ICAP CA Cost and Management Accounting Syllabus

What is reciprocal service apportionment, and name two methods of dealing with it.

Reciprocal servicing occurs when service cost centres serve each other (e.g. maintenance and stores serve one another). Methods: the repeated distribution (continuous allotment) method and the algebraic (simultaneous equation) method.

How does marginal costing differ from absorption costing in valuing inventory?

Marginal costing values inventory at variable production cost only; fixed production overheads are treated as period costs. Absorption costing includes a share of fixed production overhead in inventory value.

How is the difference in profit between marginal and absorption costing reconciled?

Difference in profit = Change in inventory units x fixed overhead absorption rate per unit. When inventory increases, absorption profit is higher; when inventory decreases, marginal profit is higher.

What is job costing and when is it used?

Job costing is a costing method where costs are collected for each separately identifiable job or order made to a customer's specification. Used for non-repetitive, customised work (e.g. printing, construction, repairs).

What is batch costing and how is the cost per unit found?

Batch costing applies where identical items are produced in distinct batches. Total batch cost is accumulated like a job, then Cost per unit = Total batch cost / Number of units in the batch.

In process costing, what are normal loss, abnormal loss, and abnormal gain?

Normal loss is expected unavoidable loss (a % of input), bearing no cost (only scrap value). Abnormal loss is loss above normal, valued at cost. Abnormal gain occurs when actual loss is less than normal, valued at cost like good output.

How is the cost per equivalent unit calculated in process costing?

Cost per equivalent unit = (Total process costs - scrap value of normal loss) / (Equivalent units of good output, including abnormal loss/gain). Equivalent units convert partly-completed WIP into equivalent whole units.

What are 'equivalent units' in process costing?

Equivalent units express partially completed work in process as a number of fully completed units (e.g. 400 units that are 50% complete = 200 equivalent units), enabling fair cost allocation between output and closing WIP.

How are joint products and by-products distinguished in process costing?

Joint products have significant sales value and are the main objective of processing; joint costs are apportioned among them. A by-product has minor sales value relative to main products and its net realisable value is usually credited against process costs.

What is Activity-Based Costing (ABC) and how does it differ from traditional absorption costing?

ABC assigns overheads to products based on the activities that drive those costs, using multiple cost drivers and cost pools. Traditional absorption costing uses a single volume-based rate (e.g. labour hours), so ABC gives more accurate product costs where overheads are diverse.

Define 'cost pool' and 'cost driver' in Activity-Based Costing.

A cost pool is a grouping of overhead costs relating to a particular activity (e.g. machine setups). A cost driver is the factor that causes the cost of that activity (e.g. number of setups), used to absorb the pool into products.

How is the contribution per unit calculated and what does it represent?

Contribution per unit = Selling price per unit - Variable cost per unit. It represents the amount each unit contributes towards covering fixed costs and then generating profit.

What is the contribution/sales (C/S) ratio and how is it used?

C/S ratio = Contribution / Sales (expressed as a fraction or %). It is used to find break-even revenue (Fixed costs / C/S ratio) and the contribution from any level of sales revenue.

State the formula for the break-even point in units and in revenue.

Break-even point (units) = Fixed costs / Contribution per unit. Break-even point (revenue) = Fixed costs / C/S ratio.

How is the margin of safety calculated and what does it indicate?

Margin of safety = Budgeted (or actual) sales - Break-even sales, often expressed as a percentage of budgeted sales. It shows how far sales can fall before a loss is made.

What sales volume is required to achieve a target profit?

Units for target profit = (Fixed costs + Target profit) / Contribution per unit. In revenue terms: (Fixed costs + Target profit) / C/S ratio.

What are the underlying assumptions of cost-volume-profit (CVP) analysis?

Costs split cleanly into fixed and variable; selling price, variable cost per unit, and fixed costs are constant; production equals sales (no inventory change); a single product or constant sales mix; and activity is the only factor affecting costs.

Why might the profit shown by the cost (cost-ledger) accounts differ from the profit in the financial accounts?

Differences arise from items in one ledger but not the other (e.g. notional costs, purely financial items like dividends or loss on asset sales), different stock valuation bases, and over/under-absorption of overheads. These are reconciled in a reconciliation statement.

In a reconciliation of cost and financial profit, how are 'income only in financial accounts' (e.g. interest received, profit on asset sale) treated?

When starting from cost (costing) profit, income recorded only in the financial accounts is added, and expenses recorded only in the financial accounts (e.g. discounts allowed, fines) are deducted to arrive at financial profit.

What is the typical sequence for preparing functional budgets, and which is the principal budget factor?

