ICSAN Management Accounting cheat sheet

Prime cost = direct materials + direct labour + direct expenses. Conversion cost = direct labour + production overheads.

Product costs attach to units (DM, DL, production overheads); period costs (admin, selling, distribution) are expensed in the period incurred.

Fixed cost per unit falls as activity rises; variable cost per unit is constant in the relevant range; total fixed cost is constant.

Stepped fixed cost is constant over a range then jumps; semi-variable cost has a fixed element plus a variable rate per unit.

High-low method: variable rate = (cost at high activity − cost at low activity) ÷ (high activity − low activity); fixed cost = total cost − variable rate × activity.

Relevant range: the activity band over which the assumed cost behaviour holds; cost estimates outside it are unreliable.

Direct cost is traceable to a cost object; indirect cost (overhead) is apportioned, allocated or absorbed.

Overhead absorption rate = budgeted overhead ÷ budgeted activity level (e.g., labour hours, machine hours, direct labour cost).

Controllable cost is influenced by the manager responsible; uncontrollable costs (e.g., apportioned rent) should not be used to judge that manager.

Job costing accumulates costs per distinct job on a job cost card; overhead is absorbed using a predetermined rate.

Batch costing: cost per unit = total batch cost ÷ number of units in the batch; average cost falls as batch size increases within capacity.

Contract costing uses a separate account per contract; profit recognised on incomplete contracts is based on value of work certified and degree of completion.

Process costing: normal loss is valued at scrap value; abnormal loss = (normal cost of good output ÷ expected good output) × abnormal units; abnormal gain is the mirror calculation.

Equivalent units (weighted average) = completed units + closing WIP × % completion; cost per equivalent unit = total process cost ÷ equivalent units.

FIFO equivalent units = completed output + closing WIP % − opening WIP %; opening WIP is kept separate from current-period costs.

Service costing uses composite cost units (e.g., cost per passenger-mile, per patient-day); costs are collected by cost centre and divided by service units.

Joint products share a split-off point; common costs are apportioned by sales value or physical units; by-products are credited at net realisable value.

Spoilage and rework: normal spoilage is a product cost; abnormal spoilage is written off to profit or loss.

Material price variance = (standard price − actual price) × actual quantity purchased or used; material usage variance = (standard quantity for actual output − actual quantity) × standard price.

Labour rate variance = (standard rate − actual rate) × actual hours paid; labour efficiency variance = (standard hours for actual output − actual hours worked) × standard rate.

Variable overhead expenditure variance = actual hours × (standard rate − actual rate); efficiency variance = (standard hours − actual hours) × standard rate.

Fixed overhead expenditure variance = budgeted fixed overhead − actual fixed overhead; volume variance = (budgeted hours − standard hours for actual output) × standard absorption rate.

Sales price variance = (actual price − standard price) × actual units sold; sales volume contribution variance = (actual units − budgeted units) × standard contribution per unit.

Mix and yield variances apply where multiple materials or grades are combined; mix variance isolates the effect of changing the input proportions.

Favourable (F) variance increases profit relative to standard; adverse (A) variance reduces profit. Check the sign convention before interpreting.

Operating statement reconciles budgeted profit to actual profit by adding F variances and deducting A variances.

Idle time variance = idle hours × standard rate, always adverse; it is separated from the efficiency variance.

Absorption costing includes fixed production overhead in product cost; marginal costing treats fixed production overhead as a period cost.

Marginal costing profit = contribution − fixed costs; contribution = sales − variable costs.

Difference in profit = change in inventory units × fixed overhead absorption rate per unit.

When inventory increases, absorption profit exceeds marginal profit; when inventory decreases, marginal profit exceeds absorption profit.

Over-absorption = absorbed overhead − actual overhead (positive = over-absorbed); under-absorption is the negative case.

Absorption rate per unit = budgeted fixed production overhead ÷ budgeted production units.

Marginal costing is preferred for short-term decisions because it avoids arbitrary fixed overhead apportionments.

Reconciliation: absorption profit = marginal profit + (closing inventory − opening inventory) × fixed overhead per unit.

Contribution per unit = selling price − variable cost per unit; C/S ratio = contribution ÷ sales.

Break-even units = fixed costs ÷ contribution per unit; break-even revenue = fixed costs ÷ C/S ratio.

Margin of safety (units) = budgeted sales − break-even sales; margin of safety % = margin of safety ÷ budgeted sales × 100.

Target profit volume = (fixed costs + target profit) ÷ contribution per unit.

Profit = (sales volume × contribution per unit) − fixed costs.

Multi-product break-even: weighted average C/S ratio = total contribution ÷ total sales revenue; break-even revenue = fixed costs ÷ weighted average C/S ratio.

Operating gearing = contribution ÷ profit; higher gearing means profit is more sensitive to sales volume changes.

CVP assumptions: constant selling price, constant variable cost per unit, fixed costs constant, single product or constant sales mix, and units produced equal units sold.

Incremental budgeting adjusts last period's budget; zero-based budgeting builds each activity from a zero base and requires justification of all spend.

Flexed budget restates the original budget for actual activity; variances are then computed against the flexed budget.

Planning (budget) variance = original budget − flexed budget; operational variance = flexed budget − actual.

Rolling budget is continuously updated by adding a new period as the current one expires; it keeps the horizon constant.

