Management Accounting: Costing, Budgeting and Decision Making
Management accounting questions test your ability to produce and use cost information for planning, control and decisions. Master cost classification (fixed, variable, semi-variable, direct, indirect), overhead absorption (predetermined rates, over/under absorption), marginal versus absorption costing, and process costing (equivalent units, normal loss, abnormal gain).
A high-yield area is cost-volume-profit analysis: contribution per unit, break-even units = fixed costs ÷ contribution per unit, margin of safety, and the impact of changes in price, cost or volume. Remember that contribution is revenue less variable costs, and that in a limiting-factor situation you rank products by contribution per unit of the scarce resource, not by contribution per unit.
Relevant costing for decisions requires incremental cash flows only: ignore sunk costs and apportioned fixed overheads, but include opportunity costs. Make-or-buy, accept-or-reject special orders, and shutdown decisions all hinge on this. For budgeting, know the functional budgets feeding the cash budget, and the behavioural issues of participative versus imposed budgets.
Worked example: Fixed costs 60,000; selling price 20; variable cost 12. Contribution per unit = 8. Break-even = 60,000 ÷ 8 = 7,500 units. If budgeted sales are 9,000 units, the margin of safety is 1,500 units (16.7%). If a scarce machine hour limits output and product A earns contribution of 8 per 2 hours (4 per hour) while product B earns 9 per 3 hours (3 per hour), prioritise A despite the lower unit contribution.