management accounting performance evaluation

CIMA’s Official
Study System
Managerial Level
Management
Accounting –
Performance
Evaluation
Bob Scarlett
AMSTERDAM BOSTON HEIDELBERG LONDON NEW YORK OXFORD
PARIS SAN DIEGO SAN FRANCISCO SINGAPORE SYDNEY TOKYO
CIMA Publishing
An imprint of Elsevier
Linacre House, Jordan Hill, Oxford OX2 8DP
30 Corporate Drive, Burlington, MA 01803
First published 2005
Copyright © 2005 Elsevier Ltd. All rights reserved
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A catalogue record for this book is available from the British Library
ISBN 0 7506 67117
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For information on all CIMA publications
visit our website at www.cimapublishing.com
Important Note
A new edition of the CIMA Official Terminology is due to be published in
September 2005. As this is past the publication date of this Study System the
page reference numbers for ‘Management Accounting Official Terminology’
contained in this Study System are for the 2000 edition. You should ensure that
you are familiar with the 2005 CIMA Official Terminology (ISBN 0 7506 6827 X)
once published, available from www.cimapublishing.com
2005.1
iii
The CIMA Study System xiii
Acknowledgements xiii
How to use your CIMA Study System xiii
Study technique xv
The Performance Evaluation syllabus xvi
Transitional arrangements xxi
1 Cost Accounting Systems 1
Learning Outcomes 1
1.1 Introduction 1
1.2 The difference between marginal costing
and absorption costing 1
1.3 Preparing profit statements using each method 2
1.3.1 Profit statements using marginal costing 3

1.3.2 Profit statements using absorption costing 3
1.4 Reconciling the profit figures 4
1.4.1 Reconciling the profits given by the different methods 4
1.4.2 Reconciling the profits for different periods 5
1.4.3 Profit differences in the long term 5
1.5 Marginal costing or absorption costing? 6
1.6 Specific order costing 6
1.7 Job costing 7
1.7.1 Job cost cards and databases 7
1.7.2 Collecting the direct costs of each job 7
1.7.3 Attributing overhead costs to jobs 8
1.7.4 A worked example 8
1.7.5 Other applications for job costing 10
1.8 Batch costing 10
1.9 Process costing 10
1.9.1 Previous process costs 12
1.9.2 Opening work in progress 12
1.9.3 Solution to Example 1 using the FIFO method 14
1.9.4 Discussion of Example 1 15
1.9.5 Choice of methods and standard costing 16
1.9.6 Process costing with opening work in progress 17
1.9.7 Solution to Example 2 using the FIFO method 18
1.9.8 Process losses 20
Contents
1.10 Joint products and by-products 21
1.10.1 Joint product costing 22
1.10.2 Apportioning common costs to joint products 22
1.10.3 Using notional or proxy sales values for common
cost apportionment 23
1.10.4 The final sales value method of

common cost apportionment 24
1.10.5 Using joint product costs for decision-making 25
1.10.6 Joint products and the further processing decision: an example 25
1.10.7 Costing by-products 26
1.10.8 Joint and by-products: an example 27
1.11 Summary 28
Reading 29
Revision Questions 31
Solutions to Revision Questions 37
2 The Theory and Practice of Standard Costing 43
Learning Outcomes 43
2.1 Introduction 43
2.2 The theory and practice of standard costing 43
2.3 What is a standard cost? 44
2.4 Performance levels 45
2.4.1 A standard 45
2.4.2 Ideal standard 45
2.4.3 Attainable standard 45
2.4.4 Basic standard 45
2.5 Setting standard costs 46
2.5.1 Standard material price 46
2.5.2 Standard material usage 46
2.5.3 Standard labour rate 46
2.5.4 Standard labour times 46
2.5.5 Production overhead costs 46
2.6 Updating standards 47
2.7 Standard costing in the modern industrial environment 47
2.8 What is variance analysis? 47
2.9 Variable cost variances 48
2.9.1 Direct material cost variances 48

