The CFM certification program was established approximately 10 years ago, and more than 4,100 management accounting professionals have earned the CFM designation. The ICMA and its parent, the Institute of Management Accountants (IMA^®), will continue to support all CFM holders with appropriate member services, recognition of the CFM achievement, and the maintenance of certification records.

"This was a difficult decision for the Board, but we believe that the benefits to be gained by focusing solely on the enhancement of the CMA program will, in the long run, make the decision worthwhile. We again congratulate those who have earned the CFM and assure them of our continuing support." said John Brausch, chair, ICMA Board of Regents, CMA/CFM.

Those who are currently CMAs and those who are currently enrolled in the CFM program, will continue to have the opportunity to take the CFM examination until December 31, 2007. New enrollees who are not yet CMAs will be accepted into the CFM program until December 31, 2006 and will also have until the end of 2007 to take the CFM examination.

Read Frequently Asked Questions (.pdf) about these changes here.

Expected return of the asset A is 10% and the standard deviation is 8.66%. Expected return of the asset B is 15%, the standard deviation is 12%.

The calculation of the portfolio expected return is a fairly straightforward. But the calculation of the standard deviation and variance of the portfolio is more complicated, because portfolio variability (standard deviation) is not the weighted-average of the variabilities of the individual assets. Diversification reduces the variability of the portfolio, because the prices of different assets vary differently. In many cases, the decrease in price of one asset is compensated by the price growth for another.

Portfolio expected return is the weighted average of the expected returns of the individual assets held in our portfolio:

r = 0,6*r_A + 0,4*r_B
r = 0,6*10% + 0,4*15% = 12%

For calculation of the variance ?? and the standard deviation ? of the portfolio return, we need to know the covariance between assets A and B. Covariance is the measure of how much returns of two assets vary together. This is distinct from variance, which measures how much a single asset varies.

The formula for the covariance is:

?₁₂ = E(R_A - r_A)(R_B - r_B)

It follows from the formula above, that the covariance of an asset with itself ?₁₁ is its variance ?₁?.

The value of the covariance will be given in the exam problems. Or, instead of the covariance, it will be given the value of the coefficient of correlation. The coefficient of correlation is a dimensionless measure and can be expressed as the standardized covariance. The correlation coefficient varies between -1 and +1.

The correlation coefficient formula is:

?₁₂ = ?₁₂/?₁?₂

Say ?₁₂ = 0.7.

The correlation coefficient ?₁₂  and the covariance ?₁₂ are positive, if the returns of assets move in the same direction (in most cases). Correlation and covariance are negative, when returns move in the opposite directions. If the returns are independent then the correlation coefficient is 0.

For calculation of the portfolio variance we need to fill the following matrix. The (i; j) element is the (X_iX_j ?_ij ), where X_i - the weights of assets A and B in the portfolio.

This matrix is very like covariance matrix. The (i; j) element of covariance matrix is (?_ij ).  

Next, we simply summarized the elements of out matrix and calculate the portfolio variance:
?? = X₁? ?₁? + X₂? ?₂? + 2(X₁X₂ ?₁₂ ?₁?₂)
or for general case of N assets:
 
Calculation of portfolio variance:
?? = 0,6? * 8,66? + 0,4? *12? + 2*( 0,6 * 0,4 * 0,7 * 8,66 * 12) = 84,96

Standard deviation is equal the square root of the variance:
? = ?84,96 = 9,22

it is easy to verify that if the correlation coefficient is +1 then portfolio standard deviation is equal the weighted average of the standard deviations of the individual portfolio assets ? = X₁ ?₁ + X₂ ?₂. If the correlation coefficient is -1 then portfolio standard deviation is equal ? = x₁ ?₁ - X₂ ?₂ and it is possible to achieve the zero portfolio standard deviation by varying the proportion of assets weights X₁ and ;X₂ in the portfolio. Unfortunately, it is not possible in practice.

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First, let’s calculate the expected return and the variance for asset A. Assume, that the asset A has the following estimated rate of return distribution:

Rate of Return                Probability
(-5%)                                  20%
10%                                    50%
20%                                    30%

The expected rate of return for RA is:

rA = (-5%)*0.2 + 10%*0.5 + 20%*0.3 = 10%

The formula for variance RA is:

= (-5-10)(-5-10)*0.2 + (10-10)(10-10)*0.5 + (20-10)(20-10)*0.3 = 75

Standard deviation is simply the square root of the variance:
= 8.66%
Let us assume that the asset B has the expected value of return rB = 15%, and the standard deviation of RB is 12%.

