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CMA Final Strategic Cost Management Syllabus
The Strategic Cost Management syllabus for CMA Final in full: 3 chapters and 9 topics, every one listed below, plus 51 Strategic Cost Management flashcards with answers.
Strategic Cost Management syllabus: all 3 chapters
Expand any chapter to see its topics and sub-topics.
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Cost Management Techniques
3 topics- Activity-Based Costing
- Target Costing
- Life Cycle Costing
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Cost Control and Cost Reduction
3 topics- Cost Control Techniques
- Cost Reduction Strategies
- Value Analysis
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Transfer Pricing
3 topics- Methods of Transfer Pricing
- Transfer Pricing Regulations
- International Transfer Pricing
CMA Final Strategic Cost Management flashcards — 51 questions with answers
What is Activity-Based Costing (ABC)?
A costing method that assigns overheads to products/services based on the activities required to produce them, using cost drivers to trace costs more accurately than traditional volume-based absorption.
In ABC, what is a 'cost driver'?
A factor that causes a change in the cost of an activity (e.g., number of setups, machine hours, purchase orders). It is the basis used to allocate activity cost pools to cost objects.
Distinguish between a resource cost driver and an activity cost driver in ABC.
A resource cost driver measures resources consumed by an activity (used to assign resource costs to cost pools); an activity cost driver measures how much of an activity a cost object consumes (used to assign activity costs to products).
Name the four levels of activities in ABC's cost hierarchy.
Unit-level, Batch-level, Product-level (product-sustaining), and Facility-level (facility-sustaining) activities.
Give an example of a batch-level activity in ABC.
Machine setups, material handling per batch, or purchase ordering — costs incurred each time a batch is produced, independent of the number of units in the batch.
What is the formula for an activity cost driver rate in ABC?
Activity cost driver rate = Total cost of the activity cost pool / Total quantity of the cost driver.
State the main steps in implementing ABC.
1) Identify activities; 2) Assign resource costs to activity cost pools; 3) Identify cost drivers for each activity; 4) Compute the cost driver rate; 5) Assign activity costs to products using driver consumption.
What is Activity-Based Management (ABM)?
The use of ABC information to manage activities and business processes — eliminating non-value-added activities, improving efficiency, and supporting decisions on pricing, product mix and process improvement.
In ABC, distinguish value-added from non-value-added activities.
Value-added activities increase worth of the product to the customer (e.g., machining, assembly); non-value-added activities add cost but no customer value (e.g., inspection, storage, waiting) and should be minimized/eliminated.
What key limitation of traditional absorption costing does ABC overcome?
Traditional costing over/under-costs products by using a single volume-based rate; ABC reduces this distortion by tracing overheads via multiple activity drivers, important where overheads are large and product diversity is high.
Define Target Costing.
A proactive cost management technique where the allowable (target) cost of a product is derived from a competitive market price minus the desired profit margin, and the product is designed to be produced within that cost.
State the basic Target Costing formula.
Target Cost = Target Selling Price (market-driven) − Desired Profit Margin.
What is a 'cost gap' in Target Costing and how is it addressed?
Cost gap = Estimated current cost − Target cost. It is closed through value engineering, value analysis, design changes, supplier negotiation and process improvements before production begins.
How does Target Costing differ from traditional cost-plus pricing?
Cost-plus sets price = cost + markup (cost determines price). Target costing reverses this: the market sets price, the firm subtracts profit to get cost, then designs to that cost (price determines allowable cost).
At which stage of a product's life is most cost 'locked in' under Target Costing, and why focus there?
At the design/development stage — roughly 70-80% of a product's lifetime cost is committed during design, so target costing concentrates effort before production starts.
List the main steps of the Target Costing process.
1) Determine market-driven target selling price; 2) Set required profit margin; 3) Compute target cost (price − profit); 4) Estimate current product cost; 5) Identify cost gap; 6) Use value engineering to close the gap.
