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Summary CIMA Management accounting (P1): Condensed Revision Notes: $21.85   Add to cart

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Summary CIMA Management accounting (P1): Condensed Revision Notes:

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This condensed guide covers key concepts from the CIMA P1 Management Accounting syllabus, including costing methods, budgeting, variance analysis, and decision-making techniques. It provides clear explanations, essential formulas. Designed for quick reference and efficient revision, this summary hi...

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Difference between mgmt. & financial accounting
 Financial is more clearly defined & narrower
 Legal aspect to financial accounting
 Financial is governed by rules & regulations
 Financial deal with historical financial information
 Financial produce statutory financial statements
Management accounting – planning, control & decision making
Cost transformation model
 Creating cost conscious culture – aiming to be a cost leader
 Understanding cost drivers
 Managing risks from cost consciousness, such as reducing cost may reduce quality & customer
satisfaction
 Maximising value from new products – assessing profitability & flexibility
 Environmental impact of products
Cost unit – unit of product or service in relation to which costs are ascertained
Cost centre – production or service location, function, activity or item of equipment for which costs are
accumulated
Cost object – product, service, centre, activity, customer or distribution channel in relation to which costs are
ascertained, units & centres both fit this.
Cost behaviour – fixed, variable, semi-variable, stepped
Cost element – materials, labour, expense, can be subdivided
Cost nature – direct (prime cost), indirect
Period or product - product occur during production, period occurs due to passage of time
Absorption costing – full production cost per unit
 Fixed production costs can be a large proportion of total production costs, so without absorbing them
a large % of cost would be excluded from measurements
 Follows the matching concept (accruals concept) by carrying forward a proportion of the production
cost in the inventory valuation
 Necessary for fixed production overheads in inventory values for financial statements
 Analysis of under/over absorbed overheads can be useful for identifying inefficiencies
 An argument long term is that all costs are variable & it’s appropriate to identify overhead costs with
the products/services that cause them
 Allocation is arbitrary, there won’t always be a clear obvious choice for allocation basis
 Profits vary with changes in production volume, which can encourage overproduction
Marginal costing – extra cost arising from producing one more unit
 Simpler costing system due to no apportion of overheads
 Reflects the behaviour of costs in relation to activity, making it more relevant for short term decisions
 Avoids the arbitrary allocations & production volume change issues
 Not ideal when fixed costs are high relative to variable costs
 Treats direct labour as a variable cost, but often staff are salaried, making their cost fixed
Pricing strategies
Costs – sufficient price to cover costs of producing product/providing service
Competitors – competing with competitor’s pricing
Customers – value placed on the product by customers often determines the price
Corporate objectives – gain market share/break into market/attract customers/project quality image
Full cost plus pricing
 Required profit made if budgeted sales volumes achieved
 Useful in industries where fixed costs are low compared to variable ones
 Quick & cheap to employ
 Useful for justifying selling prices
 Issues with the selection of a suitable basis on which to charge fixed costs, can unintentionally lose
money

,  If prices are set on the basis of normal volume, then volume is below, overheads won’t be fully
recovered
 Mark up can be arbitrary & reduce competitiveness
Marginal cost-plus pricing
 Accurate as total cost-plus pricing
 Knowledge of marginal cost allows pricing below total cost when times are bad to fill capacity
 Particularly useful in pricing one off contracts
 Recognises the existence of scarce of limiting resources
 Ignores other factors such as levels of competition, customer attitudes, etc.
 Mark-up is even more arbitrary than in full cost plus, as it has to subjectively include extra to cover
fixed costs
ABC
Modern production environments have changed production:
 More machinery & computers
 Smaller batch sizes
 Less use of ‘direct’ labour, causing:
 More indirect overheads
 Less direct labour costs
This has meant tradition costing methods aren’t so useful due to:
 Indirect overheads being the largest production cost, meaning proper cost control can’t be
implemented
 Direct labour hours is a smaller proportion of product costs, making it not a useful form of allocation
 Total production costs can be wrong, leading to poor pricing & production decisions
ABC is relevant when:
 Indirect costs are high relative to direct costs
 Products/services are complex, or tailored to customer specifications
 Some products are sold in large numbers, others small numbers
 More accuracy
 Better cost understanding
 Fairer allocation of costs
 Better cost control
 Works in complex situations
 Applied beyond production
 Used in service industries
 Not always relevant
 Still arbitrary cost allocations
 Need to choose appropriate drivers & activities
 Complex & expensive to operate
Joint product costing
Specific order costing – costs of distinct products or services are collected, individual cost units are different
according to individual customer requirements. Batch costing fits this too.
Continuous costing – costs are collected & averaged over no. of products produced.
Joint product costs can be apportioned based on da variety methods, physical measurement, market value or
NRV.
Throughput accounting – similar to marginal costing, but can be used to make long term decisions.
Throughput contribution = revenue – direct material costs (totally variable costs)
Return per factory hour = throughput contribution / product’s time on bottleneck resource
Cost per factory hour = total factory cost / total time on bottleneck resource
Throughput accounting ratio = return per factory hour / cost per factory hour
Throughput focuses on the short term, when business have fixed supplies of resources & operating expenses
are largely fixed.

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