SOCPA Fellowship Managerial & Gov Complete Review Guide 2026–2027

4. Idle time variance = idle hours × standard rate, always unfavorable.
5. Overhead two-way analysis: budget (controllable) and volume variances; three-way: spending, efficiency, volume; four-way: variable spending, efficiency, fixed spending, volume.
6. Safety stock guards against stock-outs from higher usage or late delivery; maximum stock = EOQ + safety stock when an order arrives.
7. ABC inventory classification: class A items are few but high in value and need the tightest control; class C items are many and low in value and need only simple control.
8. Value engineering redesigns the product and processes to cut cost without sacrificing functions the customer values; kaizen reduces cost gradually after production starts.
9. Activity-based costing pools costs by activity and charges them with cost drivers; it gives more accurate costs for low-volume complex products than a direct-labour-hour rate.
10. Activity levels: unit, batch, product and facility; facility-level costs have no causal driver.
11. Contribution margin = selling price − variable cost; contribution margin ratio = margin ÷ selling price.
12. Operating income = total contribution margin − fixed costs; high operating leverage means profit is more sensitive to a change in sales.
13. A special order is accepted if its price exceeds the differential cost, spare capacity exists and regular sales are unaffected.
14. Decisions: make or buy (compare avoidable costs), shutdown (compare contribution with avoidable fixed costs), further processing (extra revenue vs extra cost, ignoring costs before the split-off point).
15. Cost-plus pricing: price = cost × (1 + markup percentage); target pricing starts from the price the market accepts.
16. Transfer prices may be based on market price, cost or negotiation; when the seller has spare capacity, the minimum is variable cost.
17. A flexible budget recomputes variable costs at the actual activity level, so it suits control better than a static budget.
18. The cash budget excludes non-cash expenses such as depreciation; it shows surplus or deficit and the need to borrow.

Common mistakes in this chapter

• ✕ Price variance uses quantity purchased if measured at purchase and quantity used if measured at usage; usage variance always uses quantity used. Students often use the purchased quantity for the second variance.
• ✕ Standard quantity allowed is based on actual output, not budgeted output. If 2,500 units were made against a budget of 3,000, compute the standard on 2,500.
• ✕ The fixed overhead production volume variance measures capacity use, not spending; it is unfavorable when standard hours allowed fall below normal capacity. Fixed spending variance = actual − budgeted fixed overhead.
• ✕ In EOQ, demand and cost units must be consistent (annual). EOQ does not depend on lead time, and it does not rise in proportion to demand: quadrupling demand only doubles EOQ because of the square root.
• ✕ Do not confuse target costing (start from market price and work down to cost) with kaizen costing (continuous small reductions on existing products during manufacturing). Check whether profit is a percentage of price or of cost.
• ✕ In special-order and shutdown decisions, sunk and unavoidable fixed costs are dropped, and the contribution lost from the alternative use of capacity (opportunity cost) is added. Full unit cost is not always the relevant cost.
• ✕ With a scarce resource, do not rank products by contribution per unit but by contribution per hour (or unit) of the scarce resource; the product with the highest unit margin may earn least per hour.
• ✕ ROI may lead managers to reject projects earning less than the current average even when above the required rate; RI accepts them. Payback ignores discounting, so it alone cannot judge profitability. In costs of quality, inspection (appraisal) is not prevention.