CIMA P1 key terms

A costing method that assigns both variable costs and a share of fixed production overhead to each unit produced, using a predetermined absorption rate based on labour hours, machine hours or another activity base.

A costing approach that charges only variable production costs to units, treating fixed production overhead as a period cost written off in full against contribution in the period incurred.

The rate used to spread budgeted production overhead across units, calculated as budgeted overhead divided by budgeted activity such as direct labour hours, machine hours or units.

The difference between overhead actually absorbed into production using the predetermined rate and overhead actually incurred; over-absorption means too much was charged, under-absorption means too little.

A costing system that assigns overhead to products via cost pools and cost drivers reflecting the activities that consume resources, rather than a single volume-based absorption rate.

A factor that causes a change in the cost of an activity, such as number of set-ups, orders or machine hours, used as the basis for allocating costs in activity-based systems.

A grouping of individual cost items or overhead costs collected together before being allocated or apportioned to products, departments or activities on a consistent basis.

Sales revenue less variable costs. It measures the amount each unit or product line contributes towards covering fixed costs and then generating profit.

The level of sales activity at which total revenue equals total cost, so the business makes neither profit nor loss; often expressed in units or revenue.

The amount by which budgeted or actual sales exceed the break-even level, expressed in units, revenue or as a percentage of sales, indicating how far sales can fall before losses arise.

A technique examining how changes in volume, selling price, variable cost and fixed cost affect profit, often using break-even charts and contribution per unit calculations.

A control system that sets predetermined costs and revenues for products and compares them with actual results to identify and investigate variances.

A planned unit cost built from expected quantities and prices of materials, labour and overhead, used as the benchmark against which actual performance is measured.

The process of calculating differences between budgeted or standard figures and actual figures, then breaking them into price and quantity elements to explain performance.

A split of total variance into the part caused by revising the original standard or budget (planning) and the part caused by actual operating performance against the revised standard (operational).

A budget adjusted to the actual level of activity achieved, so that variable costs reflect actual volume and comparisons with actual costs isolate genuine price and efficiency variances.

A budget prepared for one specific planned level of activity, remaining unchanged when actual activity differs, which limits its usefulness for performance evaluation.

The use of budgets to plan operations, communicate targets, monitor actual performance against plan and take corrective action where significant differences arise.

A budgeting approach that starts from the previous period's budget or actual figures and adjusts them for expected changes, inflation or known developments, rather than building from zero.

A method where every activity and cost must be justified from a nil base each budget cycle, typically through decision packages ranked for funding, rather than relying on prior spending.

A budget continually updated by adding a new period as the current one expires, so the planning horizon always extends a fixed number of periods into the future.

The deliberate inflation of budgeted costs or understatement of budgeted revenues by managers to make targets easier to achieve, reducing the budget's usefulness for planning and control.

A system that assigns revenues and costs to individual managers or centres accountable for them, so performance is judged only on items within that manager's control.

A cost that a particular manager can influence or decide upon within a given period, and which is therefore appropriate to include when evaluating that manager's performance.

A future cash cost or benefit that differs between the alternatives being considered; costs that are sunk, committed or identical across options 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; it is relevant to decision making even without a cash outflow.

A cost already incurred, or a committed outlay that cannot be changed by the decision, and which is therefore irrelevant to choosing between future alternatives.

A decision technique comparing only the additional revenues and additional costs arising from a proposed change, ignoring amounts unaffected by the choice.

The scarce resource, such as machine hours, skilled labour or materials, that restricts output and therefore determines the ranking of products by contribution per unit of that resource.

A choice between producing a component or service internally and purchasing it externally, based on comparing relevant internal costs with the external purchase price and any lost contribution.

A short-term judgement on whether to cease an activity, usually comparing the contribution lost against the fixed costs saved and considering whether closure is temporary or permanent.

A constraint-focused approach measuring throughput as sales revenue less material cost, then ranking products by throughput per unit of the bottleneck resource rather than by contribution.

The approach a business takes to setting prices, such as cost-plus, market-based, penetration, skimming or price discrimination, chosen to meet commercial and competitive objectives.

A pricing-led approach where the allowable cost is derived by subtracting the required profit margin from a market-determined selling price, and the product is designed to meet that cost.

The accumulation of all costs associated with a product over its entire life from design and development through production to withdrawal and disposal, supporting pricing and design decisions.

The possibility that actual outcomes differ from expected outcomes, where the range of possible results and their probabilities are known or can be estimated.

A situation where possible outcomes or their probabilities cannot be reliably identified or assigned, so decision makers must rely on judgement, ranges or scenario reasoning.

The probability-weighted average of the possible outcomes of a decision, calculated by multiplying each outcome by its probability and summing the results.

A diagram mapping sequential decisions, possible outcomes and their probabilities, used to evaluate alternatives by rolling back expected values from the end nodes.

A technique that tests how far one input variable, such as price or volume, can change before a decision's outcome or break-even position is altered.

The examination of several coherent alternative futures, such as best, worst and most likely cases, to assess the range of possible outcomes and their implications for decisions.

Decision rules under uncertainty: maximin selects the alternative with the best worst-case outcome, while maximax selects the alternative with the highest possible payoff.

A statistical measure of the maximum loss expected over a defined period at a given confidence level, used to express exposure to adverse movements in a single figure.