Cost and Management Accounting
Cost and Management Accounting in CS Executive tests how costs are collected, classified and used for decisions rather than merely recorded. Expect computation-heavy questions on marginal costing, CVP analysis, standard costing variances and cost-sheet preparation.
Core rules
- Under marginal costing, inventory carries only variable cost; fixed cost is written off to the P&L. Profit differs from absorption costing only by the fixed overhead absorbed into opening/closing stock.
- Contribution = Sales − Variable cost. P/V ratio = Contribution/Sales. BEP (units) = Fixed cost/Contribution per unit; BEP (₹) = Fixed cost/P/V ratio.
- Margin of safety = Actual sales − BEP sales, and Profit = MOS × P/V ratio.
- Material price variance = (Standard price − Actual price) × Actual quantity (purchased or used, per the convention stated). Usage variance = (Standard qty for actual output − Actual qty) × Standard price.
- Labour efficiency variance = (Standard hours for actual output − Actual hours) × Standard rate.
Worked example
Fixed cost ₹1,20,000; selling price ₹50; variable cost ₹30. Contribution = ₹20, P/V ratio = 40%. BEP = 1,20,000/20 = 6,000 units, i.e. ₹3,00,000 of sales. At 8,000 units, MOS = 2,000 units (₹1,00,000) and profit = 2,000 × 20 = ₹40,000, which also equals MOS × P/V ratio = 1,00,000 × 40%.
Traps
Treating fixed cost per unit as constant when volume changes; using profit instead of contribution in the P/V ratio; adding fixed overhead to inventory value under marginal costing; declaring a favourable price variance without noting the adverse usage variance it may cause with cheaper material.