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EXAM TOPICS
EXAM TOPICS ........................................................................................................................................ 1 KEY TERMS ............................................................................................................................................ 3 INTENDED BENEFITS OF THE E-BOOK ................................................................................................... 5 AUTHORS PROFILE ............................................................................................................................. 11 IMPORTANT! ....................................................................................................................................... 12 USERS GUIDE...................................................................................................................................... 14 INTRODUCTION TO F5 PERFORMANCE MANAGEMENT .................................................................... 15 EXAMINERS GUIDANCE...................................................................................................................... 18 AUTHORS GUIDANCE ......................................................................................................................... 19 STUDY PLANNER ................................................................................................................................. 20 FORMULA SHEET ................................................................................................................................. 21 PAST PAPER ANALYSIS ........................................................................................................................ 22 ACTIVITY BASED COSTING .................................................................................................................. 23 LIFE CYCLE COSTING ........................................................................................................................... 34 TARGET COSTING ................................................................................................................................ 39 THROUGHPUT ACCOUNTING.............................................................................................................. 41 ENVIRONMENTAL ACCOUNTING ........................................................................................................ 52 RELEVANT COSTING ............................................................................................................................ 53 SHORT TERM DECISION MAKING ....................................................................................................... 56 COST VOLUME PROFIT ANALYSIS ....................................................................................................... 66 PRICING DECISIONS ............................................................................................................................ 74 LINEAR PROGRAMING ........................................................................................................................ 76 RISK & UNCERTAINITY IN DECSION MAKING ...................................................................................... 78 LEARNING CURVE THEORY ................................................................................................................. 89 FORECASTING ..................................................................................................................................... 98 BUDGETING SYSTEMS ....................................................................................................................... 100
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THIS STUDY MATERIAL IS NOT AVAILABLE OFFLINE IN ANY FORM (DVDs, CDs, PRINTED BOOKS) TYPES OF BUDGETING....................................................................................................................... 102 BASIC VARIANCE ANALYSIS ............................................................................................................... 104 MIX & YIELD VARIANCES ................................................................................................................... 123 PLANNING & OPERATIONAL VARIANCE ........................................................................................... 129 FINANCIAL PERFORMANCE MEASUREMENT.................................................................................... 136 NON FINANCIAL PERFORMANCE MEASUREMENT ........................................................................... 145 TRANSFER PRICING ........................................................................................................................... 147 BEHAVIOURAL ASPECTS OF PERFORMANCE MEASUREMENT ......................................................... 149 Be An Affiliate
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KEY TERMS
A Absorption Costing .......................................22 Achievable...................................................287 Acid Test Ratio ............................................259 Additive Model ...........................................159 B Benchmarking .............................................290 Blanket Rate or Single Factory Wide Rate ....22 Building block model..................................285 C Capacity Ratio .............................................294 Cash Budgets...............................................183 Clear ............................................................287 Coefficient of Correlation ...........................147 Coefficient of Determination ......................150 Competitive Performance ..........................289 Consumer Price Index (CPI) ........................154 Contribution ..................................................29 Controllability .............................................287 Critical Success Factors (CSF) ......................283 Current Asset Ratio .....................................258 Cyclical Variations .......................................156 D Deflation .....................................................153 Departmental Overhead Absorption Rate ...24 Deseasonalisation .......................................164 Determinants ..............................................288 Dimensions .................................................287 Direct Labour Budget ..................................181 Dividend Cover............................................269 Dividends Yield............................................268 E Earnings per Share (EPS) ............................ 265 Earnings Yield ............................................. 267 Economy ..................................................... 292 Effectiveness ............................................... 292 Efficiency..................................................... 292 Efficiency Ratio ........................................... 293 Equity .......................................................... 286 F Financial Gearing ........................................ 260 Financial Performance ................................ 289 Fixed Production Overhead Capacity Variance ................................................................ 198 Fixed Production Overhead Efficiency Variance .................................................. 197 Fixed Production Overhead Expenditure Variance .................................................. 196 Fixed Production Overhead Variance......... 196 Fixed Production Overhead Volume Variance ................................................................ 197 Flexibility ..................................................... 288 Functional Budgets ..................................... 179 G Gearing ratios............................................. 247 Gross Profit Margin .................................... 247 I Idle Time Variance ...................................... 194 Inflation ...................................................... 153 Innovation................................................... 288 Interest Cover ............................................. 264 Inventory Turnover..................................... 254 Investor ratios. ........................................... 247
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THIS STUDY MATERIAL IS NOT AVAILABLE OFFLINE IN ANY FORM (DVDs, CDs, PRINTED BOOKS) Quick Ratio ................................................. 259 R Random Variations ..................................... 156 Raw Materials Budget ................................ 180 Regression Analysis .................................... 150 Residual Income (RI) ................................... 276 Resource Utilization ................................... 288 Results ........................................................ 288 Retail Price Index (RPI) ............................... 154 Return on Capital Employed (ROCE) .......... 272 Return on Equity (ROE)............................... 274 Return on Investment (ROI) ....................... 272 Rewards ...................................................... 287 S Sales Budget ............................................... 178 Seasonal Variations .................................... 156 Share Options ............................................. 310 Standards .................................................... 286 T Trade Payable Turnover ............................. 256 Trade Receivable Turnover ........................ 252 Trend........................................................... 155 V Value for Money ......................................... 291 Variable Production Overhead Efficiency Variance .................................................. 196 Variable Production Overhead Expenditure Variance .................................................. 195 Variable Production Overhead Variance .... 195 W Working capital & liquidity ratios. ............ 247
Key Performance Indicators (KPI) ...............283 L Labour Cost Variance ..................................193 Labour Rate Variance..................................194 M Marginal Costing ...........................................28 Master Budgets ...........................................186 Material Cost Variance ...............................192 Material Price Variance ..............................192 Motivation ..................................................287 Moving Averages ........................................157 Multiplicative Model...................................162 N Net profit margin ........................................248 O Operating Profit Margin .............................248 Operational Gearing ...................................263 Overhead Budget ........................................181 Ownership ...................................................286 P Payout Ratio ................................................270 Pre-determined Overhead Absorption Rate 22 Pre-Determined Overhead Absorption Rate 22 Price Earnings (P/E) Ratio ...........................266 Principle Budget Factor ..............................178 Production Budget ......................................179 Production Volume Ratio ...........................294 Profitability ratios. .....................................247 Q Quality .........................................................288
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THIS STUDY MATERIAL IS NOT AVAILABLE OFFLINE IN ANY FORM (DVDs, CDs, PRINTED BOOKS) 5) Exam Support Exam Support provides guidance on application of knowledge in exam context. Just knowledge is not enough for passing exams rather you have to use it wisely in limited time available in the exams. 6) Past Paper Analysis Past paper analysis is given at the beginning of the e-book and also directly below each syllabus area. Past paper analysis gives an idea about the length and complexity of requirements and VERBS (Explain, Evaluate, Report etc) in which each syllabus area can be examined. It also enables you to practice past exam questions relevant to each syllabus area on ACCA global website. Therefore, you do not need to buy expensive practice kit. 7) Illustrations Illustrations are simple numerical examples given to prepare students for more challenging exam standard questions. Illustrations depend on the type of ACCA paper. Discussion based ACCA papers may not include illustrations. 8) Explanations Explanations are given to explain the rationale behind steps involved in calculations. Explanations depend on illustrations provided in the e-book. 9) Examples Examples are given to explain technical theoretical knowledge of F5 Performance Management in understandable way. It also shows how the application of knowledge into practice. It is especially useful when you are expected to apply your knowledge
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THIS STUDY MATERIAL IS NOT AVAILABLE OFFLINE IN ANY FORM (DVDs, CDs, PRINTED BOOKS) to answer scenario based questions. It will also motivate you to learn harder, as you will understand the benefit of technical knowledge in your career as chartered accountant. 10) Diagrams Diagrams are given to explain complex concepts and procedures which are difficult to understand in words. Diagrams also lead to better memorization of knowledge. 11) Practice Questions Practice questions are exam standard questions to provide a clue about length complexity and format of questions likely to be asked in the exams. Solutions are given in a format that will save time while solving questions during the exams. 12) Highlighting Highlighting shows the relationship among words and numerical values. These e-books aim to make complex concepts and calculations easily understandable way by showing the relationship among various words and figures. 13) Cross References Cross references are links to other text inside the e-book. In addition, Exam topics are to table of exam topics and sub exam topics are
to table of sub exam topics given at the beginning of each exam topic. 14) Bookmarks 15) Key Terms Bookmarks are given for reaching quickly to relevant syllabus area. Table of key terms shows important terms across the e-book that you must understand in order to pass the exams. It allows you to reach to the place inside an e-book; where you can develop basic understanding about particular term. 16) Colours Colours are used for demarcation between essential text, examples,
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THIS STUDY MATERIAL IS NOT AVAILABLE OFFLINE IN ANY FORM (DVDs, CDs, PRINTED BOOKS) exam support etc. It will enable you to find required text easily. Colours also make learning interesting. 17) Annotations You can highlight text and add comment anywhere in the e-book. Highlighting will enable you to highlight phrases and sentences you want to read again. Commenting will allow you to make a brief note in the e-book. You can use commenting to:
However, most publishers do not allow these features to enforce their copyright protection rights. Please! read copyright notice by clicking at the link given at bottom of the page. 18) Readout Loud Readout load enables students to listen written text. Those who have problem reading text can particularly benefit from this feature. Others can have a break from reading text. It will also help revision of your syllabus before exams much faster. Each point of theory is started from separate line to enable you to listen only the text of your interest. 19) Accessibility These e-books have legible fonts and high contrast colours to enable you read easily. You do not need to zoom and then scroll horizontally to read
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THIS STUDY MATERIAL IS NOT AVAILABLE OFFLINE IN ANY FORM (DVDs, CDs, PRINTED BOOKS) text. 20) Study Planner Study planner is a method allows you to plan for study within limited time available. It also allows you to track your progress against plan; therefore, you can adjust your speed of study and study hours accordingly. 21) Printer Friendly ACCA exam focused study text e-books are economical to print. Diagrams, tables and other formatting are made to keep the cost of printing to minimum. You may consider printing two pages side by side to save papers and cost. It will also provide portability as you can easily carry it in our bags. 22) PDF File Format PDF (Portable document format) files can be viewed using free adobe reader. Adobe reader is compatible with most operating systems such as windows and Mac. You can also read ACCA exam focused study text e-books on tablets and cell phones supporting PDF format to take these e-books on the way or at workplace in your pocket. Therefore, you also do not need to buy pocket notes too. However, conversion of PDF into DOC, TXT etc format may distort structure of e-books. 23) Instant Download 24) Environment friendly You can benefit from studying immediately after purchase. Reading e-books on digital media such as PC, laptop, tablets, cell phones are among the best ways to save papers and therefore, environment from greenhouse effect.
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THIS STUDY MATERIAL IS NOT AVAILABLE OFFLINE IN ANY FORM (DVDs, CDs, PRINTED BOOKS) Millions of papers can save thousands of trees each day. It also prevents CO2 emission in travelling or delivery of printed books in addition to cost. In addition, it is our moral duty to care for environment and society who lives in that environment.
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AUTHORS PROFILE
Name: Murtaza Lanewala. Career Status: Freelance writer & tutor for professional accountancy qualifications. Professional bodies include ACCA, CIMA and ICAEW. Author & CEO of accasupport.com E-mail: kabuli_52@hotmail.com or murtaza@accasupport.com
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IMPORTANT!
1 Disclaimer
This study material is sold only through accasupport.com website. However, Clickbank.com is the credit card processing organization for collecting payments for this study material. This study material is not available offline (shops, schools etc.) in any form such as DVDs, CDs, Printed books etc. Study materials purchased from unauthorized source can be out of date and incomplete. In addition, you will not be able to receive free updates given to the buyers of original material. Demo version of this material is available free of cost, please take care, not to pay for demo version of this e-book to unauthorized sellers. This material is for ACCA examination June 2012 only. Students who are reading out-dated material are at risk, as it will not be representative of current examination format, terminologies and syllabus. Readers of this material will be solely responsible for the consequences of any decisions made in real life. Author & accasupport.com are not responsible to the readers of this material under any circumstances. Recommendations made of any kind are intelligent guesses to the best of authors knowledge. Names of individuals, organizations, countries, religions etc are used for educational purpose only. It is not intended to abuse, discriminate and heart anyone's feelings and dignity.
2 Copyright Notice
This material is subject to copyright protection law. Infringement of copyright law results in criminal liability (fine or imprisonment or both). Copyright infringement is effectively theft of intellectual property; therefore, it is unethical from social viewpoint and sinful act from religious viewpoint as well. Copyright 2012 Murtaza Lanewala. All rights reserved.
2.1 Do
You can make a backup copy of this material. You can use parts of this material provided you quote the appropriate reference to the author and material.
