Chartered Global Management Accountant (CGMA) Management Control, Performance Measurement, and Responsibility Accounting Syllabus

Management Control, Performance Measurement, and Responsibility Accounting syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Management Control, Performance Measurement, and Responsibility Accounting in Chartered Global Management Accountant (CGMA), not a summary of it.

1. 1

   Performance Management Systems

   4 topics

   • The Purpose and Design of Control Systems
     • Feedback and feedforward control
     • Controllability principle and goal congruence
   • Responsibility Centers
     • Cost, revenue, profit, and investment centers
     • Reporting structures and controllable costs
   • Divisional Performance Measurement
     • Return on investment (ROI)
     • Residual income and economic value added (EVA)
   • Behavioral Consequences of Performance Measures
2. 2

   Transfer Pricing

   4 topics

   • Objectives and Principles of Transfer Pricing
     • Goal congruence, autonomy, and motivation
   • Transfer Pricing Methods
     • Market-based transfer prices
     • Cost-based and cost-plus transfer prices
     • Negotiated and dual-rate prices
   • Transfer Pricing with Constraints and Intermediate Markets
   • International Transfer Pricing and Tax Considerations
3. 3

   Integrated and Non-Financial Performance Reporting

   4 topics

   • Multidimensional Performance Frameworks
     • The balanced scorecard in practice
     • Fitzgerald and Moon building block model
   • Benchmarking and Continuous Improvement
     • Internal, competitive, and functional benchmarking
   • Non-Financial Performance Indicators
     • Customer, quality, and innovation measures
     • Employee and sustainability metrics
   • Reporting and Influencing Behavior with Metrics
4. 4

   Strategic Cost and Value Management

   4 topics

   • Lifecycle and Target Costing
     • Product lifecycle costing
     • Target costing and value engineering
   • Value Analysis and Kaizen Costing
     • Kaizen costing and continuous cost reduction
     • Value analysis and value engineering
   • Throughput Accounting
     • Theory of constraints and throughput contribution
     • The throughput accounting ratio
   • Environmental and Sustainability Cost Management

Management Control, Performance Measurement, and Responsibility Accounting flashcards for Chartered Global Management Accountant (CGMA)

23 of 58 cards from the Management Control, Performance Measurement, and Responsibility Accounting deck — real questions with worked answers.

1. What are the three main purposes of a management control system?

   (1) To communicate the organization's objectives and strategy; (2) To motivate and guide managers/employees toward goal-congruent behavior; (3) To monitor performance, provide feedback, and enable corrective action so actual results align with plans.

2. Distinguish between feedback control and feedforward control.

   Feedback control compares actual outputs against a standard after the event and takes corrective action (e.g., variance analysis). Feedforward control predicts likely outcomes and acts in advance to prevent deviations before they occur (e.g., cash-flow forecasting).

3. What is goal congruence in the context of control systems?

   The condition in which the personal goals of managers and employees align with the strategic objectives of the organization, so that actions taken in self-interest also advance organizational goals.

4. Differentiate controllable and uncontrollable factors in responsibility accounting.

   Controllable factors are costs/revenues a manager can significantly influence within a period; uncontrollable factors lie outside the manager's authority. The controllability principle holds managers accountable only for what they can control.

5. Name the four main types of responsibility centers and the financial dimension each manager controls.

   Cost center (controls costs only), Revenue center (controls revenues only), Profit center (controls both costs and revenues, i.e., profit), and Investment center (controls profit and the level of invested capital/assets).

6. Why might holding a manager accountable for items they cannot control still be justified?

   It can encourage them to influence behavior of others, take a wider view, share risk, or because tracing strict controllability is impractical; however, it can also demotivate if perceived as unfair.

