Management Accounting and Business Finance
Management Accounting and Business Finance tests how cost data support planning, control, performance measurement and funding decisions. Numerical questions usually require a clear decision rule, not just a calculation.
Core rules
- Relevant costing uses future incremental cash flows; exclude sunk costs and allocated fixed overhead that does not change.
- Absorption costing absorbs overhead on a selected base and creates over- or under-absorption; marginal costing reports contribution.
- CVP: breakeven units = fixed costs ÷ contribution per unit; margin of safety = (budgeted sales − breakeven sales) ÷ budgeted sales.
- Budgeting and control: flexible budgets adjust for actual activity; price and usage variances isolate causes; responsibility centres assign accountability.
- Investment appraisal: NPV discounts relevant after-tax cash flows, including working capital and salvage; IRR can mislead with non-conventional cash flows.
- WACC uses market-value weights and the after-tax cost of debt.
Worked example
Selling price is LKR 1,000, variable cost LKR 600 and fixed cost LKR 200,000. Contribution is LKR 400. To earn a target profit of LKR 100,000, required units = (200,000 + 100,000) ÷ 400 = 750 units. If budgeted sales are 900 units, margin of safety = 150 ÷ 900 = 16.7%. The decision rule is to accept only if the proposal improves contribution after any additional fixed cost.
Traps
Using accounting profit instead of cash flow in NPV; including sunk research; ignoring working-capital recovery; using book values in WACC; treating fixed overhead per unit as constant when volume changes.