CPA PM Elective flashcards

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

Value chain analysis

A framework that separates an organisation's activities into primary activities that create customer value and support activities that enable them, so cost and differentiation advantages can be traced to specific activities.

VRIN criteria

A resource sustains competitive advantage only when it is valuable, rare, inimitable, and non-substitutable. If any condition fails, rivals can erode the advantage over time.

Balanced Scorecard perspectives

Four linked perspectives: financial, customer, internal business process, and learning and growth. Leading operational measures are assumed to drive lagging financial outcomes through cause-and-effect relationships.

High-low method

Estimates the variable cost per unit by dividing the change in total cost between the highest and lowest activity levels by the change in activity. Uses only two data points.

Contribution margin ratio

Contribution divided by revenue, where contribution equals revenue less variable costs. It shows the proportion of each sales dollar available to cover fixed costs and generate profit.

Overhead under-application

Occurs when applied overhead, calculated as the predetermined rate multiplied by actual activity, is less than actual overhead incurred. The shortfall is charged as an expense or prorated.

Flexible budget

A budget restated at actual activity volume using standard rates. It isolates controllable spending variances from volume effects that managers do not control in the short run.

Material price variance

Actual quantity purchased multiplied by the difference between actual price and standard price. A positive result is adverse because the organisation paid more than the standard.

Planning versus operational variance

Planning variance compares original and revised budget, capturing forecast error. Operational variance compares revised budget with actual, capturing execution performance.

Residual income

Divisional profit less a charge for invested capital at the required rate. Unlike ROI, it encourages managers to accept projects earning above the required rate even if divisional ROI falls.

Transfer price range

The acceptable span between the selling division's minimum, variable cost plus lost contribution, and the buying division's maximum, the external purchase price. Outside this range goal congruence breaks down.

Economic value added

After-tax operating profit less the weighted average cost of capital multiplied by invested capital. It charges for equity as well as debt and aligns divisional decisions with shareholder value.

Price elasticity of demand

Percentage change in quantity demanded divided by percentage change in price. When the absolute value exceeds one, demand is elastic and a price increase reduces total revenue.

Target costing

Target cost equals the competitive selling price less the required profit margin. The resulting gap drives design changes and value engineering before production begins.

Skimming versus penetration pricing

Skimming sets a high launch price to capture inelastic early adopters. Penetration sets a low price to build share and experience-curve cost advantage before competitors respond.

Net present value

The sum of future cash flows discounted at the cost of capital, less initial investment. A positive NPV means the project adds value and should be accepted if funds allow.

Profitability index

NPV divided by initial investment, used to rank projects when capital is rationed. It measures value created per unit of the scarce resource rather than absolute value.

Real options

The value of managerial flexibility to defer, expand, contract, or abandon a project as uncertainty resolves. Static NPV ignores this value and can understate project worth.

Segregation of duties

Separating authorisation, custody of assets, recording, and reconciliation among different people so no individual can both perpetrate and conceal an error or fraud.

Three lines model

Operational management owns and manages risk as the first line. Risk and compliance functions monitor as the second line. Internal audit gives independent assurance as the third line.

Recovery point objective

The maximum acceptable amount of data loss measured in time. It drives backup frequency, while recovery time objective drives the speed of system restoration.

Prescriptive analytics

The most advanced analytics stage, which recommends actions using an objective function and constraints. It builds on predictive output and requires explicit decision criteria.

Sensitivity versus scenario analysis

Sensitivity analysis changes one input at a time to find the most influential variable. Scenario analysis changes several inputs together to model coherent alternative futures.

Confirmation bias

The tendency to seek and weight evidence that supports an existing belief while discounting contradictory information. It is countered by actively seeking disconfirming evidence.

Threats to ethical compliance

Self-interest, self-review, advocacy, familiarity, and intimidation. Each must be evaluated and reduced to an acceptable level by safeguards or the engagement declined.

Relevant cost

A future, incremental cash flow that differs between alternatives. Sunk costs, committed costs, and allocated fixed overhead are excluded because they do not change with the decision.

Opportunity cost

The contribution forgone from the next best alternative use of a resource. Omitting it from a decision overstates the benefit of the option being evaluated.

Cash operating cycle

Inventory days plus receivable days less payable days. It measures the period between paying suppliers and collecting from customers, and drives the working capital financing requirement.

Economic order quantity

The order size that minimises total inventory cost, occurring where ordering cost equals holding cost. It assumes constant demand, known costs, and no quantity discounts.

Equivalent units

Completed units plus closing work in progress multiplied by its degree of completion. It converts partially finished output into whole-unit equivalents for process costing.

Zero-based budgeting

A method requiring every activity and cost to be justified from a zero base in ranked decision packages. It resists incremental slack but consumes significant management time.

Weighted average cost of capital

The blended after-tax cost of debt and equity weighted by market values. It is the minimum return required from investments and the discount rate for average-risk projects.