Management Accounting and Cost Accounting
What this domain tests
Management Accounting and Cost Accounting tests how costs behave, how they are absorbed into products, and how managers use cost data for planning, control and decisions.
Core rules
- Classification: direct vs indirect; fixed, variable and semi-variable (split using high-low); product vs period costs.
- Absorption costing charges overhead with a predetermined rate: budgeted overhead ÷ budgeted activity (labour or machine hours). Marginal costing charges only variable cost and treats fixed cost as a period cost; the difference shows up in inventory valuation and therefore in profit.
- CVP: contribution per unit = price − variable cost; break-even units = fixed costs ÷ contribution per unit; margin of safety = (budgeted units − break-even units) ÷ budgeted units.
- Variances: material price = (standard price − actual price) × actual quantity; material usage = (standard quantity for actual output − actual quantity) × standard price.
Worked example
Budgeted fixed costs are £60,000, selling price £20 and variable cost £12. Contribution is £8 per unit, so break-even is 7,500 units. If the budget is 10,000 units, the margin of safety is 2,500 units, or 25%. Each extra unit sold adds £8 of profit, which is why contribution, not full cost per unit, drives short-term decisions such as a one-off order at a reduced price.
Traps that cost marks
- Treating fixed cost per unit as constant when volume changes.
- Getting favourable/adverse signs wrong: paying above standard price is adverse.
- Using absorption cost for a special-order decision and rejecting work that covers variable cost and contributes.