Acca f2

ACCA F2

Management Accounting (MA)

The exam

• 2 hours

Marks

• Forty 2-mark questions 80

• Ten 1-mark questions 10

90

• Pass mark – 50%

Core syllabus areas

Chapter 1

The nature and purpose of

management accounting

The nature and purpose of

management accounting

• Data and information.

• Planning, decision making and control.

• Responsibility centres.

• The role of management accounting.

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).

Good information

The ‘ACCURATE’ acronym:

– A – Accurate

– C – Complete

– C – Cost-effective

– U – Understandable

– R – Relevant

– A – Accessible

– T – Timely

– E – Easy-to-use!

Planning, decision making

& control

Strategic, technical and

operational planning

Responsibility Centres

An part of the business whose manager has personal responsibility

for its performance.

Managers to plan & control areas of performance on which they are

measured.

Responsibility Centre

Cost Centre

Profit Centre Investment

Centre

Revenue Centre

Responsibility Centres

Responsibility centres -

Examples

Management Accounting vs.

Financial Accounting

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

Chapter 2

Types of cost and cost behaviour

Classifying costs

Production Costs

Production costs are those incurred when raw materials

are converted into finished and part-finished goods.

Non-Production Costs

Non- Production costs are costs not directly associated with the

production processes in a manufacturing organisation.

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

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

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.

Cost behaviour – Semi variable

costsA cost with a fixed and a variable element, e.g.telephone charges with fixed

line rental and charge per call

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)

Hi-low method - Example

Linear Cost functions

Cost Objects, Units & Centres

A Cost object : any activity for which a

separate measurement of cost is undertaken, e.g. A

product

Cost unit : a unit of product or

service in relation to which costs are ascertained e.g. A

hotel room.

Cost centre : a production or service location, function, activity or item of equipment for which costs can be ascertained e.g. A ward in a hospital.

Cost Card

Chapter 3

Business Mathematics

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.

Expected Values - Example

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 maker’s attitude

to risk.

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.

Regression

(Given)

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

Correlation Coefficient

(Given)

r measures the strength of a linear relationship between two

variables.

• If r = 1 perfect positive correlation

•If r = 0, no correlation

•If r = -1, perfect negative correlation.

-1 < r < 1

Correlation does not prove cause and effect – it merely suggests it.

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).

Chapter 4

Ordering and Accounting for Inventory

Ordering, Receiving and issuing

materials

Ordering, Receiving and issuing

materials

Paperwork

Document Completed

by

Sent to Information

included

Purchase Requisition form Production department Purchasing department Goods required

Manager’s 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

Double entry

Double entry

Control Procedures

Chapter 5

Order Quantities and Reorder Levels

Holding & Ordering Costs

Stock-out costs : running out of inventory

Loss of sales

Loss of customers and goodwill

Reduced profits

Holding costs: holding inventory

Fixed costs

• Cost of storage space, insurance

Variable costs

• Interest on capital tied up in stock

Ordering costs : placing orders

Administrative costs

Delivery

Order costs vary with number of orders placed

Minimise total of holding, ordering and stock-out costs

Economic Order Quantity

The EOQ minimises the total of holding, ordering &

stock-out costs

2C0DCh

EOQ =

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 = Ch*Q/2

√

Bulk Discounts

Economic Batch Quantity

2C0D

Ch(1-D/R)EBQ = √

The number of manufactured items to produce in a batch,

to minimise total costs

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 = Ch*Q/2 (1-D/R)

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 usage*maximum lead time

Maximum Inventory level = Re-order level + re-order quantity –

(minimum usage*minimum lead time)

Minimum Inventory level (buffer stock) = Re-order level – (average

usage *average lead time)

Average inventory = (Re-order quantity / 2) + minimum inventory

Chapter 6

Accounting for Labour

Direct or Indirect Costs?

