CMA Inter Paper 12 Management Accounting cheat sheet

Management accounting is internally focused, forward-looking and unregulated; financial accounting is externally focused, historical and governed by statute and accounting standards.

Cost object: anything for which a separate measurement of cost is required (product, department, customer, activity).

Direct cost is traceable to a cost object without apportionment; indirect cost (overhead) is not economically traceable and must be allocated or apportioned.

Prime cost = direct material + direct labour + direct expenses. Conversion cost = direct labour + production overhead.

Product cost is inventorised until sale; period cost is written off in the period incurred.

Cost classification bases: nature/element, function, behaviour (fixed, variable, semi-variable), traceability, controllability, relevance for decisions.

Value chain: R&D, design, production, marketing, distribution, customer service. Management accounting spans all links, not only production.

Line vs staff: line managers hold authority for operations; staff (management accountant) advises and supplies information without command authority.

Cost accounting is a subset of management accounting; it feeds cost data into planning, control and decision support.

High-low method: variable cost per unit = (cost at high activity − cost at low activity) / (high activity − low activity); fixed cost = total cost − variable cost at either point.

Contribution per unit = selling price − variable cost per unit. C/S ratio = contribution / sales (per unit or in total).

Break-even units = fixed cost / contribution per unit; break-even revenue = fixed cost / C/S ratio.

Margin of safety = actual or budgeted sales − break-even sales (units or value). Margin of safety % = margin of safety / actual sales.

Target profit units = (fixed cost + target profit) / contribution per unit. For target profit after tax, divide by (1 − tax rate) first.

Operating gearing = contribution / profit. High gearing means profit is highly sensitive to sales volume changes.

In marginal costing, closing inventory is valued at variable cost only; fixed production overhead is charged in full to the period.

Profit difference between absorption and marginal costing = change in inventory units × fixed production overhead absorption rate per unit.

For multi-product break-even, rank products by contribution per unit of limiting factor; break-even is reached by cumulative contribution.

Material price variance = (standard price − actual price) × actual quantity purchased or used.

Material usage variance = (standard quantity for actual output − actual quantity used) × standard price.

Labour rate variance = (standard rate − actual rate) × actual hours paid.

Labour efficiency variance = (standard hours for actual output − actual hours worked) × standard rate.

Overhead fixed expenditure variance = budgeted fixed overhead − actual fixed overhead; volume variance = absorbed − budgeted fixed overhead.

Variable overhead variances are calculated on the same quantity basis as material usage and labour efficiency.

Sales price variance = (actual price − standard price) × actual quantity sold; sales volume profit variance = (actual quantity − budget quantity) × standard profit per unit.

Operating profit variances reconcile budgeted profit to actual profit: standard profit on actual sales ± cost variances (adverse variances reduce profit).

Idle time variance = idle hours × standard rate, always adverse; it is separated from the efficiency variance.

Fixed budget is set for one activity level; flexible budget is recast for the actual activity level so like-for-like comparison is possible.

Flexed budget = budgeted fixed cost + (actual units × budgeted variable cost per unit).

Incremental budgeting starts from last period's figures and adjusts; zero-based budgeting rebuilds each cost from a zero base and requires justification.

ZBB decision packages are ranked to allocate resources; it consumes more time and management effort than incremental budgeting.

Principal budget factor (limiting factor) is the constraint that governs the whole budget; the sales budget or production budget is prepared first accordingly.

Production budget (units) = sales units + closing finished goods − opening finished goods.

Material purchases (units) = production usage + closing inventory − opening inventory.

Cash budget records cash receipts and payments only; depreciation, accruals and bad debt write-offs are excluded from cash flow.

Rolling (continuous) budget is revised each period by adding a new period and dropping the expired one, keeping the horizon constant.

ABC assigns overhead to cost pools by activity, then to products using cost drivers (machine hours, setups, orders, inspections, deliveries).

Cost driver rate = activity cost pool / total driver quantity. Overhead per product = sum of (driver quantity used × driver rate).

ABC is most useful where overhead is high, products are diverse, and batch or product-sustaining costs are significant.

ABC reduces cross-subsidisation caused by a single volume-based recovery rate, but is not a substitute for variable costing in short-term decisions.

