Management Accounting 1

🎯 Define relevant cost.

A future cash flow that differs between decision alternatives.

⏳ Three relevance tests?

Future, cash-related, and different between alternatives.

🕳️ Define sunk cost.

A past cost that cannot be changed by the decision.

📉 Is depreciation relevant?

Normally no: depreciation itself creates no future cash outflow.

🏢 When is fixed overhead relevant?

When the decision changes actual future cash spending.

💔 Define opportunity cost.

Benefit sacrificed by rejecting the next-best alternative.

🎁 Define opportunity benefit.

A cost avoided or benefit gained through the decision.

📦 How value existing materials?

Consider replacement cost, resale value, or alternative use.

👷 When is existing labour relevant?

When extra wages arise or alternative contribution is sacrificed.

🤝 Name qualitative factors.

Quality, employee morale, customer goodwill, and supplier reliability.

🚧 Define limiting factor.

A scarce resource restricting how much the business can produce.

💰 Contribution per unit?

Selling price minus variable cost per unit.

⏱️ Contribution per scarce hour?

Contribution per unit divided by scarce hours per unit.

🏆 Which product first?

Highest contribution per limiting-factor unit, up to demand.

📦 What after demand is met?

Allocate remaining scarce capacity to the next-ranked product.

🧮 Calculate required resource.

Demanded units multiplied by resource used per unit.

🚨 Calculate resource shortfall.

Resource required minus resource available, if positive.

🛒 Define excess purchasing cost.

Relevant buying cost minus relevant manufacturing cost per unit.

🔝 Make-or-buy ranking rule?

Make products with highest excess purchasing cost per scarce resource unit first.

🏠 Include allocated fixed overhead?

Only if the decision changes total fixed cash spending.

🎲 Define probability.

The likelihood of an outcome, measured between zero and one.

➕ Total possible probabilities?

All mutually exclusive, exhaustive outcome probabilities add to one.

💸 Expected value formula?

Add each outcome multiplied by its probability.

🚨 Is expected value guaranteed?

No; it is a weighted average across possible outcomes.

🌳 Decision-tree square means?

A decision point where management chooses an action.

⭕ Decision-tree circle means?

A chance event with uncertain outcomes.

🔮 Define perfect information.

Information revealing which uncertain outcome will occur.

🧮 EVPI formula?

Expected value with perfect information minus best expected value without it.

🏆 Define maximax.

Choose the option with the highest possible payoff.

☂️ Maximin versus minimax regret?

Maximin protects worst payoff; minimax regret minimises worst possible regret.

🏷️ Define target costing.

Set allowable costs from market price and desired profit.

🧮 Target cost formula?

Target selling price minus target profit.

💰 Profit margin basis?

Profit expressed as a percentage of sales.

📈 Profit markup basis?

Profit expressed as a percentage of cost.

🎯 Target cost at 30% margin?

Selling price multiplied by 70%.

➗ Target cost at 25% markup?

Selling price divided by 1.25.

✂️ Required cost reduction?

Estimated cost minus target cost.

🛠️ Define value engineering.

Redesign to reduce cost while preserving required quality and functions.

🔬 Define tear-down analysis.

Study competitors’ products to identify cost-saving design ideas.

🤝 Why cross-functional teams?

Design, production, purchasing, and finance jointly deliver the target cost.

🧠 Define learning curve effect.

Average production time decreases as cumulative output and experience increase.

8️⃣ Meaning of 80% learning?

Average time becomes 80% whenever cumulative production doubles.

🚨 Does 80% mean each unit?

No; the course model applies to cumulative average time.

📐 Learning curve equation?

Y = a × xᵇ, where Y is cumulative average time.

1️⃣ What does a represent?

Time taken to produce the first unit.

🔢 What does x represent?

Total cumulative number of units produced.

🧮 Learning index b formula?

log(learning rate) divided by log(2).

⏱️ Total cumulative hours?

Cumulative average hours per unit multiplied by cumulative units.

➖ Incremental hours formula?

Later cumulative hours minus earlier cumulative hours.

⚠️ Can learning continue forever?

No; efficiency gains may slow or eventually level off.

🧾 Traditional accountant role?

Record, report, and explain past financial performance.

🧭 Modern management accountant role?

Support planning, strategic decisions, control, and performance improvement.

♻️ Define lean accounting.

Accounting focused on waste reduction, value streams, and customer value.

🛍️ Customer profitability formula?

Customer revenue minus product costs and customer-service costs.

📦 Examples of service costs?

Delivery, sales support, marketing, and administration.

📊 Define enterprise performance management.

Integrate performance measures to support strategy, control, and improvement.

🚦 Define KPI.

Key performance indicator: a measure of progress toward objectives.

🔮 Define predictive accounting.

Use forecasts and what-if scenarios to support future decisions.

💻 Define business analytics.

Analyse data and relationships to improve business decisions.

🤝 Define behavioural cost management.

Manage employee attitudes and resistance during cost or process changes.