ACCA PM CHEAT SHEET

1. Overview

 Purpose: PM focuses on applying management accounting techniques to assist in decision-making,

planning, performance evaluation, and control in business contexts. The paper builds on costing
principles and introduces more advanced techniques like budgeting, variance analysis, and
performance measurement systems.

2. Key Exam Tips

 Exam Format:

o Section A: 15 multiple-choice questions (2 marks each), focusing on various syllabus areas.

o Section B: 3 scenario-based questions (10 marks each), each containing five objective test
questions worth 2 marks.

o Section C: 2 long-form questions (20 marks each) requiring written responses and
calculations, often based on case studies that test performance evaluation, decision-making,
and control systems.

 Time Allocation:

o Allocate around 45 minutes for Sections A and B, and 90 minutes for Section C.

 Marking Criteria:

o Emphasis on both calculations and explanations. Show all workings clearly, use structured
layouts for written responses, and ensure your answers are well-organized with headings and
subheadings.

3. Key Concepts and Theories

 A. Costing Techniques:

o Absorption Costing: Includes fixed overheads in product costs, ensuring all production costs
are allocated.

 Example: A manufacturing company uses absorption costing to calculate product

costs, including fixed overheads like rent and utilities.

o Marginal Costing: Only variable costs are included in product costing; fixed costs are treated
as period costs.

 Example: A company uses marginal costing to make short-term decisions, such as

accepting a special order at a lower price without affecting fixed costs.

o Activity-Based Costing (ABC): Allocates overheads based on activities that drive costs,
leading to more accurate product costing.

 Example: An electronics manufacturer uses ABC to allocate costs based on activities

like assembly, testing, and packaging, ensuring accurate product pricing.
 B. Budgeting Techniques:

o Incremental Budgeting: Starts with the previous budget and adjusts for changes. Simple but
may perpetuate inefficiencies.

 Example: A government department adjusts its budget annually based on inflation

rates and past expenditures.

o Zero-Based Budgeting (ZBB): Starts from zero, requiring justification for every expense.
Useful for cost control but time-consuming.

 Example: A non-profit organization uses ZBB to ensure funds are allocated

effectively, avoiding unnecessary expenditures.

o Flexible Budgets: Adjusts based on actual activity levels, useful in performance evaluation.

 Example: A hotel uses flexible budgeting to adjust costs based on occupancy rates,
allowing for better performance evaluation against actual levels.

C. Variance Analysis:

o Material, Labour, and Overhead Variances: Break down differences between actual and
standard costs.

 Example: A construction company analyzes Labour variances to identify why actual

Labour costs exceeded budgeted amounts, such as overtime or inefficient work
practices.

o Sales Variances: Evaluate variances in sales volume, price, and mix.

 Example: A retail chain examines sales variances to understand why some stores
exceeded sales targets while others underperformed.

o Planning and Operational Variances: Separate variances due to changes in standards from
those due to operational inefficiencies.

 Example: A manufacturing firm assesses planning variances to understand if

unfavourable results were due to external factors like supplier price increases.

 Remember the Direction: Always keep in mind if a variance is favourable (F) or adverse (A).
An increase in costs or a decrease in revenue is typically adverse, while a decrease in costs or
an increase in revenue is favourable.

o Material Price Variance: (Actual Price−Standard Price) ×Actual Quantity

o Material Usage Variance: (Actual Quantity−Standard Quantity) ×Standard Price
o Labor Rate Variance: Actual Rate−Standard Rate) ×Actual Hours
o Labor Efficiency Variance: (Actual Hours−Standard Hours) ×Standard Rate
D. Performance Measurement Systems:

o Balanced Scorecard: Combines financial and non-financial metrics across perspectives

(Financial, Customer, Internal Processes, Learning & Growth).

 Example: A telecom company uses the balanced scorecard to track performance

beyond financial metrics, including customer satisfaction and service quality.

o Building Block Model: Focuses on dimensions (quality, innovation), standards (benchmarks),

and rewards to enhance performance.

 Example: A tech company uses the Building Block Model to link employee
performance rewards with innovation and quality targets.

o KPIs (Key Performance Indicators): Metrics used to gauge success in achieving objectives.

 Example: A logistics firm tracks delivery times and customer complaints as KPIs to
monitor operational performance.

o ROI vs. RI:

 Return on Investment (ROI): Operating Profit /Capital Employed×100%

 Residual Income: Operating Profit− (Capital Employed ×Cost of Capital)

E. Decision-Making Techniques:

o Relevant Costing: Focuses on costs that will change as a result of a decision. Ignore sunk and
non-relevant costs.

