CPA Foundation Exam Management Accounting

Variable Cost per Unit (High-Low Method) Formula

(Highest Cost - Lowest Cost) / (Highest Activity - Lowest Activity). Use the highest and lowest activity level.

Fixed Costs (High-Low Method) Calculation

Total Cost - (Variable Cost per Unit * Activity Level). Use either high or low activity point.

Direct Material Price Variance (MPV) Formula

(Standard Price - Actual Price) * Actual Quantity PURCHASED. Favourable if Standard Price > Actual Price.

Direct Material Usage Variance (MUV) Formula

(Standard Quantity Allowed for Actual Output - Actual Quantity USED) * Standard Price.

Direct Labour Rate Variance (LRV) Formula

(Standard Rate - Actual Rate) * Actual Hours PAID.

Direct Labour Efficiency Variance (LEV) Formula

(Standard Hours Allowed for Actual Output - Actual Hours WORKED) * Standard Rate.

Idle Time Variance Formula

(Actual Hours Paid - Actual Hours Worked) * Standard Rate. This is ALWAYS Adverse (U).

Fixed Overhead Volume Variance Formula

(Actual Production Units - Budgeted Production Units) * Standard Fixed Overhead Rate per Unit.

Deprival Value of an Asset Rule

It is the LOWER of Replacement Cost and the HIGHER of Net Realisable Value or Expected Future Revenues.

Ranking Products with Scarce Resource (Limiting Factor) Steps

1. Calculate Contribution Margin per Unit. 2. Divide by Limiting Factor per unit. 3. Rank by highest contribution.

Make or Buy Decision Rule

Buy externally if: External Price < In-House Relevant Cost. In-House Relevant Cost includes materials, labour, overhead, etc.

Return on Investment (ROI) Formula

(Divisional Operating Profit / Divisional Net Assets) * 100. Can cause sub-optimization.

Residual Income (RI) Formula and Benefit

RI = Divisional Operating Profit - (Divisional Net Assets * Cost of Capital Rate). Resolves ROI sub-optimization.

Accounting Rate of Return (ARR) Formula

(Average Annual Profit / Average Investment) * 100. Only method using accounting profit, not cash flows.(excludes non-cash expenses, EBIT not EBITDA)

Average Annual Profit = Sum of all accounting profits / number of years of accounting profits.

Average investment = (initial cost of investment + salvage value) / 2

Payback Period Calculation

For constant cash flows: Initial Investment / Annual Net Cash Inflow. For uneven flows: Track cumulative cash flows.

Economic Order Quantity (EOQ) Formula

$EOQ = \text{Square Root of }\frac{2 \times \text{Annual Demand} \times \text{Cost per Order}}{\text{Annual Holding Cost per Unit}}$.

Reorder Level Calculation with Uncertainty

Maximum Lead Time * Maximum Usage Rate. Builds in a safety margin.

Steps in Target Costing

1. Determine market selling price. 2. Subtract profit margin to find Target Cost. 3. Re-engineer the product to close cost gap.

Normal Loss vs. Abnormal Loss in Process Costing

Normal Loss is expected and absorbed by good units. Abnormal Loss is unexpected and valued at full cost.

Equivalent Units for Closing WIP Formula

Physical WIP Units * Completion Percentage for that specific cost element.

Absorption Costing vs. Marginal Costing Profit Reporting

If Production > Sales, Absorption Profit > Marginal Profit due to fixed overhead deferral.

Principal Budget Factor

This factor limits organization activities, usually sales demand. It's the FIRST budget prepared.

Zero-Based Budgeting vs. Incremental Budgeting

ZBB requires justification for all expenses from scratch. Incremental bases next year on this year + inflation.

4 Perspectives of the Balanced Scorecard

1. Financial, 2. Customer, 3. Internal Business Process, 4. Learning & Growth.

Minimum Transfer Pricing Rule (Selling Division)

Minimum TP = Incremental Out-of-Pocket Cost per Unit + Opportunity Cost per Unit.

Maximum Transfer Pricing Rule (Buying Division)

Maximum TP = Lower of External Market Purchase Price OR Maximum Target Input Cost.

Activity-Based Costing (ABC) Driver Rate Formula

Total Costs in Activity Cost Pool / Total Quantity of Activity Cost Driver.

Standard Costing: Ideal vs. Attainable Standards

Ideal assumes zero waste; Attainable allows for normal waste and is better for motivation.

Relevant Costs Rule for Decision Making

INCLUDE future cash flows, opportunity costs, avoidable fixed costs. EXCLUDE sunk costs, non-cash items.

Break-Even Sales Revenue Calculation Steps

1. Find Contribution to Sales Ratio. 2. Break-Even Revenue = Total Fixed Costs / C/S Ratio.

Margin of Safety Percentage Formula

(Budgeted Sales Units - Break-Even Sales Units) / Budgeted Sales Units * 100.

Causes of Unfavourable Direct Material USAGE Variance

Using more material than standard allows due to poor quality, untrained staff, or machine issues.

