US CMA Part 1 — Cost Accounting Fundamentals: Complete Study Notes ,Text your querries on 9773464206.

US CMA Part 1 — Cost Accounting Fundamentals: Complete Study Notes ,Text your querries on 9773464206.

Below is a CMA Part 1 exam-oriented master summary covering the major cost-accounting concepts, formulas, examples, journal entries, and decision implications.

1. COST — BASIC MEANING

Cost = sacrifice of resources made to obtain a product, service, asset, or benefit.

Example:

A company purchases raw material for ₹100,000.

• ₹100,000 = cost of acquiring the material.
• When the material is used in production, it becomes a manufacturing cost.
• When the product is sold, the related manufacturing cost becomes COGS.

Cost flow

Raw Materials → Work in Process → Finished Goods → Cost of Goods Sold

2. TYPES OF COST

A. Direct Cost

A cost that can be conveniently and economically traced to a specific cost object.

Examples:

• Direct material
• Direct labor
• Special equipment used for one job

Example

A furniture company makes Table A.

Wood costing ₹5,000 used specifically for Table A = direct material cost.

3. INDIRECT COST

A cost that cannot be conveniently traced to one specific cost object.

Examples:

• Factory supervisor salary
• Factory electricity
• Factory rent
• Factory depreciation
• Indirect materials
• Indirect labor

Indirect manufacturing costs are generally classified as manufacturing overhead.

4. PRIME COST

Formula

Prime Cost = Direct Material + Direct Labor + Direct Expenses

Example:

Cost	₹
Direct material	50,000
Direct labor	30,000
Direct expense	5,000
Prime cost	85,000

CMA shortcut

Prime = Direct Material + Direct Labor + Direct Expenses

5. CONVERSION COST

Conversion cost represents the cost of converting raw materials into finished products.

Formula

Conversion Cost = Direct Labor + Manufacturing Overhead

Example:

Direct labor = ₹40,000
Factory overhead = ₹60,000

Conversion cost = ₹100,000

6. MANUFACTURING / PRODUCTION COST

Generally:

Manufacturing Cost = Direct Material + Direct Labor + Manufacturing Overhead

Example:

DM = ₹100,000
DL = ₹60,000
MOH = ₹40,000

Manufacturing cost = ₹200,000

7. MANUFACTURING OVERHEAD

Manufacturing overhead includes all manufacturing costs other than direct material and direct labor.

Examples:

• Indirect materials
• Indirect labor
• Factory rent
• Factory electricity
• Factory insurance
• Factory depreciation
• Factory supervisor salary
• Factory maintenance

8. FACTORY OVERHEAD VS NON-PRODUCTION OVERHEAD

Factory/manufacturing overhead

Related to manufacturing.

Examples:

• Factory rent
• Factory depreciation
• Factory supervisor
• Factory utilities

Non-production overhead

Not directly related to manufacturing.

Examples:

Selling expenses

• Sales commission
• Advertising
• Salesperson salary

Administrative expenses

• Head-office rent
• Accountant salary
• Legal expenses
• Corporate office depreciation

These are generally period costs, not inventoriable manufacturing costs.

9. INVENTORIABLE COSTS

An inventoriable cost is initially recorded as an asset/inventory cost and becomes expense when the inventory is sold.

For a manufacturer:

Direct Material + Direct Labor + Manufacturing Overhead

are generally inventoriable under absorption costing.

Flow

Inventory → COGS when sold

10. PERIOD COSTS

Costs charged against income in the period incurred rather than included in inventory.

Examples:

• Selling expenses
• Administrative expenses
• Advertising
• Corporate office expenses

11. COST OBJECT

A cost object is anything for which management wants to measure cost.

Examples:

• Product
• Customer
• Department
• Project
• Service
• Job
• Contract
• Distribution channel

CMA exam question

"If management wants to determine the cost of serving Customer A, Customer A is the..."

Answer: Cost object

12. ACTIVITY

An activity is an action or process that consumes resources.

Examples:

• Machine setup
• Purchase ordering
• Quality inspection
• Material handling
• Processing customer orders

13. ACTIVITY COST

The cost associated with performing an activity.

Example:

Annual machine setup cost = ₹500,000.

If the company performs 1,000 setups:

Activity cost per setup = ₹500

14. COST POOL

A cost pool is a collection of costs associated with a particular activity or cost center.

Example:

Machine setup cost pool:

• Setup labor = ₹300,000
• Setup supplies = ₹100,000
• Setup-related depreciation = ₹100,000

Total setup cost pool = ₹500,000

15. COST DRIVER

A cost driver is a factor that causes or influences the cost of an activity.

