Management Accounting: Decision and Control
This domain covers costing methods, variances and short-term decisions. Understand absorption versus marginal costing, activity-based costing, target costing, life-cycle costing and throughput accounting. Know which costs are relevant for decisions: future, incremental, cash costs. Sunk costs, committed costs and apportioned fixed overheads are irrelevant.
Standard costing variances: material price and usage, labour rate and efficiency, variable overhead expenditure and efficiency, fixed overhead expenditure and volume. Learn the formulas and the sign conventions - a positive variance is favourable. Operating statements reconcile budgeted profit to actual profit through variances.
Traps: using actual quantity versus standard quantity in price variances (price variance uses actual quantity purchased or used); confusing marginal and absorption profit differences (difference = change in inventory × fixed overhead absorption rate); ignoring limiting factors - rank products by contribution per unit of scarce resource, not contribution per unit. For make-or-buy, compare relevant variable cost with buy price plus any lost contribution.
Rule of thumb: always rank by contribution per limiting factor. Worked example: product A contribution £6, uses 2 machine hours; product B contribution £9, uses 4 hours. A = £3/hour, B = £2.25/hour, so prioritise A.