Managerial and Cost Accounting: Cost Behavior and Decisions
Cost classification
Managerial accounting serves internal planning and control. Know the distinctions among product and period costs, direct and indirect costs, and fixed, variable, and mixed costs. Manufacturing costs comprise direct materials, direct labor, and manufacturing overhead; overhead is applied using a predetermined rate, and the difference between applied and actual overhead is under- or over-applied, closed to cost of goods sold or prorated.
Costing systems
Job-order costing suits custom work; process costing suits continuous production, using equivalent units and weighted-average or FIFO methods. Activity-based costing assigns overhead by activities and drivers, reducing distortion from a single plantwide rate.
CVP and relevant costing
Contribution margin equals sales minus variable costs. Break-even units equal fixed costs divided by unit contribution margin; the margin of safety is the excess of budgeted sales over break-even. In short-run decisions, ignore sunk costs and allocated fixed costs; include opportunity costs and avoidable costs. Keep or drop, make or buy, and special-order questions hinge on relevant, incremental cash flows.
Worked example
Fixed costs are 60,000; price is 20; variable cost is 12. Unit contribution margin is 8, so break-even is 7,500 units. To earn 20,000 of profit, required units equal (60,000 + 20,000) / 8 = 10,000. A trap: dividing fixed costs by the contribution margin ratio gives break-even sales dollars, not units. Another trap: treating a sunk cost as relevant in a special-order decision.