fixed Overhead
CM = Contribution Margin
CMR = Contribution Margin Ratio
CMU = Contribution Margin per Unit
DL = Direct Labor
DM = Direct Materials
DOL = Degree of Operating Leverage
FE = Fixed Expenses
FMOH = Fixed Manufacturing Overhead
FOH = Fixed Overhead
LEV = Labor Efficiency Variance
LRV = Labor Rate Variance
MOH = Manufacturing Overhead
MQV = Materials Quantity Variance
MPV = Materials Price Variance
NOI = Net Operating Income
P = Price per unit
POHR = Predetermined Overhead Rate
SH = Standard Hours
SQ = Standard Quantity
SR = Standard Rate
VCU = Variable Cost per unit
VMOH = Variable Manufacturing Overhead
VOH = Variable Overhead

Make-or-Buy and Special Order Decisions

Make or buy decisions: Max Purchase Price = (DM + DL + VOH) + (Avoidable Fixed Costs + Opportunity Margin)/Units

Special order decision:

  1. Calculate revenue from special order
  2. Calculate relevant costs per unit
  3. Add costs per unit plus one-time costs
  4. Subtract total costs from special order revenue
  5. Rule: Advantage if > 0

Special Order with Absorption-Cost Reimbursement:
Absorption cost = DM + DL + VMOH + (FMOH / Normal Capacity Units)
Special-Order Revenue: Revenue per Unit = Absorption Cost Reimbursement + Fee (or credit or any additional payment)
Calculate Relevant Costs per Unit
Calculate Contribution Margin per Unit = CM per Unit = Revenue per Unit – Relevant Cost
Financial Advantage = CM per Unit x Special Order Units

Rule: If capacity is limited then compare CM lost vs CM gain. If capacity is available then ignore regular CM and analyze only incremental CM.

Method 1: Incremental Analysis: Advantage = (special order price – relevant cost) x units

Method 2: Contribution Margin Difference (capacity conflict): Net impact = CM from special order – CM lost from regular sales

Keep, Replace, and Sell-or-Process Decisions

Keep or replace:

Net Effect = -New equipment cost + trade-in on old equipment + (Savings x Years)

Sell or Process Further:

Incremental profit (or loss) = ((Selling price after processing – Selling price at split off) x quantity) – additional processing cost

Contribution Margin for Constrained Resources

Contribution Margin per Unit of the Constrained Resource:
CM per Constrained Resource = (Selling Price – Variable Cost) / Amount of Constrained Resource Per Unit. Make sure it is per unit (hours, lbs, etc.).

Constrained Make-or-Buy (Machine Hour Limited)

Constrained Make-or-Buy (Machine Hour Limited):

Step 1) Make Cost = DM + DL + VOH
Step 2) Savings = Buy Price – Make Cost
Step 3) Savings per Machine Hour = Savings / Machine Hours per Unit

Flexible Budget and Budget Variance

Flexible Budget Variance (Total Spending Variance):

Step 1) Variable cost per unit = Budgeted Variable Costs / Budgeted Units
Step 2) Flexible budget = (VCU x actual units produced) + budgeted fixed costs
Step 3) Total spending variance = actual total cost – flexible budget

Budget variance: which variances should be investigated? (Actual cost / budget) – 1 = % variance. Select those with highest variance.

Absorption Cost

Absorption Cost: Total manufacturing cost assigned to a unit = DM + DL + VMOH + FMOH per unit

Return on Investment (ROI) Metrics

ROI = Margin x Turnover = (Net Operating Income / Sales) x (Sales / Average Operating Assets)
ROI (alternate) = Net Operating Income / Average Operating Assets
Margin = NOI / Sales
Turnover = Sales / Assets
ROI = Margin x Turnover

Required Return and Residual Income

Required Return = Minimum Required Rate of Return x Average Operating Assets

Residual Income = Net Operating Income – Required Return

ROI Decision Rule: Accept project if Project ROI > Current ROI

Residual Income Decision Rule: Accept project if Project ROI > Minimum Required Rate of Return