Applied Management Accounting
Costing, budgeting and decision-making
Applied management accounting asks you to use techniques, not just define them. Core areas: absorption versus marginal costing, standard costing and variance analysis, relevant costing for short-term decisions, and budgeting (incremental, zero-based, rolling). You must be fluent in variance analysis - material price and usage, labour rate and efficiency, and the sales variances - and able to explain whether a variance is favourable or adverse and why.
Relevant costs and limiting factors
For decision-making, only relevant costs matter: future, incremental, cash costs that differ between alternatives. Sunk costs, committed costs and non-cash apportioned overheads are irrelevant. When a resource is scarce, rank products by contribution per unit of the limiting factor, not contribution per unit. Be ready to calculate a break-even point and margin of safety, and to explain the assumptions behind CVP (constant selling price, fixed costs and variable cost per unit).
Traps to watch
- Absorption costing includes fixed production overhead in product cost; marginal costing does not - profit differs only by the change in inventory.
- A favourable price variance may be caused by buying cheaper, lower-quality material, which then drives an adverse usage variance.
- Contribution per unit is the wrong ranking basis when a limiting factor exists.
- Apportioned head-office overhead is usually irrelevant to a shut-down or accept/reject decision.
Worked rule of thumb
Break-even (units) = fixed costs ÷ contribution per unit. If fixed costs are £40,000 and contribution per unit is £8, break-even is 5,000 units. If budgeted sales are 6,500 units, the margin of safety is 1,500 units (23%).