ICMA Pakistan Fundamentals of Cost & Management Accounting Syllabus

Describe the ABC system of inventory control.

Items are classified by value/importance: A items are high value/low quantity needing tight control; B items are medium; C items are low value/high quantity needing minimal control. Control effort is concentrated on A items.

What is the two-bin (periodic review) system of stock control?

Stock is held in two bins; issues are made from the first bin and when it is empty (signalling the reorder level), a new order is placed while issues continue from the reserve (second) bin.

Explain Just-in-Time (JIT) inventory.

A system in which materials are received and goods produced only as needed, minimizing inventory holding. It relies on reliable suppliers and aims to eliminate the costs and waste of holding stock.

How does FIFO price material issues?

First In First Out assumes the earliest (oldest) units purchased are issued first, so issues are valued at the oldest prices and closing stock is valued at the most recent prices.

How does LIFO price material issues?

Last In First Out assumes the most recently purchased units are issued first, so issues are valued at the latest prices and closing stock is valued at the oldest prices.

How is the weighted average cost (AVCO) per unit calculated?

Weighted average price = Total cost of stock held ÷ Total units held, recomputed after each new receipt. Issues and closing stock are valued at this average.

Under rising prices, compare the effect of FIFO and LIFO on profit and closing stock.

When prices rise: FIFO gives lower cost of issues, higher closing stock value and higher profit. LIFO gives higher cost of issues, lower closing stock value and lower profit.

At what value is inventory stated under IAS 2?

Inventory is valued at the lower of cost and net realizable value (NRV). NRV = estimated selling price − estimated costs to complete and sell.

Distinguish normal loss from abnormal loss of stock.

Normal loss is the unavoidable, expected loss inherent in handling/processing; its cost is absorbed by good units. Abnormal loss is avoidable/unexpected; it is valued at full cost and written off to the costing P&L.

How are abnormal gains treated in costing?

An abnormal gain (actual output exceeds expected good output) is valued at the same rate as good units and credited to the costing P&L (it improves profit).

What is time-rate (day-rate) remuneration?

A wage system paying workers a fixed rate per hour or day worked regardless of output. Pay = Hours worked × Rate per hour. It is simple but gives no direct incentive to increase output.

How is straight piecework pay calculated?

Pay = Units produced × Rate per unit. The worker is paid purely on output; quality control and a guaranteed minimum wage may be needed.

Describe the Halsey premium bonus scheme.

The worker receives time-rate pay plus a bonus of (usually) 50% of the time saved valued at the hourly rate. Bonus = 50% × (Time allowed − Time taken) × Rate per hour.

Describe the Rowan premium bonus scheme.

Bonus = (Time saved ÷ Time allowed) × Time taken × Rate per hour. Total pay = Time taken pay + this bonus. Rowan limits the bonus and protects against over-loose time standards.

What is a differential piece-rate (Taylor) system?

A system using two or more piece rates: a low rate for output up to standard and a higher rate for output above standard, strongly rewarding efficient workers.

Give the labour turnover rate formula.

Labour turnover rate = (Number of employees leaving and replaced during the period ÷ Average number of employees in the period) × 100.

Distinguish controllable from uncontrollable causes of labour turnover.

Controllable causes can be reduced by management (poor pay, bad conditions, lack of promotion). Uncontrollable causes cannot (retirement, death, illness, marriage, relocation).

What is the efficiency (productivity) ratio formula?

Efficiency ratio = (Standard hours for actual output ÷ Actual hours worked) × 100. Over 100% means workers are more efficient than standard.

Define the capacity ratio and the activity (production volume) ratio.

Capacity ratio = (Actual hours worked ÷ Budgeted hours) × 100. Activity ratio = (Standard hours for actual output ÷ Budgeted hours) × 100 = Efficiency ratio × Capacity ratio.

How is idle time treated in labour cost accounting?

Idle time (paid but non-productive hours) caused by normal reasons is treated as an overhead/indirect cost; abnormal idle time is written off to the costing P&L. It is not part of direct productive labour cost.

How is overtime premium normally treated in cost accounting?

The basic rate for overtime hours is a direct labour cost. The overtime premium is normally treated as a production overhead, unless the overtime is at a specific customer's request, when it is a direct cost of that job.

Distinguish cost allocation from cost apportionment.

Allocation charges a whole cost item directly to one cost centre that caused it. Apportionment splits a shared cost over several cost centres on a fair basis (e.g. floor area, number of employees).

What is reapportionment of service cost centre overheads?

The process of transferring (reapportioning) the costs of service cost centres to production cost centres so that all overheads can be absorbed into products. Methods include direct, step-down and reciprocal.

What is the repeated distribution (reciprocal) method?