2.9.2 The direct material price variance and
stock valuation 49
2.9.3 Direct labour cost variances 50
2.9.4 Variable overhead cost variances 51
2.10 Fixed production overhead variances 52
2.10.1 The reasons for under- or over-absorption of overhead 52
2.10.2 The fixed production overhead total variance 53
2.10.3 The fixed production overhead expenditure variance 53
2.10.4 The fixed production overhead volume variance 53
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2.10.5 Analysing the fixed production overhead volume variance 54
2.10.6 Fixed production overhead capacity variance 54
2.10.7 Fixed production overhead efficiency variance 54
2.11 Sales variances 55
2.11.1 The selling price variance 55
2.11.2 The sales volume variance 56
2.11.3 The sales volume profit variance 56
2.12 Reconciling the actual and budget profit 56
2.13 Standard marginal costing 59
2.13.1 The fixed overhead volume variance 59
2.13.2 The fixed overhead expenditure variance 59
2.13.3 The sales volume contribution variance 59
2.13.4 Reconciling the actual and budget profit 60

2.14 Idle time variances 61
2.14.1 Expected idle time 62
2.15 Calculating actual data from standard cost details and variances 63
2.16 Example: Preparing a reconciliation statement 64
2.16.1 Reconciliation of budgeted and actual profit 66
2.16.2 Calculation of cost variances shown in reconciliation above 67
2.17 Some miscellaneous ideas 68
2.18 Summary 69
Readings 71
Revision Questions 89
Solutions to Revision Questions 97
3 Standard Costing and Performance Evaluation 107
Learning Outcomes 107
3.1 Introduction 107
3.2 Material mix and yield variances 107
3.3 Labour mix and yield variances 110
3.4 Sales variances 112
3.5 Planning and operational variances 114
3.6 Capacity ratios 118
3.6.1 Standard hour 118
3.6.2 Calculating the capacity ratios 119
3.7 Investigation and interpretation of variances 120
3.7.1 Percentage variance charts 121
3.7.2 The reasons for variances 122
3.7.3 Investigation models 123
3.7.4 Interrelationship of variances 124
3.8 Behavioural considerations 126
3.8.1 Organisational goals 126
3.8.2 Target levels for standards and budgets 126
3.8.3 Performance measures and evaluation 127

3.8.4 Participation in setting standards and budgets 128
3.8.5 Budget bias 128
3.9 Standard costing in the modern business environment 129
3.9.1 Criticisms of standard costing 129
3.9.2 Addressing the criticisms 129
3.9.3 Standards and variances: a cautionary note 130
3.10 Benchmarking 130
3.11 Developments and current thinking in the application
of standard costing 131
3.11.1 McDonaldization – Another angle on things 131
3.11.2 Diagnostic reference groups 131
3.12 Summary 132
Readings 133
Revision Questions 139
Solutions to Revision Questions 145
4 Basic Aspects of Management Accounting 153
Learning Outcomes 153
4.1 Introduction 153
4.2 Cost behaviour 153
4.2.1 Fixed cost 154
4.2.2 Variable cost 155
4.2.3 Semi-variable cost 157
4.2.4 Analysing semi-variable costs 158
4.2.5 Using historical data 160
4.3 Costs and activity based techniques (ABTs) 160
4.4 Breakeven or cost–volume–profit analysis 161
4.4.1 Calculating the breakeven point 161
4.5 The margin of safety 161
4.6 The contribution to sales (C/S) ratio 162
4.7 Drawing a basic breakeven chart 163

4.8 The contribution breakeven chart 165
4.9 The PV chart 165
4.9.1 The advantage of the PV chart 166
4.10 The limitations of breakeven (or CVP) analysis 167
4.11 The economist’s breakeven chart 168
4.12 Using costs for decision-making 168
4.12.1 Short-term decision-making 169
4.13 Evaluating proposals 169
4.14 Relevant costs 171
4.14.1 Non-relevant costs 171
4.15 Opportunity costs 173
4.15.1 Examples of opportunity costs 173
4.15.2 Notional costs and opportunity costs 173
4.16 Avoidable, differential and incremental costs 174
4.16.1 Avoidable costs 174
4.16.2 Differential/incremental costs 174
4.16.3 Using incremental costs 174
4.16.4 Incremental revenues 174
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4.17 Limiting factor decision-making 175
4.17.1 Decisions involving a single limiting factor 176
4.18 Summary 178
Readings 179
Revision Questions 183
Solutions to Revision Questions 189
5 The Theory and Practice of Budgeting 195
Learning Outcomes 195

