Management Accounting

0 · How to Use Thisread first

No final exam. You're graded by two timed online class tests on iLearn (25% + 25%) plus weekly assignments (15%), participation (15%) & an Excel assignment (20%). Test I = Wks 1–7 (this side); Test II = Wks 8–12 (flip over).

This unit is formula- & procedure-driven: marks come from setting the calculation up correctly. So this sheet is a formula + worked-template bank — recognise the question type, grab the right formula, lay out the schedule.

1 · Cost ConceptsWk1 · Ch1–3

Management vs financial accounting: internal decisions / future-oriented / no GAAP / flexible — vs external / past / regulated.

Classify every cost

• By traceability: direct (traced) vs indirect (allocated)
• By function: product (DM + DL + MOH) vs period (selling & admin)
• By behaviour: variable · fixed · mixed (step)
• Combos: prime = DM + DL · conversion = DL + MOH

Product cost flows: DM + DL + MOH → WIP → finished goods → COGS (only at sale). Relevant range · the activity band where fixed/variable behaviour holds.

1b · Cost Flows & Behaviourthe plumbing

Manufacturing cost flowDM purchased → Raw Materials → (used) WIP
+ DL + applied MOH → WIP
→ completed → Finished Goods
→ sold → COGS (expense)

COGM = beg WIP + DM used + DL + MOH applied − end WIP. COGS = beg FG + COGM − end FG.

Split a mixed cost — high-low: VC/unit = (cost_high − cost_low)/(units_high − units_low); then FC = total cost − VC × units. Per-unit fixed cost falls as volume rises — never unitise fixed costs for decisions.

Worked · high-low

Highest month: 9,000 units cost $74,000. Lowest: 4,000 units cost $44,000. VC/unit = (74,000−44,000)/(9,000−4,000) = $6/unit. FC = 74,000 − 6×9,000 = $20,000. So cost equation y = 20,000 + 6x; at 6,500 units ⇒ $59,000. Trap: use the highest & lowest activity rows, not the highest/lowest cost rows. High-low uses only two points, so it ignores the middle data — regression is more accurate.

2 · CVP AnalysisWk2 · Ch18

How profit responds to volume, price & cost. Built on the contribution margin.

Core CVP formulasCM/unit = Price − VC/unit
CM ratio = CM / Sales
BEP units = FC / CM per unit
BEP $ = FC / CM ratio
Target-profit units = (FC + profit) / CM unit
Margin of safety = actual sales − BEP sales

Worked · break-even

Price $50, VC $30, FC $80,000. CM/unit = $20 ⇒ BEP = 80,000/20 = 4,000 units ($200,000). For $40k profit: (80,000+40,000)/20 = 6,000 units.

Operating leverage = CM / profit — high leverage ⇒ profit swings hard with sales. Assumptions: linear costs, constant mix, units made = sold.

Margin of safety

MoS $ = actual sales − BEP sales
MoS % = MoS / actual sales

The buffer before you slip into loss. Above: 6,000 vs 4,000 BEP ⇒ MoS = 2,000 units (33%).

Multi-product CVP

Use the weighted-average CM at the sales mix: w-CM = Σ(CM/unit × mix%). BEP units = FC / w-CM, then split back by the mix. A shift toward low-CM products raises break-even.

CVP graph

Total-revenue & total-cost lines cross at break-even; the widening wedge above = profit, below = loss. A profit-volume chart plots profit directly against units.

Worked · target profit + what-if

Same data (P $50, VC $30, FC $80k). Target profit $50,000 ⇒ units = (80,000+50,000)/20 = 6,500 units ($325,000 sales). What-if FC rise $10,000 & price cut to $48: new CM/unit = 18 ⇒ new BEP = 90,000/18 = 5,000 units. Profit at 6,500 = 6,500×18 − 90,000 = $27,000.

CM income statement

After-tax target: gross up first — required pre-tax profit = after-tax profit ÷ (1 − tax rate), then use the normal target formula. E.g. want $42k after 30% tax ⇒ pre-tax = 42,000/0.70 = $60,000.

3 · Job CostingWk3 · Ch4

For custom / distinct jobs (each batch unique). Costs accumulate on a job cost card: DM + DL traced directly; MOH applied via a rate.

Overhead applicationPOHR = est. total MOH / est. total driver
Applied MOH = POHR × actual driver used
Over/under-applied = Applied − Actual MOH

Disposition: over-applied (applied > actual) ⇒ credit/reduce COGS; under-applied ⇒ add to COGS (or prorate across WIP/FG/COGS if material).

