ACT503 Cheatsheet · Cost and Management Accounting

0 · Exam Mapcourse data · brief

“Final exam: open book, date to be determined” (ACT503 first-class administration slides, 2026–27)

The test/exam rubric weights problem identification, critical analysis and application at 50%, comprehension at 40%, and logical expression at 10%. After every result, state the managerial action and why a tempting alternative figure misleads.

Answer spine: name the decision → select the method → show labelled working → check direction and units → recommend an action.

1 · Cost Object FirstC1–2

Direct means economically traceable to the named cost object; indirect means allocated. The same salary can be direct to a line but indirect to each product. Name the object before classifying.

mixed costTotal cost = fixed amount + (variable rate × activity)

2 · Manufacturing FlowC2

DM used = opening raw materials + purchases − closing raw materials
COGM = opening WIP + manufacturing costs incurred − closing WIP
COGS = opening finished goods + COGM − closing finished goods

Prime cost = DM + direct labour. Conversion = direct labour + manufacturing overhead. Labour overlaps; neither subtotal is a fourth cost category.

3 · CVP CoreC3 · numerical

contributionCM/unit = selling price − variable cost/unit
CM ratio = CM ÷ sales = CM/unit ÷ price
Operating income = units × CM/unit − fixed costs

solve for outputBreakeven units = fixed costs ÷ CM/unit
Breakeven sales = fixed costs ÷ CM ratio
Target units = (fixed costs + target OI) ÷ CM/unit

CM ≠ gross margin: CM deducts all variable costs; gross margin deducts COGS, including absorbed fixed manufacturing overhead.

Decision reading: margin of safety answers “how far can sales fall before loss?” Operating leverage answers “how strongly will profit respond to a percentage sales movement?” A high fixed-cost structure raises leverage once it is above breakeven, but it also makes the loss region more exposed.

3b · CVP AssumptionsC3

• Revenue and cost are linear within the relevant range.
• Price, unit variable cost and total fixed cost are known and constant.
• For multiple products, sales mix is constant.
• Units made equal units sold, or inventory change is ignored.

Also assume costs can be separated into fixed and variable components and that the chosen activity driver explains cost. If a requirement attacks an assumption, explain the direction: a step-up in capacity changes fixed cost; a discount changes price; a mix shift changes the weighted contribution margin.

4 · Choose the Costing SystemC4–6

normal job costingPredetermined OH rate = budgeted OH ÷ budgeted base
OH allocated = predetermined rate × actual base used
Job cost = direct materials + direct labour + allocated OH

Actual OH > allocated OH → underallocated → write-off raises COGS. Actual < allocated → overallocated → write-off lowers COGS. Alternatives: adjusted allocation rate; prorate across WIP/FG/COGS; write off to COGS.

Seven steps: job → direct costs → base → indirect pool → budgeted rate → OH at actual base use → total cost. Rate = budgeted ÷ budgeted; allocation = that rate × actual use.

5 · Process CostingC5 · five steps

1. Reconcile physical units.
2. Compute equivalent units for materials and conversion.
3. Summarise costs to account for.
4. Cost per equivalent unit.
5. Assign cost to transferred output and ending WIP; tie back.

EU definition: physical units × completion %. Use separate materials and conversion denominators. Under FIFO, opening WIP contributes only work needed: units × (100% − opening completion).

6 · ABC RefinementC6

Refine when product diversity, indirect cost and competition rise. Improve by tracing more costs directly, opening homogeneous pools, and selecting cause-and-effect drivers.

Activity rate = budgeted pool cost ÷ budgeted driver quantity
Product OH = Σ(activity rate × product driver use)

Under a simple plant-wide system, divide the whole OH pool by the total volume-driver quantity—not one activity pool by that driver's quantity.

ABC changes assignment, not total overhead. Use the result for pricing/product mix, cost reduction/process improvement, design, and planning activities.

7 · Pricing DirectionC7

Target cost/unit = target market price − required operating income/unit
Required operating income = invested capital × target return
Cost-plus price = chosen cost base × (1 + markup %)

Target sequence: product specification → market price → required profit → cost ceiling → value engineering. Full cost is common for recovery, stability and simplicity. A cost is locked in when a prior decision makes it unavoidable, often before it is incurred.

Markup trap: when target income is a percentage of revenue, divide total cost by 1 − target percentage. Adding that percentage to cost gives the wrong price.

