Management Accounting and Cost Accounting: Costing, Variances and Decisions
This domain tests whether you can build a cost, explain cost behaviour, and use cost data to support a decision or evaluate performance. Expect computational questions on CVP, variances and relevant costing, plus short interpretation of the figures.
Cost behaviour and absorption
- Separate fixed, variable, semi-variable (use high-low or least squares) and stepped costs; the relevant range limits linear assumptions.
- Under absorption costing, fixed production overhead is absorbed via a predetermined rate (budgeted overhead ÷ budgeted activity); over/under-absorption is the difference between absorbed and actual overhead.
- ABC assigns overhead on activity drivers, improving accuracy where products consume overhead differently; it does not change total overhead.
Relevant costing and CVP
- Include only future, incremental cash flows: exclude sunk costs, committed costs and apportioned fixed overhead; include opportunity costs.
- Contribution = sales less variable costs. Break-even units = fixed costs ÷ contribution per unit; margin of safety = (budgeted sales − break-even sales) ÷ budgeted sales.
Worked example: material variances
Standard: 3 kg at 5.00 = 15.00 per unit. Output was 1,000 units; 3,200 kg were purchased and used for 16,640 (actual price 5.20). Price variance = (5.00 − 5.20) × 3,200 = 640 adverse. Usage variance = (3,000 standard kg for actual output − 3,200) × 5.00 = 1,000 adverse. Total 1,640 adverse, which reconciles to 16,640 actual cost less 15,000 standard cost of output.
Traps that cost marks
- Valuing the price variance at standard quantity instead of actual quantity purchased.
- Treating apportioned fixed overhead as relevant to a special order.
- Quoting a break-even figure without checking it lies inside the relevant range, and confusing contribution with gross profit.