Cost Accounting

In accounting contribution margin is defined as revenues minus variable expenses. In other words, the contribution margin reveals how much of a company's revenues will be contributing (after covering the variable expenses) to the company's fixed expenses and net income. The contribution margin can be presented as:

1) The total amount for the company

2) The amount for each product line

3) The amount for a single unit of product

4) As a ratio or percentage of net sales

When a fixed cost remains constant in total, the fixed cost per unit of output or input will change inversely with the change in the quantity of output or input. For instance, if the rent of the production facility is fixed at $120,000 per year and there are 30,000 machine hours of good output during the year, the rent will be $4 ($120,000/30,000) per machine hour. If there are 40,000 machine hours during the year, the rent will be $3 ($120,000/40,000) per machine hour.

Net incremental cash flows are the combination of the cash inflows and the cash outflows occurring in the same time period, and between two alternatives. For example, a company could use the net incremental cash flows to decide whether to invest in new, more efficient equipment or to retain its existing equipment.

A variable cost is a constant amount per unit produced or used. Therefore, the total amount of the variable cost will change proportionately with volume or activity. Generally, a product's direct materials are a variable cost.

An incremental cost is the increase in total costs resulting from an increase in production or other activity.

The production volume variance is associated with a standard costing system used by some manufacturers. This variance indicates the difference between:

1) the company's budgeted amount of fixed manufacturing overhead costs

2) the amount of the fixed manufacturing overhead costs that were assigned to (or absorbed by) the company's production output.

To get a basic understanding of cost accounting I recommend reading the managerial accounting topics found in the second half of an introductory accounting textbook. Such a textbook is often 1,200+ pages in length since it covers both financial and managerial accounting. (A textbook containing only financial accounting topics is not helpful.) A person in the U.S. should be able to obtain a 5-year-old edition of a 1,200-page introductory accounting textbook from a re-seller on Amazon.com for approximately $5.