Management Accounting and Cost Accounting
Cost behavior and systems
Management accounting serves internal planning and control. Understand cost classification by behavior (fixed, variable, mixed), by traceability (direct vs. indirect), and by relevance (sunk, opportunity, incremental). Know product costing systems - job order, process, and activity-based costing - and when each fits. Absorption costing assigns fixed overhead to inventory; variable costing expenses it immediately, creating a profit difference equal to the change in inventory units times the fixed overhead rate.
Planning and control tools
Candidates must handle cost-volume-profit analysis: contribution margin, break-even units (fixed costs ÷ contribution margin per unit), margin of safety, and operating leverage. Budgeting concepts - flexible vs. static budgets, standard costs, and variance analysis - are heavily tested. Compute price and quantity variances for materials and labor, and understand whether each is favorable or unfavorable from the sign, not the label.
Decision traps
Common errors: treating sunk costs as relevant; ignoring opportunity cost; mixing per-unit fixed costs into decisions; assuming a favorable variance is always good (overpaying for materials may be unfavorable); and forgetting that allocated fixed costs do not disappear when a segment is dropped.
Worked example
Fixed costs $60,000, selling price $25, variable cost $15. Contribution margin per unit = $10; break-even = 6,000 units. If actual sales are 8,000 units, margin of safety = 2,000 units (25%). Rule: always compute contribution margin before break-even.