The standard deviation reflects the degree of risk for each individual assets A and B. When we want to compare the risk of different assets with the different expected return, we need to use the relative measure - the coefficient of variation:

Hence,asset's A coefficient of variation is: 8.66/10 = 0.866
             asset's B coefficient of variation is: 12/15 = 0.8
So, we can say that asset A is a riskier investment than asset B.

In the next post, we'll calculate the expected return of our portfolio, define the covariance and coefficient of correlation for two assets, and how these values affect the variance and the standard deviation of the portfolio.

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I learned the definitions of star, cash cow, dog and question mark (BCG Growth Share Matrix) from the article, that was very helpful.

Also, I recommend to examine the Five Forces of Competition Model diagam. This diagram was a good addition to my textbook. I like the visualisation, it helps me to understand better and more quickly.

I began the serious preparation in the middle of May, so it took more than two months.  The understanding of concepts did not seem difficult to me, since some concepts were partially covered  in part 1 “Business Analysis” and part 2 “Management Accounting and Reporting” materials (planning, bonds, ratios, etc.), and the Hock textbook presents the theory in a very clear way, as usual.

For the purpose of time saving during the preparation, I did not give much attention to the real options (only several pages that were in the Hock materials) and the calculation of covariance, hoping for only general questions on these topics.

While initially it seemed that third exam wouldn’t be very difficult, I read a lot of messages from IMA email exchange that part 3 “Strategic Management” of the Revised exam was the hardest... and it definitely was. So I was warned and decided to focus on trying to make calculations more accurate  and faster, and better understanding the concepts. This exam became a real challenge for me.

At first, I was faced with the time shortage again. I spent too much time on text questions, the most part of which were very tricky. When I answered all questions, I only have 10 minutes left.

Secondly, I marked near the 30 questions, so I wasn’t sure that one third of my answers were correct.

Thirdly, I got 7–10 questions about the real options and the calculation of covariance . The guessing in the latter was especially annoying because I think that these questions were very simple.

Honestly, when the last seconds of the exam were gone and I stared at the waving (as usual for Prometric) white screen, I was sure I failed. And when, after the long dramatic pause I received the congratulatory message, I was happy. 540 scores are not the brilliant result, but I passed and it is good!

The suggestions I would make are as follows:

1. If you need to learn the concepts before taking the exam – use Hock materials. If you really know the material and just need to refresh memory – use Gleim review, which includes much more materials and details, but less clear explanations than Hock. If you use Hock materials, be sure that you understand all topics, because Hock provides you with not only sufficient but also necessary information.

2. I used Gleim software. As usual, Gleim test prep has a lot of sly, complex and not aligned with LOS questions. I think that this is very good, since it prepares you for unexpected questions on the exam.

3. IMA Q&A books. These questions are highly representative of what you will see on the exam. But the average book question is more short and simplistic than the average exam question.

4. For better time management I answered all the text question first, then the short computational questions and 5 long computational questions for last. The good timing is very important.

That’s my report.

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What Do You Want to Do?
"If you want exposure to many industries and public auditing skills, CPA is the way to go"
"If you want to hang your hat in the same office every day and make a difference with one company, the CPA is good, but the CMA is extremely relevant."
Are You Qualified?
What�s the Pay Differential?
Will You Be Competitive?
What Are Less-Obvious Advantages?

Then, you can take a small quiz �CPA, CMA or MBA? Which Credential Is Right for You?� and read the similar article �CPA or MBA?� by the same author.

Let us consider more general case of solving standard maximization problem with arbitrary right-hand side of the constraints.

Initial linear programming (LP) problem:

4�1 + 15�2 + 12�3 + 2�4 -> min

2x2 + 3x3 + x4 >= 1
x1 + 3x2 + x3 - x4 >= 0
x1, x2, x3, x4 >=0

Convert initial LP problem to maximization LP problem:

-4�1 - 15�2 - 12�3 - 2�4 -> max

-2x2 - 3x3 - x4 <= -1
-x1 - 3x2 - x3 + x4 <= 0
x1, x2, x3, x4 >=0

Let S1, S2 >= 0 are slack variables.
Rewrite the constraint inequalities as equations by adding these variables:

-4�1 - 15�2 - 12�3 - 2�4 -> max (objective function)

0x1 - 2x2 - 3x3 - x4 + 1s1 + 0s2 = -1 (constraint equations)
-x1 - 3x2 - x3 + x4 + 0s1 + 1s2 = 0
x1, x2, x3, x4, s1, s2 >=0

Set up the initial simplex tableau (Click to see full size image):

1. The Cj row consists of the coefficients preceding x1, x2, x3, x4, s1, s2 from the objective function. 1 and 2 rows consist of the coefficients from the constraint equations. The RHS (right-hand side) column consists of -1 and 0 from right-hand side of these equations.
The variables that form an identity matrix are basic variables. S1 and S2 are the basic variables in our case.