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2.2 Do Not
You cannot publicly share this material in the form of hard copy or soft copy (physically and over the internet) for cash or for free. You cannot transform this material into other means of communication such as photocopy, video, audio etc. Unless needed for accessibility purpose or personal use. You cannot change the file format of this material or make it editable. You cannot resell this material unless you are selling the original copy purchased. You cannot use any part of this material in or with contents associated with violence, politics, religious and pornographic contents in any way. Be An Affiliate
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USERS GUIDE
E book features Past Papers Details Past papers provides a clue about the verbs (Explain, Evaluate etc) and marks available in the exams. It provides list of main headings at the beginning of each exam topic. You have to click relevant heading in a list to reach there. It provides broad information on composition (theoretical v computational) and importance of each paper in exam context. Exam Support provides detailed information on application of theory and calculations in exam context. Example provides practical application of technical theoretical knowledge. Illustration provides numerical applications of theoretical knowledge. Explanations provide the reasons for correctness or un correctness of particular statements and calculation. Formula is mathematical equations and tabular formats. Diagrams are visual (Graph, Charts, Tree formats etc) presentations of theoretical knowledge. Cross-referencing are hyperlinks to other exam topics. Click previous view button to go back. Highlighting is used show the relationship or connection between words and figures. Click bookmark icon in the side bar (see below) to jump to specific exam topic in the e-book.
Sub Exam Topics Exam Topic Awareness Exam Support Example Illustration Explanation Formula Diagram
Cross reference Highlighting Bookmarks
Screen Shot:
If you not currently using adobe reader, then I recommend you to download adobe reader, to get most benefits from this ebook. Click http://get.adobe.com/reader/ to download.
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2 Aim
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.
Exam Support:
Syllabus areas that are not included in the study guide of previous papers are more likely to be examined in F5 Performance Management than those that are already included in pervious papers.
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Example:
Question examining Part A (Specialist cost and management accounting techniques) can cover chapters such as Absorption costing, Marginal costing and ABC costing as requirement a, b, c respectively.
7 Duration of Exam
Total time: 3 hours 15 minutes 3 hours are writing and reading time. Additional 15 minutes are reading and planning time. However, you can annotate question paper only during that time.
8 Resources:
http://www2.accaglobal.com/students/acca/exams/f5/ http://www2.accaglobal.com/students/pass/ http://updates.accasupport.com
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EXAMINERS GUIDANCE
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AUTHORS GUIDANCE
1 Preparing for Exams 2 Exam Day Guidance
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STUDY PLANNER
Determine number of days available Formula:
Idle time can be incurred due to sickness, computer crash, social events etc. It depends on your daily activities and environment. I recommend you to make a printed copy to read when computer is not available.
Number of pages will include allowance for solving past paper questions, student accountant articles etc. Please note that different syllabus areas will take different amount of time. Calculations will take more time than theoretical areas. Therefore, it will give you only rough idea of your progress.
If revised number of page per day is > than originally plan; it means you are lagging behind and now you have to do study more per day.
Troubleshooting
Study at time of day when you are fresh. This will enable you to learn more in available time. Consider skip reading examples, if you understood theory by reading main text. Study in the end sub exam topics, which is less likely to be examined in your exam session. You can see past paper analysis given below each sub exam topic
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FORMULA SHEET
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Above analysis is given to emphasis the comparative importance of each topic. This analysis can be used as guide for allocating time to topics accordingly. Do not attempt to guess future question paper from this analysis, as this is historical data and it is not helpful for reading examiners mind at a time of setting exam paper. F5 has a ratio of 40-50 marks of calculation and 50-60 marks of theory till date. Beware, that future would contain significantly different ratio. Also try to see how each question requirements are spread between topics. This suggests interlink between topics.
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Exam Topic 1
Exam Awareness
Factors Frequency Magnitude Composition
Relationship
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1 Absorption Costing
Past paper Q.no 12/10 06/10 06/08 P/P Q4:a Q1:a Q4:c Q1:a
Requirement Calculate the full cost per unit for products A, B and C under traditional absorption costing, using direct labour hours as the basis for apportionment. Calculate the cost and quoted price of a GC and of an EX using labour hours to absorb the overheads. Calculate the cost per unit and the margin for the CB and the TJ using machine hours to absorb the overheads. Calculate the cost per unit for each product using traditional methods, absorbing overheads on the basis of machine hours.
Exam Support:
Absorption costing is the most important product costing technique for both exams and in practice. Absorption costing is the traditional technique for recovering (absorbing) overheads (indirect costs) via including it in products cost on some fair basis. It is due to overhead costs which forms significant part of the product cost cannot be directly identified and allocated, like direct material & direct Labour, Need for absorbing overhead arises when organization manufactures more than one type of product. Each product may consume different amount resources and therefore consumes different amount of overhead costs. In retail organizations, there are no or little overheads, such as packaging and labelling. These overhead costs are unlikely to be significant and therefore, cost incurred in absorbing overhead cost into products may not exceed revenue. Therefore, overheads are treated as period cost rather than absorbed into products.
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Exam Topic 1: ACTIVITY BASED COSTING It is used were organizations have single department or multiple departments having similar kinds of activities (labour intensive or machine intensive) it performs for manufacturing good or providing services.
Example:
An organization selling handmade biscuits, in which every work from making dough to rolling and cooking are all Labour intensive operations.
Example:
A laundry shop, where cloths are washed and dried using washing machines.
Illustration:
Organization has following detail for overhead cost in the upcoming period. Expenses Factory rent Power cost Machine & tools depreciation Machine maintenance cost Cleaning & hygiene Subsidized canteen Total allocated overheads $ 50,000 15,000 10,000
6,000 4,000 5,000 328,000 418,000 Production cost centres Cutting Assembling Finishing Machine hours 8,000 4,000 3,200 Labour hours 5,000 8,000 5,000 Organization wishes to absorb overheads on machine hour basis.
Required:
Calculate factory wide absorption overhead rate.
Solution:
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Exam Support
Overhead absorption rate should be rounded up to at least contain two decimal places. Rounding up to less than two decimal places can significantly change product cost.
Example:
A clothes manufacturing company, where yarns of cloth are manufactured by using machines; and cutting and sewing is done manually by Labours.
Exam Support
Allocation and apportionment for overhead costs are not examinable in paper F5. However, it is given below to refresh your memory.
Formula:
Illustration:
Organization has following detail for overhead cost in the upcoming period. Expenses Factory rent Power cost Machine & tools depreciation Machine maintenance cost Cleaning & hygiene Subsidized canteen $ 50,000 15,000 10,000 6,000 4,000 5,000 Production cost centres Cutting Assembling Finishing Total allocated overheads $106,000 $108,000 $114,000 Service cost centres Cleaning Canteen Total $328,000
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Machine hours 8,000 4,000 Floor area 5,000 5,000 Factory volume 8,000 8,000 No of Labours (direct & indirect) 30 30 30 5 5 100 Labour hours 5,000 8,000 5,000 1000 1000 20,000 Organization wishes to absorb overheads on machine hour basis for cutting cost centre and on labour hour basis for assembling and finishing cost centre.
Exam Topic 1: ACTIVITY BASED COSTING 3,200 2,000 1,000 18,200 5,000 500 2,000 17,500 8,000 800 1,000 25,800
Required:
Calculate departmental overhead absorption rate for each production cost centre.
Solution:
Production cost centres Service cost centres Cutting Assembling Finishing Cleaning Canteen $ $ $ $ $ 14,286 14,286 14,286 1,429 5,714 4,651 4,651 4,651 465 581 4,396 2,198 1,758 1,099 550 2,637 ____-_ 25,970 2,449 28,419 3,941 32,360 210 32,570 8.2 32,578.2 106,000 138,578.2 1,319 ____-_ 22,454 2,449 24,903 3,941 28,844 210 29,054 8.2 29,062.2 108,000 137,062.2 1,055 ____-_ 21,750 2,449 24,199 3,941 28,140 210 28,350 8.2 28,358.2 114,000 142,358.2 659 4,000 ____-_ 7,652 (7,652) 0 657 657 (657) 0 1.37 1.37 330 Total $ 50,000 15,000 10,000 6,000 4,000 5,000 90,000 0 90,000 0 90,000 0 90,000 0 90,000 328,000 418,000
Factory rent Power cost Machine & tool depreciation Machine maintenance cost Cleaning and hygiene Subsidized canteen Total overhead costs Cleaning cost Canteen cost Cleaning cost Canteen cost Total allocated overheads
1.37
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Exam Topic 1: ACTIVITY BASED COSTING To determine cutting department overheads on the basis of machine hours as cutting department seems to be machine intensive.
To determine assembling department overheads on the basis of Labour hours as assembling department seems to be Labour intensive.
To determine finishing department overheads on the basis of Labour hours as finishing department seems to be Labour intensive.
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Exam Topic 1: ACTIVITY BASED COSTING Costs Details $ Direct Labour X Direct expense X Prime cost X Production overheads (Based on absorption rate) X Product cost X Admin overheads (Period cost) X Selling & distribution (Period cost) X Full cost X X
Illustration:
An organization has following data for costs in upcoming period. Direct material Direct Labour Direct expenses $300,000 $250,000 $100,000
Production overheads are absorbed on basis of factory wide rate of $22.967/machine hour. There will be 18,200 machine hour during the period. Selling cost for the period is estimated at $5/ unit. Sales and production volume for the period is 10,000 units and there is no closing inventory in the previous period. Administration cost for the period is $ 50,000.
Required:
Calculate the product cost and product cost per unit and also full cost.
Solution:
Costs Direct material Direct Labour Direct expense Prime cost Production overheads Product cost Admin overheads Selling & distribution Details $ 300,000 250,000 100,000 650,000 418,000 1,068,000 50,000 50,000 Workings ($300,000/10,000) ($250,000/10,000) ($100,000/10,000)
($22.967 x 18,200hrs/10,000units)
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$ Full cost 1,168,000 Finance overheads are never included in product cost.
Costs
Details
Required:
Calculate the cost and quoted price of a GC and of an EX using labour hours to absorb the overheads.
Solution:
Details Workings GC Workings EX Materials 3,500 8,000 Labour 300hrs x $15/hr 4,500 500hrs x $15/hr 7,500 Overheads 300hrs x $10/hr (W1) 3,000 500hrs x $10/hr (W1) 5,000 Total cost 11,000 20,500 Quoted price 11,000 x 150% 16,500 20,500 x 150% 30,750
Workings:
4 Marginal Costing
Marginal costing is the technique used to determine product cost for short term decision making.
Examples:
Whether to manufacture in-house or buy from external supplier. How much of each product should be manufactured.
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Exam Topic 1: ACTIVITY BASED COSTING Whether to accept or reject offer made by customer or supplier. Whether to continue or discontinue an operation. Marginal costing only considers variable costs as relevant for decision making. It considers all fixed costs as irrelevant and so it should not be taken into account for short term decision making. Marginal costing recognizes the fixed costs as irrelevant because in short term fixed cost remains constant (cannot be changed) with change in activity level. It just not only considers production costs (material, Labour and overheads) as variable; it also non-production variable costs (Selling &distribution, administration and finance overheads) as well. This leads to each and every relevant cost being considered in decision making process.
5 Contribution
Contribution is figure obtained after deducting all variable costs from sales. Marginal costing considers only contribution as relevant for decision making rather than profit.
(X) (X) (X) (X) (X) (X) X (X) (X) (X) (X) X
Illustration:
An organization has sales revenue of $1,000,000 and costs are given below: Direct materials $(000) 100
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Exam Topic 1: ACTIVITY BASED COSTING $(000) Direct Labours 150 Variable production overheads (indirect material + indirect Labour) 100 Fixed production overheads 150 Selling & distribution overheads (60% fixed cost) 150 Administration overheads (80% fixed cost) 120 Finance overheads (100% fixed cost) 50
Required:
Calculate contribution and profit and discuss the results?
Solution:
Sales revenue Variable costs (Product Cost) Direct materials Direct Labours Variable production overheads Selling & distribution overheads ($150 x 40%) Administration overheads ($120 x 20%) Total variable costs Contribution $(000) $(000) 1,000
Fixed costs (Period Cost) Fixed production overheads 150 Selling & distribution overheads ($150 x 60%) 90 Administration overheads 96 Total fixed cost (excluding finance overheads) 336 Net Profit/Operating Profit 230 Contribution indicates how each product will contribute towards recovery of fixed cost. As I said earlier, that fixed cost is irrelevant. However, if organization has to survive it has to recover its total cost (Variable + Fixed) to break even (no profit/no loss) in the longer term.
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Exam Topic 1: ACTIVITY BASED COSTING Contribution allows finding profit maximizing combination of selling price and demand. Contribution allows evaluation of proposals such as outsourcing, buying materials from outside supplier, Discontinuing activities, products, departments, branches etc. Contribution helps in determining the optimal production mix. Products can be rank according to the level of contribution provided by each product.
