CMA Inter Paper 12 Management Accounting flashcards

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

Cost object

Any item for which a separate measurement of cost is required, such as a product, service, department, customer or activity. Costs are traced or allocated to it.

Prime cost

The sum of direct material, direct labour and direct expenses incurred in making a product. It excludes all production overhead, which is added to give factory cost.

Conversion cost

The cost of transforming raw material into finished output, equal to direct labour plus production overhead. It excludes direct material cost entirely.

Contribution per unit

Selling price per unit minus variable cost per unit. It measures how much each unit sold contributes towards covering fixed costs and then generating profit.

Break-even point

The activity level at which total contribution equals total fixed cost, giving neither profit nor loss. In units it is fixed cost divided by contribution per unit.

Margin of safety

The excess of actual or budgeted sales over break-even sales, expressed in units, revenue or as a percentage of actual sales. It indicates how far sales can fall before a loss arises.

Operating gearing

Contribution divided by profit. A high figure means fixed costs are large relative to variable costs, so a small change in sales volume produces a large change in profit.

Material usage variance

Standard quantity for actual output minus actual quantity used, multiplied by standard price per unit. It isolates waste or efficiency in physical material consumption.

Labour efficiency variance

Standard hours for actual output minus actual hours worked, multiplied by the standard rate. It measures productivity of labour independent of any pay-rate differences.

Fixed overhead volume variance

Absorbed fixed overhead minus budgeted fixed overhead. It arises only under absorption costing and reflects the difference between actual and budgeted activity levels.

Sales volume profit variance

Actual quantity sold minus budgeted quantity, multiplied by standard profit per unit. It shows the profit impact of selling more or fewer units than budgeted.

Flexible budget

A budget recast for the actual activity level achieved, using budgeted variable cost per unit and budgeted fixed cost. It allows a fair comparison with actual results.

Zero-based budgeting

A budgeting method where every cost must be justified from a nil base rather than from last period's figure. It requires decision packages to be prepared and ranked.

Principal budget factor

The constraint, often sales demand or a scarce resource, that limits the organisation's activity and therefore determines the order in which budgets are prepared.

Rolling budget

A budget continuously updated by adding a new period when the earliest period expires, so the planning horizon always remains constant, typically twelve months ahead.

Cost driver rate

An activity cost pool divided by the total quantity of its cost driver. It is used in activity based costing to charge overhead to products according to driver consumption.

Batch-level activity

An activity performed each time a batch is produced, such as machine setup or inspection, regardless of the number of units within the batch.

Activity based management

The use of activity based costing information to improve customer value and profit, through activity analysis and by eliminating non-value-added activities and their costs.

Sunk cost

A cost already incurred in the past that cannot be changed by any future decision. It is excluded from relevant costing because it does not differ between alternatives.

Opportunity cost

The contribution or benefit forgone by using a scarce resource in its next best alternative use. It is a relevant cost even though no cash payment is recorded.

Relevant cost

A future incremental cash flow that differs between the alternatives being considered. Costs that are past, committed or identical across options are irrelevant.

Limiting factor ranking

Where one resource is scarce, products are ranked by contribution per unit of that resource and produced in rank order until the resource is exhausted.

Price elasticity of demand

The percentage change in quantity demanded divided by the percentage change in price. Demand is elastic when the absolute value exceeds one.

Target costing

A method that sets the allowable cost as competitive selling price minus required profit margin, then designs the product to meet that cost, closing any cost gap.

Price skimming

A pricing strategy that sets a high initial price to capture customers willing to pay a premium, then reduces the price over time to reach more price-sensitive buyers.

Penetration pricing

A pricing strategy that sets a low initial price to attract volume quickly and build market share, often accepting low or negative early margins.

Net present value

The sum of present values of all relevant future cash flows, discounted at the cost of capital, minus the initial investment. A positive NPV means the project adds value.

Internal rate of return

The discount rate at which a project's net present value equals zero. A project is acceptable when its IRR exceeds the organisation's cost of capital.

Profitability index

A project's net present value divided by its initial investment. It is used to rank projects when capital is rationed and projects are divisible.

Return on investment

Divisional profit divided by divisional investment. It is a relative measure that permits comparison across divisions of different sizes but can discourage worthwhile investment.

Residual income

Divisional profit minus an imputed interest charge on the divisional investment. It encourages acceptance of any project earning more than the imputed charge.

Dual transfer pricing

A system crediting the selling division at the external market price while charging the buying division only the variable cost, with head office absorbing the difference.