CMA Final Paper 13 cheat sheet

Relevant cost test: a cost is relevant only if it is a future cost that differs between alternatives; sunk costs and allocated common fixed costs are never relevant.

Contribution margin per unit = selling price − variable cost per unit; contribution margin ratio = contribution margin ÷ sales; use CM ratio for break-even in revenue terms.

Break-even units = total fixed costs ÷ contribution margin per unit; target profit units = (fixed costs + target profit) ÷ contribution margin per unit.

Special-order rule: accept when incremental revenue exceeds incremental costs and idle capacity exists; opportunity cost of lost regular sales must be added when capacity is binding.

Make-or-buy rule: outsource only when avoidable fixed costs plus variable costs exceed the outside purchase price plus qualitative factors such as quality and supplier risk.

Throughput contribution = sales revenue − direct material cost; Theory of Constraints prioritizes relieving the bottleneck before improving non-bottleneck resources.

Target costing: allowable cost = target selling price − target profit margin; cost gaps are closed through value engineering, not by raising price.

Activity-based costing assigns overhead via cost pools and cost drivers; it corrects cross-subsidization when product volumes and complexity differ.

Relevant costing for scarce resources: rank products by contribution margin per unit of the limiting factor, not by absolute contribution margin.

WACC = (E/V) × Ke + (D/V) × Kd × (1 − tax rate); use market values of debt and equity, and after-tax cost of debt.

CAPM: Ke = risk-free rate + beta × market risk premium; levering beta uses Hamada: βL = βU × [1 + (1 − t)(D/E)].

FCFF = EBIT × (1 − t) + depreciation − capital expenditure − increase in net working capital; discount at WACC.

FCFE = net income + depreciation − capex − ΔNWC + net borrowing; discount at cost of equity.

Terminal value (Gordon growth) = FCF in year n+1 ÷ (WACC − g); g must be below the long-run growth rate of the economy.

NPV is the primary decision rule; IRR can mislead with non-conventional cash flows or when ranking mutually exclusive projects of different scale.

Modigliani-Miller with taxes: firm value rises with debt by the tax shield (t × D), offset by financial distress and agency costs.

Dividend irrelevance holds in perfect markets; in practice, dividend policy signals management expectations and interacts with clientele and tax effects.

Economic value added (EVA) = NOPAT − WACC × invested capital; positive EVA indicates returns above the cost of capital.

COSO internal control framework components: control environment, risk assessment, control activities, information and communication, and monitoring activities.

Segregation of duties splits authorization, custody of assets, record keeping, and reconciliation among different people.

COSO ERM integrates strategy and performance: governance and culture, strategy and objective-setting, performance, review and revision, and information, communication and reporting.

Risk response options are avoid, reduce, share (transfer), and accept; residual risk is the exposure remaining after the response.

Inherent risk is exposure before controls; residual risk is after controls; detection risk is the risk that audit procedures fail to catch a material misstatement.

Three lines model: management owns risk, a risk and compliance function oversees, and internal audit provides independent assurance.

Preventive controls stop errors before they occur (approvals, access limits); detective controls find them afterwards (reconciliations, exception reports).

Fraud triangle: pressure or incentive, opportunity, and rationalization; opportunity is reduced by strong controls and segregation of duties.

Business continuity uses RTO (recovery time objective) and RPO (recovery point objective) to set backup and redundancy requirements.

Ethical decision tests: utilitarian (greatest good), rights-based (duty and entitlements), justice (fairness), and virtue (character) frameworks.

A conflict of interest exists when personal interest could improperly influence professional judgment; the standard response is disclosure and recusal.

Independence of auditors is impaired by financial interests, employment relationships, and long association; safeguards include rotation and independent review.

A strong code of conduct is specific, communicated, enforced with consequences, and supported by a whistleblowing channel with anti-retaliation protection.

Agency problem: managers may pursue perquisites and empire-building; monitoring, incentive alignment, and board oversight are the main mitigants.

Board effectiveness requires a majority of independent directors, separation of chair and CEO roles, and an independent audit committee.

Shareholder primacy and stakeholder theory differ on whose interests the board must balance; disclosure and transparency are common to both.

