Cost and Management Accounting Techniques
Cost classification and behaviour
Direct costs are traceable to a unit; indirect costs (overheads) are not. Costs behave as fixed, variable, semi-variable or stepped fixed. For the high–low method use the highest and lowest activity levels, not the highest and lowest costs: variable cost per unit = (cost at high − cost at low) ÷ (units at high − units at low), then fixed cost = total cost − variable element.
Overheads
Allocation charges a whole cost to one cost centre; apportionment shares a cost on a fair basis; service centre costs are then reapportioned. Absorption uses a rate such as direct labour hours or machine hours. Over/under absorption = overhead absorbed − overhead actually incurred. Activity based costing absorbs overhead using cost drivers (set-ups, orders, inspections) and is superior where overheads are not volume-driven.
Absorption versus marginal costing
Marginal costing values inventory at variable cost only. Profit under absorption costing = marginal profit + (increase in inventory units × fixed overhead per unit).
Relevant costing and CVP
Relevant costs exclude sunk costs and non-cash items and include opportunity costs. Contribution = sales − variable costs. Breakeven units = fixed costs ÷ contribution per unit; margin of safety = (budgeted − breakeven) ÷ budgeted.
Process costing
Compute equivalent units for opening and closing WIP, value normal loss at scrap value and treat any difference as abnormal loss or gain.
Worked example
Fixed costs £60,000, price £20, variable cost £12 → contribution £8 per unit → breakeven = 60,000 ÷ 8 = 7,500 units.