Define Life Cycle Costing.
A technique that accumulates and manages all costs of a product over its entire life cycle — from research, design and development through production, marketing, use and final disposal/abandonment.
Name the typical stages of a product life cycle in Life Cycle Costing.
Introduction, Growth, Maturity, and Decline (preceded by the development/design phase and followed by abandonment/disposal).
Why is Life Cycle Costing important for decision making?
It reveals total costs (including pre-production and post-production costs often ignored by conventional costing), enabling better pricing, product profitability assessment and cost minimization over the whole life.
What are 'committed' vs 'incurred' costs in life cycle costing?
Committed costs are locked in by early design decisions even though spent later; incurred costs are actually paid out over time. Most costs are committed early but incurred during production — hence early design focus.
Show the other 31 Strategic Cost Management flashcards
What are the three broad categories of life cycle costs?
Pre-production/upstream costs (R&D, design), production/manufacturing costs, and post-production/downstream costs (marketing, distribution, customer service, disposal).
Define Cost Control.
The process of regulating actual costs to keep them within predetermined targets/standards/budgets, through measurement, comparison of actual with planned, and corrective action; it maintains performance at established standards.
List common techniques of Cost Control.
Standard costing and variance analysis, budgetary control, inventory control (EOQ, ABC analysis), responsibility accounting, ratio analysis, and Just-in-Time (JIT).
How does Standard Costing aid cost control?
It sets predetermined standard costs, compares them with actual costs to compute variances, and investigates significant variances so management can take corrective action (management by exception).
What is Budgetary Control?
A cost-control technique of establishing budgets, comparing actual results against budgeted figures, analysing variances, and taking corrective action to ensure objectives are achieved.
Define Cost Reduction.
The real and permanent reduction in the unit cost of goods/services without impairing their suitability for the intended use or quality, achieved by eliminating wasteful and unnecessary elements of cost.
State three key differences between Cost Control and Cost Reduction.
1) Control keeps cost within standards; reduction lowers cost below standards. 2) Control is preventive and ends at standards; reduction is corrective and challenges standards. 3) Control may be temporary; reduction aims for permanent savings.
List major tools/techniques of Cost Reduction.
Value analysis/value engineering, work study (method + work measurement), standardization, variety reduction, business process re-engineering, JIT, Kaizen costing, and quality control.
What is Kaizen Costing?
A continuous improvement approach (applied during the manufacturing stage) that seeks ongoing small incremental cost reductions over a product's production life, complementing target costing used at the design stage.
What is Business Process Re-engineering (BPR) as a cost reduction tool?
Fundamental rethinking and radical redesign of business processes to achieve dramatic improvements in cost, quality, service and speed — focusing on whole processes rather than incremental fixes.
Define Value Analysis (VA).
A systematic, organized study of the functions of an existing product/process to provide the required function at the lowest total cost without reducing quality, reliability or performance.
How does Value Engineering differ from Value Analysis?
Value Engineering is applied at the design/development stage of a new product (before production); Value Analysis is applied to existing products already in production. Both aim to maximize value (function/cost).
State the value formula used in Value Analysis.
Value = Function (or Worth/Utility) / Cost. Value is improved by increasing function for the same cost, maintaining function at lower cost, or both.
Name the types of 'value' considered in Value Analysis.
Use (functional) value, Esteem (prestige) value, Exchange (market) value, and Cost value.
List the main phases of a Value Analysis job plan.
Information, Function analysis, Creative (idea generation), Evaluation, Development/Recommendation, and Implementation/Follow-up phases.
What is a Transfer Price?
The price at which goods or services are transferred between divisions, departments or units of the same organization (or associated enterprises), used to record inter-divisional transactions.
What are the main objectives of transfer pricing in a decentralized firm?
Goal congruence, fair divisional performance evaluation, divisional autonomy, and optimal resource allocation/profit maximization for the firm as a whole.
