Performance Management and Control Flashcards

What is the 'contribution margin' in management accounting?

Answer: Revenue minus variable costs, representing the amount available to cover fixed costs and profit

Contribution margin is revenue minus variable costs; it represents the amount available to cover fixed costs, with any remainder being profit.

Activity-based costing (ABC) differs from traditional absorption costing in that it:

Answer: Traces overhead costs to products via cost drivers and multiple cost pools

ABC uses multiple cost pools and cost drivers to more accurately trace overhead costs to the products or services that consume them.

In transfer pricing, what is the general rule for setting a minimum transfer price?

Answer: Minimum transfer price = marginal cost + opportunity cost of the transferring division

The minimum transfer price should cover the marginal cost plus any opportunity cost (lost contribution) of the transferring division.

What does 'return on investment' (ROI) measure for an investment center?

Answer: Profit as a percentage of the capital invested in the division

ROI measures the profit generated as a percentage of the capital invested in a division, assessing how efficiently capital is being deployed.

Which costing method is most appropriate for pricing decisions in the short run, where fixed costs are already committed?

Answer: Marginal costing

Marginal costing is most relevant for short-run pricing decisions because fixed costs are already committed and only variable (marginal) costs are avoidable.

What is 'residual income' as a performance measure for investment centers?

Answer: Operating profit less a charge for the cost of capital employed

Residual income is operating profit minus a notional charge for the capital employed, rewarding managers who earn above the required rate of return.