CMA (Cost & Management Accountancy) Final: Strategic Cost Management, Audit and Performance Syllabus

State the general rule (economic/minimum) for the transfer price.

$$\text{Minimum Transfer Price} = \text{Marginal (variable) cost of the transferring division} + \text{Opportunity cost per unit to the firm}$$ When there is spare capacity, opportunity cost is zero, so the minimum is marginal cost.

Why can transfer pricing create goal-congruence conflict between divisions?

A price that maximises the selling division's profit may be too high for the buying division, causing it to source externally or reject internally optimal transfers. The conflict is resolved by negotiated prices, dual pricing, or head-office intervention to ensure decisions optimise overall firm profit.

What is dual-rate transfer pricing and what problem does it solve?

Under dual pricing the selling division is credited at one (higher, e.g. market) price while the buying division is charged a different (lower, e.g. variable cost) price; head office reconciles the difference. It resolves divisional conflict and motivates internal transfer, but reduces cost-control discipline and overstates total divisional profits.

List the principal pricing strategies for new products.

Market skimming pricing (high initial price for early adopters) and market penetration pricing (low initial price to gain market share quickly and deter competitors).

Name common pricing methods/strategies used in pricing decisions.

Cost-plus pricing, marginal/contribution pricing, going-rate (competitive) pricing, skimming, penetration, price discrimination, loss leader pricing, target-return pricing, and value-based pricing.

When is marginal-cost (contribution) pricing appropriate in pricing decisions?

For special orders, spare-capacity situations, competitive bidding, perishable goods, or to enter a market — when fixed costs are already covered and any price above marginal cost contributes to profit. Price must at least cover variable cost.

In linear programming, what are the objective function and constraints?

The objective function is the linear expression (e.g. total contribution) to be maximised or minimised. Constraints are the linear inequalities representing limited resources; together with non-negativity conditions ($x \geq 0,\ y \geq 0$) they define the feasible region.

Where does the optimal solution of a linear programming problem occur?

At a corner point (vertex) of the feasible region. The optimum of a linear objective always lies at one (or along an edge between two) extreme points of the convex feasible region.

What is a 'shadow price' (dual price) in linear programming?

The shadow price of a binding (scarce) resource is the increase in the objective function value (e.g. contribution) from having one additional unit of that resource. Non-binding (slack) resources have a shadow price of zero.

State the learning curve theory and its standard equation.

As cumulative output doubles, the cumulative average time per unit falls by a constant percentage (the learning rate). $$y = a x^{b},\quad b = \frac{\log r}{\log 2}$$ where $y$ = cumulative average time per unit, $a$ = time for first unit, $x$ = cumulative units, $r$ = learning rate.

For an 80% learning curve, what is the cumulative average time after output doubles, and the value of the exponent b?

Each doubling makes the cumulative average time 80% of the previous level. $$b = \frac{\log 0.8}{\log 2} \approx -0.322$$

What is the statutory basis for cost records and cost audit in India?

Section 148 of the Companies Act, 2013, read with the Companies (Cost Records and Audit) Rules, 2014. Section 148 empowers the Central Government to direct the maintenance of cost records and the audit thereof for prescribed classes of companies.

Under the Companies (Cost Records and Audit) Rules, 2014, what distinguishes regulated from non-regulated sectors for applicability?

Companies in regulated sectors (e.g. telecom, electricity, petroleum, drugs, sugar, fertilizers) face cost record/audit thresholds at lower turnover, while non-regulated sectors (other specified industries) have higher thresholds. The Rules (Table A and Table B) list the relevant CETA chapter headings.

State the general turnover thresholds for maintenance of cost records and for cost audit under the 2014 Rules.

Cost records must be maintained if overall turnover from all products/services is $\geq \mathrm{Rs.}\,35$ crore in the immediately preceding financial year. Cost audit applies (regulated) if overall turnover $\geq \mathrm{Rs.}\,50$ crore and aggregate turnover of individual covered products $\geq \mathrm{Rs.}\,25$ crore; (non-regulated) $\geq \mathrm{Rs.}\,100$ crore and $\geq \mathrm{Rs.}\,35$ crore respectively.

In which form are cost records prescribed and in which forms is the cost audit report submitted?

Cost records are maintained in Form CRA-1. The cost auditor's report is in Form CRA-3, and the company files it with the Central Government in Form CRA-4 (XBRL). The auditor is appointed via Form CRA-2 (intimation to Central Government).

Who can be appointed as a cost auditor and who appoints them?