2. The CB column consists of the coefficients preceding the basic variables in the objective function, i.e. 0 for S1 (row 1) and 0 for S2 (row 2).

3. The first element of the Zj row (in X1 column) is the sum of the products of multiplying each element in the CB column by each element in the X1 column.
0 (row 1, column CB) * 0 (row 1,column X1) + 0 (row 2, column CB) * (-1) (row 2,column X1) = 0
The subsequent elements of the Zj row (columns X2, X3, X4, S1, S2, RHS) are obtained in a similar way.

4. Compute the row 4 (Cj - Zj) by subtracting each element in the Zj row from each element in the Cj (top) row.

5. If all elements of the RHS (row 1, 2) are NON-NEGATIVE then go to 5''.
else go to 5'.

5'. For each rows (1 and 2) compute the ratios RHS/x, where x runs elements from columns
x1, x2, x3, x4, s1, s2. We seek the MINIMAL POSITIVE number (so we can compute only ratios with numerator and denominator are of the same sign).
Row 1:
column X2: (-1)/(-2)=0,5; column X3: (-1)/(-3)=0,3333(3); column X4: (-1)/(-1)=1
Row 2: all elements are zero

MINIMAL POSITIVE element is 0,33(3) from X3 column. Hence, 0,33(3) (mark green) is the leading element, X3 is the leading column, row 1 is the leading row. Go to 7.

7. Compute the rows 5 and 6: divide the leading row by the leading element and transform the leading column into identity column. Don't forget convert the RHS.

Let us make the next iteration step. In the previous step we compute the rows 5 and 6. Now all the RHS elements (0,33 and 0,33) are non-negative, hence go to 5".

5". We considered this case in the previous example. First, find the
LARGEST STRICTLY POSITIVE element in the (Cj-Zj) row (if there is not then go to the end of algorithm). This element is 2 from X4 column, row 8. So, X4 is new leading column.

6. Compute the ratios RHS/leading column for each row and find the MINIMAL POSITIVE element. This element gives us leading row. Intersection the leading row and the leading column give us leading element.
Row 5, Column X4: 0,33/0,33 = 1;
Row 6, Column X4: 0,33/1,33 = 0,25.
So, 1.33 (mark green) is new leading element. Go to 7.

Repeat iterations until (if the optimal solution exists) we can't find strictly positive leading element at the step 5' or 5" and 6.

In our example:
We form rows 9, 10, 11 and test RHS (rows 9, 10) for non-negativity (step 5). 0,25 and 0,25 are non-negative, hence, go to the step 5". 3,50 is the largest strictly positive number, but we can't find positive elements in this leading row (step 6). Hence, we have find the optimal solution:
X3 = 0,25;
X4 = 0,25;
Objective function value = -3,50 (mark red)

Lately I've been very busy at work and I can't pay as much attention to this blog as I'd like to. That's why I want to remind you the following - you can always send me your own articles for publication in this blog.

I'll be glad to receive articles with the descriptions of your personal exam experience, thoughts about the certification importance and comparison of different financial certifications.

The articles, context of which consists of brief, clear and elegant statement of some theoretical aspects, simple explanations of complicated notions are also interesting for me. You can also send visual examples, which are properly illustrating the theory.

It often happens so, that some theoretical fragment doesn't "want" to be learned, but then a kind of insight happens and everything becomes clear. Tell me about issues, which seemed to be very complicated at first and the perfect solutions of such a problem you managed to find.

It'll be also very interesting to get to know about your ways of learning great number of information, concerning formulas, theory, and legislation.

Don't forget about the data, which will be published about you as the author, your site reference, and anything else you'd like to say about yourself.

So, press the button to submit your article!

Quantity Variance = (Standard Quantity for Actual Output - Actual Output) * Standard Price, or

Quantity Variance = (SQ - AQ) * SP

When there is more than one input, we calculate Quantity (Efficiency) Variance for each input individually:

In this situation, the Quantity (Efficiency) Variance may be caused by two different factors:

1. The mix of material (labor) actually used was different from the mix that should have been used, or

2. Total quantity of the inputs actually used to produce the actual output was different from the standard quantity that should have been used to produce actual output.

Therefore, the Quantity (Efficiency) Variance can be broken down into two variances: the Mix Variance and the Yield Variance.

