Cost and Management Accounting: Costing, Decisions and Control
Cost classification and flow
Start with the distinction between product and period costs, direct and indirect costs, and fixed, variable and semi-variable behaviour. Master the flow of costs through raw materials, work in progress and finished goods, and the treatment of normal versus abnormal losses (normal loss is absorbed into the cost of good output; abnormal loss is written off to profit or loss).
Overheads and costing methods
Understand absorption costing (predetermined overhead absorption rates, under- and over-absorption) versus activity-based costing, which attacks the distortion caused by spreading overheads on a single volume base. Job, batch, contract and process costing each have signature features - contract costing uses work certified and retention; process costing uses equivalent units for opening and closing WIP.
Decision techniques
Marginal costing underpins short-term decisions: accept a special order if the incremental revenue exceeds incremental cost (and no better use of capacity exists); make-or-buy on avoidable costs; shut-down decisions on avoidable fixed costs. Beyond the short term, discounted cash flow governs. Standard costing yields variances - price and usage for materials, rate and efficiency for labour, expenditure and volume for overheads, and the sales price/volume split. Always ask whether a variance is favourable from whose perspective (a favourable purchase price variance may signal poor quality).
Traps and rule of thumb
- Treating sunk costs or allocated fixed overheads as relevant.
- Mixing up equivalent units under FIFO and weighted average.
- Forgetting that a limiting factor decision ranks products by contribution per unit of the scarce resource.
Worked example: two products use the same machine hour; A gives contribution 30 per hour, B gives 45 per hour. With 1,000 machine hours, prioritise B: 1,000 × 45 = 45,000 maximum contribution, not simply the product with the highest unit contribution.