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

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).

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.

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.

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.

How do you calculate over- or under-absorbed overhead, and what causes it?

$$\text{Absorbed overhead} = \text{OAR} \times \text{actual activity}$$ Compare with actual overhead: if absorbed > actual it is over-absorbed; if absorbed < actual it is under-absorbed. It arises because the OAR uses budgeted (estimated) figures.

State the key difference in inventory valuation between absorption and marginal costing.

Under absorption costing, inventory (and cost of sales) includes a share of fixed production overhead; under marginal costing, inventory is valued at variable production cost only, and fixed production overhead is treated as a period cost.

Define 'contribution' and give its formula per unit.

Contribution is the amount each unit contributes towards fixed costs and then profit. $\text{Contribution per unit} = \text{Selling price per unit} - \text{Variable cost per unit}$.

Reconcile profit under marginal and absorption costing when inventory increases over a period.

When inventory increases, absorption costing profit is higher than marginal costing profit because fixed overhead is carried forward in closing inventory. $\text{Difference in profit} = \text{change in inventory units} \times \text{fixed overhead per unit}$.

When will marginal costing and absorption costing report the same profit?

When there is no change in inventory levels (production equals sales), so no fixed overhead is carried forward or brought forward in inventory.

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, e.g. printing, vehicle repairs or bespoke furniture. Each job has its own cost record.

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

Costing for a group of identical items produced together as a batch. $$\text{Cost per unit} = \frac{\text{Total batch cost}}{\text{Number of units in the batch}}$$

What is process costing and for what type of production is it suitable?

A costing method for continuous mass production of identical units through a series of processes (e.g. chemicals, food, oil). Costs are averaged over all units produced in the period.

In process costing, how is the cost per equivalent unit calculated?

$$\text{Cost per equivalent unit} = \frac{\text{Total process cost}}{\text{Equivalent units of production}}$$ Equivalent units convert partly completed work-in-progress into an equivalent number of fully complete units.

Distinguish normal loss from abnormal loss in process costing.

Normal loss is the expected, unavoidable loss inherent in the process; its cost is absorbed by good output (scrap value, if any, reduces process cost). Abnormal loss is loss above the expected level; it is valued at the cost per good unit and written off to the income statement.

What is abnormal gain in process costing and how is it treated?

Abnormal gain occurs when actual loss is less than normal (expected) loss. It is valued at the cost per good unit and credited (added back) to profit, with its scrap value adjusted accordingly.

What is the core principle of Activity-Based Costing (ABC)?

Overheads are caused by activities, so costs are pooled by activity and charged to products using cost drivers that reflect each product's actual consumption of those activities, rather than a single volume-based rate.

Define 'cost driver' and 'cost pool' in ABC.

A cost pool is a grouping of overhead costs relating to one activity (e.g. machine set-ups). A cost driver is the factor that causes the cost of an activity to change (e.g. number of set-ups), used to charge costs to products.

How is an ABC cost driver rate calculated?

$$\text{Cost driver rate} = \frac{\text{Total cost in the activity cost pool}}{\text{Total number of cost driver units}}$$

State one advantage of ABC over traditional absorption costing.

ABC gives more accurate product costs (especially where overheads are high and products are diverse), better reflecting what drives costs and improving pricing, product-mix and cost-control decisions.

What is a budget and what is the master budget?

A budget is a quantitative plan for a future period expressed in financial terms. The master budget is the overall summary budget, comprising the budgeted income statement, budgeted statement of financial position and the cash budget.

In most organisations, what is the 'principal budget factor' and why is it identified first?

The principal (key/limiting) budget factor is the constraint that limits activity, often sales demand. It is identified first because all other budgets must be built around it; the budget for this factor is prepared before any other.

List the typical sequence of preparing functional budgets when sales is the limiting factor.

Sales budget → production budget → materials usage and purchases budget, labour budget and overhead budget → then the master budget (budgeted income statement, statement of financial position and cash budget).

Give the production budget formula linking sales and inventory.

$$\text{Production (units)} = \text{Sales units} + \text{Closing finished goods inventory} - \text{Opening finished goods inventory}$$

Give the materials purchases budget formula (in units of material).

$$\text{Purchases} = \text{Material used in production} + \text{Closing material inventory} - \text{Opening material inventory}$$

Distinguish a fixed budget from a flexible budget.

A fixed budget is prepared for a single planned level of activity and is not changed if actual activity differs. A flexible budget is adjusted (flexed) to reflect the actual level of activity, recognising cost behaviour, giving a more meaningful comparison.

What is a flexible budget primarily used for in control?

To compare actual results against what costs and revenues should have been at the actual level of activity, so that variances reflect efficiency/price effects rather than simply differences in volume.

What is incremental budgeting and one drawback of it?

