Icaew Cfab Mi 2019 Study Guide

The Institute of Chartered Accountants in England and Wales
MANAGEMENT
INFORMATION
For exams in 2019
Study Guide
www.icaew.com
Contents
1 Key resources 1
2 Study guide 2
3 Syllabus and learning outcomes 23
4 Technical knowledge grid 25
5 Glossary of terms 33
The Management Information module enables you to prepare essential financial information for
the management of a business.
ii ICAEW 2019
1 Key resources
Whether you're studying the ACA qualification or ICAEW CFAB, with an employer, at university,
independently (self-studying), or via an apprenticeship, we provide a wide range of fantastic
resources and services to help you in your studies. They can be found on our website. Be sure to
visit the specific area for you.
ACA students, you can access dedicated exam resources, guidance and information for the ACA
qualification via your dashboard at icaew.com/dashboard.
ICAEW CFAB students, you can find everything you need at icaew.com/cfabstudents.
Syllabus and technical knowledge grids
This gives you the full breakdown of learning outcomes for each module and how your technical
knowledge will grow throughout the qualification.
Study guide
This guides you through your learning process, putting each chapter and topic of the Study
Manual into context and showing what learning outcomes are attached to them.
Exam webinars
The pre-recorded webinars focus on how to approach each exam, plus exam and study tips.
Errata sheets
These are available on our website if we are made aware of a mistake within a Study Manual or
Question Bank once it has been published.
Student support team
Our dedicated student support team is here to help and advise you throughout your studies,
don't hesitate to get in touch. Email studentsupport@icaew.com or call +44 (0)1908 248 250 to
speak to an adviser.
ICAEW 2019 Study Guide 1

2 Study guide
2.1 Help yourself study for your ACA exams

The right approach
1 Develop the right attitude
Believe in yourself Yes, there is a lot to learn. But thousands have

succeeded before and you can too.
Remember why you're doing it You are studying for a good reason: to advance your
career.
2 Focus on the exam
Read through the Syllabus in this This tells you what you are expected to know.
guide
3 The right method
See the whole picture Keeping in mind how all the detail you need to know fits
into the whole picture will help you understand it better.
 The Practical significance and Working context to
each chapter in the study guide put the material
into context.
 The Learning outcomes and Section overviews in
the study manual show you what you need to
grasp.
Use your own words To absorb the information (and to practise your written
communication skills), you need to put it into your own
words.
 Take notes.
 Answer the questions in each chapter.
 Draw mindmaps.
 Try 'teaching' a subject to a colleague or friend.
Give yourself cues to jog your The Study Manual uses bold to highlight key points.
memory
 Try colour coding with a highlighter pen.
 Write key points on cards.
4 The right recap
Review, review, review Regularly reviewing a topic in summary form can fix it in
your memory. The Study Manual helps you review in
many ways.
 Each Chapter Summary will help you to recall that
study session.
 The Self-test actively tests your grasp of the
essentials.
 Go through the Examples in each chapter a second
or third time.
2 Management Information ICAEW 2019

2.2 Study cycle
The best way to approach the Study Manual is to tackle the chapters in order. We will look in
detail at how to approach each chapter below but as a general guide, taking into account your
individual learning style, you could follow this sequence for each chapter.
Key study steps Activity

Step 1 This topic list is shown in the contents for each chapter and helps you
Topic list navigate each part of the book; each numbered topic is a numbered
section in the chapter.
Step 2 The practical significance and working context sections for each chapter,
Introduction set out in this study guide, give you the big picture in terms of the context
of the chapter. The Examination context guidance shows what the
examiners are looking for and tells you why the topics covered in the
chapter need to be studied.
Step 3 Section overviews give you a quick summary of the content of each of the
Section overviews main chapter sections. They can also be used at the end of each chapter to
help you review each chapter quickly.
Step 4 Proceed methodically through each chapter, particularly focusing on areas
Explanations highlighted as significant in the chapter introduction or study guide.
Step 5 Take brief notes, if you wish. Don't copy out too much. Remember that
Note taking being able to record something yourself is a sign of being able to
understand it. Your notes can be in whatever format you find most helpful;
lists, diagrams, mindmaps.
Step 6 Work through the examples very carefully as they illustrate key knowledge
Examples and techniques.
Step 7 Check yours against the suggested solutions, and make sure you
Answers understand any discrepancies.
Step 8 Review it carefully, to make sure you have grasped the significance of all
Chapter summary the important points in the chapter.
Step 9 Use the Self-test to check how much you have remembered of the topics
Self-test covered.
Step 10 Ensure you have ticked off the Learning outcomes.
Learning outcomes
Moving on...
When you are ready to start revising, you should still refer back to the Study Manual.
 As a source of reference (you should find the index particularly helpful for this).
 As a way to review (the Section overviews, Examination context, Chapter summaries and
Self-test questions help you here).
Remember to keep careful hold of the Study Manual – you will find it invaluable in your work.
2.3 Detailed study guide

Use this schedule and your exam timetable to plan the dates on which you will complete each
study period that follows.
Revision Phase – your revision should be centred around using the questions in the ICAEW
Question Bank.

Study Due
period Practical significance Working context Approach Syllabus references and exam context date
1 The fundamentals of costing You will come across cost Read quickly through section 1 of Many of the fundamental aspects of costing
All businesses, including sole traders, classifications in a variety Chapter 1 to set cost accounting in covered in this chapter do not lend themselves
partnerships and companies incur of contexts in your context. Spend more time making sure easily to numerical objective test questions.
costs every day. Accounting systems working life. For example, that you understand the basic concepts
Therefore, you are more likely to see the
can be set up to record the amount of when inventories are in section 2. Learn the two definitions in
majority of these subjects in narrative
expenditure incurred on different types being valued it is section 3. Once you have read through
questions. For example, you might be
of cost, such as rent, power (gas and important to be able to section 4 practice drawing all of the
required to pick out correct definitions or
electricity) and salaries. identify which costs are cost behaviour patterns you have
statements from a number of statements
direct costs of the learned about. Skim through section 5
 Such systems can include methods supplied in a question, or you might have to
inventory items and which and learn the definitions. You will meet
for business managers to obtain the identify an appropriate cost unit from a
are indirect costs and all of these concepts again in Chapter
information they need to manage number of suggestions for a particular
cannot be attributed to 8.
the business on a day-to-day basis. organisation to use as the basis of its
the inventory items.
For example, providing detailed Work through the ethical principles in accounting system.
Correct cost classification
answers to questions such as the section 6 and make sure you could
is fundamental to the In the examination, students may be required
following. identify them if faced with an ethical
determination of the cost to:
dilemma in a scenario. Finally work
 What did it cost to provide a of any cost object.  Recognise the use of cost information for
through the self-test questions carefully
particular service to a particular different purposes
to ensure that you have grasped the
client?
main points in the chapter.  Classify costs as fixed, variable, direct or
 What price should be tendered for indirect
a contract?
 Identify and explain ethical issues relating
 What is the cost of operating to the preparation, presentation and
different departments each period? interpretation of financial information for
 How much sales revenue is the management of a business
generated by a particular product? Knowing the various definitions is
 Are the actual costs incurred on a fundamental to answering questions in this
particular activity higher or lower area. For example it is essential to determine
than the planned costs? the 'cost object' in a question (ie, the thing
being costed), in order to determine whether
costs are direct or indirect as regards that cost
object.
The specific syllabus references for this
chapter are: 1a, b, 5a.

Study Due
The aim of the cost accounting system

within an overall accounting system is
to provide the information that helps to
answer these and similar questions.
The cost accounts form the basis of the
internal management accounting
information that managers will use for
planning, control and decision-making.
This information must be reported
fairly, honestly and in accordance with
professional standards. ICAEW
provides ethical guidance to help
ensure that this happens.
Stop and think
Why do you think that management
accounting is an internal service for a
business's managers? Why are
management accounts not usually
distributed to interested parties
outside the business?

