CMA Sri Lanka SL1 Strategic Management Accounting Exam flashcards

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

Relevant cost

A future cash flow that differs between alternatives. Sunk costs, committed fixed costs, and non-cash book values are excluded because they do not change with the decision.

Opportunity cost

The contribution or benefit forgone from the next best alternative use of a resource. It is a relevant cost even though no cash payment is made.

Target cost

Competitive market price minus the required profit margin. The resulting allowable cost drives design, value engineering, and process redesign before production begins.

Life-cycle costing

Accumulating all costs over a product's whole life, from research and design through production, distribution, and disposal, so design-stage decisions reflect total cost.

High-low method

Estimates the variable rate as the change in cost divided by the change in activity between the highest and lowest activity levels; fixed cost is the residual.

Coefficient of determination

r squared: the proportion of total variation in the dependent variable explained by the independent activity driver in a regression. A value near one indicates a strong fit.

Learning curve

Cumulative average model: each time cumulative output doubles, the average time per unit falls to a constant percentage of its previous average.

Engineering cost estimate

A cost estimate built from specification, time, and quantity studies rather than historical data. It suits new activities but is costly and may embed current inefficiency.

Step-fixed cost

A cost that stays constant over a range of activity and then jumps to a new level. Each relevant range must be estimated separately.

Cost hierarchy

Classification of overhead into unit-level, batch-level, product-sustaining, and facility-sustaining costs. Only unit-level costs vary proportionately with production volume.

Activity-based costing

Assigning overhead to products through activities: pool cost divided by driver quantity gives a rate, multiplied by each product's driver consumption.

Over-absorption

The excess of overhead absorbed using a predetermined rate over overhead actually incurred. It is credited to cost of sales at the period end.

Production budget

Budgeted sales units plus required closing finished goods units minus opening finished goods units. It drives material, labour, and overhead budgets.

Flexed budget

A budget restated at actual activity using standard variable cost per unit, while fixed costs remain at budgeted amount. It is the correct comparator for variance analysis.

Zero-based budgeting

Each activity and cost must be justified from a zero base rather than from last year's figure. It challenges slack but is time-consuming and costly.

Principal budget factor

The limiting factor, such as scarce material, skilled labour, or machine capacity, that restricts output. It is identified first and all other budgets are built around it.

Material usage variance

Standard quantity for actual output minus actual quantity used, multiplied by standard price. It isolates inefficient material consumption from price effects.

Labour efficiency variance

Standard hours for actual output minus actual hours worked, multiplied by standard rate. It measures productivity against the standard allowance.

Sales mix variance

Actual total quantity times the difference between actual and standard mix proportions, times standard contribution margin per unit. It isolates the effect of changing product mix.

Planning variance

The difference between the original standard and a revised standard, caused by forecasting error or changed conditions. It is separated from operating variances.

Profit-maximising price

The price at the output where marginal revenue equals marginal cost. Price is read from the demand curve at that quantity, not from total cost.

Price elasticity of demand

Percentage change in quantity demanded divided by percentage change in price. Demand is elastic when the absolute value exceeds one, so a price cut raises total revenue.

Price skimming

Setting a high launch price to capture value from early adopters and recover development cost, then reducing price as competition enters.

Penetration pricing

Setting a low initial price to build market share quickly, gain experience-curve cost reductions, and deter entrants.

Minimum transfer price

Variable cost of the selling division plus the opportunity cost of transferring internally. With spare capacity the opportunity cost is zero.

Dual transfer pricing

The selling division is credited at market price while the buying division is charged variable cost. The difference is absorbed centrally, motivating both divisions.

Residual income

Divisional operating profit minus the required rate of return multiplied by divisional investment. It encourages acceptance of projects earning above the required rate.

Balanced scorecard

A performance framework with financial, customer, internal process, and learning and growth perspectives, each with objectives, measures, targets, and initiatives.

Controllability principle

Managers should be assessed only on revenues, costs, and investments they can influence. Allocated head-office costs and uncontrollable items should be excluded from their appraisal.

Sell or process further

Process further only if incremental revenue from additional processing exceeds incremental cost. Joint costs incurred before split-off are sunk and irrelevant.

Shut-down decision

A segment is retained in the short run if its contribution covers avoidable fixed costs. Unavoidable allocated fixed costs do not affect the decision.

Decision tree

A diagram of sequential decisions and chance events with probabilities and payoffs. Expected values are rolled back from the branch ends to the first decision.

Coefficient of variation

Standard deviation divided by expected value. It measures risk relative to return, allowing comparison of projects with different expected values.

Maximin criterion

Choosing the alternative whose worst possible outcome is better than the worst outcome of every other alternative. It reflects a risk-averse attitude.

Minimax regret

Choosing the alternative that minimises the maximum opportunity loss, where regret is the difference from the best outcome for each state of nature.