Incremental budgeting bases the new budget on the previous period's figures plus an adjustment (e.g. for inflation/growth). A drawback is that it perpetuates past inefficiencies and 'budget slack' without questioning whether the spending is justified.

What is zero-based budgeting (ZBB)?

A method where each budget starts from zero and every item of expenditure must be justified afresh as if the activity were new, rather than being assumed from prior periods. It helps eliminate waste but is time-consuming.

What is 'budgetary slack' and why is it a behavioural problem?

Slack is the deliberate over-estimation of costs or under-estimation of revenues when setting a budget, so targets are easier to meet. It distorts planning and control and wastes resources, undermining the budget's usefulness.

Distinguish top-down (imposed) budgeting from bottom-up (participative) budgeting in behavioural terms.

Top-down budgets are set by senior management and imposed on managers, which is quick but can demotivate. Participative (bottom-up) budgets involve those responsible in setting targets, improving acceptance and motivation but risking slack and being slower.

What is a standard cost?

A predetermined estimate of the cost of one unit of product or service, built up from standard quantities and standard prices for materials, labour and overheads, used as a benchmark for control and variance analysis.

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

$$\text{Price variance} = (\text{Standard price} - \text{Actual price}) \times \text{Actual quantity purchased}$$ $$\text{Usage variance} = (\text{Standard usage for actual output} - \text{Actual usage}) \times \text{Standard price}$$

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

$$\text{Rate variance} = (\text{Standard rate} - \text{Actual rate}) \times \text{Actual hours paid}$$ $$\text{Efficiency variance} = (\text{Standard hours for actual output} - \text{Actual hours worked}) \times \text{Standard rate}$$

What does a 'favourable' variance mean versus an 'adverse' variance?

A favourable (F) variance increases profit relative to standard (actual cost lower or revenue higher than expected); an adverse (A) variance reduces profit (actual cost higher or revenue lower than expected).

State two possible causes of an adverse material usage variance.

Excessive wastage or scrap, poor quality materials, theft, inefficient working, or use of lower-grade labour. (Any reason for using more material than standard for the output achieved.)

What is the sales volume contribution variance in a marginal costing system?

$$\text{Sales volume variance} = (\text{Actual sales units} - \text{Budgeted sales units}) \times \text{Standard contribution per unit}$$ It measures the profit/contribution effect of selling more or fewer units than budgeted.

Give the break-even point formulas in units and in revenue (£).

$$\text{Break-even (units)} = \frac{\text{Fixed costs}}{\text{Contribution per unit}}$$ $$\text{Break-even (£)} = \frac{\text{Fixed costs}}{\text{C/S ratio}}$$ where the C/S ratio is contribution divided by sales.

What is the contribution-to-sales (C/S) ratio and how is it calculated?

It is the proportion of sales revenue that is contribution. $$\text{C/S ratio} = \frac{\text{Contribution per unit}}{\text{Selling price per unit}} = \frac{\text{Total contribution}}{\text{Total sales}}$$

How do you calculate the number of units needed to achieve a target profit?

$$\text{Units} = \frac{\text{Fixed costs} + \text{Target profit}}{\text{Contribution per unit}}$$

Define the margin of safety and give its formula.

The margin of safety is the amount by which expected (or actual) sales exceed the break-even level. $$\text{Margin of safety (\%)} = \frac{\text{Budgeted sales} - \text{Break-even sales}}{\text{Budgeted sales}} \times 100\%$$

List three key assumptions underlying cost-volume-profit (CVP) analysis.

Costs split cleanly into fixed and variable elements; selling price and variable cost per unit are constant; fixed costs are constant in total; and production equals sales (no inventory change), all within the relevant range.

What is a 'relevant cost' for decision making?

A future, incremental cash flow that arises as a direct consequence of a decision. Only relevant costs and revenues should be used in decision making.

Why are sunk costs and committed costs ignored in decision making?

A sunk cost has already been incurred and cannot be changed by the decision; a committed cost will be incurred regardless of the decision. Neither is a future incremental cash flow, so both are irrelevant.

Define 'opportunity cost' and explain its relevance.

The opportunity cost is the value of the benefit forgone by choosing one option over the next-best alternative use of a resource. It is a relevant cost in decision making even though it involves no cash outlay.

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

If the material is in regular use, the relevant cost is its current replacement cost. If it is no longer used, the relevant cost is the higher of its scrap (resale) value or any saving from using it instead of buying an alternative.

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

To decide the most profitable production mix when one resource (e.g. labour hours, machine hours, material) is scarce and cannot meet all demand, by maximising contribution earned from the scarce resource.

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

Calculate contribution per unit of the limiting factor for each product ($\text{contribution per unit} \div \text{limiting factor units per unit}$), then rank products highest-first and allocate the scarce resource to the highest-ranked products until it runs out.

Why can profit per unit not be used to rank products under a limiting factor?