5.1 Introduction 195
5.2 The purposes of budgeting 195
5.2.1 Budgetary planning and control 196
5.2.2 What is a budget? 196
5.2.3 The budget period 197
5.2.4 Strategic planning, budgetary planning and
operational planning 197
5.3 The preparation of budgets 198
5.3.1 Co-ordination: the budget committee 198
5.3.2 Participative budgeting 198
5.3.3 Information: the budget manual 198
5.3.4 Early identification of the principal
budget factor 199
5.3.5 The interrelationship of budgets 199
5.3.6 Using spreadsheets in budget preparation 200
5.3.7 The master budget 200
5.4 Preparation of operational budgets 200
5.4.1 Using stock control formulae in budget preparation 201
5.4.2 Budget interrelationships 202
5.5 The cash budget 202
5.5.1 Preparing cash budgets 202
5.5.2 Interpretation of the cash budget 204
5.5.3 Cash budget: second example 204
5.6 Rolling budgets 207
5.7 Forecasting and planning 208
5.8 Time series 210
5.8.1 The concept 210
5.8.2 Factors that cause variations 211
5.8.3 Time series modelling 211
5.9 Sensitivity analysis 214

5.10 Zero-based budgeting 215
5.10.1 Advantages of ZBB 217
5.10.2 Disadvantages of ZBB 217
5.10.3 ZBB in practice 218
5.11 Programme-planning budgeting systems 218
5.12 Activity-based budgeting 221
5.13 Summary 222
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Readings 223
Revision Questions 235
Solutions to Revision Questions 245
6 Budgetary Control 255
Learning Outcomes 255
6.1 Introduction 255
6.2 The Theory of Systems 256
6.3 System design 256
6.3.1 The characteristics and components of a system 256
6.3.2 Control systems 256
6.4 Feedback control loops and system operation 257
6.5 Budgetary control information 258
6.5.1 Budget centres 258
6.5.2 Budgetary control reports 259
6.6 Fixed and flexible budgets 261
6.6.1 Preparing a flexible budget 261
6.6.2 Using flexible budgets for planning 263
6.6.3 Flexible budgets 263
6.6.4 Extrapolating outside the relevant range 265

6.7 Behavioural aspects of budgetary control 265
6.7.1 Motivation and co-operation 266
6.7.2 Failure of goal congruence 266
6.7.3 The budget as a pot of cash 267
6.7.4 Budget negotiation 267
6.7.5 Influence on accounting policies 268
6.7.6 Budget constrained management styles 268
6.7.7 Budgets and motivation 268
6.8 Modern developments in control systems 269
6.8.1 The problem of discretionary costs 269
6.8.2 Developments from financial modelling and
budgeting packages 270
6.8.3 Rethinking the purpose of the monthly report and
decision support systems 270
6.8.4 Beyond budgeting 271
Readings 273
Revision Questions 283
Solutions to Revision Questions 289
7 Budgeting and Performance Evaluation 301
Learning Outcomes 301
7.1 Introduction 301
7.2 Performance evaluation 302
7.2.1 The profit and loss account 302
7.2.2 Return on capital employed 303
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7.2.3 Asset turnover 303
7.2.4 Liquidity 304

7.3 Exercise 304
7.4 Understanding the business 306
7.5 Reporting a performance evaluation 306
7.6 Non-financial performance indicators 307
7.7 Benchmarking 310
7.8 The balanced scorecard 312
7.9 Performance evaluation in
the not-for-profit sector 313
7.10 Summary 315
Reading 317
Revision Questions 323
Solutions to Revision Questions 325
8 Developments in Management Accounting 331
Learning Outcomes 331
8.1 Introduction 331
8.2 The modern economic environment 331
8.2.1 Traditional production processes 331
8.2.2 The background to change 332
8.3 The new manufacturing 333
8.3.1 Computer-aided design 333
8.3.2 Computer-aided manufacturing 333
8.3.3 Computer-integrated manufacturing 334
8.3.4 Flexible manufacturing systems 334
8.4 The value chain 335
8.5 Production operations systems and management strategies 335
8.5.1 Material requirements planning 335
8.5.2 Manufacturing resources planning 336
8.5.3 Optimised production technology (OPT) 337
8.5.4 ERP, CRM and SCM 338
8.5.5 Just-in-time concept 339

