acca f5 lsbf class notes december 2011

ACCA Paper F5

Performance

Management

Class Notes

December 2011

© The Accountancy College Ltd, June 2011 All rights reserved. No part of this publication may be reproduced, stored in a retrieval

system, or transmitted, in any form or by any means, electronic, mechanical,

photocopying, recording or otherwise, without the prior written permission of The

Accountancy College Ltd.

2 www.studyinteractive.org

Contents

PAGE

INTRODUCTION TO THE PAPER 5

FORMULAE PROVIDED IN THE EXAMINATION PAPER 7

CHAPTER 1: COST ACCOUNTING AND NEW DEVELOPMENTS 9

CHAPTER 2: DECISION MAKING AND LINEAR PROGRAMMING 31

CHAPTER 3: PRICING 55

CHAPTER 4: DECISION MAKING UNDER UNCERTAINTY 69

CHAPTER 5: BUDGETING TYPES 83

CHAPTER 6: BUDGETARY CONTROL 91

CHAPTER 7: QUANTITATIVE AIDS TO BUDGETING 103

CHAPTER 8: STANDARD COSTING AND VARIANCE ANALYSIS 121

CHAPTER 9: ADVANCED VARIANCE ANALYSIS 139

CHAPTER 10: PERFORMANCE EVALUATION 153

CHAPTER 11: TRANSFER PRICING 175

APPENDIX: SOLUTIONS TO EXERCISES AND EXAMPLES 183 www.studyinteractive.org 3

Introduction to the paper

www.studyinteractive.org 5

INTRODUCTION TO THE PAPER

AIM OF THE PAPER

To develop knowledge and skills in the application of management accounting

techniques to quantitative and qualitative information for planning, decision-making,

performance evaluation and control.

OUTLINE OF THE SYLLABUS

1. Cost accounting techniques.

2. Decision-making techniques including risk and uncertainty.

3. Budgeting techniques and methods.

4. Standard costing systems.

5. Performance appraisal including financial and non-financial measures.

FORMAT OF THE EXAM PAPER

The syllabus is assessed by a three hour paper-based examination.

The examination consists of 5 questions of 20 marks each. All questions are compulsory.

FAQs

How has the exam format changed and what impact will that have on the paper?

The paper has moved to having five 20 mark questions rather than four 25 mark

questions. This move has been, it appears, to improve pass rates. Initial evidence would

suggest that this will be the case. The questions will become less complex and there will

be less emphasis on the discursive elements of answers and more emphasis on

computation. The downside for students is that there will be more time pressure due to

the fact that five separate scenarios must be understood during the limited time of the

exam. On balance this is a good thing for students in future diets.

What is the skills set that a student must bring to the paper?

As a student approaching this paper the basic requirement is an ability to understand

and compute the differing techniques and methods in the syllabus. In addition there is a

need to understand the scenario and critically be able to write in relation to the scenario

and whatever the numbers you have already calculated.

What impact will there be of having a new examiner on this paper?

There should be little or no impact of having a new examiner on the well prepared

student. The style and content of the questions will change to some degree but the new

examiner is given the same remit as the previous examiner.


Formulae provided in the examination paper


FORMULAE & TABLES PROVIDED IN THE EXAMINATION PAPER

FORMULAE SHEET

Learning curve

Y axb

Where: y = average cost per batch a =

cost of first batch

x = total number of batches produced b

= learning factor (log LR/log 2)

LR = the learning rate as a decimal

Regression analysis y

a bx

b n∑ xy − ∑ x∑ y n∑ x

2 − ∑ x

2

a ∑ y − b∑ x n n

n∑ xy − ∑ x∑ y r

n∑ x2 − ∑ x

2 n∑ y

2 − ∑ y

2

Demand curve

b

P a − bQ change in price

change in quantity a price when Q 0


Chapter 1

Cost accounting and new developments


CHAPTER 1 – COST ACCOUNTING AND NEW DEVELOPMENTS

CHAPTER CONTENT DIAGRAM

Costing methods

Absorption Activity Other costing

costing based costing methods

H Full cost per unit H Accurate product H Life cycle costing

H Issue: Arbitrary costs

H Target costing

cost allocation H Swap cost units

H Solution: Activity with cost pools

based costing H Swap OARs with

cost driver rates

Throughput Environmental accounting Accounting

H Return per factory hour H Costing methods

H Cost per factory hour H Reasons for use

H Throughput accounting ratio (TPAR)