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Exam Topic 2
Exam Awareness
Factors Frequency Magnitude Composition
Relationship
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Life cycle costing is the cost management approach for managing products, functions, division and organization as a whole. For now, we will discuss it for products only.
2.2 Introduction
Product is first launched in the market. Marketing expenditure is high due to the need for increasing demand for the new product as customers are unaware of the product and its features. Product cost per unit is high because of: Greater material wastages due to labour are learning production process.
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Exam Topic 2: LIFE CYCLE COSTING Labours working are less efficiently on new product than on existing products. Overhead cost is also high because of lower production volume, production in small batches and ordering materials in small quantities. Costs are still greater revenues resulting in negative cash balance.
2.3 Growth
Product starts to gain popularity as more and more customers are being aware of product and its features. Marketing expenditure is slightly lower than that at introduction stage. Product cost per unit gradually reducing because of: Lower material wastages due to labours are learning the production process. Labours are increasing being efficient and labour cost per unit in decreasing. Overhead cost is decreasing due to lower production volume, production in large batches and obtaining bulk purchase discounts for ordering large quantities of material. Revenue is increasing gradually resulting in positive cash balance. New competitors are entering the market or developing the similar products.
2.4 Maturity
Product has achieved its full growth potential and product is well known amongst customers. Marketing expenditure is at minimum at this stage, just to maintain and gain market share. Further expansion of market itself is not possible. Product cost per unit is lowest at this stage because of: Economies of scale (bulk purchase discounts) are achieved due to mass (bulk) production volumes. Labour efficiency is increased to its full potential. Labours are making more products per hour resulting in reduced labour cost. Overhead cost low due to economies of scales. Products are of high quality and reduce warranty claim cost. Minimal training and supervision cost than above stages.
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Exam Topic 2: LIFE CYCLE COSTING Revenues are at peak and product is generating high cash flow balance ever. Competitor try to penetrate (enter) the market reducing their selling price. This puts increased demand for product quality to maintain selling price.
2.5 Decline
Customers are getting bored of the product and looking for other products offered by competitor or newer version of existing product. Marketing expenditure can generate some interest in product particularly in lower income group. Product cost begin to rise because of Production volume is reduced due to reduction in demand, resulting in loss of economies of scale. Changes in product design can increase the life of products perhaps at some costs. Cost should only be incurred if expected benefits are greater than cost. Product can still be profitable (cash generating) because of competitors leaving the market. As a result price pressures are decreased and organization can enjoy monopoly position in the market. Competitor may leave because find the market unattractive and want to pursue other interests. Finally, at the end of life cycle product is discontinued.
Past paper
Q.no
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Exam Topic 2: LIFE CYCLE COSTING dysfunctional (misleading) decision making. It drops product which are profitable during its whole life but loss making in earlier stages of its life cycle. Product life cycle demonstrate the importance of timing to be considered in developing and introducing to the market. Earlier the organization launches its product more time it will have as a monopolist. This will result in more profitability from the product over its life cycle. Conversely, voidable delays in developing and introducing the product can erode profitability of the product. Hence, time management and scheduling is important for product profitability.
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Exam Topic 3
TARGET COSTING
Sub Exam Topics
S.no 1 2 3 4 5 6 Headings (click the hyperlinks below for easy navigation) Download Full Version Download Full Version Download Full Version Download Full Version Download Full Version Download Full Version Details Target costing is moderately examined topic. Target costing can form the basis of complete 20 marks question or it can be examined as part of longer question. Target costing can be examined as calculation (50%) and as discussion based question (50%). Calculation and discursive element are independent of each other. If calculation is wrong, you still gain marks are reasonable discussion. Same applies to each part of the question. It can be examined with ABC, product life cycle costing, forecasting (learning curve) etc.
Exam Awareness
Factors Frequency Magnitude
Composition
Relationship
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Exam Topic 4
THROUGHPUT ACCOUNTING
Sub Exam Topics
S.no 1 2 3 4 5 6 7 Headings (click the hyperlinks below for easy navigation) What Is Throughput Accounting Principle Resource Factor Calculating Throughput Accounting Ratio (TPAR) Improving TPAR Non-Financial Factors to Consider To Before Decision Based On TPAR Calculating Optimal Product or Process Mix Extending Capacity to Improve Factory Wide Profitability Details Throughput accounting is moderately examined topic. It can be examined as complete 20 marks question or it can be examined as a part of longer question. It can be examined as calculation (50%) and discussion (50%). It can be examined in combination with other costing techniques such as ABC costing, product life cycle and target costing.
Exam Awareness
Factors Frequency Magnitude Composition Relationship
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Reason:
Labours are increasingly becoming fixed cost due salaries and minimum wage rate requirements imposed by legislation. Overhead cost are increasing become fixed due to outsourcing of various supporting business activities (internal audit) for a fixed monthly or yearly fee. Managers trying to make longer term (long term loan) agreements (contracts) to reduce risk and uncertainty in decision making. It means the only cost which is variable in short term is direct material cost. Throughput (profitability) can be maximized by using material more efficiently.
Examples:
Throughput can be maximized using just in time (JIT) inventory management system to save inventory ordering cost. Total quality management (TQM) to reduce material wastage, ideally eliminate completely.
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This formula is applied for each process or resource over number of products given in question. Process or resource giving lowest number of units for products in total is the principal resource factor.
Required:
Identify the bottleneck process and briefly explain why this process is described as a bottleneck.
Workings
Budgeted factory hours given is 225,000 hrs. It can also be calculated as follows
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1) Pressing Process
Formulae:
It is assumed that material will always available in full supply. Above formula gives throughput generating ability of a product in each scarce hour. It enables managers to take short term decisions on deciding which product will be made more and which product will be made less. Product generating greater throughput will be given higher rank in resource allocation. ( Where )
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Exam Topic 4: THROUGHTPUT ACCOUNTING Factory hours are the number of hours for which factory gate remains open
Example:
5 workers work 5,000 hours per year during the same timings. Factory hours will be 5,000 hrs because it does not matter how many hours are paid per year, what matter is how long factory remained open per year. This formula compares throughput on principal resource with conversion cost incurred for whole factory during factory hours. If TPAR is greater than 1 it means product is generating more cash (throughput) than cash spent on running the factory. If TPAR is lesser than 1 it means product is losing cash in each hour product is made in the factory. It is due to cash generated from product is less than cash spent on running the factory. That product should be discontinued unless needed for other strategic purpose.
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Exam Topic 4: THROUGHTPUT ACCOUNTING Procedure A Procedure B Procedure C $ per procedure $ per procedure $ per procedure Pre-operative nurses injections 700 800 1,000 Anaesthetic 35 40 45 Dressings 5.60 5.60 5.60 There are five members of staff employed by Thin Co. Each works a standard 40-hour week for 47 weeks of the year, a total of 1,880 hours each per annum. Their salaries are as follows: Advisor: $45,000 per annum; Nurse: $38,000 per annum; Anaesthetist: $75,000 per annum; Surgeon: $90,000 per annum; Recovery specialist: $50,000 per annum. The only other hospital costs (comparable to factory costs in a traditional manufacturing environment) are general overheads, which include the theatre rental costs, and amount to $250,000 per annum. Maximum annual demand for A, B and C is 600, 800 and 1,200 procedures respectively. Time spent by each procedure is as follows: Procedure A Procedure B Procedure C Hours Hours Hours per procedure per procedure per procedure Advisor 0.24 0.24 0.24 Nurse 0.27 0.28 0.30 Anaesthetist 0.25 0.28 0.33 Surgeon 0.75 1 1.25 Recovery specialist 0.60 0.70 0.74 Part hours are shown as decimals e.g. 024 hours = 144 minutes (024 x 60). Surgeons hours have been correctly identified as the bottleneck resource.
Required:
Calculate the throughput accounting ratio for procedure C. Note: It is recommended that you work in hours as provided in the table rather than minutes.
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Exam Topic 4: THROUGHTPUT ACCOUNTING The return per factory hour for products A and B has been calculated and is $2,61253 and $2,65440 respectively. The throughput accounting ratio for A and B has also been calculated and is 896 and 911respectively. Calculate the optimum product mix and the maximum profit per annum.
Therefore conversion cost per hospital hour = $548,000/1,880 = $29149. Selling price Material cost Pre-operative nurses injections Anaesthetic Dressings Throughput $/unit 4,250 1,000 45 560
1,050.60 3,19940
( (
) )
Marking Scheme TAR Cost per hour 3 Return per hour C 2 Ratio C 1 Total 6 marks Procedure C generates more throughput than costs incurred during operation of hospital.
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Marking Scheme Optimal production plan Ranking 1 Optimum number of A 1.5 Optimum number of B 1.5 Optimum number of C 1.5 Total throughput 0.5 Less cost 0.5 Profit 0.5 Total 7 marks
4 Improving TPAR
Past paper Q.no 06/09 Q1:c (i) Requirement Explain how Yam could improve the TPAR of product C. Marks 4
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Requirement Marks Calculate the optimum product mix and the maximum profit per 06/11 Q5:b 7 annum. This is the second stage in throughput accounting after deciding whether to produce a product at all or not. Now, we will consider: What product should be made first to make sure it gets sufficient resources to meet the demand with respect to it. How much of each product should be made taking account of any principle factor associate with product (government restriction to make above certain level) or production process (availability of resources such as labour hours and machinery condition).
Required:
Calculate the optimum product mix and the maximum profit per annum.
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Exam Topic 4: THROUGHTPUT ACCOUNTING Marking Scheme Optimal production plan Ranking 1 Optimum number of A 1.5 Optimum number of B 1.5 Optimum number of C 1.5 Total throughput 0.5 Less cost 0.5 Profit 0.5 Total 7 marks
Required:
Discuss whether the overall profit of the company could be improved by equipping and using the extra theatre. Note: Some basic calculations may help your discussion. Identify the next bottleneck resource if existing bottleneck is removed, perhaps by employing additional resources. Also determine the extent to which it is underutilized currently.
To determine bottleneck resource, consider hours consumed by product for which market demand is unsatisfied. Consider the additional throughput that can be generated if existing bottleneck is removed. Number of units that can be made will be equal to the extent to which next bottleneck resource is underutilized currently. Consider the incremental (additional) cash outflows for arranging more resources.
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Exam Topic 4: THROUGHTPUT ACCOUNTING If addition throughput exceeds additional cash outflows (costs), then proposal to extend capacity is worthwhile.
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Exam Topic 5
ENVIRONMENTAL ACCOUNTING
Sub Exam Topics
S.no Headings
Exam Awareness
Factors Details Frequency Download Full Version Magnitude Download Full Version Composition Download Full Version Relationship Download Full Version Also, new international accounting standards are being devised enforcing environmental accounting incorporating into traditional financial accounting. However, as it is being examined first time examiner may be straight forward in his requirements. Please do not underestimate this topic.
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Exam Topic 6
RELEVANT COSTING
Sub Exam Topics
S.no 1 2 3 4 5 Headings (click the hyperlinks below for easy navigation) Download Full Version Download Full Version Download Full Version Download Full Version Download Full Version
Exam Awareness
Factors Frequency Magnitude Details It is regularly examined topic. It can be examined as complete 20 marks question or it can be examined as a part of longer question. Composition This topic can be examined as both calculation and discussion on 50/50 basis. Relationship It can be examined in combination with short term decisions making, CVP analysis, pricing strategies, linear programming and risk and uncertainty as other topics as well. Even, if it is not examined directly, its knowledge is essential for successful performance on other exam topics. This is highly important topic for this F5 exam and for future ACCA study. Thorough understanding to this topic is condition for learning other topics in F5. Do not go head until you thoroughly know it. It will save your efforts and time. You will be rewarded some marks for principles, if you make a mistake do not stuck if know have applied principles correctly. State assumptions that you made in reaching the result in support of your result and always show you working logical format cross referenced and labelled.
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Exam Topic 7
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Exam Topic 7
Exam Awareness
Factors Frequency Magnitude It is regularly examined topic. It can be examined as complete 20 marks question or it can be examined as a part of longer question. Composition This topic can be examined as both calculation and discussion on 50/50 basis. Relationship It can be examined in combination with relevant costing, CVP analysis and pricing decisions etc. See past paper analysis to analyse more. It works on the principles of marginal costing and relevant costing. Revise them if you are not comfortable them. It contains variety of short term decision making situations. Fortunately, they all are very similar and works on same principles. So focus on understanding the principles rather than memorizing steps of each situation. That is what examiner wants from you. Also it will lead to save to effort and time. Examiner has said that majority of the student fail because they do not understand the text and they merely attempt to rote learn and copy/paste the text in exam paper. As this is diverse topic is can be examined in countless ways. You should practise more different looking exam questions moderately rather than practising few questions deeply. Exam question will definitely different from past questions. Only principles will help you deal with such questions. You will be rewarded some marks for principles, even If you make mistake not stuck if know you have applied principle correctly. State any assumptions that you have used in reaching the result in support of your result and show your workings in logical format, cross-referenced and labelled.