1. Mix Variance:

or

or
Mix Variance = (WASP - WAAP) * AQ

2. Yield Variance:

or

or

Yield Variance = (SQ - AQ) * WASP

Now, we can demonstrate that Quantity (Efficiency) Variance is equal the sum of Mix and Yield Variances:

Technorati Tags: VarianceVariance Analysis]]> mazoo http://learning.mazoo.net/archives/001222.html http://learning.mazoo.net/archives/001222.html cost management Tue, 06 Dec 2005 11:52:26 +0300 Author.::.Mike The fourth part is the summary of three previous ones. There isn't much new information and this part is quite simple (just for training your understanding and memory). That's why I concentrated on revising the material of the second... Author.::.Mike

The fourth part is the summary of three previous ones. There isn't much new information and this part is quite simple (just for training your understanding and memory). That's why I concentrated on revising the material of the second and the third parts, which are the major. I supposed that the tasks I'd have to complete would refer to those themes, where it would be necessary to find some management decision based on theory. My supposition turned out to be true.

There were 6 tasks containing 2-3 questions and I had approximately 25-30 minutes for each task or 10 minutes for a question. There were two types of the tasks: calculating (75-80%) and theoretical (20-25%). The latter are quite simple, and there are good examples of them on IMA site. That's why it'll be better to concentrate on preparing for computational problems. I remember the following types (from those I had to solve):

1) cost of equity - CAPM and dividend growth model. Everything is very simple but I failed to remember the formulas (which are also quite simple). One should know them and basic presuppositions of models.

2) decision making, like special order, produce/outsource etc. They are typical from Decision Analysis program (part D)

3) investment analysis - NPV/IRR calculating + sensitivity analysis (here one should remember basic suppositions of analysis and the way cash flow (including tax effects of non-cash expenses (depreciation)) is counted.

Theoretical tasks were like that:
- ethics (part 4);
- strategical marketing (part 3, section 2);
- communication while setting budget/standard setting (part 4 and partially part 2).

It took me 3 months (from May till August) to prepare for this exam (just as for previous ones). I even didn't spare much time on it - I revised the textbooks and read additional literature (more for myself). Largely, textbook-revision could be enough. I took IMA Self-Study Course and was completely satisfied by this textbook (80-90% of material from it was included in the exam tasks).

I received my results in two months.

1. Hock vs. Gleim

The HOCK Distance Learning Program and Gleim's CMA/CFM Review System are the most popular study systems among CMA/CFM candidates. The both are very good and you can choose one based on your accounting and financial experience. Already well prepared candidates may prefer Gleim's Review, because it is a brief outline for necessary topics with a lot of additional (often outside the scope of the exam) information. Hock's Study Materials teach you to understand the concepts and provide sufficient level of understanding and knowledge to pass the exam. Hock's Study Materials are very well aligned with LOS (Learning Outcome Statements).

For example, the pensions occupy 7 pages in Gleim, with 3 pages of definitions (defined benefit pension plan, PBO, ABO, NPPC, accrued/prepaid pension cost). Hock gives detailed explanation on 21 pages. Therefore, if you already know accounting and calculations for pensions you may choose Gleim's outline. However, it wasn't my case :-)

Hence, the preparation with Gleim's Study Materials is very time consuming when you don't have good background, because you should use another sources of information for understanding the materials (on the Web, other study materials, etc.).

Mel, I used old Gleim's materials 11th Edition for my Revised CMA Part 1 (I think 10th and 11th Editions are essentially the same). It was sufficient for part 1. The CMA/CFM exam is updated to reflect changes in US GAAP one year after the effective date, so some questions from old study materials are out of date now. In the comparison of Reorganized CMA Exam with Old CMA Exam you can find the topics from Revised Exams that not covered by old Gleim's Study Materials. But, for me, the key item that I missed with Cleim's old materials was the time. It is not very convenient to jump from one book to another + specifics of Gleim's materials as I mentioned above. Again, if you are well prepared, I think old Gleim will be sufficient for you, just be aware about obsolete questions.

Gleim's Test Prep software is convenient to use and have a very large question bank. When I prepared for Revised Part 2, I often skipped the questions from source "publisher" (in the last stage of preparation, I skipped "CPA" and "CIA" questions too). My results were about 90%+ for CMA source questions. So, Reem, 70-78% is a good percentage without skipping.

I didn't use Hock's software with questions bank, so can't tell my opinion about it. The Hock's Study Materials have not very many questions, but these questions are good.

