Management Accounting

How to calculate Variable Cost per Unit (High-Low Method)? --- Formula: (Highest Cost - Lowest Cost) / (Highest Activity - Lowest Activity). EXAM TRAP: Always pick the data points with the highest and lowest ACTIVITY level (units), not the highest/lowest dollar cost! How to calculate Fixed Costs (High-Low Method)? --- Formula: Total Cost - (Variable Cost per Unit Activity Level). Use either the high or low activity point to calculate. How to calculate Direct Material Price Variance (MPV)? --- Formula: (Standard Price - Actual Price) Actual Quantity PURCHASED. Rule: Favourable if Standard Price > Actual Price. How to calculate Direct Material Usage Variance (MUV)? --- Formula: (Standard Quantity Allowed for Actual Output - Actual Quantity USED) Standard Price. EXAM TRAP: Use the actual output units to find the "Standard Quantity Allowed". How to calculate Direct Labour Rate Variance (LRV)? --- Formula: (Standard Rate - Actual Rate) Actual Hours PAID. How to calculate Direct Labour Efficiency Variance (LEV)? --- Formula: (Standard Hours Allowed for Actual Output - Actual Hours WORKED) Standard Rate. EXAM TRAP: Only use active hours worked; exclude idle time! How to calculate Idle Time Variance? --- Formula: (Actual Hours Paid - Actual Hours Worked) Standard Rate. Rule: This is ALWAYS Adverse (U). How to calculate Fixed Overhead Volume Variance? --- Formula: (Actual Production Units - Budgeted Production Units) Standard Fixed Overhead Rate per Unit. Note: This variance only exists in Absorption Costing. How to determine the "Deprival Value" of an asset? --- Rule: It is the LOWER of Replacement Cost and the HIGHER of Net Realisable Value (Scrap) or Expected Future Revenues. How to rank products when a resource is scarce (Limiting Factor)? --- Step 1: Calculate Contribution Margin per Unit. Step 2: Divide by the Limiting Factor consumed per unit. Step 3: Rank and prioritize the product with the HIGHEST contribution per limiting factor. What is the Make or Buy Decision Rule? --- Buy externally if: External Price < In-House Relevant Cost. In-House Relevant Cost = Direct Materials + Direct Labour + Variable Overhead + AVOIDABLE Fixed Overhead + Opportunity Cost of capacity. How to calculate Return on Investment (ROI) and what is its main trap? --- Formula: (Divisional Operating Profit / Divisional Net Assets) 100. TRAP: It can cause sub-optimization (managers rejecting a profitable project just because it lowers their division's high average ROI). How to calculate Residual Income (RI) and why is it preferred? --- Formula: Divisional Operating Profit - (Divisional Net Assets Cost of Capital Rate). Benefit: Resolves ROI sub-optimization. Accept ANY project where RI is greater than $0. How to calculate the Accounting Rate of Return (ARR)? --- Formula: (Average Annual Profit / Average Investment) 100. EXAM TRAP: ARR is the ONLY method that uses accounting profit, not cash flows. You MUST subtract depreciation from cash flows to find profit! How to calculate the Payback Period? --- For constant cash flows: Initial Investment / Annual Net Cash Inflow. For uneven flows: Track cumulative cash flows until the initial investment is recovered. TRAP: Ignore depreciation; use raw cash flows. How to calculate the Economic Order Quantity (EOQ)? --- Formula: Square Root of [(2 Annual Demand Cost per Order) / Annual Holding Cost per Unit]. Goal: It is the exact point where total annual holding costs equal total annual ordering costs. How to calculate the Reorder Level (with uncertainty)? --- Formula: Maximum Lead Time Maximum Usage Rate. Goal: Builds in a safety margin for worst-case scenarios. What are the steps in Target Costing? --- Step 1: Determine target market selling price. Step 2: Subtract required profit margin to find Target Cost. Step 3: Re-engineer/redesign the product to close any "Cost Gap" BEFORE production begins. How do you treat Normal Loss vs. Abnormal Loss in Process Costing? --- Normal Loss is expected; its cost is absorbed by the good units (valued at scrap or zero). Abnormal Loss is unexpected; it is valued at the FULL cost per unit so it doesn't distort the cost of good output. How to calculate Equivalent Units for Closing WIP? --- Formula: Physical WIP Units Completion Percentage for that specific cost element. EXAM TRAP: Materials and Conversion Costs often have different completion percentages and must be calculated separately. Absorption Costing vs. Marginal Costing: Which reports higher profit? --- If Production is GREATER than Sales, Absorption Profit is HIGHER than Marginal Profit. Why? Because a portion of fixed overheads gets deferred (hidden) in closing inventory value under Absorption costing. What is the Principal Budget Factor? --- It is the factor that limits the activities of an organization (usually sales demand). TRAP: It is the FIRST budget prepared because all other functional budgets must be built around this constraint. Zero-Based Budgeting (ZBB) vs. Incremental Budgeting? --- Incremental bases next year on this year + inflation. ZBB ignores history; it requires managers to justify EVERY expense from scratch using "decision packages" ranked by priority. What are the 4 perspectives of the Balanced Scorecard? --- 1. Financial (ROI, EPS), 2. Customer (on-time delivery, satisfaction), 3. Internal Business Process (quality control, setup times), 4. Learning & Growth (training hours, staff turnover). What is the Minimum Transfer Pricing Rule (Selling Division)? --- Minimum TP = Incremental Out-of-Pocket Cost per Unit + Opportunity Cost per Unit. (If excess capacity, Opp Cost = $0. If full capacity, Opp Cost = lost external contribution). What is the Maximum Transfer Pricing Rule (Buying Division)? --- Maximum TP = Lower of External Market Purchase Price OR Maximum Target Input Cost. How to calculate an Activity-Based Costing (ABC) Driver Rate? --- Formula: Total Costs in Activity Cost Pool / Total Quantity of Activity Cost Driver. TRAP: ABC uses transaction drivers (e.g., setups, orders) for non-volume overheads, correcting the distortion of traditional labour-hour costing. Standard Costing: Ideal vs. Attainable Standards? --- Ideal assumes perfect conditions with zero waste (highly demotivating). Attainable assumes efficient operations with normal allowances for waste (best for motivation, planning, and inventory valuation). What is the Relevant Costs Rule for Decision Making? --- INCLUDE: Future incremental cash flows, opportunity costs, avoidable fixed costs. EXCLUDE: Sunk costs, non-cash items (depreciation), and general apportioned overheads. How to calculate Break-Even Sales Revenue? --- Step 1: Find Contribution to Sales (C/S) Ratio = Contribution per Unit / Selling Price. Step 2: Break-Even Revenue = Total Fixed Costs / C/S Ratio. How to calculate Margin of Safety (Percentage)? --- Formula: (Budgeted Sales Units - Break-Even Sales Units) / Budgeted Sales Units * 100. TRAP: Always divide by the Budgeted/Actual sales, never by the break-even sales! What causes an Unfavourable Direct Material USAGE Variance? --- Using more physical material than the standard allows. Common causes: Poor quality materials, untrained staff, or machine malfunctions. TRAP: Trade discount changes affect PRICE variance, not usage.