Cost and Management Accounting
Cost and Management Accounting tests how costs are classified, accumulated and used for planning and decisions. Expect questions on cost behaviour, overhead absorption, marginal versus absorption costing, cost-volume-profit analysis, budgeting and basic variances.
Core rules
- Direct costs can be traced to a unit; indirect costs (overheads) must be absorbed. A predetermined overhead absorption rate (OAR) = budgeted overhead ÷ budgeted activity, so it is set before the period begins.
- Under marginal costing, inventory carries only variable production cost; fixed overhead is a period cost. Contribution = sales − variable costs.
- Breakeven units = fixed costs ÷ contribution per unit. Margin of safety = actual or budgeted sales − breakeven sales.
- Under absorption costing, fixed production overhead is absorbed into inventory, so profit differs from marginal costing whenever inventory levels change.
Worked example
A product sells for €20, variable cost is €12 and fixed costs are €40,000. Contribution per unit = €8. Breakeven = 40,000 ÷ 8 = 5,000 units. If budgeted sales are 6,500 units, margin of safety = 1,500 units, or 1,500 ÷ 6,500 = 23.1%. At 6,500 units, profit = 6,500 × €8 − €40,000 = €12,000.
Marks-losing traps
- Dividing actual overhead by actual hours when the question asks for a predetermined OAR.
- Treating fixed cost per unit as constant as output changes.
- Calling contribution 'profit' and then deducting fixed costs twice.
- Including sunk or committed costs in a relevant-cost decision.
- Mixing units and euros in the margin of safety.