Management Accounting Decision Management
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| Management Accounting Performance Evaluation | Management Accounting Decision Management | Organisational Management and Information Systems | Integrated Management | Financial Accounting and Tax Principles | Financial Analysis |First examined in May 2005
Syllabus outline
The syllabus comprises:
Topic |
Study weighting | |
|---|---|---|
| A | Financial Information for Short-term Decision Making | 30% |
| B | Financial Information for Long-term Decision Making | 25% |
| C | The Treatment of Uncertainty in Decision Making | 15% |
| D | Cost Planning and Analysis for Competitive Advantage | 30% |
Learning aims
Students should be able to:
- separate costs into their fixed and variable components and use these in break-even analysis and in decision-making under multiple constraints;
- establish relevant cash flows for decision making and apply these principles in a variety of contexts including process/product viability and pricing including evaluation of the tension between short-term, 'contribution based' pricing and long-term, 'return on investment' pricing;
- develop relevant cash flows for long-term projects taking account of inflation and taxation where appropriate, evaluate projects using discounting and traditional methods, critically assess alternative methods of evaluation and place evaluation techniques in the context of the whole process of investment decision making;
- apply learning curves in forecasting future costs and the techniques of activity-based management, target costing and value analysis in managing future costs and evaluate the actual and potential impacts of contemporary techniques such as JIT, TOC and TQM on efficiency, inventory and cost;
- undertake sensitivity analysis and assess the impact of risk in decision models using probability analysis, expected value tables and decision trees as appropriate;
- discuss externally oriented management accounting techniques and apply these techniques to the value chain, 'gain sharing' arrangements and customer/channel profitability analysis.
Assessment strategy
There will be a written examination paper of three hours, with the following sections.
- Section A - 20 marks
A variety of compulsory objective test questions, each worth between two and four marks. Mini-scenarios may be given, to which a group of questions relate. - Section B – 30 marks
Three compulsory medium answer questions, each worth 10 marks. Short scenarios may be given, to which some or all questions relate. - Section C – 50 marks
Two questions, from a choice of three, each worth 25 marks. Short scenarios may be given, to which questions relate.
Learning outcomes and syllabus content
A - Financial Information for Short-term Decision Making – 30%
Learning outcomes
On completion of their studies students should be able to:
- discuss the principles of decision making including the identification of relevant cash flows and their use alongside non-quantifiable factors in making rounded judgements;
- explain the particular issues that arise in pricing decisions and the conflict between ‘marginal cost’ principles and the need for full recovery of all costs incurred;
- apply an approach to pricing based on profit maximisation in imperfect markets and evaluate the financial consequences of alternative pricing strategies;
- explain the possible conflicts between cost accounting for profit reporting and stock valuation and the convenient availability of information for decision-making;
- explain why joint costs must be allocated to final products for financial reporting purposes, but why this is unhelpful when decisions concerning process and product viability have to be taken;
- discuss the usefulness of dividing costs into variable and fixed components in the context of short-term decision making;
- apply variable/fixed cost analysis in multiple product contexts to break-even analysis and product mix decision making, including circumstances where there are multiple constraints and linear programming methods are needed to reach 'optimal' solutions;
- discuss the meaning of 'optimal' solutions and show how linear programming methods can be employed for profit maximising, revenue maximising and satisfying objectives.
Syllabus content
- Relevant cash flows and their use in short-term decisions, typically concerning acceptance/rejection of contracts, pricing and cost/benefit comparisons.
- The importance of strategic, intangible and non-financial judgements in decision-making.
- Pricing decisions for profit maximising in imperfect markets. (Note: tabular methods of solution are acceptable).
- Pricing strategies and the financial consequences of market skimming, premium pricing, penetration pricing, loss leaders, product bundling/optional extras and product differentiation to appeal to different market segments.
- The allocation of joint costs and decisions concerning process and product viability based on relevant costs and revenues.
- Multi-product break-even analysis, including break-even and profit/volume charts, contribution/sales ratio, margin of safety etc.
- Simple product mix analysis in situations where there are limitations on product/service demand and one other production constraint.
- Linear programming for more complex situations involving multiple constraints. Solution by graphical methods of two variable problems, together with understanding of the mechanics of simplex solution, shadow prices etc. (Note: questions requiring the full application of the simplex algorithm will not be set although candidates should be able to formulate an initial tableau, interpret a final simplex tableau and apply the information it contained in a final tableau.)
