Management Accounting and Finance
Scope
Management Accounting and Finance tests internal decision support: costing, budgeting, variance analysis, working capital and investment appraisal. It rewards numerical discipline and clear assumptions.
Core rules
- Cost behaviour. Separate fixed, variable and mixed costs. Contribution = sales less variable costs; it covers fixed costs and profit.
- CVP. Break-even units = fixed costs ÷ contribution per unit. Margin of safety = budgeted sales minus break-even sales.
- Budgeting. Use flexed budgets for control; compare actual costs at actual activity with the flexed budget, not the static budget.
- Investment appraisal. NPV discounts incremental after-tax cash flows at the cost of capital; accept positive NPV. IRR is the discount rate giving zero NPV; use it cautiously with non-conventional cash flows.
- Working capital. Manage receivables, inventory and payables; a cash cycle needs financing even when profit is positive.
Worked example
A project costs N100m and yields N40m annually for four years. At 10%, the four-year annuity factor is 3.170. PV of inflows = N40m × 3.170 = N126.8m; NPV = N26.8m. Accept, because NPV is positive and value is added. If the cash flows were accounting profits, the calculation would be wrong; depreciation is not a cash flow, and tax and working capital must be included.
Traps
Do not use sunk costs; do not discount accounting profit; do not ignore working capital or tax; do not compare IRR across projects of different scale without care.
Key discipline
State assumptions, use incremental cash flows, and reconcile NPV to the financing decision.