Only a Cost Accountant (member of ICMAI) in practice, or a firm/LLP of cost accountants, can be a cost auditor. The cost auditor is appointed by the Board of Directors (on the recommendation of the Audit Committee where applicable), not by shareholders.

Within what time must a company intimate the cost auditor's appointment to the Central Government, and file the cost audit report?

Appointment is intimated in Form CRA-2 within 30 days of the Board meeting or 180 days of the start of the financial year, whichever is earlier. The cost auditor submits the report to the Board within 180 days of the close of the financial year, and the company files Form CRA-4 within 30 days of receiving the report.

State two key disqualifications/duties relating to the cost auditor under the Companies Act, 2013.

A statutory (financial) auditor of a company cannot be appointed as its cost auditor (to maintain independence). Duties include conducting the audit per cost auditing standards, reporting fraud under Section 143(12), and complying with auditing standards issued by ICMAI.

Define Management Audit.

Management audit is a comprehensive, independent and constructive appraisal of the overall performance and effectiveness of the management of an organisation — its policies, plans, procedures and controls — to identify weaknesses and recommend improvements. It is forward-looking and not statutorily mandated.

Define Operational Audit and contrast it with financial audit.

Operational audit is a systematic review of an organisation's operating activities to assess their efficiency, effectiveness and economy (the 3 Es). Unlike financial audit, which verifies the truth and fairness of accounts, operational audit evaluates operating performance and processes and recommends improvements.

What are the '3 Es' evaluated in operational/performance audit?

Economy (acquiring resources at lowest cost), Efficiency (maximum output from given input), and Effectiveness (achievement of intended objectives/outcomes).

Define Internal Audit and state its statutory basis in India.

Internal audit is an independent appraisal activity established within an organisation to examine and evaluate its activities and internal controls. Section 138 of the Companies Act, 2013 (with Rule 13) mandates internal audit for prescribed classes of companies; it may be conducted by a CA, CMA, or other professional decided by the Board.

Define internal control and name its components per the COSO framework.

Internal control is the process designed to provide reasonable assurance regarding effectiveness/efficiency of operations, reliability of reporting, and compliance with laws. COSO's five components: Control Environment, Risk Assessment, Control Activities, Information & Communication, and Monitoring Activities.

Distinguish internal audit from internal control.

Internal control is the system of policies and procedures management establishes to safeguard assets and ensure reliable operations. Internal audit is an independent function that evaluates and monitors whether those internal controls are adequate and operating effectively.

What special considerations arise in auditing specific industries such as banks, insurance, or hospitals?

Industry-specific audits require knowledge of the governing law and regulator (e.g. RBI for banks, IRDAI for insurance), specialised revenue/asset recognition (interest income, NPAs, premium, claims reserves), industry accounting norms, and statutory reporting formats unique to that sector.

Define a Performance Measurement System (PMS).

A PMS is a set of metrics and processes used to quantify the efficiency and effectiveness of actions, translating strategy into operational targets, monitoring achievement, and supporting decision-making and accountability across financial and non-financial dimensions.

What are the four perspectives of the Balanced Scorecard (Kaplan & Norton)?

(1) Financial, (2) Customer, (3) Internal Business Process, and (4) Learning and Growth (innovation/people). Together they balance financial and non-financial, internal and external, and lead and lag measures.

What is the central purpose of the Balanced Scorecard?

To translate an organisation's vision and strategy into a coherent, balanced set of performance measures across four perspectives, linking long-term strategic objectives with short-term actions and overcoming the limitations of relying solely on financial measures.

Give an example metric for each Balanced Scorecard perspective.

Financial: ROCE / revenue growth. Customer: customer satisfaction / retention rate. Internal Process: cycle time / defect rate. Learning & Growth: employee training hours / staff retention / new product introduction rate.

Distinguish lead indicators from lag indicators in a balanced scorecard.

Lag indicators measure outcomes that have already occurred (e.g. profit, customer satisfaction) and confirm past performance. Lead indicators (performance drivers) measure activities that drive future outcomes (e.g. training, process improvements), enabling proactive management.

What is value engineering and how does it support cost reduction and target costing?

Value engineering is a systematic, function-oriented review of a product's design to achieve the required functions at the lowest total cost without sacrificing quality, reliability or performance. It is a primary technique for closing the target cost gap and achieving permanent cost reduction.

What is Kaizen costing and how does it differ from target costing?

Kaizen costing seeks continuous, incremental cost reduction during the manufacturing (production) phase of a product's life. Target costing reduces cost at the design/development phase before production begins. Both pursue cost reduction but at different stages of the product life cycle.