Cost, budgeting, and variance
The Cost Machine
Split fixed from variable, then feed the right numbers into high-low, a costing reconciliation, CVP, or an incremental decision.
How the exam words it
- -The stem gives cost at a high and a low activity level and asks for the variable rate or the fixed cost.
- -It gives production and sales quantities and fixed overhead and asks how absorption and variable costing income differ.
- -It gives price, variable cost, and fixed cost and asks for breakeven or the units for a target profit.
- -It describes a special order, a make-or-buy, or a sell-or-process-further choice and asks whether to accept.
The playbook
- 1For high-low, divide the change in cost by the change in activity for the variable rate, then back into fixed cost at either point.
- 2Reconcile the costing methods with fixed overhead per unit times the change in inventory units: absorption income is higher when production exceeds sales.
- 3For CVP, divide fixed costs (plus any target profit) by the contribution margin per unit, or by the CM ratio for a dollar breakeven.
- 4For a decision, compare only incremental future amounts: accept a special order priced above variable cost, and ignore sunk and unavoidable allocated costs.
The trap
Letting an allocated fixed cost into a special-order decision, or using variable cost instead of contribution margin for breakeven. With idle capacity only incremental cost is relevant.
How the exam varies it
The same pattern, re-skinned along these axes:
Cost behavior (high-low) versus a costing-method reconciliationCVP breakeven versus a target-profit volumeSpecial order versus make-or-buy versus sell-or-process-further
Drill this pattern
8 questions of The Cost Machine from across the AUD topics. Clear it by getting 5 right with a streak of 3.