Study Due
2 Calculating unit costs (Part 1) You may come across Read quickly through section 1 of The context of much of this chapter provides
An important task to be fulfilled by the inventory valuations in the Chapter 2 to reinforce your scope for a range of numerical questions.
management information system is to context of audit understanding of direct and indirect However, you should also be prepared to
provide unit costs as the basis for a engagements. Typical costs. Spend a little more time thinking deal with narrative questions that examine
variety of management planning and procedures might involve about each item in interactive question your understanding of the implications of the
control activities. checking that costs have 1 and use this to test whether you really techniques you are using.
been calculated and understand the concepts.
But how are the individual elements of Narrative questions on the pricing of
recorded correctly and
costs to be determined for each cost Section 2 of this chapter is very materials issues and on the classification of
that the inventory
unit? For example there must be important and requires you to be costs have been popular in past examinations.
valuation method has
mechanisms for recording the hours actively involved. Do not just skim over
been applied consistently. In the examination, students may be required
worked by employees and the tasks all the workings. Get a calculator and
to:
they accomplish in this time. check that you understand where each
figure in the tabulations comes from.  classify costs as direct or indirect
As regards material, if several different  calculate the prime cost of a cost unit
Find a method of laying out the
batches of material are purchased, all
calculations that works for you.  calculate the price of materials and the
at different prices, which price should
Although you will not receive marks for value of inventory using ('first in, first out')
be reported within unit costs for
workings in the actual exam, you will FIFO, ('last in, first out') LIFO and average
managers to use as the basis of their
need to use a clear layout to achieve pricing methods
day-to-day operational and planning
the necessary 100% accuracy.
decisions? It is important to realise that in this chapter
Finally work through the self-test and the next, ideas from Chapter 1 are being
Information providers need
questions at the end of the chapter. applied in determining the cost of a unit of
mechanisms to systematically record
output. The cost object is, therefore, the unit
the prices paid for material and the
of output and all terms such as direct and
quantities purchased and issued to
indirect are used in that context. It is also
production or sales.
essential to appreciate that direct and
Stop and think variable costs and indirect and fixed costs are
In times of rapid inflation, why is it not the same thing. The narrative is as
important to use up to date prices important as the calculations for FIFO, LIFO
when reporting costs to the manager and weighted average inventory valuations.
who is responsible for determining the The specific syllabus references for this
selling price of the company's main chapter are: 1b, c.
products or services?

Study Due
3 Calculating unit costs (Part 2) Once again you are likely Chapter 3 contains a lot of very Numerical questions on the calculation of
We have seen that it is possible to to come across the subject important material. Read quickly overhead absorption rates and of over and
attribute direct costs to individual cost matter of this chapter in through sections 1.1 and 1.2. In section under absorption of overheads have been
units. However, for certain the context of auditing 1.3 skim through interactive question 1 popular in past papers. Furthermore, the
management decisions, for example, inventory valuations. and then give the worked example sample paper for this syllabus included a
when determining selling prices or Typical procedures might extra attention. Check that you question that required the calculation and
valuing finished goods inventory, involve checking that the understand the derivation of all of the application of a fixed overhead absorption
management might need to know the indirect cost attributed to figures in the final table. Think about rate based on labour hours.
full cost of the item, including a share inventory items is the apportionment of service cost You should also be prepared to tackle
of the indirect costs or overheads. determined using a centre costs: why it is necessary and narrative questions on overhead absorption
realistic and systematic how it is done. Work carefully through as well as on the selection of the most
Accordingly a method has to be
basis. the interactive questions and examples. appropriate costing method in specific
devised for sharing the indirect costs
between all the units that benefit from Section 1.4 is of vital importance. The circumstances. The latter subject also
them. techniques and principles that you featured in the sample paper for this syllabus.
learn here will arise a number of times You will not be required to answer numerical
The costing method used to determine throughout this syllabus so you must questions about Activity Based Costing but
an organisation's unit costs will get a firm grasp of them before you you should be able to demonstrate a general
ultimately depend on the nature of the continue. Work carefully through the understanding of the underlying principles of
organisation's operations. example and interactive question. this costing system.
Stop and think Read quickly through section 1.5 and In the examination, students may be required
then give section 1.6 extra attention. to:
Why will the costing method used by a
company that builds motorway bridges Students often find the calculation of  calculate the full cost of a cost unit using
be different from the costing method under and over absorption difficult so absorption costing
used by a company that manufactures spend the time necessary to gain a  demonstrate an understanding of the
canned soup? What aspects of their good understanding of this topic. basic principles of activity based costing
operations mean that a different Read section 2 quickly and ensure that  identify the most appropriate costing
costing method will be required? you know the difference between activity method in specific circumstances
based costing (ABC) and traditional
 demonstrate an understanding of the
absorption costing. Learn what is meant
general principles of target costing, life
by a cost driver and a cost pool. Skim
cycle costing and just in time
through the worked example to
reinforce your understanding of the It is essential to appreciate the difference
difference between the two methods between the allocation and apportionment of
and the overhead costs that might be overheads, which links back to the ideas
derived from each. about direct and indirect cost covered earlier.

Study Due
Read quickly through section 3 and A common difficulty is failing to allow for
make notes about the different costing under/over absorption when predetermined
methods and when each is most overhead rates are used.
appropriate. Try interactive question 9
to ensure you have understood the
chapter are: 1c, d.
principles covered.
Read quickly through section 4, paying
particular attention to the diagrams
which are a good way of fixing the
principles in your mind.
Lastly, study the summary carefully to
ensure you have absorbed all the
material in this important chapter. Then
try all the self-test questions.

Study Due
4 Marginal costing and absorption If a company's Skim through section 1 of Chapter 4 The calculation of the different profits
costing management accounting but spend some time thinking about reported under marginal costing and
We have seen in Chapter 1 that costs system is prepared on a the conclusions in section 1.3 and absorption costing is likely to be a popular
may be classified as product costs or marginal costing basis you ensure you have absorbed the points examination topic. You are also likely to be
period costs. Product costs are costs may need to check that made. Learn the quick calculation asked to reconcile the difference between the
identified with goods produced or the management method described in this section (for profits reported under the two systems.
purchased for resale. Such costs are accounting profit is MCQs only). Use the worked example
In the examination, students may be required
initially identified as part of the value of correctly reconciled to the in section 2 to reinforce your learning
to:
inventory and only become expenses financial accounting profit. from Chapter 3 and to compare the two
when the inventory is sold. The latter will always be costing systems. You need to be able to  calculate the profit reported under
prepared on an calculate absorption costing and marginal costing and under absorption
In contrast, period costs are costs that
absorption costing basis. marginal costing profits side by side. costing using the same basic set of data
are deducted as expenses during a
This is shown in interactive question 4.
particular period without ever being  reconcile the difference between the
included in the value of inventory held. Work through all the examples, learn profits reported under the two systems
In Chapter 3 we saw that with the advantages of each system and
 derive the marginal costing profit from
absorption costing, fixed production lastly try all the self-test questions.
data provided that is prepared using
overheads are treated as product costs absorption costing, and vice versa
and are absorbed into the cost of units
of output that go into inventory. Examiner's comments
In contrast, marginal costing treats all Most students are comfortable with marginal
fixed costs as period costs and deducts costing but have difficulty with absorption
them from sales value as expenses costing, particularly the under or over
during a particular period. Only absorption of overheads. Narrative questions
variable production costs are treated as as well as numerical questions are important
product costs and included in inventory in this area of the syllabus.
valuations. The specific syllabus reference for this
Each costing system, because of the chapter is: 1c.
different inventory valuations used,
produces a different profit figure. This
clearly has practical implications for
management decision making and
control. Each method of costing has its
own supporters and can be useful in
different situations.

