Course Slides: For Exams in June 2010

CAT Paper 7
– Planning, control and performance management
Course slides
For exams in
June 2010
Syllabus
A Cost accounting
B Planning and control
C Standard costing
D Management accounting applications
Slide 2
Examiner and exam format
Examiner:
Examiner:Steve
SteveJay
Jay
Exam format (four compulsory questions) Marks
Question 1 10 multiple choice questions 20

Question 2 Written question from entire syllabus 20
Total 100
Pass
Passmark:
mark:40%
40%
Slide 3
The BPP Learning Media classroom slides
What do these slides cover?

– A selection of key areas of the syllabus
Using the slides

– Use the slides as a point of reference
– Add detail by talking around the slides (eg using material
from the corresponding Study Text chapter)
– Consider adding slides yourself to suit your course
– Recommend students attempt appropriate questions from
the Practice & Revision Kit
Slide 4
Chapter 1 Study Text Chapter 1
Accounting for
management
The management function
Managers have to:
• Plan
• Control
• Organise
• Motivate
• Make decisions
The management accountant assists the manager by
providing information to carry out these functions.
Slide 6
The decision-making process
This has six steps:
• Identify objectives
• Search for alternative courses of action
• Collect data on these courses of action
• Select between these
• Implement the decision
• Compare actual and planned outcomes and take action
if needed
Slide 7
External information
Sources:
Primary: invoices, advertisements, letters
Secondary: government stats, newspapers,
consultancies
Can you think of other examples?
Slide 8
Cost behaviour
Direct production costs
• Those costs which can be identified to a particular
cost unit
Indirect production costs/production overheads
• Those costs which are incurred in the course of
making the product but which can’t be easily
identified to a particular cost unit
Slide 9
Question practice – end of Chapter 1
You
You should
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be able
able to
to attempt
attempt the
the following
following key
key
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questions from
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Q1 Q2 Q3
The
The material
material inin this
this chapter
chapter isis covered
covered inin the
the following
following BPP
BPP
Learning
LearningMedia
Mediai-Pass
i-Passmodule.
module.
Module 1: Principles of cost accounting
Slide 10
Absorption costing and

activity based costing
Reminder: Absorption costing (AC) method
Total Production Costs
Direct Costs Indirect Costs

(overheads) 2.Allocate &
Apportion
COST CENTRES
1. Production 1 Production 2 Service

Allocate
Production 1 Production 2 3.Reapportion
4. Absorb
COST UNIT
Slide 12
Reminder: allocation and apportionment
• Allocation = whole cost items are charged to a cost
centre
• Apportionment = cost items are divided between

several cost centres using an appropriate basis
Slide 13
Reasons for under/over absorption
Budgeted overhead
_________________
Pre-determined =
OAR* Budgeted activity level
Budgeted overhead Budgeted activity


Actual overhead

Actual activity
Expenditure variance Volume variance

*Overhead absorption rate
Slide 14
Activity Based Costing (ABC) Examined regularly!
Volume related
overheads
COMPLEXITY DIVERSITY
Service support functions
Slide 15
Activity Based Costing (ABC)
Production set No. of production

OAR
up costs set ups
Machine oil
& machine No. of machine
hours
OAR
repairs
Supervisor’s No. of labour

OAR
Salary hours
ACTIVITIES COST DRIVERS
Slide 16
Steps in ABC
1. Group overheads into activities
–cost pools
2. Identify significant factors driving the costs
–
cost drivers
3. Calculate a cost per unit of cost driver
4. Absorb activity costs based on usage of drivers
Slide 17
Advantages of ABC over absorption costing
• Meaningful product cost

• Recognises diversity of overhead build-up
• Better decision-making
• Better pricing
• New focus for cost control
• Overheads charged more equitably
Slide 18
Criticisms of ABC
• Only introduce if provides more info
• Still some arbitrary apportionment
• Little benefit if single product
• Does it enhance value?
• Complex if multiple cost drivers
• Costs vs. benefits
• Can we measure the driver?
Slide 19
Favourable conditions for ABC
• Overheads are high
• Wide diversity of product range
• Differences in usage of resource by different
products
• Consumption of resources not driven by volume
Slide 20
You
You should
should now
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able to
to attempt
attempt the
the following
following key
key
questions
questions from
from the
the BPP
BPP Learning
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Media Practice
Practice
and
andRevision
RevisionKit.
Kit.
Q6 Q7 Q8
The
The material
material inin this
this chapter
covered inin the
the following
following BPP
BPP
Learning
LearningMedia
Mediai-Pass
i-Passmodule.
module.
Slide 21
Absorption costing and

marginal costing compared
Marginal costing (MC)
This is the variable cost of a product or service.

