Chartered Institute of Public Finance and Accountancy (CIPFA) Management Accounting Syllabus

How is an overhead absorption rate (OAR) calculated?

$$\text{OAR} = \frac{\text{Budgeted overheads of cost centre}}{\text{Budgeted level of activity (e.g. labour or machine hours)}}$$

What is over-absorption and under-absorption of overhead, and how does each affect profit?

Over-absorption occurs when absorbed overhead exceeds actual overhead (credited to profit, increasing it). Under-absorption occurs when absorbed overhead is less than actual (debited, reducing profit). They arise because OARs use budgeted, not actual, figures.

What is the reciprocal services problem in overhead reapportionment, and name a method to solve it?

It occurs when service cost centres provide services to each other (e.g. maintenance serves stores and vice versa). It can be solved using the repeated distribution (continuous allotment) method or the algebraic/simultaneous-equations method.

What is marginal costing?

A costing method where only variable production costs are charged to units, and all fixed costs are treated as period costs and written off in full against contribution in the period incurred.

Under marginal costing, how are inventories (stocks) valued?

At variable (marginal) production cost only — fixed production overhead is excluded from inventory values.

Why do absorption and marginal costing give different profits when inventory levels change?

Because absorption costing carries fixed production overhead within inventory values, whereas marginal costing writes fixed overhead off as a period cost. The difference equals the change in inventory units × fixed overhead per unit.

State the rule reconciling marginal and absorption costing profit when inventory rises or falls.

If inventory increases, absorption profit > marginal profit (fixed overhead is carried forward). If inventory decreases, absorption profit < marginal profit. $$\text{Profit difference} = \Delta\text{Inventory units} \times \text{Fixed OH per unit}$$

How do you reconcile marginal costing profit to absorption costing profit?

Start with marginal costing profit, add fixed overhead in the closing inventory increase (or subtract for an inventory decrease): $$\text{Absorption profit} = \text{Marginal profit} + (\Delta\text{Inventory units} \times \text{Fixed OH per unit})$$

What is Activity-Based Costing (ABC)?

An overhead costing method that assigns overheads to products based on the activities that drive them, using cost pools and cost drivers, rather than a single volume-based absorption rate.

Define cost pool and cost driver in ABC.

A cost pool groups all overhead costs relating to one activity (e.g. machine set-ups). A cost driver is the factor that causes the cost of that activity to change (e.g. number of set-ups) and is used to charge the pool to products.

How is a cost driver rate calculated in ABC?

$$\text{Cost driver rate} = \frac{\text{Total cost of activity pool}}{\text{Total number of cost driver units}}$$

What is the main advantage of ABC over traditional absorption costing?

ABC gives more accurate product/service costs where overheads are high and diverse, because it links costs to the activities (drivers) that actually cause them rather than spreading them on a single volume measure such as labour hours.

What is job costing and when is it used?

A costing method for unique, customer-specified jobs where costs are collected separately for each identifiable job (e.g. an audit assignment, a bespoke building repair). Each job has its own cost record.

What is batch costing?

A costing method for production of identical items in batches; total batch cost is collected and divided by the number of units to give a cost per unit. $$\text{Cost per unit} = \frac{\text{Total batch cost}}{\text{Number of units in batch}}$$

What is service (operation) costing and what distinguishes it?

Costing for services rather than tangible products (e.g. transport, leisure centres, refuse collection). It uses composite cost units that combine two factors, such as cost per passenger-mile or cost per patient-day.

Give two examples of composite cost units used in service costing.

Examples include cost per tonne-kilometre (transport/freight), cost per passenger-mile, cost per patient-day (hospitals), and cost per occupied bed-night (hotels).

What is a budget?

A quantitative financial plan for a defined future period, prepared and approved in advance, expressing planned income, expenditure and resource use to help achieve objectives.

List the typical stages of the budget cycle.

1) Communicate objectives/guidelines; 2) Identify the principal budget factor (limiting factor); 3) Prepare the budget for that factor first; 4) Prepare other functional budgets; 5) Negotiate and coordinate; 6) Review and approve the master budget; 7) Monitor and control against actuals (feedback).

