Management Accounting and Performance Management
Costing and decision logic
Candidates must be comfortable with cost classification (direct/indirect, fixed/variable, product/period), absorption versus marginal costing, activity-based costing, process costing with normal losses, job and contract costing, and standard costing with variance analysis. Know the purpose of budgets, the behavioural implications of budgeting, and the mechanics of zero-based, incremental and rolling budgets. Beyond costing, performance management requires the balanced scorecard, divisional performance measures (ROI, residual income, economic value added), transfer pricing, and non-financial indicators.
Traps to watch
- Absorption costing profit differs from marginal costing profit only by the fixed overhead absorbed in the change in inventory.
- A favourable variance is not automatically good: buying cheaper material may cause an adverse usage variance.
- Mixing up labour rate and labour efficiency variances, or forgetting idle time.
- Transfer prices above market or below variable cost distort decisions; always check goal congruence.
- Residual income is an absolute amount; ROI is a percentage. A division can improve ROI while reducing overall value.
Worked example
Budget: 1,000 units, 2 kg each at 5 per kg. Actual: 900 units, 1,850 kg at 5.20 per kg. Material price variance = (5.20 − 5.00) × 1,850 = 370 adverse. Material usage variance = (1,850 − 1,800) × 5.00 = 250 adverse, where 1,800 kg is the standard quantity for actual output. Total material variance = 620 adverse.
Rule of thumb
Always flex the budget to actual output before judging performance, and isolate the cause of each variance rather than netting them.