That is, a cost which would be avoided if the
unit was not produced or provided.
Slide 23
Cost card – marginal costing
$/unit
Direct materials X
Direct labour X Used to value
Variable overhead X inventory under
Marginal costing
Marginal cost X
Used to value
Fixed overheads X inventory under
Absorption
Full product cost X costing
Slide 24
Contribution
Contribution = selling price less ALL variable costs

$
Selling price X
Less: Variable production costs X
Variable non-production costs X
(X)
Contribution X
Slide 25
AC or MC: effect on profit
Difference = Change in inventory X OAR/unit

in profit
But which profit is higher

AC profit Or MC Profit?
Production
=>< Sales
Closing inventory =>< Opening inventory
AC Profit =>< MC Profit
Slide 26
Reconciliation proforma
Year 1 Year 2
$ $
Absorption costing profit
Add: Fixed overhead in
opening inventory
Less: Fixed overhead in
Closing inventory
Marginal costing profit
Slide 27
Marginal costing Income statement
$
Sales X
Cost of sales
Opening inventory (@ Marginal cost) X
Production costs:
Variable costs (mats, lab, var.overhead) X
Closing inventory (@ Marginal cost) (X)
_____
(X)
Variable non production costs (X)
____
Contribution X
Less: Fixed costs (X)
____
Net Profit X
Slide 28
You
You should
should now
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able to
to attempt
attempt the
the following
following key
key
questions
questions from
from the
the BPP
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andRevision
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Q12 Q13 Q14
The
The material
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covered inin the
the following
following BPP
BPP
Learning
LearningMedia
Mediai-Pass
i-Passmodule.
module.
Slide 29
Job, batch,
contract, service
and process
costing
Job and batch costing
• Job = a cost unit of a single order/contract
• Batch = a cost unit which consists of separate, readily

identifiable group of units
Slide 31
Contract costing
Is a form of job costing which applies where the job
is:
• On a large scale
• For a long duration
Slide 32
Cost structures
If profit is 20% of cost If profit is 20% of sales price
Total costs 100% Total costs 80%
Profit 20% Profit 20%
Selling price 120% Selling price 100%
MARK - UP MARGIN
Slide 33
Service costing
• Where an organisation doesn’t make or sell a tangible product

• Profit making or not-for-profit sector
– E.g. Accountancy firms, hotels, schools, hospitals
• Service costing v. other product costing
– Cost of direct materials is small
– Unit cost is difficult to calculate
– Costing will vary from one service to another
Slide 34
Lecture example
Service Appropriate cost unit
Road rail, air transport Passenger/mile

Hotels Occupied bed night
Education Student
Hospitals Patient/day
Catering establishments Meals served
Slide 35
Cost per unit
Total costs for a period

Cost per unit = ______________________________
Number of service units in the period
But what is a
service cost unit ?
Slide 36
Composite cost unit
A composite cost unit takes into account

several elements of a service
EG excess baggage service
Cost per KG? OR Cost per mile transported?
Cost per KG/mile
Slide 37
Process costing revisited
Finished unit WIP units
We can’t give them the same value
Slide 38
Process costing: equivalent units
+ =
½ unit + ½ unit = 1 equivalent

whole unit
cost per equivalent unit
Slide 39
You
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LearningMedia
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Slide 40
The collection of
data
Information
…is data that has been processed in a way to be

meaningful and useful to its recipients.
Information is data with added business value.
Information systems collect, process and provide
information for use within the organisation.
Slide 42
Sources of organisational information
Internal sources External sources

Formal Formal
• Management accounting • Commercial data vendors
information • Government and official
• Control procedures, records authorities
and general correspondence • Trade associations and
• Appraisal systems professional bodies
Informal
• Cross-departmental Informal
networking • Suppliers and other
• The “Grapevine” intermediaries
• Social gatherings • Customers and their
representatives
• The Internet
Slide 43
Sampling
Data is often collected from a sample rather than
from the entire population.
Methods include:
• Random
• Stratified random
• Systematic
• Multistage
• Cluster
• Quota
Slide 44
You
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Q17 Q18
The
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covered inin the
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following BPP
BPP
Learning
LearningMedia
Mediai-Pass
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module.
Module 2: Collection and analysis of information
Slide 45
Presentation of
information
Introduction
Price indices Quantity indices
Change in value Change in quantity

