Management Accounting and Cost Accounting
Core Concepts
Management accounting focuses on internal decision-making. Key topics:
- Cost classification: direct/indirect, fixed/variable, product/period.
- Costing methods: job costing, process costing, activity-based costing (ABC).
- Cost-volume-profit (CVP) analysis: break-even point, contribution margin, margin of safety.
- Budgeting: incremental, zero-based, rolling budgets; variance analysis (material, labour, overhead).
- Relevant costing: differential costs, opportunity costs; ignore sunk costs.
- Transfer pricing: market-based, cost-based, negotiated.
Common Traps
- Sunk costs are irrelevant for decision-making.
- Opportunity costs must be included in relevant costing.
- In process costing, normal losses are absorbed into the cost of good units; abnormal losses are treated as period costs.
- Fixed costs per unit change with volume, but total fixed costs remain constant within the relevant range.
- Variance analysis: an adverse variance may be favourable in another area (e.g., cheaper material may lead to more waste).
Worked Example
A company sells a product for BGN 50, variable cost per unit BGN 30, fixed costs BGN 100,000. Contribution per unit = 20. Break-even point = 100,000 / 20 = 5,000 units. If the company wants a profit of BGN 40,000, required units = (100,000 + 40,000) / 20 = 7,000 units. Rule of thumb: Break-even = Fixed costs / Contribution per unit.