Examples:

Activity	Cost Driver
Machine setup	Number of setups
Purchasing	Purchase orders
Inspection	Number of inspections
Material handling	Material movements
Machine operation	Machine hours
Shipping	Number of shipments

ABC formula

Activity Rate = Cost Pool ÷ Expected Cost Driver Activity

Example:

Setup cost pool = ₹600,000
Expected setups = 1,200

Activity rate:

₹600,000 ÷ 1,200 = ₹500 per setup

16. COST TRACING VS COST ALLOCATION

Cost tracing

Directly identify the cost with a cost object.

Example:

Wood used specifically for Product A = traced directly to Product A.

Cost allocation

Assign an indirect cost to cost objects using an allocation base.

Example:

Factory rent allocated based on square feet.

Remember

Direct cost → Trace

Indirect cost → Allocate

17. ALLOCATION BASE

An allocation base is the measure used to assign indirect costs.

Examples:

• Direct labor hours
• Direct labor cost
• Machine hours
• Units produced
• Square feet
• Material cost

18. ALLOCATION, APPORTIONMENT & REAPPORTIONMENT

Allocation

Assigning an entire cost to a specific department when directly identifiable.

Example:

Factory supervisor exclusively working in Department A → allocated to Department A.

Apportionment

Dividing a common cost among departments using a reasonable basis.

Example:

Factory rent:

• Department A = 60%
• Department B = 40%

Reapportionment

Redistributing service/support department costs to production departments.

Example:

Maintenance Department → Production Department A & B.

19. BLANKET OVERHEAD RATE

A single overhead rate used for the entire plant.

Formula

Blanket OH Rate = Total Factory Overhead ÷ Total Allocation Base

Example:

Factory overhead = ₹1,000,000
Machine hours = 50,000

Rate = ₹20 per machine hour.

Advantage

Simple.

Disadvantage

May cause inaccurate product costs when different departments consume overhead differently.

20. DEPARTMENTAL OVERHEAD RATE

Different overhead rates are calculated for different departments.

Example:

Machining Department → Machine hours

Assembly Department → Direct labor hours

Usually more accurate than one blanket rate.

21. SUPPLEMENTARY OVERHEAD RATE

A supplementary rate may be used to adjust for underapplied or overapplied overhead.

Example:

Actual overhead = ₹1,050,000
Applied overhead = ₹1,000,000

Underapplied = ₹50,000.

A supplementary rate can be used to distribute the difference among:

• WIP
• Finished Goods
• COGS

22. FIXED COST

A cost that remains constant in total within the relevant range as activity changes.

Examples:

• Factory rent
• Insurance
• Salaried supervisor

Important:

Fixed cost per unit changes as volume changes.

Example:

Fixed cost = ₹100,000

At 10,000 units:

₹10/unit

At 20,000 units:

₹5/unit

23. VARIABLE COST

A cost that changes in total in proportion to activity.

Example:

Material cost = ₹10 per unit.

Units	Total Variable Cost
1,000	₹10,000
2,000	₹20,000
5,000	₹50,000

Variable cost per unit remains constant within the relevant range.

24. MIXED / SEMIVARIABLE COST

Contains both fixed and variable components.

Formula

Y = a + bX

Where:

• Y = total cost
• a = fixed cost
• b = variable cost per unit
• X = activity level

Example:

Telephone cost:

₹5,000 fixed + ₹10 per call.

At 1,000 calls:

₹5,000 + (₹10 × 1,000)

= ₹15,000

25. HIGH-LOW METHOD

Used to separate mixed costs into fixed and variable components.

Formula

Variable Cost per Unit = Change in Total Cost ÷ Change in Activity

Example:

Activity	Total Cost
10,000 units	₹180,000
6,000 units	₹140,000

Variable cost:

(₹180,000 − ₹140,000) ÷ (10,000 − 6,000)

= ₹40,000 ÷ 4,000

= ₹10/unit

Fixed cost:

₹180,000 − (₹10 × 10,000)

= ₹80,000

Cost equation:

Y = ₹80,000 + ₹10X

CMA trap

Do not automatically select the highest and lowest cost. Select the highest and lowest activity levels.

26. RELEVANT RANGE

The relevant range is the range of activity within which cost behavior assumptions remain valid.

Example:

Factory rent = ₹100,000 for production between 10,000 and 20,000 units.

If production increases to 30,000 units, the company may need another facility.