over time over time
Slide 47
Characteristics of indices
What Items?
• Basket of goods Typical mix?
Obsolescence?
• Base year Typical base year?
• Weightings How to weight?
• Use to deflate costs
Slide 48
Basic single product index
P
___
1
Price index x 100
P0
Q1
Quantity index ___ x 100
Q0
Slide 49
Weighted indices
Weights =
base year
LASPEYRE quantities
P Q
_____0 x 100
1
Price index
P0Q0 Weights =
base year
Prices
Q P
_____
1 0
Quantity index x 100
Q0P0
Slide 50
Weighted indices
Weights =
current year
PAASCHE quantities
P Q
_____1 x 100
1
Price index
P0Q1 Weights =
current year
Prices
Q P
_____
1 1
Quantity index x 100
Q0P1
Slide 51
Chain index
Use when the basic nature of a commodity is

changing over time.
e.g. Week Price Index

1 28c 100
2 32c 32/28 x 100 114
3 34c 34/32 x 100 106
4 etc.
Slide 52
You
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Learning
LearningMedia
Mediai-Pass
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Module 2: Collection and analysis of information
Slide 53
Forecasting
Purpose
• Aid planning and decision making

• Predict sales volume and prices
• Predict costs
• Identify availability of resources
• Economic trends
Slide 55
Time series analysis
Trend: Disadvantages:
• General movement of time • all changes time related?
series over a long period • old data
• Expect smooth line/curve • reliability
Advantages:
How to get the trend:
• underlying pattern
• Linear regression • simple & cheap
• Moving averages • can be developed
Slide 56
Components of a time series:
– Trend
– Seasonal variation
– Cyclical variation time series
– Random variation $
trend
output
Slide 57
Additive model Multiplicative model
TS = T + SV + RV + CV TS = T x SV x RV x CV
TS = T + SV TS = T x SV
SV = TS - T SV = TS
T
Slide 58
Lecture example 1(a) – additive model
Step 1: use moving averages to get trend
Seasonal
Period Sales (TS) 4 period MA Centred MA Variation (SV)
TS - T
Yr1 Q1 18
90 - 69
Q2 60
67.50
Q3 90 69.000 +21.000
70.50
Q4 102 72.000 +30.000
73.50
Yr2 Q1 30 74.625 -44.625
75.75
Q2 72 78.000 -6.000
80.25
Q3 99 81.000 +18.000
81.75
Q4 120 84.000 +36.000
86.25
Yr3 Q1 36 88.125 -52.125
90.00
Q2 90 91.875 -1.875
93.75
Q3 114
Q4 135
Slide 59
Lecture example 1(a) – seasonal variations
Step 2: average seasonal variations

Q1 Q2 Q3 Q4 Total
Yr1 +21.000 +30.000
Yr2 -44.625 -6.000 +18.000 +36.000
Yr3 -52.125 -1.875 0.188/4=0.047
Average -48.375 -3.937 +19.500 +33.000 +0.188
Adjust -0.047 -0.047 -0.047 -0.047 -0.188
Estimate -48.422 -3.984 +19.453 +32.953
Slide 60
Lecture example 1(a) – average trend
Step 3: average trend increase
Trend has increased from 69.000 to 91.875 over

7 quarters.
Quarterly inc in trend = 91.875 – 69.000

7
= 3.27/quarter
Slide 61
Lecture example 1(a) – year 4 forecast
Step 4: forecast Year 4 Q1 sales
Seasonal
Trend (T) + variation = Forecast sales
(SV) (TS)
Q1 101.685 -48.422 53.263
91.875 + (3x3.27)
Slide 62
Lecture example 1(b) – multiplicative model
Step 1: use trend to get seasonal variation
Seasonal
Period Sales (TS) 4 period MA Trend = T Variation (SV)
(centred MA)
TS/T
Yr1 Q1 18
90/69
Q2 60
67.50 1.304
Q3 90 69.000
70.50 1.417
Q4 102 72.000
73.50 0.402
Yr2 Q1 30 74.625
75.75
Q2 72 78.000 0.923
80.25 1.222
Q3 99 81.000
81.75 1.429
Q4 120 84.000
86.25 0.409
Yr3 Q1 36 88.125
90.00 0.981
Q2 90 91.875
93.75
Q3 114
Q4 135
Slide 63
Lecture example 1(b) – seasonal variations
Step 2: average seasonal variations
Q1 Q2 Q3 Q4 Total
Yr1 1.304 1.417
Yr2 0.402 0.923 1.222 1.429
Yr3 0.409 0.981 0.044/4=0.011
Average 0.406 0.952 1.263 1.423 4.044
Adjust -0.011 -0.011 -0.011 -0.011 -0.044
Estimate 0.395 0.941 1.252 1.412
Slide 64
Lecture example 1(b) – average trend
Step 3: average trend increase
Trend has increased from 69.000 to 91.875 over