Study Due
Stop and think

In which types of situation might it be
more useful for managers to focus on
the variable unit costs rather than on
the full cost per unit that includes
absorbed fixed production overheads?

Study Due
5 Pricing calculations You might come across Read quickly through sections 1 and 2 Pricing decisions could feature as a narrative
The price charged by an organisation the need to audit the of Chapter 5 and learn the advantages question or as a calculation question. The
for the sale of its product or services to determination of sales and disadvantages of full cost-plus and sample paper for this syllabus featured one
external customers will be one of the prices where the marginal cost-plus pricing. calculation question and one narrative
major influences on the organisation's agreement between the question about pricing as well as a calculation
Section 3 looks deceptively
profits. If the price is too low it might buyer and the supplier question about transfer pricing.
straightforward but you should devote
fail to cover all of the organisation's allows prices to be based The need for an understanding of profit
a sufficient amount of time to
costs. If it is too high then it might deter on the actual costs margins also underpinned a number of other
understanding the difference between
customers so that potentially profitable incurred. In this case the questions on the sample paper.
mark up and margin. Many students get
sales are forgone. buyer is likely to require
the principle wrong in the exam so The content of this chapter is deceptively
assurance that costs are
Clearly the determination of a selling ensure that you try interactive question straight forward. A thorough knowledge of
adequately recorded and
price is a very important management 2. this, and earlier topics such as fixed and
controlled.
decision. variable costs, is required to answer questions
Learn the aims of a transfer pricing
The other aspect of pricing we will system and work through all the in this area.
consider in this chapter is the pricing of material about the behavioural impact In the examination, students may be required
products or services provided within of transfer prices. to:
the organisation, for example the  calculate a selling price using full cost-plus
Lastly try all the self-test questions.
pricing of the transfer of goods from pricing
one department to another or from one  calculate a selling price using marginal
subsidiary to another. This is called cost-plus pricing
transfer pricing and involves a
 demonstrate an understanding of the
consideration of the behavioural
difference between mark-up and margin
aspects as well as the numerical
and of the relationship between them
aspects of pricing.
 derive the mark up percentage that will
Stop and think achieve a desired return on the investment
In what ways would the price charged in a product
for transfers of goods or services  calculate a transfer price that will achieve
between divisions affect the willingness profit maximisation and encourage an
of the supplying division to make the alignment of the goals of groups or
transfer and of the buying division to individuals with the goals of the
accept the transfer? organisation as a whole
chapter are: 1e, f.

Study Due
6 Budgeting You will come across Read sections 1 and 2 of Chapter 6 to Numerical questions will be limited in scope
Individual managers within a company budgets throughout your put budgeting into context in your (eg, individual budgets). Narrative questions
have responsibility for providing a working life. Even if you mind. Study the order of budget need to be read very carefully, particularly
service or product within the company are not a budget holder, preparation and work carefully through those that ask whether statements are true or
or to the company's customers. For responsible for planning the worked example in section 3.3. false.
example, the manager of the accounts and controlling costs and Spend some time thinking about the
receivable (AR) department must In the examination, students may be required
revenues, you are likely to link between budgeting and standard
ensure that the staff and other to:
work for somebody who is costing because this is an important
necessary resources are in place to a budget holder. You issue. In section 4 think about how all  demonstrate an understanding of the:
administer the expected number of might be asked your the functional budgets provide the
customer accounts and to provide the – objectives of a budgetary planning and
opinion about the basic data for the master budget. The
required credit control services and so control system
estimated expenditure for high-low method in section 5 is a very
on. the forthcoming period, or important technique that you must – difference between a budget and a
The AR manager will need to be able to perhaps you will be asked practice several times. It could arise in forecast
incur costs within the department to help to investigate the the context of various types of question,
– administrative process of budget
without seeking separate authorisation reason for an overspend not just those on budgeting. Ensure
preparation
for each item of expenditure. For against the budget for that you understand all the measures of
example, it may be necessary to send a your department. correlation and how to interpret them.  prepare functional budgets and the
member of the credit control staff on a Big data and data analytics can be used income statement and balance sheet
training course. If the manager has to in budgeting and forecasting. Ensure elements of a master budget from data
contact the accounts department first you know the benefits and problems of supplied
to check that the money is available big data. Read section 6 carefully and
then time will be wasted by the  calculate the effect on budget outcomes
commit to memory the advantages and
manager and by the accounts of changes in specified variables
disadvantages of the different
department. approaches to budgeting.  demonstrate an understanding of a range
To avoid this situation the AR manager of budgeting approaches and methods
Lastly try all the self-test questions,
may be provided with a budget, which
reading all the narrative questions The specific syllabus references for this
is a plan for the forthcoming period
and details the authorised level of particularly carefully. chapter are: 2a, b, c, d.
expenditure that may be incurred on
each type of cost during the period.
Thus a budget acts as a plan and as an
authorisation to allow a manager, such
as the AR manager, to incur
expenditure.

Study Due
Another main role of a budget is as a

control tool. The actual expenditure
can be compared with the budgeted
expenditure for each period and
variances highlighted. Monitoring
these variances means that control
action can be taken if necessary to
correct such deviations from the
budget.
Budgets have other roles in addition to
authorisation and control, which we will
also investigate in this chapter.
Stop and think
Is the budgetary planning and control
process concerned only with numbers?
Why are effective budget systems
designed with full consideration of
their behavioural impact? For example,
suppose you were planning the
budgeted expenditure for the next
period for the department in which you
work. Would you prepare a completely
objective plan without any bias, or
would you be influenced by the desire
to ensure you do not overspend your
budget or by a feeling of self-
importance if your authorised budget is
larger than those of your colleagues? A
budgetary planning and control system
is about managing people as well as
managing numbers.

Study Due
7 Working capital In this chapter you will In Chapter 7 we look at how a business You could be asked to prepare a full cash
It is in the context of working capital learn how to monitor the manages its working capital (inventory, budget in the exam in a scenario-based
management, and especially cash cash operating cycle. You payables and receivables, and cash). question. Alternatively, you could be asked to
management, that the finance function will also see how high prepare an extract from information provided.
First, read through sections 1 and 2 at
has the most direct impact on the levels of receivables and For example, you may be asked to calculate
least twice, making sure you
success of the business. Cash is king; inventory, for example, the budgeted receipts from customers or the
understand the issues that affect how a
no business can afford to run out of can create a long cash budgeted payments made to suppliers,
business balances the need to make a
cash, and nor can it afford not to operating cycle and cause taking account of the budgeted activity and
profit against the imperative that it
achieve a reasonable return on cash. liquidity problems. planned credit periods.
should never run out of cash. Then read
The cash budget is one of the most In a working context this section 3 on using ratios to help In the examination, students may be required
important planning tools available to should help you to manage working capital very carefully, to:
an organisation. It shows the cash appreciate the cash flow working through the examples and
effect of all decisions taken in the  use data supplied to prepare cash
effect of a delay in completing the interactive question.
budgetary planning process. For budgets or extracts from cash budgets
collecting payment from a
example, a manager might have After reading through section 4 and
client because of slow  select appropriate actions to be taken in
budgeted to increase inventories or to completing the interactive question,
invoicing procedures or the light of information provided by a cash
grant additional credit to customers. you should then work slowly and
poor credit control budget
methodically through each of sections
Both of these planning decisions will operations, or the cash
5 to 8. Make sure that you learn as  calculate and interpret the cash cycle for a
have a negative impact on the flow effect of excessive
many of the practical management business
company's cash flow, which must be inventories of stationery
techniques available for working capital
planned for. Hence the preparation of and other items.  assess the liquidity of a business using
management as possible. Work
the cash budget can lead budget current and quick ratios
through each example very carefully.
managers to modify their budgets if it
Questions on working capital and treasury
shows that there are insufficient cash Section 9 is important because you
management could easily appear in the exam.
resources to finance the planned need to be able to prepare a cash
They are likely to be set in an application
operations. budget. Make sure you work through
context. Knowledge-type questions are also
Liquidity is vital to the survival of any the interactive questions in the section
likely, set on particular principles or
business. Even a highly profitable before trying the self-test questions at
definitions.
business might face liquidity problems the end of the chapter.
from time to time. An effective The specific syllabus references for this
manager must be equipped with the chapter are: 2e, f, g, h.
tools to monitor the liquidity position.
Important measures that can be used in
this context will be covered in this
chapter.

