Management Accounting and Cost Control
Cost behaviour and decisions
Management accounting supplies cost information for planning, control and decisions. Cost control compares actual results with budgets and standards, then explains variances.
- Fixed costs do not change with activity in the relevant range; variable costs change in proportion to activity.
- Contribution equals sales revenue minus variable costs. It covers fixed costs and then produces profit.
- Break-even point in units equals fixed costs divided by contribution per unit.
- Relevant costs are future, incremental and avoidable; sunk costs are irrelevant.
- Standard costing sets expected costs; variances are analysed by price or rate and by quantity or efficiency.
Worked example: Fixed costs are 120,000; selling price is 50; variable cost is 30. Contribution per unit is 20. Break-even is 120,000 divided by 20, which equals 6,000 units. To earn a target profit of 40,000, required units are (120,000 + 40,000) divided by 20, which equals 8,000. A supplier offers a one-off order at 35 per unit; the relevant contribution is 5 per unit if no fixed costs change, so the order may be accepted only if capacity and longer-term price effects are considered.
Traps
Dividing total cost by units and calling it variable cost; treating allocated fixed overhead as relevant to a special order; confusing contribution with gross profit; using break-even revenue when asked for units.