• Global Frameworks: US IMA CMA Part 1 (Cost Management), CIMA Operational Level (P1 Management Accounting).

1. Foundational Cost Classifications
Management accounting provides internal financial data to guide corporate decision-making. Unlike financial accounting, it categorizes costs by how they behave and how they are assigned to products:
  • By Behavior:
    • Variable Costs: Change in direct proportion to shifts in production volume (e.g., raw materials, direct piece-rate labor). Cost per unit remains constant.
    • Fixed Costs: Remain constant in total within a relevant range of production capacity, regardless of volume shifts (e.g., factory rent, executive salaries). Cost per unit decreases as volume increases.
    • Mixed (Semi-Variable) Costs: Contain both fixed and variable elements (e.g., utility bills with a flat base fee plus a usage rate).

  • By Assignment to Cost Objects:
    • Direct Costs: Can be easily and cost-effectively traced to a specific product or department (e.g., wood used to manufacture a table).
    • Indirect Costs: Cannot be easily traced to a specific product; they must be allocated using an overhead distribution rate (e.g., factory supervisor salaries, factory depreciation).

2. Manufacturing vs. Non-Manufacturing Cost Streams
  • Product Costs (Inventoriable Costs): Costs directly tied to manufacturing products. They are capitalized as assets in inventory on the balance sheet and only move to Cost of Goods Sold (COGS) on the income statement when the product is sold.
    • Components: Direct Materials + Direct Labor + Manufacturing Overhead (MOH).

  • Period Costs: Selling, general, and administrative (SG&A) expenses that cannot be capitalized into inventory. They are expensed on the income statement in the period they occur.

3. Linear Mixed Cost Estimation: The High-Low Method
 
To predict future costs, mixed costs must be split into their fixed and variable components. The High-Low Method isolates this behavior by comparing data from the periods with the highest and lowest production volumes:
Variable Cost per Unit (b) = (Cost at Highest Volume − Cost at Lowest Volume) / (Highest Volume − Lowest Volume)
Once the variable cost per unit is determined, the fixed cost component is isolated using data from either the high or low period:

Total Fixed Cost (a) = Total Cost − (b × Volume)
This defines the linear cost function:

Y = a + bX
Where Y equals total projected cost and X equals the target activity volume.
 
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