Hierarchy of activities: unit-level, batch-level, product-sustaining, facility-sustaining. Facility-sustaining costs are not driven by products.

ABM uses ABC information to improve operations (activity analysis) and to change the mix of activities (business process re-engineering).

Value-added vs non-value-added activities: only non-value-added activities such as rework, storage and waiting are targets for elimination.

ABC cost data are more accurate for pricing and product-mix decisions but ignore unused capacity unless capacity-based drivers are used.

Relevant cost is a future incremental cash flow that differs between alternatives; past (sunk) costs and committed costs are irrelevant.

Opportunity cost is the contribution forgone from the next best alternative use of a scarce resource and is included in relevant cost.

For a special order, minimum price = incremental variable cost + any opportunity cost of capacity used.

Material already in stock: relevant cost is nil if no alternative use; replacement cost if it will be replaced; net realisable value if it would otherwise be sold.

Labour: relevant cost is the wage paid if the labour is hired specifically; if transferred from other work, relevant cost is the contribution forgone.

Make-or-buy: compare variable cost of making plus opportunity cost of facilities with the buy price; avoidable fixed costs are relevant.

Shut-down decision: continue if contribution from the segment exceeds avoidable fixed costs.

With one limiting factor, rank products by contribution per unit of the scarce resource and produce in rank order.

With two or more limiting factors, use linear programming; the optimal solution lies at a corner of the feasible region.

Price elasticity of demand = % change in quantity demanded / % change in price. Demand is elastic where |e| > 1.

Profit-maximising price: marginal revenue = marginal cost. For P = a − bQ, MR = a − 2bQ.

Cost-plus pricing: price = cost × (1 + mark-up %). Full cost plus uses absorption cost; marginal cost plus uses variable cost and contribution.

Mark-up on cost vs margin on price: margin = mark-up / (1 + mark-up).

Target costing: target cost = competitive selling price − required profit margin; the cost gap must be closed by design and process improvement.

Penetration pricing sets a low initial price to build volume; price skimming sets a high initial price to capture early adopters.

Relevant (incremental) pricing for a one-off order is acceptable when spare capacity exists and the order does not cannibalise existing sales at a lower price.

Transfer price minimum for the selling division = variable cost + opportunity cost of the transferred unit.

Payback period = time to recover the initial outlay from cumulative net cash inflows; it ignores cash flows after payback and the time value of money.

ARR = average annual accounting profit / average investment, where average investment = (initial cost + scrap value) / 2.

NPV discounts all relevant cash flows at the cost of capital; accept if NPV > 0. It is the preferred method because it is absolute and additive.

IRR is the discount rate at which NPV = 0; accept if IRR > cost of capital.

Annuity factor and discount factor tables: DF = 1/(1+r)^n; annuity factor is the sum of discount factors for the period.

Tax and depreciation: capital allowances give tax relief; depreciation itself is not a cash flow. Tax is normally assumed paid one year in arrears.

Relevant cash flows are incremental, after tax, and exclude sunk costs, allocated fixed overhead and financing costs already in the discount rate.

Capital rationing with divisible projects: rank by profitability index = NPV / initial investment; with indivisible projects, use trial combinations.

ROI = divisional profit / divisional investment. RI = divisional profit − (imputed interest rate × divisional investment).

ROI can cause goal congruence problems because a manager may reject a project earning above the cost of capital but below the current divisional ROI.

RI encourages acceptance of any project earning above the imputed charge, but it is an absolute measure that is harder to compare across divisions.

Transfer price range: minimum = variable cost + opportunity cost of the selling division; maximum = lower of external market price and the buying division's net marginal revenue.

Market-based transfer price is appropriate where a competitive external market exists; cost-based transfer price is used where no market exists.

Dual transfer pricing credits the seller at market price and charges the buyer at variable cost; the difference is a head-office adjustment.

Balanced Scorecard perspectives: financial, customer, internal business process, learning and growth.

Non-financial indicators: quality, cycle time, on-time delivery, customer satisfaction, staff turnover, capacity utilisation.

Controllable profit excludes items not influenced by the divisional manager, such as apportioned head-office costs and interest.