7. Define Return on Investment (ROI) and give its formula.

   ROI measures profit relative to capital invested in a division. $$ROI = \frac{\text{Controllable (operating) profit}}{\text{Capital employed (operating assets)}} \times 100\%$$

8. Express ROI using the DuPont decomposition (margin and turnover).

   $$ROI = \text{Profit margin} \times \text{Asset turnover} = \frac{\text{Profit}}{\text{Sales}} \times \frac{\text{Sales}}{\text{Capital employed}}$$

9. Define Residual Income (RI) and give its formula.

   RI is divisional profit after deducting an imputed interest charge on capital employed. $$RI = \text{Controllable profit} - (\text{Capital employed} \times \text{Imputed cost of capital})$$

10. A division earns profit of $90{,}000 on capital employed of $500{,}000; the cost of capital is 12%. Compute ROI and RI.

    $$ROI = \frac{90{,}000}{500{,}000} = 18\%$$ $$RI = 90{,}000 - (500{,}000 \times 0.12) = 90{,}000 - 60{,}000 = 30{,}000$$

11. What is the key dysfunctional behavior that ROI can cause but RI avoids?

    ROI can lead managers to reject projects that earn more than the cost of capital but less than the division's current ROI (because they would lower the average ROI). RI accepts any project with positive residual income, promoting goal-congruent decisions.

12. Define Economic Value Added (EVA) and its basic formula.

    EVA is a refined residual income using adjusted (NOPAT) profit and a capital charge based on WACC. $$EVA = NOPAT - (\text{Capital} \times WACC)$$ where NOPAT is net operating profit after tax, with accounting adjustments (e.g., capitalizing R&D, adding back goodwill amortization).

13. Give two advantages of EVA over traditional accounting profit as a performance measure.

    (1) It charges for the full cost of capital, discouraging value-destroying use of assets; (2) Its adjustments (e.g., capitalizing R&D/marketing) reduce short-term manipulation and align managers with long-term shareholder value creation.

14. List three behavioral problems caused by relying on short-term financial performance measures.

    (1) Short-termism/managerial myopia (cutting R&D, training, maintenance to boost current profit); (2) Manipulation of accounting figures (earnings management); (3) Tunnel vision — focusing only on measured items and ignoring unmeasured but important factors.

15. What is 'gaming' in performance measurement?

    Deliberate manipulation of behavior or data to obtain a favorable performance rating without genuinely improving underlying performance (e.g., deferring expenses, sandbagging targets, or hitting the metric while undermining its intent).

16. Distinguish accountability for absolute performance versus relative performance evaluation.

    Absolute evaluation compares a manager against a fixed budget/standard; relative performance evaluation compares them against peers or external benchmarks, filtering out common external shocks but possibly discouraging cooperation.

17. Define transfer price.

    The internal price charged by one division (the selling/supplying division) for goods or services transferred to another division (the buying/receiving division) within the same organization.

18. What are the four objectives a good transfer pricing system should achieve?

    (1) Goal congruence (decisions benefit the whole company); (2) Performance evaluation (fair measurement of each division); (3) Divisional autonomy (managers free to make decisions); (4) Motivation/effort. (Often also: accurate cost reflection and minimizing global tax).

19. State the general economic rule for the optimal minimum transfer price.

    $$\text{Minimum transfer price} = \text{Marginal (variable) cost of production} + \text{Opportunity cost to the supplying division}$$

20. What is the optimal transfer price when the supplying division has spare (idle) capacity and a perfectly competitive intermediate market does not exist?

    The marginal/variable cost of production, because opportunity cost is zero — no external sales are forgone by transferring internally.

21. What is the optimal transfer price when the supplying division is operating at full capacity?

    Market price (or variable cost plus the contribution/opportunity cost forgone on lost external sales), since transferring internally means giving up a profitable external sale.

22. List the main categories of transfer pricing methods.

    (1) Market-based prices; (2) Cost-based prices (marginal/variable cost, full cost, full cost-plus, standard vs actual); (3) Negotiated transfer prices; (4) Dual pricing / two-part tariffs.

23. Why is using actual full cost as a transfer price generally discouraged?

    It passes the selling division's inefficiencies (and a guaranteed cost recovery) on to the buying division, removes incentives for the supplier to control costs, and can distort the buyer's decisions because fixed costs appear variable. Standard cost is preferred to avoid transferring inefficiency.

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