CMA Final Paper 20A key terms

A costing method that assigns overhead to products or services based on the activities they consume, using cost drivers rather than a single volume-based rate. It improves accuracy where product diversity and overhead are high.

Any factor that causes a change in the total cost of an activity, such as number of setups, machine hours, or orders processed. Cost drivers form the allocation base in activity-based costing systems.

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

The benefit forgone by choosing one alternative over the next best option. It is a relevant cost in decision making even though it never appears in accounting records as an actual cash outflow.

A cost already incurred that cannot be recovered or changed by any future decision. Sunk costs are irrelevant to decision making and should be ignored when comparing alternatives.

A decision technique that compares only the differences in revenue, cost, and investment between alternatives. It focuses attention on relevant items and simplifies complex choices such as make-or-buy or special orders.

A minimal costing approach that treats only direct material as a product cost and expenses all other costs in the period incurred. It emphasises throughput contribution and short-term bottleneck management.

A management philosophy holding that a system's output is limited by its bottleneck resource. Improvement focuses on identifying, exploiting, and elevating the constraint rather than optimising every process equally.

The price at which one division of an organisation charges another for goods or services. Methods include market-based, cost-plus, and negotiated prices, and the choice affects divisional performance measurement.

A performance measurement framework that translates strategy into objectives across financial, customer, internal process, and learning-and-growth perspectives. It balances lagging financial results with leading operational indicators.

A quantifiable measure selected to track progress toward a specific strategic objective. Effective KPIs are specific, measurable, achievable, relevant, and time-bound, and are linked to accountability.

Divisional profit less a charge for the capital employed, calculated as operating profit minus a required return multiplied by invested capital. It encourages managers to accept projects earning above the cost of capital.

A widely used model describing internal control as five interrelated components: control environment, risk assessment, control activities, information and communication, and monitoring activities. It underpins assessments of control effectiveness.

An enterprise risk management model that integrates risk with strategy and performance. It sets out governance, strategy-setting, performance, review and revision, and information and communication across the entity.

The amount and type of risk an organisation is willing to accept in pursuit of its objectives. It is set by the board and expressed through risk tolerance limits and policies.

A structured log recording identified risks, their likelihood and impact ratings, owners, and mitigation actions. It is a core tool for monitoring and reporting risk across the organisation.

The level of risk before any controls are applied. Comparing inherent risk with residual risk shows how much protection existing controls actually provide.

The risk remaining after management has implemented controls and mitigation. It is compared against risk appetite to decide whether further action is required.

A preventive control that separates authorisation, custody, and record-keeping so no single person can both perpetrate and conceal an error or fraud. It is a fundamental element of internal control.

A governance model in which operational management owns risk, a risk and compliance function provides oversight, and internal audit gives independent assurance to the board. It clarifies accountability for risk management.

The standard requiring revenue to be recognised when control of goods or services transfers to the customer, using a five-step model from contract identification to satisfaction of performance obligations.

The standard requiring lessees to recognise most leases on the balance sheet as a right-of-use asset and a lease liability. It removes the previous distinction between operating and finance leases for lessees.

The requirement to reduce an asset's carrying amount when its recoverable amount falls below book value, and to recognise the loss in profit or loss. Recoverable amount is the higher of fair value less costs of disposal and value in use.

Cash generated by operations less capital expenditure needed to maintain and grow the asset base. It represents cash available to debt and equity holders and underpins valuation.

The sum of a project's future cash flows discounted at the cost of capital, less 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 cost of capital, though it can mislead when comparing projects of different scale or with non-conventional cash flows.

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

A model pricing equity as the risk-free rate plus beta multiplied by the market risk premium. It estimates the cost of equity used in calculating the weighted average cost of capital.

A measure of how much a share's returns move relative to the overall market. A beta above one indicates above-market volatility and raises the required return under the capital asset pricing model.

A value-based measure equal to net operating profit after tax minus a capital charge on invested capital. It indicates whether a firm earns more than its cost of capital.

The value of managerial flexibility to defer, expand, contract, or abandon an investment as uncertainty resolves. It supplements conventional discounted cash flow analysis for strategic projects.

A tax levied on the profit realised when a capital asset is sold for more than its cost base, with indexation or exemptions often applying. It is distinct from tax on ordinary business income.

An accounting adjustment recognising the future tax effect of temporary differences between accounting profit and taxable profit. It appears as a deferred tax asset or liability on the balance sheet.

Arranging affairs to reduce tax legally, often by exploiting gaps in the law. Aggressive schemes may breach anti-avoidance rules or general anti-abuse provisions and attract penalties.

The illegal non-payment or underpayment of tax through concealment, false reporting, or deliberate misrepresentation. It is a criminal offence distinct from lawful tax planning.

The principle that auditors must be free from relationships or interests that could compromise objective judgement. Safeguards include rotation, fee restrictions, and prohibitions on certain non-audit services.

A situation where a personal or financial interest could improperly influence professional judgement or duty. It must be disclosed and managed, often by recusal or independent review.

The protected disclosure by an employee of wrongdoing within an organisation. Effective whistleblowing channels and anti-retaliation policies are key elements of an ethical control environment.

A reporting approach explaining how an organisation creates value over time through six capitals and its business model. It links strategy, governance, performance, and prospects in a single concise report.

A sustainability accounting concept measuring performance across profit, people, and planet. It broadens reporting beyond financial results to social and environmental outcomes.

In sustainability and financial reporting, the threshold at which information could influence stakeholder decisions. Material topics vary by organisation and require assessment rather than a fixed quantitative cut-off.

The process of identifying and communicating with parties affected by an organisation's activities to understand their concerns. It informs materiality assessment and strengthens governance and sustainability reporting.