CIMA P2 key terms

A future cash flow that differs between the alternatives being compared. Sunk costs, committed costs and allocated fixed overheads are excluded because they do not change whatever decision is taken.

The contribution or benefit forgone by using a scarce resource in one way rather than its next best alternative. It is a relevant cost even though no cash leaves the business.

Money already spent that cannot be recovered by any future decision. It is irrelevant to decision making and should be ignored when comparing alternatives.

Comparing only the changes in revenues, costs and investment that result from a decision, rather than comparing total figures for each option. It keeps the focus on relevant items.

Ranking products or activities by contribution per unit of the scarce resource so that the constraint is used to maximise total contribution. Also called contribution per limiting factor ranking.

A constraint-focused method that treats direct material as the only truly variable cost and measures throughput as sales revenue less material cost. It prioritises speed of flow through the bottleneck.

The view that every process has at least one bottleneck governing total output. Improvement effort should identify the constraint, exploit it, subordinate everything else to it, then elevate it.

The increase in contribution from one extra unit of a scarce resource, equal to its marginal value to the business. It indicates the most a firm should pay to acquire more of that resource.

A mathematical technique for allocating scarce resources among competing uses when the objective and constraints are linear. Solved graphically for two variables or by simplex for more.

Setting a product cost by deducting a required profit margin from an estimated selling price the market will accept, then designing the product to meet that allowable cost.

Systematically reviewing product design and components to reduce cost without losing the functions customers value. Used to close the gap between current and allowable cost.

Accumulating all costs and revenues of a product from design through development, production and withdrawal, so that decisions reflect the whole life rather than one accounting period.

Assigning overheads to products via activities and cost drivers rather than broad volume bases. It improves accuracy where products consume support activities in different proportions.

A factor that causes or influences the level of cost in an activity, such as number of set-ups, orders or machine hours. It is the basis for assigning activity costs.

Using activity analysis to improve customer value and profit, for example by eliminating non-value-added activities, renegotiating driver volumes or redesigning processes.

The price at which one division of an organisation charges another for goods or services. It affects divisional profit, performance evaluation and the incentive to trade internally.

Divisional profit less an imputed interest charge on the division's invested capital. Unlike ROI it charges for the capital used, encouraging managers to accept projects earning above the cost of capital.

Divisional operating profit divided by divisional invested capital, expressed as a percentage. Simple and comparable, but can discourage managers from accepting profitable projects that dilute the ratio.

A residual wealth measure equal to after-tax operating profit less a charge for the capital employed, using a risk-adjusted cost of capital. It aligns divisional decisions with shareholder value.

Assessing the results of an investment centre using measures such as ROI, residual income and controllable profit, while separating items the manager can influence from those they cannot.

The blended required return of a firm's debt and equity, weighted by their market values after tax. It is the discount rate typically used to appraise projects of average risk.

The sum of a project's expected cash flows discounted at the cost of capital, including the initial outlay. A positive NPV means the project adds value to shareholders.

The discount rate at which a project's net present value equals zero. It is compared with the cost of capital to decide acceptance, but can mislead with non-conventional cash flows.

The time taken for cumulative discounted cash flows to recover the initial investment. It recognises the time value of money but still ignores cash flows arising after the cut-off.

A method of estimating the cost of equity as the risk-free rate plus a beta-scaled market risk premium. Beta captures the systematic risk of the share relative to the market.

A measure of how much a share's returns move with the market. A beta above one indicates above-average systematic risk; only systematic risk is rewarded in CAPM.

The level of misstatement or omission that could influence the economic decisions of users of the financial statements. It guides planning, evidence gathering and the evaluation of uncorrected errors.

The risk that the auditor expresses an inappropriate opinion on financial statements that are materially misstated. It comprises inherent, control and detection risk.

The susceptibility of an assertion to material misstatement before considering related controls. It is higher for complex estimates, unusual transactions and pressured or incentivised management.

The risk that a material misstatement will not be prevented or detected on a timely basis by the entity's internal controls. It drives how much substantive testing is needed.

The risk that audit procedures fail to detect a material misstatement. It is controlled by the auditor through the nature, timing and extent of testing.

An amount set below overall materiality to reduce to an appropriately low level the probability that uncorrected and undetected misstatements together exceed materiality.

Procedures that detect material misstatements at the assertion level, including tests of detail and substantive analytical procedures. They are required whatever the assessed level of control risk.

Information used by the auditor to reach conclusions on which the opinion is based. It must be sufficient in quantity and appropriate in relevance and reliability.

The auditor's formal conclusion on whether the financial statements give a true and fair view. It may be unmodified, qualified, adverse or a disclaimer depending on the issue.

The assumption that an entity will continue in operation for the foreseeable future. Auditors must assess and report on material uncertainty about this assumption.

A fixed place of business through which an enterprise carries on business in another country, giving that country taxing rights over the profits attributable to it.

The pricing of transactions between related parties in different tax jurisdictions. Rules require arm's length prices so that profit is not artificially shifted to low-tax locations.

Mechanisms that prevent the same income being taxed twice, such as a credit for foreign tax paid or an exemption. Often provided under a bilateral tax treaty.

Tax deducted at source by the payer on payments such as dividends, interest or royalties to non-residents, usually at a reduced treaty rate.

Arranging affairs within the letter of the law to reduce tax liability. It is generally lawful but may be challenged by general anti-abuse rules.

Deliberately concealing or misrepresenting information to pay less tax than is legally due. It is a criminal offence, unlike lawful avoidance.

Structuring transactions and timing of income, deductions and reliefs to optimise tax outcomes legitimately while meeting commercial objectives.

A liability or asset recognised for tax expected in future periods due to temporary differences between accounting carrying amounts and tax bases of assets and liabilities.

Examining very large, varied datasets to reveal patterns and support decisions. In audit and finance it enables full-population testing instead of sampling.

Software bots that perform repetitive, rule-based tasks such as data entry, reconciliations and invoice matching, freeing staff for judgement-based work.

Accessing computing services, storage and software over the internet on demand. It changes cost structure to subscription and raises data residency and security considerations.

Controls and practices protecting systems and data from unauthorised access, loss or disruption. Includes access controls, encryption, monitoring and incident response planning.

Using historical data and statistical models to forecast future outcomes such as demand, cash flow or fraud likelihood, supporting planning and risk assessment.

Presenting data graphically through dashboards and charts so that trends, outliers and relationships are quickly understood by decision makers.

A distributed, tamper-evident ledger of transactions shared across participants. It can support provenance and reconciliation but raises questions about control and audit access.