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Requirement Briefly describe three issues that Stay Clean should consider if it decides to outsource the manufacture of one of its future products. Considering factors before outsourcing a product or activity.
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1.2.4 Legislation
Legislation may limit dealing in foreign countries to protect its currency value or dealing with rival countries. It may protect some stakeholder rights by enforcing legislation e.g. imposing high import duty to protect home industries or by imposing licensing requirements to business operating in particular industry requiring some activities or standards which are pre-requisite to get a license.
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Exam Support
Adjust the depth of each point to marks available and number of points to be made is specifically told.
Where, Potential revenue is the revenue after making a decision. And existing revenue is the revenue before making a decision. Incremental revenue must exceed incremental cost if proposal is to accept.
Exam Support
Use this principle in exam as general guide to solve question requiring short term decision. Especially, if you are not able to trace exam requirement to syllabus area(s).
Illustration:
An organization makes following components for its products and has recently approached by supplier offering the same components at following prices. Each component can be purchased independently.
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Exam Topic 7: SHORT TERM DECISION MAKING Products W X Y Z Making cost 10 12 11 15 Buying cost 5 7.5 7 8 Yearly Demand 9,000 11,000 10,000 12,000 D.L hrs taken 2 2.5 2 3 Fixed overhead absorption rate for these components is $2/labour hour which is included in the making cost. Specifically attributable fixed cost (overhead) is $500 for each component this year as a result of buying.
Required:
Recommend a course of action for each component?
Solution:
Products Make In-house cost Budgeted fixed cost Variable cost/unit Total variable cost Buy Supplier price/unit Total price Specific fixed cost Total buying cost Incremental (cost)/savings W $ 10 (4) 6 54,000 X $ 12 (5) 7 77,000 Y $ 11 (4) 7 70,000 Z $ 15 (6) 9 108,000
Product W will result in incremental savings of $8,500 each year if it were brought from external supplier. It is because total cost of buying (including specific fixed cost) is less than variable or marginal cost of making. Product X will result in incremental cost of $6,000 each year if it were brought from external supplier. It is because variable or marginal cost of making is less than total cost of buying. Product Y will result in incremental cost of $500 if it were brought from external supplier. Price offered by the supplier is same as making cost; this incremental cost is due to specific fixed cost incurred in purchasing.
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Exam Topic 7: SHORT TERM DECISION MAKING Specific fixed cost is the estimated cost which may not be exactly the same as actual and can be more or less. So it should be treated with caution. Product Z will result in incremental savings if it were brought from external supplier rather than made in-house. So on the basis of above information, it is recommended that product W and Z should purchase while product X and Y should made in-house.
Exam Support
Exam question can contain word outsource in replace of buying. Outsourcing involves buying from external supplier rather than manufacturing internally (in-house).
Exam Support
Note: recommendations should reasonably be justified if full marks have to earn. These decisions would be taken for products (goods or services) and Divisions (subsidiaries or branches). It is based on the principles of marginal and relevant costing techniques. General rule, Products or divisions should be continued unless it gives negative contribution or, Resources (cash, material, labour or machine hours) can be used elsewhere to generate greater contribution than existing product or division. Provided that resource is in short supply.
Illustration:
An organization with many divisions is considering restructuring. You are presented with recent management accounting information for two divisions and it is assumed that these trends will be continued in future. The following two divisions are under consideration. Divisions A $ B $
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Divisions Sales revenue Variable cost Specific fixed cost to be saved Absorbed fixed cost per year Estimated discontinuing cost per year
Exam Topic 7: SHORT TERM DECISION MAKING A B 10,000 12,000 5,000 13,000 74,000 0 10,000 15,000 1,000 6,000
Required:
Recommend course of action for each division.
Solution:
Division Sales volume Variable cost Contribution Discontinuing cost* Fixed cost savings** A $ 10,000 (5,000) 5,000 1,000 (7,000) B $ 12,000 (13,000) (1,000) 6,000 0
Net contribution (1,000) 5,000 Absorbed fixed cost for each division (10,000) (15,000) Profit/(loss) (11,000) (10,000) *Discontinuing cost deters from discontinuing the division just like revenue deters the discontinuing decision. **Fixed cost savings to be made after discontinuation provides encourages discontinuing the division just like variable cost encourages the discontinuing decision. Division A is losing money $1,000 (net contribution per year). Hence, it should be discontinued unless needed for other strategic purpose. Division A is giving position contribution if neglecting the consequences of discontinuation. Discontinuation cost and savings are estimated of future cost and benefit which may not be realized in actual. If this happens, discontinuation of Division A will be a wrong decision. Division B is generating positive contribution $5,000 per year even it is making a loss of $10,000 but it is providing it contribution toward recovery of fixed cost. Hence, if it were discontinued the loss will be equal to fixed cost $15,000. It should be noted that division B is actually helping in minimizing the loss by providing positive contribution. Division B should be continued.
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Illustration (continued):
Now, organization is considering using its scare resources more productively. Organization is represented with the proposal for division C having following cost and revenues. $ Sales revenue 13,000 Variable cost 5,000 Fixed cost 10,000 This division can only be opened at a cost of division B.
Required:
Recommend a course of action?
Solution:
$ Sales revenue 13,000 Variable cost (5,000) Contribution 7,000 Fixed cost (10,000) Profit (3,000) Division C is generating a contribution of $7,000 as compared to $5,000 generated by division B. hence; it is generating incremental contribution of $2,000. So, Division C should be opened at the cost of division B
Marks 12
15
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Product A
Further processing decision
Product C
Product B
General rule, Incremental cost must be equal to or exceed incremental revenue. It also makes use of the principles of relevant and marginal costing.
Illustration:
An organization has two joint products, both of which can be processed further. Following data is available for these two products. Selling price at split off point Apportioned variable cost at split off point Fixed cost absorbed unit Product A $11 $6 $2 Product B $7 $4 $1 Product C
Selling price after further processing Incremental variable cost Apportioned variable cost is share of common process cost.
$15 $2
Incremental variable cost is additional cost will be incurred due to further processing decision.
Required:
Recommend a course of action at split off point whether to sell or further process?
Solution:
Incremental selling price per unit Incremental variable cost per unit Incremental benefit or contribution ($15-$11) Product C $4 $2 $2
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Exam Topic 7: SHORT TERM DECISION MAKING Further processing decision will lead to additional contribution of $2 per unit. Cost and revenues incurred before further processing decision is past cost and therefore not relevant to decision making. It is recommends that product A should be further processed. Note: if you are asked to recommend you should explicitly recommend a course of action or otherwise you will lose easy mark. Do assume that marker will understand. Similarly, any other verb is used such as advice, conclude and evaluate you should end your answer accordingly.
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Exam Topic 8
Exam Awareness
Factors Frequency
Magnitude
Composition Relationship
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Illustration:
Budgeted sales volume for the year is 10,000 units. Sales revenue per unit is $5. Variable cost per unit is $2. Fixed cost for the year is $25,000
Required:
Calculate and interpret C/S ratio?
Solution:
It represents contribution per $1 sales revenue. It suggests the extent to which product makes contribution towards recovery of fixed cost. Higher the C/S ratio better it is.
Exam Support
You must learn all the formulae, as these will not be given in formula sheet.
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Exam Topic 8: COST VOLUME PROFIT ANALYSIS Sales volume where there is no profit and no loss.
Formulae:
( )
( ) Or ( ) ( )
Illustration:
Budgeted sales volume for the year is 10,000 units. Sales revenue per unit is $5. Variable cost per unit is $2. Fixed cost for the year is $25,000
Required:
Calculate and interpret breakeven point?
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Solution:
Breakeven point can also be calculated by replacing contribution per unit with C/S ratio. This will give breakeven point in sales revenue. ( ( ) ) ( ) ( ) At least 8,333.33 units or $41,666.67 are required to operate at no profit or no loss. Contribution (5-2) $3 can be earned for each unit sold above breakeven point or Contribution loss of $3 for each unit unsold below breakeven point.
Required:
Calculate and interpret Margin of safety?
Solution:
Decrease in budgeted sales below 1666.67 units will give contribution loss of $3 per unit.
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Exam Topic 8: COST VOLUME PROFIT ANALYSIS It is the level below which organization cannot afford to lose sales.
Formula:
( ( ) )
Illustration:
Sales revenue per unit is $5. Variable cost per unit is $2. Fixed cost for the year is $25,000 Budgeted or target profit for the year is $2,000 Calculate and interpret Target profit in units?
Solution:
( ( ) )
Sales volume required to achieve budgeted profit of $2,000 is 15,666.67 units. ( ) ( ) Sales revenue required to achieve budgeted profit of $2,000 is $78,333.33 If units are known then $ can be calculated by multiplying units with $per unit. If $ are known then units can be calculated by dividing $ with $per unit.
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It is more likely that multi product situation will be examined at this level of syllabus than single product situation.
Required:
Calculate and interpret C/S ratio?
Solution:
Products Product Sales Mix ratio X C/S ratio Weighted average C/S ratio
Product A (10,000 x $5) 50,000/(50,000+72,000) X (5-2)/5 0.2459 Product B (12,000 x $6) 72,000/(50,000+72,000) X (6-3)/6 0.2951 Total 0.5410 Weighted average C/S ratio in multi-product situation is 0.5410:1 or 54.10%. It means combined contribution of both products towards fixed cost for each $1 sales is $0.5410. C/S ratio for each product is weighted according to sales revenue expected to be provided by each product.
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Exam Topic 8: COST VOLUME PROFIT ANALYSIS If the actual product sales mix will different from budgeted product sales mix, then actual C/S ratio will be different from this C/S ratio which based on budgeted figures.
Illustration:
An organization has two products. Product A Product B Budgeted sales demand 10,000 12,000 Selling price per unit $5 $6 Variable cost per unit $2 $3 Fixed cost for the year is $55,000 Calculate and interpret C/S ratio?
Solution:
( ) ( ) Or ( ( ) ) ( )
Breakeven point in units for product B is ($59,998.18/$6) 9,999.69 units. Breakeven point for Product A and Product B combined is (8,331.08 +9,999.69) 18,330.77 units.
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Illustration:
Product A Product B Selling price per unit $5 $6 Variable cost per unit $2 $3 Fixed cost for the year is $55,000 Budgeted profit or revenue is $5,000 for the year. Calculate and interpret target profit or revenue?
Solution:
( ) ( ) ( ) ( )
Target profit or revenue volume units for product A is ($45,453/$5) 9,090.63 units. ( ) ( )
Target profit or revenue volume units for product B is ($65,452.56/$6) 10,908.76 units.
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Exam Topic 9
PRICING DECISIONS
Sub Exam Topics
S.no 1 2 3 4 5 6 7 Headings (click the hyperlinks below for easy navigation) Download Full Version Download Full Version Download Full Version Download Full Version Download Full Version Download Full Version Download Full Version Details It is amongst most frequently examined topics. It can be examined as complete 20 marks question or as a part of a question. It is examined as calculation (60%) and discussion (40%) based question. Calculations are simple algebraic equations to solve. It can be examined in combination with relevant costing, short term decisions, risk and uncertainty and costing techniques (part A of the syllabus) etc. Knowledge gained at this level will help passing professional paper P5 as well.
Exam Awareness
Factors Frequency Magnitude Composition Relationship
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Exam Topic 10
LINEAR PROGRAMING
Sub Exam Topics
S.no 1 2 3 4 5 Headings (click the hyperlinks below for easy navigation) Download Full Version Download Full Version Download Full Version Download Full Version Download Full Version
Exam Awareness
Factors Frequency Magnitude Details Linear programming is frequently examined topic. It can be examined as complete 20 marks question. It usually requires lengthy calculations therefore; it is unlikely to be examined as a part of a question. Composition It can be examined as calculation (70%) and discussion (30%) based question. Relationship It is a short term decision making techniques where more than one limiting factors are involved. Earlier you studied short term decision making in which only one limiting factor is involved. Examiner has emphasized weak performance of the candidates in this area. So it is very likely to be examined again.
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Exam Topic 11
Exam Awareness
Factors Details Frequency Risk & uncertainty is frequently examined topic. Magnitude It can be examined as full 20 marks question or as a part of a question. Composition It can be examined as calculation (60%) and discussion (40%) based question. Relationship It can be examined with various decision making topics above. Examiner wants you to understand concepts governing each method rather than just learn and apply those methods
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Risk is the hazard or impact which would result due to taking or not taking a decision. Risk can be associate with profits as well as losses In practice, risk and uncertainty are often used interchangeably.
Uncertainty Uncertainty cannot be measured using statistical formula. Uncertainty can only be analysed through nonfinancial means.
1.3 Outcome
Outcome is the monetary value that would be result due to taking a decision.