‘Type’ of worker

Directly involved in making productsIndirect workers

(Maintenance staff,

supervisors, Canteen

Direct Labour cost

•Basic Pay

•Overtime Premium

‘on specific job’, ‘at

customer’s 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

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)

Remuneration methods -

examples

Labour Turnover

Labour Related Ratios

Labour Related Ratios

Chapter 7

Accounting for Overheads

Absorption costing

OVERHEADS

Production Department

A

A

Production Department

B

B

Service Department

C

Service Department

D

Cost Unit x

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

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

Re-apportionment

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

Ledger Accounting

• Credited to the production overheads

account

• Transferred to income statement at the end of the period

• Debited to one of the

non-production

OH accounts

• In Production Overheads Account

Indirect Production

Costs

Non-production Overheads

Absorbed Production Overheads

Over- or under-

absorption overheads

Chapter 8

Marginal and Total Absorption Cost

Contribution

PROFIT

Fixed CostsFixed Production & non production cost

per unitTotal Production cost

CONTRIBUTIONPer Unit Total Contribution

Variable costVariable Production & Non-production

cost per unitTotal Variable Costs

Sales RevenuePer Unit Total Sales Revenue

Absorption & marginal costing

and profitsABSORPTION 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

Net Profit / (Loss)

Fixed non-production costs

Variable non-production costs

Gross Profit

Over/Under absorption

Cost of sales

Units sold Full prod. cost/unit

Sales Revenue

Units Sold Price

Profit Statements

Net Profit / (Loss)

Fixed costs

Production Non-Production

Contribution

Variable non-production costs incurred

Cost of sales

Units sold Marginal cost/unit

Sales Revenue

Units Sold Price*

*

*

*

Reconciliation

MARGINAL COSTING PROFIT

Increase in inventory * Fixed OAR

ASORPTION COSTING PROFIT

Absorption Vs Marginal

Definitions

C/S ratio

=

Contribution per unit / Selling Price

B.E.P. =

Fixed Costs / Contribution per unit

Margin of Safety

• Budgeted Sales – Breakeven Point Sales

• (Budgeted – BEP sales) / Budgeted Sales %

Target profit =

(Fixed Costs + Required profit) / Contribution per

unit

CVP Analysis

Breakeven Chart

Contribution Breakeven Chart

P/ V Chart

Chapter 9

Relevant Costs

Relevant Cash Flows

Relevant Cash flow

CASH

INCREMENTAL

FUTURE

Relevant Cash Flows

Relevant Cash Flows -

Materials

Relevant Cash Flows - Labour

Relevant Cash Flows - Labour

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 P+M is to be replaced, then relevant cost =

current replacement cost

•If P+M 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).

Chapter 10

Dealing with Limiting Factors

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.

Multiple Limiting factor

Linear

Programming is

the technique

used to

establish an

optimum

product mix

when there are

two more

resource

constraints.

Finding the solution – Method 1

Draw an example contribution line by making up a suitable value of C, such that the sample line is easy to draw on the graph.

To solve a maximisation problem, whilst keeping its slope constant, slide the line out, away from the origin.

Find the last point where this is still feasible.

Solve simultaneously the equations of the 2 lines that cross at the optimal point identified on the graph.

Finding the solution – Method 2

Co-ordinates of each of the corners of the feasible region are calculated using simultaneous equations.

For each corner calculate the value of the objective function.

Select the corner with the highest or lowest value, depending on whether you are minimising / maximising.

Chapter 11

Job. Batch and Process Costing

Job Costing

Use the same principles of

costing

Produce a cost

card for each job.

Each job is unique

PROFIT can be a

mark-up on cost,

or a margin (%).

Batch Costing

Cost per unit : Total Cost of

batch / Number of units in a batch.

Determine total cost of batch.

Each batch is different, but items identical.

PROFIT can be a

mark-up on cost,

or a margin (%).

Process Costing - Features

Production is continuous.

Difficult to identify units of production.

Output of one process =

input of next process

Closing WIP Period 1

=

Opening WIP Period 2

LossesPart-finished

units

By- products & joint

products

Process Costing – Losses &

Gains

EXPECTED to occur

Do not pick up a share of process costs

Sometimes sold for scrap –credit process account.