 Example: A company deciding whether to discontinue a product line considers

relevant costs like direct materials and Labour, ignoring past R&D expenses.

o Make-or-Buy Decisions: Evaluates whether to produce internally or outsource based on cost

and capacity.

 Example: A car manufacturer assesses make-or-buy decisions for components like

engines, weighing cost savings against quality control.

o Limiting Factor Analysis: Identifies constraints (e.g., machine hours, Labour) and maximizes
contribution.

 Example: A bakery identifies oven time as a limiting factor and optimizes its product
mix to maximize profit.
4. Formulas and Equations

 Costing Formulas:

o Overhead Absorption Rate: Total Overheads / Total Activity Level (e.g., machine hours)

 Example: A furniture maker calculates an absorption rate based on machine hours

to allocate factory overheads to each product.

 Variance Formulas:

Material Price Variance: (Actual Price - Standard Price) × Actual Quantity

o Example: A company analyses why material costs exceeded the budget due to supplier price
increases.

Labour Efficiency Variance: (Actual Hours - Standard Hours) × Standard Rate

o Example: A factory assesses labour efficiency variance to identify inefficiencies in the

production process.

Sales Volume Variance: (Actual Sales Volume - Budgeted Sales Volume) × Standard Profit per Unit

o Example: A retailer evaluates sales volume variance to understand discrepancies between

forecasted and actual sales.

 Decision-Making Formulas:

Contribution per Unit: Selling Price - Variable Cost per Unit

o Example: A company uses contribution per unit to decide which products to focus on in times
of limited resources.

Break-even Point (Units): Fixed Costs / Contribution per Unit

o Example: A startup calculates the break-even point to determine the sales volume needed to
cover its fixed costs.

5. Frameworks and Standards

 Performance Measurement:

o Balanced Scorecard: Measures across multiple perspectives to provide a comprehensive

performance view.

 Example: A healthcare provider tracks patient care quality (Internal Processes)

alongside financial performance to ensure holistic improvement.

o Building Block Model: Focuses on aligning performance standards with strategic goals.

 Example: An IT services firm implements the Building Block Model to set targets for
service quality and customer satisfaction.
  Costing Standards:

o Standard Costing: Sets benchmarks for costs and evaluates performance against these
standards.

 Example: A manufacturing company uses standard costing to assess production

efficiency and identify areas for improvement.

 ABC (Activity-Based Costing): Focus on cost drivers and how costs relate to activities rather than just
volume. Remember to identify high-overhead activities.

 Throughput Accounting Ratio

(TAR): Total Factory Cost Throughput Contribution

 Break-Even Analysis : =Fixed Costs / Contribution per Unit

6. Mnemonics and Memory Aids

 SPAM: For Variance Analysis:

o Sales, Price, Activity, Mix variances help to remember types of variances.

 MAIDS: For Decision-Making:

o Make-or-Buy, Accept or Reject (special order), Investment, Discontinuation, Sales Mix

decisions.

7. Common Pitfalls and Mistakes

 Ignoring Non-Financial Factors: Focus on both financial and non-financial impacts in decision-making.

 Over-Reliance on Historical Data: Adjust for future conditions; historical data may not always be a
reliable predictor.

 Failure to Show Workings: Clearly show calculations and reasoning in written responses.

8. Approach to Questions

 Structured Answering:

o Step 1: Identify the requirements and relevant techniques.

o Step 2: Lay out your calculations and explanations clearly with headings.

o Step 3: Justify decisions using both numerical analysis and narrative explanation.

 Time Management:

o Start with questions you are confident in, especially in Sections A and B.

o Leave time to review calculations and ensure your answers address all parts of the question.

9. Key Case Studies or Examples

 Budgeting in Practice:
 o Example: A public sector organization uses Zero-Based Budgeting (ZBB) to ensure resources
are allocated based on current priorities rather than historical spending patterns.

 Decision-Making Scenarios:

o Example: A manufacturing firm faces a make-or-buy decision for a component and uses
relevant costing to determine the most cost-effective option.

10. Key Legislation (Where Applicable)

 Standards for Cost Allocation: Adherence to accounting standards ensures consistency and accuracy
in costing methods.

 Regulatory Requirements: Compliance in performance reporting, particularly in highly regulated

industries like finance and healthcare.

11. Practice Question Breakdown

 Scenario-Based Questions:

o Likely to involve analysis of performance metrics, variance calculations, or budgeting

recommendations.

o Example: Evaluating a company’s variances and providing recommendations on cost control

and efficiency improvements.