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ICAP PRC-3 Business and Economic Insights study materials
ICAP PRC-3 Business and Economic Insights study resources

ICAP PRC-3 Business and Economic Insights: Cost and management accounting

ICAP PRC-3 Business and Economic Insights · Work through your exam, one topic at a time.

All guide sections

Cost and management accounting

This domain tests costing systems, cost behaviour, break-even analysis, budgeting and standard-cost variances - the internal numbers managers use rather than the external financial statements.

Core concepts

  • Cost behaviour: fixed, variable, semi-variable (split by the high-low method), and stepped fixed costs. Unit fixed cost falls as volume rises - a common exam trap.
  • Absorption versus marginal costing: absorption assigns fixed production overhead via a predetermined rate (budgeted overhead ÷ budgeted activity) and produces over- or under-absorption; marginal costing treats fixed overhead as a period cost. Profit differs only by the change in inventory multiplied by the fixed overhead absorption rate.
  • CVP: contribution per unit, contribution-to-sales ratio, break-even units = fixed costs ÷ contribution per unit, margin of safety in units or as a percentage.
  • Relevant costing: include future, incremental, cash costs and opportunity cost; exclude sunk costs, committed fixed costs and apportioned overhead.
  • Variances: material price = AQ × (SP − AP); material usage = (SQ − AQ) × SP; labour rate and efficiency; sales price and volume; fixed overhead expenditure and volume. Standard quantity is flexed to actual output.
  • ABC: pools costs by activity and charges them on cost drivers, improving accuracy where overheads are not volume-driven.

Worked example

Price PKR 100, variable cost 60, fixed costs 240,000. Contribution is 40, so break-even is 6,000 units. At sales of 8,000 units the margin of safety is 2,000 units, or 25%. Separately: standard 2 kg per unit at PKR 10; output 1,000 units; actual usage 2,100 kg costing 22,050 (PKR 10.50 per kg). Price variance = 2,100 × (10 − 10.50) = 1,050 adverse; usage variance = (2,000 − 2,100) × 10 = 1,000 adverse.

Traps that cost marks

Multiplying the usage variance by actual quantity instead of standard price; flexing the budget wrongly; comparing marginal-cost profit with absorption profit without the inventory adjustment; treating apportioned fixed overhead as relevant.