Management Accounting: Costing, Budgeting and Decision Making
Cost classification and behaviour
Management accounting is inward-facing. Classify costs by nature (material, labour, overhead), by function (production, administration, selling) and by behaviour (fixed, variable, semi-variable, stepped fixed). Know the distinction between direct and indirect costs, and between product and period costs. High-low analysis splits a semi-variable cost into its fixed and variable elements using the change in total cost divided by the change in activity.
Costing methods
Understand absorption costing (overheads recovered using a predetermined rate, usually per labour hour or machine hour) and marginal costing (only variable costs in product cost, contribution = sales less variable costs). Know the causes of under- and over-absorption. Job, batch, process and service costing apply to different settings; process costing introduces normal loss and equivalent units.
Worked example
Budgeted overheads 60,000; budgeted machine hours 15,000 → absorption rate 4 per machine hour. Actual overheads 63,000; actual hours 15,500 → absorbed 62,000, so overheads are under-absorbed by 1,000, which reduces profit.
Budgeting and variance analysis
Know the purpose of budgets (planning, coordination, control, motivation) and the difference between fixed and flexible budgets. Standard costing produces variances: material price and usage, labour rate and efficiency, sales price and volume. Always state whether a variance is adverse or favourable and identify possible causes.
Decision making and traps
Use contribution for short-term decisions, relevant costing for accept-or-reject choices, and break-even (fixed costs ÷ contribution per unit). Traps: including fixed costs in a relevant-cost decision, forgetting opportunity cost, confusing contribution with profit, and mixing up adverse and favourable labels.