CIMA P1 flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Absorption overhead absorption rate

Budgeted overhead divided by budgeted activity base such as labour hours or machine hours. Applied overhead equals the rate multiplied by actual activity, and the difference from actual overhead is over- or under-absorption.

Overhead apportionment bases

General overheads are shared using fair bases: floor area for rent and heating, machine hours for power, number of employees for canteen and personnel costs, and asset values for insurance and depreciation.

High-low method

Estimates the variable cost per unit as the change in total cost divided by the change in activity between the highest and lowest activity levels, then derives fixed cost by subtraction.

Learning curve formula

Cumulative average time per unit is y equals ax to the power b, where b is log of the learning rate divided by log of two. Each doubling of cumulative output multiplies average time by the learning rate.

Material price variance

Calculated as standard price minus actual price, multiplied by actual quantity purchased. An adverse result means materials cost more than standard; it is usually the purchasing manager's responsibility.

Material usage variance

Standard quantity for actual output minus actual quantity used, multiplied by standard price. It measures excess or saved material and is normally the production manager's responsibility.

Labour efficiency variance

Standard hours for actual output minus actual hours worked, multiplied by the standard rate. Adverse means more hours were used than the standard allows for the output achieved.

Fixed overhead volume variance

Actual output minus budgeted output, multiplied by standard fixed overhead per unit. It arises because fixed overhead is absorbed per unit but does not vary with volume.

Sales volume contribution variance

Actual units sold minus budgeted units sold, multiplied by standard contribution per unit. It isolates the profit effect of selling a different quantity from the fixed budget.

Incremental budgeting

Starts from the previous period's budget and adjusts for inflation, growth or known changes. It is quick and cheap but perpetuates past inefficiencies and slack in the base.

Zero-based budgeting

Every activity is justified from a zero base in decision packages that are ranked by cost and benefit. It challenges discretionary spending but is time-consuming and requires substantial management effort.

Rolling budget

A budget covering a fixed future horizon, such as twelve months, that is extended by one period as each period ends. It keeps plans current but requires continual updating.

Flexed budget purpose

A budget restated for the actual level of activity, keeping variable costs at standard per unit and fixed costs unchanged. Comparing it with actual spending removes volume effects from variances.

Production budget formula

Production units equal sales units plus required closing finished goods inventory minus opening finished goods inventory. The result feeds the material usage and purchases budgets.

Material purchases budget

Purchases in units equal production usage plus closing raw material inventory minus opening raw material inventory. Multiplying by unit cost gives the purchases figure for the cash budget.

Cash budget exclusions

Cash budgets record receipts and payments only, so depreciation, accrued but unpaid expenses and other non-cash items are excluded, while capital expenditure and tax paid are included.

Budgetary slack

A deliberate understatement of budgeted revenue or overstatement of budgeted cost by a manager, creating an easier target. Participative budgeting and link to rewards increase its likelihood.

Relevant cost criteria

A relevant cost is future, incremental and cash-based, and differs between alternatives. Sunk costs, committed costs and apportioned fixed overheads are excluded unless the decision changes them.

Special order decision rule

Accept an order when incremental revenue exceeds incremental cost, provided spare capacity exists. If regular sales are displaced, add the lost contribution as an opportunity cost.

Make or buy comparison

Compare the variable cost of making plus any avoidable fixed cost and the opportunity cost of the facilities, against the external purchase price plus buying costs.

Limiting factor ranking

When one resource is scarce, rank products by contribution per unit of that resource, not by contribution per unit sold, then allocate the scarce resource in rank order.

Shadow price definition

The increase in total contribution from one additional unit of a scarce resource, valid only within the range where the current optimal product mix stays unchanged.

Shutdown decision rule

A division should continue in the short term if its contribution exceeds its avoidable fixed costs. Positive contribution means continuing reduces the overall loss.

Sell or process further

Compare incremental revenue from further processing with the incremental cost incurred after split-off. Joint costs before split-off are sunk and irrelevant to the decision.

Throughput accounting ratio

Throughput per unit of bottleneck resource divided by the total factory cost per unit of bottleneck resource. A ratio above one indicates the product is worth producing.

Expected value formula

The sum of each possible outcome multiplied by its probability. It represents a long-run average and may not equal any single outcome that can actually occur.

Maximin decision criterion

A pessimistic rule that selects the alternative whose worst possible outcome is the best of all the worst outcomes. It suits decision makers who prioritise avoiding large losses.

Minimax regret criterion

For each state of nature, regret is the best outcome minus the actual outcome. The rule selects the alternative with the lowest maximum regret across all states.

Coefficient of variation

Standard deviation divided by expected value. It expresses risk relative to return and allows comparison of projects with different expected values or scales.

Risk versus uncertainty

Risk applies when outcomes and their probabilities are known and measurable. Uncertainty applies when probabilities are unknown, so sensitivity, scenario analysis or simulation is used instead.

Sensitivity margin formula

The percentage change in an input that makes the decision break even, calculated as expected value minus break-even value, divided by expected value.

Decision tree rolling back

Expected values are computed at outcome nodes and the highest expected value branch is chosen at decision nodes, working from the right of the tree back to the start.