Profit per unit includes fixed overheads which are unaffected by the production mix in the short term. The objective is to maximise total contribution from the scarce resource, so ranking must be on contribution per unit of the limiting factor.

When evaluating a one-off special order, which costs are relevant?

Only the additional (incremental) costs caused by accepting the order — typically variable costs plus any specific extra fixed costs or opportunity costs. Existing fixed overheads that would be incurred anyway are ignored.

What is cost-plus pricing and give its basic formula?

A pricing method that adds a profit mark-up to the cost of a product. $\text{Selling price} = \text{Cost} \times (1 + \text{mark-up \%})$. The cost base may be full cost or marginal (variable) cost.

Distinguish 'mark-up' from 'margin'.

Mark-up expresses profit as a percentage of cost; margin expresses profit as a percentage of selling price. For example, a 25% mark-up on cost equals a 20% margin on selling price.

What are penetration pricing and price skimming?

Penetration pricing sets a low initial price to gain market share quickly. Price skimming sets a high initial price to maximise profit from early adopters, then lowers it over time as competition enters or the market matures.

Give the formula for Return on Capital Employed (ROCE) and what it measures.

$$\text{ROCE} = \frac{\text{Operating profit}}{\text{Capital employed}} \times 100\%$$ It measures how efficiently capital is used to generate operating profit (overall profitability).

Give the formulas for gross profit margin and net (operating) profit margin.

$$\text{Gross profit margin} = \frac{\text{Gross profit}}{\text{Revenue}} \times 100\% \qquad \text{Operating margin} = \frac{\text{Operating profit}}{\text{Revenue}} \times 100\%$$

Give the formulas for the current ratio and the quick (acid-test) ratio.

$$\text{Current ratio} = \frac{\text{Current assets}}{\text{Current liabilities}} \qquad \text{Quick ratio} = \frac{\text{Current assets} - \text{Inventory}}{\text{Current liabilities}}$$ Both measure short-term liquidity.

How is inventory holding period (days) calculated and what does it indicate?

$$\text{Inventory days} = \frac{\text{Average inventory}}{\text{Cost of sales}} \times 365$$ It indicates how long, on average, inventory is held before being sold; a longer period may signal slow-moving stock or overstocking.

Give examples of non-financial performance indicators (NFPIs).

Customer satisfaction scores, on-time delivery rates, defect/reject rates, number of customer complaints, employee turnover, market share, and lead/cycle times. They capture quality and operational performance that money figures alone miss.

Why are non-financial performance indicators important alongside financial ones?

They give a fuller, more balanced picture of performance, are often leading indicators of future financial results, are harder to manipulate, and capture quality, customer and innovation factors critical to long-term success.

What are the four perspectives of the Balanced Scorecard?

Financial, Customer, Internal business process, and Learning and growth (innovation). It links non-financial drivers to financial outcomes and strategy.

Give the formula for Return on Investment (ROI) used to assess a division.

$$\text{ROI} = \frac{\text{Divisional (controllable) profit}}{\text{Divisional capital employed (investment)}} \times 100\%$$ It is often compared with a target rate of return.

What is Residual Income (RI) and how is it calculated?

$$\text{RI} = \text{Divisional profit} - (\text{Imputed interest rate} \times \text{Capital employed})$$ It charges a notional cost of capital against profit; a positive RI means the division earns above the required return.

State one advantage RI has over ROI for divisional performance evaluation.

RI promotes goal congruence: it encourages managers to accept any project earning above the cost of capital (increasing absolute RI), whereas ROI may make a manager reject a good project that would lower the division's average ROI.

What is a transfer price and why does it matter?

A transfer price is the price at which goods or services are transferred between divisions of the same organisation. It affects each division's reported profit and performance, and can influence managers to make decisions for or against the company's overall benefit.

State the general (theoretically optimal) rule for setting a transfer price.

$$\text{Transfer price} = \text{Marginal cost of production} + \text{Opportunity cost to the supplying division}$$ If there is spare capacity the opportunity cost is nil, so the minimum transfer price is marginal cost.

What is benchmarking?

The systematic comparison of an organisation's processes, products or performance against a standard — typically best practice or a leading competitor — to identify gaps and opportunities for improvement.

Distinguish internal, competitive and functional (best-in-class) benchmarking.

Internal compares units within the same organisation; competitive compares against a direct competitor's performance; functional/best-in-class compares a specific process against the best performer of that process in any industry.

What is Kaizen (continuous improvement) and how does it relate to costing?

Kaizen is a philosophy of ongoing, incremental improvement involving all employees. In Kaizen costing, cost-reduction targets are set for each period during production, focusing on continually driving down costs of an existing product.

What is Total Quality Management (TQM) and its core aim regarding cost of quality?

TQM is an approach seeking continuous improvement and 'getting it right first time' throughout the organisation. Its aim is to reduce total quality costs by investing in prevention so that internal/external failure and appraisal costs fall.