ICAP CAF CAF-5: Management Accounting Syllabus

CAF-5: Management Accounting syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for CAF-5: Management Accounting in ICAP CAF, not a summary of it.

1. 1

   Elements and Costing Methods

   4 topics

   • Elements of cost of product, job or service
   • Absorption, marginal and activity-based costing
   • Over and under-absorbed overheads
   • Cost behavior and cost drivers
2. 2

   Material and Labour

   3 topics

   • Raw material inventory valuation
   • Labour productivity and remuneration systems
   • Learning curve theory
3. 3

   Overheads and Manufacturing Accounts

   3 topics

   • Allocation and apportionment of overheads
   • Predetermined factory overhead rate
   • Preparation of manufacturing accounts
4. 4

   Process Costing

   4 topics

   • Flow of cost in process costing
   • Normal and abnormal loss, abnormal gain and rework
   • Work in process and finished goods valuation
   • Joint and by-product costing
5. 5

   Target Costing and Variance Analysis

   3 topics

   • Target costing tools
   • Standard rates of material, labour and overhead
   • Variance analysis
6. 6

   Cost-Volume-Profit and Decision Making

   5 topics

   • Cost-volume-profit and breakeven analysis
   • Special order decisions
   • Make or buy and product mix decisions
   • Further processing decisions
   • Shut down and product discontinuation decisions
7. 7

   Inventory Management

   2 topics

   • Economic Order Quantity (EOQ)
   • Safety stock and re-order levels

CAF-5: Management Accounting flashcards for ICAP CAF

19 of 52 cards from the CAF-5: Management Accounting deck — real questions with worked answers.

1. What are the three elements of the cost of a product, job or service?

   Direct materials, direct labour, and overheads (expenses). Together direct materials + direct labour + direct expenses = prime cost; prime cost + production overheads = total production cost.

2. Define 'prime cost'.

   Prime cost is the total of all direct costs: direct materials + direct labour + direct expenses. It excludes overheads.

3. Distinguish between direct costs and indirect costs (overheads).

   Direct costs can be traced wholly and economically to a single cost object (e.g. material in a product). Indirect costs (overheads) cannot be traced directly and must be shared/apportioned over cost objects.

4. What is absorption costing?

   A costing method in which all production costs, both variable and fixed, are charged to (absorbed into) units of output. Fixed production overheads are treated as product costs and included in inventory valuation.

5. What is marginal (variable) costing?

   A costing method in which only variable production costs are charged to units; fixed production overheads are treated as period costs and written off in full against the period's profit. Inventory is valued at variable cost only.

6. How does the choice between absorption and marginal costing affect reported profit when inventory levels change?

   If closing inventory > opening inventory (stock rising), absorption profit > marginal profit (fixed overhead carried forward in stock). If inventory falls, absorption profit < marginal profit. If no change, profits are equal.

7. Define 'contribution' in marginal costing and give its formula.

   Contribution is sales revenue minus variable costs. Per unit: Contribution = Selling price per unit − Variable cost per unit. Contribution first covers fixed costs, then becomes profit.

8. What is activity-based costing (ABC)?

   A costing method that assigns overheads to products based on the activities that drive those costs. Overheads are pooled by activity and charged to products using cost drivers, giving more accurate product costs than blanket absorption.

9. List the main steps in implementing activity-based costing (ABC).

   1) Identify major activities; 2) Group costs into cost pools for each activity; 3) Identify the cost driver for each activity; 4) Calculate a cost driver rate (pool cost ÷ driver volume); 5) Absorb costs into products using driver usage.

10. What is a cost driver in ABC?

    A cost driver is the factor that causes the cost of an activity to change (e.g. number of set-ups, number of orders, machine hours). It is used to charge activity costs to products.

11. Give the formula for the predetermined (budgeted) overhead absorption rate.

    Overhead absorption rate = Budgeted total overheads ÷ Budgeted level of activity (e.g. budgeted labour hours, machine hours or units).

12. Why are predetermined overhead absorption rates used rather than actual rates?

    Because actual overheads and actual activity are not known until the period ends; predetermined rates allow overheads to be charged to jobs/products throughout the period for timely cost and pricing decisions.

13. What is over-absorption of overheads and how is it treated?

    Over-absorption occurs when overheads absorbed (rate × actual activity) exceed actual overheads incurred. It is a favourable adjustment credited to the income statement, increasing profit.

14. What is under-absorption of overheads and how is it treated?

    Under-absorption occurs when overheads absorbed are less than actual overheads incurred. It is an adverse adjustment debited (charged) to the income statement, reducing profit.

15. State the two causes of over/under-absorption of overheads.

    1) Actual overhead expenditure differing from budget; 2) Actual activity level differing from the budgeted activity used to set the rate. (Often both occur together.)

16. Define a fixed cost and a variable cost (cost behaviour).

    A fixed cost stays constant in total over a range of activity (e.g. rent); per unit it falls as output rises. A variable cost changes in total in direct proportion to activity (e.g. raw material); per unit it stays constant.

17. What is a semi-variable (mixed) cost and how is it analysed?

    A semi-variable cost has both a fixed and a variable element (e.g. electricity with a standing charge). It is split using the high-low method or regression to find fixed and variable components.

18. Explain the high-low method of estimating cost behaviour.

    Variable cost per unit = (Cost at highest activity − Cost at lowest activity) ÷ (Highest activity − Lowest activity). Fixed cost = Total cost at any level − (Variable cost per unit × that activity level).

19. What is a stepped fixed cost?

    A cost that is fixed over a range of activity but jumps to a higher fixed level once activity exceeds a certain point (e.g. needing an extra supervisor when output doubles).

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