Managerial and Cost Accounting
Managerial and Cost Accounting tests the production of cost information for planning, control and decision-making. The exam covers cost classification, job and process costing, absorption and marginal costing, cost-volume-profit analysis, standard costing variances, relevant costing and budgeting.
Cost behaviour and costing
- Fixed costs are constant in total over the relevant range; variable costs vary with activity; semi-variable costs have both elements and are separated using the high-low method.
- Absorption costing includes fixed production overheads in product cost; marginal costing treats them as period costs.
- Process costing uses equivalent units for opening and closing work in progress and distinguishes normal loss, abnormal loss and abnormal gain.
- Activity-based costing assigns overheads to activities and then to products using cost drivers.
Decision-making and variances
- Relevant costs are future, incremental and avoidable; sunk costs and allocated common fixed costs are irrelevant.
- CVP: contribution = sales − variable costs; break-even units = fixed costs ÷ contribution per unit.
- Material price variance = (standard price − actual price) × actual quantity purchased; material usage variance = (standard quantity − actual quantity) × standard price.
Worked example
A product sells for EGP 50, variable cost is EGP 30, and fixed costs are EGP 200,000. Contribution per unit = EGP 20. Break-even = 200,000 ÷ 20 = 10,000 units. To earn a target profit of EGP 60,000, required units = (200,000 + 60,000) ÷ 20 = 13,000 units. At 13,000 units, margin of safety = 13,000 − 10,000 = 3,000 units, or 23.1% of budgeted sales. The reasoning is that each unit contributes EGP 20 toward fixed costs and then profit.
Traps that cost marks
- Including sunk costs or allocated fixed overheads in a special-order decision.
- Using actual output instead of normal capacity to absorb fixed overheads.
- Confusing the material price variance based on quantity purchased with the variance based on quantity used.
- Treating abnormal gain as a normal credit to the process account without adjusting equivalent units.
- Forgetting that fixed costs per unit fall as volume rises, which affects absorption costing profit.