Management Accounting and Performance Measurement
Cost Concepts
Understand fixed, variable, mixed costs; relevant costing (incremental costs and opportunity costs); and cost allocation. Candidates must be able to compute contribution margin, break-even point, and margin of safety. Be careful with step-fixed costs and semi-variable costs.
Budgeting and Variance Analysis
Know the purposes of budgets, types (master, flexible, rolling), and behavioural aspects. Variance analysis: calculate price and quantity variances for materials and labour, and variable overhead variances. Understand the distinction between planning and operational variances. Trap: mixing up favourable and unfavourable signs; always check the direction.
Performance Measurement
Balanced Scorecard perspectives (financial, customer, internal processes, learning and growth). Divisional performance: ROI vs residual income; ROI can lead to suboptimal decisions (goal congruence issues). Transfer pricing: minimum transfer price = variable cost + opportunity cost. Traps: ignoring opportunity cost when capacity is constrained; using absorption costing for decisions when contribution approach is better.
Worked Example
A company produces 1,000 units. Actual material cost: 2,100 kg at $11/kg = $23,100. Standard: 2 kg per unit at $10/kg. Standard quantity for actual output = 2,000 kg. Price variance = (Actual price - Standard price) * Actual quantity = ($11 - $10) * 2,100 = $2,100 unfavourable. Quantity variance = (Actual quantity - Standard quantity) * Standard price = (2,100 - 2,000) * $10 = $1,000 unfavourable. Total variance = $3,100 unfavourable.
Rule of thumb: For decision-making, use relevant costs only; exclude sunk costs and allocated fixed costs.