7 quarters.
Quarterly inc in trend = 91.875 – 69.000

7
= 3.27/quarter
Slide 65
Lecture example 1(b) – year 4 forecast
Step 4: forecast Year 4 Q1 sales
Trend
Seasonal
(T) x variation = Forecast sales
(SV) (TS)
Q1 101.685 0.395 40.165
91.875 + (3x3.27)
Slide 66
Forecasting problems
• Future is not predictable
• Availability of data
• Reliability of data
• Past trends may not continue
• Random events
• Etc….
Slide 67
Question practice – Chapter 7 Examined regularly!
You
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LearningMedia
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Module 3: Forecasting
Slide 68
Planning and
control systems
Cycle of Planning & Control
Revise objectives
Control Planning
Compare actual
Revise budget
with budget
Operate in line
with new
objectives
Slide 70
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Module 4: Budgetary planning and control
Slide 71
The budgetary
process
What is a budget?
• A financial and/or quantitative plan of

operations for a forthcoming period
Putting your objectives into $
Slide 73
Purpose of budgets & budgetary control
P lanning
R esponsibility
I ntegration and co-ordination
M otivation
E valuation
Slide 74
Budget preparation timetable
• Communicating details
• Determine factor that restricts output
• Prepare sales budget
• Initial preparation of other budgets
• Negotiate budgets with superiors
• Co-ordinate budgets
• Final acceptance of budgets
• Communication of budgets
• Budget review
Slide 75
Examined 12/05
Principal budget factor (PBF)
The factor that prevents an organisation from

expanding beyond a certain point
Setting up a budget:
• identify the PBF
• work the budgets around it
Slide 76
Functional budgets Examined regularly!
Sales Budget
Production Budget
Material usage Budgeted Income

statement
Material Purchases
Labour utilisation
Slide 77
Lecture example – Kes Plc
Sales Budget
Kent Essex Sussex
Sales (batches) 1,000 2,000 500
Price per batch $50 $75 $100
_______ _______ _______
Revenue $50,000 $150,000 $50,000
Slide 78
Lecture example cont.
Production Budget
Kent Essex Sussex
Sales (units) 1,000 2,000 500
Closing inventory 100 200 50
(10% of sales)
Opening inventory (200) (200) (100)
_______ _______ _______
Production (units) 900 2,000 450
Slide 79
Cont.
Production Budget
Production (units) 900 2,000 450
Material usage x 1.2kg
5cm x 6cm
1.3kg x 7cm
1.4kg
Kent Essex Sussex Total
Leather (cm) 4,500 12,000 3,150 19,650
Wire (kg) 1,080 2,600 630 4,310
Slide 80
Cont.
Material Purchases
Leather Wire
Material Usage 19,650 4,310

Closing inventory (W1)
Slide 81
Cont.
W1: Closing inventory of Raw Materials

“….sufficient inventories of raw materials to cope
with 20% of demand for the finished product.”
Kent Essex Sussex Total
Sales 1,000 2,000 500
@ 20% 200 400 100
Leather (cm) 1,000 2,400 700 4,100
Wire (kg) 240 520 140 900
Slide 82
Cont.
Material Purchases Leather Wire
Material Usage 19,650 4,310

Closing inventory (W1) 4,100 900
Opening inventory (1,000) ______
______ (500)
Material Purchases 22,750 4,710
Price / cm or kg 10c
______ $2.00
______
Total cost $2,275 $9,420
Slide 83
Cont.
Labour utilisation Stitchers Assemblers

Prod’n
K 900 (@ 1/2 hr) 450 (@ 1/2 hr) 450
E 2,000 (@ 3/4 hr) 1,500 (@ 1/2 hr) 1,000
S 450 (@ 1 hr) 450 (@ 1 hr) 450

_____ _____
2,400 1,900
Hourly rate $2/hr $3/hr
Total labour cost $4,800 $5,700
Slide 84
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Slide 85
Making budgets
work
Fixed and flexible budgets Examined regularly!
• Fixed budget
– prepared before beginning of budget period
– budget volumes and $
• Flexible budget
– changes as volume of activity changes
– used to ascertain the budget cost allowance, or
flexed budget
Slide 87
Purpose of flexible budgets
• To cope with different activity levels
• Useful at planning stage
• Necessary for control
Slide 88
Lecture example
Compare:
actual DIFFERENCE flexed

results = budget
$152,000 VARIANCE @ 7,350
bottles
Slide 89
Lecture example - costs
6,000 7,000 8,000

units units units
Material cost / unit $7 $7 $7
VARIABLE COST
Labour cost / unit $10.00 $9.86 $9.75
MIXED COST
constant at all levels of output
Overheads
FIXED COST
Slide 90
Lecture example – high-low method
Need to split labour cost into fixed and variable components, using high-low
Output Labour costs

(units) $
High 8,000 78,000
Low 6,000 60,000

Difference 2,000 18,000
Var labour cost / unit = 18,000 = $9

2,000
Slide 91
Lecture example – high-low method cont
Var labour cost / unit = 18,000 = $9