Study Due
Stop and think

What do we mean by working capital?
What should our objectives be in
managing cash, inventory, receivables
and payables? For what reasons might
an organisation's budgeted income
statement reveal a substantial increase
in profit compared to the latest year
while at the same time the cash budget
forewarns of a significant budgeted
cash outflow during the year?

Study Due
8 Performance management Throughout your career Read carefully through section 1 of It is important to appreciate that both
The basis of a performance your performance will be Chapter 8, paying particular attention numerical and written questions will be set on
management system is the setting of assessed by your to the behavioural impact of performance measures and a thorough
appropriate targets for managers to superiors and you will at performance measurement. In section 2 understanding of flexed budgets is required
achieve and then the monitoring of the times be responsible for learn the advantages and as a basis for variance analysis in the next
actual results for comparison with the assessing the performance disadvantages of decentralisation and chapter.
targets. This monitoring and of your staff and of the features of the four types of In the examination, students may be required
comparison of the actual results businesses as a whole. A responsibility centre. Focus particularly to:
establishes a control mechanism which sound understanding of on the controllability principle. Shared
enables managers to confirm that all the features of effective service centres can lead to an  identify the most appropriate performance
parts of the organisation are continuing performance improvement in the quality of the measure in a given situation
to work towards the achievement of the management systems will service provided and standard  demonstrate an understanding of the
overall objectives. be an invaluable tool in approaches can lead to consistent effect of management actions on specific
this respect. Particularly if management of business data and performance measures
The targets must be set in such a way
you work in audit, you may improved management information.
that managers are motivated to take  demonstrate an understanding of the
also be called upon to Make sure you know the risks and
actions that will contribute to the purpose and operation of a responsibility
assess the adequacy of an benefits of cloud accounting. Learn the
achievement of the organisation's accounting system
organisation's internal formula for ROI in section 3 and work
objectives. In this chapter we will see  interpret the information provided by
control system and to carefully through the interactive
that a number of criteria must be met in specific performance measures
understand how the questions and worked examples. Read
order to establish an appropriate set of
performance measures quickly through section 4 and then use  calculate the flexed cost budget for a
performance measures.
selected by the interactive question 3 to ensure you given level of activity
Effective management accounting organisation's have understood the main principles.
 interpret the information provided by a
reporting and control mechanisms will management support and Section 5 contains some very important
flexed budget comparison
enable convergence between the supplement the general information. Read it carefully and
management accounting system and systems of control in the practice all the examples. You will need The specific syllabus references for this
the system for producing financial business. a thorough understanding of flexible chapter are: 3a, b, d, e.
accounting reports. budgets when you move on to Chapter
9.
Stop and think
Work carefully through all of the self-
Can you think of situations where a
test questions.
performance measure might motivate a
manager to act in a dysfunctional way,
which is not in the best interests of the
organisation?

Study Due
9 Standard costing and variance analysis You will come across Read quickly through section 1 of The calculation and analysis of variances
standard costs in service Chapter 9 to place standard costing in lends itself well to numerical exam questions.
We have seen how the use of a system
organisations as well as in context. Section 2 is very practical and However you are also likely to be presented
of flexible budgets enables managers
manufacturing contains a lot of important information. with narrative questions, perhaps testing your
to exercise control over revenues and
organisations. We have You need to be able to calculate all of understanding of the meaning of calculated
expenditures through the comparison
seen above the example the variances quickly and accurately so variances.
of the actual results with a realistic
of standard costs being do not be tempted to skim the
budget cost allowance for the actual The examiner is also likely to ask you to 'work
used to plan and control workings. Try calculating each variance
level of activity achieved. backwards' from variance information to
the cost of an audit. before working through the solution
derive extracts from the actual results or the
However the absolute variances Standard revenues might provided. Learn the calculation of the
original standards. This requires a thorough
derived from this comparison do not also be used, for example sales variances in section 3 and try
understanding of the methods of variance
help the manager to identify the in terms of a standard interactive question 1. This will enable
calculation and of the meaning of the results
reasons for each variance. For example, charge-out rate per hour you to check that you can calculate all
of the calculations.
if the actual cost of direct materials is of a consultant's time. of the variances and give you practice
greater than the budget cost at preparing an operating statement. In the examination, students may be required
allowance, is this difference caused by Go carefully through the worked to:
the quantity of material used being too example reconciling budgeted profit to
 calculate and interpret variances for
high or by the price paid for materials actual profit. Study the table in section
variable costs
being too high? 4 to get an idea of the range of possible
causes of a variance. Work carefully  calculate and interpret contribution-based
In a standard costing system, standard
through the example in section 4.3 variances for sales
costs are determined for each cost unit
because questions that work backwards
in terms of the price and quantity of  derive actual cost and standard cost data
from variance information to derive the
each resource to be consumed. For from calculated variances
actual results are a common way of
example, the standard material cost
testing variance analysis in an exam.  demonstrate an understanding of the
per unit is established in terms of the
meaning and use of standard cost
price of material and the quantity of Finally, try all of the self-test questions, operating statements
material to be used to produce each make a note of any questions that you
unit. This enables the total variance for get wrong and try them again after a Traditionally students find variances a difficult
material cost, obtained from the day or two. area. They can be approached in a tabular
flexible budget comparison, to be manner or using formulae – find the one that
further analysed for improved cost suits you best. Understanding the meaning
control. can help with understanding and
remembering the calculations.

Study Due
Clearly a standard costing system will The specific syllabus reference for this
be useful for cost control in a chapter is: 3c.
manufacturing environment. However,
standard costs and variance analysis
can also be used in a service
organisation. For example the
expected number of hours to carry out
an audit for a client, together with the
expected labour rate per hour, can be
determined in advance. This will
represent a standard cost which can
then be compared with the actual cost
of the audit. The detail in the
predetermined standard cost means
that any difference or variance between
the standard cost and the actual cost of
the audit can be analysed. This would
enable managers to establish how
much of the variance is caused by a
difference in the labour rate per hour
and how much is caused by a
difference in the number of hours
worked.
Stop and think
The example described, of the analysis
of labour cost variances arising on a
client's audit, is carried out after the
event. Since it is not possible to go
back now and take action to correct the
variances, what is the point of carrying
out the analysis at all?

