Fundamentals of Cost & Management Accounting
Cost and management accounting provides internal information for planning, control, and decision-making. Candidates must understand cost classification (direct/indirect, fixed/variable, product/period), cost accumulation (job, batch, process costing), overhead absorption, marginal vs absorption costing, cost-volume-profit (CVP) analysis, budgeting, and standard costing with variances.
Traps to watch
- Confusing contribution (sales − variable costs) with profit.
- Forgetting that under absorption costing, fixed overhead is included in product cost; under marginal costing it is a period cost.
- Mixing favourable and adverse variances - check the sign carefully.
- Using the wrong denominator when computing overhead absorption rates.
Worked example
Fixed costs = 50,000; selling price = 20; variable cost = 12. Contribution per unit = 8. Break-even units = 50,000 / 8 = 6,250 units. To earn a target profit of 10,000, required units = (50,000 + 10,000) / 8 = 7,500 units. Rule of thumb: break-even = fixed costs ÷ contribution per unit; margin of safety = actual sales − break-even sales.
Variances
A favourable variance increases profit; adverse reduces it. Investigate significant variances rather than all variances.