8 · Master Budget ChainC8

Production units = sales + desired closing FG − opening FG
Materials usage = production × material/unit
Purchases = usage + desired closing materials − opening materials

Cash budget: cash available → disbursements → financing → closing cash. Receipts follow collection timing; payments follow payment timing. Depreciation is in the income statement, never the cash budget.

Budget ≠ forecast: a forecast predicts what will happen; a budget is a plan and commitment for which someone is answerable. A profitable plan may still need financing because customer credit, supplier credit and inventory separate profit from cash.

9 · Flexible Budget + VariancesC9

Price/rate variance = AQ × (AP − SP)
Efficiency variance = SP × (AQ − SQ allowed for actual output)

For a cost, actual below standard is favourable; for revenue, the direction reverses. The label is arithmetic, not praise. Variable OH splits spending/efficiency. Fixed OH splits spending and production volume; the latter is underused capacity, not overspending.

10 · Relevant DecisionsC10

Variable/fixed is not relevant/irrelevant. A disappearing supervisor salary may be fixed and relevant; a variable amount identical under both options is irrelevant.

11 · Transfer + PerformanceC12–13

Supplier floor = incremental cost + opportunity cost
Buyer ceiling = outside purchase price
ROI = operating income ÷ operating assets
= operating margin × asset turnover
RI = operating income − (required rate × assets)
EVA = after-tax OI − [WACC × (assets − current liabilities)]

Balanced scorecard chain: learning & growth → internal process → customer → financial. The causal arrows, with lead and lag measures, distinguish a scorecard from four lists.

W1 · CVP RebuildC3 worked example

Given: price 90; unit variable cost 54; monthly fixed costs 43,200; target operating income 18,000. Proposal: price 84, advertising +7,200, volume 2,100.

base caseCM/unit = 90 − 54 = 36
CM ratio = 36 ÷ 90 = 40%
BE units = 43,200 ÷ 36 = 1,200
BE sales = 43,200 ÷ .40 = 108,000
Target units = (43,200 + 18,000) ÷ 36 = 1,700
Target sales = 1,700 × 90 = 153,000

proposalNew fixed = 43,200 + 7,200 = 50,400
OI = 2,100 × 30 − 50,400 = 12,600
Sales = 2,100 × 84 = 176,400

Reject on these expectations: sales are 23,400 above the original target-sales figure while OI is 5,400 below target. To restore 18,000 requires 2,280 units, a 34% rise rather than the forecast 24%.

Proof and interpretation

Managerial sentence: “Do not accept the proposal on the 2,100-unit forecast; either protect price/variable cost or establish credible demand of at least 2,280 units.” This completes the application step that a bare 12,600 does not.

CVP Trapsmark check

For a multiple-product case, preserve the assumed sales mix and use the weighted-average CM. If production differs from sales, the simple model's no-inventory-change assumption has failed; say so before applying a one-period result.

W2 · Normal Job CostingC4 worked example

Given: budget OH 1,380,000; budget direct-labour hours 46,000. Actual activity 44,000 hours; actual OH 1,395,000. Job 214: 260 hours, DM 18,400, DL 9,100.

rate then jobBudget OH rate = 1,380,000 ÷ 46,000 = 30/DLH
Job OH = 260 × 30 = 7,800
Job 214 = 18,400 + 9,100 + 7,800 = 35,300

year endAllocated OH = 44,000 × 30 = 1,320,000
Actual − allocated = 1,395,000 − 1,320,000 = 75,000 underallocated

Under direct write-off, COGS rises 75,000. An adjusted-rate method recomputes at actual; proration spreads the difference across WIP, finished goods and COGS. Prorating on allocated OH is more causally precise than using total ending balances.

Why the method is used

Ledger logic: manufacturing-overhead control accumulates actual indirect cost; manufacturing-overhead allocated records the amount applied to production. Keep them separate until the period-end comparison. The job receives only the allocation, never the 1,395,000 actual pool directly.

Direction CheckC4

Never use budget hours in the allocation step. That merely recreates budget OH and forces the difference towards zero by construction.

Disposal chooser: use adjusted rate for the strongest correction; use proration when inventories containing the misallocation are material; use COGS write-off when the difference is immaterial. State purpose, size and whether extra accuracy is worth the work.

W3 · Weighted-Average ProcessC5 worked example

Given: opening WIP 600 litres (materials 100%, conversion 40%), costs 7,200 + 2,160. Started 3,400; transferred 3,200; ending WIP 800 (materials 100%, conversion 25%). Added costs 40,800 + 25,040.

