Management Information: Costing, Budgeting and Performance Analysis
Domain overview
The ICAEW MI module tests how management information is prepared, analysed and used for planning, control and decision-making. Core areas include cost classification, absorption and marginal costing, cost-volume-profit (CVP) analysis, budgeting and budgetary control, standard costing variances, and performance measurement. Questions often require a calculation followed by interpretation of what the result means.
Core rules and concepts
- Cost classification: direct/indirect, fixed/variable, production/non-production. Only production costs enter inventory valuation under absorption costing.
- Marginal costing: inventory is valued at variable production cost only; fixed overhead is charged in full to profit. Contribution = sales less variable costs.
- Absorption costing: fixed production overhead is absorbed using a predetermined rate (budgeted overhead ÷ budgeted activity). Over- or under-absorption arises when actual activity differs from budget.
- CVP: break-even units = fixed costs ÷ contribution per unit; margin of safety = (budgeted sales − break-even sales) ÷ budgeted sales.
- Budgeting: functional budgets build into the master budget; a cash budget records timing, not profit. Flex the budget to actual volume before analysing variances.
- Standard costing: price/rate and usage/efficiency variances; an operating statement reconciles budget profit to actual profit.
Worked example
A company makes 1,000 units and sells 900; opening inventory is nil. Variable production cost is £10/unit, fixed production overhead £5,000, selling price £30 and variable selling cost £2/unit. The absorption rate is £5,000 ÷ 1,000 = £5/unit. Marginal profit: contribution = £30 − £10 − £2 = £18; 900 × £18 = £16,200; less £5,000 fixed = £11,200. Absorption profit: cost of sales = 900 × (£10 + £5) = £13,500; gross profit = £27,000 − £13,500 = £13,500; less variable selling £1,800 = £11,700. The £500 difference equals 100 closing inventory units × £5 fixed overhead. Absorption profit is higher because fixed overhead is carried forward in inventory.
Traps
- Using gross profit as contribution in CVP calculations.
- Flexing the budget after calculating variances rather than before.
- Treating depreciation or loan principal in a cash budget as a profit item.
- Ignoring over- or under-absorption when actual output differs from budget.
- Giving a calculation without interpreting the result for management.