Strategic Management Accounting
The decision focus
This domain tests whether you can produce the number that changes a decision: relevant costing, limiting factors and linear programming, throughput accounting, target and life-cycle costing, activity-based costing, transfer pricing, divisional performance measures and the balanced scorecard.
Concepts to hold firmly
Relevant costing: future, incremental, cash. Exclude sunk costs, committed costs and apportioned fixed overhead. Include opportunity cost. Limiting factor: rank by contribution per unit of the scarce resource, not contribution per unit. Throughput accounting: throughput = sales revenue less direct material; the ratio is throughput per unit of bottleneck time. Target costing: target cost = competitive price less required margin; close the gap through design, not after production. Transfer pricing: the general rule is that the minimum is the supplying division's marginal or opportunity cost and the maximum is the external market price net of savings. Divisional performance: ROI can drive suboptimal decisions because a manager rejects a project earning above the cost of capital but below the division's current ROI; residual income aligns better with goal congruence.
Traps that appear in questions
Treating direct labour as free when it is scarce or redeployable. Using total contribution per unit when a bottleneck exists. Ignoring the difference between profit and cash in relevant costing. Calculating throughput as contribution. Forgetting that ABC allocates overhead on activities, not on volume, and so distorts where product complexity differs. Mixing the balanced scorecard's four perspectives with financial KPIs only.
Rule of thumb
For scarce labour, relevant cost is the higher of the wage rate and the contribution foregone from redeployment. If the workforce is paid and idle regardless of the decision, the wage is irrelevant but the lost contribution is not.