CMA Inter Paper 12 Management Accounting key terms

Sales revenue minus all variable costs. It shows how much each sale adds towards covering fixed costs and then generating profit, and it is the core measure used in marginal costing and CVP analysis.

The level of sales, in units or value, at which total contribution exactly equals total fixed costs, so profit is zero. It marks where the organisation moves from loss into profit.

The amount by which budgeted or actual sales exceed break-even sales, expressed in units, revenue or as a percentage. It measures how far sales can fall before a loss is incurred.

Contribution divided by sales revenue, expressed as a percentage. It indicates the proportion of each rupee of sales available to cover fixed costs and profit, and is used to compute break-even revenue.

A costing method in which only variable production costs are treated as product cost, while fixed costs are written off against contribution in the period incurred. It supports short-term decisions and CVP analysis.

A costing method that assigns both variable and fixed production costs to units produced, so fixed overhead is carried in inventory until the goods are sold. Profit therefore depends partly on production volume.

The predetermined rate used to charge fixed and variable production overhead into product cost, usually total budgeted overhead divided by a budgeted base such as labour hours or machine hours.

The difference between overhead actually incurred and overhead absorbed into production using the predetermined rate. Over-absorption means too much was charged to products; under-absorption means too little was charged.

A statement explaining the difference between marginal costing profit and absorption costing profit, usually by the change in inventory volume multiplied by the fixed overhead absorption rate per unit.

A future, incremental cash flow that differs between the alternatives being considered. Costs that are sunk, committed or identical under every option are irrelevant and must be excluded from the decision.

The contribution or benefit forgone by using a scarce resource in one way rather than in its next best alternative. It is a relevant cost even though no cash payment appears in the accounts.

A cost already incurred by a past decision that cannot be changed by any future action. It is never relevant to a decision and should be ignored, however large it appears.

A fixed cost arising from a past decision to acquire capacity, such as factory rent or a lease, which cannot be altered in the short term. It is generally irrelevant to short-term decisions.

A scarce resource, such as machine hours, skilled labour or a key material, that restricts the volume of output or sales. Ranking products by contribution per unit of the limiting factor maximises total contribution.

A choice between producing a component internally and purchasing it externally. Relevant costs are the avoidable internal costs compared with the purchase price, adjusted for opportunity costs of freed capacity.

A short-term judgement on whether to cease an activity or segment. The activity is usually retained while it earns a positive contribution, unless closure releases capacity with a higher-value alternative use.

A cost that can be eliminated if an activity, product or department is discontinued. Only avoidable costs are relevant when evaluating closure, because unavoidable allocated fixed costs continue regardless.

A predetermined estimate of the cost of producing one unit, built from quantity and price standards for materials, labour and overhead. It provides the benchmark against which actual performance is measured.

The process of comparing actual results with standard or budgeted figures, identifying the causes of differences and reporting them by responsibility. Favourable variances increase profit; adverse variances reduce it.

The difference between the standard price and the actual price paid, multiplied by the actual quantity purchased or used. It measures purchasing performance and is usually the responsibility of the purchasing manager.

The difference between the standard quantity allowed for actual output and the actual quantity used, valued at the standard price. It measures efficiency in consuming material or labour.

The cost of paid hours during which employees could not work because of machine breakdowns, material shortages or similar causes, valued at the standard labour rate. It is always adverse.

The difference between overhead absorbed into production at the standard rate and budgeted fixed overhead, caused by producing more or less than the budgeted volume. It is an absorption costing measure only.

The portion of a total variance caused by an error in, or a revision of, the original standard itself. It is separated from operational variance so managers are judged only on factors they control.

The portion of a total variance caused by actual operating performance differing from a revised, realistic standard. It reflects efficiency and price performance that managers can actually influence.

A standard set assuming perfect efficiency, no waste, no idle time and best possible prices. It is motivating in theory but often demoralising in practice because it is rarely achievable.

A standard that allows for normal levels of waste, idle time and machine downtime, so it can be achieved with efficient working. It is the usual basis for budgeting and performance evaluation.

A budget prepared for the actual level of activity achieved, by flexing variable costs with volume while holding fixed costs constant. It allows a fair comparison of actual cost with what should have been incurred.

A budget prepared for one planned level of activity only and not adjusted afterwards. Comparing it directly with actual results at a different volume produces misleading variances.

A budgeting approach in which every activity must be justified from a nil base each period, rather than by adjusting last year's figure. Decision packages are ranked and funded in priority order.

A budgeting approach that starts from the previous period's budget or actual cost and adjusts it for expected changes such as inflation or volume. It is quick but tends to perpetuate past inefficiencies.

The process of setting budgets, communicating them, measuring actual performance against them and taking corrective action on significant deviations. It links planning with day-to-day control of responsibility centres.

A costing method that assigns overhead to products according to the activities they consume, using cost drivers rather than a single volume-based absorption rate. It improves accuracy where products differ in complexity.

A factor that causes the cost of an activity to change, such as number of set-ups, orders or machine hours. It provides the basis for allocating activity cost pools to products.

The use of activity based cost information to improve operations, for example by eliminating non-value-added activities, redesigning processes or improving product mix and pricing decisions.

An activity that increases the worth of a product or service to the customer and that the customer would be willing to pay for. Non-value-added activities consume resources without adding worth.

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 should increase shareholder wealth and be accepted.

The discount rate at which a project's net present value equals zero. It is compared with the cost of capital; a project is acceptable when its IRR exceeds the required rate.

The time taken for cumulative cash inflows to equal the initial investment. It is simple and emphasises liquidity and risk, but ignores the time value of money and cash flows after payback.

The required rate of return used to convert future cash flows into present value, reflecting the cost of capital and the risk of the project. A higher rate reduces the present value of distant cash flows.

The weighted average return a company must earn on its investments to satisfy lenders and shareholders. It is the minimum acceptable return and the usual discount rate in investment appraisal.

Divisional profit less a notional interest charge on the division's invested capital. Unlike return on investment, it encourages managers to accept projects earning above the cost of capital.

Divisional operating profit divided by divisional invested capital, expressed as a percentage. It is widely used but can cause managers to reject profitable projects that would lower the division's existing ratio.

The price at which one division of a company supplies goods or services to another. It affects divisional profit, manager motivation and goal congruence, and should ideally reflect opportunity cost.

The alignment of individual managers' and divisions' objectives with those of the organisation as a whole, so that decisions taken locally also maximise overall corporate benefit.

A transfer pricing arrangement in which the supplying division is credited at one price, often market price, while the receiving division is charged a lower price, such as variable cost plus a mark-up.

A constraint-based approach that treats only direct material as a truly variable cost and ranks products by throughput per unit of bottleneck resource, where throughput is sales revenue less material cost.

A system that assigns revenues, costs and investment to individual managers and reports performance against controllable items, so that each responsibility centre is evaluated on what it can influence.

A pricing-led approach in which the allowable cost is found by deducting the required profit margin from an estimated selling price set by market conditions, and the product is then designed to meet that cost.

A pricing method that adds a fixed mark-up or margin to the estimated cost of a product or service. It is simple and ensures costs are covered but ignores customer demand and competitor prices.

A technique that tests how a decision or project outcome changes when one key assumption, such as selling price, volume or discount rate, is varied. It identifies the variables to which results are most exposed.