Management Accounting and Costing
Management Accounting and Costing tests whether you can classify costs, build product costs, and use costing information for planning, control, and short-term decisions.
Cost behaviour and product costing
- Separate fixed, variable, and mixed costs within the relevant range. Total fixed cost is constant; fixed cost per unit falls as volume rises.
- Absorption costing includes fixed production overhead in product cost. Variable costing treats fixed production overhead as a period cost. Profit under the two methods differs by the change in inventory multiplied by the fixed overhead absorption rate.
- Use job costing for heterogeneous jobs and process costing with equivalent units for homogeneous mass production. Compute equivalent units separately for materials and conversion costs when inputs occur at different stages.
Decision tools
- Contribution margin = sales revenue − variable costs. Break-even units = fixed costs ÷ contribution per unit. Margin of safety = budgeted sales − break-even sales.
- Relevant costing includes future, incremental cash flows. Exclude sunk costs and allocated common fixed costs that do not change with the decision.
- Standard costing variances: material price variance = (standard price − actual price) × actual quantity purchased; material usage variance = (standard quantity for actual output − actual quantity used) × standard price. State each variance as favorable or adverse.
Worked example
A product sells for 50, has variable cost of 30, and fixed costs are 200,000. Contribution per unit is 20. Break-even units = 200,000 ÷ 20 = 10,000 units. If budgeted sales are 14,000 units, the margin of safety is 4,000 units, or 4,000 ÷ 14,000 = 28.6%. Reasoning: each unit contributes 20 toward fixed costs; at 10,000 units total contribution equals fixed costs and profit is zero. Every unit above break-even adds 20 to profit.
Traps that cost marks
- Using absorption profit to justify a special order when fixed overhead is not incremental.
- Treating a sunk cost such as prior research as relevant.
- Mixing up the price and usage variance formulas and losing the favorable/adverse label.
- Assuming equivalent units are the same for materials and conversion costs.