Worked

Est MOH $200k, est 10,000 DLH ⇒ POHR = $20/DLH. Job uses 120 DLH ⇒ applied = $2,400.

Cost-flow journals

DM used Dr WIP / Cr Raw Materials · DL Dr WIP / Cr Wages · apply MOH Dr WIP / Cr MOH Applied · finish Dr FG / Cr WIP · sell Dr COGS / Cr FG.

Normal costing = actual DM + actual DL + applied MOH (predetermined rate, available immediately). Actual costing waits for real MOH at period-end — too late for pricing/quotes.

Worked · job cost build-up

Job 207: DM $3,200; DL 120 DLH @ $25 = $3,000; MOH applied = 120 × $20 = $2,400 ⇒ total job cost $8,600. Output 200 units ⇒ $43/unit. Mark-up 40% ⇒ price $60.20/unit.

Worked · over/under-applied

Actual MOH for year $208,000; applied (10,400 DLH × $20) = $208,000? — say applied = $205,000. Then under-applied $3,000 (applied < actual) ⇒ Dr COGS / Cr MOH $3,000. If applied had exceeded actual, it would be over-applied ⇒ credit COGS (income up). Prorate across WIP/FG/COGS only if the amount is material.

Read the sign

• Under-applied = applied < actual ⇒ costs were understated ⇒ add to COGS (debit)
• Over-applied = applied > actual ⇒ costs overstated ⇒ subtract from COGS (credit)
• Material balance ⇒ prorate by the MOH in ending WIP, FG & COGS
• The rate (POHR) never changes mid-year — only the disposition adjusts

4 · Process CostingWk4 · Ch4–5

For mass, identical units flowing through processes. Cost per unit = total process cost / equivalent units (EU).

Equivalent unitsWeighted-avg EU = units completed
  + (ending WIP × % complete)
FIFO EU = beg WIP × % to finish
  + started & completed + ending WIP × %
Cost/EU = cost ÷ EU (WA: incl. beg; FIFO: this period only)

5-step report

1. Physical flow of units
2. Equivalent units (split DM vs conversion)
3. Cost per equivalent unit
4. Assign cost to completed + ending WIP
5. Reconcile costs (in = out)

DM & conversion often have different % complete — compute EU separately for each.

Worked · weighted-average

Completed 8,000; ending WIP 2,000 @ 50% conversion (100% materials). EU_mat = 10,000; EU_conv = 8,000 + 1,000 = 9,000. Conversion cost $90,000 ⇒ $10/EU; ending-WIP conversion = 1,000 × $10 = $10,000.

FIFO vs WA: FIFO counts only this period's work — it strips out beginning-WIP work done last period, giving a purer current-period unit cost (WA blends the two).

Worked · cost reconciliation (WA)

Above: EU_mat 10,000, EU_conv 9,000. Materials cost $50,000 ⇒ $5/EU; conversion $90,000 ⇒ $10/EU ⇒ total $15/EU.

Reconciles to costs in: $50,000 + $90,000 = $140,000. Step 5 must balance — if "in" ≠ "out", an EU or cost figure is wrong.

Worked · FIFO equivalent units

Beg WIP 1,500 @ 40% conversion done; started 8,500; completed 8,000; end WIP 2,000 @ 50%. FIFO conversion EU = beg to finish (1,500×60%) + started&completed (8,000−1,500=6,500) + end (2,000×50%) = 900 + 6,500 + 1,000 = 8,400 EU. (WA would add back the 600 done last period.)

5 · Overhead CostsWk5 · Ch7

Indirect costs can't be traced — they're allocated via a base/driver.

• Plantwide rate — one rate, one base (simple, can distort)
• Departmental rates — a rate per department (more accurate)
• Two-stage: costs → cost pools/departments → products

Choose a cost driver that actually causes the cost (labour hrs, machine hrs). Bad base ⇒ cost distortion (over/under-costing products).

Worked · plantwide vs dept

MOH $600k. Plantwide: 30,000 DLH ⇒ $20/DLH. Departmental: Machining $400k ÷ 20,000 MH = $20/MH; Assembly $200k ÷ 25,000 DLH = $8/DLH. A machine-heavy job now picks up cost via MH, not DLH ⇒ departmental rates stop labour-light jobs being under-costed. Two-stage: overhead → cost pools/departments → products via each pool's own driver. The base must move with the cost it carries, or products are over/under-costed.

