Management Accounting
& Control

The two disciplines serve different audiences and operate under different constraints. Knowing these distinctions is a common exam starting point.

Modern MA is not just about cost - it supports the entire strategic management cycle. Key success factors (KSFs) are the performance dimensions that determine competitive success in a given market.

• Cost efficiency: Delivering value at competitive cost - linked to cost leadership strategy.
• Quality: Conformance and performance quality - reduces failure costs.
• Time: Speed to market, delivery lead times, cycle time reduction.
• Innovation: New products, processes, and business models.
• Customer satisfaction: Repeat business, loyalty, and lifetime value.

MA sits at the heart of the management cycle - connecting strategy to operational execution through four linked activities.

The direct/indirect distinction is about traceability to a cost object (a product, department, customer, or project) - not about behaviour.

This distinction determines whether a cost flows through the balance sheet (as inventory) or hits the income statement immediately.

Two methods exist for assigning costs to products. They differ only in the treatment of fixed manufacturing overhead.

The contribution margin (CM) is the amount each unit contributes toward covering fixed costs and then generating profit. It is the engine of CVP analysis.

The break-even point (BEP) is the sales volume at which total revenues equal total costs - zero profit, zero loss.

When a firm sells multiple products with different CMs, the break-even point depends on the weighted average contribution margin based on the sales mix.

Cost-plus pricing starts from cost and adds a mark-up percentage to determine the selling price. The mark-up can be applied to variable cost, total cost, or investment.

Criticisms of Cost-Plus Pricing

• Ignores demand - price set without considering what customers will pay
• Circular reasoning - volume is needed to estimate unit fixed cost, which is needed to set price, which affects volume
• No guarantee of profitability - if volume assumed is wrong, total cost may exceed total revenue
• Wrong decisions possible - budgeted (not actual) activity used to unitise costs can mislead

Target costing is the reverse of cost-plus pricing. The market price is the starting point, not the end point. Most suited to high-volume products in competitive markets.

Kaizen (改善) literally means "continuous improvement." Both approaches aim to reduce costs, but at different stages of the product life cycle.

A special order is a one-time request (often at a discounted price) from a customer outside the firm's normal market. The key test: does the order cover its incremental variable costs and any opportunity costs?

Should the firm produce a component internally or purchase it from an external supplier? Compare the relevant (avoidable) cost of making with the external purchase price.

When a scarce resource (machine hours, labour hours, floor space) limits production, the firm should maximise contribution margin per unit of the scarce resource - not simply CM per unit.

Should the firm add a new product line or drop an existing one? Only avoidable costs - those that disappear if the line is dropped - are relevant.

Both methods assign direct costs identically (actual rate × actual use). They differ only in how indirect costs (overhead) are applied to jobs.

The predetermined overhead absorption rate (OAR) is calculated at the start of the year using budgeted figures. It is then applied to all jobs throughout the year based on actual activity consumption.

Because the OAR uses budgeted figures, the overhead actually applied to jobs will rarely equal actual overhead incurred. The difference is reconciled at year-end.

Every job has a cost sheet that accumulates its three cost components. The total job cost divided by units produced gives the unit cost for pricing and inventory valuation.

ABC reroutes overhead costs through activities before assigning them to products - using the activities that actually cause costs rather than volume proxies.

The cost hierarchy classifies activities by the level at which their costs vary. This is the most exam-tested concept in ABC - know all four levels and their allocation logic.

Not all customers are equally profitable. Some generate high revenue but consume disproportionate service costs (frequent returns, small orders, many deliveries). ABC applied to customers as cost objects reveals true profitability.

Both quality costs and environmental costs follow the same four-category framework: prevention, appraisal, internal failure, and external failure. The goal is to invest more in prevention to reduce the larger costs of failure.

ABC can be extended to environmental costs by treating environmental activities as cost pools with their own drivers. This makes product-level environmental costs visible - supporting eco-design and sustainability reporting.

The master budget is the comprehensive financial plan for the organisation. It consists of two linked blocks: the operating budget (income-focused) and the financial budget (balance-sheet and cash-focused).

Otley's "acid test": any accounting system must produce desirable behaviour from those who receive its information. Budgets are social processes as much as technical ones.

Variances are labelled Favourable (F) if they increase profit, Adverse (A) if they reduce it. Always compute: Actual − Budget (sign determines F or A).

Transfer pricing sets the internal price at which one division sells goods/services to another. The choice of method affects divisional performance measures, goal congruence, and tax efficiency.

RI is the absolute profit earned above the minimum required return on capital. Unlike ROI, it does not penalise managers for accepting value-creating investments.

EVA is a refinement of RI that uses after-tax profit and the actual weighted average cost of capital (WACC) - replacing the arbitrary minimum rate with the true cost of financing the business.

Each BSC entry has four components. This is the standard exam template for constructing or evaluating a BSC.

Full-cost accounting includes environmental and social costs in product cost - applied by P&G via ABC (T1) and Patagonia via Life-Cycle Costing (T2).

The core insight: environmental externalities are reframed as measurable economic liabilities, not purely reputational concerns. ABC is applied in three steps.

Life-Cycle Costing tracks all costs from design through end-of-life - not just manufacturing costs. Patagonia's LCC covers the full chain: Design → Sourcing → Production → Distribution → Repair → End-of-Life.

Patagonia uses responsibility accounting to manage sustainability as rigorously as financial performance. Key programmes operate as cost/responsibility centres with measurable drivers.

McDonald's faces a fundamental tension: it manages costs exceptionally well through standardisation and scale, but its core product (beef) generates substantial environmental impacts - particularly methane from livestock.

The F-35 programme illustrates the limits of job costing when programme scope is poorly defined and technical risks are underestimated.

DNVBs cannot simply price on manufacturing cost. Profitability is measured at the order level - every order must cover its full cost-to-serve.

Many DNVBs eventually open physical stores. This is not a contradiction - it is a strategic response to high CAC and returns online.

Despite impeccable target costing execution, the Nano failed commercially. The course's lesson: target costing requires a delicate balance between price, functionalities, AND quality - the Nano lost the balance.

Tesla positions itself as a sustainability company - but manufacturing EVs has significant environmental costs, particularly battery production (mining lithium, cobalt) and Gigafactory energy use.

Airlines use route-level contribution analysis - equivalent to the relevant cost framework from Part 2 applied to aviation. Each route must cover its avoidable costs to justify flying.

SIA and Scoot share some infrastructure (parent group, Changi hub) but operate as separate profit centres with very different cost models. This is responsibility accounting applied at the subsidiary level.