Why opening completion disappears: weighted average blends opening costs and counts all work to date. The supplied 40% opening conversion is the FIFO temptation; do not subtract it here.

Five-step audit trail

Step 1 must reconcile both ways before costs enter. Step 2 keeps materials and conversion separate. Step 3 includes opening plus added cost because the method is weighted average. Step 4 divides each cost column by its matching EU column. Step 5 prices transferred units as fully complete and ending WIP at its own completion percentages.

The assignment has an economic meaning: each transferred litre receives 12 of material and 8 of conversion; an ending litre receives all 12 of material but only 25% × 8 = 2 of conversion. Thus ending WIP is 14 per physical litre, producing 11,200 for 800 litres.

Process TrapsC5

Under FIFO, opening WIP is the first layer completed and transferred; only the work needed to finish it belongs in current-period EU. Started-and-completed units form the next layer. Ending WIP is the final current-period layer.

W4 · Four Direct-Cost VariancesC9 worked example

Standards: steel 2.5 kg at 6; labour 0.8 h at 25 per kettle. Static output 12,000. Actual output 11,400; 29,400 kg at 6.20; 9,400 h at 24.60.

allowed quantities at actual outputSteel SQ = 11,400 × 2.5 = 28,500 kg
Labour SH = 11,400 × 0.8 = 9,120 h

Interpret together: 3,760 F in labour rate accompanies 12,400 U across the two efficiency results. “Favourable” is arithmetic; the purchase/hiring choice may be operationally poor.

Shape before sign

A price/rate variance holds quantity at actual and changes the price. An efficiency variance holds price at standard and changes the quantity. This convention prevents double-counting the overlap. Compute SQ allowed before touching either efficiency formula; here it depends on 11,400 actual kettles, never the 12,000-unit static plan.

Managerial sentence: test whether the lower labour rate reflects less-experienced staff or another common cause of the extra 280 hours and 900 kg; do not investigate four numbers as four unrelated events.

Variance Error ScanC9

• Using static-budget quantity makes both efficiency variances wrong while price/rate stays right.
• Materials price may be recorded at purchase or use; follow the requirement.
• Variable OH efficiency shares labour's base movement; it is not separately manageable.
• Reconcile static-budget OI to actual: F adds, U subtracts.

W5 · Make or BuyC10 worked example

Given: 4,000 panels. In-house unit cost 96 = DM 38 + DL 22 + variable OH 14 + allocated fixed OH 22. Supplier quote 84. Of fixed OH, 6 is avoidable supervision; 16 continues. Freed space earns 30,000.

makeRelevant/unit = 38 + 22 + 14 + 6 = 80
Relevant make cost = 4,000 × 80 = 320,000

buySupplier = 4,000 × 84 = 336,000
Less alternative-space income 30,000
Net relevant buy cost = 306,000

Buy; annual saving 14,000. The 16/unit plant charge fails the “different” test. The 30,000 opportunity benefit is relevant although absent from the accounts.

Reconcile the recommendation

Buying looks dearer before capacity use: 336,000 versus 320,000, a 16,000 disadvantage. Releasing the floor then creates 30,000 of contribution elsewhere, reversing the result to a 14,000 advantage. This is why the opportunity cost must sit beside the explicit cash flows rather than appear as an afterthought.

Qualitative check: after the numerical answer, consider quality, reliability of supply, delivery timing, confidentiality, staff effects and whether the alternative use of space is feasible. These factors do not replace the relevant-cost schedule; they test whether its assumptions hold.

Decision-Family TrapsC10

Opportunity cost = contribution forgone from the best alternative use. Sunk cost is past and irrelevant regardless of size. A disposal loss built from a past book value remains sunk; use future disposal cash flow instead.

12 · Capacity + Transfer PriceC12 fast drill

Source numbers: supplier VC 46; fixed cost 18/unit; outside selling price 72; buyer can purchase outside at 70; order 8,000.

If spare capacity covers only part, split the order: floor 46 inside spare capacity; floor 72 beyond it. A single floor for the whole order is wrong.

13 · Performance VerdictC13 fast drill

Division ROI = 1,440,000 ÷ 8,000,000 = 18%
Margin = 1,440,000 ÷ 12,000,000 = 12%
Turnover = 12,000,000 ÷ 8,000,000 = 1.5
RI = 1,440,000 − 12%×8,000,000 = 480,000
EVA = 1,080,000 − 10%×6,800,000 = 400,000