Frequently Asked Questions(FAQ)

What Is an Outlier?
In an accounting context, an outlier has the same meaning. It is something that was not initially projected in the initial observations. It has to be understood that practically all accounting practices will have outliers that cannot be foreseen. After all, accounting is only a projection, no matter how well it has been prepared on the most robust data. In cost accounting, an outlier is a data point that does not conform with previous patterns, for a myriad of different reasons.
What Is the Cost of Goods Manufactured?
Cost of Goods Manufactured (‘COGM’) is a metric that is used to determine whether or not production costs are too high or low (as compared to total revenue/sales). The formula is
COGM = Beginning WIP Inventory + Total Manufacturing Cost – Ending WIP Inventory
This is a simplified version, as calculating the total cost of manufacturing is not as simple as it sounds. The COGM is a critical component when calculating the Cost of Goods Sold. It helps management to look at the individual components of a given manufacturing process.
What Is a Cost Center?
The best way to describe a cost center is to contrast it with its opposite – the profit center. A profit center is directly correlated with activities that increase the overall profit. A cost center is a center that does not directly generate profits for the organization. Of course, this does not mean that you can run a business only with profit centers! Typical cost centers include human resources and accounting departments.

They are essential to the functioning of any organization. Cost centers typically involve customer service or IT. While important, the issue with cost centers from an accounting perspective is that it is impossible to accurately derive how much profit they generate. But if you have poor customer service, you can bet it hurts your profit margins.
How Is Cost Accounting Different From Standard Accounting?
The major difference is that cost accounting is not standardized with general accounting principles. It is used (primarily) so that businesses can monitor their efficiency levels and make better decisions. As such, there is a lot more flexibility associated with cost accounting. While all companies need to do standard accounting, cost accounting is more relevant to manufacturing businesses involved in physical production as compared to other business models
What Is the Matching Principle?
The matching principle is quite straightforward and is the basis of accounting. You have a debit on one side and a credit on the other. An expense on one side and income on the other. You report your cost of goods sold on one side of the ledger with total sales on the other side of the ledger. Of course, it gets a lot more complex than this. Not all expenses are directly correlated with revenue such as cost centers. If a future benefit of a cost cannot be determined, then it is recorded as an expense. For instance, an advertisement will go down as an expense.
What Is the Principle of Conservatism?
As the name suggests, this is a risk-averse principle. But it is well-grounded in practicality. The Principle of Conservatism states that you can predict future costs well, but not so many future profits. Because you can know what you are going to buy. You have control over that. But you can never understand what your customers are going to do. So it is easier to anticipate costs than profits. You have more control over one than the other. In other words, as the most typical accounting slogan goes “Anticipated losses are losses, anticipated gains are not always gained”. This principle is tied into the lower of cost or market rule.
What Is the Break-Even Point Formula?
The break-even point formula is the point at which a business will break even (though it is also useful in trading and investing). For instance, let’s say that you have fixed costs of $1,000,000 and a $50 sale price for your product, with $10 in variable costs. This means that your contribution margin is $40. You would simply divide the fixed costs by the contribution margin to determine how many units you would need to sell to break even (no profit or loss). In this instance, you would divide $1,000,000 by $40 to arrive at a figure of 25,000 units to break even. The formula is:
Fixed Costs/Contribution Margin = Break Even Formula.

About the Authors

Daniel Lewis

Daniel Lewis

MBA accredited investment professional

Daniel Lewis is an MBA accredited investment professional who wants to assist small business owners to gain access to finance. After going through many channels for funding, Lewis has found that getting the first loan right is vitally important for future success.

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Kal Salem

Kal Salem

CPA, PMP and Finance Consultant

A CPA and finance professional working with small businesses to educate owners and grow alongside their businesses. He holds a Masters in Accounting and a BS in Supply Chain Management. Owner at Salem CPA Services LLC.

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