Management accounting is internally focused, forward-looking and unregulated; financial accounting is externally focused, historical and governed by statute and accounting standards.

Cost object: anything for which a separate measurement of cost is required (product, department, customer, activity).

Direct cost is traceable to a cost object without apportionment; indirect cost (overhead) is not economically traceable and must be allocated or apportioned.

Prime cost = direct material + direct labour + direct expenses. Conversion cost = direct labour + production overhead.

Product cost is inventorised until sale; period cost is written off in the period incurred.

Cost classification bases: nature/element, function, behaviour (fixed, variable, semi-variable), traceability, controllability, relevance for decisions.

Value chain: R&D, design, production, marketing, distribution, customer service. Management accounting spans all links, not only production.

Line vs staff: line managers hold authority for operations; staff (management accountant) advises and supplies information without command authority.

Cost accounting is a subset of management accounting; it feeds cost data into planning, control and decision support.

High-low method: variable cost per unit = (cost at high activity − cost at low activity) / (high activity − low activity); fixed cost = total cost − variable cost at either point.

Contribution per unit = selling price − variable cost per unit. C/S ratio = contribution / sales (per unit or in total).

Break-even units = fixed cost / contribution per unit; break-even revenue = fixed cost / C/S ratio.

Margin of safety = actual or budgeted sales − break-even sales (units or value). Margin of safety % = margin of safety / actual sales.

Target profit units = (fixed cost + target profit) / contribution per unit. For target profit after tax, divide by (1 − tax rate) first.

Operating gearing = contribution / profit. High gearing means profit is highly sensitive to sales volume changes.

In marginal costing, closing inventory is valued at variable cost only; fixed production overhead is charged in full to the period.

Profit difference between absorption and marginal costing = change in inventory units × fixed production overhead absorption rate per unit.

For multi-product break-even, rank products by contribution per unit of limiting factor; break-even is reached by cumulative contribution.

Material price variance = (standard price − actual price) × actual quantity purchased or used.

Material usage variance = (standard quantity for actual output − actual quantity used) × standard price.

Labour rate variance = (standard rate − actual rate) × actual hours paid.

Labour efficiency variance = (standard hours for actual output − actual hours worked) × standard rate.

Overhead fixed expenditure variance = budgeted fixed overhead − actual fixed overhead; volume variance = absorbed − budgeted fixed overhead.

Variable overhead variances are calculated on the same quantity basis as material usage and labour efficiency.

Sales price variance = (actual price − standard price) × actual quantity sold; sales volume profit variance = (actual quantity − budget quantity) × standard profit per unit.

Operating profit variances reconcile budgeted profit to actual profit: standard profit on actual sales ± cost variances (adverse variances reduce profit).

Idle time variance = idle hours × standard rate, always adverse; it is separated from the efficiency variance.

Fixed budget is set for one activity level; flexible budget is recast for the actual activity level so like-for-like comparison is possible.

Flexed budget = budgeted fixed cost + (actual units × budgeted variable cost per unit).

Incremental budgeting starts from last period's figures and adjusts; zero-based budgeting rebuilds each cost from a zero base and requires justification.

ZBB decision packages are ranked to allocate resources; it consumes more time and management effort than incremental budgeting.

Principal budget factor (limiting factor) is the constraint that governs the whole budget; the sales budget or production budget is prepared first accordingly.

Production budget (units) = sales units + closing finished goods − opening finished goods.

Material purchases (units) = production usage + closing inventory − opening inventory.

Cash budget records cash receipts and payments only; depreciation, accruals and bad debt write-offs are excluded from cash flow.

Rolling (continuous) budget is revised each period by adding a new period and dropping the expired one, keeping the horizon constant.

ABC assigns overhead to cost pools by activity, then to products using cost drivers (machine hours, setups, orders, inspections, deliveries).

Cost driver rate = activity cost pool / total driver quantity. Overhead per product = sum of (driver quantity used × driver rate).

ABC is most useful where overhead is high, products are diverse, and batch or product-sustaining costs are significant.

ABC reduces cross-subsidisation caused by a single volume-based recovery rate, but is not a substitute for variable costing in short-term decisions.

