CMA Sri Lanka SL1 Strategic Management Accounting Exam cheat sheet

Strategic management accounting extends cost accounting outward: it adds competitor cost, customer value, and market-position data to internal cost data.

Relevant cost criteria: a cost must be future-dated and differ between alternatives; sunk costs and committed fixed costs are excluded from the decision.

Opportunity cost is the contribution forgone from the next best rejected alternative and must be included in relevant costing even though no cash flow occurs.

Value chain analysis separates primary activities (inbound logistics, operations, outbound logistics, marketing, service) from support activities; cost advantage is sought at activity level.

Target costing works backwards: target cost = competitive selling price - required profit margin; the gap to current cost drives design and process redesign.

Kaizen costing applies continuous incremental reduction to costs of products already in production, unlike target costing which acts at the design stage.

Life-cycle costing accumulates upstream (R&D, design) and downstream (distribution, disposal) costs, so decisions are not distorted by counting only manufacturing cost.

Contribution per unit of scarce resource = contribution per unit / units of the limiting factor; rank products by this ratio, not by unit contribution.

High-low method: variable cost per unit = (cost at highest activity - cost at lowest activity) / (highest activity - lowest activity); fixed cost = total cost - variable rate x activity.

High-low uses only two data points, so it ignores all other observations and is sensitive to outliers; regression uses all observations.

Least-squares regression slope b = [nΣxy - ΣxΣy] / [nΣx² - (Σx)²]; intercept a = (Σy - bΣx) / n.

Coefficient of determination r² = proportion of variation in the dependent cost explained by the activity driver; r² near 1 indicates a good fit.

Learning curve (cumulative average model): average time per unit for 2n units = average time for n units x learning rate; total time = average time x number of units.

Incremental unit-time learning model reduces the time for each additional unit by a constant percentage, giving a different (higher) total than the cumulative average model.

Engineering estimates build costs from time-and-motion or specification studies; they suit new activities with no historical data but are costly and can embed inefficiency.

Account classification (analytical) method classifies each ledger account as fixed or variable; it is judgement-based and ignores mixed-cost behaviour within accounts.

Step-fixed costs remain constant over a relevant range then jump; treat each range separately when estimating.

Cost hierarchy: unit-level, batch-level, product-sustaining, and facility-sustaining costs; only unit-level costs vary proportionally with volume.

Mixed cost: total cost = fixed cost + (variable rate x activity); the relevant range is the band of activity over which the assumed behaviour holds.

ABC assigns overhead via activities: cost driver rate = activity cost pool / total driver quantity; product overhead = Σ (driver rate x driver quantity consumed).

ABC is most beneficial where overhead is large, product diversity is high, and batch/product-sustaining costs are significant.

Traditional absorption costing uses volume-based drivers (labour hours, machine hours) and over-costs high-volume standard products while under-costing low-volume complex products.

Activity-based management uses ABC output for ABB (activity-based budgeting), process improvement, and customer profitability analysis.

Time-driven ABC estimates cost per time unit of resource supplied and unit times of activity demanded, avoiding costly driver surveys.

Customer profitability: a customer's net margin = revenue - product cost - customer-specific costs (order handling, special packaging, returns, credit).

Under- or over-absorption = actual overhead incurred - overhead absorbed (predetermined rate x actual activity); under-absorption is a debit to cost of sales.

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

Material purchases (units) = production requirement + closing material inventory - opening material inventory.

Cash budget receipts use the collection pattern (e.g. 60% in month of sale, 40% next month); payments follow the supplier credit pattern, and depreciation is excluded as non-cash.

Flexed budget = original budget adjusted to actual activity using the standard variable cost per unit; fixed costs stay at budgeted amount.

Zero-based budgeting requires each activity to be justified from a zero base; incremental budgeting rolls forward last year's budget with adjustments.

Rolling (continuous) budgets are re-drawn each period, keeping a constant future horizon, and reduce the risk of stale annual plans.

Beyond budgeting decentralises targets and uses relative KPIs and rolling forecasts instead of fixed annual contracts.

Top-down budgeting is fast and aligned to strategy but can demotivate; participative (bottom-up) budgeting improves commitment but risks budgetary slack.

Principal budget factor (limiting factor) is identified first; all other budgets are built around it.

Material price variance = (standard price - actual price) x actual quantity purchased; material usage variance = (standard quantity for actual output - actual quantity used) x standard price.

Labour rate variance = (standard rate - actual rate) x actual hours paid; labour efficiency variance = (standard hours for actual output - actual hours worked) x standard rate.

Variable overhead efficiency variance uses hours; variable overhead expenditure variance = actual variable overhead - (standard rate x actual hours).

Fixed overhead expenditure variance = budgeted fixed overhead - actual fixed overhead; volume variance = (budgeted hours - standard hours for actual output) x standard fixed overhead rate.

Sales price variance = (actual price - standard price) x actual units sold; sales volume contribution variance = (actual units - budget units) x standard contribution per unit.

Mix variance = (actual mix proportion - standard mix proportion) x actual total quantity x standard margin; yield variance = (actual yield - standard yield from actual input) x standard margin.

Operating statement reconciles budgeted profit to actual profit: start with budgeted profit, add favourable variances, deduct adverse variances, adjust for fixed-cost volume.