6 · Activity-Based CostingWk6 · Ch8

Assigns overhead through multiple activities, each with its own driver — fixes the distortion of one plantwide rate.

ABC steps1 identify activities & cost pools
2 activity rate = pool cost / driver volume
3 product cost = Σ(rate × driver used) + DM + DL

ABC only beats volume costing when there are several real drivers & products use them unevenly. One dominant driver ⇒ traditional wins (ABC's cost > benefit).

Worked · activity rate

Setup pool $120,000 ÷ 600 setups = $200/setup. Product A needs 50 setups ⇒ $10,000 assigned; repeat for machining & inspection pools, then ÷ units for per-unit overhead.

Hierarchy of activities

• Unit-level — per unit made (machining, power)
• Batch-level — per batch (setups, inspections)
• Product-level — per product line (design)
• Facility-level — plant-sustaining (rent) — not driver-traced

6b · ABC vs Volumeclassic compare

Distortion pattern: traditional costing over-costs high-volume simple products & under-costs low-volume complex ones.

Symptom in practice: healthy reported margins on low-volume specials, yet falling overall profit — a classic sign that a single volume base is under-costing the complex line.

6c · Why ABC Shifts Costthe intuition

Low-volume, complex products trigger many setups/inspections but a plantwide labour rate spreads overhead by volume — so they look cheap. ABC charges them for the activities they actually cause ⇒ their cost rises; simple high-volume products fall.

Worked · cost shift, 2 products

MOH $300k; Hi (high-vol, 9,000 u, 6,000 DLH, 20 setups), Lo (low-vol, 1,000 u, 2,000 DLH, 80 setups). Plantwide $300k/8,000 DLH = $37.50/DLH ⇒ Hi gets $225k ($25/u), Lo $75k ($75/u). ABC: setups 100 ⇒ $3,000/setup ⇒ Hi $60k ($6.67/u), Lo $240k ($240/u). Lo's cost jumps $75→$240/u — it was being massively under-costed.

Job vs Processpick the system

Hybrid (operation) costing suits products with common processing but custom finishes (cars, clothing) — process-cost the conversion, job-cost the materials.

Formula BeltTest I

CM/unit = P − VC · CM ratio = CM/Sales
BEP units = FC/CM unit · BEP$ = FC/CM ratio
Target units = (FC+profit)/CM unit
MoS = sales − BEP · op leverage = CM/profit
High-low VC = ΔCost/ΔUnits
POHR = est MOH/est driver
Applied = POHR × actual driver
Over/under = applied − actual
EU(WA) = done + endWIP×% · Cost/EU = cost/EU
ABC rate = pool / driver volume
COGM = begWIP + DM + DL + MOH − endWIP

7 · Absorption vs VariableWk8 · Ch6–7

The only difference: where fixed manufacturing overhead goes.

Income differenceAbs − Var income = ΔInventory units × FMOH/unit
Prod > Sales (inv ↑) ⇒ Absorption higher
Prod < Sales (inv ↓) ⇒ Variable higher

Why: absorption defers fixed MOH in unsold inventory; variable expenses it all now. Danger: absorption lets managers overproduce to bury fixed cost in inventory and inflate reported profit; variable costing removes that incentive.

Worked · reconcile

Produce 10,000, sell 8,000; FMOH $50,000 ⇒ $5/unit. Inventory rises 2,000 units, so absorption defers 2,000 × $5 = $10,000 ⇒ Absorption income = Variable income + $10,000.

Worked · full reconciliation

Same firm: P $40, DM+DL+VMOH $18/u, FMOH $50k (⇒ $5/u at 10,000 made), fixed S&A $20k. Sold 8,000.

Abs COGS = 8,000×$23; Var COGS = 8,000×$18. Gap = $10,000 = 2,000 inv units × $5 FMOH deferred. ✓

Service costing

Professional firms (audit, consulting): trace labour to clients/jobs; allocate support overhead — client/job profitability analysis.

Variable costing's CM format is what feeds CVP & relevant-cost decisions — that's why managers prefer it internally even though GAAP reporting needs absorption. Over the long run (steady inventory) the two methods report the same cumulative profit — timing only.

8 · Relevant CostsWk9 · Ch19

Relevant cost = future + differs between options. Ignore sunk costs & unavoidable allocated overhead.