8.6 Total quality management (TQM) 341
8.7 Synchronous manufacturing 343
8.8 The emphasis on continuous improvement 344
8.9 Activity-based costing 344
8.9.1 Traditional versus activity-based cost 344
8.10 Transaction analysis and cost drivers 346
8.11 Favourable conditions for ABC 348
8.12 Establishing an activity-based product cost 348
8.12.1 Comparison with traditional costing 348
8.12.2 Analysis of activities 349
8.12.3 Cost management and ABC 352
8.12.4 A comprehensive example of ABC 353
8.12.5 Variance analysis and ABC 362
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8.13 Throughput accounting 363
8.13.1 The theory of constraints 363
8.13.2 Throughput accounting 364
8.13.3 Throughput cost control and effectiveness measures 367
8.13.4 Summary of throughput accounting 368
8.14 Backflush accounting 369
8.15 Summary 372
Readings 373
Revision Questions 387
Solutions to Revision Questions 393
9 Responsibility Centres and Transfer Pricing 409
Learning Outcomes 409
9.1 Introduction 409

9.2 Cost, Revenue, Profit and Investment Centres 410
9.2.1 Cost centres 410
9.2.2 Profit centres 411
9.2.3 Revenue centres and investment centres 411
9.2.4 Reporting responsibility centre results 412
9.3 Transfer pricing 412
9.3.1 Aims and features 413
9.3.2 General rules 413
9.3.3 Cost-based prices 414
9.3.4 Market-based prices 416
9.3.5 Marginal cost 419
9.3.6 Dual pricing 420
9.3.7 Profit-maximising transfer prices 420
9.3.8 Negotiated transfer prices 421
9.3.9 Other behavioural considerations 422
9.4 Taxation and other financial aspects of transfer pricing 423
9.4.1 Taxation 423
9.4.2 Repatriation of funds 426
9.4.3 Minority shareholders 427
9.5 Using subsidies to spread risk 427
9.6 Investment centres and performance measures 429
9.6.1 Investment centres/strategic business units 429
9.6.2 Return on investment 431
9.6.3 The problems with ROI 432
9.6.4 Residual income (RI) 434
9.6.5 Current thinking about performance metrics 435
9.7 Summary 437
Reading 439
Revision Questions 443
Solutions to Revision Questions 449

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Preparing for the Examination 461
Revision Questions 463
Solutions to Revision Questions 503
Index 557
May 2005 Exam
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2005.1
xiii
The CIMA
Study System
Acknowledgements
Every effort has been made to contact the holders of copyright material, but if any here
have been inadvertently overlooked the publishers will be pleased to make the necessary
arrangements at the first opportunity.
How to use your CIMA Study System
This Performance Evaluation Study System has been devised as a resource for students attempt-
ing to pass their CIMA exams and provides:
a detailed explanation of all syllabus areas;
extensive ‘practical’ materials, including readings from relevant journals;
generous question practice, together with full solutions;
an exam preparation section, complete with exam standard questions and solutions.
This Study System has been designed with the needs of home-study and distance-learning

