ICMA Pakistan Advanced Management Accounting Syllabus

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

The incremental/avoidable costs of making versus the purchase price of buying, plus any opportunity cost of the freed capacity. Unavoidable fixed costs are irrelevant.

What is limiting factor (key factor) analysis?

A technique to maximise profit when one resource is scarce: rank products by contribution per unit of the limiting factor and allocate the scarce resource to the highest-ranked product first.

State the rule for ranking products under a single limiting factor.

Rank by contribution per unit of limiting factor = Contribution per unit / Limiting factor units per unit. Produce highest-ranked products first up to demand, then next, until the resource is exhausted.

When is linear programming used instead of simple limiting factor analysis?

When there are two or more scarce resources (constraints) limiting production simultaneously, so a single ranking is insufficient.

What are the steps to formulate a linear programming problem?

1) Define decision variables; 2) Formulate the objective function (maximise contribution/minimise cost); 3) Express constraints as inequalities; 4) Add non-negativity constraints; 5) Solve graphically or by simplex.

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

The increase in the objective function (contribution) from having one extra unit of a scarce (binding) resource. It represents the maximum premium worth paying for additional units of that resource.

What is the difference between a binding and a non-binding (slack) constraint?

A binding constraint is fully used at the optimum (zero slack) and has a positive shadow price. A non-binding constraint has spare capacity (slack) and a shadow price of zero.

What is cost-plus pricing and one weakness of it?

Setting price by adding a profit mark-up to total or marginal cost. Weakness: it ignores market demand, competition, and price elasticity, and may set prices that the market will not accept.

Distinguish market skimming from market penetration pricing.

Skimming: set a high initial price to maximise margins from early adopters, then lower it. Penetration: set a low initial price to gain market share quickly and deter competitors.

State the formula linking price, demand and elasticity in a linear demand function P = a − bQ.

a = price at which demand is zero; b = change in price / change in quantity. The profit-maximising output is where marginal revenue (MR) = marginal cost (MC).

At what point is profit maximised in economic pricing theory?

Profit is maximised where Marginal Revenue (MR) = Marginal Cost (MC).

What is incremental (rolling) budgeting and its main drawback?

Budgeting by adjusting the previous period's actuals/budget for expected changes. Drawback: it perpetuates past inefficiencies and 'budgetary slack' without questioning whether activities are still needed.

What is a flexible budget?

A budget that is adjusted (flexed) to reflect the actual level of activity achieved, enabling a like-for-like comparison with actual costs for variance analysis.

What is Zero-Based Budgeting (ZBB)?

A method where every budget starts from a 'zero base'; all expenditure must be justified afresh each period as if the activity were new, rather than basing it on prior spending.

What are the steps in Zero-Based Budgeting?

1) Define decision units; 2) Prepare decision packages describing each activity, its costs and benefits; 3) Evaluate and rank packages; 4) Allocate resources to the highest-priority packages within available funds.

What is Activity-Based Budgeting (ABB)?

Budgeting that uses ABC principles: it sets budgets based on the activities and their cost drivers needed to achieve planned output, rather than on departments or line items.

Name three quantitative forecasting methods used in budgeting.

Time-series analysis (trend and seasonal variation), linear regression (least squares), and high-low method / moving averages.

In time-series analysis, how do additive and multiplicative seasonal models differ?

Additive: Y = Trend + Seasonal + Random (seasonal variation is a constant amount). Multiplicative: Y = Trend x Seasonal x Random (seasonal variation is a proportion of the trend).

State the direct material price and usage variance formulas.

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 direct labour rate and efficiency variance formulas.

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.

What is the labour idle time variance?

Idle time variance = Idle hours x Standard rate per hour (always adverse). It separates hours paid but not worked from the efficiency variance.

State the variable overhead expenditure and efficiency variance formulas.

Variable overhead expenditure variance = Actual variable overhead − (Actual hours x Standard variable OH rate). Efficiency variance = (Standard hours for actual output − Actual hours) x Standard variable OH rate.

Under absorption costing, what are the components of the fixed overhead variance?

Fixed overhead total variance = Expenditure variance + Volume variance. The volume variance further splits into Capacity variance and Efficiency variance.

What is the fixed overhead volume variance and how is it calculated?

It is the over/under absorption due to actual output differing from budgeted output: (Actual output − Budgeted output) x Standard fixed OH rate per unit. It arises only under absorption costing.

State the sales price and sales volume variance formulas.

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

What do the sales mix and sales quantity variances measure?

Sales mix variance measures the effect of selling products in different proportions than budgeted. Sales quantity variance measures the effect of total sales volume differing from budget at the standard mix. Together they make up the sales volume variance.

What is the difference between materials mix and materials yield variances?

Mix variance: effect of using inputs in proportions different from standard. Yield variance: effect of total input producing more/less output than the standard yield. Together they equal the total materials usage variance.

What is an operating statement (variance reconciliation)?

A statement that reconciles budgeted profit to actual profit by listing all favourable and adverse variances, showing how each variance contributed to the difference.

Distinguish a planning variance from an operational variance.

Planning variance arises from a flawed or revised standard (uncontrollable, comparing original vs revised standard). Operational variance measures performance against the realistic revised standard (controllable by managers).

What is the difference between an investment centre, a profit centre and a cost centre?

Cost centre: manager responsible only for costs. Profit centre: responsible for costs and revenues (profit). Investment centre: responsible for costs, revenues and capital investment (return on investment).

Compare Return on Investment (ROI) and Residual Income (RI) as divisional measures, including one weakness of ROI.

ROI = Divisional profit / Capital employed (%). RI = Divisional profit − (Capital employed x Imputed interest/cost of capital). Weakness of ROI: it can lead managers to reject projects that exceed the cost of capital but lower the division's average ROI, causing dysfunctional (sub-optimal) decisions.

What is the general rule for setting an optimal transfer price?

Transfer price = Marginal (variable) cost of the transferring division + Opportunity cost of the transfer. With no spare capacity, market price is generally optimal; with spare capacity, marginal cost is the minimum.

What is expected value (EV) and how is it calculated?

EV is the weighted average of possible outcomes: EV = Σ (probability x outcome value). It is used to choose between options under uncertainty by selecting the highest expected payoff.

How is a decision tree used and what is the rollback technique?

A decision tree maps decisions (squares) and chance events (circles) with probabilities and payoffs. Rollback: work from right to left, calculating EVs at chance nodes and choosing the best option at decision nodes.

What is sensitivity analysis in decision making?

A 'what-if' technique that measures how much a variable (e.g., price, cost, volume) can change before the decision changes — identifying the percentage margin of safety and the most critical/sensitive variables.

How is the sensitivity margin of a variable calculated in an NPV/decision context?

Sensitivity (%) = NPV (or profit) / Present value (or value) of the variable under review x 100. The lower the percentage, the more sensitive (critical) the project is to that variable.