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

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.

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.

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.

When is a market-based transfer price most appropriate, and what is its main advantage?

When a competitive external market exists for the intermediate product. Advantage: it is objective, preserves divisional autonomy, and approximates the price the divisions would face as independent businesses, promoting goal congruence.

What is a dual-rate (dual) transfer pricing system?

A system where the selling division is credited at one price (e.g., market price) while the buying division is charged a different, lower price (e.g., variable cost). The difference is reconciled at the corporate level. It motivates both divisions but can mask inefficiency and double-counts profit.

What is a two-part tariff transfer price?

The buying division pays the variable cost per unit transferred plus a fixed periodic lump-sum fee covering the supplier's fixed costs and a profit margin. This allows variable-cost decisions while letting the supplier recover fixed costs.

How is the transfer price set when there is an intermediate market but the supplier incurs lower costs on internal transfers (e.g., saved selling/distribution costs)?

Transfer price = external market price minus the costs avoided by transferring internally (e.g., delivery, packaging, sales commission), i.e., the adjusted market price.

Under a production constraint, what cost concept should be added to variable cost to set the transfer price?

The contribution (shadow price) per unit of the scarce resource forgone — i.e., the opportunity cost of the limiting factor used to make the transferred item, often derived from linear programming shadow prices.

What is the primary motivation for setting international transfer prices, and what constrains it?

Minimizing the group's overall tax burden by shifting profit to low-tax jurisdictions. It is constrained by tax authorities' arm's-length rules (e.g., OECD guidelines), import duties, anti-avoidance legislation, and the risk of double taxation.

What is the 'arm's-length principle' in international transfer pricing?

The requirement that transfer prices between related entities be set as if the transaction were between independent parties in an open market, ensuring profit is taxed where economic activity occurs. It underpins OECD transfer pricing rules.

Besides corporate income tax, name three other factors influencing international transfer pricing decisions.

(1) Import tariffs/customs duties; (2) Currency exchange rates and exchange controls; (3) Repatriation/remittance restrictions on profits, plus local minority-shareholder interests and political risk.

What is the balanced scorecard, and who developed it?

A multidimensional performance framework developed by Kaplan and Norton that translates strategy into measures across four perspectives, balancing financial and non-financial, internal and external, and lagging and leading indicators.

Name the four perspectives of the balanced scorecard and a sample question each addresses.

(1) Financial — 'How do we look to shareholders?'; (2) Customer — 'How do customers see us?'; (3) Internal business process — 'What must we excel at?'; (4) Learning and growth (innovation) — 'Can we continue to improve and create value?'

Distinguish lagging indicators from leading indicators.

Lagging (outcome) indicators report results after the fact (e.g., profit, ROI); leading (driver) indicators measure activities that drive future outcomes (e.g., customer satisfaction, employee training hours), giving early signals of performance.

What are the three dimensions of the Fitzgerald and Moon 'building block' model for service performance?

(1) Dimensions (results: competitiveness, financial performance; determinants: quality, flexibility, resource utilization, innovation); (2) Standards (ownership, achievability, equity/fairness); (3) Rewards (clarity, motivation, controllability).

Define benchmarking.

The systematic process of measuring an organization's products, services, or processes against those of recognized leaders (internal or external) to identify performance gaps and adopt best practices for improvement.

List four types of benchmarking.

(1) Internal benchmarking (between units of the same organization); (2) Competitive benchmarking (against direct competitors); (3) Functional/industry benchmarking (against similar functions in the same industry); (4) Generic/process benchmarking (against best-in-class processes in any industry).

What is continuous improvement (Kaizen) as a management philosophy?

An ongoing, incremental approach in which all employees continuously seek small improvements in processes, quality, and cost rather than relying on occasional large innovations; it embeds improvement into everyday work.

Give two advantages and two limitations of non-financial performance indicators (NFPIs).

Advantages: they capture quality, customer/employee satisfaction, and leading drivers of future success; harder to manipulate than profit. Limitations: can be subjective/hard to quantify, may proliferate causing information overload, and can conflict with financial goals if not integrated.

Give three examples of non-financial performance indicators relevant to quality and customers.

Customer satisfaction scores, number of customer complaints, on-time delivery percentage, defect/reject rates, warranty claims, customer retention rate, and net promoter score.

What does 'what gets measured gets managed' imply for designing performance reports?

