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ACCA Paper F5

Performance Management
Class Notes December 2011

photocopying. June 2011 All rights reserved. stored in a retrieval system.org .© The Accountancy College Ltd.studyinteractive. 2 www. or transmitted. in any form or by any means. No part of this publication may be reproduced. without the prior written permission of The Accountancy College Ltd. electronic. recording or otherwise. mechanical.

Contents PAGE INTRODUCTION TO THE PAPER FORMULAE PROVIDED IN THE EXAMINATION PAPER CHAPTER 1: CHAPTER 2: CHAPTER 3: CHAPTER 4: CHAPTER 5: CHAPTER 6: CHAPTER 7: CHAPTER 8: CHAPTER 9: CHAPTER 10: CHAPTER 11: APPENDIX: COST ACCOUNTING AND NEW DEVELOPMENTS DECISION MAKING AND LINEAR PROGRAMMING PRICING DECISION MAKING UNDER UNCERTAINTY BUDGETING TYPES BUDGETARY CONTROL QUANTITATIVE AIDS TO BUDGETING STANDARD COSTING AND VARIANCE ANALYSIS ADVANCED VARIANCE ANALYSIS PERFORMANCE EVALUATION TRANSFER PRICING SOLUTIONS TO EXERCISES AND EXAMPLES 5 7 9 31 55 69 83 91 103 121 139 153 175 183 www.org 3 .studyinteractive.

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studyinteractive.Introduction to the paper www.org 5 .

In addition there is a need to understand the scenario and critically be able to write in relation to the scenario and whatever the numbers you have already calculated. The downside for students is that there will be more time pressure due to the fact that five separate scenarios must be understood during the limited time of the exam. This move has been. What impact will there be of having a new examiner on this paper? There should be little or no impact of having a new examiner on the well prepared student. OUTLINE OF THE SYLLABUS 1. 4. Initial evidence would suggest that this will be the case. The questions will become less complex and there will be less emphasis on the discursive elements of answers and more emphasis on computation. On balance this is a good thing for students in future diets. 2. Cost accounting techniques. Performance appraisal including financial and non-financial measures. 3. performance evaluation and control. 6 www. Budgeting techniques and methods. What is the skills set that a student must bring to the paper? As a student approaching this paper the basic requirement is an ability to understand and compute the differing techniques and methods in the syllabus.org . Decision-making techniques including risk and uncertainty. FAQs How has the exam format changed and what impact will that have on the paper? The paper has moved to having five 20 mark questions rather than four 25 mark questions. FORMAT OF THE EXAM PAPER The syllabus is assessed by a three hour paper-based examination. it appears.studyinteractive. The examination consists of 5 questions of 20 marks each.INTRODUCTION TO THE PAPER AIM OF THE PAPER To develop knowledge and skills in the application of management accounting techniques to quantitative and qualitative information for planning. decision-making. The style and content of the questions will change to some degree but the new examiner is given the same remit as the previous examiner. 5. to improve pass rates. Standard costing systems. All questions are compulsory.

org 7 .Formulae provided in the examination paper www.studyinteractive.

FORMULAE & TABLES PROVIDED IN THE EXAMINATION PAPER FORMULAE SHEET Learning curve Y  ax b Where: y = average cost per batch a = cost of first batch x = total number of batches produced b = learning factor (log LR/log 2) LR = the learning rate as a decimal Regression analysis y  a  bx b  n∑ xy − ∑ x∑ a∑ r y n∑ x − ∑ x 2 2 y − ∑ y2  b∑ x n n n∑ xy − ∑ x∑ y n∑ x 2 − ∑ x2 n∑ y2 − Demand curve P  a − bQ b change in price change in quantity a  price when Q  0 8 www.org .studyinteractive.

studyinteractive.org 9 .Chapter 1 Cost accounting and new developments www.

org .CHAPTER 1 – COST ACCOUNTING AND NEW DEVELOPMENTS CHAPTER CONTENT DIAGRAM Costing methods Absorption costing Activity based costing Other costing methods H H H Full cost per unit Issue: Arbitrary cost allocation Solution: Activity based costing H H H Accurate costs product H H Life cycle costing Target costing Swap cost units with cost pools Swap OARs with cost driver rates Throughput accounting Environmental Accounting H H H H Return per factory hour Cost per factory hour Throughput ratio (TPAR) accounting H H Costing methods Reasons for use Decision making 10 www.studyinteractive.

