Management Accounting and Performance Management
This domain tests how candidates use cost information for planning, control, and performance evaluation. Questions often require a calculation followed by an interpretation: contribution, breakeven, relevant cost, variance, or divisional performance. The exam rewards candidates who link numbers to decisions.
Core rules
- Cost behaviour separates fixed, variable, and mixed costs. Contribution is revenue minus variable costs and is the basis for short-term decisions.
- Absorption costing includes fixed production overhead in inventory cost; variable costing expenses it in the period. Profit differs when inventory levels change.
- Relevant costing considers future incremental cash flows. Sunk costs, committed costs, and allocated fixed overhead are generally irrelevant.
- Variances analyse price and quantity effects. A favourable variance is not automatically good if it reflects lower quality or deferred maintenance.
- The balanced scorecard uses financial, customer, internal process, and learning and growth perspectives. KPIs must be specific, measurable, and controllable.
- Transfer prices should preserve goal congruence and fair divisional performance. Market price is often a starting point when a competitive market exists.
Worked example
A product sells for 100, has variable cost of 60, and fixed costs are 120,000. Target profit is 60,000. Contribution per unit is 40. Required units are (120,000 + 60,000) / 40 = 4,500. If budgeted sales are 5,000 units, margin of safety is 500 units, or 10% of budgeted sales. If a one-off order is offered at 70 per unit and spare capacity exists, the relevant contribution is 10 per unit; existing fixed costs are irrelevant unless the order causes additional fixed costs. If the order uses scarce capacity, compare contribution per limiting factor instead.
Traps that cost marks
Do not include sunk costs in relevant costing. Do not use absorption profit for a short-term accept-or-reject decision. Do not treat a favourable price variance as good without checking quality. Do not evaluate a manager on costs they cannot control. Do not ignore scarce resources when ranking products.