2. Other CMA/CFM Self-Study Courses. I can't tell my opinion because I didn't use them. One thing you need to know about "Only from IMA" IMA's CMA Learning System. It is just another learning system without access to any exam information from the ICMA (Institute of Certified Management Accountants) other than the information that the ICMA makes available to other providers of exam prep products and services.

Please, leave your impressions about using the different study materials in comments!

CMA Interactive Online Resources (Forums)

1. JPS Accounting Forums. The big online community for accountants over the world. Its services are focused on the Arab Accountants. Website contains a lot of useful information especially for those who know the Arabic language.

2. CMA section on CPAnet Forum. Not active, but exist.

3. Hock's CMA/CFM Forums. Ask the questions to Brian Hock.

4. Gleim's CMA Candidate Forum. You should be registered for access. The forum structure is not usual.

If you know other helpful online resources, please, suggest them in the comments.

Study materials:

As I mentioned earlier, I used Gleim's study materials for my Revised CMA Part 1 exam. However, it turned out that Gleim's outlines was insufficient for me even for understanding the material from section E "External Financial Reporting". I followed advice from successful candidates and purchased Hock's online study materials. I like these study materials. Reviews are well organized, clear, logical and intelligible. Also, I bought Gleim's Test Prep Software with the question bank. In addition, I bought ICMA's Question and Answer book, which was last step of my preparation.

Tips:

1. Again, follow the Learning Outcome Statements (LOS) (PDF file, 322Kb). Hock's study materials, unlike Gleim's outlines, are very well aligned with the LOS.

2. Practice with multiple-choice questions as much as you can. But be aware that many answers in Gleim's Test Prep Software are out of date (for example, about extraordinary items).

3. If you are already a member of IMA, join the IMA's Certification E-Mail Exchange. It is a source of extremely helpful information. Also, you can ask the questions arising in preparation.

4. Read carefully Bruce Pounder's "Tips for taking CMA/CFM Exams":
one ;
two;

three (PDF file, 24 Kb);
four.

Time management is critical success factor. I used Bruce's advice and I still had about 45 min left after answering all questions during Part 2 exam (I didn�t have any time to review marked questions in the first exam).

I am going to publish a lot study tips for Revised CMA Part 2 after my two weeks vacation. Also, I want to redesign this blog and rewarded myself with second shark tooth in the header.

See you soon and good luck on the exams!

Paul Sharman, President and CEO, discusses the current state of the accountancy profession in the U.S. and IMA's strategic initiatives aimed at rebalancing and advancing the profession. IMA is dedicated to rebalancing the accountancy profession by educating society regarding the business building role of management accountants and finance professionals working inside organizations. These "inside" professionals drive business performance through value-adding activities that include designing, implementing, and managing effective decision support, planning and control mechanisms that impact all strategic areas of the organization.

UPD: the part of this post was deleted on the request

These questions often arise during job interviews. Below you can find excellent explanation of the differences between the CMA and the CPA from Steve Colton:

My undergraduate days were spent at Iowa State University which had, and still has, a highly regarded College of Engineering. Many of my friends were engineering students and knowing them made me keenly aware of the many different flavors of engineering that existed. Some of my friends were civil engineers; others electrical engineers and still others mechanical engineers, chemical engineers and so on. While freshmen, all shared a common curriculum, but as upperclassmen, they branched off into the specialized studies that gave each engineering discipline its uniqueness.

In much the same fashion, the field of accounting has underlying specialties built upon a common foundation. At the highest-level, the field of accounting is subdivided into two specialties: financial accounting and management accounting.

Financial accounting is concerned with in providing information about a company's operations to parties external to the company such as the IRS, bankers, suppliers, creditors and shareholders. A primary focus is on standardized reporting and achieving compliance with applicable regulations. Management accounting is concerned with providing financial information about a company¹s operations to its internal managers. The focus is on developing relevant and timely information that helps internal managers resolve the problems and make the decisions that arise on a day-to-day basis.

A Certified Public Accountant (CPA) is the industry-acknowledged expert in financial accounting. There are both internal and external financial accounting roles mandated by law and regulation. Consequently CPAs are employed both inside and outside of organizations. In general, a public accounting firm is composed of CPAs who perform the external tasks (such as audit and attest) in the financial reporting process.

A Certified Management Accountant (CMA) is the industry-acknowledged expert in the practice of management accounting. CMAs are most frequently employed within an organization. Management accounting firms, such as Accounting Insights, provide management accounting services to companies that, for one reason or another, do not have the expertise internally.

Steve Colton
Accounting Insights
Management Accounting & Business Economics

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