List the principal methods of setting transfer prices.
1) Cost-based (marginal/variable cost, full/absorption cost, cost-plus); 2) Market-based (market price); 3) Negotiated transfer price; 4) Opportunity-cost/dual pricing.
What is a market-based transfer price and when is it ideal?
Setting the transfer price equal to the external market price of the intermediate product. It is ideal when a competitive (perfect) external market exists, promoting goal congruence and fair performance measurement.
What is a cost-plus transfer price?
A transfer price set at the supplying division's cost (variable or full) plus an agreed markup/profit margin, allowing the selling division to earn a profit on internal transfers.
What is a negotiated transfer price and its key drawback?
A price arrived at by bargaining between buying and selling divisions. Drawback: it can be time-consuming, may depend on relative bargaining power, and can lead to sub-optimal (non-goal-congruent) outcomes or conflict.
State the general economic rule for the minimum transfer price.
Minimum transfer price = Marginal (variable) cost of the supplying division + Opportunity cost per unit to the firm of transferring internally. With spare capacity, opportunity cost = 0, so minimum = marginal cost.
What is dual transfer pricing?
A system where the selling division records the transfer at one price (e.g., market or cost-plus) and the buying division records it at another (e.g., marginal cost), with the difference adjusted at the corporate level.
What is the Arm's Length Principle (ALP) in transfer pricing?
The principle that prices for transactions between associated enterprises should be the same as those that would be charged between independent (unrelated) parties in comparable transactions under comparable conditions.
Which sections of the Indian Income-tax Act, 1961 govern transfer pricing?
Sections 92 to 92F (computation of income from international/specified domestic transactions at arm's length), supported by Rules 10A to 10E of the Income-tax Rules.
What is an 'Associated Enterprise' under Indian transfer pricing regulations?
An enterprise that participates directly/indirectly in the management, control or capital of another enterprise (or both controlled by common persons), as defined in Section 92A — making their transactions subject to ALP.
List the methods prescribed under Indian transfer pricing rules for determining arm's length price.
Comparable Uncontrolled Price (CUP), Resale Price Method (RPM), Cost Plus Method (CPM), Profit Split Method (PSM), Transactional Net Margin Method (TNMM), and 'Other Method' as prescribed.
What is a 'Specified Domestic Transaction' in Indian transfer pricing?
Certain domestic transactions between related parties (per Section 92BA) exceeding a prescribed monetary threshold, to which arm's length provisions apply even though they are not international transactions.
What is an Advance Pricing Agreement (APA)?
An agreement between a taxpayer and the tax authority (CBDT in India) that fixes, in advance, the transfer pricing method and arm's length price for specified future international transactions, providing certainty and avoiding disputes.
What is the Comparable Uncontrolled Price (CUP) method?
A transfer pricing method that compares the price charged in a controlled transaction (between associated enterprises) with the price charged in a comparable uncontrolled transaction between independent parties to test arm's length compliance.
What factors influence international transfer pricing decisions of multinationals?
Differences in tax rates across countries, customs/import duties, exchange-rate and currency restrictions, profit repatriation rules, inflation, and compliance with each country's transfer pricing regulations.
CMA Final Strategic Cost Management FAQ
What is in the CMA Final Strategic Cost Management syllabus?
CMA Final Strategic Cost Management is split into 3 chapters: Cost Management Techniques, Cost Control and Cost Reduction and Transfer Pricing. Together they contain 9 topics.
How many chapters are in CMA Final Strategic Cost Management?
3 chapters, containing 9 topics. The largest chapter is Cost Management Techniques, with 3 topics.
Are there flashcards for CMA Final Strategic Cost Management?
Yes — a 51-card Strategic Cost Management deck, printed in full in the flashcards section of this page and available in the Examius app with spaced repetition. The free plan covers one exam of your choice, including its flashcards; Examius Pro, a one-time purchase, unlocks every other exam and deck.