Cost and Management Accounting
This section covers Cost and Management Accounting. MATSEC SEC Accounting tests cost classification, the manufacturing account, marginal and absorption costing, break-even analysis and simple budgeting for internal decisions.
Core rules
- Prime cost = direct materials + direct labour + direct expenses. Production cost = prime cost + factory overheads + opening work in progress − closing work in progress.
- Product costs attach to units; period costs such as administration are written off in the period.
- Marginal costing separates variable and fixed costs. Contribution = sales − variable costs. Profit = contribution − fixed costs.
- Break-even units = fixed costs / contribution per unit. Margin of safety = actual or budgeted sales − break-even sales.
- In decision-making, use relevant costs: future, incremental cash flows. Ignore sunk costs and apportioned fixed overheads that do not change.
Worked example
A product sells for €20; variable cost is €12; fixed costs are €40,000. Contribution = €8 per unit. Break-even = €40,000 / €8 = 5,000 units. To earn €16,000 profit, required units = (€40,000 + €16,000) / €8 = 7,000 units. At 7,000 units, margin of safety = 7,000 − 5,000 = 2,000 units, or 28.6% of sales.
Reasoning: each unit first contributes €8 to fixed costs; after 5,000 units fixed costs are covered. Every extra unit adds €8 profit.
Traps
- Treating fixed cost per unit as constant when output changes.
- Using mark-up on cost where the question asks for margin on selling price.
- Including sunk costs in a special-order decision.
- Ignoring over- or under-absorption of overheads.
- Counting opening work in progress as a deduction in the manufacturing account.