Therefore, ₹100,000 fixed cost may no longer apply.

27. STEP COST

A step cost remains constant within a range but jumps when activity crosses a threshold.

Example:

One supervisor can supervise up to 10 employees.

Salary = ₹50,000.

Employees	Supervisors	Cost
1–10	1	₹50,000
11–20	2	₹100,000
21–30	3	₹150,000

This is a step cost.

28. COMMITTED FIXED COST

Long-term fixed costs that result from previous decisions.

Examples:

• Factory building
• Long-term lease
• Depreciation
• Property taxes

Usually difficult to change in the short run.

29. DISCRETIONARY FIXED COST

Fixed costs that management can change relatively easily.

Examples:

• Advertising
• Employee training
• Research programs
• Management development

Exam distinction

Committed = difficult to change

Discretionary = management can adjust

30. ENGINEERED COST

A cost having a clear physical/operational relationship between input and output.

Examples:

• Direct material
• Direct labor
• Electricity directly related to machine hours

The relationship can generally be measured objectively.

31. OPPORTUNITY COST

The benefit sacrificed by choosing one alternative over another.

Example:

A machine can produce either Product A or Product B.

Product A contribution = ₹100,000
Product B contribution = ₹70,000.

If management chooses A, opportunity cost of A is the contribution sacrificed from B:

₹70,000

Opportunity cost is generally not recorded in financial accounting books.

32. EXPLICIT COST

Actual monetary expenditure.

Examples:

• Wages paid
• Rent paid
• Material purchased
• Electricity paid

33. IMPLICIT COST

Cost of using resources owned by the company/owner without an actual cash payment.

Example:

Owner uses his own building instead of renting it out.

The lost rental income is an implicit/opportunity cost.

34. ECONOMIC COST

Economic analysis generally considers both:

Explicit Cost + Implicit Cost

Example:

Explicit cost = ₹500,000
Implicit opportunity cost = ₹100,000

Economic cost = ₹600,000

35. SUNK COST

A past cost that has already been incurred and cannot be changed by a current decision.

Example:

A company paid ₹1 million for research last year.

The ₹1 million is a sunk cost for today's decision.

CMA decision rule

Ignore sunk costs when making future decisions.

36. HISTORICAL COST

The original cost incurred to acquire an asset.

Example:

Machine purchased for ₹2 million.

Historical cost = ₹2 million, regardless of its current market value.

37. RELEVANT COST

A future cost that:

1. Differs between alternatives, and
2. Is relevant to the decision.

Relevant cost = Future + Different between alternatives

38. SHORT RUN

In the short run, at least one factor of production is fixed.

Example:

Factory capacity cannot immediately be changed.

Therefore:

Short run → Some resources fixed

Long run → All factors can potentially be changed

39. FACTORS OF PRODUCTION

Traditional economic factors:

1. Land
2. Labor
3. Capital
4. Entrepreneurship

Modern production analysis may additionally emphasize technology, information and knowledge.

40. CAPACITY

Theoretical capacity

Maximum possible production under perfect conditions.

Assumes:

• No downtime
• No maintenance
• No defects
• No interruptions

Usually unrealistic.

Practical capacity

Theoretical capacity minus unavoidable operating limitations.

Includes allowances for:

• Maintenance
• Breakdowns
• Holidays
• Normal downtime

Remember

Theoretical > Practical capacity

41. NORMAL VS ABNORMAL SPOILAGE

Normal spoilage

Expected under efficient operating conditions.

Example:

Normal production process expects 2% defective units.

Normal spoilage is generally treated as a product cost and absorbed by good production.

Abnormal spoilage

Spoilage above the expected normal level.

Example:

Expected spoilage = 2%

Actual spoilage = 5%

Excess 3% = abnormal spoilage.

Abnormal spoilage is generally treated as a period loss and separately recognized.

42. JOB ORDER COSTING

Used when products/services are separately identifiable.

Features

• Each job is unique.
• Costs accumulated by job.
• Job cost sheet maintained.
• Direct materials traced to jobs.
• Direct labor traced to jobs.
• Overhead applied using predetermined rate.

Examples

• Construction
• Custom furniture
• Aircraft
• Specialized machinery
• Advertising agencies
• Legal services
• Custom printing

Formula

Job Cost = DM + DL + Applied OH

43. PROCESS COSTING

Used when large quantities of homogeneous products are produced continuously.

Examples:

• Oil refining
• Chemicals
• Cement
• Paint
• Food processing
• Paper
• Beverages

Costs are accumulated by department/process rather than individual job.