Hierarchy of activities: unit-level, batch-level, product-sustaining, facility-sustaining. Facility-sustaining costs are not driven by products.

ABM uses ABC information to improve operations (activity analysis) and to change the mix of activities (business process re-engineering).

Value-added vs non-value-added activities: only non-value-added activities such as rework, storage and waiting are targets for elimination.

ABC cost data are more accurate for pricing and product-mix decisions but ignore unused capacity unless capacity-based drivers are used.

Relevant cost is a future incremental cash flow that differs between alternatives; past (sunk) costs and committed costs are irrelevant.

Opportunity cost is the contribution forgone from the next best alternative use of a scarce resource and is included in relevant cost.

For a special order, minimum price = incremental variable cost + any opportunity cost of capacity used.

Material already in stock: relevant cost is nil if no alternative use; replacement cost if it will be replaced; net realisable value if it would otherwise be sold.

Labour: relevant cost is the wage paid if the labour is hired specifically; if transferred from other work, relevant cost is the contribution forgone.

Make-or-buy: compare variable cost of making plus opportunity cost of facilities with the buy price; avoidable fixed costs are relevant.

Shut-down decision: continue if contribution from the segment exceeds avoidable fixed costs.

With one limiting factor, rank products by contribution per unit of the scarce resource and produce in rank order.

With two or more limiting factors, use linear programming; the optimal solution lies at a corner of the feasible region.

Price elasticity of demand = % change in quantity demanded / % change in price. Demand is elastic where |e| > 1.

Profit-maximising price: marginal revenue = marginal cost. For P = a − bQ, MR = a − 2bQ.

Cost-plus pricing: price = cost × (1 + mark-up %). Full cost plus uses absorption cost; marginal cost plus uses variable cost and contribution.

Mark-up on cost vs margin on price: margin = mark-up / (1 + mark-up).

Target costing: target cost = competitive selling price − required profit margin; the cost gap must be closed by design and process improvement.

Penetration pricing sets a low initial price to build volume; price skimming sets a high initial price to capture early adopters.

Relevant (incremental) pricing for a one-off order is acceptable when spare capacity exists and the order does not cannibalise existing sales at a lower price.

Transfer price minimum for the selling division = variable cost + opportunity cost of the transferred unit.

Payback period = time to recover the initial outlay from cumulative net cash inflows; it ignores cash flows after payback and the time value of money.

ARR = average annual accounting profit / average investment, where average investment = (initial cost + scrap value) / 2.

NPV discounts all relevant cash flows at the cost of capital; accept if NPV > 0. It is the preferred method because it is absolute and additive.

IRR is the discount rate at which NPV = 0; accept if IRR > cost of capital.

Annuity factor and discount factor tables: DF = 1/(1+r)^n; annuity factor is the sum of discount factors for the period.

Tax and depreciation: capital allowances give tax relief; depreciation itself is not a cash flow. Tax is normally assumed paid one year in arrears.

Relevant cash flows are incremental, after tax, and exclude sunk costs, allocated fixed overhead and financing costs already in the discount rate.

Capital rationing with divisible projects: rank by profitability index = NPV / initial investment; with indivisible projects, use trial combinations.

ROI = divisional profit / divisional investment. RI = divisional profit − (imputed interest rate × divisional investment).

ROI can cause goal congruence problems because a manager may reject a project earning above the cost of capital but below the current divisional ROI.

RI encourages acceptance of any project earning above the imputed charge, but it is an absolute measure that is harder to compare across divisions.

Transfer price range: minimum = variable cost + opportunity cost of the selling division; maximum = lower of external market price and the buying division's net marginal revenue.

Market-based transfer price is appropriate where a competitive external market exists; cost-based transfer price is used where no market exists.

Dual transfer pricing credits the seller at market price and charges the buyer at variable cost; the difference is a head-office adjustment.

Balanced Scorecard perspectives: financial, customer, internal business process, learning and growth.

Non-financial indicators: quality, cycle time, on-time delivery, customer satisfaction, staff turnover, capacity utilisation.

Controllable profit excludes items not influenced by the divisional manager, such as apportioned head-office costs and interest.