Performance metrics direct managerial attention and effort; therefore measures must be chosen to reflect true strategic priorities, because employees will optimize the reported metric — potentially at the expense of unmeasured but important objectives (tunnel vision).

Define product life cycle costing.

The accumulation and management of all costs incurred over a product's entire life — from design and development, through manufacture and marketing, to abandonment/decommissioning — rather than reporting costs only during the production phase.

List the typical stages of a product life cycle.

Introduction, Growth, Maturity, and Decline. (The cost life cycle adds a pre-introduction design/development phase and a post-sales/abandonment phase.)

Define target costing and state its formula.

Target costing sets a cost ceiling derived from a competitive market price and a desired profit margin, then drives design to meet it. $$\text{Target cost} = \text{Target selling price} - \text{Required profit margin}$$

What is a 'cost gap' in target costing and how can it be closed?

The cost gap is the excess of the estimated (current) product cost over the target cost. $$\text{Cost gap} = \text{Estimated cost} - \text{Target cost}$$ It is closed through value engineering, design simplification, alternative materials, eliminating non-value-added features, and supplier negotiation.

Define value analysis and value engineering.

Value engineering is a systematic examination of a product's design before production to reduce cost while maintaining required function and quality. Value analysis applies the same review to existing products. Both aim to maximize the ratio of function to cost.

Distinguish the use value and esteem value of a product in value analysis.

Use value is the cost of the properties/functions that enable the product to perform its purpose. Esteem value is the cost of features that make the product attractive or prestigious (appearance, brand) beyond pure function. Value analysis seeks to retain value while cutting unnecessary cost.

Define Kaizen costing and contrast it with standard costing.

Kaizen costing focuses on continuous cost reduction during the manufacturing phase, setting progressively tighter cost-reduction targets each period. Standard costing aims to meet a fixed cost standard (cost maintenance), whereas Kaizen costing aims to continuously beat it (cost reduction).

At which life-cycle stage does target costing operate versus Kaizen costing?

Target costing operates at the design/planning stage (before production) where most costs are locked in; Kaizen costing operates during the production/manufacturing stage to drive ongoing incremental reductions.

Define throughput accounting and the throughput contribution formula.

Throughput accounting (from the Theory of Constraints) treats only direct materials as variable and all other costs as fixed 'operating expenses.' $$\text{Throughput} = \text{Sales revenue} - \text{Totally variable (material) cost}$$

State the Throughput Accounting Ratio (TPAR) and the decision rule.

$$TPAR = \frac{\text{Throughput per bottleneck hour}}{\text{Operating (factory) cost per bottleneck hour}}$$ A product is worth producing when $TPAR > 1$; the higher the ratio, the more priority it should receive.

What are the five steps of the Theory of Constraints (TOC)?

(1) Identify the system's constraint (bottleneck); (2) Decide how to exploit the constraint; (3) Subordinate everything else to that decision; (4) Elevate the constraint (increase its capacity); (5) If the constraint is broken, return to step 1 — avoid inertia.

In throughput accounting, how should products be ranked when a bottleneck resource is scarce?

Rank by throughput contribution (sales minus material cost) per unit of the bottleneck resource, allocating bottleneck capacity to the product with the highest throughput per bottleneck hour first.

What are environmental management accounting (EMA) and its purpose?

EMA is the identification, collection, and analysis of both physical (energy, water, waste, materials) and monetary environmental information to support internal decisions, control environmental costs, and improve sustainability performance.

Name the four categories of environmental costs in the quality-cost-style classification.

(1) Environmental prevention costs; (2) Environmental detection (monitoring/measurement) costs; (3) Environmental internal failure costs (e.g., waste disposal, recycling); (4) Environmental external failure costs (e.g., cleaning up contamination, restoring damage, fines).

Describe input/output flow analysis as an environmental costing technique.

It records the physical mass of materials/energy entering a process and traces it to outputs, classifying outputs as product or waste. Since 'what comes in must go out,' it highlights the cost of materials lost as waste, motivating reduction. (Mass balance principle.)

What is environmental life-cycle costing?

Assessment of the total environmental cost of a product across its whole life cycle — from raw material extraction and design through use to disposal/decommissioning — including remediation, recycling, and end-of-life costs, supporting greener design decisions.

What is activity-based costing's role in environmental cost management?

Environmental ABC traces hidden environmental costs (often buried in general overhead) to the activities and products that cause them using environment-related cost drivers, giving more accurate product costs and revealing the true cost of polluting products/processes.