Study Due
10 Breakeven analysis and limiting factor If you are managing a Chapter 10 is another practical chapter Examination questions about breakeven
analysis team of auditors you which requires active participation from analysis and limiting factor analysis can be
We have seen how an understanding of might at times have more you. In section 1 learn the formulae for quite complicated but there are strict decision
cost behaviour patterns enables work available than your calculating the breakeven point, the rules which can be applied in every question
managers to control costs more staff can deal with. In this contribution ratio and the margin of of this type. For example, unless otherwise
effectively through the use of a flexible situation you will need to safety. Work through all the examples stated, the absolute amount of expenditure
budgeting system. know how to allocate the carefully, trying to produce your own on fixed costs and the variable cost per unit
restricted staff time in answer before looking at the solution. remain the same for every level of activity.
This valuable understanding of cost
order to earn the Study the labels on the breakeven
behaviour patterns also assists Questions on this area of the syllabus will
maximum profit. charts in section 2 and make sure that
managers in their decision making usually involve some calculations.
Furthermore you will need you know how to read information from
activities. Equipped with an
to know how to decide the chart. In section 3 learn the series of In the examination, students may be required
understanding of which costs will
whether or not to steps required to maximise contribution to:
change as a result of their decisions
outsource work, which in a limiting factor situation. Section 3.4
(usually the variable costs) managers  calculate the breakeven point, margin of
tasks should be is particularly important because a
can manipulate data to calculate safety and contribution ratio for a product
outsourced and which make or buy decision with scarce
important measures such as the level of or service
should be kept in-house. resources often causes difficulty for
activity required to achieve a target
students. A definite decision rule is  calculate the volume of sales or level of
profit or to break even, earning neither
stated before the worked example. activity required to achieve a target profit
a profit nor a loss. This is called the
Memorise the decision rule and then for the period
'breakeven point'.
apply it to the data in the example
 calculate the effect on profit, breakeven
An understanding of the contribution before you look at the solution.
point, etc, of changes in the major
earned by different products and
Lastly try all of the self-test questions. decision variables
services will also help managers to
determine how best to allocate a  identify the optimum production plan or
restricted resource in order to similar when a resource is in limited
maximise contribution. supply, and when:
Stop and think – there is a maximum and/or minimum

limit on the demand for individual
Within the relevant range of activity, products or services; and/or
why will the maximisation of
contribution automatically lead to the – it is possible to alleviate the resource
maximisation of profits? restriction by subcontracting work to
parties outside the business

Study Due
This area involves students following a logical

series of steps (or rules) which must be
learned. The most difficult type of question in
this area normally involves consideration of
the possibility of subcontracting or
outsourcing work.
chapter are: 4a, b.

Study Due
11 Investment appraisal techniques You might become Read quickly through section 1 of Since most of this part of your syllabus is
Capital expenditure differs from day-to- involved in the investment Chapter 11 and then read section 2 concerned with calculation techniques you
day revenue expenditure for two appraisal process, for about the payback period. Calculation can expect to encounter predominately
reasons: example in the context of of the payback period should not cause numerical questions about these topics.
the purchase of new office you too many problems but make sure In the examination, students may be required
 Capital expenditure often involves a equipment or the that you know the advantages and to:
larger outlay of cash. development of software disadvantages of this appraisal method.
for internal use. An In section 3 learn both formulae for  calculate the net present value, internal
 The benefits from capital
understanding of the calculating the ARR, practice their rate of return, payback period or
expenditure are likely to accrue
significance of the timing application in the worked example and accounting rate of return from data
over a long period of time, usually
of forecast cash flows will study the method's advantages and supplied
well over a year and often over very
long time periods. In such be important if you are disadvantages. Section 4 is very  interpret information about the net
circumstances the benefits cannot asked to contribute important and explains a number of present value, internal rate of return,
all be set against costs in the current information for the techniques and their advantages and payback or accounting rate of return for a
year's income statement. investment appraisal disadvantages. It is crucial that you project or projects
process. work carefully through all the examples  demonstrate an understanding of the
For these reasons any proposed capital
and narrative information in this section. advantages and disadvantages of the
expenditure should be properly
Study all of the graphs in section 5 and investment appraisal techniques specified
appraised, and found to be worthwhile,
learn the formula for calculating the IRR. above
before the decision is taken to go
In section 5.6 use the interactive
ahead with the expenditure. Formal  manipulate simple data involving
question to practice sketching NPV
procedures should therefore be in annuities, perpetuities and non-
profiles. This is a useful technique which
place for the appraisal and monitoring conventional cash flows
might come in handy in the exam.
of investment projects before they are  demonstrate an understanding of the
Although you would not be required to
undertaken, while they are in progress, derivation and meaning of the net terminal
produce a sketch you might need to be
and after they have been completed. value of a project
able to do so for your own workings in
In this syllabus you will focus on the order to select the correct option in a While most of the questions in this area of the
appraisal process that takes place multiple choice question. syllabus will be numerical (where such issues
before investment projects are as the timing of cash flows will be critical) it is
Finally work carefully through all of the
undertaken. You will be learning about vital to understand what each of the
self-test questions.
the key measures that are used in techniques involves (and their weaknesses) in
practice to assess the acceptability of a order to be able to tackle narrative questions.
proposed capital project.
chapter are: 4c, d.

Study Due
Stop and think

The most important investment
appraisal techniques are concerned
not only with what cash flows will arise
in the future as a result of the project,
but also with the timing of those cash
flows. For what reasons might earlier,
perhaps smaller, forecast cash inflows
be preferred than later, perhaps larger,
cash inflows?

3 Syllabus and learning outcomes
Covered
in chapter
1 Costing and pricing
Students will be able to establish the costs associated with the production of
products and provision of services and use them to determine prices.
In the assessment, students may be required to:
(a) Recognise the use of cost information for different purposes; 1
(b) Classify costs as fixed, variable, direct or indirect; 1, 2
(c) Calculate unit costs and profits/losses from information provided, using: 2, 3, 4
 marginal costing
 absorption costing
and reconcile the differences between the costs and profits/losses obtained;
(d) Select the most appropriate method of costing for a given product or 3
service;
(e) Calculate the sales price for a given product or service using cost based 5
pricing; and
(f) Calculate transfer prices for specified sales to internal customers which take 5
account of appropriate costs.
2 Budgeting and forecasting

Students will be able to select appropriate budgeting approaches and methods
and prepare budgets.
(a) Apply forecasting techniques to assist management in performance 6
measurement and planning;
(b) Identify how data analytics can be used in budgeting and forecasting; 6
(c) Prepare budgets, or budget extracts, from information supplied; 6
(d) Select the most appropriate of the following budgeting approaches and 6
methods, taking into account their advantages and disadvantages for
planning, control and motivation:
 bottom-up and top-down approaches to generating and managing
budgets
 activity-based, responsibility-based and product-based budget
structures
 zero-based and incremental budgeting;
(e) Prepare and/or comment upon a cash budget for a business which highlights 7
the quantity and timing of cash surpluses and deficits;
(f) Calculate the cash cycle for a business and recognise its significance; 7
(g) Identify the constituent elements of working capital and treasury and specify 7
the methods by which each element can be managed to optimise working
capital and cash flows; and
(h) Recognise how a business manages surpluses and deficits predicted in cash 7
budgets.

Covered
in chapter
3 Performance management and management information

operations
Students will be able to identify key features of effective performance
management systems, select appropriate performance measures and calculate
differences between actual performance and standards or budgets, and identify
the key features, risks and benefits of a range of approaches to management
information operations.
(a) Identify the reasons for and key features of effective performance 8
management systems;
(b) Select appropriate financial and non-financial performance measures which 8
effectively encourage the business as a whole to meet its objectives;
(c) Calculate differences between actual performance and standards or 9
budgets in terms of price and volume effects and identify possible reasons
for those differences;
(d) Identify the features of cloud accounting and their associated risks and 8
benefits; and
(e) Identify the features of shared service centres and their relative merits for the 8
provision of management information
4 Management decision making

Students will be able to identify and calculate relevant data for use in
management decision making.
(a) Calculate the breakeven point, contribution and margin of safety for a given 10
product or service;
(b) Allocate scarce resource to those products or services with the highest 10
contribution per limiting factor;
(c) Calculate the net present value, internal rate of return, payback period or 11
accounting rate of return for a given project; and
(d) Identify and comment upon the advantages and disadvantages of the 11
investment appraisal techniques specified in 4(c) above.
5 Ethics
(a) Identify and explain ethical issues relating to the preparation, presentation 1
and interpretation of financial information for the management of a business.

