Management Accounting: Costing, Budgeting and Performance
Core concepts
Management accounting supplies internal information for planning, control and decisions. Candidates must classify costs by behaviour (fixed, variable, mixed, step), by traceability (direct, indirect/overhead), and by relevance (sunk, opportunity, avoidable). Know product versus period costs, cost of goods manufactured, and the treatment of under- or over-applied overhead. Master cost-volume-profit analysis: contribution margin, contribution margin ratio, break-even in units and dollars, target profit, margin of safety and operating leverage. Be able to prepare and interpret operating budgets (sales, production, purchases, cash) and flexible budgets, and to compute material and labour variances.
Traps
Fixed cost per unit falls as volume rises, so a question asking for total cost at a new volume must hold total fixed cost constant. Break-even uses contribution, not gross profit or selling price alone. Production budget = sales units + closing finished goods - opening finished goods; candidates often reverse the inventory adjustment. Purchases budget uses production needs plus closing raw materials less opening raw materials. Sunk costs are never relevant. In variance analysis, an unfavourable material price variance may be offset by a favourable usage variance; report both. Overhead applied on a predetermined rate leaves a balance that must be disposed of, not ignored.
Worked example
Selling price $50, variable cost $30, fixed costs $120,000. Contribution per unit = $20; break-even = 120,000 / 20 = 6,000 units. To earn a target profit of $40,000, required units = (120,000 + 40,000) / 20 = 8,000. Rule of thumb: for any CVP question, convert everything to contribution first, then divide fixed costs plus target profit by contribution per unit.