ACCA F2

1
ACCA F2

• Management Accounting (MA)

2
The exam

• 2 hours
• Marks
• Forty 2-mark questions 80
• Ten 1-mark questions 10
• 90
• Pass mark 50

3
Core syllabus areas
4

• Chapter 1
• The nature and purpose of management accounting

5
The nature and purpose ofmanagement accounting

• Data and information.
• Planning, decision making and control.
• Responsibility centres.
• The role of management accounting.

6
Data and information

• Data and information are different.
• Data consists of numbers, letters, symbols, raw
  facts, events and transactions which have been
  recorded but not yet processed into a form
  suitable for use.
• Information is data which has been processed in
  such a way that it is meaningful to the person
  who receives it (for making decisions).

7
Good information

• The ACCURATE acronym
• A Accurate
• C Complete
• C Cost-effective
• U Understandable
• R Relevant
• A Accessible
• T Timely
• E Easy-to-use!

8
Planning, decision making control
9
Strategic, technical and operational planning
10
Responsibility Centres
An part of the business whose manager has
personal responsibility for its performance.
Cost Centre
Responsibility Centre
Investment Centre
Profit Centre
Revenue Centre
Managers to plan control areas of performance
on which they are measured.
11
Responsibility Centres
12
Responsibility centres - Examples
13
Management Accounting vs. Financial Accounting
14
Management Accounting vs. Financial Accounting
Management Accounting Financial Accounting
Information mainly produced for Internal users, e.g. Managers and employees External users e.g. Shareholders, creditors, lenders, banks, government
Purpose of information To aid planning, control and decision making To record financial performance and position in a period
Legal requirements No Yes (limited companies)
Formats No set format managers decide on content presentation Limited companies must produce financial accounts
Nature of information Financial non-financial Mostly financial
Time period Historical forward-looking Mainly an historical record
15

• Chapter 2
• Types of cost and cost behaviour

16
Classifying costs
17
Production Costs
Production costs are those incurred when raw
materials are converted into finished and
part-finished goods.
18
Non-Production Costs
Non- Production costs are costs not directly
associated with the production processes in a
manufacturing organisation.
19
Direct and Indirect costs
Direct costs costs which can be directly
identified with a specific unit or cost centre
Total of direct costs Direct Materials
Direct labour Direct expenses Prime Cost
Indirect costs costs which can not be directly
identified with a specific unit or cost centre
Indirect costs Indirect Materials Indirect
labour Indirect expenses Overheads
20
Cost Behaviour variable cost

• The way in which costs vary at different levels
  of activity

• A cost that varies with the level of activity,
  e.g. Material cost

21
Cost behaviour Fixed Costs
A cost that, within certain output and sales
revenue limits, is unaffected by changes in the
level of activity.
Stepped Fixed Costs A fixed cost which is only
fixed within a certain level of activity. Once
the upper level is reached, a new level of fixed
costs becomes relevant.
22
Cost behaviour Semi variable costs
A cost with a fixed and a variable element,
e.g.telephone charges with fixed line rental and
charge per call
23
Cost behaviour Hi-low method
Costs are analysed into variable fixed elements
using the hi-low method.
Step1 Select high and low activity levels and
their associated costs.
Step 2 Variable Cost per unit Change in
Cost / Change in level of activity
Step 3 Find fixed cost by substitution Fixed
cost per unit Total cost (Variable Cost per
unit Number of units)
24
Hi-low method - Example
25
Linear Cost functions
26
Cost Objects, Units Centres
27
Cost Card
28

• Chapter 3
• Business Mathematics

29
Expected Values
The weighted average of a probability
distribution, used in simple decision-making
situations.
EV ?px
Where p probability of outcome occurring x
outcome.

• When using Expected Values
• Only accept projects if EV is positive
• With mutually exclusive options, accept the one
  with the highest EV.

30
Expected Values - Example
31
Expected Values - Limitations

• Expected values
• Use past data and estimates, which may be
  inaccurate
• Are not always suitable for one-off decisions as
  they are long-term average. The expected value
  might never occur for any single result
• Do not take into account the time value of money
• Do not take into account the decision makers
  attitude to risk.