B - Financial Information for Long-term Decision Making - 25%
Learning outcomes
On completion of their studies students should be able to:
- explain the processes involved in making long-term decisions;
- apply the principles of relevant cash flow analysis to long-run projects that continue for several years;
- calculate project cash flows, accounting for tax and inflation, and apply perpetuities to derive 'end of project' value where appropriate;(li) apply activity-based costing techniques to derive approximate ‘long-run’ product or service costs appropriate for use in strategic decision making;
- explain the financial consequences of dealing with long-run projects, in particular the importance of accounting for the 'time value of money';
- evaluate project proposals using the techniques of investment appraisal;
- compare, contrast and evaluate the alternative techniques of investment appraisal;
- evaluate and rank projects that might be mutually exclusive, involve unequal lives and/or be subject to capital rationing;
- apply sensitivity analysis to cash flow parameters to identify those to which net present value is particularly sensitive;
- produce decision support information for management, integrating financial and non-financial considerations.
Syllabus content
- The process of investment decision making, including origination of proposals, creation of capital budgets, go/no go decisions on individual projects (where judgements on qualitative issues interact with financial analysis), and post audit of completed projects;
- Generation of relevant project cash flows taking account of inflation, tax, and 'final' project value where appropriate.
- Activity-based costing to derive approximate ‘long-run’ costs appropriate for use in strategic decision making.
- The techniques of investment appraisal: payback, discounted payback, accounting rate of return, net present value and internal rate of return.
- Application of the techniques of investment appraisal to project cash flows and evaluation of the strengths and weaknesses of the techniques.
- Sensitivity analysis to identify the input variables that most effect the chosen measure of project worth (payback, ARR, NPV or IRR).
- Methods of dealing with particular problems: the use of annuities in comparing projects with unequal lives and the profitability index in capital rationing situations.
C - The Treatment of Uncertainty in Decision Making – 15%
Learning outcomes
On completion of their studies students should be able to:
- evaluate the impact of uncertainty and risk on decision models that may be based on CVP analysis, relevant cash flows, learning curves, discounting techniques etc.;
- apply sensitivity analysis on both short and long-run decision models to identify variables that might have significant impacts on project outcomes;
- analyse risk and uncertainty by calculating expected values and standard deviations together with probability tables and histograms;
- prepare expected value tables and ascertain the value of information;
- prepare and apply decision trees.
Syllabus content
- The nature of risk and uncertainty.
- Sensitivity analysis in decision modelling and the use of computer software for 'what if' analysis.
- Assignment of probabilities to key variables in decision models.
- Analysis of probabilistic models and interpretation of distributions of project outcomes.
- Expected value tables and the value of information.
- Decision trees for multi-stage decision problems.
D - Cost Planning and Analysis for Competitive Advantage – 30%
Learning outcomes
On completion of their studies students should be able to:
- compare and contrast value analysis and functional cost analysis;
- evaluate the impacts of just-in-time production, the theory of constraints and total quality management on efficiency, inventory and cost;
- explain the concepts of continuous improvement and Kaizen costing that are central to total quality management and prepare cost of quality reports;
- explain and apply learning and experience curves to estimate time and cost for new products and services;
- apply the techniques of activity-based management in identifying cost drivers/activities and explain how process re-engineering can be used to eliminate non-value adding activities and reduce activity costs;
- explain how target costs can be derived from target prices and describe the relationship between target costs and standard costs;
- explain the concept of life cycle costing and how life cycle costs interact with marketing strategies at each stage of the life cycle.
- explain the concept of the value chain and discuss the management of contribution/profit generated throughout the chain;
- discuss gain sharing arrangements whereby contractors and customers benefit if contract targets for cost, delivery etc. are beaten;
- apply activity-based costing ideas to analyse ‘direct customer profitability and extend this analysis to distribution channel profitability;
- apply Pareto analysis as a convenient technique for identifying key elements of data and in presenting the results of other analyses, such as activity-based profitability calculations.
Syllabus content
- Value analysis and quality function deployment.
- The benefits of just-in-time production, total quality management and theory of constraints and the implications of these methods for decision-making in the 'new manufacturing environment'.
- Kaizen costing, continuous improvement and cost of quality reporting.
- Learning curves and their use in predicting product/service costs, including derivation of the learning rate and the learning index.
- Activity-based management in the analysis of overhead and its use in improving the efficiency of repetitive overhead activities.
- Target costing.
- Life cycle costing and implications for marketing strategies.
- The value chain and supply chain management, including the trend to outsource manufacturing operations to Eastern Europe and the Far East.
- Gain sharing arrangements in situations where, because of the size of the project, a limited number of contractors or security issues (e.g. in defence work), normal competitive pressures do not apply.
- The use of direct and activity-based cost methods in tracing costs to 'cost objects', such as customers or distribution channels, and the comparison of such costs with appropriate revenues to establish ‘tiered’ contribution levels, as in the activity-based cost hierarchy.
- Pareto analysis.