A reapportionment method used when service cost centres serve each other; their costs are repeatedly reapportioned back and forth until the amounts left are negligible, fully clearing service centres.

Give the general formula for an overhead absorption rate (OAR).

OAR = Budgeted (estimated) production overheads ÷ Budgeted level of the absorption base (e.g. labour hours, machine hours, units).

Name common bases for absorbing overheads.

Direct labour hours, machine hours, units produced, percentage of direct labour cost, percentage of direct material cost, and percentage of prime cost. The base should reflect what drives the overheads.

Why is a predetermined overhead absorption rate used?

It is calculated in advance from budgeted figures so that product costs and prices can be set throughout the period without waiting for actual overheads to be known at period end.

How do you identify over- or under-absorption of overheads?

Compare absorbed overhead (actual activity × OAR) with actual overhead incurred. Absorbed > actual = over-absorption (credited to P&L). Absorbed < actual = under-absorption (debited to P&L).

What two factors cause over/under-absorption of overhead?

1) Actual overhead expenditure differing from budget. 2) Actual activity level differing from the budgeted activity used to set the OAR.

What is job costing and when is it used?

A costing method where costs are collected for each separately identifiable job or order made to a customer's specification. Used when output consists of distinct, non-repetitive jobs (e.g. printing, construction).

How does batch costing differ from job costing?

Batch costing collects costs for a batch of identical units produced together; the cost per unit = total batch cost ÷ number of units in the batch. Job costing treats each job as a single cost unit.

What is process costing and where is it applied?

A method used for continuous mass production where output is homogeneous and passes through successive processes. The total process cost is averaged over units produced to get cost per unit.

What are equivalent units in process costing?

A way of expressing partly completed (WIP) units as a number of fully completed equivalent units, so that costs can be fairly shared between finished output and closing work-in-progress.

What is the cost per equivalent unit formula in process costing?

Cost per equivalent unit = (Costs incurred for the element) ÷ (Total equivalent units for that element), calculated separately for materials and conversion costs.

What are joint products and by-products?

Joint products are two or more main products of significant value arising together from a common process. A by-product is incidental output of minor value arising alongside the main products.

What is service (operation) costing and give an example cost unit.

Costing applied to services rather than goods, using composite cost units. Examples: cost per passenger-kilometre (transport), cost per patient-day (hospital), cost per kilowatt-hour (electricity).

What is a composite cost unit?

A cost unit made up of two factors combined, used in service costing because a single measure is inadequate, e.g. tonne-kilometre, passenger-mile, patient-day.

Define contribution and give its formula.

Contribution = Sales revenue − Variable costs. It is the amount each unit/period contributes first to covering fixed costs and then to profit. Per unit: Selling price − Variable cost per unit.

Distinguish marginal (variable) costing from absorption costing.

Marginal costing charges only variable production cost to units and treats fixed production overhead as a period cost. Absorption costing includes fixed production overhead in unit cost (inventory).

Why do marginal and absorption costing profits differ, and reconcile them.

They differ because of fixed overhead carried in inventory. Reconciliation: Absorption profit = Marginal profit + (Closing stock − Opening stock) × Fixed overhead absorption rate per unit. When stock rises, absorption profit is higher.

What is the contribution-to-sales (C/S) or P/V ratio and its formula?

It measures contribution earned per rupee of sales. C/S (P/V) ratio = (Contribution ÷ Sales) × 100, or (Contribution per unit ÷ Selling price per unit) × 100.

State the key assumptions of cost-volume-profit (CVP) analysis.

Selling price, variable cost per unit and total fixed costs are constant; production equals sales; a single product or constant sales mix; and costs are accurately split into fixed and variable.

Give the break-even point formula in units and in sales value.

Break-even units = Fixed costs ÷ Contribution per unit. Break-even sales value = Fixed costs ÷ C/S (P/V) ratio.

How do you calculate the sales volume needed to earn a target profit?

Required units = (Fixed costs + Target profit) ÷ Contribution per unit. Required sales value = (Fixed costs + Target profit) ÷ C/S ratio.

Define margin of safety and give its formulas.

The amount by which actual/budgeted sales exceed the break-even point. Margin of safety = Budgeted sales − Break-even sales; as a percentage = (Budgeted sales − Break-even sales) ÷ Budgeted sales × 100.

What does a break-even chart show and where is the break-even point on it?

It plots total costs and total revenue against output. The break-even point is where the total revenue line crosses the total cost line; beyond it the gap is profit, before it the gap is loss.

What is a profit-volume (P/V) chart?

A graph plotting profit/loss against sales volume or value. It starts below zero (loss equal to fixed costs at nil sales), crosses the x-axis at break-even, and the slope equals the C/S ratio.