2,000
Total labour cost = Fixed cost + VC/unit x Output
At high output = 8,000 units:
$78,000 = Fixed cost + $9/unit x 8,000
$78,000 = Fixed cost + $72,000
Fixed cost = $6,000
Total labour cost = $6,000 + $9 x output
Slide 92
Lecture example - flexed budget
Flexed budget @ 7,350 bottles:
$
Materials 51,450
7,350 bottles x $7/bottle
Labour 72,150
$6,000 + 7,350 bottles x $9/bottle
Overheads 30,000
153,600
Slide 93
Overview
Flexed Actual
Budget results Variance
Production vol. 7,350 7,350 -
$ $ $
Costs:
Materials 51,450 54,000 2,550A
Labour 72,150 70,000 2,150F
Overheads 30,000 28,000 2,000F
Profit 153,600 152,000 1,600F
Slide 94
Zero based budgeting v incremental budgeting
Start with a clean sheet Base on current year
Next year’s budget is zero Add on % for growth/infl’n
Advantages:
• Easy to prepare
Disadvantages:
• Inefficient
• Budgetary slack
Slide 95
Zero based budgeting
Start with a clean sheet

Advantages: Disadvantages:
• Identifies inefficiencies • Emphasis on short
• Close examination term benefits
• More efficient resource • Needs skills
allocation • Resistance
• Time and effort
• Limited resources
Slide 96
Rolling / continuous budgets
Q1 Q2 Q3 Q4 Q1 Q2 Q3
Advantages: Disadvantages:
•Reduce uncertainty •Effort & expense
•Regularly reassess •Demotivational
planning & control
•Extend into future
Slide 97
Behavioural aspects of budgeting
Problems
• Managers who set them often aren’t responsible for
achieving them
• Goal incongruence
• Who report to?
• Inter-departmental conflicts
Ensure budget motivates and ensures goal

congruence
Slide 98
Problems in constructing budgets
• Forecasting
– sales
– resources
• Inflation
• Overstatement of costs by management
• Rivalry – dysfunctional behaviour
• Demotivation
Slide 99
Behavioural aspects of budgeting
Top-down system Bottom-up system
imposed by management input into budget setting
Advantages: Advantages:
• Quicker • Better information
• Avoid slack / bias • Morale / motivation
• Total resource • Achievement
availability
Slide 100
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Slide 101
Standard Costing
Standard Costing
WHAT IS A STANDARD COST?
• An estimated unit cost
• Based on expected:
– efficiency
– prices
– budgeted overhead and activity
Slide 103
Bases
• Ideal standard  perfect operating
conditions
• Expected standard  attainable
improvements
• Current standard  use last year
• Basic standard  leave unaltered over

long period
Slide 104
Advantages
•Budgeting/budgetary control
•Performance measurement and

target setting
•Close analysis of business
•Setting prices
•Simplifies bookkeeping
•Inventory valuation
Slide 105
Disadvantages
•Difficult to forecast accurately
•Time consuming
•Regular revision required
•Demotivating if wrong
Slide 106
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i-Passmodule.
module.
Module 5: Variance analysis
Slide 107
Variance analysis
Variances
DIFFERENCES
actual =
expected
results VARIANCES results
Slide 109
Variances
DIFFERENCES
actual =
expected
Can be
FAVOURABLE
Slide 110
Variances
DIFFERENCES
actual =
expected
Or ADVERSE
Slide 111
Lecture example 1 Examined regularly!
• Approach:
– Do basic cost and sales variances

– Start with costs
– Do fixed overhead variances
– Think about causes too
Slide 112
Lecture example 1 cont
Total materials variance
$
Price variance
Usage variance
Total variance
Slide 113
Materials
Price variance: based on actual purchases
$
35,464kg should cost (@ $4.50) 159,588
35,464kg did cost 163,455
Variance 3,867
Adverse
Slide 114
Materials
Usage variance: based on actual production
kg
8,900 bidgets should use (@ 4kg) 35,600
8,900 bidgets did use 34,928
Difference 672
Value at standard ($4.50) $3,024
Favourable
Slide 115
Total materials variance
$
Price variance 3,867 A
Usage variance 3,024 F
Total variance 843 A
Slide 116
Total labour variance

$
Rate variance
Idle time variance
Efficiency variance
Total variance
Slide 117
Labour
Rate variance: based on actual hours paid
$
45,400hrs should cost (@$5/hr) 227,000
45,400hrs did cost 224,515
Variance 2,485
Favourable
Slide 118
Labour
Idle time variance: compares hrs worked and paid
hrs
Hours worked 44,100
Hours paid 45,400
Difference 1,300
Value at standard ($5/hr) $ 6,500
The idle time variance is always adverse
Slide 119
Labour
Efficiency variance: based on actual production
hrs
8,900 bidgets should take (@ 5hrs) 44,500
8,900 bidgets did take 44,100
Difference 400
Value at standard ($5) $2,000
Favourable
Slide 120
Total labour variance

