Cost and Management Accounting
Cost and Management Accounting tests cost classification, product costing, budgeting, standard costing, variance analysis, cost-volume-profit analysis and relevant costing for short-term decisions.
Core rules
- Separate product costs from period costs; only product costs enter inventory.
- Under absorption costing, fixed production overhead is absorbed using a predetermined rate.
- Under marginal costing, contribution = sales − variable costs; profit = contribution − fixed costs.
- Variance analysis: price/rate variance = (standard price − actual price) × actual quantity; usage/efficiency variance = (standard quantity − actual quantity) × standard price.
- Relevant costs are future, incremental cash flows; ignore sunk and allocated fixed costs.
Worked example
Standard: 2 kg at 5 per kg per unit. Output is 1,000 units. Actual: 2,100 kg costing 11,130. Material price variance = (5 − 5.30) × 2,100 = 630 adverse. Material usage variance = (2,000 − 2,100) × 5 = 500 adverse. Total 1,130 adverse, reconciling standard cost 10,000 with actual 11,130.
Traps
Adverse is not always bad; it depends on the variance. Do not use actual quantity in the usage variance. Fixed overhead volume variance arises only under absorption costing. In limiting-factor decisions, rank by contribution per unit of scarce resource, not by unit profit.