ICAG Paper 1.4 Cost & Management Accounting cheat sheet

Cost object is anything for which a separate measurement of cost is required: product, service, department, customer or activity.

Classification by nature: direct costs are traceable to the cost object; indirect costs (overheads) are not economically traceable and are absorbed via a predetermined rate.

Classification by behaviour: fixed cost is constant in total within the relevant range; variable cost varies in total with activity; semi-variable (mixed) cost has both elements, separated by high-low or least-squares regression.

High-low method: variable cost per unit = (cost at highest activity - cost at lowest activity) / (highest activity - lowest activity); fixed cost = total cost - (variable rate x activity).

Prime cost = direct materials + direct labour + direct expenses. Conversion cost = direct labour + production overhead. Production cost = prime cost + production overhead.

Cost of goods sold = opening finished goods + cost of production - closing finished goods. Cost of production = prime cost + production overhead + opening WIP - closing WIP.

Product costs are inventoried and expensed on sale; period costs (administration, selling, distribution) are expensed in the period incurred.

Relevant range is the activity band within which the fixed cost and variable rate assumptions hold; step-fixed costs jump at defined capacity thresholds.

Overhead absorption rate = budgeted overhead / budgeted activity base (labour hours, machine hours, direct labour cost, units); over-absorption arises when absorbed overhead exceeds actual overhead.

Job costing accumulates costs per identifiable unit or customer order; batch costing treats a group of identical units as one cost unit, unit cost = batch cost / batch quantity.

Contract costing applies to long-term, site-based work: costs are accumulated per contract, certified work is recognised as turnover, and a contract account shows notional profit = value of work certified + work in progress certified - costs to date.

Contract profit recognition: prudent approach recognises a proportion of notional profit based on cash received to work certified, only where the contract is sufficiently complete and profit is reasonably certain.

Process costing averages costs over output; normal loss is valued at scrap value only, abnormal loss/gain is valued at full cost per good unit and written off or credited to profit.

Equivalent units convert partly completed output to finished-equivalent units; weighted average method blends opening WIP costs with current costs, FIFO method keeps them separate.

Standard costing compares predetermined standard cost with actual cost; variances are classified by element (material, labour, overhead) and by cause (price, usage, efficiency, expenditure, volume).

Marginal costing values inventory at variable production cost only; absorption costing includes fixed production overhead. Profit differs by the change in inventory multiplied by the fixed overhead absorption rate per unit.

Activity-based costing assigns overhead to cost pools driven by activities and charges products via cost drivers, reducing cross-subsidy where products consume overheads differently.

Budget purposes: planning, coordination, communication, motivation, control and performance evaluation. A budget is a quantified plan for a defined future period.

Flexed budget restates the fixed budget for actual activity using the standard variable cost per unit; only variable costs flex, fixed costs stay at budget.

Material price variance = (standard price - actual price) x actual quantity purchased; material usage variance = (standard quantity for actual output - actual quantity used) x standard price.

Labour rate variance = (standard rate - actual rate) x actual hours paid; labour efficiency variance = (standard hours for actual output - actual hours worked) x standard rate.

Variable overhead expenditure variance = budgeted variable overhead for actual hours - actual variable overhead; efficiency variance = (standard hours - actual hours) x standard variable overhead rate.

Fixed overhead variances under absorption costing: expenditure = budgeted - actual fixed overhead; volume = (budgeted hours - standard hours for actual output) x standard fixed overhead rate, split into capacity and efficiency.

Sales variances: price = (actual price - standard price) x actual units sold; volume (marginal costing) = (actual units - budgeted units) x standard contribution per unit.

Operating statement reconciles budgeted profit to actual profit by adding favourable and deducting adverse variances in a logical order.

Relevant costs are future, incremental cash flows that differ between alternatives; sunk costs, committed costs and non-cash book values are irrelevant.

Opportunity cost is the contribution forgone from the next best alternative use of a scarce resource and must be included in the decision.

Contribution per unit = selling price - variable cost per unit. Where a resource is scarce, rank products by contribution per unit of limiting factor, not by contribution per unit.

Make-or-buy: compare avoidable internal cost (variable cost plus any specific fixed cost saved) with the external purchase price plus opportunity cost of freed capacity.

Accept-or-reject special order: accept if incremental revenue exceeds incremental cost, provided spare capacity exists and no regular market is undercut.

Shut-down decision: a segment should be discontinued only if its contribution is less than the specific fixed costs avoided by closing it.

Relevant costing for pricing: minimum price in the short run equals variable cost; in the long run it must cover full cost including a fair share of fixed overhead.

Throughput accounting ranks products by throughput (sales less material cost) per unit of bottleneck resource; the bottleneck governs the system's output.

Return on investment = controllable profit / capital employed; residual income = controllable profit - (imputed interest rate x capital employed). RI avoids some dysfunctional behaviour caused by ROI rejection of profitable projects.

Balanced scorecard perspectives: financial, customer, internal business process, and learning and growth; measures should be linked to strategy, not just financial outcomes.

Transfer pricing: minimum transfer price = variable cost + opportunity cost of the transferred unit; where spare capacity exists the opportunity cost is nil.

Divisional performance must separate controllable from non-controllable items; managers are judged on items they influence.

Responsibility centres: cost centre (cost control), revenue centre (sales), profit centre (profit), investment centre (profit and capital employed).

Variance investigation decision compares the cost of investigation with the expected benefit of correcting the cause; use control limits and standard error of the variance.

Non-financial indicators include quality, lead time, delivery reliability, customer satisfaction and staff turnover; they give early warning of future financial results.

A management control system aligns goals through budgets, performance targets, feedback reports and incentives; goal congruence is achieved when individual and organisational objectives coincide.