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

24 sample cards from the Management Accounting and Costing deck

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

1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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).

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

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

11. 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.

12. 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.

13. 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.

14. 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.

15. 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.

16. 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.

17. 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.

18. 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.

19. 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.

20. 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.

21. 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.

22. 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.

23. 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.

24. 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.

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Management Accounting and Costing flashcards FAQ