Management Accounting and Cost Accounting
The Management Accounting and Cost Accounting domain tests cost behaviour, product costing, budgeting, variance analysis and short-term decisions. The exam expects calculations and interpretation, not just definitions, and often combines costing with performance measurement.
Core rules
- Cost classification: fixed, variable or mixed; direct or indirect; product or period.
- Absorption costing includes fixed production overhead in inventory; variable costing treats it as a period cost. Profit differs by the change in inventory multiplied by the fixed overhead rate.
- CVP: contribution margin = sales − variable costs; break-even units = fixed costs ÷ CM per unit; margin of safety = budgeted sales − break-even sales.
- Standard costing variances: material price = AQ × (AP − SP); material usage = (AQ − SQ) × SP; labour rate and efficiency variances follow the same logic.
- Relevant costing: include incremental costs and opportunity costs; exclude sunk costs and allocated fixed costs that do not change.
- Activity-based costing assigns overhead using cost pools and activity drivers.
Worked example
Fixed costs are $120,000, selling price $20, variable cost $12, so CM is $8 per unit. Break-even is $120,000 ÷ $8 = 15,000 units. To earn an after-tax profit of $60,000 at a 20% tax rate, pre-tax profit must be $60,000 ÷ 0.8 = $75,000. Required units = ($120,000 + $75,000) ÷ $8 = 24,375.
Traps
Putting after-tax profit directly into the CVP formula; treating fixed cost per unit as constant across volumes; including sunk costs in a special-order decision; and using absorption profit for short-term decisions when fixed costs do not change.