Planning (planning/budget) variances arise from revised standards and are separated from operating variances, which are the responsibility of operational managers.

A variance is investigated only if it exceeds a threshold or shows a non-random pattern; random variances within control limits are not actionable.

Profit-maximising output occurs where marginal revenue = marginal cost; price is read from the demand curve at that quantity.

Price elasticity of demand = percentage change in quantity demanded / percentage change in price; demand is elastic when the absolute value exceeds 1, so a price cut raises revenue.

Full cost-plus price = total cost x (1 + mark-up); marginal cost-plus uses variable cost as the base and is valid for short-term spare-capacity decisions.

Return on investment pricing sets price so that profit / capital employed meets a target ROI.

Target pricing: price is set by the market, and the required cost is derived; cost reduction closes the gap (target costing).

Price skimming sets a high launch price to recover development cost from early adopters; penetration pricing sets a low price to build share and experience-curve cost advantage.

Predatory pricing is below cost to eliminate competitors and is prohibited under competition law; limit pricing sets price just below the level that would attract entrants.

Relevant (minimum) price for a one-off order = incremental variable cost + any opportunity cost of scarce resources + incremental fixed cost.

General transfer pricing rule: minimum transfer price = variable cost of the selling division + opportunity cost of transferring internally.

When the selling division has spare capacity, opportunity cost is zero, so the minimum transfer price equals variable cost.

When the selling division is at full capacity, opportunity cost equals the lost external contribution, so minimum transfer price = variable cost + lost contribution per unit.

Market-based transfer prices are objective and preserve divisional autonomy but ignore internal cost savings and market imperfections.

Cost-based transfer prices (variable cost, full cost, cost-plus) are simple but can pass inefficiency downstream and distort divisional profit.

Dual transfer pricing records the selling division at market price and the buying division at variable cost, with the difference absorbed centrally; it motivates both but needs a reconciling account.

Goal congruence requires the transfer price to make the optimal group decision also optimal for both divisional managers.

Value engineering reduces cost by changing design or specification without reducing customer value; value analysis does the same for existing products.

Supply chain cost management extends cost reduction to suppliers and customers, using total cost of ownership rather than purchase price alone.

ROI = divisional operating profit / divisional investment; residual income = operating profit - (required rate x investment).

RI encourages acceptance of any project earning above the required rate; ROI can cause rejection of projects that dilute a high existing ROI.

EVA = after-tax operating profit - (WACC x adjusted capital employed); adjustments capitalise R&D and add back accounting distortions.

Balanced scorecard perspectives: financial, customer, internal business process, learning and growth; each needs objectives, measures, targets, and initiatives.

A good performance measure must be valid, reliable, timely, and controllable by the manager being assessed.

Controllability principle: managers should be judged only on revenues, costs, and investments they can influence.

Transfer-pricing and allocated head-office costs distort divisional profit; distinguish divisional contribution from group profit.

Benchmarking compares processes and performance against best practice internally, competitively, functionally, or generically.

Management control systems combine cybernetic controls (budgets, variance reports), beliefs systems, boundary systems, and interactive controls.

Relevant costing for make-or-buy: compare avoidable internal cost with the external purchase price plus any opportunity cost of released capacity.

Shut-down decision: a segment is retained in the short run if its contribution covers avoidable fixed costs; unavoidable allocated fixed costs are irrelevant.

Accept-or-reject special order: accept if incremental revenue exceeds incremental cost plus opportunity cost, and if it does not breach existing market price agreements.

Sell-or-process-further: process further if incremental revenue from the additional processing exceeds incremental processing cost; joint costs before split-off are sunk.

Asset replacement: compare the total relevant cost of keeping versus replacing, including disposal proceeds and operating cost savings, ignoring past depreciation.

Qualitative factors that can override a quantitative decision: quality, supplier reliability, employee morale, customer reaction, brand, and legal constraints.

Decision trees evaluate sequential decisions by rolling back expected values from the branch ends; probabilities must be mutually exclusive and exhaustive.

Sensitivity analysis asks how far a variable can change before the decision reverses: margin of safety = (expected value - breakeven value) / expected value.

Relevant cost of using a scarce material already in stock = its opportunity cost (resale value or contribution from alternative use), not its original purchase price.

Expected value = Σ (probability x outcome); it is a long-run average and ignores the decision-maker's attitude to risk.

Expected value is unsuitable for one-off decisions or where outcomes are extreme, because it hides the spread of results.

Standard deviation measures absolute risk; coefficient of variation = standard deviation / expected value measures relative risk and allows comparison across projects.

Maximin selects the alternative with the best worst-case outcome (risk-averse); maximax selects the best best-case outcome (risk-seeking).

Minimax regret selects the alternative that minimises the maximum opportunity loss, computed from a regret table.

Risk is measurable with known probabilities; uncertainty means probabilities are unknown, so sensitivity and scenario analysis are used.

Sensitivity of a project variable = NPV / present value of the variable's cash flows; it shows the percentage change that makes NPV zero.

Scenario analysis recalculates outcomes under several coherent sets of assumptions; simulation (Monte Carlo) samples many combinations of variables.

Risk can be reduced by diversification, hedging, insurance, staged investment, and contractual risk transfer to third parties.