CMA Final Paper 13 key terms

A costing method that assigns overhead to products or services based on the activities they consume, using cost drivers rather than broad volume measures. It improves accuracy when products differ in complexity and batch size.

Any factor that causes a change in total cost, such as number of setups, machine hours, or orders processed. Identifying drivers is the foundation for assigning overhead in activity-based and driver-based cost models.

A future, incremental cash cost that differs between alternatives and therefore belongs in a decision analysis. Sunk costs and allocated fixed costs that do not change are excluded.

The contribution forgone when a scarce resource is committed to one use rather than its next best alternative. It is relevant to decisions such as special orders, make-or-buy, and constrained resource allocation.

A cost already incurred that cannot be recovered or changed by any future decision. It is irrelevant to decision making and should be excluded, even though it may be emotionally persuasive.

A management approach that identifies the bottleneck limiting system output, exploits and subordinates other operations to it, then elevates capacity. Throughput per unit of the constrained resource guides product priority.

A minimalist costing method that treats only direct materials as product cost and expenses all other costs in the period. It emphasises the rate at which the system generates money through sales.

A market-driven approach that subtracts a desired profit margin from the competitive selling price to set an allowable cost, then designs the product to meet it. Cost reduction begins at the design stage.

A systematic review of product design and processes to reduce cost without sacrificing the functions customers value. It is a key tool for closing the gap identified in target costing.

Accumulating all costs over a product's whole life, from research and design through manufacturing, distribution, service, and disposal. It supports pricing and design decisions that consider costs beyond production.

The blended required return on a firm's debt and equity, weighted by their market-value proportions and adjusted for tax deductibility of interest. It is the standard discount rate for evaluating average-risk projects.

A model that estimates the required return on equity as the risk-free rate plus beta times the market risk premium. Beta measures the sensitivity of the security's returns to market movements.

A measure of systematic risk expressing how much a security's returns move relative to the overall market. A beta above one indicates greater volatility than the market and a higher required return.

The sum of expected future cash flows discounted at the required rate of return, minus the initial investment. A positive NPV indicates the project adds value to shareholders.

The discount rate at which a project's net present value equals zero. It is compared with the hurdle rate, though it can mislead when comparing projects of different scale or timing.

A residual income measure equal to after-tax operating profit minus a capital charge on invested capital. It shows whether operations earn more than the cost of the funds employed.

Divisional profit less a charge for the capital employed, calculated using a required rate of return. Unlike return on investment, it encourages managers to accept projects earning above the capital charge.

An integrated, entity-wide process for identifying, assessing, and responding to risks across strategy, operations, reporting, and compliance. It aligns risk appetite with the pursuit of organisational objectives.

A widely used model describing internal control as five components: control environment, risk assessment, control activities, information and communication, and monitoring. It provides criteria for assessing control effectiveness.

A preventive control that separates authorisation, custody of assets, and record keeping among different people so no individual can both commit and conceal an error or fraud.

The amount and type of risk an organisation is willing to accept in pursuit of its objectives, expressed in qualitative or quantitative terms. It guides risk tolerance limits and decision boundaries.

A governance structure in which operational management owns risk, a risk and compliance function provides oversight, and internal audit gives independent assurance to the governing body.

The conflict that arises when managers acting as agents for shareholders pursue their own interests, such as perks or empire building, rather than maximising owner wealth. Governance and incentives aim to reduce it.

The system of rules, practices, and processes by which a company is directed and controlled, balancing stakeholder interests. It covers board composition, accountability, disclosure, and shareholder rights.

Reporting suspected wrongdoing within or outside an organisation, typically through a protected channel. Effective ethics programmes provide confidential routes and prohibit retaliation against reporters.

The signals senior leaders send through their behaviour, decisions, and communications about the importance of ethics and control. It strongly shapes the control environment and employee conduct.

Deliberate accounting or operational choices that steer reported results toward a desired figure. When it crosses into misrepresentation it becomes fraudulent and undermines the reliability of financial reporting.

A performance framework that translates strategy into objectives and measures across financial, customer, internal process, and learning and growth perspectives, linked by cause-and-effect relationships.

A visual diagram showing how objectives across the balanced scorecard perspectives connect through cause-and-effect chains, communicating how intangible capabilities drive financial outcomes.

A quantifiable measure selected to track progress on a critical success factor. Effective KPIs are specific, measurable, and tied to accountable owners and targets.

A ratio of divisional profit to invested capital, widely used to assess performance. It can discourage managers from accepting profitable projects that would lower the division's existing ratio.

The price charged for goods or services transferred between divisions of the same organisation. It affects divisional profit, motivation, and goal congruence, and must satisfy tax rules for cross-border transfers.

The alignment of individual managers' incentives with the organisation's overall objectives. Control systems, performance measures, and reward structures are designed to promote it.

The policies, roles, and processes that ensure data is accurate, secure, consistent, and used responsibly. It assigns ownership and accountability for data quality across the organisation.

Techniques that use historical data and statistical or machine-learning models to forecast future outcomes such as demand, default risk, or customer churn, supporting planning and decision making.

Software bots that mimic repetitive, rule-based human tasks such as data entry and reconciliation. It reduces processing time and error rates while raising new control and monitoring requirements.

European Union law governing the collection, processing, and transfer of personal data. It grants individuals rights over their data and imposes breach notification and accountability duties on organisations.