44. JOB ORDER VS PROCESS COSTING

Feature	Job Order	Process
Product	Customized	Homogeneous
Cost accumulation	Job	Process/department
Cost sheet	Job cost sheet	Production report
Examples	Construction	Oil refining
Unit cost	Job cost ÷ units	Process cost ÷ equivalent units

45. JOURNAL ENTRIES — MANUFACTURING COST FLOW

A. Purchase raw materials

Dr. Raw Materials Inventory

      Cr. Accounts Payable/Cash

B. Direct material issued to production

Dr. Work in Process Inventory

      Cr. Raw Materials Inventory

C. Indirect material issued

Dr. Manufacturing Overhead

      Cr. Raw Materials Inventory

D. Direct labor

Dr. Work in Process Inventory

      Cr. Wages Payable

E. Indirect labor

Dr. Manufacturing Overhead

      Cr. Wages Payable

F. Other actual factory overhead

Dr. Manufacturing Overhead

      Cr. Cash/Accounts Payable/Accumulated Depreciation

G. Apply manufacturing overhead

Dr. Work in Process Inventory

      Cr. Manufacturing Overhead

H. Transfer completed goods

Dr. Finished Goods Inventory

      Cr. Work in Process Inventory

I. Sale of finished goods

Two entries are normally required.

Revenue

Dr. Accounts Receivable/Cash

      Cr. Sales Revenue

Cost

Dr. Cost of Goods Sold

      Cr. Finished Goods Inventory

46. OVERHEAD APPLICATION

Predetermined overhead rate

Predetermined OH Rate = Budgeted Manufacturing OH ÷ Budgeted Allocation Base

Example:

Budgeted OH = ₹900,000
Budgeted machine hours = 30,000

Rate:

₹900,000 ÷ 30,000

= ₹30 per machine hour

If Job A uses 500 machine hours:

Applied OH:

500 × ₹30 = ₹15,000

47. OVERAPPLIED OVERHEAD

When:

Applied OH > Actual OH

Example:

Actual OH = ₹950,000
Applied OH = ₹1,000,000

Overapplied = ₹50,000

Under a simple year-end close:

Dr. Manufacturing Overhead

      Cr. Cost of Goods Sold

This reduces COGS.

48. UNDERAPPLIED OVERHEAD

When:

Actual OH > Applied OH

Example:

Actual OH = ₹1,000,000
Applied OH = ₹950,000

Underapplied = ₹50,000

Simple close:

Dr. Cost of Goods Sold

      Cr. Manufacturing Overhead

This increases COGS.

49. PRORATION OF OVER/UNDERAPPLIED OH

If the amount is material, the difference may be prorated among:

• Work in Process
• Finished Goods
• COGS

based on their share of applied overhead.

Exam point

Immaterial amount → often close to COGS

Material amount → prorate among WIP, FG and COGS

50. UNDERCOSTING & OVERCOSTING

Undercosting

A product is assigned less cost than it actually consumes.

Consequences:

• Product appears more profitable.
• Selling price may be set too low.
• Company may expand an unprofitable product.
• Cross-subsidization may occur.

Overcosting

A product is assigned more cost than it actually consumes.

Consequences:

• Product appears less profitable.
• Price may be unnecessarily high.
• Company may discontinue a profitable product.

51. HOW TO OVERCOME COST DISTORTION

A major solution is:

Activity-Based Costing (ABC)

ABC uses multiple activities and cost drivers rather than relying on a single volume-based allocation base.

52. TRADITIONAL VOLUME-BASED COSTING

Traditional costing generally assigns overhead using a volume-related allocation base such as:

• Direct labor hours
• Machine hours
• Direct labor cost

Suitable when:

• Products are relatively homogeneous.
• Overhead is low.
• Production processes are similar.
• Products consume overhead in similar proportions.
• Direct labor/machine hours are a good driver of overhead.

53. ACTIVITY-BASED COSTING

ABC identifies activities that consume resources and assigns costs to products based on their consumption of those activities.

ABC sequence

Resources → Activities → Cost Pools → Cost Drivers → Products

54. WHY ABC IS REQUIRED

Traditional costing can distort product costs when:

• Multiple products exist.
• Products differ substantially.
• Overhead is significant.
• Automation reduces direct labor.
• Setup costs are significant.
• Purchasing/inspection activities vary by product.
• Different products consume support activities differently.

