Association of Chartered Certified Accountants (ACCA) Corporate and Business Law (LW) and Performance Management (PM) Flashcards

24 sample cards from the Corporate and Business Law (LW) and Performance Management (PM) deck

Sampled from the end of the deck, so these are different cards from the ones shown on the syllabus page.

1. Name four management accounting techniques used to identify and manage environmental costs.

   Input/output flow analysis, environmental activity-based costing (treating environment-driven costs as separate cost pools), flow cost accounting (material, system and delivery/disposal categories), and life-cycle costing.

2. Define a relevant cost and state the three characteristics it must have.

   A relevant cost is one used in decision making. It must be: (1) future (not already incurred), (2) incremental/cash flow (a cash cost that differs between alternatives), and (3) it excludes sunk costs, committed costs, and non-cash items like depreciation.

3. What is an opportunity cost and why is it relevant in relevant costing?

   An opportunity cost is the value of the benefit forgone (contribution lost) by using a scarce resource for one purpose rather than its best alternative use. It is a relevant cost because it represents a real economic sacrifice, even though it is not a recorded outlay.

4. State how to determine the relevant cost of materials that are in regular use versus those no longer used.

   Materials in regular stock and use: relevant cost = current replacement (purchase) cost. Materials in stock but no longer used: relevant cost = higher of net realisable (scrap/resale) value or any saving from using them in place of other materials; if there is no alternative use, the relevant cost is the net realisable value forgone.

5. In single-limiting-factor analysis, how do you rank products to maximise profit?

   Rank products in order of contribution per unit of the limiting (scarce) resource, then allocate the scarce resource to the highest-ranked products first until it runs out. $$\text{Rank by } \frac{\text{Contribution per unit}}{\text{Limiting factor units per unit}}$$

6. What is a shadow (dual) price in linear programming, and what does it represent?

   The shadow price is the increase in total contribution that results from having one extra unit of a scarce (binding) resource. It is the maximum premium worth paying above the normal price to obtain an extra unit. Non-binding (slack) resources have a shadow price of zero.

7. List the steps in formulating and solving a linear programming problem graphically.

   (1) Define the variables; (2) state the objective function (e.g. maximise contribution); (3) formulate the constraints as inequalities (including non-negativity); (4) plot constraints to find the feasible region; (5) move the objective function (iso-contribution) line outward to the optimal corner point; (6) solve simultaneous equations at that vertex.

8. State and explain price elasticity of demand and its formula.

   Price elasticity of demand (PED) measures the responsiveness of quantity demanded to a price change. $$\text{PED} = \frac{\% \text{ change in quantity demanded}}{\% \text{ change in price}}$$ Demand is elastic if $|\text{PED}| > 1$ (price rises reduce revenue) and inelastic if $|\text{PED}| < 1$ (price rises increase revenue).

9. Give the formula for the linear demand (price) equation used in PM pricing decisions.

   $$P = a - bQ \quad\text{where}\quad b = \frac{\text{change in price}}{\text{change in quantity}}$$ Here $a$ is the price at which demand is zero and $b$ is the gradient. Profit is maximised where marginal revenue (MR) = marginal cost (MC), with $MR = a - 2bQ$.

10. List four pricing strategies and briefly describe each.

    Market skimming (high initial price for a novel product, lowered over time); market penetration (low price to gain market share quickly); cost-plus (add a mark-up to cost); price discrimination (different prices to different segments); complementary/loss-leader and going-rate pricing are also used.

11. Define expected value (EV) and give its formula for decision making under risk.

    Expected value is the weighted average of all possible outcomes, weighted by their probabilities. $$EV = \sum (p \times x)$$ where $p$ is the probability of each outcome and $x$ is its value. The decision rule is to choose the option with the highest EV (for profit).

12. Explain the maximax, maximin and minimax regret decision criteria.

    Maximax (optimist): choose the option with the best possible outcome (maximise the maximum). Maximin (pessimist/risk-averse): choose the option whose worst outcome is best (maximise the minimum). Minimax regret: minimise the maximum 'regret' (opportunity loss) by constructing a regret table and picking the lowest maximum regret.