32
Regression
If x is the independent variable and y the
dependent variable, least squares regression
finds the line of best fit through the scatter
diagram.

y a bx
Where a is the y value when x is 0, and b is the
change in y when x increases by one unit.
33
Regression
In the context of cost estimation y represents
the total cost x represents the production volume
in units a represents the total fixed costs b
represents the variable cost per unit
(Given)
34
Correlation Coefficient
r measures the strength of a linear relationship
between two variables.
-1 lt r lt 1

• If r 1 perfect positive correlation
• If r 0, no correlation
• If r -1, perfect negative correlation.

(Given)
Correlation does not prove cause and effect it
merely suggests it.
35
Coefficient of determination
r² shows how much of the variation in the
dependent variable is dependent on the variation
of the independent variable.
E.g. If r 0.95, r² 0.90 or 90 This means
that 90 of the variation in y (costs) is
explained by the variation in x (level of
output).

36

• Chapter 4
• Ordering and Accounting for Inventory

37
Ordering, Receiving and issuing materials

38
Ordering, Receiving and issuing materials

39
Paperwork
Document Completed by Sent to Information included
Purchase Requisition form Production department Purchasing department Goods required Managers authorisation
Purchase order form Purchasing Department Supplier Accounting (copy) Goods receiving department (copy) Goods required
Delivery note Supplier Goods Receiving Department Check of goods delivered against order form
Goods Received Note Goods receiving department Purchasing department Verification of goods received to enable payment
Materials requisition note Production department Stores Authorisation to release goods Update stores record
Materials returned notes Production Department Stores Details of goods returned to stores Update stores record
Materials Transfer notes Production Department A Production Department B Goods transferred between departments Update stores records

40
Double entry

41
Double entry

42
Control Procedures

43

• Chapter 5
• Order Quantities and Reorder Levels

44
Holding Ordering Costs

Minimise total of holding, ordering and stock-out
costs
45
Economic Order Quantity
The EOQ minimises the total of holding, ordering
stock-out costs
v
2C0D
EOQ
Ch

Where D demand p.a. C0 Cost of placing one
order Ch cost of holding one unit per
year Annual ordering costs C0D/Q Annual holding
cost ChQ/2
46
Bulk Discounts
47
Economic Batch Quantity
The number of manufactured items to produce in a
batch, to minimise total costs
v
2C0D Ch(1-D/R)
EBQ

Where D demand p.a. C0 Cost of setting up
batch Ch cost of holding one unit per year R
Annual replenishment (annual production)
rate Annual setup costs C0D/Q Annual holding
cost ChQ/2 (1-D/R)
48
Re-order levels
The pre-determined level of inventory at which
order is placed, to avoid stock-outs.
Re-order level usage per day lead time in days
When lead time and demand in lead time is not
constant
Re-order level maximum usagemaximum lead time
Maximum Inventory level Re-order level
re-order quantity (minimum usageminimum lead
time)
Minimum Inventory level (buffer stock) Re-order
level (average usage average lead time)
Average inventory (Re-order quantity / 2)
minimum inventory
49

• Chapter 6
• Accounting for Labour

50
Direct or Indirect Costs?
Type of worker
Directly involved in making products
Indirect workers (Maintenance staff, supervisors,
Canteen

• Direct Labour cost
• Basic Pay
• Overtime Premium on specific job, at
  customers request

• Indirect Labour cost
• General O/T premiums
• Bonus payments
• Idle time
• Sick pay
• Time spent on indirect jobs

Indirect Labour cost ALL COSTS
Dr Bank Labour Costs Incurred Cr WIP Direct
Labour Costs Cr Production Overheads Indirect
Labour Costs
51
Remuneration Methods

• Time Based Schemes
• Total Wages
• (hours worked basic pay/hour) (o/t hrs worked
  o/t premium/hour)
• Higher quality if workers are happy to spend
  longer on units to get them right However, no
  incentive to improve productivity.

• Piecework Schemes
• Total Wages
• Number of units completed agreed rate per unit.
• May involve a guaranteed minimum wage
• May use a higher rate per unit once productivity
  target achieved
• Higher productivity at the expense of quality?