55. ABC EXAMPLE

Suppose:

Setup cost pool = ₹500,000
Number of setups = 1,000

Activity rate:

₹500,000 ÷ 1,000

= ₹500/setup

Product A requires 100 setups:

₹500 × 100 = ₹50,000

Product B requires 20 setups:

₹500 × 20 = ₹10,000

ABC therefore assigns overhead based on actual activity consumption.

56. VOLUME-BASED VS ABC

Feature	Traditional	ABC
Cost drivers	Usually volume-based	Multiple activity drivers
Accuracy	Lower when products differ	Usually higher
Complexity	Simple	More complex
Cost	Lower implementation cost	Higher
Best suited	Homogeneous production	Diverse products
Overhead allocation	Broad average	Activity-specific

57. ABSORPTION COSTING

Also called full costing.

Product cost includes:

DM + DL + Variable OH + Fixed Manufacturing OH

Therefore fixed manufacturing overhead is inventoriable.

58. VARIABLE COSTING

Product cost includes:

DM + DL + Variable Manufacturing OH

Fixed manufacturing overhead is treated as a period cost.

Key difference

Absorption costing → Fixed manufacturing OH goes into inventory

Variable costing → Fixed manufacturing OH goes directly to expense

59. SUPERVARIABLE / THROUGHPUT COSTING

Throughput costing generally treats direct material as the primary/only truly variable production cost for product-costing purposes.

Conceptually:

Throughput contribution = Sales − Direct Material Cost

Other manufacturing costs are generally treated as operating expenses in the short-run throughput framework.

60. EFFECT OF ABSORPTION VS VARIABLE COSTING ON INVENTORY

Suppose:

Production = 10,000 units
Sales = 8,000 units.

Under absorption costing, some fixed manufacturing overhead remains in ending inventory.

Therefore:

Production > Sales → Absorption operating income generally > Variable costing income

because some fixed manufacturing overhead is deferred in inventory.

If:

Sales > Production → Absorption operating income generally < Variable costing income

because previously deferred fixed overhead is released from inventory into COGS.

61. EFFECT ON COGS

Absorption costing

COGS includes:

• Variable manufacturing cost
• Fixed manufacturing overhead relating to units sold

Variable costing

COGS includes:

• Variable manufacturing costs of units sold

Fixed manufacturing overhead is separately expensed.

62. EFFECT ON GROSS PROFIT

Absorption costing produces a traditional:

Sales − COGS = Gross Profit

Variable costing generally emphasizes:

Sales − Variable Costs = Contribution Margin

Thus, variable costing is particularly useful for internal decision-making.

63. EQUIVALENT UNITS OF PRODUCTION

Used in process costing when units are partially completed.

Example:

1,000 units are 60% complete with respect to conversion costs.

Equivalent units:

1,000 × 60%

= 600 equivalent units

Important

Equivalent units are not necessarily physical units.

They represent the amount of completed production work.

64. PURPOSE OF EQUIVALENT PRODUCTION

To determine the cost of partially completed units.

Example:

Conversion cost = ₹600,000
Equivalent units = 60,000

Cost per equivalent unit:

₹600,000 ÷ 60,000

= ₹10

65. COST CONTROL

Cost control focuses on keeping costs within established standards/budgets.

Process:

Set standard → Measure actual → Compare → Analyze variance → Correct

Example:

Budgeted material cost = ₹10/unit
Actual = ₹12/unit

Management investigates the ₹2 unfavorable variance.

66. COST REDUCTION

Cost reduction aims at permanently reducing the cost of operations without sacrificing required quality or performance.

Examples:

• Process redesign
• Supplier negotiation
• Waste elimination
• Automation
• Value engineering
• Better resource utilization

Difference

Cost control = keep cost within target

Cost reduction = permanently lower cost

67. MARKUP VS PROFIT MARGIN

This is a classic CMA trap.

Suppose:

Cost = ₹800
Profit = ₹200
Selling price = ₹1,000

Markup on cost

Profit ÷ Cost

= ₹200 ÷ ₹800

= 25%

Profit margin on sales

Profit ÷ Sales

= ₹200 ÷ ₹1,000

= 20%

Therefore:

Markup ≠ Margin

68. MARKUP FORMULAS

Selling price from markup

Selling Price = Cost × (1 + Markup %)

Cost = ₹800
Markup = 25%

Selling price:

₹800 × 1.25 = ₹1,000

Price based on desired margin

If desired margin = 20%:

Selling Price = Cost ÷ (1 − Margin)

₹800 ÷ 0.80 = ₹1,000

69. MARGINAL COST

Marginal cost is the additional cost resulting from producing one additional unit.