H Decision making



CHAPTER CONTENTS

ABSORPTION COSTING ------------------------------------------------- 12

ABSORPTION COSTING – A REMINDER 12

TRADITIONAL OVERHEAD ANALYSIS 12

STEPS USING ABSORPTION COSTING 12

CRITICISMS OF ABSORPTION COSTING: 13

RECENT CHANGES IN MANUFACTURING 13

A REVISED ANALYSIS – ABC 14

STEPS USING ABC 14

CONDITIONS UNDER WHICH ABC IS MOST APPROPRIATE 17

BENEFITS AND LIMITATIONS 17

ACTIVITY BASED BUDGETING (ABB) ---------------------------------- 18

THROUGHPUT ACCOUNTING ------------------------------------------- 19

BASICS 19

RATIONALE 19

KEY TERMINOLOGY 19

CONCEPTS UNDERPINNING THROUGHPUT ACCOUNTING 20

FACTORS AFFECTING THE VALUE OF THROUGH ACCOUNTING PUT 20

STEPS IN THROUGHPUT ACCOUNTING 20

LIMITATIONS OF THROUGHPUT ACCOUNTING 21

TARGET COSTING-------------------------------------------------------- 22

TRADITIONAL COSTING SYSTEMS 22

TARGET COSTING STEPS 22

CLOSING A TARGET COST GAP 23

IMPLICATIONS OF USING TARGET COSTING 24

LIFE CYCLE COSTING---------------------------------------------------- 25

COMPARISON OF LIFE CYCLE COSTING AND TRADITIONAL MANAGEMENT ACCOUNTING 25

ENVIRONMENTAL ACCOUNTING --------------------------------------- 28

INTRODUCTION 28

TYPES OF ENVIRONMENTAL COSTS 28

MANAGING ENVIRONMENTAL COSTS 29

ENVIRONMENTAL COSTS STRATEGIES 29

METHODS FOR ACCOUNTING OF ENVIRONMENTAL COSTS 29



ABSORPTION COSTING

Absorption costing – a reminder

The linking of all production costs to the cost unit to prepare a full cost per unit.

Uses

1. Stock Valuation

2. Pricing decisions

3. Budgeting

Traditional overhead analysis

Overhead Cost Cost

cost item Centres Units

Steps using absorption costing

The steps using absorption costing are:

1 Overhead costs are collected in various cost centres

Allocation: Specific overhead costs directly relating to individual cost centres, for example, supervision, indirect materials.

Apportionment: General or common overhead costs like rent, heating, electricity

are incurred as a whole item by the company and therefore have to be distributed

to cost centres on some sharing bases like floor area, machine hours, number of

staff etc

2 Overhead absorption is achieved by means of a predetermined Overhead Absorption Rate.

Budgeted Overheads

a. Overhead Absorption Rate = Budgeted Level of Activity *

* Activity levels generally used by examiners are number of units,

labour hours or machine hours, which means overheads are

charged to units on these bases.

Number of Units: Single product environment

Labour Hours: Manual manufacturing operations

Machine Hours: Mechanical manufacturing operations

b. Absorbed overheads = OAR x Actual Activity 12 www.studyinteractive.org


Example 1 2P2D Ltd

2P2D Ltd produces 2 products in 2 departments. Relevant product information is:

Product A Product B Direct material cost (£) 20 35 Direct labour cost in Department X (£) 20 30 Time per unit in Department X (Hours) 4 6 Direct labour cost in Department Y (£) 25 35 Time per unit in Department Y (Hours) 5 7 Budgeted number of units 2,000 1,000

The labour rate is £5 per hour in each department.

The Budgeted Departmental Overheads are:

Department X £18,000 Department Y £6,500

Required:

Calculate the cost/unit using:

(a) Separate OARs for each department, based on labour hours.

(b) An overall OAR, based on labour hours.

(c) Discuss the differences.

Criticisms of absorption costing

Criticisms of absorption costing are:

H A big amount of guess work in relating overhead costs to the products.

H Inappropriate bases to link overheads to products

H Can only work in single product and simple manufacturing environments

Recent changes in manufacturing

The reason for the increasing inaccuracy of absorption costing is due to two basic issues:

1. Increased production complexity.

2. Increased proportion of overhead costs.

Production complexity

A wide variety of production processes have become more complex in recent years in a number of ways:

1. Flexible manufacturing systems allow for a number of widely differing products to

be produced on the same machinery. Absorbing overhead on a simple volume

base is unlikely to reflect the differing overhead costs incurred by each product. www.studyinteractive.org 13


2. Fast product development may mean that a number of differing iterations of the

same product may be produced in quick order. With such products having differing

production volumes again a volume base is unlikely to work.

3. Wider product ranges lead to a more complex cost analysis.

Increased proportion of overhead costs

Overheads have increased in importance as a percentage of total costs due to both the

substitution of direct labour with indirect labour as companies mechanise to a greater

degree. Also the increased production complexity outlined above has given rise to

increased costs for such disciplines as production planning and logistics.

Increased proportion of support services’ costs

Activity based costing also introduces the important aspect that cost are incurred in

selling and distributing a product and the cost of servicing customers are often more

important than production therefore an accurate cause effect relationship should be

established as to what generates the cost and what is the real impact of this cost on the

volume of units sold.

A revised analysis – ABC

Overhead Cost Cost

Cost Item Pool Unit

Steps using ABC

The steps involved in ABC are:

1. Identify an organisation’s activities.

2. Collect the cost of each activity into what is called cost pool (equivalent to cost centre under traditional costing).

3. Identify the factors which determine the size of the costs of an activity. These are

called cost drivers.

Activity Possible Cost Drivers Ordering number of orders

Material handling number of production run Production scheduling number of production run

Despatching number of despatches

4. Assign the cost of activities to products according to the product’s demand for activities.

Cost Pool is an activity that consumes resources and for which overhead costs are identified and allocated. For each cost pool there should be a cost driver.

Cost Driver is any factor which causes a change in the cost of an activity.


PDF to Word

http://pdfonline.blogspot.com/

acca f5 lsbf class notes december 2011

Documents