• Other Schemes e.g. Flat salary bonus
• Bonus Schemes (individuals or groups)

52
Remuneration methods - examples
53
Labour Turnover
54
Labour Related Ratios
55
Labour Related Ratios
56

• Chapter 7
• Accounting for Overheads

57
Absorption costing
Step1 O/H allocated or apportioned to cost
centres using suitable bases
Step 2 Service cost centres reapportioned to
production cost centres
Step 3 Overheads absorbed into units of
production
Cost Unit x
58
Absorption costing
Step1 Allocation is the charging of overheads
directly to specific departments where they can
be identified directly with a cost centre or cost
unit. Apportionment is the sharing of overheads
which relate to one department between those
departments on a fair basis.
Step 2 Service department costs need to be
reapportioned to the production departments,
using a suitable basis linked to usage of the
service.

• Step 3 Costs within production cost centres are
  charged to a cost unit, using Overhead absorption
  rates (OAR) based on
• Labour or machine hours
• of direct labour cost
• ....

OAR Budgeted overheads / Budgeted level of
activity
59
Re-apportionment
60
Over- or under-absorption of overheads
Overheads Absorbed Actual labour hours OAR
per labour hour
Actual Overheads Incurred
Overhead under- or over-absorbed
Actual overheads different from budget
Actual activity level different from budget
61
Ledger Accounting
62

• Chapter 8
• Marginal and Total Absorption Cost

63
Contribution
64
Absorption marginal costing and profits
ABSORPTION COSTING MARGINAL COSTING
Valuing units Total production cost Marginal (variable) production cost
Valuing inventory Opening and closing stock valued at total production cost OS and CS valued at marginal cost
Fixed production overheads Carried forward from one period to the next as part of the closing / opening stock valuation. Only hit profit when units are sold. FC charged in full against profit in the period in which they are incurred
Adjusting for over- or under-absorption Yes in the income statement None needed
Impact of increase in inventory levels Gives higher profit Gives lower profit
Impact of decrease in inventory levels Gives lower profit Gives higher profit
Inventory level constant Same profit under both systems Same profit under both systems
65
Profit Statements




66
Reconciliation
MARGINAL COSTING PROFIT
Increase in inventory Fixed OAR
ASORPTION COSTING PROFIT
67
Absorption Vs Marginal
68
Definitions
69
Breakeven Chart
70
Contribution Breakeven Chart
71
P/ V Chart
72

• Chapter 9
• Relevant Costs

73
Relevant Cash Flows
74
Relevant Cash Flows
75
Relevant Cash Flows - Materials
76
Relevant Cash Flows - Labour
77
Relevant Cash Flows - Labour
78
Other Relevant Costs

• The Relevant cost of overheads is only that which
  varies as a direct result of the decision taken.
• Fixed Assets
• Relevant costs are treated as if related to
  materials
• If PM is to be replaced, then relevant cost
  current replacement cost
• If PM not to be replaced, then relevant cost is
  higher of
• Sales proceeds (if sold)
• Net cash inflows arising from use of the asset
  (if not sold).

79

• Chapter 10
• Dealing with Limiting Factors

80
Single Limiting factor
A limiting factor is a factor that prevents a
company achieving the level of activity it would
like to.
Scarce resources are where one or more of the
manufacturing inputs needed to make a product are
in short supply.
81
Multiple Limiting factor
Linear Programming is the technique used to
establish an optimum product mix when there are
two more resource constraints.
82
Finding the solution Method 1
83
Finding the solution Method 2
84

• Chapter 11
• Job. Batch and Process Costing

85
Job Costing
PROFIT can be a mark-up on cost, or a margin ().
86
Batch Costing
PROFIT can be a mark-up on cost, or a margin ().
87
Process Costing - Features
Find a cost per unit
Value Closing Stock
88
Process Costing Losses Gains
89
Steps for answering questions
90
WIP Equivalent Units
91
WIP Equivalent Units
2 Methods
AVCO
FIFO
Opening WIP Units are completed first.
Opening Inventory Values are added to current
costs to provide overall average cost per unit

• Process Costs in the period allocated between
• Opening WIP units
• Units started completed in period
• Closing WIP Units

92
Losses part way through production
93
Joint and by-products
94
Joint and by-products
Accounting Treatment
95

• Chapter 12
• Service and Operation Costing

96
Service operation costing
97
Suitable Cost Units
Service Possible Cost Unit
Hotel Cost per guest per night
Transport Cost per passenger mile
College Cost per student
Hospital Cost per patient day / cost per procedure
98
Service Cost Analysis
Labour may be the only direct cost
OH likely to be absorbed using labour hours
99