Example:

Total cost at 10,000 units = ₹500,000
Total cost at 10,001 units = ₹500,040

Marginal cost = ₹40

70. RELEVANT RANGE + COST BEHAVIOR

CMA questions often combine these concepts.

Within relevant range:

• Total fixed cost → constant
• Fixed cost/unit → changes
• Variable cost/unit → constant
• Total variable cost → changes with volume

Quick memory table

Cost	Total	Per Unit
Fixed	Constant	Changes
Variable	Changes	Constant
Mixed	Changes	Changes
Step	Stepwise	Depends on volume

71. SKILLED VS UNSKILLED LABOR

Skilled labor

Requires specialized knowledge/training.

Examples:

• CNC machine operator
• Skilled technician
• Specialized welder

Unskilled labor

Requires limited specialized training.

Examples:

• Basic material handler
• General helper

CMA point

Classification as direct or indirect depends on traceability, not simply skill level.

A skilled worker can be indirect, and an unskilled worker can sometimes be direct.

72. NORMAL COST VS ABNORMAL COST

Normal cost is expected under efficient operating conditions.

Abnormal cost arises from unusual/unexpected events.

Examples of abnormal losses:

• Unexpected major machine failure
• Excessive spoilage
• Fire
• Unusual waste

73. NORMAL SPOILAGE — BASIC ACCOUNTING LOGIC

Normal spoilage is part of the expected production process.

Therefore its cost is generally absorbed by the good units produced.

Conceptually:

Normal Spoilage

       ↓

Cost absorbed by good production

       ↓

Higher unit cost of good units

74. ABNORMAL SPOILAGE

Abnormal spoilage is treated separately as a loss.

Conceptually:

Dr. Abnormal Spoilage Loss

      Cr. Work in Process

The exact entry can vary depending on the costing system and recovery/scrap value.

CMA principle

Normal spoilage → product cost

Abnormal spoilage → period loss

75. COST OF GOODS SOLD

Formula

COGS = Beginning Finished Goods + Cost of Goods Manufactured − Ending Finished Goods

Example:

Beginning FG = ₹100,000
COGM = ₹700,000
Ending FG = ₹150,000

COGS:

₹100,000 + ₹700,000 − ₹150,000

= ₹650,000

76. COST OF GOODS MANUFACTURED

Formula

COGM = Beginning WIP + Total Manufacturing Costs − Ending WIP

Total manufacturing costs:

DM Used + DL + Manufacturing OH

77. GROSS PROFIT

Gross Profit = Sales − COGS

Example:

Sales = ₹1,500,000
COGS = ₹900,000

Gross profit = ₹600,000

78. OPERATING INCOME

Operating Income = Gross Profit − Operating Expenses

Example:

Gross profit = ₹600,000
Selling expense = ₹100,000
Administrative expense = ₹150,000

Operating income:

₹600,000 − ₹250,000

= ₹350,000

79. COST ACCOUNTING VS MANAGEMENT ACCOUNTING VS FINANCIAL ACCOUNTING

Feature	Cost Accounting	Management Accounting	Financial Accounting
Main purpose	Determine/control costs	Internal decision-making	External reporting
Users	Internal management	Internal management	Investors, creditors, regulators
Focus	Cost accumulation	Planning & decisions	Financial statements
Rules	Flexible	Flexible	GAAP/IFRS depending jurisdiction
Time	Past + present + future	Strong future orientation	Primarily historical
Detail	Highly detailed	Decision-oriented	Aggregated
External reporting	No	No	Yes

80. COST ACCOUNTING

Focuses on:

• Cost accumulation
• Cost classification
• Cost allocation
• Product costing
• Cost control
• Cost reduction
• Inventory valuation

81. MANAGEMENT ACCOUNTING

Broader than cost accounting.

Includes:

• Budgeting
• Forecasting
• Variance analysis
• Cost analysis
• Performance measurement
• Decision analysis
• Risk analysis
• Strategic planning
• Data analytics

82. FINANCIAL ACCOUNTING

Focuses on preparing financial information for external users.