• Sunk — already spent (equipment depreciation) ⇒ irrelevant
• Opportunity cost — value of the forgone alternative ⇒ relevant
• Avoidable fixed cost ⇒ relevant; unavoidable ⇒ not

Make-or-buy template

Compare per unitCost to MAKE (avoidable only):
 DM + DL + variable MOH + avoidable FMOH
 + opportunity cost of freed capacity
vs Cost to BUY = supplier price
⇒ choose the lower

Worked · make-or-buy

Make/unit: DM $6 + DL $4 + VMOH $2 + avoidable FMOH $3 = $15 (allocated general OH $4 is unavoidable — ignore). Supplier $16 ⇒ make ($15) < buy ($16) — unless freed capacity earns > $1/unit elsewhere.

Other decisions

• Special order: accept if price > relevant variable cost & there's spare capacity (ignore fixed)
• Keep / drop a segment: drop only if its lost CM < the fixed costs actually saved
• Sell or process further: process only if extra revenue > extra cost (joint costs to split-off are sunk)
• Add / drop product: compare CM gained/lost vs avoidable fixed costs
• Constrained resource: rank by CM per scarce unit

Worked · special order

Spare capacity. Normal price $40; one-off order 1,000 units at $25. Variable cost $18/u; fixed unchanged. Relevant: $25 − $18 = $7/u × 1,000 = $7,000 extra profit ⇒ accept. Fixed cost & normal price are irrelevant (capacity is idle).

Worked · keep / drop

Segment CM $60,000; allocated fixed $80,000 of which only $45,000 is avoidable. Drop test: lose CM $60,000, save $45,000 ⇒ profit falls $15,000 ⇒ keep. The $35,000 unavoidable fixed just reallocates to other segments.

9 · Product Mix · LPWk10 · Ch20

With a constrained resource (machine hrs, labour), maximise profit by ranking on CM per unit of the scarce resource — not CM per unit.

Ranking ruleCM per constraint = CM per unit / resource per unit
⇒ make the highest first until the constraint runs out

Linear programming

• Objective function — maximise total CM
• Constraints — resource limits (inequalities)
• Binding constraint — the one fully used at the optimum
• Shadow price — extra CM from one more unit of a binding constraint

Two products + two constraints ⇒ graph the feasible region; the optimum sits at a corner point.

Worked · scarce resource

X: CM $30, 3 machine-hrs ⇒ $10/hr. Y: CM $24, 2 hrs ⇒ $12/hr. Though X has the higher CM/unit, Y earns more per scarce machine-hour ⇒ make Y first. Always rank by CM per constraint, not CM per unit.

Worked · two-constraint corners

Max 30X + 24Y s.t. machine 3X+2Y ≤ 1,200; labour 1X+2Y ≤ 800; X,Y ≥ 0. Solve corners:

Intersection of both binding constraints: 3X+2Y=1,200 & X+2Y=800 ⇒ X=200, Y=300 ⇒ CM $13,200 = optimum. The best mix is always at a corner of the feasible region.

LP solution steps

1. Define variables (X, Y = units)
2. Write the objective: max Σ(CM×units)
3. Write each constraint as ≤ (incl. ≥0)
4. Graph; shade the feasible region
5. Find every corner point; evaluate the objective at each
6. Pick the corner with the highest total CM

Shadow price = the extra CM from relaxing a binding constraint by one unit — the most you'd pay for one more machine-hour. A non-binding constraint has a shadow price of zero (slack remains, so more of it adds nothing).

10 · BudgetingWk11 · Ch9,11

The master budget = a linked chain; each budget feeds the next. Start with sales — everything follows.

The chainSales budget
→ Production (units = sales + desired end FG − beg FG)
→ DM purchases (= used + end − beg) · DL · MOH
→ ending inventory · COGS
→ Cash budget
→ Budgeted income statement & balance sheet

Production units ≠ sales units whenever finished-goods inventory changes. DM purchases ≠ DM used whenever raw-material inventory changes — both use the same +desired-ending −beginning logic.

Cash budget = opening cash + receipts − disbursements ± financing; watch the collection/payment lags.

Worked · production & materials

Sales 10,000; want ending FG 1,500; beginning FG 1,000 ⇒ produce 10,000 + 1,500 − 1,000 = 10,500. DM at 2 kg/unit, want end RM 800 kg, beg 500 kg ⇒ purchase = (10,500×2) + 800 − 500 = 21,300 kg.