What is the principal budget factor (limiting factor) and why is it identified first?

The factor that limits the organisation's activity (often sales demand, but could be cash, labour or capacity). It is budgeted first because it constrains all other budgets, which must be built around it.

What is a functional budget? Give three examples.

A budget for a particular function/area of the organisation. Examples: sales budget, production budget, materials usage/purchases budget, labour budget, overhead budget, cash budget.

What does the master budget comprise?

The consolidated summary of all functional budgets, typically the budgeted income statement, budgeted statement of financial position (balance sheet) and the cash budget.

How is the production budget (units) calculated from the sales budget?

$$\text{Production units} = \text{Sales units} + \text{Closing inventory} - \text{Opening inventory}$$

What is incremental budgeting and a key drawback?

Building the new budget by taking the previous period's figures and adjusting (incrementing) for changes such as inflation. Drawback: it perpetuates past inefficiencies and 'budget slack', and does not question whether activities are still needed.

What is zero-based budgeting (ZBB)?

A method that starts each budget from a 'zero base', requiring every activity and cost to be justified afresh as if newly proposed, using decision packages ranked by priority. Useful for discretionary spend common in public services.

What is a flexible budget and what is its purpose?

A budget that is flexed (recalculated) to the actual level of activity achieved, by recognising fixed and variable cost behaviour. Its purpose is meaningful control: comparing actual costs with what they should have been at the actual volume.

What is rolling (continuous) budgeting?

A budget kept continuously up to date by adding a new period (e.g. a month or quarter) as each one expires, so a full budget period always remains ahead. It suits uncertain environments but is more resource-intensive.

What is the general formula for any cost or sales variance comparison?

A variance is the difference between the flexed budget/standard and the actual result. Favourable (F) variances increase profit; adverse (A) variances reduce profit.

Give the formula for the direct material price variance.

$$\text{Material price variance} = (\text{Standard price} - \text{Actual price}) \times \text{Actual quantity purchased}$$

Give the formula for the direct material usage variance.

$$\text{Material usage variance} = (\text{Standard quantity for actual output} - \text{Actual quantity used}) \times \text{Standard price}$$

Give the formulas for the direct labour rate variance and labour efficiency variance.

Rate: $(\text{Std rate} - \text{Actual rate}) \times \text{Actual hours paid}$. Efficiency: $(\text{Std hours for actual output} - \text{Actual hours worked}) \times \text{Std rate}$.

What is the fixed overhead expenditure variance?

$$\text{Fixed OH expenditure variance} = \text{Budgeted fixed overhead} - \text{Actual fixed overhead}$$ It measures the difference between budgeted and actual fixed overhead spend.

What is the sales volume contribution variance (marginal costing)?

$$(\text{Actual sales units} - \text{Budgeted sales units}) \times \text{Standard contribution per unit}$$ It measures the profit impact of selling more or fewer units than budgeted.

Name two behavioural aspects/concepts important in budgeting.

Examples include: budget participation (top-down vs bottom-up), motivation and the aspiration level, budgetary slack (deliberate padding), goal congruence, and dysfunctional behaviour such as gaming targets.

What is budgetary slack and why does it arise?

The deliberate overstatement of budgeted costs or understatement of budgeted revenues to make targets easier to meet. It arises when managers who set or negotiate budgets are also judged against them, especially with bottom-up participation.

Distinguish top-down (imposed) from bottom-up (participative) budgeting in behavioural terms.

Top-down budgets are set by senior management and imposed: quick and goal-congruent but can demotivate. Bottom-up/participative budgets involve operational managers: improve ownership, motivation and accuracy but risk slack and are slower.

What is a relevant cost for short-term decision-making?

A future, incremental cash flow that differs between decision alternatives. Only relevant costs (and revenues) should be included in decision analysis.

Why are sunk costs and committed costs ignored in relevant costing?