Example:
It is possible to earn $5,000 (outcome) by trading in a Microsoft stock or shares. It represents the severity of risk.
1.4 Variables
Variables are the financial factors which need to be considered during decision making process.
Example:
Decision of setting a selling price for a product involves the consideration of variables such as market demand and variable cost.
1.6 Circumstances
Circumstances are the events, situation or conditions that can change the outcome due to taking or a decision
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1.7 Probability
Probability is the likelihood of the occurrence of circumstance (good or bad).
Example:
There is 30% (probability) likelihood of having a rainy day. Sum of probability for each circumstance should be equal to 1.
Example:
Circumstances Probabilities $ (Outcome) Good 0.3 or 30% 5,000 Normal 0.5 or 50% 4,000 Bad 0.2 or 20% 1,000 Total 1 or 100%
Illustration:
Circumstances Probability Selling price Demand Variable cost Good 0.2 20 10,000 14 Normal 0.4 18 9,000 15 Bad 0.6 17 8,000 16
Exam Support
Some of the above data will be given to you in narrative form. So it is necessary to learn the principals behind them and not just rote learn the steps.
Required:
Construct the payoff table and comment on the values obtained?
Solution:
Demand Selling price Variable cost Cont/pay off per (variable 1) (variable 2) (variable 3) unit First decision option for setting selling price of $20 is considered. Total cont/pay off (outcome)
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Exam Topic 11: RISK & UNCERTAINITY IN DECISION MAKING Total cont/pay Demand Selling price Variable cost Cont/pay off per off (variable 1) (variable 2) (variable 3) unit (outcome) Important part in constructing the payoff table understands what decision you are asked to make. 10,000 20 14 6 60,000 9,000 20 15 5 45,000 8,000 20 16 4 32,000 Note: probability is not considered when constructing pay off table. You will not be rewarded for presenting circumstances in the table, so ignore it. 10,000 18 14 4 40,000 9,000 18 15 3 27,000 8,000 18 16 2 16,000 10,000 17 14 3 30,000 9,000 17 15 2 18,000 8,000 17 16 1 8,000 Note: if 3 variables are given then 9 outcomes should result, similarly if 2 variables given then 6 outcomes should result. Optional: this table is made to facilitate comparison among different outcomes and commenting on results. Decision options $20 $18 $17 Good 60,000 40,000 30,000 Normal 45,000 27,000 18,000 Bad 32,000 16,000 8,000 At selling price of $20, contribution under good circumstances is 60,000 and under bad circumstances are 32,000. This 32,000 is only slightly lower than contribution under good circumstances at selling price of $18 and $17. So selling price of $20 is not much risky. Under normal circumstances selling price of $20 will result in contribution of 45,000 which is above the contribution under good circumstances at selling price of $18 and $17. I recommend the selling price $20, it is merely a recommendation and final decision is the responsibility of management. Decision taken by the management is influence by the management attitudes to risk such as risk taker or risk averse. Note: you can come to different conclusion which is perfectly acceptable if you provide reasonable justification for your conclusion.
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Circumstances
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Exam Topic 11: RISK & UNCERTAINITY IN DECISION MAKING Also if you provide reasonable and logical comments on wrong figures you will be rewarded for your comments. That is if you made calculations wrong you can still gain marks on theoretical part of the question.
3 Decision Rules
It can be examined in conjunction with pay off tables. You will be expected to select decision option which should be opted under these rules. You are also expected to criticize (disadvantage) each decision rule.
Example:
Total number of units would be sold if shop is selling 30 days (again and again) a month. Expected values can be related to revenues as well as costs. For revenues expected value should be higher. For costs expected value should be lower.
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Exam Topic 11: RISK & UNCERTAINITY IN DECISION MAKING It ignores the probability of each outcome occurring. It does not give benchmark against which actual outcome of the decision can be monitored and evaluated. Decision options $20 $18 Good 60,000 40,000 Normal 45,000 27,000 Bad 32,000 16,000 Following are the worst outcome at each decision option. Selling price (decision option) 20 18 17 Worst outcomes 32,000 16,000 8,000 Circumstances $17 30,000 18,000 8,000 Selected decision $20 (least worst)
3.4 Maximax
Best outcome amongst the best outcome for each decision option should be selected. It points toward decision option which has maximum best outcome or consequence. This approach can be chosen by organization having risk taking attitude towards management. It ignores the probability of each outcome occurring. Circumstances Good Normal Bad $20 60,000 45,000 32,000 Decision options $18 40,000 27,000 16,000 $17 30,000 18,000 8,000
Following are the worst outcome at each decision option. Selling price (decision option) Best outcomes Selected decision 20 60,000 $20 (least worst) 18 40,000 17 30,000 It is co-incidence that under both rule same decision is opted. This is not necessarily happening in every case.
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Exam Topic 11: RISK & UNCERTAINITY IN DECISION MAKING It points towards decision which minimizes losses or opportunity cost of dropping the optimal decision option in favour of opted decision option. This approach can be chosen by organization wants to minimize their regret. It ignores the probability of each outcome occurring. Note: It is most difficult rule amongst others, so it will carry more marks in the exams. Circumstances Good Normal Bad $20 60,000 45,000 32,000 Decision options $18 40,000 27,000 16,000 Selling prices (000) $18 20 (60-40) 18 (45-27) 16 (32-16) $17 30,000 18,000 8,000
Best outcome under each circumstance should be selected and deducted from other outcomes in that circumstance. It is only co-incidence that under each circumstance best outcome relates to $20 selling price. Maximum regret under each circumstance should be selected as in this case $30, $27 and $16 for good, normal and bad outcome respectively. It is again a co-incidence that selling price of $18 and $17 has same regret. $16 is the minimum regret value amongst the selected regret values. Selling price of $18 and $17 both has same regret value so both are equally acceptable.
4 Sensitivity Analysis
Sensitivity analysis is the way to measure risk associated with each variable involved in decision making.
Example:
How much decrease or increase in selling price will make managers change their decision?
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Exam Topic 11: RISK & UNCERTAINITY IN DECISION MAKING This technique only considers one variable at a time and it does not consider the interdependencies of variables of each other.
Example:
Selling price goes down from 17$ to $15 then sales demand is also likely to be affected probably it will increase. So sensitivity analysis ignores this fact. Some variable are inevitably more sensitive than others.
Example:
1% decrease in selling price will make the managers change their decision. 15% increase in variable cost will make the managers change their decision. So the selling price is more sensitive than variable cost because only a minor change or decrease in selling price can affect decision making. While on the other hand, variable cost less sensitive than selling price because only a considerable change or increase can affect decision making. Sensitivity analysis highlights the areas where managers need to pay thorough attention to monitor and control them.
Required:
Calculate the sensitivity of following variables and comment on their associated risk? Variable cost Fixed cost Sales
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Solution:
If variable cost rises by 20%, profit will be $0. So decision to pursue the activity will no longer be worthwhile on financial grounds.
If fixed cost rises by 50%, profits will be $0. Fixed cost is less risky variable under this proposal than variable cost.
If sales are decreased by 10%, profit will be $0. In this case sales is the most risky variable as only 10% increase can erode profits. Note: increase in cost increases risk. Decrease in sales increases risk.
5 Decision Tree
Decision tree is used where managers need to take decisions for long running jobs such as for a project.
Example:
Project undertaken to construct a building involves several decisions at various stages of project. It is useful tool for comparing mutually exclusive decision options; to complete a project or competing for same resources.
Example:
Decision whether to use marbles or ceramics on the floor. If marbles are used there will be no space to use ceramics on the floor. Costs of both decision options can be compared using decision tree.
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Probability
0.2 Construct building Decision point 1 Revenue $2,500 Expected value (cost) = $2,450 0.3 0.5
$3,000 if bad
$2,500 if normal
$0
Decision tree allows calculating expected values of an outcome. This expected value (cost or revenue) can then be compared with estimated revenues and costs respectively. Decision tree can help deciding whether to go ahead or terminate the project before going to next stage.
Example:
After agreeing building design, decision tree can help deciding whether to incur further cost or abandon the construction. Decision tree starts from left hand side and grows at predetermined decision points identified at various stages of project life.
Example:
Pre-determined decision points can be 2 floors completed, 5 floors completed etc. It can grow whenever circumstances change requiring reconsideration of decision previously taken.
Example:
Change in health and safety legislation make additional costs necessary and so profitability of building construction project needs to be re-evaluated. Decision tree is read from right side.
Diagram:
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Exam Topic 11: RISK & UNCERTAINITY IN DECISION MAKING Decision under consideration is written parallel to tree stem. Decision points are represented by square box. Circumstances that can affect decision are represented by circle. Probability related to circumstance is written parallel to tree stem. Magnitude (monetary value) is written at the end of the tree stem.
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Exam Topic 12
Exam Awareness
Factors Frequency Magnitude Composition Relationship Details Risk & uncertainty is frequently examined topic. It can be examined as full 20 marks question or as a part of a question. It can be examined as calculation (70%) and discussion (30%) based question. It can be examined with product life cycle costing, target costing, relevant costing, budgeting and forecasting (time series) etc. This topic involves the use of unjustifiable assumptions and statistical formulae, so do not attempt understand the logic behind these, you will be given formulae for learning curve in the exam.
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1 Learning Curve
Learning curve is the improvement in labour efficiency over period of time. Labour takes lesser time for each subsequent unit produced as he/she learns to performance job efficiently at a specific rate (learning rate) So far, you have calculated same labour cost per unit at different activity level. Learning curve theory challenges this. It recognizes that labour cost per unit changes as product move into farther stages of product life cycle. Due to changing labour cost per unit, product cost per unit also changes in direction of labour cost. If variable overheads are absorbed based on labours hours then variable overhead cost per unit will also be reduced with change in labour labours.
Diagram:
Variable O.H cost per unit Labour hours per unit Number of units made Past paper P/P Q.no Q3:a P/P Q3:b Labour cost per unit Number of units made
Illustration:
First unit of bike requires 100 hrs to make. Learning rate expected for labour is 90%. Each skilled labour is paid at rate of $10/hour.
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Exam Topic 12: LEARNING CURVE THEORY Material cost for each bike is $1,000. Overheads for absorbed on labour hours basis. Variable overheads rate is $5/hour.
Required:
Calculate cost per bike to be quoted for customer order: If customer orders 2nd bike made. If customer orders 3rd and 4th bike together. If customer order first 4 bikes together or first 8 bikes together.
Solution:
Cumulative average time required per No of bikes unit Total time required 1 100 100 2 90 (100 x 90%) 180 (90 x 2) 4 81 (90 x 90%) 324 (81 x 4) 8 72.9 (81 x 90%) 583.2 (72.9 x 8) This method can also be applied on labour cost. Incremental time for additional units 80 (180 100) 144 (324 180) 259.2 (583.2 324)
a) 2 nd Bike
Time taken by second car will be 90 hrs. $ Material cost 1,000 Labour cost (90 x $10) 900 Variable overhead (90 x $5) 450 nd Total cost of 2 bike 2,350 nd If customer orders 2 bike made by the company, then minimum price to be quoted will be $2,350. This method assumes that labour hours will reduce at learning rate whenever output (bikes) gets twice.
Example:
Labour hours reduced at learning rate of 90% when number of bikes (output) got twice (2/1), (4/2), (8/4).
rd
b) 3 rd & 4 th Bike
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Exam Topic 12: LEARNING CURVE THEORY $ Material cost (2 x $1,000) 2,000 Labour cost (144 x $10) 1,440 Variable overhead (144 x $5) 720 rd th Total cumulative cost of 3 & 4 bike 4,160 Total cost per bike ($4,160 2) 2,080 rd th If customer orders 3 & 4 bike made by the company, then minimum price to be quoted for each bike will be $2080. It is lower than 2nd bike because 1st + 2nd units will require 180 hours of total labour time and 4 units from beginning will require 324 hrs, labour will take extra time for 3rd + 4th equal to 144 hrs (324 180). Average time per bike is 72 hrs (144/2).
Exam Support
Learning curve is not suitable for determining long term product cost as it does not include fixed overhead expenditure when calculating product cost. Learning curve is suitable for one off (short term) decision making such as customer request.
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Exam Topic 12: LEARNING CURVE THEORY Learning curve can also be used for forecasting target (expected) cost and revenue.
12
Where b = Learning factor Always results in negative figure as average time reduces for each subsequent unit. LR = Learning rate.
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Exam Topic 12: LEARNING CURVE THEORY 1. Sales should be 120,000 in the year in batches of 100 units. An average selling price of $1,050 per batch of 100 units is expected. All sales are for cash. 2. An 80% learning curve will apply for the first 700 batches after which a steady state production time will apply, with the labour time per batch after the first 700 batches being equal to the time for the 700th batch. The cost of the first batch was measured at $2,500. This was for 500 hours at $5 per hour. 3. Variable overhead is estimated at $2 per labour hour. 4. Direct material will be $500 per batch of S-pro for the first 200 batches produced. The second 200 batches will cost 90% of the cost per batch of the first 200 batches. All batches from then on will cost 90% of the batch cost for each of the second 200 batches. All purchases are made for cash 5. S-pro will require additional space to be rented. These directly attributable fixed costs will be $15,000 per month. A target net cash flow of $130,000 is required in order for this project to be acceptable. Note: The learning curve formula is given on the formulae sheet. At the learning rate of 0.8 (80%), the learning factor (b) is equal to -0.3219.