Worked · cash collections (lag)

Credit sales: 60% collected in month of sale, 40% next month. Sales Apr $100k, May $120k. May receipts = (0.60×120,000) + (0.40×100,000) = $112,000.

If closing falls below the minimum, the budget triggers financing (borrow); surplus ⇒ repay/invest.

Why budget · behaviour

• Plan — force the numbers before the period
• Coordinate — link sales, ops & finance
• Communicate & authorise spending
• Control — benchmark for variance analysis
• Motivate — targets drive behaviour

Participative (bottom-up) budgeting raises buy-in but risks budgetary slack (padding); top-down is fast but can demotivate. Zero-based rebuilds each line from scratch vs incremental. A rolling (continuous) budget always adds a new month as one drops off.

11 · Standard CostingWk12 · Ch10–11

Set standard costs, compare to actual, split the gap into price & quantity variances. Always label F (favourable) / U (unfavourable).

MaterialsPrice = (AP − SP) × AQ purchased
Usage = (AQ used − SQ allowed) × SP

LabourRate = (AR − SR) × AH
Efficiency = (AH − SH allowed) × SR

OverheadVOH spending = actual VOH − (SR × AH)
VOH efficiency = (AH − SH) × SR
FOH budget = actual FOH − budgeted FOH
FOH volume = budgeted FOH − applied FOH

For a cost, actual < standard ⇒ Favourable. SQ/SH "allowed" = standard per unit × actual output.

Worked · material variances

Std 2 kg @ $5 = $10/unit; made 1,000 units (SQ = 2,000 kg). Actual: 2,200 kg @ $4.80. Price = (4.80−5.00)×2,200 = $440 F; Usage = (2,200−2,000)×5 = $1,000 U ⇒ net $560 U (cheaper price, but over-used).

Worked · overhead variances

VOH std rate $3/DLH; made 1,000 (SH 500). Actual 540 DLH, actual VOH $1,700. Spending = 1,700 − (3×540) = $80 U; Efficiency = (540−500)×3 = $120 U.

FOH: budgeted $6,000; applied $5/DLH × 500 SH = $2,500; actual $6,200. Budget = 6,200 − 6,000 = $200 U; Volume = 6,000 − 2,500 = $3,500 U (under-utilised capacity — applied less than budget).

Causes — who owns it

Interdependence: a favourable material-price variance from cheap inputs can cause an unfavourable usage variance (more waste) — read variances together, not in isolation. Investigate by exception: chase only large or persistent variances, not every small one.

11b · Static vs Flexiblebudget control

Flexible-budget variance isolates efficiency/price effects from the volume effect — the fair way to judge performance.

Worked · static vs flexible

Static plan 1,000 u: revenue $50k, VC $30k, FC $12k ⇒ profit $8k. Actual sold 1,100 u: revenue $53k, VC $34k, FC $12k ⇒ profit $7k. Flex budget @1,100: rev $55k, VC $33k, FC $12k ⇒ profit $10k. Flexible-budget variance = 7k − 10k = $3k U; activity (volume) variance = 10k − 8k = $2k F. The U is real performance; the F is just selling more.

11c · Worked · Labourrate & efficiency

Std 0.5 hr @ $20 = $10/unit; made 1,000 (SH = 500 hr). Actual 540 hr @ $21. Rate = (21−20)×540 = $540 U; Efficiency = (540−500)×20 = $800 U. Both unfavourable — investigate wage rates & productivity.

12 · Test Disciplinedon't lose marks

• Label every variance F or U — the sign is half the mark
• Make-or-buy: list avoidable costs only; flag sunk
• Process costing: pick WA or FIFO & commit
• Budgets: production ≠ sales when inventory changes
• Absorption vs variable: difference = ΔInv × FMOH/unit
• LP: two constraints ⇒ test corner points, don't just rank
• Show the schedule — method marks survive a slip

Formula BeltTest II

Abs−Var = ΔInv × FMOH/unit
Mat price (AP−SP)AQ · usage (AQ−SQ)SP
Lab rate (AR−SR)AH · eff (AH−SH)SR
VOH spend = actVOH − SR×AH · eff (AH−SH)SR
FOH budget = actFOH − budFOH
FOH volume = budFOH − applied
Prod = sales + endFG − begFG
Purch = used + endRM − begRM
CM per constraint = CM/unit ÷ resource/unit
Cash = open + receipts − payments ± fin
SQ/SH allowed = std per unit × actual output