4 Technical knowledge grid
The tables contained in this section show the technical knowledge in the disciplines of financial
reporting, audit and assurance, business analysis, ethics and taxation covered in the ACA
syllabus by module.
For each individual standard the level of knowledge required in the relevant Certificate and
Professional Level module and at the Advanced Level is shown.
The knowledge levels are defined as follows:
Level D
An awareness of the scope of the standard.
Level C
A general knowledge with a basic understanding of the subject matter and training in its
application sufficient to identify significant issues and evaluate their potential implications or
impact.
Level B
A working knowledge with a broad understanding of the subject matter and a level of
experience in the application thereof sufficient to apply the subject matter in straightforward
circumstances.
Level A
A thorough knowledge with a solid understanding of the subject matter and experience in the
application thereof sufficient to exercise reasonable professional judgement in the application
of the subject matter in those circumstances generally encountered by Chartered Accountants.
Key to other symbols:
 The knowledge level reached is assumed to be continued

Ethics Codes and Standards
Ethics Codes and Standards Level Modules
Certificate Level
C/D Accounting
B Assurance
C/D Business Technology and Finance
D Law
C Management Information
C Principles of Taxation
IESBA Code of Ethics for Professional Professional Level
Accountants (parts A, B and C and Definitions) A Audit and Assurance
B Business Strategy and Technology
ICAEW Code of Ethics B Financial Accounting and Reporting
B/C Financial Management
B Tax Compliance
B Business Planning
Advanced Level
A Corporate Reporting
A Strategic Business Management
A Case Study
FRC Revised Ethical Standard (2016) B Assurance

A Audit and Assurance
Advanced Level
A Corporate Reporting
A Strategic Business Management
A Case Study

Business Analysis
Certificate and Professional Levels
Business Strategy
Technology and
and Technology
Advanced Level
Management
Management
Topic
Information
Business,
Financial
Finance
STRATEGIC ANALYSIS
Environmental and market analysis tools
PESTEL analysis C A 
Porter's five forces C A 
Product life cycle C A 
Boston consulting group matrix C A 
Prices and markets C A 
Competitor analysis C A 
Positional and other analysis tools

Resource audit C A 
Resource-based strategy C A 
Value chain analysis C A 
SWOT analysis C A 
Gap analysis C A 
Marketing analysis C A 
Competitive advantage C A 
Benchmarking C A 
Directional policy matrix B

Business process analysis B A
Strategic risk analysis A 
Balanced scorecard C A 
STRATEGIC CHOICE
Strategy formulation, evaluation and choice C A 
Business risk management C A 
Financial analysis and data analysis A 
Stakeholder analysis C A 
Objectives and stakeholders' preferences C A 
Corporate responsibility and sustainability C B A

Business Strategy
Technology and
and Technology
Advanced Level
Management
Management
Topic
Information
Business,
Financial
Finance
STRATEGIC IMPLEMENTATION
Business plans C A 
Organisational structure C A 
Information management C B A
Change management A 
Project management A
BUSINESS MANAGEMENT
Performance management C A
Strategic marketing and brand management B A
Corporate Governance C B A
Information strategy B A
Human resource management C A
COST ANALYSIS FOR DECISION MAKING
Costing
Cost classification A  
Costing systems – direct, marginal, absorption B  
Activity based costing (ABC) C  B

Break even analysis B  A
Multi-product break even analysis B
Budgeting and performance management B  A
Pricing
Pricing decisions B A 
Transfer pricing B A 
Decision making techniques

Expected values B A
Relevant cash flows B A
Sensitivity analysis B A

Business Strategy
Technology and
and Technology
Advanced Level
Management
Management
Topic
Information
Business,
Financial
Finance
BUSINESS AND SHAREHOLDER VALUE
Valuation Techniques
Income – dividend yield B A
Income – P/E B A
Income – discounted cash flow B A
Asset based measures B A
Options approach B
Shareholder value
Value based management (VBM) B
Value drivers B A
Shareholder value analysis (SVA) B A
Short and long term growth rates and terminal A
values
Economic profit A
Cash flow return on investment (CFROI) A
Total shareholder return (TSR) A
Market value added (MVA) A
INVESTMENT APPRAISAL AND RISK ANALYSIS
Project appraisal
NPV B A 
IRR B A 
Payback B A 
Relevant cash flows A 
Tax and inflation A 
Replacement Analysis A 
Capital rationing A 
Adjusted present value (APV) A 
Assessing risk
Project appraisal and sensitivity analysis B A
Project appraisal and simulation B A

Business Strategy
Technology and
and Technology
Advanced Level
Management
Management
Topic
Information
Business,
Financial
Finance
Expected values B A
Scenario planning A
Gap analysis B 
Continuous vs. event risk B 
FINANCIAL ANALYSIS
Cost of capital
Cost of equity B A
Cost of debt B A
Cost of preference shares B A
Cost of bank loans B A
Weighted average cost of capital (WACC) B A
Effective interest rates A
Splitting convertibles into equity and debt A
elements
Equity instruments A
Portfolio theory and CAPM
Portfolio theory B A
CAPM B A
APT and MCPM A
CAPM and cost of capital B A
International cost of capital A
Bonds and fixed interest securities
Bond pricing using NPV A
Yields to maturity A
Duration and price volatility A
Convexity A
Term structure of interest rates A
Corporate borrowing and default risk A

Business Strategy
Technology and
and Technology
Advanced Level
Management
Management
Topic
Information
Business,
Financial
Finance
SOURCES OF FINANCE AND FINANCING
ARRANGEMENTS
Short, medium and long term sources of finance C A
Loan agreement conditions (warranties; B A
covenants; guarantees)
Raising capital C A
Gearing and capital structure A 
Loan agreements and covenants A 
Dividend policy A 
Financing reconstructions (eg: group B A

reconstruction, spin off, purchase of own shares,
use of distributable profits)
Treasury and working capital management C A
Small and medium company financing B
History of finance C
FINANCIAL ENGINEERING
Futures, options and swaps
Options B A
Interest rate futures B A
Interest rate options B A
Interest forward rate agreements (FRAs) B A
Interest rate swaps B A
Foreign exchange
Currency forward contracts B A
Currency money market cover B A
Currency options B A
Currency swaps B A
Operational techniques for managing currency B A
risk
Theoretical determinants of foreign exchange B A
rates

Business Strategy
Technology and
and Technology
Advanced Level
Management
Management
Topic
Information
Business,
Financial
Finance
Option value
Value of a call and put option C B
Black Scholes option pricing model B
Binomial Option Pricing Model B
Real options C B

5 Glossary of terms
Absorption costing The direct (or prime) cost of an item plus a fair share of the indirect
(overhead) costs. Also called full costing.
Accounting rate of A measure of the expected average annual accounting profits from an
return investment expressed as a percentage of the value of that investment.
Either the initial or average value of the investment can be used. Also
called return on investment (ROI) or return on capital employed (ROCE).
Activity based An approach to budgeting which uses cost drivers as a basis for
budgeting (ABB) preparing budgets.
Activity based costing An alternative to traditional absorption costing where overheads are
(ABC) related to output using multiple cost drivers (activities which cause the
overheads).
Allocation The process by which overheads are charged directly to cost centres.
Annuity A constant annual cash flow, for a number of years.
Apportionment A procedure where indirect (overhead) costs are spread fairly between
cost centres.
Avoidable costs Costs which would not be incurred if the activity to which they relate did
not exist.
Balanced scorecard An approach to the provision of information to management to help
approach strategic policy formulation and achievement. It emphasises the need to
provide the user with a set of information which addresses all relevant
areas of performance in an objective and unbiased fashion. The
information provided may include both financial and non-financial
elements, and cover areas such as profitability, customer satisfaction,
internal efficiency and learning and growth.
Batch costing A costing method applied where a group (batch) of identical items is
treated as a cost unit. The cost per item = total batch cost ÷ number of
items in the batch.
Big data Very large volumes of data too big for usual software to manage.
Blanket absorption An absorption rate used throughout a factory for all products
rate irrespective of the department in which they were produced.
Bottom-up budgeting See participative budgeting.
Breakeven analysis See cost-volume-profit analysis.
Breakeven point Number of units sold at which neither a profit nor a loss is made.
Budget A quantitative statement, for a defined period of time, which may
include planned revenues, expenses, assets, liabilities and cash flows.
Budget manual A collection of instructions governing the responsibilities of persons
and the procedures, forms and records relating to the preparation and
use of budgetary data.
Budget slack Deliberately underestimating revenues or overestimating costs in order
to ensure that achieving the budget is easy.
Capital expenditure Expenditure which results in the acquisition of long-term assets or an
improvement in their earning capacity.