Variable Cost per Unit (High-Low Method) Formula

(Highest Cost - Lowest Cost) / (Highest Activity - Lowest Activity). Use the highest and lowest activity level.

Fixed Costs (High-Low Method) Calculation

Total Cost - (Variable Cost per Unit * Activity Level). Use either high or low activity point.

Direct Material Price Variance (MPV) Formula

(Standard Price - Actual Price) * Actual Quantity PURCHASED. Favourable if Standard Price > Actual Price.

Direct Material Usage Variance (MUV) Formula

(Standard Quantity Allowed for Actual Output - Actual Quantity USED) * Standard Price.

Direct Labour Rate Variance (LRV) Formula

(Standard Rate - Actual Rate) * Actual Hours PAID.

Direct Labour Efficiency Variance (LEV) Formula

(Standard Hours Allowed for Actual Output - Actual Hours WORKED) * Standard Rate.

Idle Time Variance Formula

(Actual Hours Paid - Actual Hours Worked) * Standard Rate. This is ALWAYS Adverse (U).

Fixed Overhead Volume Variance Formula

(Actual Production Units - Budgeted Production Units) * Standard Fixed Overhead Rate per Unit.

Deprival Value of an Asset Rule

It is the LOWER of Replacement Cost and the HIGHER of Net Realisable Value or Expected Future Revenues.

Ranking Products with Scarce Resource (Limiting Factor) Steps

1. Calculate Contribution Margin per Unit. 2. Divide by Limiting Factor per unit. 3. Rank by highest contribution.

Make or Buy Decision Rule

Buy externally if: External Price < In-House Relevant Cost. In-House Relevant Cost includes materials, labour, overhead, etc.

Return on Investment (ROI) Formula

(Divisional Operating Profit / Divisional Net Assets) * 100. Can cause sub-optimization.

Residual Income (RI) Formula and Benefit

RI = Divisional Operating Profit - (Divisional Net Assets * Cost of Capital Rate). Resolves ROI sub-optimization.

Accounting Rate of Return (ARR) Formula

(Average Annual Profit / Average Investment) * 100. Only method using accounting profit, not cash flows.(excludes non-cash expenses, EBIT not EBITDA) Average Annual Profit = Sum of all accounting profits / number of years of accounting profits. Average investment = (initial cost of investment + salvage value) / 2

Payback Period Calculation

For constant cash flows: Initial Investment / Annual Net Cash Inflow. For uneven flows: Track cumulative cash flows.

Economic Order Quantity (EOQ) Formula

$EOQ = \text{Square Root of }\frac{2 \times \text{Annual Demand}\times \text{Cost per Order}}{\text{Annual Holding Cost per Unit}}$.

Reorder Level Calculation with Uncertainty

Maximum Lead Time * Maximum Usage Rate. Builds in a safety margin.

Steps in Target Costing

1. Determine market selling price. 2. Subtract profit margin to find Target Cost. 3. Re-engineer the product to close cost gap.

Normal Loss vs. Abnormal Loss in Process Costing

Normal Loss is expected and absorbed by good units. Abnormal Loss is unexpected and valued at full cost.

Equivalent Units for Closing WIP Formula

Physical WIP Units * Completion Percentage for that specific cost element.

Absorption Costing vs. Marginal Costing Profit Reporting

If Production > Sales, Absorption Profit > Marginal Profit due to fixed overhead deferral.

Principal Budget Factor

This factor limits organization activities, usually sales demand. It's the FIRST budget prepared.

Zero-Based Budgeting vs. Incremental Budgeting

ZBB requires justification for all expenses from scratch. Incremental bases next year on this year + inflation.

4 Perspectives of the Balanced Scorecard

1. Financial, 2. Customer, 3. Internal Business Process, 4. Learning & Growth.

Minimum Transfer Pricing Rule (Selling Division)

Minimum TP = Incremental Out-of-Pocket Cost per Unit + Opportunity Cost per Unit.

Maximum Transfer Pricing Rule (Buying Division)

Maximum TP = Lower of External Market Purchase Price OR Maximum Target Input Cost.

Activity-Based Costing (ABC) Driver Rate Formula

Total Costs in Activity Cost Pool / Total Quantity of Activity Cost Driver.

Standard Costing: Ideal vs. Attainable Standards

Ideal assumes zero waste; Attainable allows for normal waste and is better for motivation.

Relevant Costs Rule for Decision Making

INCLUDE future cash flows, opportunity costs, avoidable fixed costs. EXCLUDE sunk costs, non-cash items.

Break-Even Sales Revenue Calculation Steps

1. Find Contribution to Sales Ratio. 2. Break-Even Revenue = Total Fixed Costs / C/S Ratio.

Margin of Safety Percentage Formula

(Budgeted Sales Units - Break-Even Sales Units) / Budgeted Sales Units * 100.

Causes of Unfavourable Direct Material USAGE Variance

Using more material than standard allows due to poor quality, untrained staff, or machine issues.