ACCA PM key terms

A pricing-led approach in which the allowable cost of a product is found by subtracting the required profit margin from the price customers will pay, and the product is then designed to meet that cost.

The systematic review of a product's design, materials and processes to remove functions or features that add cost without adding value to the customer, typically used to close a target cost gap.

The difference between the estimated cost of making a product under its current design and the target cost that must be achieved for the planned selling price and margin to be met.

Accumulating all costs and revenues associated with a product over its whole life, from design and development through manufacturing to withdrawal and disposal, so that decisions reflect total profitability rather than one period's figures.

A constraint-focused technique that treats only direct materials as truly variable, values output by throughput (sales revenue less material cost) and judges products by throughput earned per unit of the bottleneck resource.

Sales revenue minus direct material cost for the units actually sold, representing the money generated that is available to cover all other factory and business costs.

The view that every process has one limiting factor that sets its output, so improvement effort should identify the bottleneck, exploit it fully, subordinate other operations to it and then elevate its capacity.

The activity, machine or skill in a process whose limited capacity restricts the output of the whole system and therefore determines how much can be sold and produced.

The identification, collection and analysis of financial and physical information about environmental costs, such as waste, emissions and energy, so that they can be managed and reduced.

A future, incremental cash flow that differs between the alternatives being considered; costs that are past, committed or identical under every option are excluded from the decision.

The contribution or benefit forgone by using a scarce resource in one way rather than in its next best alternative use, and therefore a relevant cost in decision making.

A cost already incurred or irrevocably committed that cannot be changed by any future decision, so it is ignored when comparing alternatives.

Comparing alternatives by looking only at the changes in revenues, costs and cash flows that result from choosing one option over another, rather than comparing total figures.

A technique for ranking competing uses of a scarce resource by contribution per unit of that resource, so as to select the product mix that maximises total contribution.

The maximum extra amount a business would be willing to pay for one additional unit of a scarce resource, equal to the increase in contribution that the extra unit would generate.

A choice between producing a component or service internally and buying it externally, decided by comparing relevant internal costs, including lost contribution, with the external purchase price.

Transferring an activity previously performed in-house to an external supplier, usually to reduce cost or access specialist skills, with risks around quality, control and dependency.

A short-term judgement on whether to cease an activity, made by comparing the contribution it earns with the avoidable fixed costs that would be saved by closing it.

The amount and type of risk an organisation is willing to accept in pursuit of its objectives, which sets the boundaries within which managers make decisions.

The weighted average outcome of a decision calculated by multiplying each possible result by its probability and summing them, giving a long-run average for repeated similar decisions.

A diagram showing decision points, possible outcomes and their probabilities, used with expected values to evaluate alternatives where outcomes are uncertain.

Testing how a decision's outcome changes when one input variable is altered, often expressed as the percentage change in a variable that would remove a project's margin of safety.

A budgeting method in which every activity and cost must be justified from a nil base each period, usually through decision packages ranked by priority, rather than by adjusting last year's figures.

Preparing next period's budget by taking the current period's figures and adjusting them for expected changes such as inflation or volume growth, which is quick but can perpetuate past inefficiencies.

Building a budget by forecasting the demand for activities and the cost drivers behind them, so that costs are planned in relation to the workload that causes them.

The deliberate understatement of budgeted revenue or overstatement of budgeted cost by a manager, creating easier targets and room to absorb unexpected problems.

A budget prepared at the actual level of activity achieved, used to compare actual costs with the costs that should have been incurred at that volume, so volume effects do not distort variances.

Splitting a total variance into the part caused by revising the original standard or budget (planning) and the part caused by actual performance differing from the revised standard (operational).

A system that sets predetermined costs and quantities for materials, labour and overhead, then compares actual results against those standards to highlight and investigate differences.

The calculation and interpretation of differences between budgeted or standard figures and actual figures, identifying whether they are favourable or adverse and what may have caused them.

The process of setting budgets, communicating them to responsibility centres, comparing actual performance against them and taking corrective action where significant differences arise.

Structuring budgets and reports around individual managers who are accountable for the revenues, costs or investments they control, so performance can be assessed fairly.

A cost that a particular manager is able to influence or authorise within a given period, and which is therefore appropriate to include when assessing that manager's performance.

A divisional performance measure calculated as divisional profit divided by divisional invested capital, showing profit earned per unit of capital employed but capable of encouraging short-term or suboptimal decisions.

Divisional profit less an imputed interest charge on the division's invested capital, showing profit remaining after the cost of the funds tied up in the division has been deducted.

A responsibility centre whose manager is accountable for both profit and the capital employed, so performance is judged using measures such as return on investment or residual income.

A performance measurement framework that combines financial measures with customer, internal process and learning and growth perspectives to give a rounded view linked to strategy.

A measure chosen because it signals how well a critical success factor is being achieved, and which is monitored regularly to guide management attention and action.

Comparing an organisation's processes, costs or performance measures with those of leading competitors or best-practice organisations in order to identify gaps and improvement opportunities.