Cost and Management Accounting: Costing Methods and Decision Rules
Core concepts
Management accounting focuses on internal decision support. Candidates must understand cost classification (direct/indirect, fixed/variable, product/period), cost behaviour, and the preparation of cost statements. Core techniques include absorption costing versus marginal (variable) costing, activity-based costing, job and process costing, standard costing with variance analysis, cost-volume-profit (CVP) analysis, relevant costing, and budgeting.
Traps
Examiners frequently test the difference between profit under absorption and marginal costing: the difference equals the change in inventory multiplied by the fixed overhead absorption rate per unit. In variance analysis, watch the direction of the variance (favourable or adverse) and the distinction between price and usage variances. In process costing, normal loss is valued at scrap value and abnormal loss is valued at full cost. In relevant costing, exclude sunk costs and apportioned fixed overheads, and include opportunity costs. CVP questions often hide a change in the sales mix or a step-fixed cost.
Worked example
A product sells for 50, variable cost is 30, and fixed costs are 200,000. Contribution per unit is 20. Break-even units = 200,000 / 20 = 10,000 units. To earn a target profit of 60,000, required units = (200,000 + 60,000) / 20 = 13,000 units. The margin of safety at 15,000 units sold is (15,000 - 10,000) / 15,000 = 33.3%.
Rule of thumb
For any decision, compare only future cash flows that differ between alternatives.