Chartered Institute of Public Finance and Accountancy (CIPFA) Management Accounting Flashcards

24 sample cards from the Management Accounting deck

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

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

   Rate: $(\text{Std rate} - \text{Actual rate}) \times \text{Actual hours paid}$. Efficiency: $(\text{Std hours for actual output} - \text{Actual hours worked}) \times \text{Std rate}$.

2. What is the fixed overhead expenditure variance?

   $$\text{Fixed OH expenditure variance} = \text{Budgeted fixed overhead} - \text{Actual fixed overhead}$$ It measures the difference between budgeted and actual fixed overhead spend.

3. What is the sales volume contribution variance (marginal costing)?

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

4. Name two behavioural aspects/concepts important in budgeting.

   Examples include: budget participation (top-down vs bottom-up), motivation and the aspiration level, budgetary slack (deliberate padding), goal congruence, and dysfunctional behaviour such as gaming targets.

5. What is budgetary slack and why does it arise?

   The deliberate overstatement of budgeted costs or understatement of budgeted revenues to make targets easier to meet. It arises when managers who set or negotiate budgets are also judged against them, especially with bottom-up participation.

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

   Top-down budgets are set by senior management and imposed: quick and goal-congruent but can demotivate. Bottom-up/participative budgets involve operational managers: improve ownership, motivation and accuracy but risk slack and are slower.

7. What is a relevant cost for short-term decision-making?

   A future, incremental cash flow that differs between decision alternatives. Only relevant costs (and revenues) should be included in decision analysis.

8. Why are sunk costs and committed costs ignored in relevant costing?

   Sunk costs are past costs already incurred and committed costs are unavoidable future costs; neither changes as a result of the decision, so they are not relevant and must be excluded.

9. Define opportunity cost and explain its relevance to decisions.

   Opportunity cost is the value of the best alternative forgone by choosing one course of action. It is a relevant cost in decision-making even though it involves no actual cash outflow, because it represents a benefit sacrificed.

10. How is the relevant cost of scarce materials already in inventory determined?

    If the material is in regular use, relevant cost = current replacement cost. If not in regular use, relevant cost = the higher of net realisable (resale) value or any scrap value forgone, i.e. the best alternative use.

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

    Compare the incremental (variable plus any avoidable fixed) cost of making in-house against the external purchase price. Unavoidable fixed costs are ignored, and any opportunity cost of using capacity to make is included.

12. With a single limiting factor, how do you decide the optimal product mix?

    Rank products by contribution per unit of the limiting factor: $$\text{Rank by } \frac{\text{Contribution per unit}}{\text{Limiting factor units per unit}}$$ and allocate the scarce resource to the highest-ranked products first.

13. What is cost-plus pricing and a formula for it?

    Setting price by adding a profit mark-up to cost: $$\text{Price} = \text{Cost} \times (1 + \text{mark-up }\%)$$ Cost may be full cost or marginal cost. Simple but ignores demand and competitors.

14. Distinguish a price based on full cost from one based on marginal cost.

    Full-cost pricing adds a margin to total (absorbed) cost, ensuring overheads are recovered. Marginal-cost pricing adds a margin to variable cost; it sets a price floor and can win extra business but risks not covering fixed costs in the long run.

15. In public services, why is full marginal/market pricing often not used?

    Many public services pursue social/equity objectives rather than profit, so prices may be subsidised, set at cost recovery, means-tested, or zero (free at the point of use), reflecting policy, accessibility and political accountability rather than maximising profit.

16. What is marginal-cost pricing (welfare pricing) and when might a public body use it?

    Setting price equal to the marginal cost of providing an extra unit to maximise social welfare/usage. Used where the public benefit of high usage outweighs full cost recovery, often requiring subsidy to cover fixed costs.

17. What is full cost recovery pricing in a public-service context?

    Setting charges so that total income exactly covers the total cost of providing the service (including overheads), so the service breaks even without subsidy or surplus.

18. What are the '3 Es' of Value for Money (VFM)?

    Economy (acquiring resources at lowest appropriate cost), Efficiency (maximising output for a given input, or input/output ratio), and Effectiveness (the extent to which objectives/outcomes are achieved). Some frameworks add Equity as a fourth E.

19. Define economy, efficiency and effectiveness as performance dimensions.

    Economy: spending less — minimising input cost for the required quality. Efficiency: spending well — the relationship between outputs and the inputs used to produce them. Effectiveness: spending wisely — achieving the intended objectives and outcomes.

20. What is a Key Performance Indicator (KPI) and why are both financial and non-financial measures used in public services?

    A KPI is a quantifiable measure tracking progress towards an objective. Public services use non-financial measures (e.g. waiting times, quality, satisfaction, outcomes) alongside financial ones because success is judged on service outcomes and VFM, not profit.

21. What is a balanced scorecard and its four perspectives?

    A performance framework linking measures to strategy across four perspectives: Financial, Customer, Internal Business Process, and Learning & Growth (innovation). It balances financial with non-financial and short- with long-term measures.

22. Why can over-reliance on a single financial performance measure cause dysfunctional behaviour?

    It encourages short-termism and gaming — managers may hit the measured target (e.g. cost reduction) while harming unmeasured aspects such as service quality or long-term outcomes ('what gets measured gets managed'), undermining true VFM.

23. What is benchmarking in public-sector performance measurement?

    Comparing an organisation's processes, costs and performance against a standard — internal, competitor, functional or best-practice — to identify gaps and improvement opportunities and to drive value for money.

24. Why is responsibility accounting important in budgetary control?

    It assigns costs and revenues to the manager who controls them (cost, profit or investment centres), so performance reports hold managers accountable only for controllable items, supporting fair appraisal and goal congruence.

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