Management Accounting and Cost Accounting
Management Accounting and Cost Accounting tests how internal data drive planning, control and decisions. Expect cost classification, product costing, budgeting, variance analysis and short-run decisions with scarce resources.
Cost behaviour and product costing
Separate fixed and variable costs before doing anything else; contribution margin, break-even and operating leverage all depend on that split. Absorption costing puts fixed production overhead into inventory, while variable costing expenses it, so profit differs by the change in inventory multiplied by the fixed overhead rate. Activity-based costing assigns overhead by cost driver and is most useful where products are diverse and overhead is large and not volume-driven.
Standard costing
A price variance uses actual quantity: (actual price − standard price) × actual quantity. A usage variance uses standard price: (actual quantity − standard quantity for actual output) × standard price. Labour efficiency mirrors usage and the rate variance mirrors price. Fixed overhead has a spending variance and a volume variance; only the spending variance is a genuine controllable difference in most settings.
Worked example
Standard: 3 kg at 8.00 per kg, so 24.00 per unit. Output is 1,000 units; material purchased and used is 3,200 kg for 26,880. Actual price is 26,880 / 3,200 = 8.40. Price variance = (8.40 − 8.00) × 3,200 = 1,280 unfavourable. Standard quantity for 1,000 units is 3,000 kg, so usage variance = (3,200 − 3,000) × 8.00 = 1,600 unfavourable. Total 2,880 unfavourable. If 3,200 kg were purchased but only 3,050 used, the price variance would use quantity purchased and the usage variance quantity used.
Decisions
Rank products by contribution per unit of the limiting factor, not by gross margin or selling price. Relevant costs are future and differential; sunk costs, allocated fixed overhead and book values are irrelevant. Keep-or-drop decisions must weigh avoidable fixed costs against lost contribution.
Traps
Using budgeted output instead of actual output for the standard quantity. Mixing purchase quantity and usage quantity in the price variance. Treating a favourable variance as good without checking quality or price consequences. Adding allocated fixed overhead to an incremental order. Ignoring the learning curve when setting labour standards for new products.