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ICAN CAP-II: Management Accounting and Decision Making: Relevant Costs and Scarce Resources

ICAN CAP-II · Work through your exam, one topic at a time.

All guide sections

Management Accounting and Decision Making: Relevant Costs and Scarce Resources

Management Accounting and Decision Making tests cost behaviour, relevant costing and performance decisions rather than historical record-keeping alone.

Core rules

  • Separate relevant costs (future, incremental, cash) from sunk costs and allocated fixed overhead.
  • Marginal costing values inventory at variable production cost; absorption costing includes fixed production overhead.
  • CVP: contribution = sales - variable costs; break-even units = fixed costs / contribution per unit.
  • With one limiting factor, rank products by contribution per unit of scarce resource, not profit per unit.
  • Use relevant costing for special orders, make-or-buy, shutdown and accept-or-reject decisions.
  • Variances analyse price, usage, efficiency, expenditure and volume; investigate significant and controllable variances.

Worked example

Machine hours available: 10,000. Product X contribution NGN 30, uses 2 hours; Y contribution NGN 24, uses 1.5 hours. Contribution per hour: X = NGN 15; Y = NGN 16. Rank Y first. Demand for Y is 4,000 units, using 6,000 hours. Remaining 4,000 hours make 2,000 units of X. Total contribution = (4,000 x NGN 24) + (2,000 x NGN 30) = NGN 96,000 + NGN 60,000 = NGN 156,000. Fixed costs are deducted afterwards and do not change the ranking.

Traps

Including sunk research or allocated head-office costs; ranking by unit contribution; ignoring the opportunity cost of using scarce labour; assuming all fixed costs are avoidable in a shutdown; and comparing absorption profit without explaining inventory build-up.