candidates in mind. Such students require very full coverage of the syllabus topics, and also
the facility to undertake extensive question practice. However, the Study System is also ideal
for fully taught courses.
The main body of the text is divided into a number of chapters, each of which is organ-
ised on the following pattern:
Detailed learning outcomes expected after your studies of the chapter are complete. You
should assimilate these before beginning detailed work on the chapter, so that you can
appreciate where your studies are leading.
Step-by-step topic coverage. This is the heart of each chapter, containing detailed explanatory
text supported where appropriate by worked examples and exercises. You should work
carefully through this section, ensuring that you understand the material being explained
and can tackle the examples and exercises successfully. Remember that in many cases
knowledge is cumulative: if you fail to digest earlier material thoroughly, you may strug-
gle to understand later chapters.
Readings and activities. Most chapters are illustrated by more practical elements, such as rel-
evant journal articles or other readings, together with comments and questions designed
to stimulate discussion.
Question practice. The test of how well you have learned the material is your ability to tackle
exam-standard questions. Make a serious attempt at producing your own answers, but at
this stage do not be too concerned about attempting the questions in exam conditions.
In particular, it is more important to absorb the material thoroughly by completing a full
solution than to observe the time limits that would apply in the actual exam.
Solutions. Avoid the temptation merely to ‘audit’ the solutions provided. It is an illusion to
think that this provides the same benefits as you would gain from a serious attempt of
your own. However, if you are struggling to get started on a question you should read the
introductory guidance provided at the beginning of the solution, and then make your
own attempt before referring back to the full solution.
Having worked through the chapters you are ready to begin your final preparations for
the examination. The final section of this CIMA Study System provides you with the guid-
ance you need. It includes the following features:

A brief guide to revision technique.
A note on the format of the examination. You should know what to expect when you
tackle the real exam, and in particular the number of questions to attempt, which ques-
tions are compulsory and which optional, and so on.
Guidance on how to tackle the examination itself.
A table mapping revision questions to the syllabus learning outcomes allowing you to
quickly identify questions by subject area.
Revision questions. These are of exam standard and should be tackled in exam condi-
tions, especially as regards the time allocation.
Solutions to the revision questions. As before, these indicate the length and the quality of
solution that would be expected of a well-prepared candidate.
If you work conscientiously through this CIMA Study System according to the guide-
lines above you will be giving yourself an excellent chance of exam success. Good luck with
your studies!
Guide to the Icons used within this Text
Key term or definition
Equation to learn
Exam tip to topic likely to appear in the exam
Exercise
Question
Solution
Comment or Note
MANAGEMENT ACCOUNTING – PERFORMANCE EVALUATION P1
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THE CIMA STUDY SYSTEM
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Study technique
Passing exams is partly a matter of intellectual ability, but however accomplished you are in
that respect you can improve your chances significantly by the use of appropriate study and
revision techniques. In this section we briefly outline some tips for effective study during

the earlier stages of your approach to the exam. Later in the text we mention some tech-
niques that you will find useful at the revision stage.
Planning
To begin with, formal planning is essential to get the best return from the time you spend
studying.
Estimate how much time in total you are going to need for each subject that you face.
Remember that you need to allow time for revision as well as for initial study of the mate-
rial. The amount of notional study time for any subject is the minimum estimated time that
students will need to achieve the specified learning outcomes set out earlier in this chapter.
This time includes all appropriate learning activities, for example, face-to-face tuition, private
study, directed home study, learning in the workplace, revision time, etc. You may find it help-
ful to read Better Exam Results by Sam Malone, CIMA Publishing, ISBN: 05066357X. This
book will provide you with proven study techniques. Chapter by chapter it covers the build-
ing blocks of successful learning and examination techniques.
The notional study time for Managerial level Performance Evaluation is 200 hours. Note
that the standard amount of notional learning hours attributed to one full-time academic
year of approximately 30 weeks is 1,200 hours.
By way of example, the notional study time might be made up as follows:
Note that all study and learning-time recommendations should be used only as a guideline
and are intended as minimum amounts. The amount of time recommended for face-to-face
tuition, personal study and/or additional learning will vary according to the type of course
undertaken, prior learning of the student, and the pace at which different students learn.
Now split your total time requirement over the weeks between now and the examination.
This will give you an idea of how much time you need to devote to study each week.
Remember to allow for holidays or other periods during which you will not be able to study
(e.g. because of seasonal workloads).
With your study material before you, decide which chapters you are going to study in
each week, and which weeks you will devote to revision and final question practice.
Prepare a written schedule summarising the above – and stick to it!
The amount of space allocated to a topic in the study material is not a very good guide