Cash budget A statement in which estimated future cash receipts and payments are
tabulated in such a way as to show the forecast cash balance of a
business at defined intervals.
Cash operating cycle The period of time which elapses between the point at which cash
begins to be spent on the production of a product and the collection of
cash from the customer who purchases it.
Cloud accounting An application of cloud computing where accountancy software is
provided in the cloud by a service provider.
Cloud computing Using a network of remote servers rather than a local server.
Coefficient of Measures the degree to which one variable is related to another.
correlation r
2
Coefficient of The square of the correlation coefficient, r . This measures the amount
2
determination r of the total variation in the value of one variable that can be explained
by variations in the value of the other variable.
Contract costing A form of specific order costing where costs are attributed to contracts.
Contribution The difference between the selling price and all of the variable costs of
a product.
Controllable costs Items of expenditure which can be directly influenced by a given
manager within a given time span.
Cost behaviour The way in which costs are affected by changes in the level of activity
where 'activity' can be volume of output, number of production runs
etc.
Cost centre Any part of an organisation which incurs costs.
Cost driver Something which causes costs to change eg, volume of output, number
of production runs etc.
Cost object Something (eg, product, service, activity) in relation to which costs are
determined.
Cost plus pricing A desired profit mark-up is added to total costs to arrive at the selling
price.
Cost pool A grouping of costs relating to a particular activity in an activity-based
costing system.
Cost unit A unit of product or service in relation to which costs are ascertained.
Cost-volume-profit An analysis of costs, volume and profit at various levels of activity. Also
(CVP) analysis known as breakeven analysis.
Cumulative weighted An inventory valuation method that calculates a weighted average cost
average pricing from both opening inventory and units introduced in the current period.
The average is calculated whenever a new delivery occurs.
Current ratio Current assets ÷ current liabilities.
Curvilinear correlation A relationship between variables which appears as a curve when drawn
on a graph.
Data analytics The process of collecting, organising and analysing large sets of data to
discover patterns and other information which an organisation can use
for its future business decisions
Data mining The process of sorting through data to identify patterns and
relationships between different items.

Decentralisation When managers of divisions have freedom to make certain decisions
relating to their division (as opposed to decisions being made centrally
by a head office).
Development costs The costs incurred between the decision to produce a new or improved
product and the commencement of full manufacture of the product.
Differential cost The difference in total cost between alternatives.
Direct cost A cost that can be traced in full to the product, service, or department
that is incurring the cost.
Direct labour cost The specific costs of the workforce used to make a product or provide a
service. Direct labour costs are established by measuring the time taken
for a job, or the time taken in 'direct production work'.
Direct labour The difference between the hours that should have been worked for the
efficiency variance number of units actually produced, and the actual number of hours
worked, valued at the standard labour rate per hour.
Direct labour rate The difference between the standard cost and the actual cost for the
variance actual number of hours paid for.
Direct labour total The difference between what the output actually cost and what it should
variance have cost, in terms of labour.
Direct material costs The costs of materials that are known to have been used in making and
selling a product, or providing a service.
Direct material price The difference between the standard cost and the actual cost for the
variance actual quantity of material used or purchased.
Direct material total The difference between what the output actually cost and what it should
variance have cost, in terms of material used.
Direct material usage The difference between the standard quantity of materials that should
variance have been used for the number of units actually produced, and the
actual quantity of materials used, valued at the standard cost per unit of
material.
Discounted cash flow Converting future sums of money to their present value, which is the
cash equivalent now of those future sums.
Discounted payback How long it will take for a project to pay back the capital outlay on a
method discounted cash flow basis.
Economic order The order quantity which minimises inventory costs. The EOQ can be
quantity (EOQ) calculated using a table, graph or formula.
Extrapolation Predicting costs at activity levels outside the relevant range.
Factoring organisation Takes over the management of the trade debts owed to its client (a
business customer) on the client's behalf. The factor company collects
the debts and provides an immediate cash advance of a proportion of
the money it is due to collect.
FIFO (first in, first out) A method of pricing materials based on the cost of the oldest units held
regardless of the sequence in which the issue of the materials takes
place.
Financing costs Costs incurred to finance a business such as loan interest.
Fixed budget A budget which is set for a single activity level.

Fixed cost A cost which is incurred for a particular period of time and which, within
certain activity levels (the relevant range), is unaffected by changes in
the level of activity.
Fixed overhead The difference between the budgeted fixed overhead expenditure and
expenditure variance actual fixed overhead expenditure.
Flexible budget A budget which, by recognising different cost behaviour patterns, is
designed to change as volume of activity changes.
Full cost-plus pricing A method of determining the sales price by calculating the full
(absorption) cost of the product and adding a percentage mark-up for
profit.
Functional budgets The budgets for the various functions of the business eg, production,
marketing, sales, purchasing budgets.
Goal congruence When individuals' goals and company goals coincide.
Incremental Basing this year's budget on last year's budget with adjustments for
budgeting changes and inflation.
Imposed budget A budget set without allowing the budget holder to participate in the
budgeting process.
Indirect cost or A cost that is incurred in the course of making a product, providing a
overhead service or running a department, but which cannot be traced directly
and in full to the product, service or department.
International States that the cost of all inventories should comprise those costs which
Accounting Standard have been incurred in the normal course of business in bringing the
2 (IAS 2) inventories to their 'present location and condition'.
Internal rate of return The discount rate at which a project has a zero NPV.
(IRR)
Investment centre A section of an organisation whose manager has some say in
investment policy in their area of operations as well as being
responsible for costs and revenues.
Invoice discounting The purchase (by the provider of the discounting service) of a
company's trade debts, at a discount. Invoice discounting enables a
company to raise finance based on their expected invoice receipts. The
invoice discounter does not take over the administration of the client's
sales ledger so the client remains in control of debt collection.
Job costing The costing method used where work is undertaken to customers'
special requirements and each order is of comparatively short duration.
Just-in-time (JIT) A system whose objective is to produce or to procure products or
components as they are required by a customer or for use, rather than
for inventory. A JIT system is a 'pull' system, which responds to demand,
in contrast to a 'push' system, in which inventories act as buffers
between the different elements of the system, such as purchasing,
production and sales.
Just-in-time A system which is driven by demand for finished products whereby
production each component on a production line is produced only when needed
for the next stage.
Just-in-time A system in which material purchases are contracted so that the receipt
purchasing and usage of material coincide to the maximum extent possible.

