CMA Sri Lanka SL1 Strategic Management Accounting Exam key terms

A future cash cost that differs between the alternatives being compared and is therefore included in a decision. Past costs and costs identical under every option are excluded.

Money already spent or irrevocably committed that cannot be recovered by any future action. It is irrelevant to decisions, though managers often let it distort choices.

The contribution or benefit forgone by using a scarce resource in one way rather than its next best alternative. It carries no invoice but is a genuine economic cost in decisions.

A cost that would cease if a particular activity, product, or segment were discontinued. It is the practical test of which fixed costs are relevant to closure decisions.

A fixed cost arising from long-term capacity decisions such as leases, plant, or salaried staff that cannot be reduced in the short run. It is generally unavoidable in short-term decisions.

The scarce resource, such as machine hours, skilled labour, or materials, that constrains output. Ranking products by contribution per unit of the limiting factor maximises total contribution.

The increase in contribution from one additional unit of a scarce resource, equal to its opportunity cost at the optimum. It shows the maximum premium worth paying to relax a constraint.

A comparison of the incremental cost of producing a component internally against the purchase price plus any avoidable fixed costs and lost contribution from freed capacity.

A cost estimation technique that takes the highest and lowest activity levels and their associated costs to derive variable cost per unit and the fixed element. Simple, but uses only two data points.

A statistical technique fitting a line to all observations to estimate the fixed and variable components of cost. Least squares regression minimises the sum of squared deviations and is more reliable than high-low.

The proportion of variation in the dependent variable, such as total cost, explained by the independent variable in a regression. A value near one indicates a strong fit.

The pattern whereby cumulative average time per unit falls by a constant percentage each time cumulative output doubles. Used to estimate labour and conversion costs for new or repetitive production.

A mathematical expression relating total cost to one or more activity drivers, typically in the form fixed cost plus variable rate multiplied by activity level. It underpins flexible budgets and forecasts.

A cost that stays constant over a range of activity then jumps to a new level when a capacity threshold is crossed, such as an extra supervisor or warehouse. Also called semi-fixed cost.

The band of activity over which a particular cost behaviour pattern, especially fixed costs and unit variable rates, can be assumed to hold. Estimates outside it are unreliable.

A costing system that assigns overhead to products using multiple activity cost drivers reflecting the underlying consumption of activities, rather than a single volume-based recovery rate.

A factor whose level causes or explains the cost of an activity, for example number of set-ups, orders, or machine hours. Choosing appropriate drivers is central to accurate overhead assignment.

A classification of costs by the level at which they are incurred: unit-level, batch-level, product-sustaining, and facility-sustaining. It clarifies which costs vary with volume and which do not.

The use of activity analysis and ABC information to improve operations, eliminate non-value-added activities, and make better product, customer, and process decisions.

A budgeting approach in which every activity and cost must be justified afresh from a nil base each period, typically through decision packages, rather than by adjusting last year's figures.

Preparing next period's budget by adjusting the prior period's figures for known changes. It is quick and stable but tends to perpetuate past inefficiencies and embedded slack.

A budget restated for the actual activity level achieved, using the standard variable rate and budgeted fixed costs. It provides the correct benchmark for variance analysis.

A budget prepared for one planned level of activity only. Comparing actual results with it mixes volume effects with price and efficiency effects.

The deliberate overstatement of budgeted costs or understatement of revenues by managers to make targets easier to achieve. It reduces the planning and control value of budgets.

A budget continuously updated by adding a new period, such as a month or quarter, as the current one expires, so the planning horizon always extends a fixed distance ahead.

A system that records predetermined costs for materials, labour, and overhead and compares them with actual costs to produce variances for control and performance evaluation.

The difference between an original standard and a revised standard caused by changes in prices, technology, or conditions outside the manager's control. It separates forecasting error from operating performance.

The difference between actual results and the revised standard, reflecting controllable operating efficiency and price performance. It is the fairer basis for appraising a manager.

Subdivisions of the material usage variance showing the effect of changing the proportions of inputs used (mix) and of obtaining more or less output from a given total input (yield).

The process of decomposing differences between actual and standard or budgeted results into specific causes, such as price, usage, and efficiency, to guide corrective management action.

A market-driven approach that sets an allowable cost by subtracting required profit from an achievable selling price, then designs and engineers the product to meet that cost.

Setting price by adding a mark-up or margin to estimated cost. It is simple and ensures cost recovery but ignores customer demand and competitor pricing.

Setting a high initial price to capture early adopters with low price sensitivity, then lowering it over time. It suits innovative products with limited initial competition.

Setting a low initial price to build market share and volume quickly, accepting low early margins in return for scale economies, learning effects, and customer lock-in.

The internal price at which one division of an organisation supplies goods or services to another. It affects divisional profit, autonomy, and the motivation to trade internally.

The minimum transfer price equals variable cost plus opportunity cost of the transfer to the supplying division, which equals market price where a perfectly competitive external market exists.

A transfer pricing arrangement that records different prices in the supplying and receiving divisions, such as market price for the seller and variable cost for the buyer, with the difference absorbed centrally.

Divisional profit less a charge for the capital employed, calculated as profit minus the required return multiplied by invested capital. It encourages investment above the cost of capital.

Divisional profit divided by invested capital, expressed as a percentage. It allows comparison across sizes but can discourage managers from accepting profitable investments that dilute their existing ratio.

A measure of after-tax operating profit less a charge for all capital employed, based on adjusted accounting profit and the weighted average cost of capital. It approximates economic profit.

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

The alignment of individual and divisional objectives with those of the organisation as a whole, so that acting in one's own interest also serves corporate strategy.

The required rate of return used to discount project cash flows, reflecting the risk of the investment and the organisation's cost of finance. It is the hurdle rate for net present value.

A technique that tests how far one input, such as price, volume, or cost, can change before a project's net present value falls to zero, highlighting the most critical assumptions.

The probability-weighted average of the outcomes of a decision, obtained by multiplying each outcome by its probability and summing. It ignores risk attitude and dispersion.

A decision rule that selects the alternative with the best worst-case outcome, reflecting a risk-averse or pessimistic attitude where probabilities are unknown.

A decision rule that selects the alternative with the highest possible payoff, reflecting an optimistic or risk-seeking attitude when outcome probabilities cannot be estimated.