$
Rate variance 2,485 F
Idle time variance 6,500 A
Efficiency variance 2,000 F
Total variance 2,015 A
Slide 121
Total variable overheads variance
$
Expenditure variance
Efficiency variance
Total variance
Slide 122
Variable overheads
Expenditure variance:
based on actual hrs worked
$
44,100hrs should cost (@$2/hr) 88,200
44,100hrs did cost 87,348
Variance 852
Favourable
Slide 123
Variable overheads
hrs
8,900 bidgets should take (@ 5hrs) 44,500
8,900 bidgets did take 44,100
Difference 400
Value at standard ($2 per hr) $800
Favourable
As for Labour Efficiency
Slide 124
Total variable overheads variance
$
Expenditure variance 852 F
Efficiency variance 800 F
Total variance 1,652 F
Slide 125
Fixed overheads
Over/under-
Total variance absorption
Expenditure Volume variance

variance
Efficiency Capacity
variance variance
Slide 126
Fixed overheads
Expenditure variance
$
Budgeted expenditure 134,074
Actual expenditure 130,500
Variance 3,574
Adverse
Slide 127
Fixed overheads
Volume variance
bidgets
Actual production 8,900
Budgeted production 8,700
Difference 200
Value at fixed overhead absorption $3,000
per unit (5 HRS @ $3/HR) Favourable
Slide 128
Fixed overheads
Hours as for labour efficiency variance 400 hrs (F)

rate($3)
Favourable
Slide 129
Fixed overheads
Capacity variance
hrs
Actual hrs worked 44,100
Budgeted hrs 43,500
Difference 600
rate ($3)
Favourable – Increased hours for same fixed overhead is a good thing!!
Slide 130
Total fixed overhead variance

$
Expenditure variance 3,574 A
Efficiency variance
Capacity variance

Volume variance
1,200 F
1,800 F
Total variance 574 A
Slide 131
Total sales variance
$
Price variance
Volume variance
Total variance
Slide 132
Sales
Price variance: based on actual sales
$
8,400 bidgets should sell for 630,000
8,400 bidgets did sell for 613,200
Variance 16,800
Adverse
Slide 133
Sales
Volume variance
bidgets
Actual sales 8,400
Budgeted sales 8,000
Difference 400
Value at std profit ($7 per bidget) $2,800
Favourable
REMEMBER!!
Slide 134
Operating statement
$
Budgeted profit (8,000 bidgets x $7) 56,000
Sales volume variance 2,800
Sales price variance (16,800)
42,000
Cost variances: F A
Mat’s - price 3,867
- usage 3,024
Labour - rate 2,485
- idle time 6,500
- eff’cy 2,000
VOH - exp’ure 852
- eff’cy 800
FOH - exp’ure 3,574
- eff’cy 1,200
- capacity 1,800
12,161 13,941
(1,780)
Actual profit 40,220
Slide 135
Variances under Marginal Costing
• So far – under AC
• Differences under MC:
– Fixed overheads: expenditure variance ONLY
– Sales volume: variance in units valued at standard
contribution (not standard profit)
– Operating statement reconciles budgeted
contribution to actual contribution, then to actual
profit
Slide 136
You
You should
should now
now be
be able
able to
to attempt
attempt the
the following
following key
key
questions
questions from
from the
the BPP
BPP Learning
Learning Media
Media Practice
Practice
and
andRevision
RevisionKit.
Kit.
Q50 Q52 Q53
The
The material
material inin this
this chapter
covered inin the
the following
following BPP
BPP
Learning
LearningMedia
Mediai-Pass
i-Passmodule.
module.
Slide 137
What variances mean

Causes of variances
• C ontrollable expenditure
• A ccuracy – measurement of data
• U ncontrollable expenditure
• S tandard type
• E xpectations – unrealistic standard
Slide 139
Interdependence of variances
Variances may affect each other

e.g.
Cheaper materials Favourable price variance
Inferior quality Adverse usage variance