Required:
Prepare detailed calculations to show whether product S-pro will provide the target net cash flow. Calculate what length of time then second batch will take if the actual rate of learning is: 80%; 90%. Explain which rate shows the faster learning. Suggest specific actions that BFG could take to improve the net cash flow calculated above.
Solution:
Sales volume Sales revenue Costs: Direct materials (W1) Direct labour (W2) Variable overhead (W3) Cash flows 120,000 units $1,260,000 $514,000 $315,423 $126,169
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Exam Topic 12: LEARNING CURVE THEORY Rent Net cash flow Target cash flow Cash flows $180,000 $124,408 $130,000
Explanation
Product S-pro will not provide target cash flow at learning rate of 80%.
Batches
b) Direct Labour
For first 700 batches
Exam Support
Always use b up to four decimal places. If x (number of units) is too large then y (cumulative average labour cost/time) will be significantly change.
Learning curve stops at 700th batch. It means 701th batch and soon will take the same time/cost as the 700th batch. Above figure $212,423 represents cost of 700 batches. To calculate the cost of the 700th batch we have to deduct the cost of 699batches from the cost of 700 batches. For first 699 batches Learning factor (b) -0.3219 will be same as for 700 batches.
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c) Variable Overhead
Division of total labour cost by labour cost per hours will give number of labour hours. In this case, it will give ($315,423/$5) 63,084.6 hrs. Variable overheads are absorbed on the basis of labour hours. Therefore, variable overhead will be $126,169.2 (63,084.6 x $2).
At 90% Incremental time for additional units 300 Cumulative average time per unit 500 450 (500 x 90%) Incremental time for additional units 400
No of units 1 2
Incremental time for 2 at 80% learning rate is lower by 100 (400 300) than incremental time at 90% learning rate. It means at 80% learning rate efficiency of labour will increase more rapidly than at 90% learning rate.
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Exam Topic 12: LEARNING CURVE THEORY Reduce labour turnover to benefit from labour learning and experience.
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Exam Topic 13
FORECASTING
Sub Exam Topics
S.no 1 2 3 4 5 6 7 8 9 10 Headings (click the hyperlinks below for easy navigation) Download Full Version Download Full Version Download Full Version Download Full Version Download Full Version Download Full Version Download Full Version Download Full Version Download Full Version Download Full Version
Exam Awareness
Factors Frequency Details Forecasting is moderately examined topic. However, it is so much importance in management accounting for forecasting and budgeting purpose. Therefore, you should not underestimate the potential of this topic. Magnitude Forecasting can be examined as full 20 marks question or as a part of a question. Scatter Composition Forecasting can be examined as approximately calculation (70%) and discussion (30%) based question. Relationship It can also be examined in combination with relevant costing, types of budgeting and financial performance measurement etc. Time series analysis can be examined mostly calculation based question with some commenting requirements on the figures. Due to its complex nature it capable of forming a basis of full 20 marks question. It should be understood rather than memorized as it can be ask in various different formats.
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Exam Topic 14
BUDGETING SYSTEMS
Sub Exam Topics
S.no 1 2 3 4 5 6 7 8 Headings (click the hyperlinks below for easy navigation) Download Full Version Download Full Version Download Full Version Download Full Version Download Full Version Download Full Version Download Full Version Download Full Version
Exam Awareness
Factors Frequency Magnitude Details Budgeting systems is frequently examined topic. Budgeting systems can be examined as full 20 marks question or as a part of a question. Composition Budgeting systems can be examined as approximately calculation (30%) and discussion (70%) based question. Relationship It can also be examined in combination with types of budgeting, basic variance analysis, performance measurement etc. Be prepared to explain budgeting systems in English and presentation skills are important here.
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Exam Topic 15
TYPES OF BUDGETING
Sub Exam Topics
S.no 1 2 3 4 5 Headings (click the hyperlinks below for easy navigation) Download Full Version Download Full Version Download Full Version Download Full Version Download Full Version Details It is rarely examined topic. Types of budgeting can be examined as full 20 marks question or as a part of a question. Budgeting systems can be examined as approximately calculation (80%) and discussion (20%) based question. It can also be examined in combination with forecasting, budgeting systems, basic variance analysis, performance measurement etc.
Exam Awareness
Factors Frequency Magnitude Composition Relationship
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Exam Topic 16
Exam Awareness
Factors Frequency Magnitude Details Basic variance analysis is regularly examined topic. Basic variance analysis can be examined as full 20 marks question or as a part of a question. Composition Basic variance analysis can be examined as calculation (50%) and discussion (50%) based question. Relationship Basic variance analysis can be examined with mix and yield variance, operational and planning variance, performance measurement and types of budgeting (flexed budget) etc. You will be required to interpret what you have calculated and suggest the reasons for its occurrence. So only memorizing the formula will not earn you full marks, you have understand them as well to be able to interpret them.
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Q.no Requirement Q3:c Calculate the total sales price and total sales volume variance.
Formula:
It is difference between budgeted sales revenue and actual sales revenue. Total Sales Variance Bud revenue > Actual revenue Adverse Bud revenue < Actual revenue Favourable It determines the impact of sales revenue difference on actual profit. It can be sub-divided into Sales price variance. Sales volume variance.
It is difference between standard selling price per unit and actual selling price per unit. Sales Price Variance Std Price > Actual Price Adverse Std Price < Actual Price Favourable It is multiplied by actual sales volume. It determines the impact of selling price difference on actual profit. If more than one actual selling price is given then average actual selling price needs to be calculated. It is calculated by dividing sum of all selling prices with number of selling prices.
It is difference between standard sales volume and actual sales volume. Sales Vol Prof/cont Variance Std vol > Actual vol Adverse Std vol < Actual vol Favourable
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Exam Topic 16: BASIC VARIANCE ANALYSIS It is multiplied by standard profit per sale. If marginal costing system is in use then profit per sale will be replaced by contribution per sale. It determines the impact of sales volume difference on actual profit. It determines the impact of sales volume difference on actual profit
12/10
Q1:a
6 7
Formula:
It is difference between standard material cost expected for actual units produced and the actual material cost incurred. Material Cost Variance Budget cost > Actual cost Favourable Budget cost < Actual cost Adverse It determines the material cost difference on actual profit. Total Material cost variance can be sub-divided into Material Price Variance. Material Usage Variance.
It is difference between actual material price per unit and standard material price per unit. Material Price Variance
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Exam Topic 16: BASIC VARIANCE ANALYSIS Material Price Variance Std price > Actual price Favourable Std price < Actual price Adverse It is multiplied by actual quantity produced or purchased It determines total impact of material price difference on actual profit.
It is difference between actual material usage and standard material usage. Material Usage Variance Std rate > Actual rate Favourable Std rate < Actual rate Adverse It is multiplied by standard material cost per unit. It determines the impact of material usage difference on actual profit. It is also called material quantity variance.
It is difference between standard Labour cost expected for actual hours worked and actual Labour cost incurred. Labour Cost Variance Budget cost > Actual cost Favourable Budget cost < Actual cost Adverse It determines the impact of labour cost difference on actual profit. Total Labour cost variance can be sub-divided into Labour rate variance.
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It is difference between actual Labour rate per hour and standard Labour rate per hour. It is multiplied by actual labour hours worked. Labour Rate Variance Std rate > Actual rate Favourable Std rate < Actual rate Adverse It determines impact of Labour rate difference on actual profit.
It is difference between actual Labour hours worked for total production and standard Labour hours expected for total production. Labour Efficiency Variance Std hrs > Actual hrs Favourable Std hrs < Actual hrs Adverse It is multiplied by the standard Labour rate per hour. It determines the impact of Labour efficiency on actual profit. It is also called labour usage variance.
Formula:
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Exam Topic 16: BASIC VARIANCE ANALYSIS It is the difference between labour hours available and actual labour hours worked. It is multiplied by the standard labour rate per hour. It determines the impact of labour not being used at full capacity. Idle time variance is always adverse or nil.
It is difference between budgeted variable overhead cost expected for actual hour worked and actual variable overhead cost incurred. Variable Prod O.D Cost Variance Budget cost > Actual cost Favourable Budget cost < Actual cost Adverse Variable production overhead variance can also use either labour hours or machine hours depending on basis used to absorbed fixed overheads into products. It determines the impact of variable overhead difference on actual profit. It can be sub-divided into Variable overhead expenditure variance. Variable overhead efficiency variance.
It is difference between actual variable overhead expenditure per Labour hour and standard variable overhead expenditure per Labour hour. Variable Prod O.D Expn Variance Std expn rate > Actual expn rate Favourable Std expn rate < Actual expn rate Adverse It is multiplied by actual Labour hours worked
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Exam Topic 16: BASIC VARIANCE ANALYSIS It determines the total impact of variable overhead expenditure difference on actual profit.
It is difference between actual Labour worked for total production and standard hours expected for total production. Variable Prod O.D Eff Variance Std hrs > Actual hrs Favourable Std hrs < Actual hrs Adverse It is multiplied by the standard variable overhead expenditure per hour. Variable production overhead efficiency variance can use either labour hours or machine hours depending on basis used to absorbed fixed overheads into products. It determines the impact of Variable overhead efficiency on actual profit.
Formula:
It is difference between actual fixed production overhead cost incurred at actual activity level and standard fixed production overhead cost expected at actual activity level. Fixed Prod O.D Cost Variance Budget cost > Actual cost Favourable Budget cost < Actual cost Adverse It can be sub-divided into Fixed production overhead expenditure variance. Fixed production overhead volume variance.
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It is difference between Budgeted fixed production overhead expenditure and actual fixed production overhead expenditure. Fixed Prod O.D Expn Variance Budget expn > Actual expn Favourable Budget expn < Actual expn Adverse Fixed Overhead expenditure is never flexed because they do not change with activity level.
It is difference between standard hours expected for actual production and budgeted hours available. Fixed Prod O.D Vol Variance Std hrs exp > Bud hrs avail Favourable Std hrs exp < Bud hrs avail Adverse It is multiplied by pre-determined (standard) absorption rate. It determines the impact of budgeting for lower hours (volume) than hours available. Fixed overhead volume variance can use either labour hours or machine hours depending on basis used to absorbed fixed overheads into products. It can be sub-divided into Fixed production overhead efficiency variance. Fixed production overhead capacity variance.
It is difference between standard hour expected for actual production and actual hours taken for actual production. Fixed Prod O.D Eff Variance
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Exam Topic 16: BASIC VARIANCE ANALYSIS Fixed Prod O.D Eff Variance Std hrs > Actual hrs Favourable Std hrs < Actual hrs Adverse It is multiplied by the standard fixed overhead absorption rate. It determines the impact of fixed overhead efficiency on actual profit. Fixed overhead efficiency variance can use either labour hours or machine hours depending on basis used to absorbed fixed overheads into products.
It is difference between Budgeted hours available and actual hours worked. Fixed Prod O.D Capacity Variance Bud hrs > Actual hrs Adverse Bud hrs < Actual hrs Favourable It is multiplied by the standard fixed overhead absorption rate. It determines the impact of capacity utilization (labour or machine hours) on actual profit.
Illustration:
Standard Cost Card (Product A) Details Direct Materials (A) Direct Labour Variable Factory Overheads(Indirect Labour + Indirect expenses) Fixed Factory Overheads (Indirect expenses) Budgeted production volume (KGs) Selling Price per unit Budgeted sales volume is same as budgeted production volume. Fixed Overheads are absorbed on basis of budgeted Labour hours. Actual Data (Product A) Details Direct Materials used (A) Direct Labour worked Variable Factory Overheads(Indirect Labour + Indirect expenses) incurred QTY/HRS Rate 11,000kg $1.9 4,000hrs $6 D.L Hrs $2.5 Budgeted Cost $20,900 $24,000 $10,000 QTY/HRS Rate 10,000kg $2 5,000hrs $5 D.L Hrs $3 50,000kgs $2.5 Budgeted Cost $20,000 $25,000 $15,000 $50,000
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Exam Topic 16: BASIC VARIANCE ANALYSIS Actual Data (Product A) Fixed Factory Overheads (Indirect expenses) $55,000 Production during the period (KGs) 49,000kgs Product A sold at $2.7
Required:
Calculate variances for material, labour, overheads and sales in as much detail as data give permits.
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6 Interpreting Variances
We can classify variances into two categories.