as to how long it will take you. For example, ‘Summarising and Analysing Data’ has a weight
of 25 per cent in the syllabus and this is the best guide as to how long you should spend on
it. It occupies 45 per cent of the main body of the text because it includes many tables and
charts.
Hours
Face-to-face study: up to 60
Personal study: up to 100
‘Other’ study – e.g. learning in the workplace, revision, etc.: up to 140
200
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It is essential to know your syllabus. As your course progresses you will become more
familiar with how long it takes to cover topics in sufficient depth. Your timetable may need
to be adapted to allocate enough time for the whole syllabus.
Tips for effective studying
(1) Aim to find a quiet and undisturbed location for your study, and plan as far as possible
to use the same period of time each day. Getting into a routine helps to avoid wasting
time. Make sure that you have all the materials you need before you begin so as to min-
imise interruptions.
(2) Store all your materials in one place, so that you do not waste time searching for items
around the house. If you have to pack everything away after each study period, keep
them in a box, or even a suitcase, which will not be disturbed until the next time.
(3) Limit distractions. To make the most effective use of your study periods you should be
able to apply total concentration, so turn off the TV, set your phones to message mode,
and put up your ‘do not disturb’ sign.
(4) Your timetable will tell you which topic to study. However, before diving in and becoming
engrossed in the finer points, make sure you have an overall picture of all the areas that need
to be covered by the end of that session. After an hour, allow yourself a short break and

move away from your books. With experience, you will learn to assess the pace you need to
work at. You should also allow enough time to read relevant articles from newspapers and
journals, which will supplement your knowledge and demonstrate a wider perspective.
(5) Work carefully through a chapter, making notes as you go. When you have covered a
suitable amount of material, vary the pattern by attempting a practice question.
Preparing an answer plan is a good habit to get into, while you are both studying and
revising, and also in the examination room. It helps to impose a structure on your solu-
tions, and avoids rambling. When you have finished your attempt, make notes of any
mistakes you made, or any areas that you failed to cover or covered only skimpily.
(6) Make notes as you study, and discover the techniques that work best for you. Your notes
may be in the form of lists, bullet points, diagrams, summaries, ‘mind maps’, or the
written word, but remember that you will need to refer back to them at a later date, so
they must be intelligible. If you are on a taught course, make sure you highlight any
issues you would like to follow up with your lecturer.
(7) Organise your paperwork. There are now numerous paper storage systems available to
ensure that all your notes, calculations and articles can be effectively filed and easily
retrieved later.
The Performance Evaluation syllabus
Examined for the first time in May 2005
Syllabus outline
The syllabus comprises:
Topic Study Weighting
A Cost Accounting Systems 25%
B Standard Costing 25%
C Budgeting 30%
D Control and Performance Measurement of Responsibility Centres 20%
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THE CIMA STUDY SYSTEM
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Learning aims
Students should be able to:
apply both traditional and contemporary approaches to cost accounting in a variety of
contexts and evaluate the impact of ‘modern’ data processing and processing technolo-
gies such as MRP, ERP and JIT;
explain and apply the principles of standard costing, calculate variances in a variety of
contexts and critically evaluate the worth of standard costing in the light of contempo-
rary criticisms;
develop budgets using both traditional and contemporary techniques, evaluate both inter-
active and diagnostic uses of budgets in a variety of contexts and discuss the issues raised
by those that advocate techniques ‘beyond budgeting’;
prepare appropriate financial statements for cost, profit and investment centre managers,
calculate appropriate financial performance indicators, assess the impact of alternative
transfer pricing policies and discuss the behavioural consequences of management con-
trol systems based on responsibility accounting, decentralisation and delegation.
Assessment strategy
There will be a written examination paper of three hours, with the following sections.
Section A – 50 marks
A variety of compulsory objective test questions, each worth between 2 and
4 marks. Mini-scenarios may be given, to which a group of questions relate.
Section B – 30 marks
Six compulsory short answer questions, each worth 5 marks. A short scenario may
be given, to which some or all questions relate.
Section C – 20 marks
One question, from a choice of two, worth 20 marks. Short scenarios may be given,
to which questions relate.
Learning outcomes and syllabus content
A – Cost Accounting Systems – 25%
Learning outcomes
On completion of their studies students should be able to:

