CMA Final · Cost and Management Audit

Management Audit in Different Functions: formula sheet

Full chapter guide

Key formulas

Capacity utilisation: Capacity utilisation (%) = Actual output ÷ Practical (or installed) capacity × 100; State which capacity base you use. Practical capacity allows for normal stoppages, so it gives a higher percentage than installed capacity.
Idle capacity: Idle capacity (%) = 100% − Capacity utilisation (%); Then find the cause: no orders, breakdowns, material shortage or labour shortage.
Labour productivity: Labour productivity = Output ÷ Labour hours worked; Compare with standard or past period. Use the same unit of output in both.
Machine productivity: Machine productivity = Output ÷ Machine hours worked; Useful where production is machine-paced.
Yield: Yield (%) = Good output ÷ Input quantity × 100; Loss % = 100% − Yield %. Compare with the normal loss allowed in the standard.
Rejection rate: Rejection rate (%) = Rejected units ÷ Units inspected × 100; Use units inspected or produced consistently. Track rework separately.
Machine availability: Availability (%) = (Planned running time − Downtime) ÷ Planned running time × 100; Breakdown hours show whether maintenance is effective.
Inventory turnover: Inventory turnover = Cost of material consumed ÷ Average inventory; Days of holding = 365 ÷ turnover. A low turnover suggests overstocking or slow-moving stock.
Sales variance (actual vs budget): Sales variance = Actual sales − Budgeted sales; Split further into price and volume variances to find the cause.
Marketing cost ratio: Marketing cost ratio = Marketing expenses ÷ Sales × 100; Compare with budget, past years and industry. Use it to judge efficiency.
Advertising to sales ratio: Advertising ratio = Advertising expenditure ÷ Sales × 100; A high ratio is a concern only if sales response is poor.
Cost per rupee of sales by channel: Channel cost ratio = Channel distribution cost ÷ Channel sales × 100; Helps compare dealers, regions or channels.
Market share: Market share = Company sales ÷ Total market sales × 100; Needs reliable market data. Rising sales with falling share signals weak performance.
Gross profit margin: Gross profit % = (Sales − Cost of goods sold) ÷ Sales × 100; Used to test pricing and discount policy.
Customer retention rate: Retention % = Customers kept at period end from the start group ÷ Customers at start × 100; Excludes new customers acquired in the period.
Current ratio: Current ratio = Current assets ÷ Current liabilities; Tests short-term liquidity. Compare with industry norm, not a fixed number.
Quick ratio: Quick ratio = (Current assets − Inventories) ÷ Current liabilities; Stricter test of liquidity. Some texts also exclude prepaid items.
Debtors collection period: Average collection period = (Average trade receivables ÷ Credit sales) × 365; Compare with credit terms granted. A longer period signals weak credit control.
Inventory holding period: Inventory days = (Average inventory ÷ Cost of goods sold) × 365; Long holding ties up funds and raises carrying cost.
Creditors payment period: Creditors days = (Average trade payables ÷ Credit purchases) × 365; Check against supplier terms. Delaying beyond terms may lose discounts or hurt goodwill.
Operating cycle: Operating cycle = Inventory days + Receivable days − Payable days; Length of time funds are blocked in operations. Shorter is generally better.
Debt-equity ratio: Debt-equity ratio = Total debt ÷ Shareholders' equity; Measures gearing. Definitions of debt vary, so state the one you use.
Interest coverage ratio: Interest coverage = EBIT ÷ Interest expense; Shows ability to service debt from operating profit.
Labour turnover rate: Labour turnover % = (Separations during period ÷ Average number of employees) × 100; Separations means employees who left. Replacements-based versions also exist, so state the version you use.
Absenteeism rate: Absenteeism % = (Man-days lost through absence ÷ Total scheduled man-days) × 100; A rising rate is a morale warning sign, but check seasonal causes.
Cost per hire: Cost per hire = Total recruitment cost ÷ Number of hires; Include advertising, agency fees, interview and joining costs. Compare across sources and periods.
Training cost per employee: Training cost per employee = Total training cost ÷ Number of employees trained; Cost alone does not show value. Pair it with performance results after training.
Revenue per employee: Revenue per employee = Total revenue ÷ Average number of employees; A productivity indicator. Compare with past years and peers.
Audit logic: Finding = Standard − Actual practice; Recommendation = Fix for the cause; Use this structure for every HR area in a written answer.
Economic Order Quantity (EOQ): EOQ = √(2 × A × O ÷ C); A = annual usage in units, O = ordering cost per order, C = carrying cost per unit per year. Used to test whether order sizes are sensible.
Reorder Level: Reorder level = Maximum usage × Maximum lead time; Use the same time unit for usage and lead time.
Minimum Level: Minimum level = Reorder level − (Normal usage × Normal lead time); The stock below which a stock-out risk arises.
Maximum Level: Maximum level = Reorder level + Reorder quantity − (Minimum usage × Minimum lead time); Stock above this signals overstocking.
Inventory Turnover Ratio: Inventory turnover = Cost of materials consumed ÷ Average stock; Low turnover suggests slow-moving stock; compare with past periods and the industry.
Stock Holding Period: Holding period (days) = 365 ÷ Inventory turnover; Gives the average days material stays in stores.
Common audit lens for any function: Objectives → Policies → Organisation → Resources → Controls → Results → Recommendations; Use this sequence as a frame for any function-wise question.
Effectiveness: Effectiveness = Actual output or result ÷ Planned output or result; Shows whether the function achieved what it set out to do.
Efficiency: Efficiency = Output achieved ÷ Resources used; Shows whether resources were used well. A function can be effective but not efficient.
R&D intensity: R&D spend as % of sales = R&D expenditure ÷ Sales × 100; Use it to compare with past years or industry peers. It is an indicator, not a rule.
Logistics cost ratio: Logistics cost as % of sales = Total logistics cost ÷ Sales × 100; Track the trend and compare with a benchmark.

