Finance, Management Accounting and Business Analysis
Cost behaviour and decision-making
Master cost classification (fixed, variable, mixed, step), contribution margin, break-even analysis, and relevant costing. Relevant costs are future, incremental, and cash-related; sunk costs and allocated fixed costs are irrelevant. Trap: questions present a special order scenario and expect you to exclude fixed overhead that will not change.
Performance measurement
Understand ROI, residual income, and the balanced scorecard. ROI can discourage investment in projects below current ROI but above the cost of capital; residual income overcomes this. For financial analysis, use the DuPont decomposition (ROE = net margin × asset turnover × equity multiplier) and interpret liquidity, solvency, and profitability ratios in context - a high current ratio may signal idle inventory, not strength.
Valuation and capital budgeting
NPV is the primary criterion; IRR can mislead with non-conventional cash flows or scale differences; payback ignores time value. WACC uses market values of debt and equity and after-tax cost of debt.
Worked example
Contribution margin = revenue − variable costs. Break-even units = fixed costs ÷ contribution per unit. If fixed costs are 600,000 AMD and contribution per unit is 1,500 AMD, break-even is 400 units. A special order at a price above variable cost but below full cost increases profit if capacity is idle.