Management Accounting and Cost Analysis
Core concepts
Management accounting supports planning, control and decision making. Candidates must classify costs by behavior (fixed, variable, mixed, step), by traceability (direct versus indirect), and by function (product versus period). Understand the flow of costs through raw materials, work in process and finished goods, and how under- or over-applied overhead arises from predetermined rates.
Master cost-volume-profit analysis: contribution margin, break-even point in units and revenue, margin of safety, and operating leverage. Know the assumptions: linear costs, constant selling price, constant sales mix, and inventory unchanged. Be able to compute relevant costs for decisions: avoid sunk costs and allocated fixed costs, include opportunity costs, and consider qualitative factors.
Other required topics include job and process costing, activity-based costing, standard costing with variance analysis (price and quantity, rate and efficiency), flexible budgets, and transfer pricing. Understand that variances must be analyzed by cause and controllability before being used for performance evaluation.
Traps
- Including sunk costs or allocated fixed overhead in a special-order decision.
- Using total fixed costs per unit as if fixed costs were variable.
- Forgetting that a change in sales mix alters the break-even point.
- Confusing favorable price variance with favorable overall performance when quality suffers.
- Treating an unfavorable variance as automatically the manager's fault.
Worked example / rule of thumb
Rule of thumb: separate what changes from what does not. Example: fixed costs are 90,000, unit price is 50, unit variable cost is 30, so contribution per unit is 20 and break-even is 4,500 units. A special order of 1,000 units at 35 uses spare capacity: incremental contribution is 5 per unit, or 5,000 total, and the order should be accepted because fixed costs do not change. If the order required giving up 2,000 of normal contribution, that opportunity cost would make the order unattractive.