Quick revision

Management audit judges efficiency, effectiveness and economy, not just accuracy of records.
Use one frame for every function: objectives, policies, controls, performance, recommendations.
Production audit covers planning, capacity use, quality control, maintenance, waste and productivity.
Marketing audit covers market research, product mix, pricing, distribution, promotion and sales control.
Finance audit covers capital structure, working capital, budgeting, cash management and credit control.
HR audit covers manpower planning, recruitment, training, appraisal, compensation and industrial relations.
Purchasing and stores audit covers purchase policy, vendor selection, stock levels, storage and issue control.
R&D audit looks at project selection, budgets, progress against plan and commercial results.
IT audit covers system controls, data security, access, backup and whether systems support business needs.
Always end an answer with a practical recommendation tied to the case.
Tie each finding to evidence or an indicator rather than a general statement.

Common mistakes

Treating the management audit as a statutory cost audit or a financial check. Fix: Write that the focus is effectiveness, efficiency and economy of operations, and the output is advisory recommendations.
Listing checkpoints without benchmarks. Fix: For every checkpoint, name what it is compared with, such as standard hours, plan or industry norm.
Treating the marketing audit as a financial audit of sales ledgers. Fix: Focus on effectiveness and efficiency of decisions: planning, targets, policies and results.
Listing areas without findings or recommendations. Fix: For each area add what you check, what could go wrong and what you recommend.
Writing a financial audit answer, such as verifying balances and vouching, instead of a management audit. Fix: Focus on policy, efficiency, effectiveness and decision quality. Ask whether the function achieves its goals, not only whether entries are correct.
Listing areas without recommendations. Fix: Every point should end with a recommendation and its expected benefit.
Treating management audit of HR as a payroll or statutory compliance check. Fix: Focus on effectiveness and efficiency of HR policies and results. Mention compliance as one part only.
Listing audit areas without techniques or evidence. Fix: For each area add what you would check and how, such as appraisal records, interviews or exit data.
Writing a financial audit answer, such as checking vouchers and totals only. Fix: Focus on policy, efficiency and decision quality. Ask whether management's buying and storing choices were sound, not only whether entries are correct.
Listing checks without recommendations. Fix: Finish every area with a practical recommendation and its expected benefit.

Exam tips

Case-based questions reward application: quote the data from the case in your findings.
Show ratio formulas and working even for simple sums, since marks follow method.
Use a fixed layout of finding, cause, effect and recommendation so the examiner can find each part.
In MCQs, remember that management audit is advisory and covers efficiency and economy, not only compliance.
Link production issues to inventory, purchasing and cost; integrated answers score better.
Structure long answers by the six areas and give each a heading-like first line so the examiner sees coverage quickly.
In case questions, quote the numbers from the case in your findings and compute at least one ratio.
Always end each point with a recommendation. Marks are given for application, not just listing.