Whistleblower protection laws and internal reporting channels reduce the cost of reporting misconduct and support ethical culture.

Return on investment = operating income ÷ invested capital; it can induce suboptimal decisions because managers may reject projects below current ROI but above the cost of capital.

Residual income = operating income − (required rate of return × invested capital); it aligns division decisions with firm value better than ROI.

Balanced Scorecard perspectives: financial, customer, internal process, and learning and growth; each needs objectives, measures, targets, and initiatives.

A KPI must be specific, measurable, achievable, relevant, and time-bound; lagging indicators measure outcomes, leading indicators predict them.

Transfer pricing methods: market-based, cost-based, and negotiated; market price best preserves divisional autonomy when a competitive market exists.

Budget variances: a favorable variance increases profit; investigate variances that are material and controllable, not every variance.

Flexible budget restates costs for actual volume; the sales-volume variance is the difference between static and flexible budgets.

Goal congruence means divisional incentives align with corporate objectives; dysfunctional behavior arises when measures reward local optimization.

Rolling forecasts and beyond-budgeting reduce the rigidity of annual fixed budgets in volatile environments.

Data analytics types: descriptive (what happened), diagnostic (why), predictive (what will happen), and prescriptive (what to do).

Data quality dimensions: accuracy, completeness, consistency, timeliness, validity, and uniqueness; poor quality undermines analytics regardless of model sophistication.

Big data characteristics: volume, velocity, variety, veracity, and value.

ERP integrates finance, supply chain, and HR into a single database, improving data consistency but raising implementation and change-management risk.

IT general controls cover access management, change management, and IT operations; application controls cover input, processing, and output.

Cloud computing service models: IaaS (infrastructure), PaaS (platform), SaaS (software); shared responsibility shifts with the model.

Cybersecurity controls: least privilege, multi-factor authentication, encryption at rest and in transit, patch management, and incident response plans.

Robotic process automation handles rule-based repetitive tasks; machine learning suits pattern recognition and prediction; process mining reveals actual process flows.

Data governance defines ownership, stewardship, and lifecycle rules; the GDPR and similar laws impose lawful basis, minimization, and breach notification duties.

Relevant cost test: a cost is relevant only if it is a future cost that differs between alternatives; sunk costs and allocated common fixed costs are never relevant.

Contribution margin per unit = selling price − variable cost per unit; contribution margin ratio = contribution margin ÷ sales; use CM ratio for break-even in revenue terms.

Break-even units = total fixed costs ÷ contribution margin per unit; target profit units = (fixed costs + target profit) ÷ contribution margin per unit.

Special-order rule: accept when incremental revenue exceeds incremental costs and idle capacity exists; opportunity cost of lost regular sales must be added when capacity is binding.

Make-or-buy rule: outsource only when avoidable fixed costs plus variable costs exceed the outside purchase price plus qualitative factors such as quality and supplier risk.

Throughput contribution = sales revenue − direct material cost; Theory of Constraints prioritizes relieving the bottleneck before improving non-bottleneck resources.

Target costing: allowable cost = target selling price − target profit margin; cost gaps are closed through value engineering, not by raising price.

Activity-based costing assigns overhead via cost pools and cost drivers; it corrects cross-subsidization when product volumes and complexity differ.

Relevant costing for scarce resources: rank products by contribution margin per unit of the limiting factor, not by absolute contribution margin.

WACC = (E/V) × Ke + (D/V) × Kd × (1 − tax rate); use market values of debt and equity, and after-tax cost of debt.

CAPM: Ke = risk-free rate + beta × market risk premium; levering beta uses Hamada: βL = βU × [1 + (1 − t)(D/E)].

FCFF = EBIT × (1 − t) + depreciation − capital expenditure − increase in net working capital; discount at WACC.

FCFE = net income + depreciation − capex − ΔNWC + net borrowing; discount at cost of equity.

Terminal value (Gordon growth) = FCF in year n+1 ÷ (WACC − g); g must be below the long-run growth rate of the economy.

NPV is the primary decision rule; IRR can mislead with non-conventional cash flows or when ranking mutually exclusive projects of different scale.

Modigliani-Miller with taxes: firm value rises with debt by the tax shield (t × D), offset by financial distress and agency costs.

