Management and Cost Accounting
Core concepts
Cost accounting tests classification and decision use. Know direct versus indirect costs, product versus period costs, and the behaviour of fixed, variable, and semi-variable costs. Be able to separate a mixed cost using the high-low method. Understand absorption costing versus marginal costing, including the treatment of fixed production overhead and the resulting difference in profit when inventory changes. Know overhead allocation: apportionment to cost centres, then reapportionment of service centre costs, then absorption using a suitable base such as labour hours or machine hours. Learn standard costing and variance analysis: material price and usage, labour rate and efficiency, and the meaning of favourable and adverse. Understand contribution, break-even, margin of safety, and relevant costing for short-term decisions.
Traps questions set
A frequent trap is applying an overhead absorption rate to the wrong base, or forgetting to adjust for over- and under-absorption. In marginal versus absorption questions, profit differs only when inventory levels change; if inventory is constant, profits are equal. Variance questions often reverse the sign: paying more than standard is adverse for price but can be favourable for usage if cheaper material is wasted. Exclude sunk costs and apportioned fixed overheads from relevant-cost decisions. Watch whether a question asks for contribution per unit or total contribution.
Worked example
Fixed costs are 40,000, selling price 25, variable cost 15. Contribution per unit is 10. Break-even is 40,000 / 10 = 4,000 units. At sales of 6,000 units, margin of safety is 2,000 units, or 33.3%. Rule of thumb: break-even units = fixed costs divided by contribution per unit; always check the units.