Cost and Management Accounting: Costing, Budgeting and Decisions
What the domain tests
This domain covers cost classification, costing methods, overhead absorption, marginal costing, break-even analysis, relevant costing and budgeting. Calculations and short explanations are both examined.
Core rules
Costs are classified as direct or indirect, fixed or variable, and product or period. Costing methods include job, batch, contract, process and service costing. Production overheads are absorbed using a predetermined rate, such as budgeted overheads ÷ budgeted direct labour hours or machine hours.
Marginal costing separates variable and fixed costs. Contribution = sales − variable costs. Profit = contribution − fixed costs. Break-even units = fixed costs ÷ contribution per unit. Break-even revenue = break-even units × selling price. Margin of safety = actual sales − break-even sales. Target profit units = (fixed costs + target profit) ÷ contribution per unit.
For decisions, use relevant costs: future incremental cash flows that differ between alternatives. Sunk costs, committed fixed costs and apportioned common costs are not relevant.
Budgets include sales, production, materials, labour and cash budgets. A cash budget records receipts and payments, including capital expenditure and loan receipts, but excludes depreciation because it is not a cash flow.
Worked example
Selling price is 5,000 FCFA; variable cost 3,000; fixed costs 4,000,000. Contribution is 2,000 per unit.
- Break-even = 4,000,000 ÷ 2,000 = 2,000 units, or 10,000,000 FCFA of sales.
- At sales of 3,000 units, margin of safety = 1,000 units, or 33.3% of sales.
- To earn 1,000,000 profit: (4,000,000 + 1,000,000) ÷ 2,000 = 2,500 units.
Traps
Fixed cost per unit falls as output rises; do not treat it as constant per unit. Do not include sunk costs in a relevant-cost decision. Overhead absorption uses budgeted figures, so under- or over-absorption arises when actual activity differs. A cash budget excludes depreciation but includes capital expenditure. Break-even analysis assumes constant selling price and variable cost per unit.