studyinteractive.org 11 .CHAPTER 1 – COST ACCOUNTING AND NEW DEVELOPMENTS CHAPTER CONTENTS ABSORPTION COSTING ------------------------------------------------ABSORPTION COSTING – A REMINDER TRADITIONAL OVERHEAD ANALYSIS STEPS USING ABSORPTION COSTING CRITICISMS OF ABSORPTION COSTING: RECENT CHANGES IN MANUFACTURING A REVISED ANALYSIS – ABC STEPS USING ABC CONDITIONS UNDER WHICH ABC IS MOST APPROPRIATE BENEFITS AND LIMITATIONS 12 12 12 12 13 13 14 14 17 17 ACTIVITY BASED BUDGETING (ABB) ---------------------------------THROUGHPUT ACCOUNTING ------------------------------------------BASICS RATIONALE KEY TERMINOLOGY CONCEPTS UNDERPINNING THROUGHPUT ACCOUNTING FACTORS AFFECTING THE VALUE OF THROUGH ACCOUNTING PUT STEPS IN THROUGHPUT ACCOUNTING LIMITATIONS OF THROUGHPUT ACCOUNTING 18 19 19 19 19 20 20 20 21 TARGET COSTING-------------------------------------------------------TRADITIONAL COSTING SYSTEMS TARGET COSTING STEPS CLOSING A TARGET COST GAP IMPLICATIONS OF USING TARGET COSTING 22 22 22 23 24 LIFE CYCLE COSTING---------------------------------------------------COMPARISON OF LIFE CYCLE COSTING AND TRADITIONAL MANAGEMENT ACCOUNTING 25 25 ENVIRONMENTAL ACCOUNTING --------------------------------------INTRODUCTION TYPES OF ENVIRONMENTAL COSTS M ANAGING ENVIRONMENTAL COSTS ENVIRONMENTAL COSTS STRATEGIES METHODS FOR ACCOUNTING OF ENVIRONMENTAL COSTS 28 28 28 29 29 29 www.

Budgeting Traditional overhead analysis Overhead cost item Cost Centres Cost Units Steps using absorption costing The steps using absorption costing are: 1 Overhead costs are collected in various cost centres Allocation: Specific overhead costs directly relating to individual cost centres. Absorbed overheads Single product environment Manual manufacturing operations Mechanical manufacturing operations = OAR x Actual Activity 12 www. machine hours. indirect materials.CHAPTER 1 – COST ACCOUNTING AND NEW DEVELOPMENTS ABSORPTION COSTING Absorption costing – a reminder The linking of all production costs to the cost unit to prepare a full cost per unit. Stock Valuation 2.org . Pricing decisions 3. Apportionment: General or common overhead costs like rent. supervision. number of staff etc 2 Overhead absorption is achieved by means of a predetermined Overhead Absorption Rate.studyinteractive. Uses 1. electricity are incurred as a whole item by the company and therefore have to be distributed to cost centres on some sharing bases like floor area. for example. Number of Units: Labour Hours: Machine Hours: b. labour hours or machine hours. which means overheads are charged to units on these bases. heating. Overhead Absorption Rate = Budgeted Level of Activity * * Activity levels generally used by examiners are number of units. Budgeted Overheads a.

000 (£) (£) The labour rate is £5 per hour in each department. The Budgeted Departmental Overheads are: Department X Department Y Required: Calculate the cost/unit using: (a) (b) (c) Separate OARs for each department. www.000 Product B 35 30 6 35 7 1. based on labour hours. £18. Flexible manufacturing systems allow for a number of widely differing products to be produced on the same machinery. Relevant product information is: Direct material cost (£) Direct labour cost in Department X Time per unit in Department X (Hours) Direct labour cost in Department Y Time per unit in Department Y (Hours) Budgeted number of units Product A 20 20 4 25 5 2. An overall OAR. Inappropriate bases to link overheads to products Can only work in single product and simple manufacturing environments Recent changes in manufacturing The reason for the increasing inaccuracy of absorption costing is due to two basic issues: 1.000 £6. Increased production complexity.500 Criticisms of absorption costing Criticisms of absorption costing are: H H H A big amount of guess work in relating overhead costs to the products.org 13 . Absorbing overhead on a simple volume base is unlikely to reflect the differing overhead costs incurred by each product. Discuss the differences. 2. Production complexity A wide variety of production processes have become more complex in recent years in a number of ways: 1. Increased proportion of overhead costs. based on labour hours.studyinteractive.CHAPTER 1 – COST ACCOUNTING AND NEW DEVELOPMENTS Example 1 2P2D Ltd 2P2D Ltd produces 2 products in 2 departments.

Increased proportion of support services’ costs Activity based costing also introduces the important aspect that cost are incurred in selling and distributing a product and the cost of servicing customers are often more important than production therefore an accurate cause effect relationship should be established as to what generates the cost and what is the real impact of this cost on the volume of units sold. Wider product ranges lead to a more complex cost analysis.studyinteractive. For each cost pool there should be a cost driver. Identify the factors which determine the size of the costs of an activity. Fast product development may mean that a number of differing iterations of the same product may be produced in quick order. Cost Pool is an activity that consumes resources and for which overhead costs are identified and allocated. Increased proportion of overhead costs Overheads have increased in importance as a percentage of total costs due to both the substitution of direct labour with indirect labour as companies mechanise to a greater degree. These are called cost drivers. With such products having differing production volumes again a volume base is unlikely to work. Possible Cost Drivers number of orders number of production run number of production run number of despatches Assign the cost of activities to products according to the product’s demand for activities. 14 www. A revised analysis – ABC Overhead Cost Item Cost Pool Cost Unit Steps using ABC The steps involved in ABC are: 1. Identify an organisation’s activities.org . 3. Cost Driver is any factor which causes a change in the cost of an activity. Activity Ordering Material handling Production scheduling Despatching 4. 2. 3.CHAPTER 1 – COST ACCOUNTING AND NEW DEVELOPMENTS 2. Collect the cost of each activity into what is called cost pool (equivalent to cost centre under traditional costing). Also the increased production complexity outlined above has given rise to increased costs for such disciplines as production planning and logistics.

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