Types Favourable (target achieved) Cost related Variances If standards cost exceeds actual cost Example: variances are Favourable. Material, labour and overhead variances Revenue related variances If actual revenue exceeds standard Example: revenue variances are Favourable. Sales price and volume variances.
Adverse (target not achieved) If actual cost exceeds standard cost variances are adverse.
7 Investigating Variances
Following factors should be taken into account before investigating variances. Benefit of investigating variance must exceed its cost. Materiality of the variance should be considered before investigating variance. Variances are based on standards which are subjective in nature. Insignificant variances should be ignored. Variances can be due to one off events which are not likely to happen again. These should be ignored as they will not affect future performance. Variances resulting in Favourable or adverse variance by the same amount every month suggests that standards itself are set wrong and there is no problem with operational processes. Variance increasing every month below the materiality level and even by smaller amount needs to be investigated. As they can soon become significant variances. It suggests that something is wrong with operational processes. Variance should only be investigated if they are controllable. Some variances occur due to external influences outside the control of manager and organization as a whole.
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06/10
Q2:a
Exam Topic 16: BASIC VARIANCE ANALYSIS Assess the performance of the production director using all the information above taking into account both the decision to use a 7 new supplier and the decision to de-skill the process. Reasons for Adverse Variance It can be adverse due to Increase in material prices. Purchase personnel lack negotiation skills. Penalties for urgent ordering. Usage of better quality material than previously agreed. Faulty planning.
Reasons for Favourable Variance It can be Favourable due to Decrease in material prices. Purchase personnel expert at negotiating discounts. Bulk purchase discounts. Usage of cheaper quality material than previously agreed. Faulty planning Use of more skilled labour capable of using material wisely. Usage of better quality material easier to work with. Faulty planning. Low labour turnover. Decrease in wage rates. Use of less skilled labour. Faulty planning. Use of more skilled labour. Better working conditions. Better quality material. Low labour turnover.
Control actions Train purchase personnel Establish reorder levels and inventory control procedures. Improve planning process. Authorized material before purchasing. Train workers. Employee skilled work force. Use standard quality material. Change production process. Use standard skilled labour. Authorized recruitment of labour. Use standard skilled labour. Provide better working conditions. Carry out proper machine maintenance.
Use of less skilled labour resulting in material wastages. Usage of cheaper quality material difficult to work with. Faulty planning. High labour turnover. Increase in wage rates. Use of more skilled labour. Faulty planning. Use of less skilled labour. Poor working conditions. Cheaper quality material High labour turnover.
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Variances
Reasons for Favourable Variance Motivated labour worked harder. Faulty planning.
Expenditure incurred more carefully. All reasons for labour rate variance. All reasons for labour efficiency variance.
Exam Topic 16: BASIC VARIANCE ANALYSIS Reasons for Adverse Variance Control actions Lack of motivation. Retain labour Machine breakdown Provide resulting in idle motivation. time. Establish Faulty planning. disciplinary procedure. Expenditure Establish incurred authorization extravagantly. procedure for All reasons for expenditures. labour rate variance. All reasons for labour efficiency variance. All control actions for labour efficiency variance. Establish authorization procedure for expenditures.
Expenditure incurred more carefully. All reasons for labour rate variance. Budgeted fixed cost planned wrongly More units produced than expected. Budgeted activity level is planned wrongly.
Expenditure incurred extravagantly. All reasons for labour rate variance. Budgeted fixed cost planned wrongly. Less units produced than expected. Budgeted activity level is planned wrongly.
Use appropriate forecasting techniques. All control action for labour efficiency variance. All control action for labour efficiency variance. It will remain inevitably adverse.
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Reasons for Favourable Variance produce more than resources available. Sales personnel are expert Motivated sales personnel General Price increase. Change in pricing policy. Sales price wrongly set. Manipulation of results if sales personnel are rewarded on commission basis. Sudden increase in demand. Sales personnel are expert. Demand wrongly forecasted. Manipulation of results if sales personnel are rewarded on commission basis. Motivated sales personnel.
Exam Topic 16: BASIC VARIANCE ANALYSIS Reasons for Adverse Variance Control actions such as holidays. Sales personnel are novice. Lack of motivation. General Price decrease. Sales price wrongly set. Change in pricing policy. Train sales personnel. Motivate sales personnel. If possible make long term contracts with customers.
Sudden decrease in demand. Sales personnel are novice. Demand wrongly forecasted. Lack of motivation.
Past paper
Q.no
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Exam Topic 16: BASIC VARIANCE ANALYSIS Relationships can be horizontal or vertical.
Example:
Sales price variance and sales volume variance are interrelated. Selling at reduced prices can give adverse sales price variance. However, it may result in increased sales volume giving rise to Favourable sales volume variance. This is an example of horizontal relationship. Material price and labour efficiency can be interrelated. Usage of poor quality material can reduce labour efficiency because poor quality materials may be difficult to work with. This is an example of vertical relationship.
10 Reconciling Budgeted & Actual Profits 10.1 Under Absorption Costing Illustration:
Use data from above question.
Solution:
Variance or Control Statement Budgeted gross profit (50,000 x 0.3) Favourable Adverse $ $ Sales variances Sales price variance Sales volume variance Total sales variance Actual sales minus standard cost of sales Cost variances Material price Material usage Labour rate Labour efficiency Var prod O.D expn Var O.D efficiency Fixed prod O.D expn Fixed prod O.D vol Actual gross profit 9,800 9,800 300 300 9,500(F) 24,500 $ 15,000
1,100 2,400 4,000 4,500 2,000 2,700 5,000 1,000 12,400 2,100 (A) 22,400
10,300
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Reconciliation:
Details Workings Sales revenue (49,000 x $2.7) Material cost (11,000 x $1.9) Labour cost (4,000 x $6) Variable prod O.D cost (4,000 x $2.5) Fixed prod O.D cost Total cost Actual gross profit $ 20,900 24,000 10,000 55,000 109,900 22,400 $ 132,300
6,400
3,900(F) 77,400
Reconciliation:
Details Workings Sales revenue (49,000 x $2.7) Material cost (11,000 x $1.9) Labour cost (4,000 x $6) Variable prod O.D cost (4,000 x $2.5) Fixed prod O.D cost Total cost $ 20,900 24,000 10,000 _ 54,900 $ 132,300
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Exam Topic 17
Exam Awareness
Factors Frequency Magnitude Details Mix and yield variances are frequently examined topic. Mix and yield variances can be examined as a part of a question. It can be examined as 6 12 marks question. Composition It can be examined as calculation based question. However, it can be examined as discussion based question in exceptional cases. Relationship Mix and yield variances can be examined with basic variance analysis, operational and planning variance, performance measurement and types of budgeting (flexed budget) etc. It can be examined in combination with basic variances requiring analysis of these variances into mix and yield variances. Although, it is computational you need through understanding to pick relevant information from the scenario.
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Example:
Restaurant selling chicken burger, club sandwich, zinger burger etc. Some products have higher gross profit margin or contribution to sales (C/S) ratio than others.
Example:
Zinger burger may have higher profit margin than chicken burger. It is worth looking into detail that which products are responsible for sales volume variance either favourable or adverse to aid future planning and control. Sales mix & yield variances are the breakup of sales volume variance.
Example:
Standard sales volume proportion for chicken burger, club sandwich and zinger burger is 3:2:1 respectively. Sales mix variance will arise if chicken burger, club sandwich and zinger burger is not actually sold in standard proportion. Sales mix variance accounts for decrease or increase in profit/contribution made from standard due to change in proportion of products in actual sales volume as each product has different profit margin or C/S ratio. If each product sold has some profit margin or C/S ratio then decrease in profit from over selling of one product will be set off by decrease in cost from under selling of other product. Therefore, no material mix variance will arise.
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Illustration:
Budgeted data for the month of June is as follows. Products Units Std Profit/Unit Chicken burger 3,000 $10 Club sandwich 2,000 $11 Zinger burger 1,000 $12 Budgeted sales volume 6,000 Actual data for the month of June is as follows. Products Chicken burger Club sandwich Zinger burger Actual sales volume Units Act Profit/Unit 2,500 $11 1,500 $10 1,200 $11 5,200
Required:
Calculate sales mix variance.
Solution:
Act sales volume Act sales Variance Products in act mix volume in Std mix in Kg Std price Variance in $ Chicken burger 2,500 2,600 100 Adv $10 $1,000 Adv Club sandwich 1,500 1,733 233 Adv $11 $2,563 Adv Zinger burger 1,200 867 333 Fav $12 $3,996 Fav Total 5,200 5,200 0 $403 Fav
( ( (
) ) )
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Formula: Illustration:
Budgeted data for the month of June is as follows. Products Units Std Profit/Unit Chicken burger 3,000 $10 Club sandwich 2,000 $11 Zinger burger 1,000 $12 Budgeted sales volume 6,000 Actual data for the month of June is as follows. Products Chicken burger Club sandwich Zinger burger Actual sales volume Units Act Profit/Unit 2,500 $11 1,500 $10 1,200 $11 5,200
Required:
Calculate sales mix variance.
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Exam Topic 17: MIX & YIELD VARIANCES Act sales volume in Std Variance Std Variance in mix in Kg price $ 867 133 Adv $12 $1,596 Adv 5,200 800 Adv $8,533 Adv
Method2:
Actual yield (production) 5,200 Standard yield expected from actual input (23,478/0.4) 6,000 Yield variance in units 800 Adv Std cost of a cake (W1) X $10.6667 Yield variance in $ (1,305 x 0.302) $8,533 Adv
Working1:
Act sales volume Variance in act mix in Kg Std price Variance in $ 2,500 500 Adv $10 $5,000 Adv 1,500 500 Adv $11 $5,500 Adv 1,200 200 Fav $12 $2,400 Fav 5,200 800 Adv $8,100 Adv
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Example:
Selling more chicken burger and fewer zinger burgers than standard will lead to increase in the requirement of actual sales volume in order to make budgeted profit or contribution. Change in sales volume requirement can also result because of change in actual selling price. Increase in selling price will result in increased profit or contribution sale. Decrease in selling price will result in increase in profit or contribution per sale. In earlier case, sales volume requirement will decrease and in later case, sales volume requirement will increase.
Example:
Reduction in selling price of zinger burger will lead to decrease in profit margin or contribution. Therefore, actual sales volume needs to be higher to compensate for decrease in profit margin or contribution. It means sales price variance can also favourably or adversely affect sales yield variance. Sales mix variance will also be affected due to change in actual selling price from standard. It is due to decrease in actual selling price will lead to increase in demand for products and increase in actual selling price will lead to decrease in demand for products.
Example:
Decrease in actual selling price of zinger burger from $12 to $11 resulted in increase in actual sales volume from 1,000 to 1,200 units. Increase in actual selling price of chicken burger from $10 to $11 resulted in decrease in actual sales volume from 3,000 to 2,500 units.
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Exam Topic 18
Exam Awareness
Factors Frequency Magnitude Composition Details Planning and operational variances are frequently examined topic. Planning and operational variances can be examined as a part of a question. Planning and operational variances can be examined as calculation based question. However, it can be examined as discussion based question in exceptional cases. Relationship Planning and operational variances can be examined with basic variance analysis, mix and yield variances, performance measurement and types of budgeting (flexed budget) etc. It can be examined in combination with basic variances requiring analysis of these variances into mix and yield variances. Thorough understanding of the reasons behind calculating variance is necessary.
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Diagram:
Effective date Operational variance (Org Act) Planning variance (Org Rev) Operational variance (Rev Act)
Required:
Analyse the above total variances into component parts for planning and operational variances in as much detail as the information allows. Assess the performance of the production manager.
Formulae:
Or
(
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( ( ( ( ) )
) )
Explanation
Total Material planning variance is $4,160 favourable. Total material planning variance represents the combined effect of material price planning variance and material usage planning variance. At strategic level, material price planning variance is in the control of purchase manager while material usage planning variance is in the control of production manager. In order to reward/penalise their individual planning performance we need to analyse the components of total material planning variance.
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Explanation
It determines the impact of change in circumstances (increased oil prices) on profit. It suggests that increase in cost of $3,360 is due to circumstances not anticipated at planning stage rather than due to operational inefficiency of a purchase manager.
( ( )
Explanation
It determines that impact of change in circumstances (change in standard size of security cards) on profit. It suggests that increase in material usage of $800 is due to circumstances not anticipated at planning stage by senior managers rather than due to operational inefficiency of a production manager.
5.1.3 Reconciliation:
Explanation
It is proved that material price planning and material usage planning variances are calculated accurately.
Exam Support
If standard material usage were not revised to 4,200g then original material usage of 4,000g will be considered as revised material usage. Similarly, if standard material price were not revised to $4.8 then original material price of $4 will be considered as revised material price. ( )
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Explanation
Material operational variance is 1,785 favourable. Total material operational variance represents the combined effect of material price operational variance and material usage operational variance. At operational level, material price operational variance is in the control of purchase manager while material usage operational variance is in the control of production manager. In order to reward/penalise their individual operational performance we need to analyse the components of total material operational variance.
