CIMA P1 cheat sheet

Absorption costing: OAR = total budgeted overhead ÷ total budgeted activity base; applied overhead = OAR × actual activity. Under/over-absorption = applied overhead − actual overhead incurred.

Overhead apportionment: allocate directly attributable costs first, then apportion general costs using a fair basis (floor area for rent/heat, machine hours for power, employees for canteen), then reapportion service centre costs to production centres (direct, step-down, or reciprocal).

High-low method: variable cost per unit = (cost at high activity − cost at low activity) ÷ (high units − low units); fixed cost = total cost − (variable rate × units). Uses only two data points, so outliers distort the result.

Learning curve (cumulative average model): y = ax^b where b = log(learning rate) ÷ log 2. Cumulative average time falls by the fixed percentage each time cumulative output doubles; total time = cumulative average × cumulative units.

Standard costing variances: material price = (SP − AP) × actual quantity purchased; material usage = (SQ for actual output − AQ used) × SP; labour rate = (SR − AR) × actual hours paid; labour efficiency = (SH for actual output − AH worked) × SR.

Fixed overhead variances (absorption): expenditure = budgeted FOH − actual FOH; volume = (actual units − budgeted units) × standard FOH per unit; volume splits into efficiency and capacity components.

Sales variances: price = (standard price − actual price) × actual units sold; volume contribution variance = (actual units − budgeted units) × standard contribution per unit.

Operating statement reconciliation: budgeted profit ± sales variances ± cost variances = actual profit; adverse variances reduce profit, favourable variances increase it.

Mix and yield variances apply when two or more materials or labour grades are substitutable: mix = (actual mix at standard proportions − actual mix) × standard price; yield = (standard input for actual output − actual input) × weighted standard price.

Budget types: incremental (prior period plus adjustment), zero-based (every cost justified from a zero base in decision packages), activity-based (cost driven by activity levels), rolling (horizon continually extended, e.g. 12 months reviewed quarterly).

Flexed budget: variable costs flexed to actual output using standard cost per unit; fixed costs held at budget. Compare flexed budget with actual to isolate controllable variances.

Cash budget receipts and payments: include cash sales, receipts from receivables (using collection periods), payments to payables, wages, overheads paid, capital expenditure, tax and dividends paid; exclude depreciation and other non-cash items.

Production budget (units) = sales units + closing finished goods − opening finished goods. Material purchases (units) = production usage + closing inventory − opening inventory.

Learning curve in budgeting: budget labour time on cumulative average hours, not on the marginal time per unit, otherwise labour cost is overstated.

Behavioural aspects: budgets set participatively tend to increase commitment but can create budgetary slack; imposed budgets are faster but risk demotivation and resistance.

Fixed and flexible budget comparison: a fixed (original) budget compared with actual mixes volume and price effects; flexing removes the volume effect and leaves price and efficiency effects.

Zero-based budgeting decision packages are ranked by cost-benefit; each activity must be justified, which suits discretionary costs such as marketing and support functions but is time-consuming.

Rolling budget benefit: keeps the plan aligned to current conditions and forces regular re-planning; drawback is the ongoing administrative effort each review cycle.

Relevant costs are future, incremental and cash-based. Sunk costs, committed costs and apportioned fixed overheads are irrelevant unless the decision changes them.

Special order rule: accept if incremental revenue exceeds incremental cost, provided spare capacity exists and no profitable regular business is displaced; opportunity cost of displaced contribution must be charged to the order.

Make-or-buy: compare variable cost of making plus avoidable fixed costs plus opportunity cost of using the facilities, against the external purchase price.

Limiting factor (single constraint): rank products by contribution per unit of the scarce resource, then allocate the resource in rank order until exhausted.

Linear programming: formulate objective (maximise contribution) and constraints (resource limits, demand limits, non-negativity); optimum lies at a corner of the feasible region unless the objective is parallel to a constraint (then multiple optimal solutions).

Shadow price = increase in contribution from one extra unit of a scarce resource, valid only within the range where the current optimal solution mix remains unchanged.

Shutdown decision: continue in the short term if contribution covers avoidable fixed costs; a positive contribution means the division reduces total loss by continuing.

Sell or process further: compare incremental revenue after further processing with incremental processing cost; joint costs incurred before the split-off point are irrelevant.

Throughput accounting: throughput = sales revenue − material cost; throughput per bottleneck hour is the ranking measure; inventory is valued at material cost only in throughput accounting.

Expected value = Σ (probability × outcome). It is a long-run average, ignores risk attitude, and may not correspond to any actual possible outcome.

Maximin (pessimist) selects the option with the best worst-case outcome; maximax (optimist) selects the best best-case outcome; minimax regret selects the option with the lowest maximum opportunity loss.

Standard deviation of a project = square root of Σ p(x − expected value)²; higher SD means greater dispersion and greater risk for a given expected value.

Coefficient of variation = standard deviation ÷ expected value; it allows risk comparison between projects with different expected values or scales.

Risk is measurable with known probabilities; uncertainty means probabilities are unknown, so sensitivity analysis, scenario analysis and simulation are used instead of expected values.

Sensitivity analysis: margin of safety on a variable = (expected value − break-even value) ÷ expected value; shows how far an input can change before the decision reverses.

Payback period ignores cash flows after payback and the time value of money; it is a simple liquidity and risk-screen measure. NPV = Σ cash flow × discount factor − initial investment.

Decision trees: expected value at each outcome node, decision at each decision node; roll back from right to left, choosing the branch with the highest expected monetary value at each decision node.

Risk attitudes: risk-averse investors require a higher expected return for greater risk; risk-neutral decisions use expected values; risk-seeking decisions prefer the gamble with the widest spread.