Cash budget records receipts and payments when cash moves; it excludes non-cash items such as depreciation.

High-low and least-squares regression estimate cost behaviour; regression gives a line of best fit and a coefficient of determination (r²).

Learning curve: cumulative average time per unit falls by a constant percentage each time cumulative output doubles; y = ax^b where b = log(learning rate) ÷ log 2.

Time series: trend, seasonal variation, cyclical and random components; moving averages smooth seasonal effects to reveal trend.

Budgetary control cycle: set budget, record actual, compare, calculate variances, investigate significant variances, and take corrective action.

Relevant cost is a future incremental cash flow that differs between alternatives; sunk costs, committed costs and non-cash costs are irrelevant.

Opportunity cost is the contribution forgone from the next best alternative and is included as a relevant cost.

Make-or-buy: compare relevant variable cost of making plus opportunity cost with the buy-in price.

Accept a special order only if incremental revenue exceeds incremental relevant cost and spare capacity exists; otherwise include the contribution lost from displaced sales.

Shut-down decision: continue in the short run if contribution covers avoidable fixed costs.

Pricing: full cost-plus = total cost × (1 + mark-up %); marginal cost-plus uses variable cost as the base.

Minimum transfer price with spare capacity = variable cost; without spare capacity = variable cost + opportunity cost (usually market price).

Limiting factor: rank products by contribution per unit of scarce resource; produce in rank order until the resource is exhausted.

Relevant costing uses cash flows, not accounting profit; depreciation is excluded unless it reflects a real cash outflow.

ROI = divisional profit ÷ divisional investment; RI = divisional profit − (imputed interest rate × divisional investment).

RI encourages managers to accept projects earning above the imputed cost of capital, whereas ROI can reject projects that dilute the existing ROI.

EVA = net operating profit after tax − (WACC × invested capital).

Balanced Scorecard perspectives: financial, customer, internal business process, and learning and growth.

Financial performance measures include gross margin, operating margin, ROCE, asset turnover and residual income.

Non-financial measures include quality, cycle time, on-time delivery, customer satisfaction and employee retention.

Controllability principle: managers should be evaluated on items they can influence; transfer prices and allocated head office costs can distort evaluation.

Management control systems comprise planning, cybernetic control, reward and punishment, and administrative controls.

Transfer pricing methods: market-based, cost-based (variable or full cost plus mark-up) and negotiated; each affects divisional profit and goal congruence.

Working capital = current assets − current liabilities; the operating cycle = inventory days + receivable days − payable days.

Inventory days = average inventory ÷ cost of sales × 365; receivable days = trade receivables ÷ credit sales × 365; payable days = trade payables ÷ credit purchases × 365.

Cash conversion cycle measures the time between paying suppliers and collecting from customers; a shorter cycle reduces financing needs.

Economic order quantity = √(2 × annual demand × order cost ÷ holding cost per unit per year).

Total inventory cost = ordering cost + holding cost; EOQ minimises this total (ignoring quantity discounts and stock-outs).

Miller-Orr model sets a return point between upper and lower cash limits: return point = lower limit + (spread ÷ 3); spread = 3 × (3 × transaction cost × variance of cash flows ÷ interest rate)^(1/3).

Short-term finance sources: overdraft, trade credit, factoring, invoice discounting, bank loans and commercial paper.

Factoring transfers receivables and often administration to the factor; invoice discounting retains administration and customer contact.

Early settlement discount: compare the cost of forgoing the discount with the cost of short-term borrowing before deciding.

Payback period = time for cumulative cash inflows to equal the initial investment; it ignores cash flows after payback and the time value of money.

Discounted payback discounts cash flows at the cost of capital before accumulating them.

NPV = present value of cash inflows − initial investment; accept a project if NPV is positive.

IRR is the discount rate at which NPV = 0; accept if IRR exceeds the cost of capital.

Profitability index = present value of cash inflows ÷ initial investment; use it to rank projects under capital rationing.

Annuity factor = [1 − (1 + r)^−n] ÷ r; perpetuity factor = 1 ÷ r; growing perpetuity factor = 1 ÷ (r − g).

Relevant cash flows are incremental, after tax and in nominal terms when discounted at a nominal rate.

Tax: capital allowances reduce taxable profit; tax cash flows are usually assumed one year in arrears unless told otherwise.

Capital rationing: divisible projects are ranked by profitability index; indivisible projects require trial combinations to maximise total NPV.

Activity-based costing assigns overhead to products via activities and cost drivers; it improves accuracy where overheads are large and products diverse.

Target costing: target cost = competitive selling price − required profit margin; the cost gap must be closed through design and process improvement.

Life-cycle costing accumulates costs over a product's entire life, including design, development, manufacturing and end-of-life costs.

Throughput accounting: throughput = sales − direct material cost; throughput per bottleneck hour is used to rank products.

Just-in-time systems reduce inventory and waste but increase dependence on reliable suppliers and demand forecasting.

Big data and data analytics support forecasting, cost driver analysis and performance monitoring; data quality and governance remain critical.

Automation and AI shift management accounting from data gathering to interpretation, scenario modelling and decision support.

Environmental management accounting (EMA) identifies environmental costs and benefits, often hidden in general overhead, to support sustainable decisions.

Digital costing systems (ERP) integrate cost data across the value chain, enabling real-time variance analysis and faster reporting.