Major statements:

• Income statement
• Balance sheet
• Cash-flow statement
• Statement of equity

83. IMPORTANT CMA COST CLASSIFICATION MATRIX

Cost	Meaning	Example
Direct	Traceable	Product material
Indirect	Not conveniently traceable	Factory supervisor
Product	Attached to inventory	Manufacturing cost
Period	Expensed in period	Advertising
Fixed	Constant in total within range	Rent
Variable	Changes with volume	Direct material
Mixed	Fixed + variable	Electricity
Step	Constant then jumps	Supervisor
Sunk	Past/unavoidable	Previous research
Opportunity	Benefit sacrificed	Lost rental income
Explicit	Actual cash expenditure	Wages
Implicit	Noncash opportunity cost	Owner's building
Relevant	Future + differs	Additional material
Irrelevant	Does not affect decision	Sunk cost
Committed fixed	Difficult to change	Factory lease
Discretionary fixed	Management-controlled	Advertising
Engineered	Input-output relationship	Direct material
Normal spoilage	Expected	Standard defects
Abnormal spoilage	Unexpected/excess	Excess defects

84. HIGH-VALUE CMA EXAM FORMULAS

Prime Cost

DM + DL + Direct Expenses

Conversion Cost

DL + Manufacturing OH

Manufacturing Cost

DM + DL + Manufacturing OH

Predetermined OH Rate

Budgeted OH ÷ Budgeted Allocation Base

Applied OH

Predetermined Rate × Actual Activity

High-Low Variable Cost

Change in Cost ÷ Change in Activity

Fixed Cost

Total Cost − Variable Cost

COGM

Beginning WIP + Manufacturing Costs − Ending WIP

COGS

Beginning FG + COGM − Ending FG

Gross Profit

Sales − COGS

Operating Income

Gross Profit − Operating Expenses

ABC Activity Rate

Activity Cost Pool ÷ Cost Driver Quantity

Equivalent Units

Physical Units × % Completion

Markup

Profit ÷ Cost

Profit Margin

Profit ÷ Sales

85. CMA "MUST REMEMBER" CONCEPTS

🔑 1. Prime vs Conversion

Prime = DM + DL

Conversion = DL + OH

🔑 2. Product vs Period

Manufacturing → Product cost

Selling/Admin → Period cost

🔑 3. Trace vs Allocate

Direct → Trace

Indirect → Allocate

🔑 4. Normal vs Abnormal Spoilage

Normal → Product cost

Abnormal → Separate loss

🔑 5. Sunk vs Opportunity

Sunk → Ignore

Opportunity → Consider

🔑 6. Absorption vs Variable

Absorption → Fixed manufacturing OH included in inventory

Variable → Fixed manufacturing OH expensed

🔑 7. Overapplied vs Underapplied

Applied > Actual → Overapplied → COGS decreases

Actual > Applied → Underapplied → COGS increases

🔑 8. Markup vs Margin

Markup = Profit ÷ Cost

Margin = Profit ÷ Sales

🔑 9. Job vs Process

Unique/custom → Job order

Continuous/homogeneous → Process

🔑 10. Traditional vs ABC

Simple/homogeneous → Traditional costing

Complex/diverse/high overhead → ABC

🎯 US CMA Part 1 Exam Strategy

For these cost-accounting questions, don't merely memorize definitions. Train yourself to identify four things immediately:

1. What is the cost?
Direct / indirect / fixed / variable / mixed / sunk / opportunity

2. What is the cost object?
Product / job / customer / department / service

3. How should the cost be assigned?
Tracing / allocation / ABC / overhead rate

4. What is the decision effect?
Inventory / COGS / gross profit / operating income / relevant cost / variance

That framework is especially useful for the numerical and case-based questions in US CMA Part 1 because one case can combine overhead allocation, cost behavior, inventory valuation, COGS, and profitability in the same question.

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For online exam software access click link 🖇️ www.finzo.pw

 

 

Summary .. Mocktest at the end..