(i) compare and contrast marginal and absorption costing methods in respect of profit
reporting and stock valuation;
(ii) apply marginal and absorption costing approaches in job, batch and process
environments;
(iii) prepare ledger accounts according to context: marginal or absorption based in job,
batch or process environments, including work-in-progress and related accounts such
as production overhead control account and abnormal loss account;
(iv) explain the origins of throughput accounting as ‘super variable costing’ and its appli-
cation as a variant of marginal or variable cost accounting;
(v) apply standard costing methods within costing systems and demonstrate the recon-
ciliation of budgeted and actual profit margins;
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(vi) compare activity-based costing with traditional marginal and absorption costing
methods and evaluate its potential as a system of cost accounting;
(vii) explain the role of MRP and ERP systems in supporting standard costing systems,
calculating variances and facilitating the posting of ledger entries;
(viii) evaluate the impact of just-in-time manufacturing methods on cost accounting and
the use of ‘back-flush accounting’ when work-in-progress stock is minimal.
Syllabus Content
Marginal (or variable) costing as a system of profit reporting and stock valuation.
Absorption costing as a system of profit reporting and stock valuation.
Throughput accounting as a system of profit reporting and stock valuation.
Activity-based costing as a potential system of profit reporting and stock valuation.
The integration of standard costing with marginal cost accounting, absorption cost
accounting and throughput accounting.
Process accounting including establishment of equivalent units in stock, work-in-
progress and abnormal loss accounts and the use of first-in-first-out, average cost and

standard cost methods of stock valuation.
MRP and ERP systems for resource planning and the integration of accounting functions
with other systems, such as purchase ordering and production planning.
Back-flush accounting in just-in-time production environments. The benefits of just-in-
time production, total quality management and theory of constraints and the possible
impacts of these methods on cost accounting and performance measurement.
B – Standard Costing – 25%
Learning outcomes
On completion of their studies students should be able to:
(i) explain why and how standards are set in manufacturing and in service industries with
particular reference to the maximisation of efficiency and minimisation of waste.
(ii) calculate and interpret material, labour, variable overhead, fixed overhead and sales
variances;
(iii) prepare and discuss a report which reconciles budget and actual profit using absorp-
tion and/or marginal costing principles;
(iv) calculate and explain planning and operational variances;
(v) prepare reports using a range of internal and external benchmarks and interpret the
results;
(vi) discuss the behavioural implications of setting standard costs.
Syllabus content
Manufacturing standards for material, labour, variable overhead and fixed overhead.
Price/rate and usage/efficiency variances for materials, labour and variable overhead.
Further subdivision of total usage/efficiency variances into mix and yield components.
(Note: The calculation of mix variances on both individual and average valuation bases
is required.)
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Fixed overhead expenditure and volume variances. (Note: The subdivision of fixed over-

head volume variance into capacity and efficiency elements will not be examined.)
Planning and operational variances.
Standards and variances in service industries, (including the phenomenon of
‘McDonaldisation’), public services (e.g. Health) (including the use of ‘diagnostic related’
or ‘reference’ groups), and the professions (e.g. labour mix variances in audit work).
Criticisms of standard costing in general and in advanced manufacturing environments
in particular.
Sales price and sales revenue/margin volume variances (calculation of the latter on a unit
basis related to revenue, gross margin and contribution margin). Application of these
variances to all sectors, including professional services and retail analysis.
Interpretation of variances: interrelationship, significance.
Benchmarking.
Behavioural implications of setting standard costs.
C – Budgeting – 30%
Learning outcomes
On completion of their studies students should be able to:
(i) explain why organisations prepare forecasts and plans;
(ii) calculate projected product/service volumes employing appropriate forecasting
techniques;
(iii) calculate projected revenues and costs based on product/service volumes, pricing
strategies and cost structures;
(iv) evaluate projected performance by calculating key metrics including profitability,
liquidity and asset turnover ratios;
(v) describe and explain the possible purposes of budgets, including planning, commu-
nication, co-ordination, motivation, authorisation, control and evaluation;
(vi) evaluate and apply alternative approaches to budgeting;
(vii) calculate the consequences of ‘what if ’ scenarios and evaluate their impact on master
profit and loss account and balance sheet;
(viii) explain the concept of responsibility accounting and its importance in the construc-
tion of functional budgets that support the overall master budget;