(& efficiency?)
Slide 140
Interdependence of variances
Variances may affect each other
e.g.
Increase in price Favourable price variance
Fall in demand Adverse sales volume

variance
Slide 141
You
You should
should now
now be
be able
able to
to attempt
attempt the
the following
following key
key
questions
questions from
from the
the BPP
BPP Learning
Learning Media
Media Practice
Practice
and
andRevision
RevisionKit.
Kit.
Q56 Q57 Q58
The
The material
material inin this
this chapter
covered inin the
the following
following BPP
BPP
Learning
LearningMedia
Mediai-Pass
i-Passmodule.
module.
Slide 142
Performance measurement
Financial analysis
Ratio analysis is a standard technique used for

comparing figures in accounts
Year on year
Can compare
Business to business
ratios….
Division to division
Slide 144
Financial analysis: ratios
• Profitability and return
• Debt and gearing Must compare
• Liquidity different firms
and time periods
• Shareholders ratios
P/E, div cover, div
yield, EPS, div cover
ROCE, margins, asset turnover
Debt/equity, interest cover
Receivables/payables/inventory
days, current ratio, acid test
Slide 145
You
You should
should now
now be
be able
able to
to attempt
attempt the
the following
following key
key
questions
questions from
from the
the BPP
BPP Learning
Learning Media
Media Practice
Practice
and
andRevision
RevisionKit.
Kit.
Q63 Q64 Q66
The
The material
material inin this
this chapter
covered inin the
the following
following BPP
BPP
Learning
LearningMedia
Mediai-Pass
i-Passmodule.
module.
Module 6: Performance measurement
Slide 146
Applications of
performance measures
Measures of performance using the standard hour
Standard hour is the predetermined output

from one worker for one hour
i.e. it’s a quantity of work NOT time
Standard labour hours = actual units output

x std time/unit
Slide 148
Analysis of labour efficiency – control ratios
Efficiency/ Standard hours to make output x 100%

_______________________
productivity ratio =
Actual hours worked
Actual hours worked

_______________________ x 100%
Capacity ratio =
Hours budgeted
Production volume (PV)/ Standard hours to make output x 100%

_______________________
activity ratio =
Hours budgeted
Slide 149
Non-profit-making organisations
• Performance judged in terms of ‘value for

money’
– Economy
• keep costs down
– Efficiency
• output relative to input
– Effectiveness
• objectives achieved
Slide 150
Balanced Scorecard
Customer
Customer Process
Process
efficiency
efficiency
Growth
Growth Financial
Financial
Slide 151
Balanced Scorecard
Features
– Broad outlook
– Internal & external matters
– Financial & non-financial
– Identifies customer needs
Development
– Specific to company
– Can be created at all levels of management
Slide 152
You
You should
should now
now be
be able
able to
to attempt
attempt the
the following
following key
key
questions
questions from
from the
the BPP
BPP Learning
Learning Media
Media Practice
Practice
and
andRevision
RevisionKit.
Kit.
Q67 Q70 Q72
The
The material
material inin this
this chapter
covered inin the
the following
following BPP
BPP
Learning
LearningMedia
Mediai-Pass
i-Passmodule.
module.
Module 6: Performance measurement
Slide 153
Pricing
Influences on price
• Demand and price sensitivity
• Quality
• Competition
• Inflation
• Suppliers
• Newness [stage in product lifecycle]
• Incomes
Think of some others too…
Slide 155
Price setting Examined 12/05
• Market skimming
• Market penetration
• Cost plus
• Fixed price tender
Slide 156
Cost plus pricing Examined 12/05
• Full cost
• Marginal cost
• ABC
• Opportunity cost
Slide 157
You
You should
should now
now be
be able
able to
to attempt
attempt the
the following
following key
key
questions
questions from
from the
the BPP
BPP Learning
Learning Media
Media Practice
Practice
and
andRevision
RevisionKit.
Kit.
Q73 Q74
The
The material
material inin this
this chapter
covered inin the
the following
following BPP
BPP
Learning
LearningMedia
Mediai-Pass
i-Passmodule.
module.
Module 7: Cost management and pricing
Slide 158
Quality
Total quality management Examined 6/07
• Get it right, first time

• Continuous improvement
• TQM goals
• Design for quality
Slide 160
Quality costs: costs of conformance Examined 6/04, 12/08
• Prevention costs
Costs incurred to prevent or reduce defects
• Appraisal costs
Costs incurred to assess the quality of products
Slide 161
Quality costs: costs of conformance
Prevention and appraisal costs are known as the

costs of conformance
The costs incurred to ensure the

desired
level of quality is achieved
Slide 162
Quality costs: costs of non-conformance Examined 12/08
• Internal failure costs

