Institute of Financial Accountants (IFA) Qualifications Management Accounting and Costing Syllabus

Management Accounting and Costing syllabus — full chapter and topic list

Expand any chapter to see its topics and sub-topics. This is the whole examinable outline for Management Accounting and Costing in Institute of Financial Accountants (IFA) Qualifications, not a summary of it.

1. 1

   Cost Classification and Behaviour

   4 topics

   • Classifying costs by element, function and behaviour
     • Direct and indirect costs
     • Product and period costs
   • Fixed, variable and semi-variable cost behaviour
     • High-low method
     • Linear cost functions
   • Cost units, cost centres and responsibility centres
   • Coding systems for costs and revenues
2. 2

   Costing Methods

   5 topics

   • Materials, labour and overhead accounting
     • Inventory control levels and EOQ
     • Labour remuneration and idle time
   • Overhead allocation, apportionment and absorption
     • Predetermined absorption rates
     • Under- and over-absorption
   • Absorption costing versus marginal costing
     • Reconciling profit under each method
     • Treatment of fixed overheads
   • Job, batch and process costing
     • Equivalent units and normal/abnormal loss
     • Joint and by-product costing
   • Activity-based costing principles
3. 3

   Budgeting and Budgetary Control

   4 topics

   • The budgeting process and the master budget
     • Functional and subsidiary budgets
     • Cash budgets and cash flow forecasting
   • Fixed and flexible budgets
     • Flexing for activity levels
     • Budgetary control reports
   • Behavioural aspects of budgeting
     • Participation and budget slack
     • Motivation and goal congruence
   • Standard costing and variance analysis
     • Material, labour and overhead variances
     • Sales price and volume variances
     • Reconciling budgeted to actual profit
4. 4

   Short-Term Decision Making

   4 topics

   • Cost-volume-profit analysis
     • Contribution and break-even point
     • Margin of safety and target profit
   • Relevant costing for decisions
     • Avoidable, sunk and opportunity costs
     • Make-or-buy and outsourcing decisions
   • Limiting factor analysis
     • Contribution per limiting factor
     • Product mix optimisation
   • Pricing decisions and special orders
5. 5

   Performance Measurement

   4 topics

   • Financial performance indicators
     • Profitability, liquidity and efficiency ratios
     • Return on capital employed and residual income
   • Non-financial performance indicators
     • The balanced scorecard
     • Quality, time and innovation measures
   • Divisional performance and transfer pricing
   • Benchmarking and continuous improvement

Management Accounting and Costing flashcards for Institute of Financial Accountants (IFA) Qualifications

24 of 88 cards from the Management Accounting and Costing deck — real questions with worked answers.

1. What are the three main ways of classifying costs covered in management accounting?

   By element (materials, labour, expenses), by function (production, administration, selling and distribution, finance), and by behaviour (fixed, variable, semi-variable).

2. Define a 'direct cost' and give the formula for prime cost.

   A direct cost can be traced wholly and economically to a single cost unit. Prime cost is the total of all direct costs: $\text{Prime cost} = \text{Direct materials} + \text{Direct labour} + \text{Direct expenses}$.

3. What is an 'indirect cost' (overhead)?

   A cost that cannot be traced directly to a single cost unit and must instead be shared across cost units, e.g. factory rent, supervisors' salaries and machine depreciation.

4. Describe the behaviour of a fixed cost as activity changes (in total and per unit).

   In total it remains constant regardless of output (within the relevant range); per unit it falls as activity rises, because the fixed amount is spread over more units.

5. Describe the behaviour of a variable cost as activity changes (in total and per unit).

   In total it changes in direct proportion to activity; per unit it stays constant. For example $\text{Total variable cost} = \text{variable cost per unit} \times \text{units}$.

6. What is a semi-variable (mixed) cost and how is it expressed algebraically?

   A cost with both a fixed and a variable element, e.g. a telephone bill with a standing charge plus call charges. It is expressed as $y = a + bx$, where $a$ is fixed cost, $b$ is variable cost per unit and $x$ is activity.