(ix) identify controllable and uncontrollable costs in the context of responsibility account-
ing and explain why ‘uncontrollable’ costs may or may not be allocated to responsi-
bility centres;
(x) explain the ideas of feedback and feed-forward control and their application in the
use of budgets for control;
(xi) evaluate performance using fixed and flexible budget reports;
(xii) discuss the role of non-financial performance indicators and compare and contrast
traditional approaches to budgeting with recommendations based on the ‘balanced
scorecard’;
(xiii) evaluate the impact of budgetary control systems on human behaviour;
(xiv) evaluate the criticisms of budgeting particularly from the advocates of techniques
that are ‘beyond budgeting’.
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Syllabus content
Time series analysis including moving totals and averages, treatment of seasonality, trend
analysis using regression analysis and the application of these techniques in forecasting
product and service volumes.
Fixed, variable, semi-variable and activity-based categorisations of cost and their appli-
cation in projecting financial results.
What-if analysis based on alternate projections of volumes, prices and cost structures
and the use of spreadsheets in facilitating these analyses.
The purposes of budgets and conflicts that can arise (e.g. between budgets for realistic
planning and budgets based on ‘hard to achieve’ targets for motivation).
The creation of budgets including incremental approaches, zero-based budgeting and
activity-based budgets.
The use of budgets in planning: ‘rolling budgets’ for adaptive planning.
The use of budgets for control: controllable costs and variances based on ‘fixed’ and

‘flexed’ budgets. The conceptual link between standard costing and budget flexing.
Behavioural issues in budgeting: participation in budgeting and its possible beneficial
consequences for ownership and motivation; participation in budgeting and its possible
adverse consequences for ‘budget padding’ and manipulation; setting budget targets for
motivation etc.
Criticisms of budgeting and the recommendations of the advocates of the balanced
scorecard and ‘beyond budgeting’.
D – Control and Performance Measurement of
Responsibility Centres – 20%
Learning outcomes
On completion of their studies students should be able to:
(i) discuss the use of cost, revenue, profit and investment centres in devising organisation
structure and in management control;
(ii) prepare cost information in appropriate formats for cost centre managers, taking due
account of controllable/uncontrollable costs and the importance of budget flexing;
(iii) prepare revenue and cost information in appropriate formats for profit and investment
centre managers, taking due account of cost variability, attributable costs, controllable
costs and identification of appropriate measures of profit centre ‘contribution’;
(iv) calculate and apply measures of performance for investment centres (often ‘strategic
business units’ or divisions of larger groups);
(v) discuss the likely behavioural consequences of the use of performance metrics in
managing cost, profit and investment centres;
(vi) explain the typical consequences of a divisional structure for performance measure-
ment as divisions compete or trade with each other;
(vii) identify the likely consequences of different approaches to transfer pricing for divi-
sional decision making, divisional and group profitability, the motivation of divisional
management and the autonomy of individual divisions.
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Syllabus content
Organisation structure and its implications for responsibility accounting.
Presentation of financial information including issues of controllable/uncontrollable
costs, variable/fixed costs and tracing revenues and costs to particular cost objects.
Return on investment and its deficiencies; the emergence of residual income and eco-
nomic value added to address these.
Behavioural issues in the application of performance measures in cost, profit and invest-
ment centres.
The theory of transfer pricing, including perfect, imperfect and no market for the inter-
mediate good.
Use of negotiated, market, cost-plus and variable cost based transfer prices. ‘Dual’ trans-
fer prices and lump sum payments as means of addressing some of the issues that arise.
The interaction of transfer pricing and tax liabilities in international operations and
implications for currency management and possible distortion of internal company oper-
ations in order to comply with Tax Authority directives.
Transitional arrangements
Students who have passed the Performance Management paper under the Beyond 2000
syllabus will be given a credit for the Performance Evaluation paper under the new 2005
syllabus. For further details of transitional arrangements, please contact CIMA directly or
visit their website at www.cimaglobal.com.
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This text has been structured to be studied independently of the Decision Management (P2) paper,
therefore, the reader will notice some unavoidable overlap between the two texts.
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