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CPA Canada Core 1 study materials
CPA Canada Core 1 study resources

CPA Canada Core 1: Management Accounting: Relevant Costs, Variances, and Performance

CPA Canada Core 1 · Work through your exam, one topic at a time.

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Management Accounting: Relevant Costs, Variances, and Performance

Management Accounting tests how internal information supports planning, control, and decisions. Core 1 emphasizes relevant costing, cost behavior, budgeting, variance analysis, and performance measurement, often in scenarios where the 'obvious' accounting answer is not the economically correct one.

Decision rules

  • Relevant costs are future, incremental, and differ between alternatives. Exclude sunk costs and allocated fixed costs that do not change.
  • Contribution margin = sales − variable costs. Use it for short-term decisions with spare capacity.
  • When capacity is limited, rank products by contribution margin per unit of the constrained resource, not per unit sold.
  • Variances: price/rate variance = (standard − actual price) × actual quantity; efficiency/quantity variance = (standard quantity − actual quantity) × standard price. Label favorable or unfavorable from the perspective of profit.
  • Performance measures: ROI can encourage suboptimization; residual income and balanced scorecard measures can align managers with long-term goals.

Worked example: special order

Capacity is 10,000 units; current output is 8,000 units; regular price $50; variable cost $30; fixed costs $120,000. A customer offers $38 for 1,500 units.

Reasoning: spare capacity is 2,000 units, so no regular sales are displaced. Relevant cost is the $30 variable cost. Contribution is $8 × 1,500 = $12,000, so accept. If the order were 2,500 units, 500 regular units would be displaced, losing $20 contribution each = $10,000. Order contribution is $8 × 2,500 = $20,000; net benefit $10,000, so still accept, but only if no better use of capacity exists. Fixed costs are irrelevant because they do not change.

Traps that cost marks

  • Including sunk costs or general fixed overhead in a special-order decision.
  • Using absorption cost per unit as the relevant cost.
  • Ignoring the opportunity cost of constrained capacity.
  • Calculating variances with actual quantity where standard quantity belongs.
  • Treating an unfavorable variance as automatically bad; it may reflect higher quality or volume.
  • Using ROI alone to evaluate a manager who can reject profitable investments.