• Chapter 13
• Budgeting

100
Purpose
A quantitative expression of a plan of action
prepared in advance. It sets out the costs and
revenues that are expected in future periods.
Planning
Budgets
Co-ordinating Activities
Controlling Costs
Performance Evaluation
Communication of targets
Motivation
Authorisation of expenditure
101
Preparing Budgets

102
Different types of budgets

• The Master Budget includes the budgeted income
  statement, the cash budget and budgeted statement
  of financial position (Balance Sheet).
• A continuous budget is prepared for a year (or
  budget period) ahead, and is updated regularly by
  adding a further accounting period (month,
  quarter) when the first accounting period has
  expired ( Rolling Budgets).

103
Functional budgets

104
Functional budgets
105
Functional budgets

106
Example

107
Example - continued

108
Fixed, flexible flexed budgets

109
Flexed Budgets and budget variances
Variances are differences arising between the
original budget and actual results.
Volume Variance
Expenditure Variance
Fixed Budget Original expenditure levels for
budgeted activity level
Flexed Budget Original expenditure levels for
actual activity level
Actual results Actual expenditure levels for
actual activity level

Total Variance
110

• Chapter 14
• Standard Costing

111
The purpose of standard costing
Standard Costing is a control tool for
management. Standard Costs are collected on a
standard cost card. They may be based on
Absorption Costing or Marginal Costing.
112
Advantages Disadvantages of Standard Costing
113
Types of standard
Ideal What would be expected under perfect
operating conditions
Types of Standards
Attainable What would be expected under normal
operating conditions
Basic A standard left unchanged from period to
period
Current A standard adjusted for specific issues
relating to the current period
114
Variance Calculations
Are we working with a marginal or absorption
costing system?
Marginal Costing Absorption Costing
Sales Volume Variance (Budgeted Sales Actual Sales) x standard contribution/unit (Budgeted Sales Actual Sales) x standard profit / unit
Standard Selling Price is not used. When volume changes, so do production costs, and the purpose of the variance is to show the impact on profit or on contribution Standard Selling Price is not used. When volume changes, so do production costs, and the purpose of the variance is to show the impact on profit or on contribution Standard Selling Price is not used. When volume changes, so do production costs, and the purpose of the variance is to show the impact on profit or on contribution
Fixed overhead variances MC does not relate fixed o/h to cost units fixed overhead is a period cost. No fixed overheads volume variance. The fixed overhead expenditure variance is the difference between actual expenditure budgeted expenditure. It is the total variance. Fixed o/h are related to cost units by using absorption rates. The Fixed overhead total variance is equal to the over- or under-absorption of overheads. The FO Volume variance can be further subdivided into efficiency capacity variances.
115
Sales Price Variance
Sales Price Variance
(Budgeted Sales Price Actual Sales Price)
X Actual Quantity sold
116
Direct Materials Variances
Materials Price Variance
Actual units purchased X Standard Price - Actual
units purchased X Actual Price
Material UsageVariance
(Actual production X Standard usage per unit) _at_
standard cost per kg/litre - (Actual production
X Actual usage per unit) _at_ standard cost per
kg/litre
117
Direct Labour Variances
Labour rate (price) Variance
Actual hours paid X Standard Rate - Actual hours
paid X Actual Rate
Labour efficiency Variance
(Actual Production in Standard hours X Standard
hourly rate) - (Actual hours worked X Standard
hourly rate)
118
Variable Overhead variances
Variable Overhead expenditure Variance
Actual o/h cost incurred (actual hrs worked X
variable OAR per hour)
Variable overhead efficiency Variance
(Actual hours worked X variable OAR) - (Actual
production in standard hrs X variable OAR per
hour)
119
Fixed Overhead Variances
Absorption Costing
Fixed Production Overheads Total Variance
Volume Variance
Expenditure Variance
Efficiency Variance
Capacity Variance
120
Fixed Overhead Variances
Absorption Costing
Under- or over-absorption of overheads
(Actual Production in standard hours x OAR)
Budgeted FOH
Budgeted FOH Actual FOH
(Actual hours taken standard hours for output
achieved) x OAR
(Actual Hours worked budgeted hours worked) x
OAR
121
Fixed Overhead Variances
Marginal Costing
Fixed Production Overheads Total Variance
Expenditure Variance
122
Causes of Variances
123
Causes of Variances