Cost Accounting for Decision and Control
CIMA P1 tests whether you can build cost information that supports decisions and control, not simply record it. You must classify costs by behaviour and traceability, absorb overheads defensibly, explain the profit difference between absorption and marginal costing, estimate cost behaviour, and interpret standard-cost variances.
Cost classification and behaviour
- Direct costs trace to a cost object; indirect costs are apportioned.
- Fixed, variable and semi-variable costs behave differently over the relevant range.
- Product costs attach to inventory; period costs are expensed.
- Relevant costs are future, incremental and cash-based; sunk costs are irrelevant.
Overhead absorption
Predetermined OAR = budgeted overhead ÷ budgeted activity. Apportion shared overheads, reapportion service-centre costs, then absorb. Activity-based costing pools costs by activity and uses cost drivers; it improves attribution where overheads are driven by complexity rather than volume, but it is not automatically cheaper.
Marginal versus absorption profit
Contribution = sales − variable costs. Marginal profit = contribution − fixed costs. Absorption profit differs only by the fixed overhead carried in inventory: absorption profit − marginal profit = fixed overhead in closing inventory − fixed overhead in opening inventory.
Worked example
Budgeted fixed overhead £120,000; normal activity 12,000 units; OAR £10/unit. Production 11,000 units, sales 10,000, opening inventory nil. Closing inventory 1,000 units absorbs £10,000 fixed overhead. Marginal profit is lower than absorption profit by £10,000, because £10,000 remains in inventory rather than being expensed. If opening inventory had been 400 units, the difference would be (1,000 − 400) × £10 = £6,000.
Variances and control
Standard costing compares standard cost for actual output with actual cost. Material price = (standard price − actual price) × actual quantity purchased; usage = (standard quantity for actual output − actual quantity used) × standard price. Labour rate and efficiency follow the same logic. Fixed overhead expenditure and volume variances complete the operating statement; sales price and volume variances reconcile budgeted to actual profit.
Traps
- Using actual activity instead of budgeted activity in the OAR.
- Treating fixed cost per unit as variable.
- Forgetting opening inventory in the profit reconciliation.
- Assuming ABC always reduces costs.
- Mixing price and usage variances, or valuing usage at actual price.