Life cycle costing A costing method that takes into account the costs and revenues of a
product over its entire life span.
LIFO (last in, first out) A method of pricing materials based on the cost of the newest units
held regardless of the sequence in which the issue of the materials
takes place.
Limiting factor Anything which limits the activity of a company.
Linear regression A technique for estimating the equation of a line of best fit.
analysis
Liquidity How quickly an asset can be converted to cash determines its liquidity.
Cash is the most liquid asset.
Management Provide information specifically for the use of managers within an
accounting systems organisation.
Management by Only paying attention to results that are substantially different from
exception expected.
Management control The process by which managers assure that resources are obtained and
used effectively and efficiently in the accomplishment of the
organisation's objectives
Margin of safety The difference in units between the budgeted sales volume and the
breakeven sales volume. It is sometimes expressed as a percentage of
the budgeted sales volume.
Marginal cost The variable cost of one unit of product or service.
Mutually exclusive If two events are mutually exclusive, it means that they cannot occur at
the same time.
Net present value The sum of the present value of the benefits (revenues or savings) from
an investment, less the present value of expenditures. Uses discounted
cash flows (see above).
Operating statement A regular report for management of actual costs and revenues, usually
showing variances from budget.
Opportunity cost The value of the benefit sacrificed when one course of action is chosen
in preference to an alternative.
Outsourcing The use of external suppliers as a source of finished products,
components or services. This is also known as contract manufacturing or
sub-contracting.
Overhead absorption The process whereby overhead costs allocated and apportioned to
production cost centres (in traditional costing systems) or cost pools (in
activity based costing systems) are added to unit, job or batch costs.
Overhead absorption is sometimes called overhead recovery.
Participative Budgeting style which allows all budget holders to participate in setting
budgeting their own budget.
Payback period The time required for the cash inflows from a capital investment project
to equal the cash outflows.
Period cost A cost relating to a period of time.
Perpetuity A constant annual cash flow that continues forever (a perpetual annuity).
Prime costs The sum of all the direct costs.

Principal budget The budgeted factor which limits the activities of an organisation.
factor
Process costing A form of costing applicable to continuous processes where process
costs are attributed to the number of units produced.
Production costs The costs which are incurred by the sequence of operations beginning
with the supply of raw materials, and ending with the completion of the
product ready for warehousing as a finished goods item.
Profit centre Any section of an organisation, for example, a division of a company,
which earns revenue and incurs costs. The profitability of the section
can therefore be measured.
Quick ratio Current assets less inventories ÷ current liabilities
Residual income (RI) Profit less a notional interest charge for invested capital.
Residual value The disposal value of equipment at the end of its life, or its disposal
cost.
Responsibility A system of accounting that makes revenues and costs the
accounting responsibility of particular managers so that the performance of each
part of the organisation can be monitored and assessed.
Responsibility centre A section of an organisation that is headed by a manager who has direct
responsibility for its performance.
Return on capital Also called Return on investment (ROI). Is calculated as (profit/capital
employed (ROCE) employed)  100% and shows how much profit has been made in
relation to the amount of resources invested.
Revenue centre A section of an organisation which creates revenue but has no
responsibility for production. A sales department is an example.
Revenue expenditure Expenditure which is incurred for the purpose of the trade of the
business or to maintain the existing earning capacity of non-current
assets.
Rolling budget A budget continually updated to add a new budget period as the most
recent one has finished.
Sales price variance A measure of the effect on expected profit of a different selling price to
standard selling price. It is calculated as the difference between what
the sales revenue should have been for the actual quantity sold, and
what it actually was.
Sales volume variance The difference between the actual units sold and the budgeted
(planned) quantity, valued at the standard contribution per unit. In other
words, it measures the increase or decrease in standard contribution as
a result of the sales volume being higher or lower than budgeted
(planned).
Scrap Discarded material having some value.
Selling costs Sometimes known as marketing costs, are the costs of creating demand
for products and securing firm orders from customers.
Semi-variable/mixed A cost which contains both fixed and variable components and so is
cost partly affected by changes in the level of activity.
Sensitivity analysis Assesses how sensitive a budget is to changes in the budget
assumptions.

Step fixed cost A cost that is fixed for a certain range of activity but increases to a new
fixed level once a critical level of activity is reached.
Shared service centre A centre responsible for operational tasks such as accounting, for
(SSC) multiple parts of the same organisation.
Structured data Data that is contained within a field in a data record or file (eg,
databases and spreadsheets).
Target costing A process that begins with the development of a product concept and
approach then determination of the price customers would be willing to pay for
that concept. The desired profit margin is deducted from the price,
leaving a figure that represents total cost. This is the target cost.
Time value of money Recognises that £1 today is worth more than £1 at a future time,
because money can be reinvested today to earn more money over time.
Top down budget See imposed budget.
Total quality A philosophy that means that quality management is the aim of every
management part of the organisation. The aim is to 'get it right first time' which means
that there is a striving for continuous improvement in order to eliminate
faulty work and prevent mistakes.
Transfer price The amount charged by one part of an organisation for the provision of
goods or services to another part of the same organisation.
Unstructured data Data that is not easily contained within structured data fields, such as
pictures, videos, webpages, PDF files, emails or blogs.
Variable cost A cost which varies with the level of activity.
Variable production The difference between the hours that should have been worked and
overhead efficiency those actually worked, evaluated at the standard variable overhead rate
variance per hour.
Variable production The difference between the amount of variable production overhead
overhead expenditure that should have been incurred in the actual hours worked, and the
variance actual amount of variable production overhead incurred.
Variable production The difference between what the output actually cost and what it should
overhead total have cost, in terms of variable overheads.
variance
Variance The difference between a planned, budgeted, or standard cost and the
actual cost incurred.
Working capital Current assets less current liabilities (the value of raw materials, work-in-
progress, finished goods inventories, accounts receivable and cash less
accounts payable and overdraft).
Zero-based budgeting Involves preparing a budget for each cost centre from a zero base.
(ZBB) Every item of expenditure has to be justified in its entirety in order to be
included in the next year's budget.


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The Institute of Chartered Accountants in England and Wales

For exams in 2019

ICAEW 2019 Study Guide 1

2.1 Help yourself study for your ACA exams

Believe in yourself Yes, there is a lot to learn. But thousands have

2 Focus on the exam

3 The right method

4 The right recap

2 Management Information ICAEW 2019

Key study steps Activity

2.3 Detailed study guide

ICAEW 2019 Study Guide 3

4 Management Information ICAEW 2019

The aim of the cost accounting system

ICAEW 2019 Study Guide 5

6 Management Information ICAEW 2019

ICAEW 2019 Study Guide 7

8 Management Information ICAEW 2019

ICAEW 2019 Study Guide 9

Stop and think

10 Management Information ICAEW 2019

ICAEW 2019 Study Guide 11

12 Management Information ICAEW 2019

Another main role of a budget is as a

ICAEW 2019 Study Guide 13

14 Management Information ICAEW 2019

Stop and think

ICAEW 2019 Study Guide 15

16 Management Information ICAEW 2019

ICAEW 2019 Study Guide 17

18 Management Information ICAEW 2019

Stop and think – there is a maximum and/or minimum

ICAEW 2019 Study Guide 19

This area involves students following a logical

20 Management Information ICAEW 2019

ICAEW 2019 Study Guide 21

Stop and think

22 Management Information ICAEW 2019

2 Budgeting and forecasting

ICAEW 2019 Study Guide 23

3 Performance management and management information

4 Management decision making

24 Management Information ICAEW 2019

ICAEW 2019 Study Guide 25

Ethics Codes and Standards Level Modules

FRC Revised Ethical Standard (2016) B Assurance

26 Management Information ICAEW 2019

Porter's five forces C A 

Product life cycle C A 

Boston consulting group matrix C A 

Prices and markets C A 

Positional and other analysis tools

Value chain analysis C A 

Directional policy matrix B

Business risk management C A 

Financial analysis and data analysis A 

Objectives and stakeholders' preferences C A 

Corporate responsibility and sustainability C B A

ICAEW 2019 Study Guide 27

Costing systems – direct, marginal, absorption B  

Activity based costing (ABC) C  B

Decision making techniques

Relevant cash flows B A

28 Management Information ICAEW 2019

Relevant cash flows A 

Tax and inflation A 

Adjusted present value (APV) A 