Cost Management Techniques
Cost Management Techniques tests standard costing, variance analysis, budgetary control and marginal-costing tools used to control and plan costs. Numerical variance questions are common, often followed by a comment on responsibility.
Standard costing variances
Set a standard, measure actual, and explain the difference. Material price = (standard price − actual price) × actual quantity; material usage = (standard quantity for actual output − actual quantity) × standard price. Labour rate = (standard rate − actual rate) × actual hours; labour efficiency = (standard hours − actual hours) × standard rate. Variable overhead variances mirror labour. Fixed overhead splits into expenditure and volume, with volume further split into capacity and efficiency.
Marginal costing tools
Contribution = sales − variable cost. P/V ratio = contribution ÷ sales. BEP in units = fixed cost ÷ contribution per unit; BEP in value = fixed cost ÷ P/V ratio. Margin of safety = actual sales − break-even sales. When inventory rises under absorption costing, reported profit exceeds marginal-costing profit by the fixed overhead absorbed into closing stock.
Worked example
Standard: 5 kg at ₹10 = ₹50 per unit. Actual output 1,000 units, using 5,200 kg costing ₹49,400. Standard quantity allowed = 5 × 1,000 = 5,000 kg. Price variance = (10 − 9.50) × 5,200 = ₹2,600 favourable. Usage variance = (5,000 − 5,200) × 10 = ₹2,000 adverse. Total = ₹600 favourable, agreeing with budgeted ₹50,000 less actual ₹49,400.
Traps
Computing price variance on quantity purchased when the question asks about quantity consumed; reversing adverse and favourable signs; using sales value instead of contribution in the P/V ratio; and treating fixed overhead expenditure variance as a volume variance.