Management Accounting and Cost Accounting
This domain tests costing methods, budgeting, decision analysis and performance measurement, with an emphasis on explaining variances rather than just calculating them. Questions often combine a short computation with a request to interpret the figure for a manager.
The toolkit
- Absorption vs marginal costing: fixed production overhead in product cost creates inventory carrying value and an operating profit difference equal to the change in inventory units times the fixed overhead rate.
- Standard costing variances: material price (actual quantity at standard vs actual price), material usage (standard quantity for actual output vs actual quantity at standard price), labour rate and efficiency, and fixed overhead expenditure and volume.
- Relevant costing: ignore sunk costs and apportioned fixed overhead; include opportunity cost and incremental cash flow.
- Performance measures: ROI can be manipulated by deferring investment; residual income and EVA reduce that bias; the balanced scorecard adds customer, process and learning perspectives.
Worked example
Standard: 3 kg per unit at LKR 250 per kg. Actual output 2,000 units using 6,300 kg costing LKR 1,638,000 (LKR 260 per kg). Material price variance = (250 − 260) × 6,300 = LKR 63,000 adverse. The firm paid more per kg, so the purchasing decision is the likely cause. Material usage variance = (6,000 − 6,300) × 250 = LKR 75,000 adverse. Standard quantity allowed is 3 × 2,000 = 6,000 kg, so production used 300 kg too many. Total LKR 138,000 adverse. Report purchasing and production separately; blaming one manager for both is a common presentation error.
Traps that cost marks
Calculating the usage variance on units produced rather than standard quantity allowed; mixing the price variance base (actual quantity, not standard); treating a favourable variance as automatically good when it signals corner-cutting; forgetting that fixed overhead volume variance disappears under marginal costing.