Normal Losses

Actual Losses > Normal

losses

Pickup a share of process

costs

Valued like a unit of good

output

Written off in income

statement

Cost reduced by scrap proceeds

Abnormal losses

Actual Losses < Normal

losses

Abnormal gains debit the

process account

Benefit credits the income statement

Remember to Credit the scrap account

Abnormal Gains

Steps for answering questionsDraw

process account

Enter inputs and value(£)

Enter Normal Loss units & scrap value

Enter Good Output –Units only

Balance ‘units’ column with Abnormal

Loss or Gain

Calculate Average Cost

per unit

Value Good output &

Abnormal Loss or Gain

WIP – Equivalent Units

If incomplete units at the beginning or the end of the period, the concept of Equivalent Units (EU)

is used.

100 half completed

= 50 completed

EUs

Process costs can be spread

evenly between

completed & part-

completed units.

Material Cost

spread over all units

Conversion costs

spread over Eus

WIP valued Weighted

average or FIFO

WIP – Equivalent Units

AVCO FIFO2 Methods

Opening

Inventory Values

are added to

current costs to

provide overall

average cost per

unit

Opening WIP

Units are

completed first.

Process Costs in

the period allocated

between :

•Opening WIP units

•Units started &

completed in period

•Closing WIP Units

Losses part way through

production

Joint and by-products

Joint and by-products

Accounting

Treatment

Chapter 12

Service and Operation Costing

Service & operation costing

HETEROGENEITY INTANGIBILITY

PERISHABILITYSIMULTANEOUS PRODUCTION & CONSUMPTION

Output service industries is different

from product of manufacturing.

Suitable Cost Units

Based on their relevance to the service provided

May be necessary to use composite cost

units

More than one type of cost unit

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

Service Cost Analysis

Labour may be the only

direct cost

OH likely to be absorbed

using labour hours

Chapter 13

Budgeting

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.

Budgets

Co-ordinating Activities

Planning

Controlling Costs

Performance

Evaluation

Authorisation of expenditureMotivation

Communication of targets

Preparing Budgets

Define long-term objectives of the business

Form budget committee to communicate budget policy, set and approve budgets.

Produce budget manual

Identify principal budget factor

Produce budget for principal budget factor

Produce and approve other budgets based on budget for limiting factor

Review variances

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).

Functional budgets

Functional Budgets

Sales Budget

Production Budget

Raw Material Usage Budget

Raw Material

Purchases budget

Labour Budget

Overheads Budget

Functional budgets

Functional budgets

Example

Example - continued

Fixed, flexible & flexed budgets

Compares Original Budget with actual results

Remains unchanged even though level of activity changes

Does not assist in variance analysis

Fixed Budget Prepared at the

start of the period, for different possible levels of activity

Best, Most Likely, Worst

Flexible budget

Changes as the volume of activity changes

Useful for budgetary control purposes

Cost behaviour of the different items in the original budget

Hi-low method

Flexed budget

Flexed Budgets and budget

variances

Variances are differences arising between the original

budget and actual results.

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

Volume Variance Expenditure Variance

Total Variance

Chapter 14

Standard Costing

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.

Advantages & Disadvantages of

Standard Costing

Types of standard

Types of Standards

Ideal

What would be expected under perfect operating conditions

Basic

A standard left

unchanged from

period to period

Current

A standard adjusted for specific issues relating to the current

period

Attainable

What would be

expected under

normal operating

conditions

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

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.

Sales Price Variance

Sales Price Variance

(Budgeted Sales Price – Actual Sales Price)

X

Actual Quantity sold

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) @ standard cost per

kg/litre

-

(Actual production X Actual usage per unit) @ standard cost per

kg/litre

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)

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)

Fixed Overhead Variances

Fixed Production Overheads Total Variance

Absorption Costing

Expenditure

Variance

Volume

Variance

Efficiency

Variance

Capacity

Variance

Fixed Overhead Variances

Under- or over-absorption of overheads

Absorption Costing

Budgeted FOH

–

Actual FOH

(Actual Production in

standard hours x OAR)

– Budgeted FOH

(Actual hours

taken – standard

hours for output

achieved) x OAR

(Actual Hours

worked –

budgeted hours

worked) x OAR

Fixed Overhead Variances

Fixed Production Overheads Total Variance

Marginal Costing

Expenditure

Variance

Causes of Variances

Causes of Variances