Costs incurred due to not reaching the required
standard of quality before transfer of ownership
to the customer
• External failure costs
Costs incurred due to not reaching the required
standard of quality after transfer of ownership to
the customer
Slide 163
Quality costs: costs of non-conformance
Internal and external failure costs are known as the

costs of non-conformance
The costs incurred when the

level of quality is not achieved
Slide 164
Lecture example 1
a) Prevention costs b) Appraisal costs
• Quality engineering • Acceptance testing
• QC / inspection • Goods inwards
equipment inspection
• Maintenance • In-house processing
• QC admin inspection
• QC training • Performance testing
Slide 165
c) Internal failure costs d) External failure costs
• Failure analysis • Customer complaints
• Re-inspection costs admin
• Lower selling prices • Customer service costs
• Product specification • Product liability
review costs • Returns repair costs
• Replacement costs
• Loss of goodwill
Slide 166
Question practice – Chapter 17
You
You should
should now
now be
be able
able to
to attempt
attempt the
the following
following key
key
questions
questions from
from the
the BPP
BPP Learning
Learning Media
Media Practice
Practice
and
andRevision
RevisionKit.
Kit.
Q75 Q76 Q77
The
The material
material inin this
this chapter
covered inin the
the following
following BPP
BPP
Learning
LearningMedia
Mediai-Pass
i-Passmodule.
module.
Slide 167
Cost management
Cost reduction
“The reduction in unit cost of goods or services
WITHOUT IMPAIRING SUITABILITY FOR USE
INTENDED
Effective cost reduction programme:

i. Planned
ii. Continuous
iii. Across all areas
iv. Implemented at early stages of production
Slide 169
Cost reduction techniques
• Examination of current activities
– Why are we spending so much ?
• Work study
– Method study
• How to do it Key focus on
– Work measurement labour
• How long to do it ? costs
• Organisation & methods
– Clerical, admin & management
Slide 170
Value analysis
How can we make a product at a lower cost, but
with the same or higher value ?
Aspects of value:
• Cost
• Exchange
• Use
• Esteem
Slide 171
Product Life Cycle
Sales
Volume
Time
Introduction Growth Maturity Decline
Slide 172
Life Cycle Costing
Actual Costs compared with Budget
– Traditional:
• for a year
• for each function
– Modern:
• for each product/service
• over its entire life cycle
Slide 173
Implementing target costing
a) Product spec & sales volume

b) Target selling price
c) Required profit
d) Target selling price X
less: target profit (X)
Target cost X
e) Estimated cost
f) Estimated cost – target cost = cost gap
g) Negotiate with customer
Slide 174
You
You should
should now
now be
be able
able to
to attempt
attempt the
the following
following key
key
questions
questions from
from the
the BPP
BPP Learning
Learning Media
Media Practice
Practice
and
andRevision
RevisionKit.
Kit.
Q79 Q80 Q81
The
The material
material inin this
this chapter
covered inin the
the following
following BPP
BPP
Learning
LearningMedia
Mediai-Pass
i-Passmodule.
module.
Slide 175

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CAT Paper 7

– Planning, control and performance management

B Planning and control

D Management accounting applications

Exam format (four compulsory questions) Marks

Question 1 10 multiple choice questions 20

What do these slides cover?

Using the slides

Can you think of other examples?

Module 1: Principles of cost accounting

Absorption costing and

Direct Costs Indirect Costs

1. Production 1 Production 2 Service

• Apportionment = cost items are divided between

Budgeted overhead Budgeted activity

Expenditure variance Volume variance

Service support functions

Production set No. of production

Supervisor’s No. of labour

ACTIVITIES COST DRIVERS

• Meaningful product cost

Module 1: Principles of cost accounting

Absorption costing and

This is the variable cost of a product or service.

Contribution = selling price less ALL variable costs

Difference = Change in inventory X OAR/unit

But which profit is higher

Closing inventory =>< Opening inventory

AC Profit =>< MC Profit

Q12 Q13 Q14

Module 1: Principles of cost accounting

• Batch = a cost unit which consists of separate, readily

If profit is 20% of cost If profit is 20% of sales price

Total costs 100% Total costs 80%

Profit 20% Profit 20%

Selling price 120% Selling price 100%

• Where an organisation doesn’t make or sell a tangible product

Service Appropriate cost unit

Road rail, air transport Passenger/mile

Total costs for a period

A composite cost unit takes into account

EG excess baggage service

Cost per KG? OR Cost per mile transported?

Cost per KG/mile

Finished unit WIP units

We can’t give them the same value

½ unit + ½ unit = 1 equivalent

Module 1: Principles of cost accounting

…is data that has been processed in a way to be

Internal sources External sources

Module 2: Collection and analysis of information

Price indices Quantity indices

Change in value Change in quantity

• Weightings How to weight?

• Use to deflate costs

Use when the basic nature of a commodity is

e.g. Week Price Index

Q19 Q21 Q25

Module 2: Collection and analysis of information

• Aid planning and decision making

Step 2: average seasonal variations

Yr1 +21.000 +30.000

Yr2 -44.625 -6.000 +18.000 +36.000