Fundamentals of Cost Accounting
Fundamentals of Cost Accounting tests classification and accumulation of costs, overhead absorption, costing methods, marginal costing, CVP and standard costing. Numerical break-even and variance questions are common.
Core rules
- Prime cost = direct material + direct labour + direct expenses. Overhead = indirect costs. Conversion cost = direct labour + production overhead.
- Fixed costs are constant in total over the relevant range; variable costs vary with output; semi-variable costs have both elements.
- Absorption costing includes fixed production overhead in product cost; marginal costing treats it as a period cost and values inventory at variable cost.
- Contribution = sales - variable costs. Break-even units = fixed costs / contribution per unit. Margin of safety = actual sales - break-even sales.
- Over/under absorption = absorbed overhead - actual overhead.
- Material price variance = (standard price - actual price) x actual quantity; material usage variance = (standard quantity - actual quantity) x standard price.
Worked example
Fixed costs are INR 120,000; selling price INR 50; variable cost INR 30. Contribution per unit = 20. Break-even = 120,000/20 = 6,000 units. At sales of 8,000 units, margin of safety = 2,000 units; profit = 8,000 x 20 - 120,000 = INR 40,000. If actual fixed costs were 130,000, break-even would rise to 6,500 units.
Traps
Contribution is not gross profit. Fixed cost per unit falls as volume rises, but total fixed cost is unchanged. Absorption and marginal profit differ when inventory changes. Use actual quantity for the price variance. Check favorable and adverse signs carefully.