7. Using the high-low method, how do you calculate the variable cost per unit?

   $$b = \frac{\text{Cost at highest activity} - \text{Cost at lowest activity}}{\text{Highest activity} - \text{Lowest activity}}$$ The fixed cost is then found by substituting $b$ back into the total cost at either activity level.

8. What is a stepped (step-fixed) cost?

   A cost that is fixed over a range of activity but jumps to a new fixed level once activity passes a threshold, e.g. hiring an extra supervisor for each additional shift.

9. Define a 'cost unit' and give two examples.

   A unit of product or service to which costs can be attributed. Examples: a litre of paint (manufacturing), a patient-day (hospital), a passenger-mile (transport).

10. What is a 'cost centre'?

    A location, function, activity or item of equipment for which costs are accumulated, e.g. a department, a machine or a project. Managers are accountable for the costs charged to it.

11. Distinguish between a cost centre, a profit centre and an investment centre.

    A cost centre is accountable only for costs; a profit centre is accountable for both costs and revenues (profit); an investment centre is accountable for costs, revenues and the capital invested (return on investment).

12. What is a 'responsibility centre'?

    A segment of an organisation whose manager is held accountable for specified financial results (costs, revenues, profit and/or investment). Cost, revenue, profit and investment centres are all types of responsibility centre.

13. What is a cost coding system and why is it used?

    A system that assigns a unique code (number/letter combination) to each cost and revenue item so that transactions can be classified, recorded, analysed and reported quickly, accurately and consistently.

14. List three desirable features of a good coding system.

    It should be unique (each item has one code), consistent and logically structured, allow for expansion/flexibility, be concise, and ideally have a built-in check (e.g. a check digit) to reduce errors.

15. How is the cost of materials issued valued under FIFO, and what happens to closing inventory value when prices are rising?

    FIFO (first in, first out) issues materials at the cost of the earliest purchases. When prices rise, issues are valued at older (lower) prices and closing inventory is valued at the most recent (higher) prices.

16. How does AVCO (weighted average) value material issues, and how does it compare with FIFO when prices rise?

    AVCO values issues at a weighted average cost recalculated after each receipt. When prices rise, AVCO gives issue values and closing inventory between those produced by FIFO and LIFO.

17. Give the formula for the Economic Order Quantity (EOQ).

    $$\text{EOQ} = \sqrt{\frac{2 C_o D}{C_h}}$$ where $C_o$ = cost per order, $D$ = annual demand, and $C_h$ = holding cost per unit per year.

18. Distinguish between direct labour cost and indirect labour cost.

    Direct labour cost is the wages of workers directly making the product/service (traceable to cost units); indirect labour cost is wages of staff who support production but do not work on units, e.g. supervisors, storekeepers and idle time.

19. How is a labour idle time ratio calculated?

    $$\text{Idle time ratio} = \frac{\text{Idle hours}}{\text{Total hours paid}} \times 100\%$$ Idle time is generally treated as an overhead (indirect cost).

20. What are the three stages of accounting for production overheads under absorption costing?

    1) Allocation – assigning whole overhead items to cost centres; 2) Apportionment – sharing common overheads across cost centres on a fair basis; 3) Absorption – charging overhead to cost units via a predetermined absorption rate.

21. Distinguish overhead allocation from overhead apportionment.

    Allocation charges an entire overhead cost to a single cost centre that caused it; apportionment splits an overhead that relates to several cost centres between them using a fair basis (e.g. floor area for rent).

22. Give a suitable apportionment basis for each: factory rent, canteen costs, and machine depreciation.

    Factory rent – floor area; canteen costs – number of employees; machine depreciation – machine value or cost of machines in each centre.

23. What is the purpose of reapportioning service cost centre overheads, and name one method for dealing with reciprocal services.

    Service centres (e.g. stores, maintenance) do not make products, so their costs are reapportioned to production cost centres. Reciprocal (inter-service) servicing can be dealt with using the repeated distribution method or the simultaneous equation (algebraic) method.

24. Give the formula for a predetermined overhead absorption rate (OAR).

    $$\text{OAR} = \frac{\text{Budgeted production overhead}}{\text{Budgeted level of activity}}$$ The activity base is commonly direct labour hours, machine hours or units.

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