Budgets are prepared starting from the principal budget factor (usually sales), then: sales budget -> production budget -> material usage and purchases, labour, and overhead budgets -> cost budgets -> master budget. The principal budget factor is the constraint that limits all activity.

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

Units to produce = Sales units + Closing finished goods inventory - Opening finished goods inventory.

How is the materials purchases budget (in units) calculated?

Material purchases = Material required for production + Closing material inventory - Opening material inventory, where material for production = production units x usage per unit.

What does a master budget consist of?

The master budget is the consolidated summary of all functional budgets, comprising the budgeted income statement (profit and loss), the budgeted statement of financial position (balance sheet), and the cash budget.

What is a cash budget and what are its main sections?

A cash budget is a period-by-period forecast of cash receipts and payments. Its structure: opening balance + receipts - payments = closing balance, which carries forward as the next period's opening balance. It is based on cash flows, not accruals.

Why are depreciation and other non-cash items excluded from a cash budget?

A cash budget records only actual cash movements. Depreciation, provisions, and accruals do not involve cash flow, so they are excluded; instead the cash purchase of the asset is shown in the period it is paid.

What is a flexible budget and how does it differ from a fixed budget?

A fixed budget is set for a single planned activity level and not adjusted. A flexible budget is restated (flexed) to the actual activity level achieved by adjusting variable costs, enabling fair comparison and meaningful variance analysis.

State the formulas for the direct material price variance and material usage variance.

Material price variance = (Standard price - Actual price) x Actual quantity purchased. Material usage variance = (Standard quantity for actual output - Actual quantity used) x Standard price.

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

Labour rate variance = (Standard rate - Actual rate) x Actual hours paid. Labour efficiency variance = (Standard hours for actual output - Actual hours worked) x Standard rate.

How is the variable overhead split into expenditure and efficiency variances?

Variable overhead expenditure variance = Actual variable overhead - (Actual hours x standard variable OAR). Variable overhead efficiency variance = (Standard hours for actual output - Actual hours) x standard variable OAR.

What are the components of the fixed overhead variance under absorption costing?

Fixed overhead total variance = Fixed overhead expenditure variance (Budgeted - Actual fixed overhead) + Fixed overhead volume variance ((Actual output - Budgeted output) x standard fixed OAR per unit). Volume can further split into capacity and efficiency variances.

State the formulas for the sales price variance and sales volume (profit/contribution) variance.

Sales price variance = (Actual price - Standard price) x Actual units sold. Sales volume variance = (Actual units sold - Budgeted units sold) x standard profit per unit (absorption) or standard contribution per unit (marginal costing).

What is an operating statement in standard costing?

An operating statement reconciles budgeted profit to actual profit by listing all favourable and adverse variances (sales, materials, labour, overheads). It shows how each variance bridges the gap between standard and actual results.

In an operating statement, how are favourable and adverse variances treated when reconciling budgeted to actual profit?

Starting from budgeted profit, favourable variances are added and adverse variances are deducted to arrive at actual profit. (Sales variances are usually applied first, then cost variances.)

What is a relevant cost, and name its three key characteristics?

A relevant cost is a cost that is relevant to a specific decision. It must be: (1) a future cost, (2) a cash flow, and (3) incremental/differential (changes as a result of the decision).

Why are sunk costs and committed costs irrelevant to decision making?

Sunk costs are past costs already incurred and cannot be changed by any future decision; committed costs are future costs that will be incurred regardless of the decision. Neither differs between alternatives, so both are ignored as irrelevant.

What is an opportunity cost and why is it relevant?

An opportunity cost is the value of the benefit forgone by choosing one alternative over the next-best alternative use of a resource. It is relevant because it represents a real economic sacrifice of the decision, even though it is not a recorded cash outlay.

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

If the material is in regular use, the relevant cost is its current replacement cost. If it is not in regular use, the relevant cost is the higher of its net realisable (scrap/resale) value or its value in an alternative use.

What is limiting factor (key factor) analysis used for?

It determines the optimal production mix when one resource (e.g. materials, labour hours, machine hours) is in short supply, by maximising contribution earned per unit of the limiting factor.

What is the decision rule for ranking products under a single limiting factor?

Calculate contribution per unit of the limiting factor (Contribution per unit / units of limiting factor per product), rank products from highest to lowest, and allocate the scarce resource to the highest-ranked products first to maximise total contribution.

In a make-or-buy decision, what costs are relevant when comparing making in-house versus buying externally?

Compare the external purchase price against the relevant (incremental) costs of making in-house - normally the variable production costs plus any avoidable fixed costs and any opportunity cost of using scarce capacity. Unavoidable fixed costs are irrelevant.