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ACCA PasscardsPaper F5Performance Management
Passcards for exams up to June 2015
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Fundamentals Paper F5Performance Management
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First edition 2007, Eighth edition June 2014
ISBN 9781 4727 1124 3
e ISBN 9781 4727 1180 9
British Library Cataloguing-in-Publication DataA catalogue record for this book is available from the
British Library
Your learning materials, published by BPP LearningMedia Ltd, are printed on paper obtained from traceablesustainable sources.
Published by
BPP Learning Media Ltd,BPP House, Aldine Place,142-144 Uxbridge Road,London W12 8AA
www.bpp.com/learningmedia
Printed in the UK by RicohUK Limited
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All rights reserved. No part of this publication may bereproduced, stored in a retrieval system or transmitted, inany form or by any means, electronic, mechanical,photocopying, recording or otherwise, without the priorwritten permission of BPP Learning Media.
BPP Learning Media Ltd
2014
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www.bpp.com/learningmedia

Page iii
ContentsPreface
Welcome to BPP Learning Medias ACCA Passcards for Paper F5 Performance Management.
They focus on your exam and save you time.
They incorporate diagrams to kick start your memory.
They follow the overall structure of the BPP Study Texts, but BPPs ACCA Passcards are not just acondensed book. Each card has been separately designed for clear presentation. Topics are self containedand can be grasped visually.
ACCA Passcards are still just the right size for pockets, briefcases and bags.
Run through the Passcards as often as you can during your final revision period. The day before the exam, tryto go through the Passcards again! You will then be well on your way to passing your exams.
Good luck!
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ContentsPreface
Page1 Costing 12 Modern management accounting
techniques 53 Cost volume profit (CVP) analysis 154 Limiting factor analysis 275 Pricing decisions 336 Short-term decisions 457 Risk and uncertainty 518 Budgetary systems 639 Quantitative analysis in budgeting 7110 Budgeting and standard costing 7911 Variance analysis 83
Page12 Planning and operational variances 9913 Performance analysis and behavioural
aspects 10914 Performance management information
systems 11715 Sources of management information and
management reports 12716 Performance measurement in private
sector organisations 13317 Divisional performance and transfer
pricing 13918 Further aspects of performance
management 145
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1: Costing
Topic List
Costing
Absorption costing
Absorption costing vs marginal costing
You will have covered the basics of these costing methodsin your earlier studies but you need to make sure you arefamiliar with the concepts and techniques so you cananswer interpretation questions.
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Absorption costingvs marginal costing
Absorption costing
Costing
A management informationsystem which analyses past,present and future data to providea bank of data for themanagement accountant to use.
The process of determining thecost of products, services oractivities. Methods includeabsorption costing and processcosting.
Cost accounting
Costing

Absorptioncosting
Costing
1: CostingPage 3
Inventory valuations Pricing decisions Establishing profitability of products
Practical reasons for using absorption costing
What is absorption costing?Absorption costing is a method of sharing out overheads incurred amongst units produced.
Allocation
Apportionment
Absorption under/over-absorbed overhead
1
2
3

When sales fluctuate because of seasonality insales demand but production is held constant,absorption costing avoids large fluctations in profit.
Marginal costing fails to recognise the importanceof working to full capacity and its effects on pricingdecisions if cost plus method of pricing is used.
Prices based on marginal cost (minimum prices)do not guarantee that contribution will cover fixedcosts.
In the long run all costs are variable, andabsorption costing recognises these long-runvariable costs.
It is consistent with the requirements of accountingstandards.
Arguments in favour of absorptioncosting
It shows how an organisations cash flows andprofits are affected by changes in sales volumessince contribution varies in direct proportion tounits sold.
By using absorption costing and setting aproduction level greater than sales demand, profitscan be manipulated.
Separating fixed and variable costs is vital fordecision-making.
For short-run decisions in which fixed costs do notchange (such as short-run tactical decisionsseeking to make the best use of existingresources), the decision rule is to choose thealternative which maximises contribution, fixedcosts being irrelevant.
Arguments in favour of marginal costing
Absorption costing
Costing

2: Modern management accounting techniques
Topic List
Activity based costing (ABC)
Target costing
Life cycle costing
Throughput accounting
Environmental accounting
All five techniques covered are equally important andequally examinable.You need to develop a broadbackground in management accounting techniques.
In Section B in the exam, these topics may be thesubject of a 10-mark question but not a 15-markquestion.You should also expect them to feature inSection A MCQs.

Targetcosting
Life cyclecosting
Environmentalaccounting
Throughputaccounting
Activity basedcosting (ABC)
Outline of an ABC systemIdentify major activities.
Use cost allocation and apportionment methods to theseactivities (cost pools).
Identify the cost drivers which determine the size of thecosts of each activity.
For each activity, calculate an absorption rate per unit ofcost driver.
Charge overhead costs to products on the basis of theirusage of the activity (the number of cost drivers they use).
An increase in support services, which are unaffected bychanges in production volume, varying instead with therange and complexity of products.
An increase in overheads as a proportion of total costs.
Features of a modern manufacturingenvironment
Implies all overheads are related to production volume. Developed at a time when organisations produced only a
narrow range of products and overheads were only asmall fraction of total costs.
Tends to allocate too great a proportion of overheads tohigher volume products.
Leads to over production?
Inadequacies of absorption costing
1
2
3
4
5
Cost drivers Volume related (eg labour hrs) for costs that vary with
production volume in the short-term (eg power costs)
Transactions in support departments for other costs (egnumber of production runs for the cost of setting-upproduction runs)

2: Modern management accounting techniquesPage 7
ExampleCost of goods inwards department = $10,000
Cost driver for goods inwards activity = number ofdeliveries
During 20X0 there were 1,000 deliveries, 200 ofwhich related to product X. 4,000 units of product Xwere produced.
Cost per unit of cost driver = $10,000 1,000 = $10
Cost of activity attributable to product X = $10 200 = $2,000
Cost of activity per unit of X = $2,000 4,000 =$0.50
Merits of ABC Simple (once information obtained)
Focuses attention on what causes costs toincrease (cost drivers)
Absorption rates more closely linked to causes ofoverheads because many cost drivers are used
Criticisms of ABC More complex and so should only be introduced if
provides additional information
Can one cost driver explain the behaviour of allitems in a cost pool?
Cost drivers might be difficult to identify

Activity basedcosting (ABC)
Life cyclecosting
Environmentalaccounting
Throughputaccounting
Targetcosting
Determineproduct concept
Determine currently-achievable cost
Establish targetprice Establish
desired profitmargin
Set targetcost
Calculate cost gap
Try to close the gap
The target costing process
Involves setting a target cost by first of allidentifying a target selling price and thendeducting the required profit margin to reach atarget cost.
The initial estimated cost is likely to be higherthan the target cost a cost gap.
Measures to close the cost gap should beways to reduce costs without loss of value tothe customer: may involve some product re-design, removal of non-value-adding features,use of more standard components, alternativematerials for some product parts.
Target costing
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