Explanation
Material price operational variance is $1,575 adverse. It purchase manager has brought expensive material than standard. However, it is possible that material purchased may be of higher quality than standard.
Explanation
Material usage operational variance is $3,360 favourable. It suggests production manager has efficiently controlled material usage than expected from him/her. However, it is possible that material used was of higher quality which is easier to work with and therefore, it has taken less time to process.
5.2.3 Reconciliation:
Explanation
It is proved that material price operational and material usage operational variances are calculated accurately.
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Exam Support
Planning and operational variances can also be calculated in tabular format. It is useful where you are required to calculate variance for more than one type of material. Any format which leads to logical and understandable presentation will be acceptable. In case of more than one type of materials, apply the above formulae for each type of material by clearly labelling calculations for each material in brackets.
Example:
( ( ( ) ) ( ( ) ) )
Sighting the formula before performing calculations will help marker give you some reward if you applied the principles correctly but you omitted or miswritten figures. Above note applies equally to labour and sales variances.
5.3 Summary:
Variances Planning Operational Total material variance $4,160 Adverse $1,785 Favourable Material price variance $3,360 Adverse $1,575 Adverse Material usage variance $800 Adverse $3,360 Favourable
Exam Support
If you are required to comment on variances then you should draw the table to facilitate to yourself. It will also facilitate your marker as he/she can quickly award you marks. Total material operational variance is favourable. However, if total material variance is not spilt into planning and operational parts then performance will be considered as $2,375 adverse.
Operational managers will be wrongly penalised for $4,160 adverse planning variance over which they have no control. Material price operational variance is adverse. However, if material price variance is not spilt into planning and operational parts then performance will be considered as $4,375 adverse. ( )
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Purchase manager at operational level will be wrongly penalised for $3,360 adverse planning price variance over which he/she has no control. However, purchase manager is still responsible for operational price variance of $1,575 adverse. Material usage operational variance is favourable. However, if material usage variance is not split into planning and operational parts then performance will be considered as $2,000 Favourable ( ( ) )
Production manager at operational level will be wrongly penalised for $800 adverse planning usage variance over which he/she has no control. Separation of variance in planning and operational parts has prevented de-motivation on the part of production manager and result in reduced performance in future. Planning variances can also favourable. In such case, operational managers will be more rewarded than they are entitled.
Diagram:
Material price planning variance Total material cost planning variance Material usage planning variance
Material price operational variance Total material cost operational variance Material usage operational variance
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Exam Topic 19
Exam Awareness
Factors Frequency Magnitude Details Financial performance measurement is regularly examined topic. Financial performance measurement can be examined as full 20 marks question or as a part of a question. Composition As the topic name suggests, it can be examined mostly as calculation based questions with brief interpretation of financial performance measures. Relationship Financial performance measurement can be examined in combination with non-financial performance measurement and behavioural aspects of performance measurement, budgeting system, types of budgeting etc. It is important that you understand links and overlaps between various exam topics to answer question more reasonably.
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Exam Support
Use prescribed format in the requirement and address to recommended person, this will help you earn easy marks. Calculate all the financial ratios at the end of report or memo in separately appendix and after doing this comment on these ratios by organizing them in logical order (profitability, liquidity, gearing etc.).
Formula:
Where
Or
If PBIT is not given, profit before tax (PBT) or profit after tax (PAT) figure can be used. It represents the intensity with which assets have been utilized to generated profits. It is used to measure divisional performance and performance of its manager as well.
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SFP at the year ended Assets Non-current assets Property, plant and equipment Long term investments Non-current assets Current assets Inventory Account receivables Trade receivables Loan receivables Cash Current assets Total assets Liabilities (current liabilities) Overdraft Account payables Trade payables Tax payables Current liabilities Non-current liabilities 5% Redeemable preference shares Bank loan Non- current liabilities
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Exam Topic 19: FINANCIAL PERFORMANCE MEASUREMENT SFP at the year ended 30 May 2010 30 May 2011 Total liabilities 7,400 8,600 Equity Ordinary Share capital $1 Share premium Retained earnings Other reserves Equity Equity & Liabilities 3,000 5,000 4,000 1,000 13,000 20,400 3,000 5,000 4,500 1,000 13,500 22,100
Required:
Calculate ROCE and interpret the results?
Solution:
Workings Return on capital employed 2010 24.51% Workings 2011 54.30% Workings Growth/ (Decline) rate 121% It suggests that ROCE increased by 121% than previous year. Intensity with which capital employed used is increased.
It suggests that operating It suggests that operating profit $24.51 is profit of $34.30 is generated from generated from operations out of each operations out of each $100 invested. $100 invested.
Formula:
Where
If PBT is not given then PAT or PBIT can be used. It suggests how intensely equity capital is used to generate profits for equity holders. It is used to evaluate performance of division or organization as a whole from shareholders perspective.
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SFP at the year ended Assets Non-current assets Property, plant and equipment Long term investments Non-current assets Current assets Inventory Account receivables Trade receivables Loan receivables Cash Current assets Total assets Liabilities (current liabilities) Overdraft Account payables Trade payables Tax payables Current liabilities Non-current liabilities 5% Redeemable preference shares Bank loan Non- current liabilities
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Exam Topic 19: FINANCIAL PERFORMANCE MEASUREMENT SFP at the year ended 30 May 2010 30 May 2011 Total liabilities 7,400 8,600 Equity Ordinary Share capital $1 Share premium Retained earnings Other reserves Equity Equity & Liabilities 3,000 5,000 4,000 1,000 13,000 20,400 3,000 5,000 4,500 1,000 13,500 22,100
Required:
Calculate ROE and interpret the results?
Solution:
Workings Return on Equity 2010 37.31% It suggests that profit before tax of $37.31 is generated from operations out of each $100 belong to equity shareholders. Workings 2011 87.78% It suggests that operating profit of $34.30 is generated from operations out of each $100 belong to equity shareholders. Workings Growth/ (Decline) rate 135% It suggests that ROE increased by 135% than previous year. Intensity with which equity capital used is increased.
Formula:
( ( Where ) ) ( ) ( )
It represents how much profits are left in the organization after paying provider of capital. It includes both debt and equity finance providers. It is used for same purpose as ROCE.
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SFP at the year ended Assets Non-current assets Property, plant and equipment Long term investments Non-current assets Current assets Inventory Account receivables Trade receivables Loan receivables Cash Current assets Total assets Liabilities (current liabilities) Overdraft Account payables Trade payables Tax payables Current liabilities Non-current liabilities 5% Redeemable preference shares Bank loan Non- current liabilities
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Exam Topic 19: FINANCIAL PERFORMANCE MEASUREMENT SFP at the year ended 30 May 2010 30 May 2011 Total liabilities 7,400 8,600 Equity Ordinary Share capital $1 Share premium Retained earnings Other reserves Equity Equity & Liabilities Cost of capital for both years is 10%. 3,000 5,000 4,000 1,000 13,000 20,400 3,000 5,000 4,500 1,000 13,500 22,100
Required:
Calculate residual income and interpret the results.
Solution:
2010 $ Profit before interest and tax Notional cost of capital Residual Income/(Loss) 5,000 (20,400 x 10%) (2,040) (22,100 x 10%) 2011 $ 12,000 (2,210) Growth/(Decline) rate $
2,960 10,210 7,250 It suggests that profit of It suggests that profit of Organization has $2,960 is retained in the $10,210 is retained in the retained $7,250 organization after organization after more than previous meeting demand of meeting demand of year. providers of finance providers of finance Increase in profits (debtor and equity (debtor and equity after satisfying holders). holders). financers.
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Exam Topic 19: FINANCIAL PERFORMANCE MEASUREMENT ROCE RI RI results in acceptance of investment proposal which is generating positive RI. As it will improve the overall RI of the division. It will lead to goal congruence between the divisional managers and organization. ROCE is appropriate for short term performance RI is appropriate for long term performance measurement. measurement. Disadvantages ROCE results in rejection of investment proposal RI takes no account of size of the investment that is generating lower ROCE than existing used to generate profits. ROCE of division; instead generating ROCE higher than required by the organization. As it will lower the overall ROCE of the division. Particularly if managers performance and rewards are being measured on the basis of ROCE. This leads to dysfunctional decision making. ROCE cannot be adjusted to reflect different risk RI cannot be used to compare divisional involved in different investments or divisions. performance with other divisions. As it is an absolute measure of performance. ROCE can be calculated using different profit RI uses cost of capital based on individual figures such as PBT, PAT etc making comparison judgment which can be wrong. difficult.
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Exam Topic 20
Exam Awareness
Factors Frequency Magnitude Details Non-financial performance measurement is regularly examined topic. Non-financial performance measurement can be examined as full 20 marks question or as a part of a question. Composition Non-financial performance measurement can be examined as mostly discussion based question. It also involves major calculations involving the use the numbers rather than monetary values. Relationship Non-financial performance measurement can be examined in combination with Financial performance measurement and behavioural aspects of performance measurement, budgeting system, types of budgeting etc. It is very non-learning and non-repetitive topic; rather it relies on understanding of organizational activities in different sectors and creative mind. You will be required to suggest performance measures for particular industry or sector. Performance measures you suggest should be applicable to that sector. Balance scorecard can form the basis (framework) of thinking financial and non-financial performance measures of sector in question.
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Exam Topic 21
TRANSFER PRICING
Sub Exam Topics
S.no 1 2 3 4 5 Headings (click the hyperlinks below for easy navigation) Download Full Version Download Full Version Download Full Version Download Full Version Download Full Version
Exam Awareness
Factors Frequency Details It is moderately examined topic. However, its significance in management accounting and changing environment makes it very examinable topic. Magnitude Transfer pricing can be the basis of full 20 marks question or as a part of a question. Composition Transfer pricing can be examined as calculation as well as discussion based question. Relationship It can be examined in combination with pricing decisions, relevant costing, short term decision making, types of budgeting, financial and non-financial performance measurement, behavioural aspects of performance measurement etc Transfer pricing has implications for management accounting as well as financial management. It may involve calculation of prices based on different policies.
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Exam Topic 22
Exam Awareness
Factors Frequency Details Behavioural aspect of performance measurement is frequently examined topic. Magnitude Behavioural aspects of performance measurement can be the basis of full 20 marks question or as a part of a question. Composition It can only be examined as discussion based question. Relationship Behavioural aspects of performance measurement can be examined in combination with pricing decisions, relevant costing, short-term decisionmaking, types of budgeting, financial and non-financial performance measurement etc. Knowledge learnt in this topic can be used for other exam topics involving human resource (manager, direct labour) such as learning curve, budgeting systems etc It will probably be examined as part of question on decision making and performance measurement scenario. It is subjective topic, more than answer may equally acceptable provided that adequate reason is provided for your comments. Answers without justification will not be rewarded.
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Past paper
Q.no
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feasible (attainable) target amongst suggested targets. Moreover, it is difficult to persuade managers to accept and achieve the target.
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3.2 Bonus
It is also given in cash. It is used to motivate employees in the expectation that motivated employees will performance more efficiently.
3.3 Shares
Share based rewards are given to motivate managers to make them focused on aspects of performance that can lead to long term objectives of the organization.
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3.5 Pension
It is given as a percentage of basic salary. It motivates employees to focus their performance on areas that can lead to long term survival of the business. It does not motivate employees to improve their performance more than necessary for the survival of the organization.
3.6 Benefits
Benefits are non-financial incentives given to motivate employees and to enable them work more efficiently. Benefits include cars, laptops, accommodation, holiday packages etc.
4 Rewarding Performance
Requirement Marks Calculate the amount of bonus that the manager should expect to 06/10 Q5:a 6 be paid for the latest financial year. Discuss whether a given reward (bonus) will be likely to motivate 06/09 Q4:b 4 manager in particular situation. This kind of question is unlikely to be repeated again. However, if you come across such kind of question you simply have to use mathematical skills to solve. Bonus is usually given to motivate manager to improve their efficiency. Bonus can be of two types. Absolute Performance related Absolute bonus is flat rate paid to employees at regular intervals in advance. It is given in the hope that employees will improve their efficiency. Performance related bonus is paid to employees in arrears depending upon actual performance measured based on some predefined target. Amount of performance related bonus varies from period to period depending on the achievement of predefined target (standard). Predefined standard can financial as well as non-financial. Past paper Q.no
Example:
Financial standard can be 20% ROCE. Non-financial standard can be number of new customers.
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Example:
Amount of bonus payable on achievement of 20% ROCE is $1,000. Bonus payable will rise by 10% for each 5% increase in ROCE above 20%. Comparison of actual performance with predefined standard is known as benchmarking. You may be required to compare actual performance with following Budget. Actual performance of previous year. Actual performance of competitor. Actual performance of other department/division. Motivation of managers depends upon perception on feasibility (attainability) of standards.
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