CIMA BA2 key terms

A method that assigns all production costs, both variable and fixed, to units produced, usually by adding overhead absorbed on a predetermined basis to direct costs.

An approach where only variable production costs are treated as product costs, while fixed costs are charged in full against contribution in the period they arise.

A rate used to spread production overhead across units, calculated by dividing budgeted overhead by a chosen activity base such as labour hours or machine hours.

A costing method that assigns overhead to products according to the activities they consume, using cost drivers, so that complex or low-volume products bear a fairer share of support costs.

Setting a selling price by adding a fixed percentage or amount to the unit cost, so the price covers costs and provides the desired profit.

The selling price of one unit less its variable costs; it shows how much each unit contributes towards covering fixed costs and then generating profit.

The amount added to cost, expressed as a percentage of cost, to arrive at the selling price. It differs from margin, which is based on selling price.

Profit expressed as a percentage of the selling price rather than of cost. A 25% margin is not the same as a 25% mark-up.

The situation where overhead recovered using a predetermined rate is less than the overhead actually incurred, usually because activity was below budget. The shortfall is a charge to profit.

A pricing-led approach where the allowable cost is found by subtracting the required profit from the price customers will pay, and the product is designed to meet that cost.

A quantified plan for a future period, expressed in money or units, that sets out expected income, spending or resource use and provides a basis for control.

A budget continuously updated by adding a new period as each one ends, so the planning horizon stays constant, for example always covering the next twelve months.

Building each budget from a nil base, requiring every activity and cost to be justified afresh rather than taking last year's figures as the starting point.

Preparing next period's budget by adjusting the previous period's figures for known changes such as inflation or volume, without re-examining the underlying activities.

A budget restated for the actual volume of activity achieved, allowing costs to be compared with a fair benchmark when output differs from the original plan.

A forecast of cash receipts and payments over a period, showing the expected cash balance and any surplus or shortfall, so that financing needs can be planned.

Deliberate padding built into a budget by a manager, such as overstating costs or understating sales, making targets easier to achieve and reducing the budget's usefulness for control.

A process where budget holders are involved in setting their own budgets, which can improve commitment and communication but may also encourage slack.

A technique that estimates the variable cost per unit from the change in total cost between the highest and lowest activity levels, then derives the fixed element.

The idea that as cumulative output doubles, the cumulative average time per unit falls by a constant percentage, reflecting improved efficiency from repetition.

Regular, repeating movements in data within a year, such as higher sales each December, which must be removed before a trend can be identified.

A system where costs are collected separately for each identifiable job or order, typically used where products are customised or produced in distinct batches.

A costing system used where identical products pass through continuous processes; costs are averaged over output for each process and period to give a cost per unit.

A measure that converts partly finished work into the number of fully complete units it represents, allowing process costs to be spread fairly over finished goods and closing work in progress.

The unavoidable loss expected in a process under normal operating conditions; its cost is absorbed by good output, so it does not usually raise a separate charge.

Loss above the normal level, valued at full cost and written off in the period, rather than being absorbed into the cost of good output.

A system that sets predetermined costs and quantities for products and compares actual results with them, so differences can be analysed and investigated.

The difference between standard and actual price per unit of material, multiplied by the quantity purchased or used, showing the cost impact of paying more or less than planned.

The difference between the standard hours allowed for actual output and the hours actually worked, valued at the standard rate, showing whether labour worked faster or slower than planned.

A costing method for organisations providing services rather than goods, where costs are accumulated per unit of service such as a patient day or passenger mile.

A single set of accounting records in which cost and financial accounts are combined, so that one transaction updates both and reconciliation is unnecessary.

A future cash cost that differs between the alternatives being considered. Costs that are past, committed or unchanged by the decision are ignored.

The benefit given up when one option is chosen instead of the next best alternative, such as contribution lost when a scarce resource is used for one product.

Money already spent that cannot be recovered or changed by a future decision, so it should be ignored when evaluating alternatives.

The level of sales, in units or revenue, at which total contribution equals fixed costs and the business makes neither profit nor loss.

The amount by which current or budgeted sales exceed the break-even level, showing how far sales can fall before a loss arises.

A scarce resource, such as machine hours or skilled labour, that restricts the level of output and so determines the order in which products should be prioritised.

A performance measure dividing divisional profit by the capital employed, expressed as a percentage, showing the profit generated per unit of invested capital.

Divisional profit less a notional interest charge on the capital employed in the division, showing profit remaining after charging for the funds used.

The internal price at which one division supplies goods or services to another within the same organisation, affecting each division's reported profit.