Dividend irrelevance holds in perfect markets; in practice, dividend policy signals management expectations and interacts with clientele and tax effects.

Economic value added (EVA) = NOPAT − WACC × invested capital; positive EVA indicates returns above the cost of capital.

COSO internal control framework components: control environment, risk assessment, control activities, information and communication, and monitoring activities.

Segregation of duties splits authorization, custody of assets, record keeping, and reconciliation among different people.

COSO ERM integrates strategy and performance: governance and culture, strategy and objective-setting, performance, review and revision, and information, communication and reporting.

Risk response options are avoid, reduce, share (transfer), and accept; residual risk is the exposure remaining after the response.

Inherent risk is exposure before controls; residual risk is after controls; detection risk is the risk that audit procedures fail to catch a material misstatement.

Three lines model: management owns risk, a risk and compliance function oversees, and internal audit provides independent assurance.

Preventive controls stop errors before they occur (approvals, access limits); detective controls find them afterwards (reconciliations, exception reports).

Fraud triangle: pressure or incentive, opportunity, and rationalization; opportunity is reduced by strong controls and segregation of duties.

Business continuity uses RTO (recovery time objective) and RPO (recovery point objective) to set backup and redundancy requirements.

Ethical decision tests: utilitarian (greatest good), rights-based (duty and entitlements), justice (fairness), and virtue (character) frameworks.

A conflict of interest exists when personal interest could improperly influence professional judgment; the standard response is disclosure and recusal.

Independence of auditors is impaired by financial interests, employment relationships, and long association; safeguards include rotation and independent review.

A strong code of conduct is specific, communicated, enforced with consequences, and supported by a whistleblowing channel with anti-retaliation protection.

Agency problem: managers may pursue perquisites and empire-building; monitoring, incentive alignment, and board oversight are the main mitigants.

Board effectiveness requires a majority of independent directors, separation of chair and CEO roles, and an independent audit committee.

Shareholder primacy and stakeholder theory differ on whose interests the board must balance; disclosure and transparency are common to both.

Whistleblower protection laws and internal reporting channels reduce the cost of reporting misconduct and support ethical culture.

Return on investment = operating income ÷ invested capital; it can induce suboptimal decisions because managers may reject projects below current ROI but above the cost of capital.

Residual income = operating income − (required rate of return × invested capital); it aligns division decisions with firm value better than ROI.

Balanced Scorecard perspectives: financial, customer, internal process, and learning and growth; each needs objectives, measures, targets, and initiatives.

A KPI must be specific, measurable, achievable, relevant, and time-bound; lagging indicators measure outcomes, leading indicators predict them.

Transfer pricing methods: market-based, cost-based, and negotiated; market price best preserves divisional autonomy when a competitive market exists.

Budget variances: a favorable variance increases profit; investigate variances that are material and controllable, not every variance.

Flexible budget restates costs for actual volume; the sales-volume variance is the difference between static and flexible budgets.

Goal congruence means divisional incentives align with corporate objectives; dysfunctional behavior arises when measures reward local optimization.

Rolling forecasts and beyond-budgeting reduce the rigidity of annual fixed budgets in volatile environments.

Data analytics types: descriptive (what happened), diagnostic (why), predictive (what will happen), and prescriptive (what to do).

Data quality dimensions: accuracy, completeness, consistency, timeliness, validity, and uniqueness; poor quality undermines analytics regardless of model sophistication.

Big data characteristics: volume, velocity, variety, veracity, and value.

ERP integrates finance, supply chain, and HR into a single database, improving data consistency but raising implementation and change-management risk.

IT general controls cover access management, change management, and IT operations; application controls cover input, processing, and output.

Cloud computing service models: IaaS (infrastructure), PaaS (platform), SaaS (software); shared responsibility shifts with the model.

Cybersecurity controls: least privilege, multi-factor authentication, encryption at rest and in transit, patch management, and incident response plans.

Robotic process automation handles rule-based repetitive tasks; machine learning suits pattern recognition and prediction; process mining reveals actual process flows.

Data governance defines ownership, stewardship, and lifecycle rules; the GDPR and similar laws impose lawful basis, minimization, and breach notification duties.