13. What is the value of perfect information and how is it calculated?

    It is the maximum a decision-maker should pay for information that removes uncertainty. $$\text{Value of perfect information} = \text{EV with perfect information} - \text{EV without (best EV)}$$ Perfect information always points to the best outcome under each state of nature.

14. Distinguish between incremental, zero-based, rolling (continuous) and fixed budgets.

    Incremental: prior-period figures adjusted for changes. Zero-based (ZBB): every cost justified from scratch each period. Rolling/continuous: continuously updated by adding a new period as the current one expires, keeping a constant horizon. Fixed: set for one activity level and not flexed.

15. Compare top-down (imposed) and bottom-up (participative) budgeting.

    Top-down/imposed budgets are set by senior management and passed down — fast and goal-congruent but may demotivate. Bottom-up/participative budgets are built with input from operational managers — improving ownership, motivation and accuracy, but risk budgetary slack (padding) and being slower to prepare.

16. What is a flexible budget and why is it useful for control?

    A flexible budget is restated (flexed) to the actual level of activity achieved, so that fixed costs stay constant while variable costs are recalculated per the actual volume. It enables a like-for-like comparison with actual results, isolating genuine cost/efficiency variances from volume differences.

17. State the formulas for the materials price and materials usage variances.

    $$\text{Price variance} = (\text{Standard price} - \text{Actual price}) \times \text{Actual quantity purchased}$$ $$\text{Usage variance} = (\text{Standard qty for actual output} - \text{Actual qty used}) \times \text{Standard price}$$ Favourable when actual is less than standard.

18. Explain the materials mix and yield variances (advanced variance analysis).

    The mix variance measures the cost effect of using inputs in different proportions from standard: $$(\text{Actual qty in standard mix} - \text{Actual qty in actual mix}) \times \text{Standard price}$$ The yield variance measures the effect of getting more or less output than expected from the total inputs used, valued at standard cost.

19. What are planning and operational variances and why are they separated?

    A planning variance arises from a revision of the original (flawed) standard to a realistic ex-post standard — it is outside the manager's control. An operational variance compares actual performance against the revised realistic standard — it is controllable. Separating them gives fairer performance evaluation.

20. State the sales price and sales volume (contribution) variance formulas.

    $$\text{Sales price variance} = (\text{Actual price} - \text{Standard price}) \times \text{Actual units sold}$$ $$\text{Sales volume contribution variance} = (\text{Actual units} - \text{Budgeted units}) \times \text{Standard contribution per unit}$$

21. Name and define the three 'E's of value for money in performance measurement.

    Economy (acquiring inputs of appropriate quality at lowest cost), Efficiency (maximising output from given input — output/input), and Effectiveness (the extent to which objectives/outputs are achieved). Used to assess not-for-profit and public sector performance.

22. State the formulas for Return on Investment (ROI) and Residual Income (RI).

    $$\text{ROI} = \frac{\text{Controllable divisional profit}}{\text{Capital employed}} \times 100\%$$ $$\text{RI} = \text{Controllable profit} - (\text{Capital employed} \times \text{Imputed cost of capital})$$ RI avoids the dysfunctional rejection of good projects that ROI can cause.

23. What are the four perspectives of the Balanced Scorecard?

    (1) Financial perspective (how do we look to shareholders?); (2) Customer perspective (how do customers see us?); (3) Internal business process perspective (what must we excel at?); and (4) Innovation and learning/growth perspective (can we continue to improve and create value?).

24. In divisional performance, distinguish between a cost centre, profit centre and investment centre.

    A cost centre's manager is accountable only for costs. A profit centre's manager is accountable for both costs and revenues (profit). An investment centre's manager is additionally accountable for investment/capital employed, so is assessed using measures like ROI and RI.

What this deck covers

Corporate and Business Law (LW) and Performance Management (PM) flashcards FAQ