*1. COST TERMS*  

- *Cost Object*: Anything to measure cost. Ex: 1 Laptop = $1200  

- *Cost Driver*: Cause of cost. Ex: Machine hrs drive $10/hr OH  

- *Cost Pool*: Group of costs. Ex: Setup pool $20,000  

- *Prime Cost* = DM + DL. Ex: $40 + $60 = $100  

- *Conversion Cost* = DL + Mfg OH  

*2. COST BEHAVIOR*  

- *Fixed*: Total $10,000 constant. Ex: Rent  

- *Variable*: Per unit $8 constant. Ex: Material  

- *Mixed*: $50 + $0.10/unit. Ex: Phone bill  

- *Step*: Jumps. Ex: 1 supervisor for 20 workers = $3,000  

- *High-Low*: `($8,000-$5,000)/(1000-400) = $5 per unit variable`

*3. INVENTORY & PRODUCT COST*  

- *Inventoriable Cost*: Mfg Cost only. Goes to Inventory  

- *Period Cost*: Admin, Selling. Expense immediately  

- *Absorption*: Includes Fixed OH → Higher inventory value  

- *Variable*: Fixed OH = Period cost → Lower inventory value  

*4. SPOILAGE*  

- *Normal*: Expected → Add to good units cost  

- *Abnormal*: Unexpected → Dr. Loss $500 Cr. WIP $500  

*5. JOB vs PROCESS*  

- *Job*: Custom. Ex: $50,000 per Bridge  

- *Process*: Mass. Ex: $2 per Coke bottle  

- *Equivalent Units*: 10,000 units @60% = 6,000 EU  

*6. ABC vs TRADITIONAL*  

- *Traditional*: 1 rate. Ex: $10 per DL hour. Good for 1 product  

- *ABC*: Multiple drivers. Ex: $100 per setup. Better for multiple products  

*7. OH VARIANCE*  

- *Overapplied*: Applied > Actual → Cr. COGS  

- *Underapplied*: Applied < Actual → Dr. COGS  

*8. KEY FORMULAS*  

`COGS = Beg FG + COGM - End FG`  

`Gross Profit = Sales - COGS`  

`Markup % = Profit/Cost`. `Margin % = Profit/Sales`  

`Cost Driver Rate = Pool / Total Driver`

---

*20 MCQs + ANSWERS FOR PRACTICE*

*Q1. Prime Cost includes:*  

A. DM + DL  B. DM + OH  C. DL + OH  D. All mfg cost  

*Ans: A* Ex: Wood $40 + Labor $60 = $100

*Q2. Factory rent $10,000 is:*  

A. Variable  B. Fixed  C. Mixed  D. Step  

*Ans: B*

*Q3. If production doubles, which stays same per unit?*  

A. Fixed Cost  B. Variable Cost  C. Total Fixed  D. None  

*Ans: B* Ex: Material $5/unit always

*Q4. Opportunity Cost is:*  

A. Past cost  B. Cash cost  C. Benefit lost  D. Overhead  

*Ans: C* Ex: Lose $2000 by not choosing Project B

*Q5. Abnormal spoilage of $800 should be:*  

A. To WIP  B. To FG  C. To P&L Loss  D. Ignore  

*Ans: C* `Dr. Loss $800 Cr. WIP $800`

*Q6. Job costing used for:*  

A. Cement  B. Custom Furniture  C. Oil  D. Sugar  

*Ans: B* Ex: $2,000 per table

*Q7. Process costing EU: 5,000 units 40% complete =*  

A. 2,000  B. 3,000  C. 5,000  D. 200  

*Ans: A*

*Q8. Absorption costing includes:*  

A. Only Variable  B. Fixed OH  C. Period cost  D. DM only  

*Ans: B*

*Q9. Overapplied OH $2,000. Entry:*  

A. Dr COGS  B. Cr COGS  C. Dr OH  D. Both B&C  

*Ans: D* `Dr. OH $2,000 Cr. COGS $2,000`

*Q10. Best for multiple products with different activities:*  

A. Traditional  B. ABC  C. Job  D. Process  

*Ans: B*

*Q11. Cost Driver Rate = $50,000 / 5,000 hrs =*  

A. $5  B. $10  C. $50  D. $500  

*Ans: B*

*Q12. Markup 25% on Cost $80. Selling Price =*  

A. $90  B. $100  C. $105  D. $120  

*Ans: B* $80 * 1.25 = $100

*Q13. Sunk Cost is:*  

A. Future cost  B. Relevant  C. Past cost  D. Variable  

*Ans: C* Ex: $50,000 already spent

*Q14. Throughput costing includes:*  

A. DM+DL  B. Only DM  C. All mfg  D. All costs  

*Ans: B*

*Q15. Step cost example:*  

A. Material  B. Rent  C. Supervisor for every 20 workers  D. Commission  

*Ans: C*

*Q16. COGS = Beg $5k + COGM $50k - End $7k =*  

A. $48k  B. $52k  C. $62k  D. $43k  

*Ans: A*

*Q17. Discretionary Fixed Cost:*  

A. Rent  B. Depreciation  C. Advertising  D. Insurance  

*Ans: C*

*Q18. Mixed cost split using:*  

A. ABC  B. High-Low  C. Job  D. Process  

*Ans: B*

*Q19. Normal spoilage cost goes to:*  

A. Expense  B. Good units  C. Ignore  D. OH  

*Ans: B*

*Q20. Gross Profit =*  

A. Sales - Operating Exp  B. Sales - COGS  C. Sales - All costs  D. COGS - Sales  

*Ans: B*