Sunk costs are past costs already incurred and committed costs are unavoidable future costs; neither changes as a result of the decision, so they are not relevant and must be excluded.

Define opportunity cost and explain its relevance to decisions.

Opportunity cost is the value of the best alternative forgone by choosing one course of action. It is a relevant cost in decision-making even though it involves no actual cash outflow, because it represents a benefit sacrificed.

How is the relevant cost of scarce materials already in inventory determined?

If the material is in regular use, relevant cost = current replacement cost. If not in regular use, relevant cost = the higher of net realisable (resale) value or any scrap value forgone, i.e. the best alternative use.

In a make-or-buy decision, which costs are relevant?

Compare the incremental (variable plus any avoidable fixed) cost of making in-house against the external purchase price. Unavoidable fixed costs are ignored, and any opportunity cost of using capacity to make is included.

With a single limiting factor, how do you decide the optimal product mix?

Rank products by contribution per unit of the limiting factor: $$\text{Rank by } \frac{\text{Contribution per unit}}{\text{Limiting factor units per unit}}$$ and allocate the scarce resource to the highest-ranked products first.

What is cost-plus pricing and a formula for it?

Setting price by adding a profit mark-up to cost: $$\text{Price} = \text{Cost} \times (1 + \text{mark-up }\%)$$ Cost may be full cost or marginal cost. Simple but ignores demand and competitors.

Distinguish a price based on full cost from one based on marginal cost.

Full-cost pricing adds a margin to total (absorbed) cost, ensuring overheads are recovered. Marginal-cost pricing adds a margin to variable cost; it sets a price floor and can win extra business but risks not covering fixed costs in the long run.

In public services, why is full marginal/market pricing often not used?

Many public services pursue social/equity objectives rather than profit, so prices may be subsidised, set at cost recovery, means-tested, or zero (free at the point of use), reflecting policy, accessibility and political accountability rather than maximising profit.

What is marginal-cost pricing (welfare pricing) and when might a public body use it?

Setting price equal to the marginal cost of providing an extra unit to maximise social welfare/usage. Used where the public benefit of high usage outweighs full cost recovery, often requiring subsidy to cover fixed costs.

What is full cost recovery pricing in a public-service context?

Setting charges so that total income exactly covers the total cost of providing the service (including overheads), so the service breaks even without subsidy or surplus.

What are the '3 Es' of Value for Money (VFM)?

Economy (acquiring resources at lowest appropriate cost), Efficiency (maximising output for a given input, or input/output ratio), and Effectiveness (the extent to which objectives/outcomes are achieved). Some frameworks add Equity as a fourth E.

Define economy, efficiency and effectiveness as performance dimensions.

Economy: spending less — minimising input cost for the required quality. Efficiency: spending well — the relationship between outputs and the inputs used to produce them. Effectiveness: spending wisely — achieving the intended objectives and outcomes.

What is a Key Performance Indicator (KPI) and why are both financial and non-financial measures used in public services?

A KPI is a quantifiable measure tracking progress towards an objective. Public services use non-financial measures (e.g. waiting times, quality, satisfaction, outcomes) alongside financial ones because success is judged on service outcomes and VFM, not profit.

What is a balanced scorecard and its four perspectives?

A performance framework linking measures to strategy across four perspectives: Financial, Customer, Internal Business Process, and Learning & Growth (innovation). It balances financial with non-financial and short- with long-term measures.

Why can over-reliance on a single financial performance measure cause dysfunctional behaviour?

It encourages short-termism and gaming — managers may hit the measured target (e.g. cost reduction) while harming unmeasured aspects such as service quality or long-term outcomes ('what gets measured gets managed'), undermining true VFM.

What is benchmarking in public-sector performance measurement?

Comparing an organisation's processes, costs and performance against a standard — internal, competitor, functional or best-practice — to identify gaps and improvement opportunities and to drive value for money.

Why is responsibility accounting important in budgetary control?

It assigns costs and revenues to the manager who controls them (cost, profit or investment centres), so performance reports hold managers accountable only for controllable items, supporting fair appraisal and goal congruence.